b'\x0cSALES AND LEASES:\nA Problem-based Approach\nScott J. Burnham\nCurley Professor of Law\nGonzaga University School of Law\nKristen Juras\nProfessor of Law\nThe University of Montana School of Law\n\nCALI eLangdell Press 2016\n\n\x0cAbout the Authors\nProfessor Scott J. Burnham teaches in the areas of contracts, commercial law, and intellectual\nproperty. Professor Burnham received his J.D. and LL.M. degrees from New York University\nSchool of Law in 1974 and 1981. Between degrees, he practiced in New York City with London,\nButtenweiser, Bonem & Valente, and then as a sole practitioner. He has been a visiting professor\nat Santa Clara, Tennessee, Western New England, Memphis, UNLV, Hawaii, Ohio State,\nCardozo, Montevideo (Uruguay), and Vytautas Magnus (Lithuania). He is the author of\nnumerous law review articles in the fields of contracts, consumer law and legal education, and\ntwo books on drafting published by The Michie Company: The Contract Drafting Guidebook,\nwhich is written for practitioners, and Drafting Contracts, 2nd ed., which is written for law\nstudents. He is a member of the ALI.\nProfessor Kristen Juras has taught contracts, UCC Article 2, property, business, international\nlaw and other classes at the University of Montana School of Law since 2000. She is the coauthor\nof the Law of the Sea in a Nutshell (West 2009) and Cases and Materials on the Law of the Sea\n(Brill 2015). Prior to teaching, Professor Juras practiced transactional and commercial law for\nmore than twenty years, including serving as general counsel for a publicly traded corporation.\n\ni\n\n\x0cAbout CALI eLangdell Press\nThe Center for Computer-Assisted Legal Instruction (CALI\xc2\xae) is: a nonprofit organization with\nover 200 member US law schools, an innovative force pushing legal education toward change for\nthe better. There are benefits to CALI membership for your school, firm, or organization.\nELangdell\xc2\xae is our electronic press with a mission to publish more open books for legal\neducation.\nHow do we define "open?"\n\xef\x82\xb7\n\nCompatibility with devices like smartphones, tablets, and e-readers; as well as print.\n\n\xef\x82\xb7\n\nThe right for educators to remix the materials through more lenient copyright policies.\n\n\xef\x82\xb7\n\nThe ability for educators and students to adopt the materials for free.\n\nFind available and upcoming eLangdell titles at elangdell.cali.org. Show support for CALI by\nfollowing us on Facebook and Twitter, and by telling your friends and colleagues where you\nreceived your free book.\n\nii\n\n\x0cNotices\nThis is the first edition of this casebook, updated March, 2016. Visit http://elangdell.cali.org/ for\nthe latest version and for revision history.\n\nThis work by Scott J. Burnham and Kristen Juras is licensed and published by CALI eLangdell\nPress under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International (CC\nBY-NC-SA 4.0). CALI and CALI eLangdell Press reserve under copyright all rights not\nexpressly granted by this Creative Commons license. CALI and CALI eLangdell Press do not\nassert copyright in US Government works or other public domain material included herein.\nPermissions beyond the scope of this license may be available through feedback@cali.org.\nIn brief, the terms of that license are that you may copy, distribute, and display this work, or\nmake derivative works, so long as\n\xef\x82\xb7\n\nyou give CALI eLangdell Press and the author credit;\n\n\xef\x82\xb7\n\nyou do not use this work for commercial purposes; and\n\n\xef\x82\xb7\n\nyou distribute any works derived from this one under the same licensing terms as this.\n\nSuggested attribution format for original work:\nScott J. Burnham & Kristen Juras, SALES AND LEASES: A Problem-based Approach, Published\nby CALI eLangdell Press. Available under a Creative Commons BY-NC-SA 4.0 License.\nCALI\xc2\xae and eLangdell\xc2\xae are United States federally registered trademarks owned by the Center\nfor Computer-Assisted Legal Instruction. The cover art design is a copyrighted work of CALI, all\nrights reserved. The CALI graphical logo is a trademark and may not be used without permission.\nShould you create derivative works based on the text of this book or other Creative Commons\nmaterials therein, you may not use this book\xe2\x80\x99s cover art and the aforementioned logos, or any\nderivative thereof, to imply endorsement or otherwise without written permission from CALI.\nThis material does not contain nor is intended to be legal advice. Users seeking legal advice\nshould consult with a licensed attorney in their jurisdiction. The editors have endeavored to\nprovide complete and accurate information in this book. However, CALI does not warrant that\nthe information provided is complete and accurate. CALI disclaims all liability to any person for\nany loss caused by errors or omissions in this collection of information.\n\niii\n\n\x0cTable of Contents\nAbout the Authors ............................................................................................................................ i\nAbout CALI eLangdell Press .......................................................................................................... ii\nNotices ........................................................................................................................................... iii\nChapter 1. Introduction to the Uniform Commercial Code and Article 1 ...................................... 1\n1.1. History of the UCC .............................................................................................................. 1\n1.2. Purposes of the UCC ............................................................................................................ 2\nProblem 1-1 ......................................................................................................................... 3\n1.3. Variation of UCC Provisions by Agreement ....................................................................... 3\nProblem 1-2 ......................................................................................................................... 3\nProblem 1-3 ......................................................................................................................... 4\nProblem 1-4 ......................................................................................................................... 4\n1.4. Good Faith ........................................................................................................................... 5\nResearch Assignment 1-1.................................................................................................... 5\nProblem 1-5 ......................................................................................................................... 5\n1.5. Unconscionability ................................................................................................................ 5\nProblem 1-6 ......................................................................................................................... 8\n1.6. Hierarchy of Construction .................................................................................................... 9\nProblem 1-7 ....................................................................................................................... 10\nProblem 1-8 ....................................................................................................................... 11\nProblem 1-9 ....................................................................................................................... 11\nProblem 1-10 ..................................................................................................................... 11\n1.7. Supplementation by Other Law ......................................................................................... 12\n1.8. Choice of Law .................................................................................................................... 13\nProblem 1-11 ..................................................................................................................... 14\nChapter 2. Introduction to UCC Article 2 ..................................................................................... 15\n2.1. Scope of Article 2: Transactions in Goods ........................................................................ 15\nProblem 2-1 ....................................................................................................................... 15\nProblem 2-2 ....................................................................................................................... 15\nProblem 2-3 ....................................................................................................................... 15\nProblem 2-4 ....................................................................................................................... 15\nProblem 2-5 ....................................................................................................................... 15\nResearch Assignment 2-1.................................................................................................. 16\n2.2. Mixed Transactions ............................................................................................................ 17\nProblem 2-6 ....................................................................................................................... 19\nProblem 2-7 ....................................................................................................................... 20\n2.3. Application of Article 2 to Sales of Computer Software ................................................... 20\nAdvent Systems Ltd. v. Unisys Corp. ............................................................................... 20\nCase Notes: ....................................................................................................................... 24\n2.4. The Article 2 \xe2\x80\x9cMerchant\xe2\x80\x9d Rules ........................................................................................ 26\nProblem 2-8 ....................................................................................................................... 27\nProblem 2-9 ....................................................................................................................... 27\niv\n\n\x0cProblem 2-10 ..................................................................................................................... 27\nProblem 2-11 ..................................................................................................................... 28\nProblem 2-12 ..................................................................................................................... 28\n2.5. Special Cases Regarding \xe2\x80\x9cMerchant\xe2\x80\x9d Status. .................................................................... 29\nChapter 3. Formation of a Contract under the UCC ..................................................................... 31\n3.1. Common Law Principles of Contract Formation ............................................................... 31\n3.2. Relaxed Formation Rules under the UCC ......................................................................... 31\nProblem 3-1 ....................................................................................................................... 33\n3.3. Offer and Acceptance......................................................................................................... 34\nProblem 3-2 ....................................................................................................................... 34\nProblem 3-3 ....................................................................................................................... 35\nProblem 3-4 ....................................................................................................................... 35\nProblem 3-5 ....................................................................................................................... 35\nProblem 3-6 ....................................................................................................................... 36\nProblem 3-7 ....................................................................................................................... 37\nProblem 3-8 ....................................................................................................................... 37\nProblem 3-9 ....................................................................................................................... 37\nProCD, Inc. v. Zeidenberg ................................................................................................ 38\nCase Notes: ....................................................................................................................... 41\n3.4. Uniform Electronic Transactions Act ................................................................................ 41\nProblem 3-10 ..................................................................................................................... 42\nProblem 3-11 ..................................................................................................................... 42\nProblem 3-12 ..................................................................................................................... 42\nProblem 3-13 ..................................................................................................................... 43\nChapter 4. Battle of the Forms ...................................................................................................... 44\n4.1. Introduction ........................................................................................................................ 44\n4.2. First Step: Work through Section 2-207(1) before the Comma ......................................... 44\nProblem 4-1 ....................................................................................................................... 45\n4.3. Second Step: Look for Language Sufficient to Satisfy Section 2-207(1) after the Comma\n................................................................................................................................................... 47\nProblem 4-2 ....................................................................................................................... 47\n4.4. Third Step: Determine the Effect of Different or Additional Terms ................................. 48\nProblem 4-3 ....................................................................................................................... 49\nProblem 4-4 ....................................................................................................................... 49\nProblem 4-5 ....................................................................................................................... 50\nProblem 4-6 ....................................................................................................................... 50\nKlocek v. Gateway, Inc. .................................................................................................... 50\nDaitom, Inc. v. Pennwalt Corp. ......................................................................................... 55\nCase Notes: ....................................................................................................................... 59\nProblem 4-7 ....................................................................................................................... 60\nResearch Assignment 4-1.................................................................................................. 60\n4.5. Conclusion ......................................................................................................................... 60\nChapter 5. Statute of Frauds.......................................................................................................... 62\nv\n\n\x0c5.1. Statute of Frauds \xe2\x80\x93 the General Rule ................................................................................. 62\nProblem 5-1 ....................................................................................................................... 63\nProblem 5-2 ....................................................................................................................... 63\nSouthwest Engineering Co. v. Martin Tractor Co. ........................................................... 64\n5.2. The Confirmation between Merchants Exception ............................................................. 70\nProblem 5-3 ....................................................................................................................... 71\n5.3. Exceptions Applicable to Merchants and Non-Merchants ................................................ 71\nProblem 5-4 ....................................................................................................................... 71\nProblem 5-5 ....................................................................................................................... 72\n5.4. Estoppel.............................................................................................................................. 73\n5.5. Writings Signed by Agents ................................................................................................ 74\nProblem 5-6 ....................................................................................................................... 74\nChapter 6. Warranties Implied by Law ......................................................................................... 75\n6.1. Introduction to Warranties ................................................................................................. 75\n6.2 Warranties of Title .............................................................................................................. 76\nProblem 6-1 ....................................................................................................................... 76\n6.3. Warranty Against Infringement ......................................................................................... 76\n6.4. Implied Warranty of Merchantability ................................................................................ 77\nProblem 6-2 ....................................................................................................................... 77\nProblem 6-3 ....................................................................................................................... 77\nProblem 6-4 ....................................................................................................................... 77\nProblem 6-5 ....................................................................................................................... 78\n6.5. Merchantability Standards ................................................................................................. 78\nProblem 6-6 ....................................................................................................................... 79\n6.6 Merchantability of Used Goods .......................................................................................... 79\nProblem 6-7 ....................................................................................................................... 79\n6.7. Special Standards of Merchantability for Food ................................................................. 80\nWebster v. Blue Ship Tea Room, Inc................................................................................ 80\nProblem 6-8 ....................................................................................................................... 84\n6.8. Merchantability of Inherently Dangerous Goods ............................................................... 84\nResearch Assignment 6-1.................................................................................................. 85\n6.9. Implied Warranty of Fitness for a Particular Purpose ........................................................ 85\nProblem 6-9 ....................................................................................................................... 86\nProblem 6-10 ..................................................................................................................... 86\nProblem 6-11 ..................................................................................................................... 87\n6.10. Other Implied Warranties................................................................................................. 87\nProblem 6-12 ..................................................................................................................... 87\nChapter 7. Express Warranties and Warranties Given by Remote Sellers ................................... 89\n7.1. Creation of Express Warranties ......................................................................................... 89\nProblem 7-1 ....................................................................................................................... 90\nProblem 7-2 ....................................................................................................................... 91\n7.2. Basis of the Bargain ........................................................................................................... 91\nSchmaltz v. Nissen ............................................................................................................ 92\nvi\n\n\x0cCase Notes: ....................................................................................................................... 93\nProblem 7-3 ....................................................................................................................... 94\n7.3. Warranties Given by Remote Sellers ................................................................................. 95\n7.3.1. Express Warranties of Remote Sellers ........................................................................ 95\nProblem 7-4 ....................................................................................................................... 95\nResearch Assignment 7-1.................................................................................................. 97\n7.3.2. Implied Warranties of Remote Sellers ........................................................................ 97\nPeterson v. North American Plant Breeders ..................................................................... 97\nCase Notes: ....................................................................................................................... 99\nResearch Assignment 7-2................................................................................................ 101\n7.3.3. Notice of Breach ....................................................................................................... 101\nChapter 8. Disclaimer of Warranties; Magnuson-Moss Warranty Act; Third Party Beneficiaries\nunder \xc2\xa7 2-318 .............................................................................................................................. 102\n8.1. Disclaimer of Warranties ................................................................................................. 102\n8.1.1. Conflicting Warranties .............................................................................................. 102\nProblem 8-1 ..................................................................................................................... 102\nProblem 8-2. .................................................................................................................... 102\n8.1.2. Statutory Disclaimer of Warranties and Statutory Prohibitions ................................ 102\nResearch Assignment 8-1................................................................................................ 103\n8.1.3. Disclaimer of Express Warranties ............................................................................ 103\nProblem 8-3 ..................................................................................................................... 104\n8.1.4. Disclaimer of Implied Warranties ............................................................................. 104\nProblem 8-4 ..................................................................................................................... 105\nProblem 8-5 ..................................................................................................................... 106\n8.1.5. Disclaimer of Warranties of Title and Against Infringement ................................... 106\nProblem 8-6. .................................................................................................................... 107\n8.1.6. Post-Sale Disclaimers ............................................................................................... 107\n8.1.7. Limitations of Remedy.............................................................................................. 107\nProblem 8-7 ..................................................................................................................... 107\n8.2. Magnuson-Moss Warranty Act ........................................................................................ 108\n8.2.1. Introduction to the Magnuson-Moss Warranty Act .................................................. 108\nProblem 8-8 ..................................................................................................................... 108\n8.2.2. Warranties under the Act .......................................................................................... 109\nProblem 8-9 ..................................................................................................................... 111\n8.3. Third Party Beneficiaries ................................................................................................. 111\n8.3.1. Privity........................................................................................................................ 111\n8.3.2. UCC \xc2\xa7 2-318 ............................................................................................................. 112\n8.3.3. Alternatives ............................................................................................................... 113\nResearch Assignment 8-2................................................................................................ 114\nProblem 8-10 ................................................................................................................... 114\nProblem 8-11 ................................................................................................................... 115\nProblem 8-12 ................................................................................................................... 115\nProblem 8-13 ................................................................................................................... 116\nvii\n\n\x0c8.3.4. Remote Sellers under UCC \xc2\xa7 2-318.......................................................................... 116\n8.3.5. Interplay of Disclaimers and Privity ......................................................................... 116\nProblem 8-14 ................................................................................................................... 117\nChapter 9. Parol Evidence Rule; Contract Modification ............................................................ 118\n9.1. The Common Law Parol Evidence Rule.......................................................................... 118\n9.1.1. Purpose...................................................................................................................... 118\n9.1.2. Meaning of \xe2\x80\x9cParol\xe2\x80\x9d Evidence ................................................................................... 118\n9.1.3. Exceptions ................................................................................................................. 118\n9.1.4. Final Written Expression .......................................................................................... 118\n9.1.5. Necessary Elements .................................................................................................. 119\n9.2. UCC Parol Evidence Rule ............................................................................................... 119\nProblem 9-1 ..................................................................................................................... 120\nProblem 9-2 ..................................................................................................................... 120\nColumbia Nitrogen Corp. v. Royster Co......................................................................... 120\nCase Notes ...................................................................................................................... 123\nProblem 9-3 ..................................................................................................................... 125\nProblem 9-4 ..................................................................................................................... 127\nProblem 9-5 ..................................................................................................................... 127\nSierra Diesel Injection Service v. Burroughs Corp., Inc. ................................................ 127\nCase Notes ...................................................................................................................... 130\nProblem 9-6 ..................................................................................................................... 130\n9.3. Contract Modification ...................................................................................................... 131\n9.3.1. Modification .............................................................................................................. 131\nProblem 9-7 ..................................................................................................................... 131\nProblem 9-8 ..................................................................................................................... 132\n9.3.2. Statute of Frauds ....................................................................................................... 132\nProblem 9-9 ..................................................................................................................... 132\n9.3.3. Waiver ....................................................................................................................... 133\nProblem 9-10 ................................................................................................................... 133\nChapter 10. Delivery Terms and Title Issues .............................................................................. 135\n10.1. Delivery Terms .............................................................................................................. 135\n10.1.1. Identification of Goods ........................................................................................... 135\n10.1.2. When Does Identification Occur? ........................................................................... 136\n10.1.3. Tender of Delivery .................................................................................................. 137\nProblem 10-1 ................................................................................................................... 138\nProblem 10-2 ................................................................................................................... 138\nProblem 10-3 ................................................................................................................... 138\nProblem 10-4 ................................................................................................................... 138\n10.1.4. Common Carrier Contracts ..................................................................................... 139\nProblem 10-5 ................................................................................................................... 140\nProblem 10-6 ................................................................................................................... 140\n10.1.5. Risk of Loss ............................................................................................................ 140\nProblem 10-7 ................................................................................................................... 140\nviii\n\n\x0cRheinberg-Kellerei GMBH v. Vineyard Wine Co. ......................................................... 141\nProblem 10-8 ................................................................................................................... 142\nProblem 10-9 ................................................................................................................... 142\nProblem 10-10 ................................................................................................................. 142\n10.1.6. Bailment Contracts.................................................................................................. 143\n10.1.7. Choice of Law ......................................................................................................... 143\nReview Problems: Delivery Terms ................................................................................. 143\n10.2. Title ................................................................................................................................ 144\n10.2.1. Passage of Title ....................................................................................................... 144\n10.2.2. Transferor\xe2\x80\x99s Title .................................................................................................... 145\n10.2.3. Good Title ............................................................................................................... 145\n10.2.4. Voidable Title ......................................................................................................... 145\n10.2.5. Void Title ................................................................................................................ 146\nInmi-Etti v. Aluisi ........................................................................................................... 146\nCase Note ........................................................................................................................ 150\nProblem 10-11 ................................................................................................................. 150\n10.2.6. Good Faith Purchaser for Value.............................................................................. 150\n10.2.7. Entrustment ............................................................................................................. 151\nChapter 11. Impracticability (Excuse by Failure of Presupposed Conditions) ........................... 153\n11.1. Common Law................................................................................................................. 153\n11.2. The UCC Scheme: \xc2\xa7 2-615 ............................................................................................ 153\nProblem 11-1 ................................................................................................................... 154\n11.3. Failure of Basic Assumption .......................................................................................... 155\nAlamance County Bd. of Educ. v. Bobby Murray Chevrolet, Inc. ................................. 156\nCase Notes ...................................................................................................................... 159\nLawrance v. Elmore Bean Warehouse ............................................................................ 159\n11.4. Impracticability .............................................................................................................. 162\nTransatlantic Financing Corp. v. United States .............................................................. 163\nCase Notes ...................................................................................................................... 164\n11.5. Notice ............................................................................................................................. 165\n11.6. Allocation ....................................................................................................................... 165\n11.7. Section 2-616 ................................................................................................................. 166\nProblem 11-2 ................................................................................................................... 166\n11.8. Section 2-613 ................................................................................................................. 166\nValley Forge Flag Co. v. New York Dowel & Moulding Import Co. ............................ 166\nCase Note ........................................................................................................................ 167\n11.9. Section 2-614 ................................................................................................................. 168\n11.10. Use of Force Majeure Clauses ..................................................................................... 168\nWatson Labs., Inc. v. Rhone-Poulenc Rorer, Inc. ........................................................... 169\nProblem 11-3 ................................................................................................................... 173\nChapter 12. UCC Perfect Tender Rule; Seller\xe2\x80\x99s Right to Cure .................................................. 174\n12.1. Material Breach versus Immaterial Breach .................................................................... 174\n12.2. Perfect Tender Rule ....................................................................................................... 174\nix\n\n\x0c12.3. Qualifications to the Perfect Tender Rule ...................................................................... 174\nProblem 12-1 ................................................................................................................... 175\n12.4. Timing and Notice of Rejection ..................................................................................... 176\nMiron v. Yonkers Raceway, Inc...................................................................................... 176\nCase Note ........................................................................................................................ 179\nProblem 12-2 ................................................................................................................... 179\n12.5. Seller\xe2\x80\x99s Right to Cure..................................................................................................... 179\nProblem 12-3 ................................................................................................................... 180\nBartus v. Riccardi............................................................................................................ 180\nProblem 12-4 ................................................................................................................... 182\n12.6. Installment Contracts ..................................................................................................... 182\nProblem 12-5 ................................................................................................................... 184\n12.7. Buyer\xe2\x80\x99s Duties in Event of Rejection............................................................................. 184\n12.8. Summary: The Code Scheme for Delivery .................................................................... 186\nChapter 13. Acceptance; Revocation of Acceptance .................................................................. 187\n13.1. Acceptance ..................................................................................................................... 187\nProblem 13-1 ................................................................................................................... 188\n13.2. Effect of Acceptance ...................................................................................................... 188\nProblem 13-2 ................................................................................................................... 188\n13.3. Revocation of Acceptance ............................................................................................. 189\nProblem 13-3 ................................................................................................................... 189\nWilk Paving, Inc. v. Southworth-Milton, Inc. ................................................................ 191\nCase Notes ...................................................................................................................... 194\n13.4. Return of Goods after Revocation ................................................................................. 196\n13.5. Effect of Breach on Risk of Loss ................................................................................... 196\nProblem 13-4 ................................................................................................................... 197\nProblem 13-5 ................................................................................................................... 197\nChapter 14. Anticipatory Repudiation ........................................................................................ 198\n14.1. Common Law Development of Anticipatory Repudiation ............................................ 198\nProblem 14-1 ................................................................................................................... 198\nProblem 14-2 ................................................................................................................... 198\nProblem 14-3 ................................................................................................................... 199\n14.2. Remedies at Common Law ............................................................................................ 199\n14.3. UCC Rules Governing Anticipatory Repudiation ......................................................... 199\nProblem 14-4 ................................................................................................................... 200\nProblem 14-5 ................................................................................................................... 200\nProblem 14-6 ................................................................................................................... 201\nProblem 14-7 ................................................................................................................... 201\nAMF, Inc. v. McDonald\xe2\x80\x99s Corp. ..................................................................................... 201\nCase Notes: ..................................................................................................................... 205\n14.4. Common Law Still Relevant .......................................................................................... 205\nProblem 14-8 ................................................................................................................... 205\n14.5. Rights of Non-Repudiating Party under \xc2\xa7 2-610 ........................................................... 206\nx\n\n\x0cProblem 14-9 ................................................................................................................... 206\n14.6. Retraction ....................................................................................................................... 206\nProblem 14-10 ................................................................................................................. 207\n14.7. Seller\xe2\x80\x99s Right of Reclamation ........................................................................................ 207\nChapter 15. Common Law Remedy Principles and Seller\xe2\x80\x99s Remedies under the UCC ............. 209\n15.1. Common Law Remedy Principles ................................................................................. 209\n15.1.1. Basic Common Law Remedy Concepts .................................................................. 209\nProblem 15-1 ................................................................................................................... 209\nProblem 15-2 ................................................................................................................... 209\nProblem 15-3. .................................................................................................................. 210\nProblem 15-4 ................................................................................................................... 210\nProblem 15-5 ................................................................................................................... 210\n15.1.2. Purpose of Remedies............................................................................................... 210\n15.1.3. Material versus Immaterial Breach and Effect on Remedies .................................. 211\nProblem 15-6 ................................................................................................................... 213\nProblem 15-7 ................................................................................................................... 213\n15.1.5. Non-compensatory Damages .................................................................................. 214\n15.1.6. Burden of Proof....................................................................................................... 214\n15.2. UCC Seller Remedies .................................................................................................... 214\n15.2.1. Summary of Seller Remedies .................................................................................. 214\n15.2.2. Recovery of Purchase Price .................................................................................... 215\nProblem 15-8 ................................................................................................................... 215\nProblem 15-9 ................................................................................................................... 215\nProblem 15-10 ................................................................................................................. 216\n15.2.3. Remedy of Resale ................................................................................................... 216\nProblem 15-11 ................................................................................................................. 217\n15.2.4. Market Price Remedy.............................................................................................. 217\nProblem 15-12 ................................................................................................................. 217\n15.2.5. Lost Profit ............................................................................................................... 218\nProblem 15-13 ................................................................................................................. 218\nKenco Homes, Inc. v. Williams ...................................................................................... 218\n15.2.6. Unfinished Goods ................................................................................................... 221\nProblem 15-14 ................................................................................................................. 222\nChapter 16. Buyer Remedies under the UCC ............................................................................. 223\n16.1. Summary of Buyer Remedies ........................................................................................ 223\n16.2. Remedies Where Buyer Accepts Non-conforming Goods ............................................ 223\nProblem 16-1 ................................................................................................................... 224\nProblem 16-2 ................................................................................................................... 224\nSchroeder v. Barth, Inc.................................................................................................... 225\nCase Note ........................................................................................................................ 227\n16.3. Notice ............................................................................................................................. 227\nCooley v. Big Horn Harvestore Systems, Inc. ................................................................ 228\nCase Notes ...................................................................................................................... 231\nxi\n\n\x0c16.4. Buyer\xe2\x80\x99s Remedy of \xe2\x80\x9cCover.\xe2\x80\x9d ......................................................................................... 232\nProblem 16-3 ................................................................................................................... 232\n16.5. Buyer\xe2\x80\x99s Remedy of Market Price Damages ................................................................... 233\nProblem 16-4 ................................................................................................................... 233\nTongish v. Thomas.......................................................................................................... 233\n16.6. Specific Performance ..................................................................................................... 239\nProblem 16-5 ................................................................................................................... 240\nChapter 17. Limitation of Remedies ........................................................................................... 241\n17.1. Freedom of Contract ...................................................................................................... 241\nProblem 17-1 ................................................................................................................... 241\nProblem 17-2 ................................................................................................................... 241\n17.2. Liquidated Damages Clauses ......................................................................................... 241\nCalifornia and Hawaiian Sugar Co. v. Sun Ship, Inc. ..................................................... 242\nProblem 17-3 ................................................................................................................... 246\nProblem 17-4 ................................................................................................................... 246\n17.3. Limitation of Remedies under \xc2\xa7 2-719 .......................................................................... 247\nProblem 17-5 ................................................................................................................... 248\nProblem 17-6 ................................................................................................................... 248\nProblem 17-7 ................................................................................................................... 249\nProblem 17-8 ................................................................................................................... 249\nProblem 17-9 ................................................................................................................... 250\nChapter 18. Statute of Limitations .............................................................................................. 252\n18.1. Introduction .................................................................................................................... 252\n18.2. Duration \xe2\x80\x93 How long is it? ............................................................................................. 252\nResearch Assignment 18-1.............................................................................................. 252\n18.3. Accrual -- What event starts it running? ........................................................................ 253\nProblem 18-1 ................................................................................................................... 254\nProblem 18-2 ................................................................................................................... 254\nProblem 18-3 ................................................................................................................... 254\nProblem 18-4 ................................................................................................................... 254\n18.4. Suits against Manufacturers and Remote Sellers ........................................................... 255\nProblem 18-5 ................................................................................................................... 255\nProblem 18-6 ................................................................................................................... 255\n18.5. Indemnity ....................................................................................................................... 255\n18.6. Breach of Warranties for Future Performance ............................................................... 256\nRosen v. Spanierman ...................................................................................................... 256\nCase Notes ...................................................................................................................... 260\n18.7. Promises to Repair or Replace ....................................................................................... 261\n18.8. Tolling -- what events toll it (keep it from running)? .................................................... 261\nChapter 19. Assignment and Delegation..................................................................................... 264\n19.1. Introduction .................................................................................................................... 264\n19.2. Delegation of duty.......................................................................................................... 264\nProblem 19-1 ................................................................................................................... 265\nxii\n\n\x0c19.3 Assignment of rights ....................................................................................................... 265\nProblem 19-2 ................................................................................................................... 266\n19.4. Prohibition of assignment and delegation ...................................................................... 266\nProblem 19-3 ................................................................................................................... 267\nResearch Assignment 19-1.............................................................................................. 268\nBel-Ray Co., Inc. v. Chemrite (Pty) Ltd. ........................................................................ 268\nCase Note ........................................................................................................................ 274\nProblem 19-3. Review Problem: Assignment and Delegation ........................................ 274\nChapter 20. Article 2A -- Leases of Goods ................................................................................. 276\n20.1. History of Article 2A ..................................................................................................... 276\n20.2. Definition of Lease......................................................................................................... 276\n20.3. Lease or Security Interest? ............................................................................................. 277\nProblem 20-1 ................................................................................................................... 278\n20.4. Consumer Leases ........................................................................................................... 279\nProblem 20-2 ................................................................................................................... 279\nProblem 20-3 ................................................................................................................... 279\n20.5. Finance Leases ............................................................................................................... 279\nProblem 20-4 ................................................................................................................... 280\n20.6. Lease-Purchase Agreements .......................................................................................... 280\nResearch Assignment 20-1.............................................................................................. 280\nProblem 20-5 ................................................................................................................... 280\n20.7. Provisions of Article 2A ................................................................................................ 281\nProblem 20-6 ................................................................................................................... 281\n20.8. Remedies ........................................................................................................................ 281\nProblem 20-7 ................................................................................................................... 282\nProblem 20-8 ................................................................................................................... 282\nProblem 20-9 ................................................................................................................... 283\nProblem 20-10 ................................................................................................................. 283\n\nxiii\n\n\x0cChapter 1. Introduction to the Uniform Commercial Code and\nArticle 1\n1.1. History of the UCC. As interstate commerce grew, so did the need for national uniformity\nin laws applicable to commercial transactions. Under the leadership of Professor Karl Llewellyn,\nthe American Law Institute (ALI) and the National Conference of Commissioners on Uniform\nState Laws (NCCUSL) (which is now known as the Uniform Law Commission or ULC)\npromulgated the Uniform Commercial Code (UCC or Code), which was first enacted by a state\nin 1953. Today, all states have enacted most parts of the UCC, although there are some\nvariations. Louisiana is the only state that has not enacted Article 2.\n1.1.1. Article 1 of the UCC contains general provisions that, according to Revised \xc2\xa7 1102, apply when a transaction is governed by another article of the UCC. For example,\nstatements of purpose, rules of construction, and general definitions are contained in\nArticle 1. In 2001, the ULC promulgated changes to Article 1; these changes are known\nas Revised Article 1. Most states have adopted Revised Article 1, although none has\nenacted it in its uniform version. For a tally of adopting states, see the web site of the\nUniform Law Commission at http://www.uniformlaws.org.\nNote the three significant changes that Revised Article 1 made to former Article 1. It (1)\nclarifies that Article 1 applies only to Code transactions, (2) clarifies that the concept of\ncourse of performance applies throughout the Code, and (3) redefines good faith. When a\njurisdiction enacts Revised Article 1, it also makes a few changes to Article 2 to\ncoordinate with the changes in Article 1.\n1.1.2. In 1999, the ALI voted to support a draft Revised Article 2, but the ULC did not\nsupport it, probably because of the perceived difficulty of enacting such a substantial\nrevision in the states. In 2003, the ULC drafted a less radical version known as Amended\nArticle 2. In May 2011, the ULC and the ALI agreed to withdraw Amended Article 2\nfrom consideration by the states. No state has enacted either Revised Article 2 or\nAmended Article 2. Nevertheless, reference to the proposed revisions may be valuable for\nseeing the clarifications that were made to the existing text.\nThe bottom line is that a statute more than 50 years old governs modern commercial\ntransactions. As we will see, the Code has a great deal of flexibility in the joints to\naccommodate change, but there will be many strains put on it.\n1.1.3. Unless otherwise indicated, when these materials cite sections from Article 1 and\nArticle 2, this refers to the sections as found in Revised Article 1 and the pre-2003\nversion of Article 2 as amended to reflect Revised Article 1. When researching the law of\na particular jurisdiction, you will have to determine (1) whether that jurisdiction has\n1\n\n\x0cenacted Revised Article 1, and (2) whether that jurisdiction adopted any nonuniform\nprovisions when it enacted the Code.\nThese materials sometimes include a Research Assignment that invites you to determine\nor apply the rule adopted in a particular jurisdiction.\n1.1.4. Most of the Code sections are followed by Official Comments (which we often\nsimply refer to as \xe2\x80\x9cComment\xe2\x80\x9d throughout these materials). In most jurisdictions, these\nhave not been enacted by the legislature. Therefore, they are only persuasive authority.\nHowever, because they are promulgated by the drafters of the statute, they are highly\npersuasive. The Official Comments can be useful for (1) putting the section in context,\n(2) elaborating on the principles involved in the section, and (3) guiding interpretation to\npreserve uniformity.\n1.2. Purposes of the UCC. Always keep in mind the general purposes of the UCC, as set forth at\n\xc2\xa7 1-103:\n(1) To simplify, clarify, and modernize the law governing commercial transactions;\n(2) To permit the continued expansion of commercial practices through custom, usage,\nand agreement of the parties; and\n(3) To make uniform the law among various jurisdictions.\nRegarding this last purpose, consider this analysis by Judge Posner in Northrop Corp. v. Litronic\nIndustries, 29 F.3d 1173, 1175, 1178 (7th Cir. 1994):\nUnfortunately, the Illinois courts \xe2\x80\x93 whose understanding of Article 2 of the UCC\nis binding on us because this is a diversity suit governed, all agree, by Illinois law \xe2\x80\x93 have\nhad no occasion to choose among the different positions on the consequences of an\nacceptance that contains \xe2\x80\x9cdifferent\xe2\x80\x9d terms from the offer. We shall have to choose....\nThe Uniform Commercial Code, as we have said, does not say what the terms of\nthe contract are if the offer and acceptance contain different terms, as distinct from cases\nin which the acceptance merely contains additional terms to those in the offer. The\nmajority view is that the discrepant terms fall out and are replaced by a suitable UCC gapfiller.\xe2\x80\xa6 The leading minority view is that the discrepant terms in the acceptance are to be\nignored.\xe2\x80\xa6 Our own preferred view \xe2\x80\x93 the view that assimilates \xe2\x80\x9cdifferent\xe2\x80\x9d to \xe2\x80\x9cadditional,\xe2\x80\x9d\nso that the terms in the offer prevail over the different terms in the acceptance only if the\nlatter are materially different, has as yet been adopted by only one state, California\xe2\x80\xa6.\nBecause Illinois in other UCC cases has tended to adopt majority rules \xe2\x80\xa6, and\nbecause the interest in the uniform nationwide application of the Code \xe2\x80\x93 an interest\n2\n\n\x0casserted in the Code itself (see [\xc2\xa7 1-103(a)(3)]) \xe2\x80\x93 argues for nudging majority views, even\nif imperfect (but not downright bad), toward unanimity, we start with a presumption that\nIllinois, whose position we are trying to predict, would adopt the majority view.\xe2\x80\xa6\nProblem 1-1. You are litigating a case in the state of Washington involving a particular section\nof UCC Article 2 which has not been addressed by the Washington Supreme Court, but has been\naddressed by courts in other jurisdictions. What weight should the Washington Supreme Court\ngive to the decisions of other jurisdictions? Mandatory, persuasive, or something in-between?\n1.3. Variation of UCC Provisions by Agreement. Although some provisions of the UCC are\nmandatory and cannot be varied (discussed below), most provisions are intended to be \xe2\x80\x9cdefault\xe2\x80\x9d\nprovisions that govern in the absence of a differing agreement by the parties. See Scott J.\nBurnham, Is UCC Article 2 Facilitatory or Regulatory? 68 Ohio St. L. J. 57 (2007).\n1.3.1. The principle of freedom of contract (which you should always be prepared to\nargue to a court) is alive and well under the UCC. Section 1-302(a) provides:\nExcept as otherwise provided in subsection (b) or elsewhere in the UCC, the\neffect of provisions of the UCC may be varied by agreement. (emphasis added)\nAfter they finished, the Code drafters realized that sometimes they stated that a provision\ngoverned \xe2\x80\x9cunless otherwise agreed\xe2\x80\x9d and sometimes they didn\xe2\x80\x99t. They then included \xc2\xa7 1302(c) to make clear that when they failed to say it, they did not mean that the parties\ncannot otherwise agree.\nQuery: Do parties have the freedom of contract to opt out of the UCC when it would\notherwise apply? To opt into the UCC when it would not otherwise apply? See \xc2\xa7 1-302,\nOfficial Comment 2.\nProblem 1-2. Although the UCC allows a buyer to recover reasonably foreseeable consequential\ndamages arising from a breach, the UCC does not provide for a seller to recover consequential\ndamages. See \xc2\xa7\xc2\xa7 2-708, 2-713. In a transaction involving goods, the parties agree to the\nfollowing provision: \xe2\x80\x9cIn the event of a breach, both Seller and Buyer may recover from the\nbreaching party all damages arising from the breach, including reasonably foreseeable\nconsequential damages.\xe2\x80\x9d If all the elements of are established, will the seller be entitled to\nrecover consequential damages? See also \xc2\xa7 1-305.\nWhat difference does it make that Amended Article 2 provides in \xc2\xa7 2-708 that \xe2\x80\x9cthe measure of\n[seller\xe2\x80\x99s] damages for nonacceptance by the buyer is the difference between the contract price\nand the market price at the time and place for tender together with any incidental or\nconsequential damages provided in Section 2-710\xe2\x80\x9d?\n\n3\n\n\x0c1.3.2. Although \xc2\xa7 1-302(a) provides the general rule that the parties may vary the UCC\ndefault rules by agreement, under \xc2\xa7 1-302(b) the parties may not disclaim any of the\nfollowing obligations prescribed by the UCC:\n(1) good faith (see \xc2\xa7 1-304);\n(2) diligence (see, for example, the use of \xe2\x80\x9cdue diligence\xe2\x80\x9d in the context of notice\nat \xc2\xa7 1-202(f) and \xe2\x80\x9creasonable diligence\xe2\x80\x9d in the context of notice of dishonor at\n\xc2\xa7 3-504);\n(3) reasonableness (see, for example, the requirement of reasonable notice of\ntermination at \xc2\xa7 2-309(3)); and\n(4) care (see, for example, buyer\xe2\x80\x99s duty to hold rejected goods with reasonable\ncare at \xc2\xa7 2-602(b)).\nAlthough these obligations cannot be disclaimed by agreement of the parties, standards of\nperformance intended to satisfy these requirements may be specified, as long as such\nstandards are not manifestly unreasonable. See Scott J. Burnham, Setting Standards under\nSections 1-302 and 9-603, 1 The Transactional Lawyer 3 (Aug. 2011), available at\nhttp://www.law.gonzaga.edu/files/Transactional-Lawyer-Aug2011.pdf.\nProblem 1-3. In defining when a buyer\xe2\x80\x99s acceptance of goods occurs, \xc2\xa7 2-606 refers to a\n\xe2\x80\x9creasonable opportunity to inspect.\xe2\x80\x9d Your client has recently opened a retail computer store, and\nhe wants you to draft a standard purchase agreement governing the sale of personal computers to\nhis customers.\n(1) Can the agreement provide that the buyer waives the reasonable opportunity to inspect?\n(2) Can the agreement provide that the purchaser has a certain minimum time to inspect? What\nfactors would you consider in coming up with this time frame?\n1.3.3. In addition to providing that the obligations of good faith, diligence, reasonableness\nand care prescribed by the UCC may not be disclaimed, \xc2\xa7 1-302(a) contains a second\nlimitation on the parties\xe2\x80\x99 freedom to contract: \xe2\x80\x9cexcept as otherwise provided ... elsewhere\nin the UCC.\xe2\x80\x9d (emphasis added) In other words, throughout the UCC there are mandatory\nprovisions which may not be modified by contract. Some provisions expressly state that\nthey may not be varied by contract. However, others may not be so labeled.\nProblem 1-4. Determine whether the following provisions of Article 2 may be varied by\nagreement of the parties:\n(1) The statute of limitations in \xc2\xa7 2-725(1).\n(2) The statute of frauds in \xc2\xa7 2-201(1).\n(3) The requirement in \xc2\xa7 2-309(3) that a terminating party provide notice of termination of a\ncontract.\n4\n\n\x0c(4) The requirement in \xc2\xa7 2-511 that tender of payment is a condition to seller\xe2\x80\x99s duty to deliver\nthe goods.\n(5) The requirement in \xc2\xa7 2-602 that a buyer seasonably notify the seller of rejection.\n1.4. Good Faith. Section 1-304 states that the obligation of good faith applies throughout the\nCode, and \xc2\xa7 1-201(b)(20) defines it. Recall that \xc2\xa7 1-302(b) states that this obligation cannot be\ndisclaimed by the parties.\n1.4.1. Good faith is defined at \xc2\xa7 1-201(b)(20) as \xe2\x80\x9chonesty in fact and the observance of\nreasonable commercial standards of fair dealing.\xe2\x80\x9d The pre-2001 version of Article 1\napplied the subjective standard of \xe2\x80\x9chonesty in fact\xe2\x80\x9d to all parties. However, for purposes\nof Article 2, former \xc2\xa7 2-103(1)(b) applied the additional objective requirement of\n\xe2\x80\x9cobservance of reasonable commercial standards of fair dealing\xe2\x80\x9d to merchants (the\ndefinition of which is discussed in Chapter 2). Thus, it is very important in applying this\nconcept to ascertain what version of Article 1 has been adopted in the jurisdiction\ninvolved. Before applying precedent, determine whether the case you are citing applies\nthe old standard or the new standard. For non-merchants, if there was not good faith\nunder the old standard, then there would not be good faith under the new standard; but if\nthere was good faith under the old standard, then there is not necessarily good faith under\nthe new standard.\nResearch Assignment 1-1. Which version of the definition of \xe2\x80\x9cgood faith\xe2\x80\x9d applies in your\nchosen jurisdiction?\nProblem 1-5. Aunt Martha is not a merchant. She recently sold her car to her nephew, a law\nstudent. The written purchase agreement provides that the purchase price of $10,000 shall be\npaid in 36 monthly installments. However, there is a provision that gives Aunt Martha the option\nto accelerate the payment date and declare the entire amount due \xe2\x80\x9cat will.\xe2\x80\x9d See \xc2\xa7 1-309. When\nAunt Martha learned that her nephew failed his Sales and Leases Class in his second year of law\nschool, Aunt Martha declared the entire unpaid balance of the purchase price due. The nephew\nhad insufficient funds to pay her back in full. The nephew sued Aunt Martha for breach of the\nduty of good faith.\n(1) Under the old definition of good faith, what would the nephew have to prove? How could he\nprove it?\n(2) Under the new definition of good faith, what would the nephew have to prove? How could he\nprove it?\n1.5. Unconscionability. Section 2-302 addresses unconscionability in contracts for the sale of\ngoods. Although unconscionability is expressly found in the Code only in Article 2 and in Article\n2A (Leases) at \xc2\xa7 2A-108, as explained in the Williams case discussed below, it is a common law\nconcept and probably supplements all Code transactions under \xc2\xa7 1-103(b). Curiously, California\n5\n\n\x0cdid not enact \xc2\xa7 2-302. This seems shocking until your realize that the provision was codified with\nthe general Contracts statutes at Civil Code \xc2\xa7 1670.5 to make clear that it applies to all contracts\nand not just to those involving transactions in goods.\n1.5.1. The statute does not define \xe2\x80\x9cunconscionability,\xe2\x80\x9d probably because defining it might\nlimit it and the concept is intended to be applied in many different circumstances.\nHowever, Official Comment 1 states:\nThe basic test is whether, in the light of the general commercial background and\nthe commercial needs of the particular trade or case, the clauses involved are so\none-sided as to be unconscionable under the circumstances existing at the time of\nthe making of the contract.\nIt is not exactly helpful to say that a term is unconscionable if it is unconscionable.\nThe case of Williams v. Walker-Thomas Furniture Co., 350 F.2d 445, 449 (D.C. Cir.\n1965) laid out the two elements courts usually look for when confronted with an issue of\nunconscionability:\nUnconscionability has generally been recognized to include an absence of\nmeaningful choice on the part of one of the parties together with contract terms\nwhich are unreasonably favorable to the other party.\nThe element of \xe2\x80\x9cabsence of meaningful choice\xe2\x80\x9d is sometimes referred to as procedural\nunconscionability. The inquiry is into how the parties came to enter into the transaction.\nThe element of \xe2\x80\x9cunreasonably favorable terms\xe2\x80\x9d is sometimes referred to as substantive\nunconscionability. As the Williams court went on to say, the inquiry is \xe2\x80\x9cwhether the\nterms of the contract are so unfair that enforcement should be withheld.\xe2\x80\x9d Id. at 450.\nMany, but not all, courts require both elements to be present to support a finding of\nunconscionability. See, e.g., Arrowhead School Dist. No. 75, Park Co., Montana v.\nKlyap, 79 P.3d 250, \xc2\xb6 48 (Mont. 2003).\n1.5.1.1. Procedural unconscionability: Generally, courts find unconscionability\nonly when there is a \xe2\x80\x9ccontract of adhesion,\xe2\x80\x9d a contract that is prepared in advance\nof the transaction by a stronger party who offers it to a weaker party who has no\nalternative but to agree to the terms. Of course, one alternative is to walk away, so\nsome courts are less willing to find unconscionability when the market offers a\nchoice.\n1.5.1.2. Substantive unconscionability: A claim of unconscionability usually arises\nwhen the party with all the bargaining power uses that power to include unfair\nterms in a contract with which the other party must agree. What makes a term so\n6\n\n\x0cunfair that a court refuses enforcement? Obviously, the standard is subjective and\nflexible. However, \xc2\xa7 2-302(2) provides some guidance:\nWhen it is claimed or appears to the court that the contract or any clause\nthereof may be unconscionable the parties shall be afforded a reasonable\nopportunity to present evidence as to its commercial setting, purpose and\neffect to aid the court in making the determination.\n1.5.2. Most cases of unconscionability involve a consumer who agreed to a contract of\nadhesion. This makes sense, for if a party were able to negotiate the terms of a contract, it\nshould not later be heard to complain that it agreed to unfair terms. Although business\nowners may have a more difficult time establishing procedural unconscionability because\nthey are often viewed by courts as possessing \xe2\x80\x9ca greater degree of commercial\nunderstanding and substantially more economic muscle than the ordinary consumer \xe2\x80\xa6,\ngeneralizations are always subject to exceptions and categorization is rarely an adequate\nsubstitute for analysis.\xe2\x80\x9d Several courts have recognized that \xe2\x80\x9cexperienced but legally\nunsophisticated businessmen may be unfairly surprised by unconscionable contract\nterms.\xe2\x80\x9d A & M Produce Co. v. FMC Corp., 135 Cal. App. 3d 473, 489 (1982). See also\nBridge Fund Capital Corp. v. Fastbucks Franchise Corp., 622 F.3d 996, 1004 (9th Cir.\n2010), in which the court found certain terms in a franchise agreement between two\nbusinesses to be unconscionable, noting that \xe2\x80\x9cCalifornia courts have long recognized that\nfranchise agreements have some characteristics of contracts of adhesion because of the\n\xe2\x80\x98vastly superior bargaining strength\xe2\x80\x99 of the franchisor.\xe2\x80\x9d\n1.5.3. Several courts employ a sliding scale between the two elements of\nunconscionability. If there is a great deal of procedural unconscionability, then less\nsubstantive unconscionability is needed to support the finding of unconscionability. On\nthe other hand, if there is little procedural unconscionability, then a great deal of\nsubstantive unconscionability is needed to support the finding. See, for example,\nDonovan v. RRL Corporation, 27 P.3d 702, 723 (Cal. 2001), in which the court refused to\nenforce a contract for the sale of a car advertised at a mistaken purchase price because of\nsubstantive unconscionability , even though there was little evidence of procedural\nunconscionability.\n1.5.4. Note that the determination of whether a contract or a term is unconscionable is to\nbe made as of \xe2\x80\x9cthe time [the contract] was made.\xe2\x80\x9d \xc2\xa7 2-302(1). If the effect of a term turns\nout to be unfair later, it is probably not unconscionable. For example, in J.L. McEntire &\nSons, Inc. v. Hart Cotton Co., Inc., 511 S.W.2d 179 (Ark. 1974), cotton growers agreed to\nsell their crop at a certain price when the crop was delivered at harvest time. When that\ntime came, the market price had doubled. The sellers claimed that the contract was\nunconscionable, but the court held that it was fair at the time, and \xe2\x80\x9cprices could have\nfallen as easily as they could have risen.\xe2\x80\x9d Id. at 183.\n7\n\n\x0c1.5.5. What can a court do if it determines that a clause is unconscionable? The\nalternatives set forth in \xc2\xa7 2-302(1) are:\n(1) refuse to enforce the contract in its entirety;\n(2) enforce the contract without the unconscionable clause; or\n(3) limit the application of an unconscionable clause (i.e., partial enforcement in a\nway which is not unconscionable).\n1.5.6. Unconscionability is one of the provisions in the Code that the parties are not free\nto disclaim.\nPractice Tip: If a drafter is concerned that a term may appear to be unfair, the drafter may wish\nto include some recitals that explain why it is reasonable in light of commercial practices or the\ncircumstances of the parties.\nProblem 1-6. Educational Materials Company sells a package of educational materials entitled\n"Junior Institute," which is advertised to prepare toddlers for elementary school. Company\nemployees solicit sales door-to-door in areas that the company has identified as having high\nnumbers of residents with limited education and economic means. The purchase price of $600 is\nthree to four times higher than comparable educational products. Ninety-nine percent of\npurchasers elect to pay the purchase price in 36 monthly installments (rather than cash); interest\nis charged at the highest rate allowed by law. The salesman allows the consumer to examine the\nmaterials at the time of solicitation, and immediately delivers a complete set of materials to the\npurchaser if a sale is concluded. At the time of sale, the consumer is presented with a contract\ncontaining three pages of fine print. Salesmen are not authorized to make any changes to the\ncontract. In compliance with federal consumer protection laws, the contract allows the consumer\nto cancel the contract within three business days after the purchase for a full return of the\npurchase price. The contract provides that the contract may not be terminated after this three-day\ncancellation period for any reason, and disclaims in bold print in the middle of the contract any\nexpress or implied warranties.\nAfter making three of her monthly installment payments, a 22-year old purchaser terminated the\ncontract, after reading a review rating the Junior Institute program at 1.5 on a scale of 1 (poor) to\n10 (superior). She also discovered, while reading the review, that several similar but more highly\nrated toddler packages could be purchased for prices ranging between $150 and $200.\nEducational Materials Company filed a judicial proceeding to collect the balance owing on the\ncontract, plus all of its attorney\xe2\x80\x99s fees and expenses, pursuant to a clause requiring the consumer\nto pay any attorney\xe2\x80\x99s fees and expenses incurred by the company in any legal proceeding arising\nunder the contract (and which does not contain a reciprocal attorneys fee clause in favor of the\nconsumer). The mother raised the argument that the contract should not be enforced against her\nbecause it is unconscionable.\n\n8\n\n\x0c(1) What factors should the consumer\xe2\x80\x99s attorney rely upon to support an argument that the\ncontract is procedurally unconscionable?\n(2) What factors should the consumer\xe2\x80\x99s attorney rely upon to support an argument that the\ncontract is substantively unconscionable?\n(3) If you determine that the contract or portions thereof are unconscionable, what would be the\nappropriate remedy?\n1.6. Hierarchy of Construction. The UCC provides rules of construction in interpreting the\nterms of the parties\xe2\x80\x99 contract.\n1.6.1. First, you need to understand the definition of both contract and agreement under\nthe UCC. Let\xe2\x80\x99s start with the term agreement, which is defined at \xc2\xa7 1-201(b)(3) as\ncomprising the following elements:\n(1) the bargain of the parties in fact as determined from their language and the\ncircumstances;\n(2) course of performance;\n(3) course of dealing; and\n(4) usage of trade.\n1.6.2. Under \xc2\xa7 1-201(b)(12), a contract, as distinguished from an agreement, means the\ntotal legal obligation that results from the agreement as determined by the UCC (such as\ngap-fillers) and supplemental laws. For example, if I say that I will sell you ten grams of\ncocaine for $1,000 and you agree, we have made an agreement on those terms and you\nhave probably impliedly agreed to pay cash on delivery, but we have not made a contract.\n1.6.3. Note that the definitions in \xc2\xa7 1-201 apply throughout the UCC, including, for\nexample, Article 2A (Leases), Article 3 (Commercial Paper), and Article 9 (Secured\nTransactions). A separate list of definitions also appears within each Article. See, for\nexample, \xc2\xa7\xc2\xa7 2-103 through 2-106. If you run across an unfamiliar term, always check for\na definition provided elsewhere in the UCC. You should even check for definitions of\nfamiliar terms. You might assume, for example, what constitutes a writing or what the\nterm \xe2\x80\x9csigned\xe2\x80\x9d means. Now look at how those terms are defined at \xc2\xa7 1-201. Look also at\nthe Official Comment for the term \xe2\x80\x9csigned\xe2\x80\x9d for further insight. Note, however, that \xc2\xa7 1201(a) provides that the definition applies \xe2\x80\x9cunless the context requires otherwise.\xe2\x80\x9d\n1.6.4. Now, let\xe2\x80\x99s go back to the term \xe2\x80\x9cagreement.\xe2\x80\x9d In addition to the \xe2\x80\x9cbargain of the\nparties,\xe2\x80\x9d (i.e., terms specifically agreed upon by language, conduct, or other\ncircumstances), the UCC incorporates three important other sources of terms into the\nparties\xe2\x80\x99 agreement: course of performance, course of dealing, and usage of trade. These\nterms are defined at \xc2\xa7 1-303:\n9\n\n\x0c1.6.4.1. Course of performance arises when there are repeated occasions for\nperformance of this particular contract by the parties, and the repeated\nperformance by one party is accepted by or acquiesced in by the other. For\nexample, an installment contract would give rise to course of performance. See\n\xc2\xa7 1-303(a).\n1.6.4.2. Course of dealing is a sequence of conduct concerning previous\ntransactions between the parties that is fairly to be regarded as establishing a\ncommon basis of understanding for interpreting a future agreement. See \xc2\xa7 1303(b).\n1.6.4.3. Usage of trade is any practice or method of dealing having such regularity\nof observation in a place, vocation, or trade as to justify an expectation that it will\nbe observed with respect to the transaction in question. See \xc2\xa7 1-303(c).\nQuery: Are you bound by a trade usage if you are not in the trade? See \xc2\xa7 1-303,\nOfficial Comments 3 and 4.\nProblem 1-7. Identify each of the following as course of performance, course of dealing, or\nusage of trade:\n(1) On several previous occasions, a law firm has ordered stationery from a local paper company.\nThe orders are less than $500 each, and the offer and acceptance are completed orally over the\nphone each time. On each prior sale, the law firm paid within 30 days of delivery. When the\ncompany delivered the next order, it insisted on payment upon delivery. When is payment due?\n(2) An agreement provides for monthly delivery of books by Caselaw Publishing Group to\nCheapbooks.com for resale. The agreement is silent as to the delivery date. The publisher\ndelivered between the 5th and the 10th day of each month for the first three months of the\nagreement, and Cheapbooks.com accepted the deliveries without complaint. In the 4th month,\nCheapbooks.com complained that a delivery made on the 10th is late. Is it?\n(3) Poulsen\xe2\x80\x99s Hardware Store ordered 1,000 feet of 2"x4" lumber boards from Seeley Swan Mill.\nA recognized industry publication allows a variance of up to 10% in the number of feet\ndelivered. Seeley Swan Mill delivered 950 feet. Is the mill in breach?\n1.6.5. Now read \xc2\xa7 1-303(e). What happens if there is a conflict between the terms of the\nparties\xe2\x80\x99 agreement, and, for example, usage of trade? What if there is a conflict between,\nfor example, the parties\xe2\x80\x99 course of performance and any mandatory provisions of the\nUCC?\n\n10\n\n\x0cProblem 1-8. Number from 1 through 6 the priority of the following sources of terms of the\nparties\xe2\x80\x99 contract:\n___Course of dealing\n\n___Course of performance\n\n___Express terms\n\n___Usage of trade\n\n___Mandatory UCC provisions\n\n___UCC default provisions\n\nProblem 1-9. Apply the \xc2\xa7 1-303 hierarchy to the following situations:\n(1) You sell me a machine. The contract provides you will service it \xe2\x80\x9cevery week.\xe2\x80\x9d You find out\nthat in the trade, these machines are serviced monthly, so you want to switch to monthly service.\nCan you?\n(2) You sell me a machine. The contract provides you will service it \xe2\x80\x9cregularly.\xe2\x80\x9d For a year, you\nservice it every week. You find out that in the trade, these machines are serviced monthly, so you\nwant to switch to monthly service. Can you?\n(3) You sell me a machine every year for three years. Each contract provides you will service it\n\xe2\x80\x9cregularly.\xe2\x80\x9d During each of these three years, you have serviced the machine every week. In the\nfourth year, you sell me another machine. The contract provides you will service it \xe2\x80\x9cregularly.\xe2\x80\x9d\nWhen you don\xe2\x80\x99t show up the first week, I call and ask you to come service the machine. You say\nyou only have to service it monthly, because that is the trade practice. Are you right?\n(4) In the fifth year, you sell me a machine. The contract provides you will service it \xe2\x80\x9cregularly.\xe2\x80\x9d\nYou service it monthly for the first six months, and I don\xe2\x80\x99t object until the seventh month, when I\nclaim you are in breach because you serviced the previous machines every week. Are you in\nbreach?\n1.6.6. In the hierarchy, the express terms of the parties\xe2\x80\x99 agreement trumps course of\nperformance. However, under \xc2\xa7 1-303(f), if the parties\xe2\x80\x99 course of performing a particular\nagreement varies from the express terms of the agreement, the conduct may constitute a\nwaiver or modification of the term. We discuss waiver and modification in Chapter 9.\nProblem 1-10. An agreement provides for monthly delivery of books by Caselaw Publishing\nGroup to Cheapbooks.com for resale. The agreement provides for delivery on the 1st day of each\nmonth. The publisher delivered between the 5th and the 10th day of each month for the first three\nmonths of the agreement, and Cheapbooks.com accepted the deliveries without complaint. In the\n4th month, Cheapbooks.com complained that a delivery made on the 10th is late. Is it? Does\nCheapbooks.com have any recourse?\n\n11\n\n\x0c1.7. Supplementation by Other Law. Section 1-103(b) provides that unless displaced by a\nparticular provision of the UCC, the principles of law and equity supplement the provisions of\nthe UCC. Specific examples given of such supplementing laws and equitable principles include:\n(1) the law merchant (what the heck is that?);\n(2) capacity to contract, duress, coercion, mistake (issues going to the validity of a\ncontract);\n(3) estoppel;\n(4) fraud and misrepresentation;\n(5) bankruptcy;\n(6) principal and agency relationships; and\n(7) \xe2\x80\x9cother validating or invalidating cause\xe2\x80\x9d (huh?).\nFor example, in Daniels-Sheridan Federal Credit Union v. Bellanger, 36 P.3d 397 (Mont. 2001),\nSmith, a seller of cattle on credit who did not secure his interest under Article 9, claimed that he\nhad an \xe2\x80\x9cequitable\xe2\x80\x9d interest in the cattle that was superior to the interest of a creditor who had a\nperfected security interest in the cattle pursuant to Article 9, and that the secured creditor would\nbe \xe2\x80\x9cunjustly enriched\xe2\x80\x9d if Smith\xe2\x80\x99s prior equitable interest were not recognized. In rejecting his\narguments, the court stated:\n\xc2\xb640 In Northwest Potato Sales, Inc. v. Beck (1984), 208 Mont. 310, 678 P.2d\n1138, a potato dealer appealed a district court\'s dismissal of its breach of contract claim\nwhich was based on Charles Beck\'s failure to honor a contract to sell it seed potatoes.\nBeck asserted a statute of frauds defense on the basis he had never signed the written\ncontract signed by the potato dealer and forwarded to him. The potato dealer raised\nestoppel as a bar to the defense. We reversed, holding that Beck had both actively and\npassively led the potato dealer to believe the written contract would be honored and, as a\nresult, Beck was estopped from asserting a statute of frauds defense to the contract action.\nIn doing so, we rejected Beck\'s argument that estoppel cannot apply to a UCC statute of\nfrauds transaction, noting that \xc2\xa7 30-1-103, MCA, expressly mentions estoppel as one of\nthe general principles of law that supplements the UCC, absent an express displacement\nof the principle elsewhere. We ultimately determined that no provision of the UCC\nprecludes application of estoppel to defeat a statute of frauds defense.\xe2\x80\xa6\n\xc2\xb641 Smith attempts to apply our recognition in Northwest that equitable remedies\ncan supplement the UCC to the present case, but Northwest is readily distinguishable.\nNorthwest did not address the priority of secured interests and, indeed, did not relate to\nsecured interests in any way. Moreover, unlike in Northwest, the equitable principle of\nunjust enrichment urged by Smith \xe2\x80\x93 and adopted by the District Court \xe2\x80\x93 is not mentioned\nin the UCC as one of the general principles of law which can supplement the UCC\'s\nspecific hierarchy of priorities for security interests at issue here.\n\n12\n\n\x0cWas the court correct to distinguish the two cases as it did? Are the principles of law and equity\nthat are enumerated in \xc2\xa7 1-103(b) exclusive? See Official Comment 4. Could a court apply the\nequitable principle of unjust enrichment in a Code case? Is there a better reason why the court\nshould not have applied the principle in Daniels-Sheridan?\n1.8. Choice of Law. Prior to its revision in 2001, former \xc2\xa7 1-105 allowed the parties to designate\na jurisdiction whose law governs the contract if the transaction bears a \xe2\x80\x9creasonable relation\xe2\x80\x9d to\nthat jurisdiction. As noted in Official Comment 1, any jurisdiction in which \xe2\x80\x9ca significant enough\nportion of the making or performance of the contract is to occur\xe2\x80\x9d is appropriate. For example, if a\nseller of goods enters into a contract at its headquarters in Delaware, has a California warehouse\nfrom which goods are to be shipped under the contract, the goods are manufactured in South\nDakota, the buyer is located in Montana, and the goods are to be shipped to Texas, any one of\nthose jurisdictions would have a \xe2\x80\x9creasonable relation\xe2\x80\x9d to the contract, and the parties could\nchoose to apply the law of any of those jurisdictions.\nRevised Article 1 proposed a regime in which parties to a transaction that did not involve a\nconsumer were free to choose the applicable law without limitation. After this proposal was\nrejected by every jurisdiction that enacted Revised Article 1, the Uniform Law Commission gave\nin and revised \xc2\xa7 1-301 to restore the original regime.\n1.8.1. Section 1-301(c) sets forth a narrow list of limitations on the parties\xe2\x80\x99 right to\ndesignate their choice of governing law. For example, under \xc2\xa7 2A-106(1), a consumer\nlease may only designate the law of the jurisdiction where the consumer resides or in\nwhich the goods are to be used.\n1.8.2. In the absence of an effective choice of law, \xc2\xa7 1-301(b) directs the courts to apply\nthe UCC to transactions having an \xe2\x80\x9cappropriate relationship\xe2\x80\x9d to that jurisdiction. Official\nComment 1 notes that it would not be appropriate to apply the UCC if, for example, the\nparties have \xe2\x80\x9cclearly contracted on the basis of some other law.\xe2\x80\x9d Due to the uniformity\nand widespread adoption of the UCC, its application by the forum state should not\npresent difficulties, unless the forum state has adopted a non-uniform version of the\napplicable UCC provisions that may affect the outcome of the case.\n1.8.3. Note that choice of law differs from choice of forum. Choice of forum resolves the\nissue of where the case will be heard. Once that is determined, either by the parties or by\nthe rules of civil procedure, then choice of law determines the law that the court will\napply to the transaction. If the parties have not exercised their freedom of contract to\ndetermine the applicable law, then the courts will use principles of conflict of laws to\nmake the determination.\n1.8.4. Recall that \xc2\xa7 1-103(b) provides that principles of law and equity supplement the\nUCC, unless displaced. Restatement (Second) of Conflict of Laws \xc2\xa7 187(2) sets forth a\nwidely accepted principle:\n13\n\n\x0c(2) The law of the state chosen by the parties to govern their contractual rights and\nduties will be applied \xe2\x80\xa6, unless either\n(a) the chosen state has no substantial relationship to the parties or the\ntransaction and there is no other reasonable basis for the parties\' choice, or\n(b) application of the law of the chosen state would be contrary to a\nfundamental policy of a state which has a materially greater interest than\nthe chosen state in the determination of the particular issue and which \xe2\x80\xa6\nwould be the state of the applicable law in the absence of an effective\nchoice of law by the parties.\nProblem 1-11. The parties have chosen the law of a jurisdiction that has a reasonable relation to\nthe transaction. The forum state (which is a different state than the jurisdiction whose law\ngoverns) also has a reasonable relation to the transaction. The forum court has determined that\nthe law of the chosen jurisdiction applicable to certain non-UCC elements of the claim is\ncontrary to an important public policy of the forum state. Under \xc2\xa7 1-301, must the court honor\nthe choice of law clause? Applying \xc2\xa7187 of the Restatement, under what circumstances would\nthe court be allowed to disregard the parties\xe2\x80\x99 choice of law provision and apply the law of the\nforum state?\nChapter 1 Additional Sources.\nScott J. Burnham, Glannon Guide to Sales: Learning Sales Through Multiple-Choice Questions\nand Analysis (Wolters Kluwer 2d ed., 2012), Chapter 2\nJames J. White and Robert S. Summers, Uniform Commercial Code (West 6th ed., 2010),\nIntroduction\n\n14\n\n\x0cChapter 2. Introduction to UCC Article 2\n2.1. Scope of Article 2: Transactions in Goods. Article 2 of the Uniform Commercial Code\napplies to transactions in goods. \xc2\xa7 2-102.\n2.1.1. One of the purposes of this class is to teach you how to read and use statutes. In\nsome areas of law, such as torts, you rely more heavily on case law than on statutes in\ngiving advice and coming to conclusions. \xe2\x80\x9cSales of goods\xe2\x80\x9d is an area of law where you\nmust learn to begin with the statute and the Official Comments. Note that while the\nOfficial Comments are extremely valuable for purposes of interpretation, in most\njurisdictions they have not been enacted by the legislature and are only persuasive\nauthority. Cases become important when a particular UCC provision is subject to more\nthan one interpretation.\n2.1.2. You can seldom rely on a single statute when applying the UCC. In applying a\nparticular provision of Article 2, you often have to refer to other provisions of Article 2,\nor to the general provisions of Article 1. Always look at any applicable definitions, which\nmay be in Article 1 or Article 2, and at the cross-references to other UCC sections that\nare contained in or immediately follow the provision you are reading.\n2.1.3. Article 2 applies to \xe2\x80\x9ctransactions in goods.\xe2\x80\x9d \xc2\xa7 2-102. Article 2 does not apply to\ntransactions involving real property or services. Our first step is to determine what\nconstitutes a \xe2\x80\x9cgood\xe2\x80\x9d under Article 2. For a comprehensive compilation of federal and\nstate cases, see Sonja A. Soehnel, Annotation, What Constitutes "goods" Within the\nScope of UCC Article 2, 4 A.L.R.4th 912 (1981).\nProblem 2-1. Where are \xe2\x80\x9cgoods\xe2\x80\x9d defined for purposes of Article 2? Identify the statutory\nrequirements that must be met before an item can fall within the definition of \xe2\x80\x9cgoods.\xe2\x80\x9d\nProblem 2-2. Seller is in the business of creating neon signs. Buyer offers seller $1,000 to create\na neon sign that says \xe2\x80\x9cStockman\xe2\x80\x99s Bar\xe2\x80\x9d and seller promises to create the sign within 30 days. Is\nthis a contract for the sale of goods?\nProblem 2-3. What three items are specifically excluded from the definition of goods?\nProblem 2-4. In general, are things firmly affixed to the land at the time of the contract for sale\nsubject to Article 2? Under \xc2\xa7 2-107, what categories of things attached to realty fall within the\ndefinition of \xe2\x80\x9cgoods\xe2\x80\x9d?\nProblem 2-5. Now that you\xe2\x80\x99ve mastered the definition of \xe2\x80\x9cgoods,\xe2\x80\x9d let\xe2\x80\x99s apply it. Do the\nfollowing items fall within the definition of \xe2\x80\x9cgoods\xe2\x80\x9d for purposes of Article 2:\n15\n\n\x0c(1) the sale of cookies by a girl scout?\n(2) the sale of television programming?\n(3) the sale of a yellow page ad?\n(4) the sale of electricity by a utility company?\n(5) the sale of a debt owed to you?\n(6) the sale of a mobile home located on blocks on a dealer\xe2\x80\x99s lot?\n(7) the sale of a mobile home embedded in a cement foundation on land, which the buyer\nsubsequently intends to move?\n(8) the sale by a farmer in December of wheat which he will plant next May?\n(9) the sale of Confederate money?\n(10) the sale of tickets to the Final Four basketball play-offs?\n(11) the sale of the answer sheet to the Sales and Leases final exam?\n(12) the sale of water by an owner of land on which an artesian well is located to a bottler\nwho will pump 100,000 gallons per month from the spring?\nResearch Assignment 2-1. Does the sale of blood by a law student to a blood bank fall within\nthe definition of \xe2\x80\x9cgoods\xe2\x80\x9d for purposes of Article 2? Many jurisdictions have a statute on point\nthat you may wish to research. See, e.g., California Health and Safety Code \xc2\xa7 1606, which\nprovides:\nBlood, etc.; processing, distribution; service, not sale\nThe procurement, processing, distribution, or use of whole blood, plasma, blood products,\nand blood derivatives for the purpose of injecting or transfusing the same, or any of them,\ninto the human body shall be construed to be, and is declared to be, for all purposes\nwhatsoever, the rendition of a service by each and every person, firm, or corporation\nparticipating therein, and shall not be construed to be, and is declared not to be, a sale of\nsuch whole blood, plasma, blood products, or blood derivatives, for any purpose or\npurposes whatsoever.\nWhat reasons do you believe the California legislature considered in enacting this \xe2\x80\x9cblood shield\xe2\x80\x9d\nstatute?\n2.1.4. Section 2-102 specifies that Article 2 applies to \xe2\x80\x9ctransactions in goods.\xe2\x80\x9d\nTransaction is not defined, but is undoubtedly a broader concept than a \xe2\x80\x9csale.\xe2\x80\x9d Clearly,\nsales of goods are governed by Article 2, but what about gifts of goods? Leases of goods?\nBarter transactions? See \xc2\xa7 2-304.\n2.1.4.1. Most operative provisions of Article 2 apply only to sales of goods. For\nexample, the definition of \xe2\x80\x9ccontract\xe2\x80\x9d and \xe2\x80\x9cagreement\xe2\x80\x9d under \xc2\xa7 2-106 are limited\nto those relating to the present or future sale of goods. Thus, wherever the term\n\xe2\x80\x9ccontract\xe2\x80\x9d or \xe2\x80\x9cagreement\xe2\x80\x9d is used in Article 2, leases of goods are by definition\nexcluded. Similarly, most Article 2 provisions specifically refer to a contract for\n16\n\n\x0cthe sale of goods, such as the statute of frauds found at \xc2\xa7 2-201 which states \xe2\x80\x9ca\ncontract for the sale of goods ... is not enforceable ... unless there is some\nwriting.\xe2\x80\x9d\n2.1.4.2. A few sections, such as \xc2\xa7 2-403 regarding title, apply not only to sales of\ngoods, but to gifts of goods (see \xc2\xa7 1-201(b)(29) that defines a \xe2\x80\x9cpurchase\xe2\x80\x9d to\ninclude gifts and the corresponding definition of \xe2\x80\x9cpurchaser\xe2\x80\x9d at \xc2\xa7 1-201(b)(30)),\nand to \xe2\x80\x9centrusting\xe2\x80\x9d of goods.\n2.1.4.3. Transactions intended to operate as a security transaction are specifically\nexcluded from the scope of Article 2. \xc2\xa7 2-102.\n2.1.4.4. Warning: Some \xe2\x80\x9cleases\xe2\x80\x9d are actually sales in substance, especially those\nthat give ownership to the lessee at the end of the term of the lease for little or no\nadditional consideration. Sometimes what the parties call a \xe2\x80\x9clease\xe2\x80\x9d is actually a\nsale, where the seller retains a security interest in the goods. See \xc2\xa7 1-203 if you\never face this issue. We will go into more depth on this issue in Chapter 20.\n2.1.4.5. For a compilation of relevant cases, see Sonja A. Soehnel, Annotation,\nWhat Constitutes a Transaction, a Contract for Sale, or a Sale Within the Scope\nof UCC Article 2, 4 A.L.R.4th 85 (1981).\n2.2. Mixed Transactions. Article 2 does not apply to contracts for services or contracts for land,\nintangibles, or other items that are not \xe2\x80\x9cgoods.\xe2\x80\x9d Often a contract involves either both goods and\nservices (such as the sale and installation of carpet), or both UCC goods (cattle) and non-UCC\nproperty (ranch land). In a mixed transaction, the courts have developed two different tests to\ndetermine whether or not the transaction is within the scope of Article 2.\n2.2.1. The majority of jurisdictions have applied the predominant factor test. A wellknown case, Bonebrake v. Cox, 499 F.2d 951 (8th Cir. 1974) enunciated this test as\nfollows:\nThe test for inclusion or exclusion is ... whether their predominant factor, their\nthrust, their purposes reasonably stated, is the rendition of service with goods\nincidentally involved (e.g., contract with artist for painting) or is it a transaction of\nsale, with labor incidentally involved (e.g., installation of a water heater in a\nbathroom).\n2.2.2. In Pass v. Shelby Aviation, Inc., 2000 Tenn. App. LEXIS 247, an airplane was\nbrought in for a required inspection. The mechanics failed to install some bolts, resulting\nin an accident. Having missed the statute of limitations for negligence, which is 3 years,\nthe plaintiffs sought to bring a claim for breach of express and implied warranties under\nthe UCC, which has 4 year statute of limitations. The court enunciated four factors to\n17\n\n\x0clook at in determining whether the contract was predominantly for goods, or\npredominantly for services:\n\xef\x82\xb7\n\nthe language of the parties\xe2\x80\x99 contract (i.e., whether it focused on goods\nversus services);\n\n\xef\x82\xb7\n\nthe nature of the business of the supplier (is this a person who regularly\nsells goods, or rather provides services);\n\n\xef\x82\xb7\n\nthe reason the parties entered into the contract (what was bargained for B\ngoods or services); and\n\n\xef\x82\xb7\n\nthe respective amounts charged under the contract for goods and for\nservices.\n\nNo one factor alone is conclusive. For example, even where the cost of goods exceeds\nthe cost of services, the predominant purpose may still be deemed the provision of\nservices where the other factors support such a finding. Applying these factors, the\nappellate court determined that the predominant purpose of this particular contract was\nthe provision of services rather than the sale of goods, and thus plaintiff could not assert\nbreach of warranty claims under Article 2.\n2.2.3. Not all courts apply the same factors. See, for example, Colorado Carpet\nInstallation, Inc. v. Palermo, 668 P.2d 1384, 1388-89 (Colo. 1983), which defined the\nfactors as: (1) the contractual language used by the parties; (2) whether the agreement\ninvolves one overall price that includes both goods and labor or, instead, calls for separate\nand discrete billings for goods on the one hand and labor on the other; (3) the ratio that\nthe cost of goods bears to the overall contract price; and (4) the nature and reasonableness\nof the purchaser\'s contractual expectations of acquiring a property interest in goods.\n2.2.4. A minority of courts apply the gravamen test in determining whether a particular\ntransaction is subject to Article 2. This test focuses on whether the gravamen of the action\ninvolves goods or services. A well-known case applying this test involved a lady who\nsued a beauty salon where she had received a permanent. The permanent solution was\ndefective, and caused considerable damage to her hair and scalp. Under the predominant\nfactor test, most courts would find (as the trial court did) that the predominant purpose of\nthe contract was services, and thus not subject to Article 2. But the New Jersey Supreme\nCourt concluded that because the gravamen of her claim was the defective goods, Article\n2 applied. Newmark v. Gimbel\xe2\x80\x99s Inc., 258 A.2d 697 (N.J. 1969). Other courts which have\napplied the gravamen test include: Anthony Pools v. Sheehan, 455 A.2d 434 (Md. 1983)\n(plaintiff slipped on pool diving board; court held UCC applied to predominantly services\ncontract for installation of diving board because gravamen of action was alleged defect in\ndiving board); H. Hirschfield Sons, Co. v. Colt Industries Operating Corp., 309 N.W.2d\n18\n\n\x0c714 (Mich. App. 1981) (court held that UCC does not apply to contract for sale of\nrailroad and truck scale because action alleged defects in the installation of scale, not in\nthe scale itself); Providence Hospital v. Truly, 611 S.W.2d 127 (Tex. Civ. App. 1980)\n(contaminated drug was injected into plaintiff\'s eye during cataract surgery; court held\nUCC applies in action alleging breach of warranty of fitness of goods sold for particular\npurpose).\nUnder the gravamen test, a single contract could be subject to two different bodies of law:\nUCC law for any claim involving the goods, and non-UCC law for any claim relating to\nthe services. Is this troublesome? Not if you would get to the same result regardless of the\nlaw implied. But where the laws differ (and they often do regarding important issues such\nas the statute of limitations, the statute of frauds, warranties, and other areas of law), this\nmay be troublesome to a court.\n2.2.5. Most \xe2\x80\x9cmixed transactions\xe2\x80\x9d involve goods and services. In other contracts the\n\xe2\x80\x9cmixture\xe2\x80\x9d relates to goods and real property or intangibles, such as intellectual property.\nWhat body of law would govern in the event of a breach? Once again, courts will apply\neither the \xe2\x80\x9cpredominant factor\xe2\x80\x9d test or \xe2\x80\x9cgravamen\xe2\x80\x9d test, even though those tests were\ndeveloped in the context of goods/services contracts. Some of the factors of the\n\xe2\x80\x9cpredominant factor\xe2\x80\x9d test don\xe2\x80\x99t easily apply, leaving the cost of the items involved as the\nmost influential factor. Compare Cianbro Corp. v. Curran-Lavoie, Inc., 814 F.2d 7, 1314 (1st Cir. 1987), which held that Article 2 governed the sale of a construction\ncompany\'s equipment, inventory, and uncompleted construction contracts where \xe2\x80\x9cmost of\nthe significant terms\xe2\x80\x9d and 98% of the purchase price related to the sale of goods; and Fink\nv. DeClassis, 745 F. Supp. 509, 515-16 (N.D. Ill. 1990), finding that Article 2 did not\ngovern the sale of a company\'s beauty care product lines where the goods (machinery,\nequipment, and inventory) constituted only 17% of the purchase price, which also\nincluded such intangible assets as \xe2\x80\x9ctradenames, trademarks, logos, advertising, artwork,\ncustomer lists, sales records, unfulfilled sales orders, goodwill, and licensing\nagreements.\xe2\x80\x9d\n2.2.6. Drafting Point: Under the principle of freedom of contract, and subject to the\nchoice of law provisions of \xc2\xa7 1-301, the parties can agree to choose the law applicable to\nthe contract. For example, if you draft a \xe2\x80\x9cmixed transaction\xe2\x80\x9d contract, you can avoid the\n\xe2\x80\x9cpredominant factor\xe2\x80\x9d test by specifying that UCC law applies to all claims relating to the\ngoods, and non-UCC law to all other claims. Query: can you choose the UCC to govern\nall claims arising under the \xe2\x80\x9cmixed transaction\xe2\x80\x9d contract, including, for example, claims\nrelating to services or to intellectual property? What danger might there be in attempting\nto apply the UCC to all potential claims arising under a contract?\nProblem 2-6. Belva needed dentures. When she visited her dentist, he measured her mouth and\nordered the dentures. The invoice stated that the dentist\xe2\x80\x99s services were valued at $2,000 and the\ndentures at $1,000. The dentures were defective and she developed severe mouth sores. Applying\n19\n\n\x0cthe predominant factor test, does she have a claim against the dentist for breach of warranty\nunder Article 2? What factors would you consider? Would there be a different result under the\ngravamen test? Would the result be different if the dentist\xe2\x80\x99s services were valued at $1,000 and\nthe dentures at $2,000?\nProblem 2-7. A farmer contracts with an aerial spraying service to have his crops sprayed for\nweeds with a herbicide. The cost of the herbicide is separately stated in the contract, and\nrepresents 90% of the total invoice. The herbicide fails to control the weeds, and the farmer\nbrings a claim for breach of warranty under Article 2. Will the farmer be able to do so under the\npredominant factor test? What factors should you consider? See Moeller v. Huntting Elevator\nCo., 38 U.C.C. Rep. Serv. 2d (Callaghan) 1122 (Minn. App. 1999).\n2.3. Application of Article 2 to Sales of Computer Software. Does the term \xe2\x80\x9cgoods\xe2\x80\x9d include\ncomputer software? As noted by the American Law Institute in its Introduction to the Principles\nof the Law of Software Contracts, \xe2\x80\x9cperhaps no other commercial subject matter is in need of\ngreater harmonization or clarification.\xe2\x80\x9d\nAdvent Systems Ltd. v. Unisys Corp.\n925 F.2d 670 (3d Cir. 1991)\nWEIS, Circuit Judge\nIn this diversity case we conclude that computer software is a good within the Uniform\nCommercial Code.\xe2\x80\xa6\nPlaintiff, Advent Systems Limited, is engaged primarily in the production of software for\ncomputers. As a result of its research and development efforts, by 1986 the company had\ndeveloped an electronic document management system (EDMS), a process for transforming\nengineering drawings and similar documents into a computer data base.\nUnisys Corporation manufactures a variety of computers.... In June 1987 Advent and\nUnisys signed two documents.\xe2\x80\xa6\nIn these documents, Advent agreed to provide the software and hardware making up the\ndocument systems to be sold by Unisys in the United States. Advent was obligated to provide\nsales and marketing material and manpower as well as technical personnel to work with Unisys\nemployees in building and installing the document systems. The agreement was to continue for\ntwo years, subject to automatic renewal or termination on notice.\xe2\x80\xa6\nThe relationship, however, soon came to an end. Unisys, in the throes of restructuring,\ndecided it would be better served by developing its own document system and in December 1987\ntold Advent their arrangement had ended....\n20\n\n\x0cAdvent filed a complaint in the district court alleging, inter alia, breach of contract, fraud,\nand tortious interference with contractual relations. The district court ruled at pretrial that the\nUniform Commercial Code did not apply because although goods were to be sold, the services\naspect of the contract predominated.\nOn appeal ... Unisys contends that the relationship between it and Advent was one for the\nsale of goods and hence subject to the terms of statute of frauds in the Uniform Commercial\nCode. Because the agreements lacked an express provision on quantity, Unisys insists that the\nstatute of frauds bans enforcement....\nThe district court ruled that as a matter of law the arrangement between the two parties\nwas not within the Uniform Commercial Code and, consequently, the [UCC] statute of frauds\nwas not applicable. As the district court appraised the transaction, provisions for services\noutweighed those for products and, consequently, the arrangement was not predominantly one for\nthe sale of goods....\nThe Distribution Agreement begins with the statement, \xe2\x80\x9cUnisys desires to purchase, and\nAdvent desires to sell, on a non-exclusive basis, certain of Advent hardware products and\nsoftware licenses for resale worldwide.\xe2\x80\x9d\xe2\x80\xa6 Schedule A lists twenty products, such as computer\ncards, plotters, imagers, scanners and designer systems.\xe2\x80\xa6\nIn support of the district court\'s ruling that the U.C.C. did not apply, Advent contends that\nthe agreement\'s requirement of furnishing services did not come within the Code. Moreover, the\nargument continues, the \xe2\x80\x9csoftware\xe2\x80\x9d referred to in the agreement as a \xe2\x80\x9cproduct\xe2\x80\x9d was not a \xe2\x80\x9cgood\xe2\x80\x9d\nbut intellectual property outside the ambit of the Uniform Commercial Code.\nBecause software was a major portion of the \xe2\x80\x9cproducts\xe2\x80\x9d described in the agreement, this\nmatter requires some discussion. Computer systems consist of "hardware" and "software."\nHardware is the computer machinery, its electronic circuitry and peripheral items such as\nkeyboards, readers, scanners and printers. Software is a more elusive concept. Generally\nspeaking, "software" refers to the medium that stores input and output data as well as computer\nprograms. The medium includes hard disks, floppy disks, and magnetic tapes.\nIn simplistic terms, programs are codes prepared by a programmer that instruct the\ncomputer to perform certain functions. When the program is transposed onto a medium\ncompatible with the computer\'s needs, it becomes software. The process of preparing a program\nis discussed in some detail in Whelan Associates, Inc. v. Jaslow Dental Laboratory, Inc., 797\nF.2d 1222, 1229 (3d Cir. 1986), cert. denied, 479 U.S. 1031, 107 S. Ct. 877, 93 L. Ed. 2d 831\n(1987) and Apple Computer, Inc. v. Franklin Computer Corp., 714 F.2d 1240 (3d Cir. 1983),\ncert. dismissed, 464 U.S. 1033, 104 S. Ct. 690, 79 L. Ed. 2d 158 (1984). See also Rodau,\nComputer Software: Does Article 2 of the Uniform Commercial Code Apply?, 35 Emory L.J.\n853, 864-74 (1986).\n21\n\n\x0cThe increasing frequency of computer products as subjects of commercial litigation has\nled to controversy over whether software is a \xe2\x80\x9cgood\xe2\x80\x9d or intellectual property. The Code does not\nspecifically mention software.\nIn the absence of express legislative guidance, courts interpret the Code in light of\ncommercial and technological developments. The Code is designed \xe2\x80\x9cto simplify, clarify and\nmodernize the law governing commercial transactions\xe2\x80\x9d and \xe2\x80\x9cto permit the continued expansion\nof commercial practices.\xe2\x80\x9d 13 Pa. Cons. Stat. Ann. \xc2\xa7 1102 (Purdon 1984). As the Official\nCommentary makes clear:\n\xe2\x80\x9cThis Act is drawn to provide flexibility so that, since it is intended to be a semipermanent piece of legislation, it will provide its own machinery for expansion of\ncommercial practices. It is intended to make it possible for the law embodied in this Act\nto be developed by the courts in the light of unforeseen and new circumstances and\npractices.\xe2\x80\x9d\nId. comment 1.\nThe Code \xe2\x80\x9capplies to transactions in goods.\xe2\x80\x9d 13 Pa. Cons. Stat. Ann. \xc2\xa7 2102 (Purdon\n1984). Goods are defined as \xe2\x80\x9call things (including specially manufactured goods) which are\nmoveable at the time of the identification for sale.\xe2\x80\x9d Id. at \xc2\xa7 2105. The Pennsylvania courts have\nrecognized that \xe2\x80\x9c\xe2\x80\x98goods\xe2\x80\x99 has a very extensive meaning\xe2\x80\x9d under the U.C.C.\xe2\x80\x9d [cites omitted]\nOur Court has addressed computer package sales in other cases, but has not been required\nto consider whether the U.C.C. applied to software per se. See Chatlos Systems, Inc. v. National\nCash Register Corp., 635 F.2d 1081 (3d Cir. 1980) (parties conceded that furnishing the plaintiff\nwith hardware, software and associated services was governed by the U.C.C.); see also Carl\nBeasley Ford, Inc. v. Burroughs Corporation, 361 F. Supp. 325 (E.D. Pa. 1973) (U.C.C. applied\nwithout discussion), aff\'d 493 F.2d 1400 (3d Cir. 1974). Other Courts of Appeals have also\ndiscussed transactions of this nature. RRX Industries, Inc. v. Lab-Con, Inc., 772 F.2d 543 (9th\nCir. 1985) (goods aspects of transaction predominated in a sale of a software system); Triangle\nUnderwriters, Inc. v. Honeywell, Inc., 604 F.2d 737, 742-43 (2d Cir. 1979) (in sale of computer\nhardware, software, and customized software goods aspects predominated; services were\nincidental).\nComputer programs are the product of an intellectual process, but once implanted in a\nmedium are widely distributed to computer owners. An analogy can be drawn to a compact disc\nrecording of an orchestral rendition. The music is produced by the artistry of musicians and in\nitself is not a \xe2\x80\x9cgood,\xe2\x80\x9d but when transferred to a laser-readable disc becomes a readily\nmerchantable commodity. Similarly, when a professor delivers a lecture, it is not a good, but,\nwhen transcribed as a book, it becomes a good.\n\n22\n\n\x0cThat a computer program may be copyrightable as intellectual property does not alter the\nfact that once in the form of a floppy disc or other medium, the program is tangible, moveable\nand available in the marketplace. The fact that some programs may be tailored for specific\npurposes need not alter their status as \xe2\x80\x9cgoods\xe2\x80\x9d because the Code definition includes \xe2\x80\x9cspecially\nmanufactured goods.\xe2\x80\x9d\nThe topic has stimulated academic commentary with the majority espousing the view that\nsoftware fits within the definition of a \xe2\x80\x9cgood\xe2\x80\x9d in the U.C.C. Applying the U.C.C. to computer\nsoftware transactions offers substantial benefits to litigants and the courts. The Code offers a\nuniform body of law on a wide range of questions likely to arise in computer software disputes:\nimplied warranties, consequential damages, disclaimers of liability, the statute of limitations, to\nname a few.\nThe importance of software to the commercial world and the advantages to be gained by\nthe uniformity inherent in the U.C.C. are strong policy arguments favoring inclusion. The\ncontrary arguments are not persuasive, and we hold that software is a \xe2\x80\x9cgood\xe2\x80\x9d within the\ndefinition in the Code.\nThe relationship at issue here is a typical mixed goods and services arrangement. The\nservices are not substantially different from those generally accompanying package sales of\ncomputer systems consisting of hardware and software. See Chatlos Systems, Inc. v. National\nCash Register Corp., 479 F. Supp. 738, 741 (D.N.J. 1979); Beasley Ford, 361 F. Supp. at 328.\nAlthough determining the applicability of the U.C.C. to a contract by examining the\npredominance of goods or services has been criticized, we see no reason to depart from that\npractice here. As we pointed out in De Filippo v. Ford Motor Co., 516 F.2d 1313, 1323 (3d Cir.),\ncert. denied, 423 U.S. 912, 96 S. Ct. 216, 46 L. Ed. 2d 141 (1975), segregating goods from nongoods and insisting \xe2\x80\x9cthat the Statute of Frauds apply only to a portion of the contract, would be to\nmake the contract divisible and impossible of performance within the intention of the parties.\xe2\x80\x9d\nWe consider the purpose or essence of the contract. Comparing the relative costs of the\nmaterials supplied with the costs of the labor may be helpful in this analysis, but not dispositive.\nCompare RRX, 772 F.2d at 546 (\xe2\x80\x9cessence\xe2\x80\x9d of the agreement) with Triangle, 604 F.2d at 743\n(\xe2\x80\x9ccompensation\xe2\x80\x9d structure of the contract).\nIn this case the contract\'s main objective was to transfer \xe2\x80\x9cproducts.\xe2\x80\x9d The specific\nprovisions for training of Unisys personnel by Advent were but a small part of the parties\xe2\x80\x99\ncontemplated relationship.\nThe compensation structure of the agreement also focuses on \xe2\x80\x9cgoods.\xe2\x80\x9d The projected\nsales figures introduced during the trial demonstrate that in the contemplation of the parties the\nsale of goods clearly predominated. The payment provision of $ 150,000 for developmental work\nwhich Advent had previously completed, was to be made through individual purchases of\n23\n\n\x0csoftware and hardware rather than through the fees for services and is further evidence that the\nintellectual work was to be subsumed into tangible items for sale.\nWe are persuaded that the transaction at issue here was within the scope of the Uniform\nCommercial Code and, therefore, the judgment in favor of the plaintiff must be reversed.\nCase Notes:\n1. A subsidiary issue that the Advent court failed to discuss was whether the software,\nwhich it classified as a good, was sold to Unisys, and thus subject to Article 2, or\nlicensed, and thus not within the scope of Article 2. Some courts have ruled that because\na software user is not required to return the software to the vendor, it is a sale and not a\nlicense. Softman Products Co. v. Adobe Systems, Inc. 171 F. Supp. 2d 1075 (C.D. Cal.\n2001). Other courts have held that the \xe2\x80\x9csale\xe2\x80\x9d of software is a license, because the end-user\ndoes not obtain all rights to the program (such as the right to copy it), but only a limited\nright to use it. Adobe Systems v. Stargate Software, 216 F. Supp. 2d 1051 (N.D. Cal.\n2002).\n2. Not all courts have followed the Advent decision. See Triple Point Technology, Inc. v.\nD.N.L. Risk Management, Inc., 2000 U.S. Dist. LEXIS 22327 (noting that \xe2\x80\x9cmerely\nbecause the program had to be contained on a floppy disk or CD-ROM for transfer does\nnot bring this agreement under the purview of the U.C.C.\xe2\x80\x9d). Several commentators have\nalso criticized the decision, including the following comments of Lorin Brennan from\nWhy Article 2 Cannot Apply to Software Transactions, 38 Duq. L. Rev. 459, 466-67\n(2000):\nAs the court in Advent Systems v. Unisys Corp. blithely put it:\nThat a computer program may be copyrightable as intellectual property\ndoes not alter the fact that once in the form of a floppy disc or other\nmedium, the program is tangible, moveable, and available in the\nmarketplace.\nIn other words, a computer program may start off as intangible intellectual\nproperty, but once it is copied onto a floppy disc it merges into the disc and\nbecomes a tangible, physical "good." Under this view all software transactions fit\nneatly into the, if you will, Ptolemic world view of Article 2, where everything\ncircles around the fixed notion of a sale in goods.\nIt is a tidy and comforting notion - and spectacularly wrong.\xe2\x80\xa6\nThe mere fact that [a software retailer downloads and redistributes a copy of a\nLinux program] does not make Linux the computer program \xe2\x80\x9ctangible, moveable\n24\n\n\x0cand available in the marketplace.\xe2\x80\x9d Linux, the computer program, still remains an\nintangible, copyrighted work. Linux, the computer program, has not moved from\nthe Linux Web page even though it was copied. If the copy made by [the user]\ndoes not conform to the requirements of the GNU Public License, then that copy\nis unauthorized, its distribution infringing, and the copy is definitely not available\nin the marketplace.\nThis difference is profound. The goods-centric image sees a software transaction\nas a delivery of a particular CD. It makes the medium the message; the container\nthe content; the CD the computer program. The information-centric view sees just\nthe opposite. The essence of the transaction is the legal authorization to use the\nprogram; the CD is just the means to enable that use. One needs a jar to carry\ncaviar, but that does not make the jar the essence of the meal.\xe2\x80\xa6\nFor additional articles discussing whether software should constitute a \xe2\x80\x9cgood,\xe2\x80\x9d see Jean\nBraucher, Contracting out of Article 2 Using a \xe2\x80\x9cLicense\xe2\x80\x9d Label: A Strategy That Should\nNot Work for Software Products, 40 Loy. L.A. L. Rev. 261 (2006) (advocating that\nArticle 2 should apply to the sale or license of software) and Holly K. Towle, Enough\nAlready: It Is Time to Acknowledge That UCC Article 2 Does Not Apply to Software and\nOther Information, 52 S. Tex. L. Rev. 531 (2011) (advocating that Article 2 should not\napply to the sale or license of software).\n3. Applying the reasoning of the Advent court, would you characterize as an Article 2\n\xe2\x80\x9cgood\xe2\x80\x9d software that is not sold on a diskette, but which is obtained via the internet\nthrough a download from a software vendor\xe2\x80\x99s website? In Specht v. Netscape\nCommunications Corp., 306 F.3d 17, n.13 (2nd Cir. 2002), the court stated that\ndownloadable software \xe2\x80\x9cis scarcely a \xe2\x80\x98tangible\xe2\x80\x99 good,\xe2\x80\x9d but did not decide whether the\nUCC should apply to the downloaded program in question, because the application of the\nUCC (versus common law) would not affect the outcome with regard to the issues raised\nin the case (including the issue of whether an arbitration clause was enforceable).\n4. What law should apply when customized (rather than \xe2\x80\x9cshrink-wrapped\xe2\x80\x9d) software is\ninvolved?\n5. In 1999, the Uniform Law Commission promulgated the Uniform Computer\nInformation Transactions Act (UCITA) to apply to \xe2\x80\x9ccomputer information transactions\xe2\x80\x9d\nsuch as the purchase or license of shrink-wrapped software. It has been adopted in only\ntwo states (Maryland and Virginia), and in those states it is clear that UCITA governs\nsales or licenses of software rather than Article 2. The American Bar Association and\nseveral other groups have come out against UCITA, virtually stopping its enactment.\nSeveral states have adopted anti-UCITA laws, in an attempt to prevent choice of law\nclauses from making UCITA applicable to their residents. For more information on\nUCITA, see Carlyle C. Ring, Jr., Uniform Rules for Internet Information Transactions:\n25\n\n\x0cAn Overview of Proposed UCITA, 38 Duq. L. Rev. 319 (2000); Henry Deeb Gabriel, The\n2003 Amendments of Article Two of the Uniform Commercial Code: Eight Years or a\nLifetime After Completion, 52 S. Tex. L. Rev. 487 (2011).\n6. In May 2009, the American Law Institute approved its Principles on the Law of the\nLaw of Software Contracts. This publication contains valuable notes that summarize the\ncase law applying UCC provisions to software. For a discussion of the Principles, see\nMaureen A. O\'Rourke, An Essay on the Challenges of Drafting a Uniform Law of\nSoftware Contracting, 10 Lewis & Clark L. Rev. 925 (2006); Juliet M. Moringiello,\nWhat\'s Software Got To Do with It? The ALI Principles of the Law of Software\nContracts, 84 Tul. L. Rev. 1541 (2010).\n7. We will later compare the terms, especially the warranty terms, of a contract for the\nsale or licensing of software and a contract for the sale of goods. Based on your personal\nexperience, how different is a warranty on a good that you have recently purchased\ncompared to warranty terms contained in a licensing agreement for software that you have\nrecently downloaded? What do these differences tell us about the expectations of the\nsoftware companies?\n2.4. The Article 2 \xe2\x80\x9cMerchant\xe2\x80\x9d Rules. As we have seen, Article 2 applies to transactions in\ngoods. If a sale of goods is within Article 2, in general it doesn\xe2\x80\x99t matter whether the transaction is\nbetween sophisticated or unsophisticated parties. Article 2 covers Bic\xe2\x80\x99s sale of 2 million pens to\nWal-Mart, Wal-Mart\xe2\x80\x99s sale of a package of six Bic pens to me, and my sale of one pen to you.\nSee Scott J. Burnham, Why Do Law Students Insist that Article 2 Applies Only to Merchants and\nWhat Can We Do About It?, 63 Brook. L. Rev. 1271 (1997).\nHowever, there are a few occasions (thirteen to be exact), where Article 2 contains a rule that\napplies only to merchants or only \xe2\x80\x9cbetween merchants.\xe2\x80\x9d If the rule applies to a merchant, then\nonly that party has to be a merchant, but if the rule applies \xe2\x80\x9cbetween merchants,\xe2\x80\x9d then both\nparties have to be merchants for the rule to kick in. See \xc2\xa7 2-104(3).\n2.4.1. What does it mean to be a merchant? As you can imagine, when a rule applies to a\nmerchant, it is generally because the merchant is more sophisticated in business matters\nand may be held to a higher standard of diligence. How does the merchant obtain that\nsophistication? Let\xe2\x80\x99s turn to the definition of merchant at \xc2\xa7 2-104(1). The UCC\ndistinguishes between merchants as to goods and merchants as to practices.\n2.4.2. Under \xc2\xa7 2-104(1), a merchant falls into the class of a merchant as to goods in one\nof three ways:\n\xef\x82\xb7\n\nA person who deals in goods of the kind;\n\n\xef\x82\xb7\n\nA person who, by his occupation (and not by hobby) holds himself out as\n26\n\n\x0chaving knowledge or skill peculiar to the goods involved (for example, an\nautomobile parts dealer, although he doesn\xe2\x80\x99t deal in cars, may nonetheless\nbe a merchant as to cars because by his occupation he has special\nknowledge of car parts and car maintenance (see Fay v. O\xe2\x80\x99Connell, 1990\nMass. App. Div. 141);\n\xef\x82\xb7\n\nA person who employs an agent who, by the agent\xe2\x80\x99s occupation, holds\nhimself out as having knowledge or skill peculiar to the goods involved\n(see Swift Freedom Aviation, LLC v. R.H. Aero, 2005 U.S. Dist. LEXIS\n37261 (E.D. Tenn. 2005)).\n\n2.4.3. There are three important Article 2 sections which apply only to merchants as to\ngoods:\n2.4.3.1. The most important by far relates to the implied warranty of\nmerchantability under \xc2\xa7 2-314, which applies only to \xe2\x80\x9cmerchants with respect to\ngoods of that kind.\xe2\x80\x9d\n2.4.3.2. The power to transfer title in an entrustment situation applies only to a\n\xe2\x80\x9cmerchant who deals in goods of that kind.\xe2\x80\x9d \xc2\xa7 2-403(2). For example, if you\nentrust your snowboard to a ski shop for waxing, and the shop (which sells skis)\nmistakenly sells the snowboard, a buyer in the ordinary course of business will\nobtain good title.\n2.4.3.3. Under \xc2\xa7 2-312(3), a merchant dealing in goods of the kind gives a\nwarranty that the goods are free of infringement claims.\nProblem 2-8. To reduce its operating deficit, the nonprofit Nordic Sports Association sponsored\na fund-raising luncheon, where it sold Swedish meatballs. A patron\xe2\x80\x99s tooth was cracked when the\npatron bit into a big chunk of bone contained in the meatball. Does the patron have a claim for\nbreach of the implied warranty of merchantability against the Association?\nProblem 2-9. Kathleen, a law professor, collects quilts as a hobby. In 2010 she began to sell\nsome of her quilts on eBay; her transactions steadily increased to more than 100 transactions per\nyear and more than $5,000 in annual sales. In 2014, eBay invited Kathleen to become a \xe2\x80\x9cPower\nSeller.\xe2\x80\x9d Does the implied warranty of merchantability apply to Kathleen\xe2\x80\x99s sales of quilts on\neBay?\nProblem 2-10. Bob owns and operates a retail furniture store. As a hobby, he collects antique\nphonographs. If he sells one of the antique phonographs to a friend, does the warranty of\nmerchantability apply? What if Bob consigns his collection of antique phonographs to an auction\nagency that specializes in the sale of antiques (including antique phonographs)?\n27\n\n\x0c2.4.4. Section 2.4.3 notes certain Article 2 \xe2\x80\x9cmerchant\xe2\x80\x9d provisions that apply only to\nmerchants in goods. Other merchant rules apply to both merchants in goods and\nmerchants as to practices. It is much easier to fall into the class of merchants as to\npractices. This definition focuses on a person\xe2\x80\x99s familiarity with general business\npractices, and according to \xc2\xa7 2-104, Comment 2, would include \xe2\x80\x9calmost every person in\nbusiness.\xe2\x80\x9d (emphasis added) A person falls into this class by one of two means:\n2.4.4.1. A person who, by his occupation (and not by hobby) holds herself out as\nhaving knowledge or skill peculiar to the practices involved; or\n2.4.4.2. A person who employs an agent who, by the agent\xe2\x80\x99s occupation, holds\nherself out as having knowledge or skill peculiar to the practices involved (such as\na university that hires a purchasing agent familiar with general business practices\nto acquire equipment and supplies for the university).\n2.4.4.3. Important exclusion: Comment 2 states that the Article 2 sections\nproviding special rules for merchants as to practices only applies to a merchant in\nhis mercantile capacity; the special rules do not apply when a merchant is buying\ngoods for his personal use.\nProblem 2-11. Ann, a car dealer, purchases a copy machine for her office. For purposes of\ndetermining whether the written confirmation rules of \xc2\xa7 2-201(2) apply, is the car dealer a\nmerchant?\nProblem 2-12. Jack owns a pet shop. He orders a computer for his personal use from Dell by\nphone. Will Jack be considered a merchant in determining what rules to apply under \xc2\xa7 2-207(2)\nregarding any additional terms proposed by Dell contained in the shipment?\n2.4.5. You need to carefully read each Article 2 provision to determine to whom it\napplies. Although most Article 2 rules apply regardless of whether either party is a\nmerchant, several Article 2 rules are limited in their application, depending upon one or\nboth parties\xe2\x80\x99 status as a merchant as to goods or practices. In addition to the three rules\nthat apply only if a party is a merchant as to goods as noted at Section 2.4.3, following are\nexamples of rules whose application depends upon the merchant status of one or both\nparties.\n2.4.5.1. The \xc2\xa7 2-201(2) written confirmation exception to the statute of frauds\napplies when both parties are merchants, as indicated by the language \xe2\x80\x9c[b]etween\nmerchants.\xe2\x80\x9d\n\n28\n\n\x0c2.4.5.2. Section 2-207(2) regarding the \xe2\x80\x9cbattle of the forms\xe2\x80\x9d allows additional\nterms to become a part of the contract when both parties are merchants, if certain\nrequirements are met.\n2.4.5.3. Section 2-209(2) requires a \xe2\x80\x9cno oral modification clause\xe2\x80\x9d on a form\nsupplied by a merchant to be separately signed or initialed, unless both parties are\nmerchants (in which case the \xe2\x80\x9cno oral modification clause\xe2\x80\x9d does not need to be\nseparately signed or initialed).\n2.4.5.4. Section 2-205 provides that an offer by a merchant to buy or sell goods\nmay become irrevocable without consideration if certain requirements are met.\nOnly the offeror needs to be a merchant.\n2.4.5.5. As discussed in Chapter 1, Section 1.4, the obligation of \xe2\x80\x9cgood faith\xe2\x80\x9d\napplies to merchants and nonmerchants alike, but the pre-2001 version of UCC\nArticles 1 and 2 (which still exists in several jurisdictions) applies a higher\nstandard to merchants versus nonmerchants.\n2.4.5.6 Under \xc2\xa7 2-509, if the seller is a merchant as to goods or practices, the risk\nof loss passes to the buyer when the buyer receives the good. If the seller is a\nnonmerchant, the risk of loss passes to buyer on tender of delivery.\n2.5. Special Cases Regarding \xe2\x80\x9cMerchant\xe2\x80\x9d Status.\n2.5.1. Can a government be a merchant as to goods or practices? When presented with\nthis question, the Montana Supreme Court in Western Sign v. State, 590 P.2d 141, 144\n(Mont. 1979), conceded that \xe2\x80\x9cit may well be that a state may be a merchant in some\ncircumstances,\xe2\x80\x9d but ruled that the burden of proof to support such classification rests\nupon the opposing party.\nIf a government entity makes purchases through a purchasing division, and the purchasing\ndivision has knowledge regarding general purchasing practices, the government should be\na merchant as to practices under the \xe2\x80\x9cagency\xe2\x80\x9d rules of \xc2\xa7 2-104. See, for example, County\nof Milwaukee v. Northrop Data Systems, Inc., 602 F.2d 767 (7th Cir. 1979), in which the\ncourt ruled that a county that purchased a sophisticated computer system was a merchant,\nbecause the purchase was made through its purchasing division, which had extensive\nexperience in business practices.\n2.5.2. Is a farmer a merchant for purposes of \xc2\xa7 2-201(2)? This issue has been frequently\nlitigated. See David B. Harrison, Annotation, Farmers as \xe2\x80\x9cmerchants\xe2\x80\x9d Within Provisions\nof UCC Article 2, Dealing with Sales, 95 A.L.R.3d 484 (1979).\n29\n\n\x0cChapter 2 Additional Sources.\nScott J. Burnham, Glannon Guide to Sales: Learning Sales Through Multiple-Choice Questions\nand Analysis (Wolters Kluwer 2d ed., 2012), Chapters 3, 4.A, 4.B\nJames J. White and Robert S. Summers, Uniform Commercial Code (West 6th ed., 2010),\nChapter 1-1\n\n30\n\n\x0cChapter 3. Formation of a Contract under the UCC\n3.1. Common Law Principles of Contract Formation. Common law has developed principles\ngoverning formation of a contract, including the requirement of mutual assent between the\nparties manifested through an offer and acceptance. Early in its development, the common law\nwas strict, making it difficult at times to form a contract.\n3.1.1. Under the early mirror image rule, the terms of the acceptance had to exactly\nmirror the terms of the offer in order for a contract to be formed. Furthermore, the manner\nof acceptance (promise or performance) had to be the same, as did the medium of\nacceptance (letter, telegraph, etc.). For example, if an offer to sell a horse was delivered to\na potential buyer in a telegram, the buyer could accept the offer only by telegram, and not\nby letter and not by performance. However, even before the UCC was adopted, these\nstrict rules of contract formation were being relaxed by the courts and legislatures. See,\nfor example, Hammersberg v. Nelson, 224 Wis. 403 (1937) (oral acceptance of a written\noffer was sufficient to form a contract). Reflecting current common law, the Restatement\n(Second) of Contracts \xc2\xa7 30 (1981) provides: \xe2\x80\x9cUnless otherwise indicated by the language\nor the circumstances, an offer invites acceptance in any manner and by any medium\nreasonable in the circumstances.\xe2\x80\x9d\n3.1.1.1. Even though common law has relaxed the rules of offer and acceptance,\nmany courts require a \xe2\x80\x9cmirror image\xe2\x80\x9d acceptance of the terms proposed. In other\nwords, a purported acceptance is not effective if it adds new or differing terms\nfrom those proposed; instead, it is a counter-offer. See Restatement (Second) of\nContracts \xc2\xa7 59 (1981): \xe2\x80\x9cA reply to an offer which purports to accept it but is\nconditional on the offeror\xe2\x80\x99s assent to terms additional to or different from those\noffered is not an acceptance but is a counter-offer.\xe2\x80\x9d If a seller offers to sell a horse\nfor $2,000, and the buyer replies, \xe2\x80\x9cIt\xe2\x80\x99s a deal if you include the bridle,\xe2\x80\x9d then there\nis no acceptance. The buyer\xe2\x80\x99s response is a counter-offer.\n3.1.2. At common law, a contract cannot be formed if essential terms are missing. In\nDrug Fair Northwest v. Hooper Enterprises, Inc., 733 P.2d 1285 (Mont. 1987), the court\ndetermined that a letter regarding the lease of property did not form a contract. Although\nthe letter referenced the lease of a specific property and the rental amount, it did not\nspecify the commencement date of the lease or the responsibility of the parties for taxes,\ninsurance, repairs, maintenance and utilities. In addition, the letter provided for renewal\nterms, but failed to specify the rental amount for the renewal periods.\n3.2. Relaxed Formation Rules under the UCC. As noted by the Montana Supreme Court in\nConagra, Inc. v. Nierenberg, 7 P.3d 369, \xc2\xb6 28 (Mont. 2000), \xe2\x80\x9cthe UCC rules governing sales\nagreements are far more permissive in this respect than the general common law rules governing\ncontract formation.\xe2\x80\x9d The party trying to avoid a contract for the sale of grain argued that there\n31\n\n\x0cwas no mutual assent as to all material terms of the contract. The court cited \xc2\xa7 2-204 to support\nits finding that a contract had been formed, emphasizing that:\n3.2.1. Under \xc2\xa7 2-204(1), a contract for the sale of goods may be made in any manner\nsufficient to show agreement, including conduct by both parties which recognizes the\nexistence of a contract.\n3.2.2. Under \xc2\xa7 2-204(2), a contract may be found even though the moment of its making is\nundetermined.\n3.2.3. Under \xc2\xa7 2-204(3), even though one or more terms are left open a sales contract\ndoes not fail for indefiniteness if the parties have intended to make a contract and there is\na reasonably certain basis for giving an appropriate remedy. The court also noted the gapfiller provisions upon which it could rely under Part 3 of Article 2. The gap fillers are\nsummarized commencing at Section 3.2.4.1 below.\n3.2.3.1. The court noted that the only term generally required is a quantity term,\nciting Comment 1 of \xc2\xa7 2-201 (statute of frauds).\n3.2.3.2. Warning: The Official Comment to \xc2\xa7 2-204 states: \xe2\x80\x9cThe more terms the\nparties leave open, the less likely it is that they have intended to conclude a\nbinding agreement, but their actions may be frequently conclusive on the matter\ndespite the omissions.\xe2\x80\x9d Although the UCC is more flexible, it still must be\nestablished that there was an intent to agree on the part of both parties.\n3.2.4 If a seller agrees to sell a particular widget, and the buyer agrees to buy it, it looks\nlike they made an agreement, but the terms are certainly indefinite. As discussed above,\nthe Code wants to facilitate the making of the agreement, and if the parties intended an\nagreement, it will attempt to supply the missing terms. The Official Comment to \xc2\xa7 2-204\nstates:\nNor is the fact that one or more terms are left to be agreed upon enough of itself to\ndefeat an otherwise adequate agreement. Rather, commercial standards on the\npoint of \xe2\x80\x9cindefiniteness\xe2\x80\x9d are intended to be applied, this Act making provision\nelsewhere for missing terms needed for performance, open price, remedies, and\nthe like.\nLet\xe2\x80\x99s look at some of those \xe2\x80\x9cgap-fillers\xe2\x80\x9d or \xe2\x80\x9cdefault rules.\xe2\x80\x9d\n3.2.4.1. Price. In the absence of a stated price, the price is a reasonable price. The\nusual measure of a reasonable price is some objective source such as the seller\xe2\x80\x99s\ncatalog or the market price. If the price is to be set by one of the parties, then that\nparty is constrained by \xe2\x80\x9cgood faith\xe2\x80\x9d as discussed in Chapter 1.\n32\n\n\x0c3.2.4.2. Quantity. Section \xc2\xa7 2-204(3) states that a contract does not fail for\nindefiniteness if \xe2\x80\x9cthere is a reasonably certain basis for giving an appropriate\nremedy.\xe2\x80\x9d Failure to state a quantity can be fatal because without a quantity, it is\ndifficult to determine the remedy. For example, if I sue you for your failure to\ndeliver \xe2\x80\x9cwidgets,\xe2\x80\x9d how many did you promise me? Failure to state a quantity is\nnot fatal, however, if there is a reasonable basis for supplying the quantity term. It\nmight be supplied by course of dealing. If each month a law firm has purchased 10\nreams of paper from a seller and in April it orders \xe2\x80\x9cpaper,\xe2\x80\x9d the quantity can\nprobably be supplied by the past measure. According to \xc2\xa7 2-306, if the quantity is\nmeasured either by the output of the seller or the requirements of the buyer, that is\nsufficient to establish a quantity. The amount supplied or demanded is constrained\nby good faith and by prior output or requirements.\n3.2.4.3. Delivery. Section 2-307 provides the default rule that all the goods\nordered must be tendered in a single delivery. If the parties contract around that\nrule, they have created an \xe2\x80\x9cinstallment contract\xe2\x80\x9d under \xc2\xa7 2-612. According to \xc2\xa7 2308, in the absence of a specified place for delivery, the place of delivery is at the\nseller\xe2\x80\x99s place of business or residence if the seller does not have a place of\nbusiness. As we will see, this concept becomes important when we discuss\ndelivery terms in Chapter 10. The starting point is that the seller has no obligation\nto deliver the goods to the buyer.\n3.2.4.4. Time. It will not surprise you that \xc2\xa7 2-309 provides that when the contract\ndoes not specify a time, the default rule is a reasonable time.\n3.2.4.5. Payment. Sections 2-307 and 2-310 provide that payment is due on tender\nof delivery. According to \xc2\xa7 2-511, payment must be made in the manner current in\nthe ordinary course of business. So if it is customary to pay by check, the seller\nmust accept a check. However, if the seller demands legal tender, the seller must\ngive the buyer an extension of time to come up with the cash.\n3.2.4.6. Quality. The quality of the goods promised by the seller is a matter of\nwarranty law, which is discussed in Chapters 6-8.\nProblem 3-1. A buyer agrees in writing to buy a widget from a seller for $1,000. The buyer then\nfinds out that the market price of that widget at the time of sale was $800. Does the buyer have a\nclaim against the seller that the price was not reasonable under \xc2\xa7 2-305?\n\n33\n\n\x0c3.3. Offer and Acceptance. The UCC has not done away with the concepts of offer and\nacceptance. Although not expressly stated in such terms in \xc2\xa7 2-204, both must still be present in\norder to form a contract under the UCC. We turn to the common law for basic principles of offer\nand acceptance, except to the extent they are revised by the UCC (which modifications we\xe2\x80\x99ll\ndiscuss in a moment). See \xc2\xa7 1-103(b).\n3.3.1. An \xe2\x80\x9coffer\xe2\x80\x9d is defined by Restatement (Second) of Contracts \xc2\xa7 24 (1981) as \xe2\x80\x9cthe\nmanifestation of willingness to enter into a bargain, so made as to justify another person\nin understanding that his assent to that bargain is invited and will conclude it.\xe2\x80\x9d A\n\xe2\x80\x9cbargain\xe2\x80\x9d is an agreement to exchange promises or to exchange a promise for a\nperformance or to exchange performances. Id., \xc2\xa7 3.\nProblem 3-2. Are the following transactions offers? Why or why not?\n(1) Professor Burnham asks Professor Juras if she is interested in buying his bicycle.\n(2) You receive a catalog from Outdoor Adventureware offering certain goods at certain\nprices.\n(3) A regional online auction site contains an item that states: \xe2\x80\x9c2008 Subaru Outback for\nsale; 115,000 miles; $5,500 firm. Call 253-0000.\xe2\x80\x9d\n3.3.2. At common law an offer can be revoked (that is, taken back) at any time prior to\nacceptance, unless consideration is paid to hold the offer open (referred to as an option\ncontract). According to Restatement (Second) of Contracts \xc2\xa7 36 (1981), in addition to\nrevocation, the power of an offeree to accept is terminated by:\n\xef\x82\xb7\n\xef\x82\xb7\n\xef\x82\xb7\n\nRejection or counter-offer by the offeree;\nLapse of time; or\nDeath or incapacity of the offeror or offeree.\n\n3.3.3. Section 2-205 alters the common law rule on revocation of an offer. Under\ncommon law, an offeror can withdraw an offer at any time prior to acceptance, unless the\nofferor has specifically agreed to hold the offer open, which agreement must be supported\nby additional consideration, resulting in an option contract. See Restatement (Second) of\nContracts \xc2\xa7 25 (1981). For example, if on March 1 Gabe offers to sell his house to Dell\nfor $100,000, offer open until April 1, he can withdraw his offer at any time prior to\nacceptance unless Dell pays consideration to Gabe for the promise to hold the offer open\nuntil April 1.\n3.3.3.1. Take a look at \xc2\xa7 2-205, which provides that an offer will be irrevocable,\nor firm, without payment of any additional consideration (i.e., a departure from\n34\n\n\x0ccommon law). The provision probably reflects prevailing commercial practice,\nand is available only in the following circumstances:\n\xef\x82\xb7\n\xef\x82\xb7\n\xef\x82\xb7\n\xef\x82\xb7\n\nthe offeror must be a merchant;\nthere must be a writing signed by the merchant offering to hold the\noffer open;\nthe period of irrevocability must be for a reasonable time, which\ncannot exceed three months (and if longer than three months, will\nbe enforced up to three months); and\nif the writing containing the firm offer is provided by the offeree,\nthe firm offer portion of the writing must be separately signed by\nthe offeror.\n\nThis fourth requirement is a good example of \xe2\x80\x9creasonable expectations,\xe2\x80\x9d a\nconcept found frequently in the Code, though that name for it is never used. The\nconcept recognizes the reality that the parties do not read their contracts carefully,\nand puts the burden on the party offering an unusual or unexpected term to\nreasonably call it to the attention of the other party. See Scott J. Burnham,\nIncorporating the Doctrine of Reasonable Expectations in Article 2, 11 Duq. Bus.\nL.J. 217 (2009).\nProblem 3-3. A seller offers to sell a widget to a buyer for $1,000. The buyer sends the seller a\ndraft agreement containing standard terms of sale. In addition, the buyer includes this term in the\nmiddle of the contract:\n17. Seller hereby offers to sell Buyer 100 additional widgets for $1,000 each on the same\nterms. This offer will be held open until May 15.\nOn May 1, the seller signs the form on the signature line at the end and sends it to the buyer, who\nalso signs it. A week later, the buyer informs the seller that he accepts the offer in paragraph 17.\nIs there a binding contract for the 100 additional widgets?\n3.3.3.2. If consideration is paid by the offeree to the offeror to hold the offer open,\nthe terms of \xc2\xa7 2-205 do not apply. Read the last two sentences of Comment 3 to\n\xc2\xa7 2-205.\nProblem 3-4. A seller offers to sell a widget to a buyer for $1,000. The buyer wants more time to\nthink about it, and asks the seller if he will accept $25 to keep the offer open for six months. The\nseller agrees and the buyer pays the $25. Four months later, the buyer accepts the offer. Is the\noffer still open at the time the buyer accepted it?\nProblem 3-5. Raymond, who raises, trains, and sells quarter horses, sends the following letter to\nEd, who has been looking for a roping horse to buy:\n35\n\n\x0cJanuary 13, 2014\nDear Ed: I offer you the opportunity to buy an outstanding 8 year old roping horse, Pokey,\nfor $20,000. This offer remains open until May 30, 2014.\nSincerely yours, Raymond\nEd arrives on February 26, 2014 at Raymond\xe2\x80\x99s stables, $20,000 check in hand, to pick up Pokey.\nRaymond advises Ed that he sold Pokey for $25,000 to his neighbor yesterday. Ed comes to see\nyou to ask if he has a claim for breach of contract against Raymond. What do you tell him?\n3.3.4. Once an offer is made, a contract is formed when the offer is accepted. Acceptance\nis the manifestation by the offeree of assent to the terms of the offer. Restatement\n(Second) of Contracts \xc2\xa7 50. In other words, if the offeree does not clearly express assent\nto the terms that have been offered, there is no acceptance.\n3.3.4.1. Under the common law, if an expression of \xe2\x80\x9cacceptance\xe2\x80\x9d contains any\ndiffering terms or additional terms than those contained in the original offer, this\nis a \xe2\x80\x9ccounter-offer,\xe2\x80\x9d and not an acceptance. Example: Sue offers to sell John her\ncar for $10,000. John replies that he\xe2\x80\x99ll accept her offer, provided that she throws\nin a new set of tires. At common law, this is not an acceptance, but a counteroffer.\n3.3.5. The UCC has modified the common law rule regarding \xe2\x80\x9cmirror acceptance,\xe2\x80\x9d most\nnotably under \xc2\xa7 2-207, commonly referred to as the \xe2\x80\x9cbattle of the forms.\xe2\x80\x9d But let\xe2\x80\x99s start\nwith \xc2\xa7 2-206. We will dedicate Chapter 4 to the intricacies of \xc2\xa7 2-207.\n3.3.5.1. As the common law developed, there was a departure from the mirror\nimage rule regarding the manner of acceptance. Today, most jurisdictions allow\nacceptance in any reasonable manner and by any reasonable medium unless the\nofferor prescribes a specific manner or medium of acceptance. Note: At common\nlaw, the offeror is still master of the offer, and can still insist on a specific manner\nor medium of acceptance.\n3.3.5.2. Consistent with the development under common law, \xc2\xa7 2-206(1)(a)\nallows an offeree to accept \xe2\x80\x9cin any manner and by any medium reasonable in the\ncircumstances,\xe2\x80\x9d unless otherwise unambiguously indicated by the language or\ncircumstances.\nProblem 3-6. Joe offers to sell his car to Bob for $1,000, but the offer specifically states that Bob\ncan accept only by coming to Joe\xe2\x80\x99s house on February 15 between the hours of 5:00 p.m. and\n8:00 p.m. to pick up the car, along with a certified check for $1,000. Can Bob accept by writing a\nletter to Joe accepting his offer? What if he shows up at the specified time and place, but brings a\npersonal check instead of a certified check?\n36\n\n\x0c3.3.5.3. Section 2-206(1)(b) provides that if an offer to buy goods seeks \xe2\x80\x9cprompt\nor current shipment,\xe2\x80\x9d the seller can accept by either a prompt promise to ship or\nby prompt performance. In other words, a reference to a prompt shipment is not to\nbe construed as limiting the manner of acceptance to shipment, but also allows\nacceptance by promise.\n3.3.5.4. Under \xc2\xa7 2-206(1)(b), if there is an offer to buy goods for prompt or\ncurrent shipment, and a seller responds by promptly sending a shipment, but the\nshipment is non-conforming, the shipment will nonetheless operate as an\nacceptance even though it does not mirror the terms of the offer. In other words,\nthe seller accepts and breaches at the same time. However, if the seller does not\nwant to breach, it can notify the buyer that the shipment is only an\naccommodation, in which event it becomes a counter-offer that the buyer can\naccept or reject.\nProblem 3-7. Two Medicine Ranch sends the following fax to several of its neighbors: \xe2\x80\x9cIn\nurgent need of 30 head of registered Black Angus cows. Must be bred and between 3 and 4 year\nyears of age; will pay $1500 per head. If you have this quantity to sell, ship immediately to Two\nMedicine Ranch.\xe2\x80\x9d Two neighbors respond that day. First, Bob calls and says \xe2\x80\x9cI\xe2\x80\x99ll deliver 30 head\nof cattle as you described tomorrow.\xe2\x80\x9d About one hour after that phone call, Alice drives up with\n28 head of registered cows as described in the offer.\n(1) Is a contract formed between Bob and Two Medicine Ranch, although the offer\nrequested acceptance by shipment?\n(2) Is a contract formed between Alice and Two Medicine Ranch when she delivers 28\nhead of cattle as described in the offer?\nProblem 3-8. Office Supplies offers to sell a specific model of a copy machine to Mega Law\nFirm for $16,000. Mega Law firm responds: \xe2\x80\x9cWe accept but will pay $15,000 for the copy\nmachine.\xe2\x80\x9d Has there been acceptance under \xc2\xa7 2-206?\nProblem 3-9. Toyland, a retail toy store, places a written order asking Dollmaker to ship 10,000\nof its popular Cutie-Pie dolls at $1.00 per unit. Dollmaker responds by shipping 9000 Cutie-Pie\ndolls, with an invoice showing a price of $1.00 per unit. Has there been acceptance by Dollmaker\nunder \xc2\xa7 2-206?\n3.3.6. Under \xc2\xa7 2-206(2), if an offeree accepts by beginning performance, and performance\nis a reasonable mode of acceptance, the offeree must also provide notice within a\nreasonable time of beginning performance. Failure to do so will allow the offeror to treat\nthe offer as having lapsed before acceptance. Read Comment 3.\n37\n\n\x0cProCD, Inc. v. Zeidenberg\n86 F.3d 1447 (7th Cir. 1996)\nEASTERBROOK, Circuit Judge\nMust buyers of computer software obey the terms of shrinkwrap licenses? The district\ncourt held not, for two reasons: first, they are not contracts because the licenses are inside the box\nrather than printed on the outside; second, federal law forbids enforcement even if the licenses\nare contracts. 908 F. Supp. 640 (W.D. Wis. 1996). The parties and numerous amici curiae have\nbriefed many other issues, but these are the only two that matter--and we disagree with the\ndistrict judge\'s conclusion on each. Shrinkwrap licenses are enforceable unless their terms are\nobjectionable on grounds applicable to contracts in general (for example, if they violate a rule of\npositive law, or if they are unconscionable). Because no one argues that the terms of the license\nat issue here are troublesome, we remand with instructions to enter judgment for the plaintiff.\nProCD, the plaintiff, has compiled information from more than 3,000 telephone\ndirectories into a computer database....\nThe database in SelectPhone cost more than $ 10 million to compile and is expensive to\nkeep current. It is much more valuable to some users than to others. The combination of names,\naddresses, and sic codes enables manufacturers to compile lists of potential customers.... Every\nbox containing its consumer product declares that the software comes with restrictions stated in\nan enclosed license. This license, which is encoded on the CD-ROM disks as well as printed in\nthe manual, and which appears on a user\'s screen every time the software runs, limits use of the\napplication program and listings to non-commercial purposes.\nMatthew Zeidenberg bought a consumer package of SelectPhone in 1994 from a retail\noutlet in Madison, Wisconsin, but decided to ignore the license. He formed Silken Mountain\nWeb Services, Inc., to resell the information in the SelectPhone database. The corporation makes\nthe database available on the Internet to anyone willing to pay its price -- which, needless to say,\nis less than ProCD charges its commercial customers. Zeidenberg has purchased two additional\nSelectPhone packages, each with an updated version of the database, and made the latest\ninformation available over the World Wide Web, for a price, through his corporation. ProCD\nfiled this suit seeking an injunction against further dissemination that exceeds the rights specified\nin the licenses (identical in each of the three packages Zeidenberg purchased). The district court\nheld the licenses ineffectual because their terms do not appear on the outside of the packages.\nThe court added that the second and third licenses stand no different from the first, even though\nthey are identical, because they might have been different, and a purchaser does not agree to -and cannot be bound by -- terms that were secret at the time of purchase. 908 F. Supp. at 654.\nFollowing the district court, we treat the licenses as ordinary contracts accompanying the\nsale of products, and therefore as governed by the common law of contracts and the Uniform\n38\n\n\x0cCommercial Code. Whether there are legal differences between "contracts" and "licenses" (which\nmay matter under the copyright doctrine of first sale) is a subject for another day.... Zeidenberg\ndoes argue, and the district court held, that placing the package of software on the shelf is an\n"offer," which the customer "accepts" by paying the asking price and leaving the store with the\ngoods.... In Wisconsin, as elsewhere, a contract includes only the terms on which the parties have\nagreed. One cannot agree to hidden terms, the judge concluded. So far, so good -- but one of the\nterms to which Zeidenberg agreed by purchasing the software is that the transaction was subject\nto a license. Zeidenberg\'s position therefore must be that the printed terms on the outside of a box\nare the parties\' contract -- except for printed terms that refer to or incorporate other terms. But\nwhy would Wisconsin fetter the parties\' choice in this way? Vendors can put the entire terms of a\ncontract on the outside of a box only by using microscopic type, removing other information that\nbuyers might find more useful (such as what the software does, and on which computers it\nworks), or both. The "Read Me" file included with most software, describing system\nrequirements and potential incompatibilities, may be equivalent to ten pages of type; warranties\nand license restrictions take still more space. Notice on the outside, terms on the inside, and a\nright to return the software for a refund if the terms are unacceptable (a right that the license\nexpressly extends), may be a means of doing business valuable to buyers and sellers alike. See E.\nAllan Farnsworth, 1 Farnsworth on Contracts \xc2\xa7 4.26 (1990); Restatement (2d) of Contracts\n\xc2\xa7 211 comment a (1981) ("Standardization of agreements serves many of the same functions as\nstandardization of goods and services; both are essential to a system of mass production and\ndistribution. Scarce and costly time and skill can be devoted to a class of transactions rather than\nthe details of individual transactions."). Doubtless a state could forbid the use of standard\ncontracts in the software business, but we do not think that Wisconsin has done so.\nTransactions in which the exchange of money precedes the communication of detailed\nterms are common. Consider the purchase of insurance. The buyer goes to an agent, who explains\nthe essentials (amount of coverage, number of years) and remits the premium to the home office,\nwhich sends back a policy. On the district judge\'s understanding, the terms of the policy are\nirrelevant because the insured paid before receiving them. Yet the device of payment, often with\na "binder" (so that the insurance takes effect immediately even though the home office reserves\nthe right to withdraw coverage later), in advance of the policy, serves buyers\' interests by\naccelerating effectiveness and reducing transactions costs. Or consider the purchase of an airline\nticket. The traveler calls the carrier or an agent, is quoted a price, reserves a seat, pays, and gets a\nticket, in that order. The ticket contains elaborate terms, which the traveler can reject by\ncanceling the reservation. To use the ticket is to accept the terms, even terms that in retrospect\nare disadvantageous.... Just so with a ticket to a concert. The back of the ticket states that the\npatron promises not to record the concert; to attend is to agree. A theater that detects a violation\nwill confiscate the tape and escort the violator to the exit. One could arrange things so that every\nconcertgoer signs this promise before forking over the money, but that cumbersome way of doing\nthings not only would lengthen queues and raise prices but also would scotch the sale of tickets\nby phone or electronic data service.\n\n39\n\n\x0cConsumer goods work the same way. Someone who wants to buy a radio set visits a\nstore, pays, and walks out with a box. Inside the box is a leaflet containing some terms, the most\nimportant of which usually is the warranty, read for the first time in the comfort of home. By\nZeidenberg\'s lights, the warranty in the box is irrelevant; every consumer gets the standard\nwarranty implied by the UCC in the event the contract is silent; yet so far as we are aware no\nstate disregards warranties furnished with consumer products. Drugs come with a list of\ningredients on the outside and an elaborate package insert on the inside. The package insert\ndescribes drug interactions, contraindications, and other vital information -- but, if Zeidenberg is\nright, the purchaser need not read the package insert, because it is not part of the contract.\nNext consider the software industry itself. Only a minority of sales take place over the\ncounter, where there are boxes to peruse. A customer may place an order by phone in response to\na line item in a catalog or a review in a magazine. Much software is ordered over the Internet by\npurchasers who have never seen a box. Increasingly software arrives by wire. There is no box;\nthere is only a stream of electrons, a collection of information that includes data, an application\nprogram, instructions, many limitations ("MegaPixel 3.14159 cannot be used with Byte-Pusher\n2.718"), and the terms of sale. The user purchases a serial number, which activates the software\'s\nfeatures. On Zeidenberg\'s arguments, these unboxed sales are unfettered by terms -- so the seller\nhas made a broad warranty and must pay consequential damages for any shortfalls in\nperformance, two "promises" that if taken seriously would drive prices through the ceiling or\nreturn transactions to the horse-and-buggy age....\nWhat then does the current version of the UCC have to say? We think that the place to\nstart is \xc2\xa7 2-204(1): "A contract for sale of goods may be made in any manner sufficient to show\nagreement, including conduct by both parties which recognizes the existence of such a contract."\nA vendor, as master of the offer, may invite acceptance by conduct, and may propose limitations\non the kind of conduct that constitutes acceptance. A buyer may accept by performing the acts\nthe vendor proposes to treat as acceptance. And that is what happened. ProCD proposed a\ncontract that a buyer would accept by using the software after having an opportunity to read the\nlicense at leisure. This Zeidenberg did. He had no choice, because the software splashed the\nlicense on the screen and would not let him proceed without indicating acceptance. So although\nthe district judge was right to say that a contract can be, and often is, formed simply by paying\nthe price and walking out of the store, the UCC permits contracts to be formed in other ways.\nProCD proposed such a different way, and without protest Zeidenberg agreed. Ours is not a case\nin which a consumer opens a package to find an insert saying "you owe us an extra $ 10,000" and\nthe seller files suit to collect. Any buyer finding such a demand can prevent formation of the\ncontract by returning the package, as can any consumer who concludes that the terms of the\nlicense make the software worth less than the purchase price. Nothing in the UCC requires a\nseller to maximize the buyer\'s net gains....\nREVERSED AND REMANDED.\n\n40\n\n\x0cCase Notes:\n1. Although UCC \xc2\xa7 2-204(2) permits formation of a contract \xe2\x80\x9ceven though the moment of\nits making is undetermined,\xe2\x80\x9d the timing of the formation of the contract in the Pro CD\ncase was an important issue. The district court ruled that the placement of the software\nprogram on the store shelf was an offer, and the contract was formed when Mr.\nZeidenberg accepted the offer by paying the purchase price to the sales clerk. 908 F.\nSupp. 640, 652 (W.D. Wis. 1996). At that point in time, the court reasoned, Mr.\nZeidenberg had neither read nor considered the terms contained in the license enclosed in\nthe box; he could not possibly have assented to them; and thus those terms were not a part\nof the contract. Id. at 654-55. Does the appellate court agree that Mr. Zeidenberg accepted\nthe offer (and a contract was formed) when he paid the purchase price? What constituted\nacceptance, according to the appellate court?\n2. The type of contract involved in this case has been referred to as a \xe2\x80\x9cterms later,\xe2\x80\x9d\n\xe2\x80\x9crolling,\xe2\x80\x9d or \xe2\x80\x9clayered\xe2\x80\x9d contract. Can you recall a purchase that you have recently made in\nwhich you became aware of additional terms after you ordered and paid for a good?\nWhen you ordered or paid for the good, were you aware that additional terms would be\ncoming? Did you actually read the terms once they did arrive? Did you have the\nopportunity to return the good if the terms were, in fact, unacceptable to you? If there had\nnot been notice on the outside of the box that additional terms were contained within the\nbox, or if Mr. Zeidenberg had not been provided the option to return the software after\nreading those terms, would the court have reached a different result? What if there had\nbeen notice on the box and the option to return, but Mr. Zeidenberg had simply neglected\nto read the terms after he opened the box and for that reason was unaware of the\nlimitations imposed? For further discussion of these types of contracts and the difficult\nissues they raise, see Eric A. Posner, ProCD v Zeidenberg and Cognitive Overload in\nContractual Bargaining, 77 U. Chi. L. Rev. 1181 (2010); John E. Murray, Jr., The\nDubious Status of the Rolling Contract Formation Theory, 50 Duq. L. Rev. 35 (2012).\n3.4. Uniform Electronic Transactions Act. Most states have adopted the Uniform Electronic\nTransactions Act promulgated by the Uniform Law Commission in 1999. E-sign is the federal\nstatute governing the enforceability of electronic contracts and signatures. Like UETA, it does\nnot attempt to provide substantive law. E-sign does not preempt state law if a state uniformly\nenacts sections one to sixteen of UETA. 15 U.S.C. \xc2\xa7\xc2\xa7 7001-7006.\nAs noted by the ULC, \xe2\x80\x9cthe primary objective of this act is to establish the legal equivalence of\nelectronic records and signatures with paper writings and manually-signed signatures, removing\nbarriers to electronic commerce.\xe2\x80\x9d UETA is not intended to be a source of substantive law\nregarding contracts; it relies upon other applicable laws for matters such as contract formation\nand enforceability. See \xc2\xa7 7.\n\n41\n\n\x0c3.4.1. Section 5(b) of UETA specifically requires that a party assent to conduct a\ntransaction electronically in order for UETA to apply. It does not force parties to use\nelectronic records, electronic signatures, or other electronic processes.\nProblem 3-10. Jane gives out a business card with an e-mail address on it. Has she consented to\nconduct transactions electronically with those customers who receive her card and place an order\nwith her by e-mail?\n3.4.2. Where it applies, UETA allows offers and acceptances to be communicated\nelectronically. The formation of a contract may not be denied solely because there is not a\npen and ink \xe2\x80\x9cwriting\xe2\x80\x9d or \xe2\x80\x9csignature.\xe2\x80\x9d UETA \xc2\xa7 7. However, substantive law applies to the\nelectronic communications. For example, if Susan sends an e-mail to Bill stating \xe2\x80\x9cI offer\nto sell you my collection of baseball cards for $1,000,\xe2\x80\x9d and Bill replies by e-mail stating\n\xe2\x80\x9cI\xe2\x80\x99ll buy them for $900,\xe2\x80\x9d the substantive laws of offer and acceptance apply and Bill\xe2\x80\x99s email will be construed as a counter-offer rather than an acceptance.\nProblem 3-11. Nancy, a law student, orders a computer from Superfast Computer Co. for $750\non its website, and provides an electronic signature. The signature and other details of the\ntransaction, including the quantity, purchase price, and delivery terms, are recorded and stored\nelectronically at Superfast\xe2\x80\x99s website. A few hours later she finds a better deal on a better\ncomputer. Can Nancy successfully argue that her electronic signature is not valid, and thus she is\nnot obligated to purchase the computer from Superfast? That the statute of frauds (\xc2\xa7 2-201) has\nnot been satisfied? What if Nancy had engaged in the electronic deal by purchasing a used\ncomputer from another student on Craigslist? Does UETA apply to transactions where neither\nparty is a merchant?\n3.4.3. Section 14 of UETA allows contracts to be formed by machines functioning as\nelectronic agents for parties to a transaction, without action or review by a human being.\nAn electronic agent is defined at \xc2\xa7 2(6) to include, for example, an automated computer\nprogram. This is referred to as an automated transaction (defined at \xc2\xa72(2)). See also \xc2\xa7 2,\nOfficial Comment 2.\nProblem 3-12. A pharmacy has a computerized inventory program which, without human review\nor input, automatically places an order by e-mail to a drug company when it determines that the\nsupply of a particular drug is low. The drug company, through use of its own computer program\nthat has access to the e-mail, accepts the offer. Has mutual assent to form a contract occurred,\neven though no human is aware of this particular transaction at the time it is made?\n3.4.4. Under UETA \xc2\xa7 14(2), special rules apply to the formation of a contract in an\nautomated transaction occurring between an electronic agent, on one end, and an\nindividual, on the other. Not all transactions between an individual and, for example, a\nwebsite result in a contract. For example, an agreement is not necessarily formed when\nyou get onto the ULC website to look at the text of UETA. However, what if you get onto\n42\n\n\x0ca website and a little box pops up and provides you with the terms of usage, and states\nconspicuously \xe2\x80\x9cIf you proceed further you consent to the above terms\xe2\x80\x9d? Or if the\nwebsite does not allow you to proceed further unless you click \xe2\x80\x9cyes, I agree\xe2\x80\x9d (a clickwrap\nagreement). A contract may be formed if the individual performs actions that (i) the\nindividual is free to refuse to perform and (ii) the individual knows or has reason to know\nwill cause the electronic agent on the other end to complete the transaction or\nperformance. Keep that in mind next time you click \xe2\x80\x9cyes\xe2\x80\x9d to access a company\xe2\x80\x99s website.\n3.4.5. What happens, in an automated transaction, if an individual makes a mistake? For\nexample, you are in the process of ordering a shirt from the Stuffed Shirts website, and\nyou inadvertently type in \xe2\x80\x9c10" when requested to state the quantity of shirts, instead of\n\xe2\x80\x9c1\xe2\x80\x9d? Have you just formed a contract for ten shirts, when you really only wanted one?\n(By the way, is this a \xe2\x80\x9cunilateral\xe2\x80\x9d or a \xe2\x80\x9cmutual\xe2\x80\x9d mistake, and what would the result be at\ncommon law?)\nProblem 3-13. Read UETA \xc2\xa7\xc2\xa7 14(2) and 10 before responding to the following questions, which\nare based upon the above mistake while ordering from the Stuffed Shirts website.\n(1) What if the Stuffed Shirts website provides you with an opportunity to correct the\nerror? For example, at the end it provides a summary of your order, clearly showing the\nquantity as \xe2\x80\x9c10\xe2\x80\x9d and asks you to confirm the order, and you zone out and hit \xe2\x80\x9cconfirm\xe2\x80\x9d?\n(2) What if the Stuffed Shirts website provides no opportunity to correct the error? What,\nif anything, can you do to \xe2\x80\x9cavoid\xe2\x80\x9d the effect of the error?\nChapter 3 Additional Sources.\nScott J. Burnham, Glannon Guide to Sales: Learning Sales Through Multiple-Choice Questions\nand Analysis (Wolters Kluwer 2d ed., 2012), Chapter 5\nJames J. White and Robert S. Summers, Uniform Commercial Code (West 6th ed., 2010),\nChapter 1-2, 1-4, 1-5\n\n43\n\n\x0cChapter 4. Battle of the Forms\n4.1. Introduction.\n4.1.1. In today\xe2\x80\x99s business world, buyers and sellers have developed standardized forms to\nuse when offering to sell goods and when accepting an offer to buy goods. These forms\ntypically have blank spaces to fill in for \xe2\x80\x9cmaterial\xe2\x80\x9d or \xe2\x80\x9cdickered\xe2\x80\x9d terms, such as the type\nof good, quantity, price, and delivery date. These standardized forms also contain many\nparagraphs, even pages, of \xe2\x80\x9cfine print\xe2\x80\x9d or \xe2\x80\x9cboilerplate\xe2\x80\x9d terms, such as warranties,\nexclusions of warranties, payment terms, remedies (or limitations of remedies), choice of\nlaw, choice of forum, arbitration clauses, etc. UCC \xc2\xa7 2-207 was designed to resolve the\nissue of what terms govern when these forms contain terms that either contradict each\nother (i.e., \xe2\x80\x9cdifferent\xe2\x80\x9d terms), or when one form contains terms not addressed in the other\nform (i.e., \xe2\x80\x9cadditional\xe2\x80\x9d terms).\n4.1.2. Another fairly common situation today is an oral agreement followed up by written\nconfirmations. For example, a law student calls Computer Warehouse to order a new\ncomputer, specifying the model, quantity, and price. Computer Warehouse accepts the\norder over the phone. When Computer Warehouse ships the computer, it sends along a\nnine-page \xe2\x80\x9cwritten confirmation\xe2\x80\x9d of its acceptance that contains numerous terms, such as\nwarranties and choice of law clauses, none of which were discussed when the contract\nwas originally formed on the phone. UCC \xc2\xa7 2-207 provides the framework for\ndetermining whether the additional terms govern the transaction.\n4.1.3. UCC \xc2\xa7 2-207 is not a model of clarity. One commentator has this to say:\nSection 2-207, if not the most complex section in the Code, is certainly among the\nstrong contenders. It is beset with awesome difficulties in its application and few,\nif any Code commentators would presume to know all there is to know about this\ntroublesome section.\nThomas Quinn, Quinn\xe2\x80\x99s Uniform Commercial Code Commentary and Law Digest \xc2\xa72207[A][1] (West 2d ed., 2002).\n4.2. First Step: Work through Section 2-207(1) before the Comma. As discussed in Chapter\n3, formation of a contract at common law requires \xe2\x80\x9cmirror\xe2\x80\x9d acceptance of the terms offered. An\nacceptance cannot contradict terms contained in the original offer, nor add terms to those\noriginally proposed. Such an acceptance becomes a counter-offer, which the original offeror is\nnow free to accept or reject. The purpose of \xc2\xa7 2-207 is to allow, in some circumstances, a\nresponse to an offer that adds or varies terms of the original offer to nonetheless operate as an\nacceptance, whereas under common law it would be construed as a counter-offer.\n44\n\n\x0c4.2.1. Section 2-207(1) requires a communication that is either (i) a \xe2\x80\x9cdefinite and\nseasonable expression of acceptance\xe2\x80\x9d or (ii) a \xe2\x80\x9cwritten confirmation\xe2\x80\x9d following an oral\nagreement. Let\xe2\x80\x99s start by analyzing what constitutes a \xe2\x80\x9cdefinite and seasonable expression\nof acceptance.\xe2\x80\x9d\nProblem 4-1. Office Supplies and MegaLawFirm have been talking about MegaLawFirm\xe2\x80\x99s\npurchase of a new Beerox 1000 copy machine. Office Supplies writes to MegaLawFirm. \xe2\x80\x9cWe\noffer to sell the Beerox 1000 copy machine to you upon the terms contained in the enclosed\npurchase order form.\xe2\x80\x9d That form is reproduced below:\nDate: January 10, 2014\nPurchaser: MegaLawFirm\nDescription of Product: Beerox 1000 copy machine\nQuantity: 1\nPurchase Price: $16,000.00\nDelivery Date: February 1, 2014\n(1) MegaLawFirm responds to this offer as follows: \xe2\x80\x9cWe acknowledge receipt of your\noffer, and agree to enter into a contract upon the terms enclosed.\xe2\x80\x9d MegaLawFirm encloses\nthe following:\nDate: January 11, 2014\nPurchaser: MegaLawFirm\nDescription of Product: Beerox 1000 copy machine\nQuantity: 1\nPurchase Price: $15,000.00\nDelivery Date: February 1, 2014\nIs MegaLawFirm\xe2\x80\x99s response a \xe2\x80\x9cdefinite and seasonable expression of acceptance\xe2\x80\x9d under\nthe UCC? Why or why not?\n(2) What if MegaLawFirm had responded: \xe2\x80\x9cWe accept your offer, upon the terms\nenclosed.\xe2\x80\x9d MegaLawFirm encloses the following:\nDate: January 11, 2014\nPurchaser: MegaLawFirm\nDescription of Product: Beerox 1000 copy machine\nQuantity: 1\nPurchase Price: $16,000.00\nDelivery: To be delivered by Office Supplies at its expense to the offices of\nMegaLawFirm located at 100 Main Street, Missoula, Montana on February 1,\n2014.\n45\n\n\x0cIs MegaLawFirm\xe2\x80\x99s response a \xe2\x80\x9cdefinite and seasonable expression of acceptance\xe2\x80\x9d under\nthe UCC? Why or why not?\n4.2.2. In determining whether there has been \xe2\x80\x9ca definite and seasonable expression of\nacceptance,\xe2\x80\x9d what factors should you look at?\n4.2.2.1. Look for words of acceptance. In the two problems above, MegaLawFirm\nresponds in the first letter with \xe2\x80\x9cwe agree to enter into a contract upon the terms\nenclosed\xe2\x80\x9d; the other response indicates \xe2\x80\x9cwe accept your offer upon the terms\nenclosed.\xe2\x80\x9d Which presents a better case for arguing that MegaLawFirm\xe2\x80\x99s response\nis a \xe2\x80\x9cdefinite and seasonable expression of acceptance\xe2\x80\x9d? Is usage of the word\n\xe2\x80\x9caccept\xe2\x80\x9d in a response to an offer conclusive?\n4.2.2.2. Second, look at whether a purported acceptance manifests assent by the\nofferee to the offeror\xe2\x80\x99s proposed \xe2\x80\x9cdickered\xe2\x80\x9d or material terms. In the first\nproblem above, did MegaLawFirm express consent to the material terms? If in its\nresponse to an offer the offeree does not manifest assent to the material terms\nproposed by offeror, for example, by proposing a different price, quantity, type of\ngood, delivery date or something inconsistent with any other important, dickered\nterm, then you have good grounds to argue that the response is not an acceptance,\nbut a counter-offer. On the other hand, a response containing a contradictory nondickered term, or adding non-material terms not discussed, should not preclude\nacceptance.\nTo put it another way, \xc2\xa7 2-207 is concerned with reasonable expectations. Parties\nusually read the material terms in the acceptance to be sure they conform to the\nterms of the offer. But they don\xe2\x80\x99t read all the fine print. The intent of \xc2\xa7 2-207 is to\nallow formation of a contract even if the fine print differs.\n4.2.3. Now let\xe2\x80\x99s look at the written confirmation portion of \xc2\xa7 2-207(1). Note first that the\nwritten confirmation must follow \xe2\x80\x9cwithin a reasonable time.\xe2\x80\x9d Section 1-205 tells us that\nreasonable depends on the \xe2\x80\x9cnature, purpose and circumstances of the action,\xe2\x80\x9d so it will\nbe determined on a case by case basis.\n4.2.3.1. Comment 1 gives two examples in which the \xe2\x80\x9cwritten confirmation\xe2\x80\x9d\nprovision could apply. The first is a written confirmation following an agreement\nreached orally. The second is a written confirmation following an agreement\nreached by \xe2\x80\x9cinformal correspondence.\xe2\x80\x9d In other words, key terms, such as the\ndescription of the good, quantity, and purchase price, are agreed to in an exchange\nof faxes, and then one or both of the parties follows up with its five-page standard\npurchase agreement that includes numerous other terms not discussed in the\nexchange of correspondence, such as warranties and choice of law clauses.\n46\n\n\x0c4.3. Second Step: Look for Language Sufficient to Satisfy Section 2-207(1) after the\nComma. Let\xe2\x80\x99s assume you have concluded that so far \xc2\xa7 2-207(1) applies because there exists\neither a \xe2\x80\x9cdefinite and seasonable expression of acceptance\xe2\x80\x9d of an offer or a \xe2\x80\x9cwritten\nconfirmation\xe2\x80\x9d of an oral or informal agreement. Normally, either of these will operate as an\nacceptance even though they propose \xe2\x80\x9cadditional\xe2\x80\x9d or \xe2\x80\x9cdifferent\xe2\x80\x9d terms (the effect of which we\ndiscuss at Section 4.4). But there is an exception found after the comma in \xc2\xa7 2-207(1): is the\nacceptance \xe2\x80\x9cexpressly made conditional on assent to the additional or different terms\xe2\x80\x9d?\nProblem 4-2. In preparation for spring sales of its potted herbs, HerbPots submits a purchase\norder to TerraGreen for 10,000 4\xe2\x80\x9d x 4\xe2\x80\x9d plant containers made from recycled materials, at\n$.25/pot, to be delivered by February 1. In its \xe2\x80\x9cfine print,\xe2\x80\x9d the purchase order states that HerbPots\nwill pay within thirty days of receipt of the goods. TerraGreen responds with its standard form\nentitled \xe2\x80\x9cacknowledgement of order,\xe2\x80\x9d the first clause of which states (in large italicized font):\n\xe2\x80\x9cTerraGreen\xe2\x80\x99s acceptance of your purchase order is conditioned upon your assent to all of the\nfollowing terms and conditions.\xe2\x80\x9d As part of the standard terms printed on back, TerraGreen\nprovides that payment must be made within twenty days of receipt of the goods, and that a late\npayment fee of 5% will be assessed against any payment made after the twenty-day period.\n(1) Does TerraGreen\xe2\x80\x99s acknowledgement operate as an acceptance of HerbPots\xe2\x80\x99 order?\n(2) What would your conclusion be if, instead of the italicized language above,\nTerraGreen\xe2\x80\x99s acknowledgement had commenced with the following phrase: \xe2\x80\x9cThe printed\nterms contained in this form shall become a part of the contract between the parties.\xe2\x80\x9d\n4.3.1. Language making an offeree\xe2\x80\x99s acceptance conditional upon assent to its proposed\nadditional or different terms may not trigger the exception if that language is buried in\nfine print somewhere in its written acceptance form. In Daitom, Inc. v. Pennwalt Corp.,\n741 F.2d 1569 (10th Cir. 1984), Pennwalt offered to sell commercial vacuum dryers to\nDaitom. Daitom\xe2\x80\x99s response expressed its consent to the \xe2\x80\x9cdickered\xe2\x80\x9d material terms;\nhowever Daitom\xe2\x80\x99s response also contained language -- in fine print on the back -- that\nDaitom\xe2\x80\x99s \xe2\x80\x9cacceptance is expressly limited to [Daitom\xe2\x80\x99s]terms and conditions, unless\neach deviation is mutually recognized therefore in writing.\xe2\x80\x9d The court found that in order\nto constitute a \xe2\x80\x9cconditional acceptance,\xe2\x80\x9d the offeree \xe2\x80\x9cmust explicitly communicate his or\nher unwillingness to proceed with the transaction unless the additional or different terms\nin its response are accepted by the offeror.\xe2\x80\x9d Id. at 1577 (emphasis supplied). The court\nfound that Daitom did not adequately bring its conditional acceptance to the attention of\nPennwalt, and thus the exception did not apply.\n4.3.2. If a party has used language sufficient to satisfy the language of exception after the\ncomma in \xc2\xa7 2-207(1), then there is no acceptance. If there is no acceptance, at this point\nthere is no contract. There are three possibilities as to what will happen next:\n\xe2\x80\xa2 the parties will refuse to agree on terms;\n47\n\n\x0c\xe2\x80\xa2 the parties will agree on terms; or\n\xe2\x80\xa2 the parties will go ahead and ship the goods and pay for them, moving the parties\ninto \xc2\xa7 2-207(3).\n4.3.3. Section 2-207(3), which was added in 1966, is intended to apply when the writings\nof the parties do not establish a contract, but they act as if they have reached an\nagreement. Recall that if acceptance is expressly made conditional on assent, the response\nis not an acceptance but a counter-offer. If there is no acceptance then there is no contract\nestablished by the writings. But a contract might nevertheless be established by conduct.\nIn the case of Uniroyal, Inc. v. Chambers Gasket and Manufacturing Company, 380\nN.E.2d 571 (Ind. App. 1978) the court concluded that the writings exchanged between\nChambers and Uniroyal did not create a contract, because Uniroyal\'s acceptance of\nChambers\xe2\x80\x99 offer to purchase goods was expressly conditioned on Chambers\xe2\x80\x99 assent to the\nnew terms and the record revealed no manifestation of Chambers\xe2\x80\x99 assent to those terms.\nBecause Uniroyal shipped the goods ordered by Chambers, and Chambers accepted the\nshipment, the parties\xe2\x80\x99 conduct was \xe2\x80\x9csufficient to establish a contract.\xe2\x80\x9d In such a situation,\n\xc2\xa7 2-207(3) provides that the terms of the contract are those on which the writings agree,\nas supplemented by applicable Code provisions. In other words, the additional or\ndifferent terms are subject to a \xe2\x80\x9cknock-out\xe2\x80\x9d rule, the application of which is discussed in\nmore detail at Section 4.4.4.\n4.4. Third Step: Determine the Effect of Different or Additional Terms. Now let\xe2\x80\x99s back up.\nAssume that we have concluded that the requirements of \xc2\xa7 2-207(1) before the comma are\nsatisfied, and there is not sufficient language to invoke the exception after the comma. We now\nknow that an acceptance has occurred even though the acceptance proposes additional or\ndifferent terms from those offered. The problem now is to find out which terms govern \xe2\x80\x93 those in\nthe offer or those in the acceptance. Section 2-207(2) provides the framework for answering that\nquestion.\n4.4.1. Introduction. Section 2-207(2) tells us what to do with \xe2\x80\x9cadditional\xe2\x80\x9d terms, but does\nnot mention \xe2\x80\x9cdifferent\xe2\x80\x9d terms. However, Comment 3 states that subsection (2)\ndetermines whether or not either \xe2\x80\x9cadditional\xe2\x80\x9d or \xe2\x80\x9cdifferent\xe2\x80\x9d terms will become part of the\ncontract. The dilemma of \xe2\x80\x9cdifferent\xe2\x80\x9d terms is discussed at Section 4.4.4 below. With\nregard to additional terms, one set of rules applies to contracts between merchants\n(Section 4.4.2) and another set of rules applies to contracts in which one or both parties\nare non-merchants (Section 4.4.3).\n4.4.2. Additional Terms Between Merchants. Subsection (2) states that any additional\nterms \xe2\x80\x9care to be construed as proposals.\xe2\x80\x9d Where both parties are merchants, a proposed\nadditional term becomes a part of the agreement unless:\n(1) the offer expressly limits acceptance to the terms of the offer;\n48\n\n\x0c(2) the additional term materially alters the contract (Comment 4 explains that a\nterm which would \xe2\x80\x9cmaterially alter\xe2\x80\x9d the contract is one that would result in\nsurprise or hardship if incorporated into the contract; Comment 5 gives examples\nof terms that would not result in surprise); or\n(3) the offeror gives notice of its objection to the additional term, which can be\ndone either at the time the contract is made by appropriate language in the offer\n(i.e., limiting acceptance to the terms of the offer or otherwise making it clear that\nno additional terms will be considered part of the contract) or within a reasonable\ntime after receipt of notice of the additional terms.\nIf any one of these three possibilities occur, the terms of the offer control unless the\nofferee assents to the additional terms. Several courts have ruled that in contracts between\nmerchants, it is presumed that any additional terms proposed by the offeree become a part\nof the agreement, and the offeror bears the burden of proof as to the existence of one of\nthe exceptions. See, for example, Avedon Engineering, Inc. v. Seatex, 126 F.3d 1279,\n1284 (10th Cir. 1997); Bayway Refining Co. v. Oxygenated Marketing & Trading A.G.,\n215 F.3d 219, 223-224 (2nd Cir. 2000).\nProblem 4-3. On January 15, LePooch, a dog grooming and boarding business, submits a\npurchase order to Animal Treats, a manufacturer of pet supplies, for $10,000 worth of dog food,\nspecifying the quantity and price of a variety of types of dog foods, to be delivered by February 1.\nThe purchase order is silent as to when the purchase price will be paid. Animal Treats responds\nwith its standard form entitled \xe2\x80\x9cacknowledgement of order,\xe2\x80\x9d which does not contain any\n\xe2\x80\x9cconditional assent\xe2\x80\x9d language. As part of the standard terms printed on back, Animal Treats\nprovides that payment must be made within thirty days of receipt of the goods, and that any\npayments made after such date will incur interest at the rate of 6% per annum. Is Animal Treats\nentitled to collect interest if LePooch does not pay within thirty days of its receipt of the goods?\nWhy or why not?\nProblem 4-4. In addition to the 6% interest clause, Animal Treats\xe2\x80\x99 standard \xe2\x80\x9cacknowledgment of\norder\xe2\x80\x9d form includes the following term:\n\xe2\x80\x9cPurchaser may return any defective goods for refund of the purchase price or for\nreplacement within sixty days of knowledge of the defect. Except for a refund of the\npurchase price or replacement of the defective good, Purchaser shall have no other\nremedies, including, without limitation, a claim for consequential damages.\xe2\x80\x9d\nAssume that LePooch\xe2\x80\x99s order form is silent as to remedies. Does Animal Treats\xe2\x80\x99 additional term\nlimiting damages become a part of the contract?\n\n49\n\n\x0c4.4.3. Additional Terms Not Between Merchants. Whereas UCC \xc2\xa7 2-207(2) specifically\nstates what happens to proposed additional terms as between merchants, it does not say\nwhat to do when either party to the agreement is a non-merchant.\nProblem 4-5. A law student orders a new computer over the phone from Computer BigBox,\nspecifying the model, quantity, and price, which order is accepted by an agent of Computer\nBigBox over the phone. When Computer BigBox ships the computer, it sends along a \xe2\x80\x9cwritten\nconfirmation\xe2\x80\x9d of its acceptance, which is a nine-page document containing numerous terms, such\nas warranties and choice of law clauses, which were never discussed when the contract was\noriginally formed on the phone. Do these terms become part of the contract under \xc2\xa7 2-207?\nProblem 4-6. Assume that the nine-page document delivered by Computer BigBox with the\ncomputer states in bold print at the very top: \xe2\x80\x9cBy keeping your computer beyond ten days after\nthe date of delivery, you assent to these Terms and Conditions.\xe2\x80\x9d\n1. Does the law student\xe2\x80\x99s conduct of keeping the computer constitute acceptance of the\nadditional terms?\n2. Is there anything the law student can do, if she keeps the computer, to prevent the\nadditional terms and conditions from becoming a part of the contract?\nKlocek v. Gateway, Inc.\n104 F. Supp. 2d 1332 (D. Kan. 2000)\n[Klocek and other individuals purchased computers from Gateway. Plaintiff brought\nindividual and class action law suits against Gateway for breach of contract. Gateway sought to\ndismiss the actions, and requested enforcement of an arbitration clause contained in the Standard\nTerms included with the computers when they were delivered to the plaintiffs.]\nVRATIL, District Judge\n\xe2\x80\xa6.\nThe Uniform Commercial Code ("UCC") governs the parties\' transaction under both\nKansas and Missouri law.... Thus the issue is whether the contract of sale includes the Standard\nTerms as part of the agreement.\nState courts in Kansas and Missouri apparently have not decided whether terms received\nwith a product become part of the parties\' agreement. Authority from other courts is split.\nCompare Step-Saver, 939 F.2d 91 (printed terms on computer software package not part of\nagreement); Arizona Retail Sys., Inc. v. Software Link, Inc., 831 F. Supp. 759 (D. Ariz. 1993)\n(license agreement shipped with computer software not part of agreement); and U.S. Surgical\nCorp. v. Orris, Inc., 5 F. Supp. 2d 1201 (D. Kan. 1998) (single use restriction on product package\nnot binding agreement); with Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir.), cert. denied,\n50\n\n\x0c522 U.S. 808 (1997) (arbitration provision shipped with computer binding on buyer); ProCD,\nInc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996) (shrinkwrap license binding on buyer); and M.A.\nMortenson Co., Inc. v. Timberline Software Corp., 140 Wn.2d 568, 998 P.2d 305 (Wash. 2000)\n(following Hill and ProCD on license agreement supplied with software). It appears that at least\nin part, the cases turn on whether the court finds that the parties formed their contract before or\nafter the vendor communicated its terms to the purchaser. Compare Step-Saver, 939 F.2d at 98\n(parties\' conduct in shipping, receiving and paying for product demonstrates existence of\ncontract; box top license constitutes proposal for additional terms under \xc2\xa7 2-207 which requires\nexpress agreement by purchaser); Arizona Retail, 831 F. Supp. at 765 (vendor entered into\ncontract by agreeing to ship goods, or at latest by shipping goods to buyer; license agreement\nconstitutes proposal to modify agreement under \xc2\xa7 2-209 which requires express assent by buyer);\nand Orris, 5 F. Supp. 2d at 1206 (sales contract concluded when vendor received consumer\norders; single-use language on product\'s label was proposed modification under \xc2\xa7 2-209 which\nrequires express assent by purchaser); with ProCD, 86 F.3d at 1452 (under \xc2\xa7 2-204 vendor, as\nmaster of offer, may propose limitations on kind of conduct that constitutes acceptance; \xc2\xa7 2-207\ndoes not apply in case with only one form); Hill, 105 F.3d at 1148-49 (same); and Mortenson,\n998 P.2d at 311-314 (where vendor and purchaser utilized license agreement in prior course of\ndealing, shrinkwrap license agreement constituted issue of contract formation under \xc2\xa7 2-204, not\ncontract alteration under \xc2\xa7 2-207).\nGateway urges the Court to follow the Seventh Circuit decision in Hill. That case\ninvolved the shipment of a Gateway computer with terms similar to the Standard Terms in this\ncase, except that Gateway gave the customer 30 days -- instead of 5 days -- to return the\ncomputer. In enforcing the arbitration clause, the Seventh Circuit relied on its decision in ProCD,\nwhere it enforced a software license which was contained inside a product box. See Hill, 105\nF.3d at 1148-50. In ProCD, the Seventh Circuit noted that the exchange of money frequently\nprecedes the communication of detailed terms in a commercial transaction. See ProCD, 86 F.3d\nat 1451. Citing UCC \xc2\xa7 2-204, the court reasoned that by including the license with the software,\nthe vendor proposed a contract that the buyer could accept by using the software after having an\nopportunity to read the license.8ProCD, 86 F.3d at 1452. Specifically, the court stated:\nA vendor, as master of the offer, may invite acceptance by conduct, and may propose\nlimitations on the kind of conduct that constitutes acceptance. A buyer may accept by\nperforming the acts the vendor proposes to treat as acceptance.\nProCD, 86 F.3d at 1452. The Hill court followed the ProCD analysis, noting that "practical\n\n8.Section 2-204 provides: \xe2\x80\x9cA contract for sale of goods may be made in any manner sufficient to show agreement,\nincluding conduct by both parties which recognizes the existence of such contract.\xe2\x80\x9d\n\n51\n\n\x0cconsiderations support allowing vendors to enclose the full legal terms with their products." Hill,\n105 F.3d at 1149.9\nThe Court is not persuaded that Kansas or Missouri courts would follow the Seventh\nCircuit reasoning in Hill and ProCD. In each case the Seventh Circuit concluded without support\nthat UCC \xc2\xa7 2-207 was irrelevant because the cases involved only one written form. See ProCD,\n86 F.3d at 1452 (citing no authority); Hill, 105 F.3d at 1150 (citing ProCD). This conclusion is\nnot supported by the statute or by Kansas or Missouri law. Disputes under \xc2\xa7 2-207 often arise in\nthe context of a "battle of forms," see, e.g., Daitom, Inc. v. Pennwalt Corp., 741 F.2d 1569, 1574\n(10th Cir. 1984), but nothing in its language precludes application in a case which involves only\none form. The statute provides:\n2-207 Additional terms in acceptance or confirmation.\n(1) A definite and seasonable expression of acceptance or a written confirmation which is\nsent within a reasonable time operates as an acceptance even though it states terms\nadditional to or different from those offered or agreed upon, unless acceptance is\nexpressly made conditional on assent to the additional or different terms.\n(2) The additional terms are to be construed as proposals for addition to the contract [if\nthe contract is not between merchants]. . . .\nBy its terms, \xc2\xa7 2-207 applies to an acceptance or written confirmation. It states nothing\nwhich requires another form before the provision becomes effective. In fact, the official comment\nto the section specifically provides that \xc2\xa7 2-207(1) and (2) apply "where an agreement has been\n9 Legal commentators have criticized the reasoning of the Seventh Circuit in this regard. See, e.g., Jean R.\nSternlight, Gateway Widens Doorway to Imposing Unfair Binding Arbitration on Consumers, Fla. Bar J., Nov. 1997,\nat 8, 10-12 (outcome in Gateway is questionable on federal statutory, common law and constitutional grounds and as\na matter of contract law and is unwise as a matter of policy because it unreasonably shifts to consumers search cost\nof ascertaining existence of arbitration clause and return cost to avoid such clause); Thomas J. McCarthy et al.,\nSurvey: Uniform Commercial Code, 53 Bus. Law. 1461, 1465-66 (Seventh Circuit finding that UCC \xc2\xa7 2-207 did not\napply is inconsistent with official comment); Batya Goodman, Honey, I Shrink-Wrapped the Consumer: the\nShrinkwrap Agreement as an Adhesion Contract, 21 Cardozo L. Rev. 319, 344-352 (Seventh Circuit failed to\nconsider principles of adhesion contracts); Jeremy Senderowicz, Consumer Arbitration and Freedom of Contract: A\nProposal to Facilitate Consumers\' Informed Consent to Arbitration Clauses in Form Contracts, 32 Colum. J.L. &\nSoc. Probs. 275, 296-299 (judiciary (in multiple decisions, including Hill) has ignored issue of consumer consent to\nan arbitration clause). Nonetheless, several courts have followed the Seventh Circuit decisions in Hill and ProCD.\nSee, e.g., Mortenson, 2000 WL 550845 (license agreement supplied with software); Rinaldi v. Iomega Corp., 1999\nDel. Super. LEXIS 563, 1999 WL 1442014, Case No. 98C-09-064-RRC (Del. Sept. 3, 1999) (warranty disclaimer\nincluded inside computer Zip drive packaging); Westendorf v. Gateway 2000, Inc., 2000 Del. Ch. LEXIS 54, 2000\nWL 307369, Case No. 16913 (Del. Ch. March 16, 2000) (arbitration provision shipped with computer); Brower v.\nGateway 2000, Inc., 246 A.D.2d 246, 676 N.Y.S.2d 569 (N.Y. App. Div. 1998) (same); Levy v. Gateway 2000, Inc.,\n1997 WL 823611, 33 U.C.C. Rep. Serv. 2d (Callaghan) 1060 (N.Y. Sup. Ct. August 12, 1997) (same).\n\n52\n\n\x0creached orally . . . and is followed by one or both of the parties sending formal memoranda\nembodying the terms so far agreed and adding terms not discussed." Official Comment 1 of UCC\n\xc2\xa7 2-207. Kansas and Missouri courts have followed this analysis. See Southwest Engineering Co.\nv. Martin Tractor Co., 205 Kan. 684, 695, 473 P.2d 18, 26 (1970) (stating in dicta that \xc2\xa7 2-207\napplies where open offer is accepted by expression of acceptance in writing or where oral\nagreement is later confirmed in writing); Central Bag Co. v. W. Scott and Co., 647 S.W.2d 828,\n830 (Mo. App. 1983) (\xc2\xa7 2-207(1) and (2) govern cases where one or both parties send written\nconfirmation after oral contract). Thus, the Court concludes that Kansas and Missouri courts\nwould apply \xc2\xa7 2-207 to the facts in this case. Accord Avedon, 126 F.3d at 1283 (parties agree that\n\xc2\xa7 2-207 controls whether arbitration clause in sales confirmation is part of contract).\nIn addition, the Seventh Circuit provided no explanation for its conclusion that "the\nvendor is the master of the offer." See ProCD, 86 F.3d at 1452 (citing nothing in support of\nproposition); Hill, 105 F.3d at 1149 (citing ProCD). In typical consumer transactions, the\npurchaser is the offeror, and the vendor is the offeree. See Brown Mach., Div. of John Brown,\nInc. v. Hercules, Inc., 770 S.W.2d 416, 419 (Mo. App. 1989) (as general rule orders are\nconsidered offers to purchase); Rich Prods. Corp. v. Kemutec Inc., 66 F. Supp. 2d 937, 956 (E.D.\nWis. 1999) (generally price quotation is invitation to make offer and purchase order is offer).\nWhile it is possible for the vendor to be the offeror, see Brown Machine, 770 S.W.2d at 419\n(price quote can amount to offer if it reasonably appears from quote that assent to quote is all that\nis needed to ripen offer into contract), Gateway provides no factual evidence which would\nsupport such a finding in this case. The Court therefore assumes for purposes of the motion to\ndismiss that plaintiff offered to purchase the computer (either in person or through catalog order)\nand that Gateway accepted plaintiff\'s offer (either by completing the sales transaction in person\nor by agreeing to ship and/or shipping the computer to plaintiff).11 Accord Arizona Retail, 831 F.\nSupp. at 765 (vendor entered into contract by agreeing to ship goods, or at latest, by shipping\ngoods).\nUnder \xc2\xa7 2-207, the Standard Terms constitute either an expression of acceptance or\nwritten confirmation. As an expression of acceptance, the Standard Terms would constitute a\ncounter-offer only if Gateway expressly made its acceptance conditional on plaintiff\'s assent to\nthe additional or different terms. "The conditional nature of the acceptance must be clearly\nexpressed in a manner sufficient to notify the offeror that the offeree is unwilling to proceed with\nthe transaction unless the additional or different terms are included in the contract." Brown\nMachine, 770 S.W.2d at 420.12 Gateway provides no evidence that at the time of the sales\n11 UCC \xc2\xa7 2-206(b) provides that \xe2\x80\x9can order or other offer to buy goods for prompt or current shipment shall be\nconstrued as inviting acceptance either by a prompt promise to ship or by the prompt or current shipment . . .\xe2\x80\x9d The\nofficial comment states that "either shipment or a prompt promise to ship is made a proper means of acceptance of an\noffer looking to current shipment." UCC \xc2\xa7 2-206, Official Comment 2.\n12 Courts are split on the standard for a conditional acceptance under \xc2\xa7 2-207. See Daitom, 741 F.2d at 1576\n(finding that Pennsylvania would most likely adopt \xe2\x80\x9cbetter\xe2\x80\x9d view that offeree must explicitly communicate\nunwillingness to proceed with transaction unless additional terms in response are accepted by offeror). On one\nextreme of the spectrum, courts hold that the offeree\'s response stating a materially different term solely to the\n\n53\n\n\x0ctransaction, it informed plaintiff that the transaction was conditioned on plaintiff\'s acceptance of\nthe Standard Terms. Moreover, the mere fact that Gateway shipped the goods with the terms\nattached did not communicate to plaintiff any unwillingness to proceed without plaintiff\'s\nagreement to the Standard Terms. See, e.g., Arizona Retail, 831 F. Supp. at 765 (conditional\nacceptance analysis rarely appropriate where contract formed by performance but goods arrive\nwith conditions attached); Lighton Indus., Inc. v. Callier Steel Pipe & Tube, Inc., 1991 WL\n18413, Case No. 89-C-8235 (N.D. Ill. Feb. 6, 1991) (applying Missouri law) (preprinted forms\ninsufficient to notify offeror of conditional nature of acceptance, particularly where form arrives\nafter delivery of goods).\nBecause plaintiff is not a merchant, additional or different terms contained in the\nStandard Terms did not become part of the parties\' agreement unless plaintiff expressly agreed to\nthem. See K.S.A. \xc2\xa7 84-2-207, Kansas Comment 2 (if either party is not a merchant, additional\nterms are proposals for addition to the contract that do not become part of the contract unless the\noriginal offeror expressly agrees). Gateway argues that plaintiff demonstrated acceptance of the\narbitration provision by keeping the computer more than five days after the date of delivery.\nAlthough the Standard Terms purport to work that result, Gateway has not presented evidence\nthat plaintiff expressly agreed to those Standard Terms. Gateway states only that it enclosed the\nStandard Terms inside the computer box for plaintiff to read afterwards. It provides no evidence\nthat it informed plaintiff of the five-day review-and-return period as a condition of the sales\ntransaction, or that the parties contemplated additional terms to the agreement.14 See Step-Saver,\n939 F.2d at 99 (during negotiations leading to purchase, vendor never mentioned box-top license\nor obtained buyer\'s express assent thereto). The Court finds that the act of keeping the computer\npast five days was not sufficient to demonstrate that plaintiff expressly agreed to the Standard\ndisadvantage of the offeror constitutes a conditional acceptance. See Daitom, 741 F.2d at 1569 (citing Roto-Lith. Ltd\nv. F.P. Bartlett & Co., 297 F.2d 497 (1st Cir. 1962)). At the other end of the spectrum courts hold that the\nconditional nature of the acceptance should be so clearly expressed in a manner sufficient to notify the offeror that\nthe offeree is unwilling to proceed without the additional or different terms. See Daitom, 741 F.2d at 1569 (citing\nDorton v. Collins & Aikman Corp., 453 F.2d 1161 (6th Cir. 1972)). The middle approach requires that the response\npredicate acceptance on clarification, addition or modification. See Daitom, 741 F.2d at 1569 (citing Construction\nAggregates Corp. v. Hewitt-Robins, Inc., 404 F.2d 505 (7th Cir. 1968)). The First Circuit has since overruled its\ndecision in Roto-Lith, see Ionics, Inc. v. Elmwood Sensors, Inc., 110 F.3d 184, and the Court finds that neither\nKansas nor Missouri would apply the standard set forth therein. See Boese-Hilburn Co. v. Dean Machinery Co., 616\nS.W.2d 520, (Mo. App. 1981) (rejecting Roto-Lith standard); Owens-Corning Fiberglas Corp. v. Sonic Dev. Corp.,\n546 F. Supp. 533, 538 (D. Kan. 1982) (acceptance is not counteroffer under Kansas law unless it is made conditional\non assent to additional or different terms (citing Roto-Lith as comparison)); Daitom, 741 F.2d at 1569 (finding that\nDorton is "better" view). Because Gateway does not satisfy the standard for conditional acceptance under either of\nthe remaining standards (Dorton or Construction Aggregates), the Court does not decide which of the remaining two\nstandards would apply in Kansas and/or Missouri.\n14.The Court is mindful of the practical considerations which are involved in commercial transactions, but it is not\nunreasonable for a vendor to clearly communicate to a buyer -- at the time of sale -- either the complete terms of the\nsale or the fact that the vendor will propose additional terms as a condition of sale, if that be the case.\n\n54\n\n\x0cTerms. Accord Brown Machine, 770 S.W.2d at 421 (express assent cannot be presumed by\nsilence or mere failure to object). Thus, because Gateway has not provided evidence sufficient to\nsupport a finding under Kansas or Missouri law that plaintiff agreed to the arbitration provision\ncontained in Gateway\'s Standard Terms, the Court overrules Gateway\'s motion to dismiss....\n4.4.4. Different Terms. Now let\xe2\x80\x99s discuss what happens to \xe2\x80\x9cdifferent\xe2\x80\x9d terms contained in\nofferee\xe2\x80\x99s acceptance if, under \xc2\xa7 2-207(1), you have concluded that there is in fact an\noperative acceptance. Section 2-207(2), on its face, applies only to \xe2\x80\x9cadditional\xe2\x80\x9d terms.\nWhat happens if the terms contained in the acceptance are \xe2\x80\x9cdifferent\xe2\x80\x9d rather than\nadditional?\nDaitom, Inc. v. Pennwalt Corp.\n741 F.2d 1569 (10th Cir. 1984)\n[Daitom invited bids from manufacturers of commercial vacuum dryers to supply it with\nmachinery to be incorporated into a chemical manufacturing plant being built by Daitom.\nPennwalt submitted a proposal specifying the equipment to be sold, the price, and delivery and\npayment terms. Several pages of pre-printed terms and conditions were attached and incorporated\ninto the offer, including a clause providing for a one-year statute of limitations and a clause\nproviding certain express warranties and disclaiming all other warranties. Daitom accepted the\noffer by issuing its own \xe2\x80\x9cpurchase order\xe2\x80\x9d containing 17 pages of fine print terms and conditions.\nWhen the machinery failed to work properly, Daitom brought a proceeding against Pennwalt\nalleging, among other things, breach of implied warranties that had been disclaimed by Pennwalt\nin its offer. The District Court dismissed Daitom\xe2\x80\x99s breach of warranty claims, ruling that the\nclaims were barred by the one-year statute of limitations specified in Pennwalt\xe2\x80\x99s offer.]\nWilliam E. Doyle, Circuit Judge delivered the opinion of the 10th Circuit Court of Appeals:\n\xe2\x80\xa6.\nThe trial court concluded that the parties\' exchanged writings formed a contract. Thus,\nthere was not a formal single document. Pennwalt\'s September 7, 1976 proposal constituted the\noffer and Daitom\'s October 5, 1976 purchase order constituted the acceptance....\nHaving found an offer and an acceptance which was not made expressly conditional on\nassent to additional or different terms, we must now decide the effect of those additional or\ndifferent terms on the resulting contract and what terms became part of it. The district court\nsimply resolved this dispute by focusing solely on the period of limitations specified in\nPennwalt\'s offer of September 7, 1976. Thus, the court held that while the offer explicitly\nspecified a one-year period of limitations in accordance with \xc2\xa7 2-725(1) allowing such a\nreduction, Daitom\'s acceptance of October 5, 1976 was silent as to the limitations period.\nConsequently, the court held that \xc2\xa7 2-207(2) was inapplicable and the one-year limitations period\ncontrolled, effectively barring Daitom\'s action for breach of warranties.\n55\n\n\x0cWhile the district court\'s analysis undertook to resolve the issue without considering the\nquestion of the application of \xc2\xa7 2-207(2) to additional or different terms, we cannot accept its\napproach or its conclusion. We are unable to ignore the plain implication of Daitom\'s reservation\nin its boilerplate warranties provision of all its rights and remedies available at law. Such an\nexplicit reservation impliedly reserves the statutory period of limitations; without such a\nreservation, all other reservations of actions and remedies are without effect.\nThe statutory period of limitations under the U.C.C. is four years after the cause of action\nhas accrued. U.C.C. \xc2\xa7 2-725(1). Were we to determine that this four-year period became a part of\nthe contract rather than the shorter one-year period, Daitom\'s actions on breach of warranties\nwere timely brought and summary judgment against Daitom was error.\nWe realize that our conclusion requires an inference to be drawn from a construction of\nDaitom\'s terms; however, such an inference and construction are consistent with the judicial\nreluctance to grant summary judgment where there is some reasonable doubt over the existence\nof a genuine material fact. See Williams v. Borden, Inc., 637 F.2d 731, 738 (10th Cir. 1980).\nWhen taking into account the circumstances surrounding the application of the one-year\nlimitations period, we have little hesitation in adopting the U.C.C.\'s four-year limitations\nreservation, the application of which permits a trial on the merits. Thus, this court must recognize\nthat certain terms in Daitom\'s acceptance differed from terms in Pennwalt\'s offer and decide\nwhich become part of the contract. The district court certainly erred in refusing to recognize such\na conflict.\nThe difficulty in determining the effect of different terms in the acceptance is the\nimprecision of drafting evident in \xc2\xa7 2-207. The language of the provision is silent on how\ndifferent terms in the acceptance are to be treated once a contract is formed pursuant to \xc2\xa7 2207(1). That section provides that a contract may be formed by exchanged writings despite the\nexistence of additional or different terms in the acceptance. Therefore, an offeree\'s response is\ntreated as an acceptance while it may differ substantially from the offer. This section of the\nprovision, then, reformed the mirror-image rule; that common law legal formality that prohibited\nthe formation of a contract if the exchanged writings of offer and acceptance differed in any term.\nOnce a contract is recognized pursuant to \xc2\xa7 2-207(1), \xc2\xa7 2-207(2) provides the standard for\ndetermining if the additional terms stated in the acceptance become a part of the contract.\nBetween merchants, such additional terms become part of the resulting contract unless 1) the\noffer expressly limited acceptance to its terms, 2) the additional terms materially alter the\ncontract obligations, or 3) the offeror gives notice of his or her objection to the additional terms\nwithin a reasonable time. Should any one of these three possibilities occur, the additional terms\nare treated merely as proposals for incorporation in the contract and absent assent by the offeror\nthe terms of the offer control. In any event, the existence of the additional terms does not prevent\na contract from being formed.\n56\n\n\x0cSection 2-207(2) is silent on the treatment of terms stated in the acceptance that are\ndifferent, rather than merely additional, from those stated in the offer. It is unclear whether\n"different" terms in the acceptance are intended to be included under the aegis of "additional"\nterms in \xc2\xa7 2-207(2) and, therefore, fail to become part of the agreement if they materially alter\nthe contract. Comment 3 suggests just such an inclusion.7 However, Comment 6 suggests that\ndifferent terms in exchanged writings must be assumed to constitute mutual objections by each\nparty to the other\'s conflicting terms and result in a mutual "knockout" of both parties\' conflicting\nterms; the missing terms to be supplied by the U.C.C.\'s "gap-filler" provisions.8 At least one\ncommentator, in support of this view, has suggested that the drafting history of the provision\nindicates that the word "different" was intentionally deleted from the final draft of \xc2\xa7 2-207(2) to\npreclude its treatment under that subsection. The plain language, comments, and drafting history\nof the provision, therefore, provide little helpful guidance in resolving the disagreement over the\ntreatment of different terms pursuant to \xc2\xa7 2-207.\nDespite all this, the cases and commentators have suggested three possible approaches.\nThe first of these is to treat "different" terms as included under the aegis of "additional" terms in\n\xc2\xa7 2-207(2). Consequently, different terms in the acceptance would never become part of the\ncontract, because, by definition, they would materially alter the contract (i.e., the offeror\'s terms).\nSeveral courts have adopted this approach. [citations omitted.]\nThe second approach, which leads to the same result as the first, is that the offeror\'s terms\ncontrol because the offeree\'s different terms merely fall out; \xc2\xa7 2-207(2) cannot rescue the\ndifferent terms since that subsection applies only to additional terms. Under this approach,\nComment 6 (apparently supporting a mutual rather than a single term knockout) is not applicable\nbecause it refers only to conflicting terms in confirmation forms following oral agreement, not\nconflicting terms in the writings that form the agreement. This approach is supported by\nProfessor Summers. J. J. White & R. S. Summers, Uniform Commercial Code, \xc2\xa7 1-2, at 29 (2d\ned. 1980).\nThe third, and preferable approach, which is commonly called the "knock-out" rule, is\n7 Comment 3 states (emphasis added): \xe2\x80\x9cWhether or not additional or different terms will become part of the\nagreement depends upon the provision of subsection (2).\xe2\x80\x9d It must be remembered that even official comments to\nenacted statutory text do not have the force of law and are only guidance in the interpretation of that text. In re\nBristol Associates, Inc., 505 F.2d 1056 (3rd Cir. 1974) (while the comments to the Pennsylvania U.C.C. are not\nbinding, the Pennsylvania Supreme Court gives substantial weight to the comments as evidencing application of the\nCode).\n8 Comment 6 states, in part: \xe2\x80\x9cWhere clauses on confirming forms sent by both parties conflict each party must be\nassumed to object to a clause of the other conflicting with one on the confirmation sent by himself \xe2\x80\xa6. The contract\nthen consists of the terms expressly agreed to, terms on which the confirmations agree, and terms supplied by the\nAct, including subsection (2).\xe2\x80\x9d\n\n57\n\n\x0cthat the conflicting terms cancel one another. Under this view the offeree\'s form is treated only as\nan acceptance of the terms in the offeror\'s form which did not conflict. The ultimate contract,\nthen, includes those non-conflicting terms and any other terms supplied by the U.C.C., including\nterms incorporated by course of performance (\xc2\xa7 2-208), course of dealing (\xc2\xa7 1-205), usage of\ntrade (\xc2\xa7 1-205), and other "gap fillers" or "off-the-rack" terms (e.g., implied warranty of fitness\nfor particular purpose, \xc2\xa7 2-315). As stated previously, this approach finds some support in\nComment 6. Professor White supports this approach as the most fair and consistent with the\npurposes of \xc2\xa7 2-207. White & Summers, supra, at 29. Further, several courts have adopted or\nrecognized the approach. [citations omitted.]\nWe are of the opinion that this is the more reasonable approach, particularly when dealing\nwith a case such as this where from the beginning the offeror\'s specified period of limitations\nwould expire before the equipment was even installed. The approaches other than the "knockout" approach would be inequitable and unjust because they invited the very kind of treatment\nwhich the defendant attempted to provide.\nThus, we are of the conclusion that if faced with this issue the Pennsylvania Supreme\nCourt would adopt the "knock-out" rule and hold here that the conflicting terms in Pennwalt\'s\noffer and Daitom\'s acceptance regarding the period of limitations and applicable warranties\ncancel one another out. Consequently, the other provisions of the U.C.C. must be used to provide\nthe missing terms.\nThis particular approach and result are supported persuasively by the underlying rationale\nand purpose behind the adoption of \xc2\xa7 2-207. As stated previously, that provision was drafted to\nreform the infamous common law mirror-image rule and associated last-shot doctrine that\nenshrined the fortuitous positions of senders of forms and accorded undue advantages based on\nsuch fortuitous positions. White & Summers, supra at 25. To refuse to adopt the "knock-out" rule\nand instead adopt one of the remaining two approaches would serve to re-enshrine the undue\nadvantages derived solely from the fortuitous positions of when a party sent a form. Cf., 3\nDuesenberg & King at 93 (1983 Supp.). This is because either approach other than the knock-out\nrule for different terms results in the offeror and his or her terms always prevailing solely because\nhe or she sent the first form. Professor Summers argues that this advantage is not wholly\nunearned, because the offeree has an opportunity to review the offer, identify the conflicting\nterms and make his or her acceptance conditional. But this joinder misses the fundamental\npurpose of the U.C.C. in general and \xc2\xa7 2-207 in particular, which is to preserve a contract and fill\nin any gaps if the parties intended to make a contract and there is a reasonable basis for giving an\nappropriate remedy. U.C.C. \xc2\xa7 2-204(3); \xc2\xa7 2-207(1); \xc2\xa7 2-207(3). Thus, this approach gives the\nofferee some protection. While it is laudable for business persons to read the fine print and\nboilerplate provisions in exchanged forms, there is nothing in \xc2\xa7 2-207 mandating such careful\nconsideration. The provision seems drafted with a recognition of the reality that merchants\nseldom review exchanged forms with the scrutiny of lawyers. The "knock-out" rule is therefore\nthe best approach. Even if a term eliminated by operation of the "knock-out" rule is reintroduced\nby operation of the U.C.C.\'s gap-filler provisions, such a result does not indicate a weakness of\n58\n\n\x0cthe approach. On the contrary, at least the reintroduced term has the merit of being a term that the\nU.C.C. draftpersons regarded as fair.\n[The appellate court remanded the matter to the district court for application of the \xe2\x80\x9cknock-out\xe2\x80\x9d\nrule.]\nCase Notes:\n1. The original offer by Pennwalt contained a one-year statute of limitations. Daitom\xe2\x80\x99s\nacceptance was silent as to the applicable statute of limitations. How, then, did the Tenth\nCircuit conclude that Daitom\xe2\x80\x99s acceptance contained a \xe2\x80\x9cdifferent\xe2\x80\x9d four-year statute of\nlimitations?\n2. The Tenth Circuit, in discussing the first approach of treating \xe2\x80\x9cdifferent\xe2\x80\x9d terms in the\nsame manner as \xe2\x80\x9cadditional\xe2\x80\x9d terms was not acceptable, stating that \xe2\x80\x9cdifferent terms in the\nacceptance would never become part of the contract, because by definition, they would\nmaterially alter the contract.\xe2\x80\x9d Do you agree that different terms would always \xe2\x80\x9cmaterially\nalter\xe2\x80\x9d a contract? For example, if an offer, in fine print, provided for delivery by UPS, and\nthe acceptance, in fine print, provided for delivery by the USPO, and this was not a\n\xe2\x80\x9cdickered\xe2\x80\x9d term, would this be a material alteration as defined by Comment 4?\n3. The second approach discussed by the court is to apply \xc2\xa7 2-207(2) to \xe2\x80\x9cadditional\xe2\x80\x9d\nterms only, because \xc2\xa7 2-207(2) fails to mention \xe2\x80\x9cdifferent\xe2\x80\x9d terms. Under this approach,\nthe different terms would be disregarded, giving deference to the offeror\xe2\x80\x99s terms. Is this\napproach more consistent with common law than the \xe2\x80\x9cknock-out\xe2\x80\x9d rule adopted by the\ncourt?\n4. Several commentators feel the Daitom approach is supported by Comment 6. Do you\nagree that Comment 6 implements a \xe2\x80\x9cknock-out\xe2\x80\x9d rule?\n5. The \xe2\x80\x9cknock-out\xe2\x80\x9d rule has been adopted by a majority of jurisdictions.\n\n59\n\n\x0cProblem 4-7. HerbPots\xe2\x80\x99 purchase order form states in fine print on the back that HerbPots will\npay within thirty days of receipt of the goods. TerraGreen\xe2\x80\x99s acknowledgement form (which does\nnot make its acceptance conditional on assent to any additional or different terms) provides that\npayment must be made within ten days of receipt of the goods. After the exchange of forms,\nTerraGreen ships an order of pots to HerbPots. Applying \xc2\xa7 2-207(2), when is payment due:\n(1) under the first approach cited in Daitom?\n(2) under the second approach cited in Daitom?\n(3) under the knock-out rule?\n(4) would the result vary if HerbPots\xe2\x80\x99 order form was silent as to date of payment?\nResearch Assignment 4-1. Several states have modified \xc2\xa7 2-207; for example, Mont. Code Ann.\n\xc2\xa730-2-207(2) provides that \xe2\x80\x9cadditional or different terms are to be construed as proposals for\naddition to the contract.\xe2\x80\x9d Considering any modifications that may have been made to \xc2\xa7 2-207 in\nyour chosen jurisdiction, which of the three approaches discussed in Daitom applies in your\njurisdiction?\n4.5. Conclusion.\n4.5.1 In recognition of the problems that have arisen in the interpretation and application\nof \xc2\xa7 2-207, it was entirely rewritten in Amended Article 2. The revised version provided:\n\xc2\xa7 2-207. Terms of Contract; Effect of Confirmation.\nIf (i) conduct by both parties recognizes the existence of a contract although their\nrecords do not otherwise establish a contract, (ii) a contract is formed by an offer\nand acceptance, or (iii) a contract formed in any manner is confirmed by a record\nthat contains terms additional to or different from those in the contract being\nconfirmed, the terms of the contract, subject to Section 2-202, are:\n(a) terms that appear in the records of both parties;\n(b) terms, whether in a record or not, to which both parties agree; and\n(c) terms supplied or incorporated under any provision of this Act.\nRecall that the Amendments have been withdrawn, but it is nevertheless instructive to see\nhow the drafters proposed to solve the problems created by the original version. Under\nthe Amendment, what rule applies to different terms? What rule applies to nonmerchants?\n4.5.2. As parties increasingly enter into transactions through the internet, the importance\nof \xc2\xa7 2-207 is subsiding. Unless one of the parties has leverage, it may have to agree to the\n60\n\n\x0coffered terms. And if there is negotiation, the parties will only have one document that\nconstitutes the agreement.\nIf one party has agreed to the other\xe2\x80\x99s non-negotiable terms in an internet-based\ntransaction, what basis is there for challenging those terms after the transaction has been\nconcluded?\nChapter 4 Additional Sources.\nScott J. Burnham, Glannon Guide to Sales: Learning Sales Through Multiple-Choice Questions\nand Analysis (Wolters Kluwer 2d ed., 2012), Chapter 5.E\nJames J. White and Robert S. Summers, Uniform Commercial Code (West 6th ed., 2010),\nChapter 1-3\n\n61\n\n\x0cChapter 5. Statute of Frauds\n5.1. Statute of Frauds \xe2\x80\x93 the General Rule. The general rule is that oral contracts are perfectly\ngood. The exception is the collection of statutes referred to as the Statute of Frauds. These\nstatutes require certain transactions to be evidenced by a writing. Although you may have an\noffer and an acceptance that form a contract for the sale of goods, under UCC \xc2\xa7 2-201, the\ncontract may not be judicially enforceable unless it is evidenced by a writing. The writing\nrequirement only applies to sales of goods for $500 or more.\n5.1.1. Section 2-201(1) sets forth the following requirements for enforcement of a\ncontract for the sale of goods of $500 or more:\n\xef\x82\xb7\n\xef\x82\xb7\n\xef\x82\xb7\n\xef\x82\xb7\n\nsome writing;\nsufficient to indicate a contract for sale has been made between the parties;\nsigned by the party against whom enforcement is sought, or by the party\xe2\x80\x99s\nauthorized agent; and\nindicating the quantity.\n\n5.1.1.1. Official Comment 1 notes that the writing \xe2\x80\x9cneed not contain all the material\nterms\xe2\x80\x9d and any terms stated \xe2\x80\x9cneed not be precisely stated.\xe2\x80\x9d Comment 1 emphasizes\nthat the only term that must appear is the quantity term, but even that does not need to\nbe accurately stated. However, recovery is limited to the amount stated, whether\naccurate or not.\n5.1.2. \xe2\x80\x9cWriting\xe2\x80\x9d is defined at UCC \xc2\xa7 1-201(b)(43) as \xe2\x80\x9cprinting, typewriting, or any other\nintentional reduction to tangible form.\xe2\x80\x9d Under Section 7(c) of the Uniform Electronic\nTransactions Act, if a law, such as \xc2\xa7 2-201, requires a record to be in writing, an\nelectronic record satisfies the law.\n5.1.3. Any terms not supplied by the writing will be supplied by other permissible\nevidence and by the gap-filler sections of the UCC.\n5.1.4. The statute of frauds does not require the writing to be in one document. Two or\nmore writings may be pieced together, provided that they relate to the same transaction\n(which may be established by the documents themselves, or by other evidence showing\nthe connection). Thus, one signed payroll card and one unsigned payroll card could be\nread together to determine the terms of the agreement. Crabtree v. Elizabeth Arden Corp.,\n110 N.E.2d 551 (N.Y. 1953).\n\n62\n\n\x0cProblem 5-1. Would the following constitute a \xe2\x80\x9cwriting\xe2\x80\x9d for purposes of UCC \xc2\xa7 2-201(focus on\nthe writing requirement; we\xe2\x80\x99ll get to content requirements later):\n(1) A sales receipt from Wal-Mart?\n(2) An internal memorandum prepared by a manufacturing company addressed to one of\nits sales employees authorizing a sale?\n(3) Notations of the terms of a sale made on a napkin at lunch?\n(4) A digital recording?\n5.1.5. There must be some indication that a contract has been made. For example, a check\nwith a notation on the memo line such as \xe2\x80\x9cpurchase of briefcase\xe2\x80\x9d would constitute\nlanguage indicating a contract for sale has been made. A check with nothing written on it\nbut the payee\xe2\x80\x99s name and the amount of the check would not sufficiently indicate the\nexistence of a contract.\n5.1.6. The writing need not necessarily be signed by both parties. The important signature\nis the signature of the party against whom enforcement is sought. So, for example, a letter\nsigned by the purchaser, would be sufficient against the purchaser, but not against the\nseller, whose signature is not on the letter. Under \xc2\xa7 7(d) of the Uniform Electronic\nTransactions Act (UETA), if a law requires a signature, an electronic signature satisfies\nthe law.\nProblem 5-2. Read the definition of \xe2\x80\x9csigned\xe2\x80\x9d at \xc2\xa7 1-201(b)(37). Which of the following likely\nconstitutes a signature:\n(1) Handwritten initials?\n(2) A typed name?\n(3) A seller\xe2\x80\x99s letterhead?\n\n63\n\n\x0cSouthwest Engineering Co. v. Martin Tractor Co.\n473 P.2d 18 (Kan. 1970)\nFontron, J.\nThis is an action to recover damages for breach of contract. Trial was had to the court\nwhich entered judgment in favor of the plaintiff. The defendant has appealed.\nSouthwest Engineering Company, Inc., the plaintiff, is a Missouri corporation engaged in\ngeneral contracting work, while the defendant, Martin Tractor Company, Inc., is a Kansas\ncorporation. The two parties will be referred to hereafter either as plaintiff, or Southwest, on the\none hand and defendant, or Martin, on the other.\nWe glean from the record that in April, 1966, the plaintiff was interested in submitting a\nbid to the United States Corps of Engineers for the construction of certain runway lighting\nfacilities at McConnell Air Force Base at Wichita. However, before submitting a bid, and on\nApril 11, 1966, the plaintiff\'s construction superintendent, Mr. R. E. Cloepfil, called the manager\nof Martin\'s engine department, Mr. Ken Hurt, who at the time was at Colby, asking for a price on\na standby generator and accessory equipment. Mr. Hurt replied that he would phone him back\nfrom Topeka, which he did the next day, quoting a price of $18,500. This quotation was reconfirmed by Hurt over the phone on April 13. Southwest submitted its bid on April 14, 1966,\nusing Hurt\'s figure of $18,500 for the generating equipment, and its bid was accepted. On April\n20, Southwest notified Martin that its bid had been accepted. Hurt and Cloepfil thereafter agreed\nover the phone to meet in Springfield on April 28. On that date Hurt flew to Springfield, where\nthe two men conferred at the airfield restaurant for about an hour. Hurt took to the meeting a\ncopy of the job specifications which the government had supplied Martin prior to the letting.\nAt the Springfield meeting it developed that Martin had upped its price for the generator\nand accessory equipment from $18,500 to $21,500. Despite this change of position by Martin,\nconcerning which Cloepfil was understandably amazed, the two men continued their\nconversation and, according to Cloepfil, they arrived at an agreement for the sale of a D353\ngenerator and accessories for the sum of $21,500. In addition it was agreed that if the Corps of\nEngineers would accept a less expensive generator, a D343, the aggregate price to Southwest\nwould be $15,000. The possibility of providing alternate equipment, the D343, was suggested by\nMr. Hurt, apparently in an attempt to mollify Mr. Cloepfil when the latter learned that Martin had\nreneged on its price quotation of April 12. It later developed that the Corps of Engineers would\nnot approve the cheaper generator and that Southwest eventually had to supply the more\nexpensive D353 generator.\nAt the conference, Mr. Hurt separately listed the component parts of each of the two\ngenerators on the top half of a sheet of paper and set out the price after each item. The prices\nwere then totaled. On the bottom half of the sheet Hurt set down the accessories common to both\ngenerators and their cost. This handwritten memorandum, as it was referred to during the trial,\n64\n\n\x0cnoted a 10 per cent discount on the aggregate cost of each generator, while the accessories were\nlisted at Martin\'s cost. The price of the D353 was rounded off at $21,500 and the D343 at\n$15,000. The memorandum was handed to Cloepfil while the two men were still at the airport.\nWe will refer to this memorandum further during the course of this opinion.\nOn May 2, 1966, Cloepfil addressed a letter to the Martin Tractor Company, directing\nMartin to proceed with shop drawings and submittal documents for the McConnell lighting job\nand calling attention to the fact that applicable government regulations were required to be\nfollowed. Further reference to this communication will be made when necessary.\nSome three weeks thereafter, on May 24, 1966, Hurt wrote Cloepfil the following letter:\nMARTIN TRACTOR COMPANY, INC.\nTopeka Chanute Concordia Colby\nCATERPILLAR\nP.O. Box 1698\nTopeka, Kansas\nMay 24, 1966\nMr. R. E. Cloepfil\nSouthwest Engineering Co., Inc.\nP.O. Box 3314, Glenstone Station\nSpringfield, Missouri 65804\nDear Sir:\nDue to restrictions placed on Caterpillar products, accessory suppliers, and other\nstipulations by the district governing agency, we cannot accept your letter to proceed dated May\n2, 1966, and hereby withdraw all verbal quotations.\nRegretfully,\n/s/ Ken Hurt\nKen Hurt,\nManager Engine Division\nOn receipt of this unwelcome missive, Cloepfil telephoned Mr. Hurt who stated they had\nsome work underway for the Corps of Engineers in both the Kansas City and Tulsa districts and\ndid not want to take on any other work for the Corps at that time. Hurt assured Cloepfil he could\nbuy the equipment from anybody at the price Martin could sell it for. Later investigation showed,\nhowever, that such was not the case. In August of 1966, Mr. Cloepfil and Mr. Anderson, the\npresident of Southwest, traveled to Topeka in an effort to persuade Martin to fulfill its contract.\n65\n\n\x0cHurt met them at the company office where harsh words were bandied about. Tempers eventually\ncooled off and at the conclusion of the verbal melee, hands were shaken all around and Hurt went\nso far as to say that if Southwest still wanted to buy the equipment from them to submit another\norder and he would get it handled. On this promising note the protagonists parted.\nAfter returning to Springfield, Mr. Cloepfil, on September 6, wrote Mr. Hurt placing an\norder for a D353 generator (the expensive one) and asking that the order be given prompt\nattention, as their completion date was in early December. This communication was returned\nunopened.\nA final effort to communicate with Martin was attempted by Mr. Anderson when the\nunopened letter was returned. A phone call was placed for Mr. Martin, himself, and Mr. Anderson\nwas informed by the girl on the switchboard that Martin was in Colorado Springs on a vacation.\nAnderson then placed a call to the motel where he was told Mr. Martin could be reached. Martin\nrefused to talk on the call, on learning the caller\'s name, and Anderson was told he would have to\ncontact his office.\nMr. Anderson then replaced his call to Topeka and reached either the company\ncomptroller or the company treasurer who responded by cussing him and saying "Who in the hell\ndo you think you are? We don\'t have to sell you a damn thing." Southwest eventually secured the\ngenerator equipment from Foley Tractor Co. of Wichita, a company which Mr. Hurt had one time\nsuggested, at a price of $27,541. The present action was then filed, seeking damages of $6,041\nfor breach of the contract and $9,000 for loss resulting from the delay caused by the breach. The\ntrial court awarded damages of $6,041 for the breach but rejected damages allegedly due to delay.\nThe defendant, only, has appealed; there is no cross-appeal by plaintiff.\nThe basic disagreement centers on whether the meeting between Hurt and Cloepfil at\nSpringfield resulted in an agreement which was enforceable under the provisions of the Uniform\nCommercial Code \xc2\xa7 2-201 (1) . . . .\nSouthwest takes the position that the memorandum prepared by Hurt at Springfield\nsupplies the essential elements of a contract required by the foregoing statute, i.e., that it is (1) a\nwriting signed by the party sought to be charged, (2) that it is for the sale of goods and (3) that\nquantity is shown. In addition, the reader will have noted that the memorandum sets forth the\nprices of the several items listed.\nIt cannot be gainsaid that the Uniform Commercial Code has effected a somewhat radical\nchange in the law relating to the formation of enforceable contracts as such has been expounded\nby this and other courts. In the Kansas Comment to 84-2-201, which closely parallels the Official\nU.C.C. Comment, the following explanation is given:\nSubsection (1) relaxes the interpretations of many courts in providing that the required\nwriting need not contain all the material terms and that they need not be stated precisely.\n66\n\n\x0cAll that is required is that the writing afford a basis for believing that the offered oral\nevidence rests on a real transaction. Only three definite and invariable requirements as to\nthe writing are made by this subsection. First, it must evidence a contract for the sale of\ngoods; second, it must be signed, a word which includes any authentication which\nidentifies the party to be charged; and third, it must specify quantity. Terms relating to\nprice, time, and place of payment or delivery, the general quality of goods, or any\nparticular warranties may all be omitted. . . .\nThe defendant does not seriously question the interpretation accorded the statute by\neminent scriveners and scholars, but maintains, nonetheless, that the writing in question does not\nmeasure up to the stature of a signed memorandum within the purview of the Code; that the\ninstrument simply sets forth verbal quotations for future consideration in continuing negotiations.\nBut on this point the trial court found there was an agreement reached between Hurt and\nCloepfil at Springfield; that the formal requirements of K.S.A. 84-2-201 were satisfied; and that\nthe memorandum prepared by Hurt contains the three essentials of the statute in that it evidences\na sale of goods, was authenticated by Hurt and specifies quantity. Beyond that, the court\nspecifically found that Hurt had apparent authority to make the agreement; that both Southwest\nand Martin were "merchants" as defined in K.S.A. 84-2-104; that the agreement reached at\nSpringfield included additional terms not noted in the writing: (1) Southwest was to install the\nequipment; (2) Martin was to deliver the equipment to Wichita and (3) Martin was to assemble\nand supply submittal documents within three weeks; and that Martin\'s letter of May 24, 1966,\nconstituted an anticipatory breach of the contract.\nWe believe the record supports all the above findings.\nWe digress at this point to note Martin\'s contention that the memorandum is not signed\nwithin the meaning of 84-2-201. The sole authentication appears in handprinted form at the top\nlefthand corner in these words: "Ken Hurt, Martin Tractor, Topeka, Caterpillar." The court found\nthis sufficient, and we believe correctly so.\nK.S.A. 84-1-201 (39) provides as follows:\n"Signed" includes any symbol executed or adopted by a party with present intention to\nauthenticate a writing.\nThe official U.C.C. comment states in part:\nThe inclusion of authentication in the definition of "signed" is to make clear that as the\nterm is used in this Act a complete signature is not necessary. Authentication may be\nprinted, stamped or written; ... It may be on any part of the document and in appropriate\n\n67\n\n\x0ccases may be found in a billhead or letterhead. . . . The question always is whether the\nsymbol was executed or adopted by the party with present intention to authenticate the\nwriting.\nHurt admittedly prepared the memorandum and has not denied affixing his name thereto.\nWe believe the authentication sufficiently complies with the statute. . . . It is quite true, as the\ntrial court found, that terms of payment were not agreed upon at the Springfield meeting. . . .\nHowever, a failure on the part of Messrs. Hurt and Cloepfil to agree on terms of payment would\nnot, of itself, defeat an otherwise valid agreement reached by them. K.S.A. 84-2-204(3) reads:\nEven though one or more terms are left open a contract for sale does not fail for\nindefiniteness if the parties have intended to make a contract and there is a reasonably\ncertain basis for giving an appropriate remedy.\nThe official U.C.C. Comment is enlightening:\nSubsection (3) states the principle as to "open terms" underlying later sections of the\nArticle. If the parties intend to enter into a binding agreement, this subsection recognizes\nthat agreement as valid in law, despite missing terms, if there is any reasonably certain\nbasis for granting a remedy. The test is not certainty as to what the parties were to do nor\nas to the exact amount of damages due the plaintiff. Nor is the fact that one or more terms\nare left to be agreed upon enough of itself to defeat an otherwise adequate agreement.\nRather, commercial standards on the point of "indefiniteness" are intended to be applied,\nthis Act making provision elsewhere for missing terms needed for performance, open\nprice, remedies and the like.\nThe more terms the parties leave open, the less likely it is that they have intended to\nconclude a binding agreement, but their actions may be frequently conclusive on the matter\ndespite the omissions. . . .\nSo far as the present case is concerned, K.S.A. 84-2-310 supplies the omitted term. This\nstatute provides in pertinent part:\nUnless otherwise agreed\n(a) payment is due at the time and place at which the buyer is to receive the goods even\nthough the place of shipment is the place of delivery;\nIn our view, the language of the two Code provisions is clear and positive. Considered\ntogether, we take the two sections to mean that where parties have reached an enforceable\nagreement for the sale of goods, but omit therefrom the terms of payment, the law will imply, as\npart of the agreement, that payment is to be made at time of delivery. In this respect the law does\nnot greatly differ from the rule this court laid down years ago. . . .\n68\n\n\x0cWe do not mean to [imply] that terms of payment are not of importance under many\ncircumstances, or that parties may not condition an agreement on their being included. However,\nthe facts before us hardly indicate that Hurt and Cloepfil considered the terms of payment to be\nsignificant, or of more than passing interest. Hurt testified that while he stated his terms he did\nnot recall Cloepfil\'s response, while Cloepfil stated that as the two were on the point of leaving,\neach stated their usual terms and that was as far as it went. The trial court found that only a brief\nand casual conversation ensued as to payment, and we think that is a valid summation of what\ntook place. Moreover, it is worthy of note that Martin first mentioned the omission of the terms\nof payment, as justifying its breach, in a letter written by counsel on September 15, 1966, more\nthan four months after the memorandum was prepared by Hurt. On prior occasions Martin\nattributed its cancellation of the Springfield understanding to other causes. In its May 24 letter,\nMartin ascribed its withdrawal of "all verbal quotations" to "restrictions placed on Caterpillar\nproducts, accessory suppliers, and other stipulations by the district governing agency." In\nexplaining the meaning of the letter to Cloepfil, Hurt said that Martin was doing work for the\nCorps of Engineers in the Kansas City and Tulsa districts and did not want to take on additional\nwork with them at this time.\nThe entire circumstances may well give rise to a suspicion that Martin\'s present insistence\nthat future negotiations were contemplated concerning terms of payment, is primarily an\nafterthought, for use as an escape hatch. Doubtless the trial court so considered the excuse in\narriving at its findings. . . .\nNeither confirmation nor acceptance by Southwest was needed on May 2 to breathe life\ninto the agreement previously concluded at Springfield, for it was memorialized in writing at the\ntime of making. In an article entitled The Law of Sales Under the Uniform Commercial Code, 17\nRutgers Law Review 14, Professor Calvin W. Corman writes:\nThe Code Provision merely requires that the writing be sufficient to indicate that a\ncontract for sale has been made between the parties. (p. 20.)\nIn our opinion the instant memorandum amply satisfies that requirement, affording a\nsubstantial basis for the belief that it rests on a real transaction.\nWe find no error in this case and the judgment of the trial court is affirmed.\nAuthors\xe2\x80\x99 Note: The definitions of \xe2\x80\x9csigned\xe2\x80\x9d and \xe2\x80\x9cwriting\xe2\x80\x9d are now found at \xc2\xa7\xc2\xa7 1-201(37) and (43)\nrespectively.\n\n69\n\n\x0c5.2. The Confirmation between Merchants Exception. Section 2-201(1) having set forth the\ngeneral requirements imposed by the statute of frauds, subsection (2) provides an exception for\nagreements between merchants:\nIF\n\xef\x82\xb7\n\xef\x82\xb7\n\xef\x82\xb7\n\na written confirmation is sent within a reasonable time after an agreement is\nmade,\nthe writing is \xe2\x80\x9csufficient against the sender,\xe2\x80\x9d\nthe writing is received by the other party, and the other party has reason to know\nof its contents\n\nAND\n\xef\x82\xb7 the recipient does not object to the writing\xe2\x80\x99s contents within 10 days of receipt\nTHEN the writing satisfies the statute of frauds, and is enforceable against the recipient,\neven though not signed by the recipient.\n5.2.1. See UCC \xc2\xa7 1-205 which states that \xe2\x80\x9creasonable\xe2\x80\x9d time depends on \xe2\x80\x9cthe nature,\npurpose and circumstances of the action.\xe2\x80\x9d\n5.2.2. What does it mean to be \xe2\x80\x9csufficient against the sender?\xe2\x80\x9d The writing must meet the\nelements of subsection (1) (i.e., a writing, indication of contract, at least a quantity term,\nsigned by the sender).\n5.2.3. The written confirmation must be received. See \xc2\xa7 1-202(e), which states that a\nperson \xe2\x80\x9creceives\xe2\x80\x9d a notice when:\n\xef\x82\xb7\n\xef\x82\xb7\n\nit comes to that person\xe2\x80\x99s attention, or\nit is duly delivered in a form reasonable under the circumstances at the place of\nbusiness through which the contract was made OR at another location held out by\nthat person as the place for receipt of such communications.\n\nSection 15(b) of UETA states that an electronic record is received when it enters an\ninformation processing system that the recipient has designated or uses for the purpose of\nreceiving electronic records or information of the type sent and from which the recipient\nis able to retrieve the electronic record, in a form capable of being processed by that\nsystem.\n5.2.4. Note the distinctions between notice, receipt, and knowledge. See \xc2\xa7 1-202. What\ndoes it mean in \xc2\xa7 2-201(2) that the writing must be \xe2\x80\x9creceived\xe2\x80\x9d and the recipient must\nhave \xe2\x80\x9creason to know\xe2\x80\x9d its contents? What if it said that one party must \xe2\x80\x9cnotify\xe2\x80\x9d the other\nparty of the confirmation? What if it said that the recipient must \xe2\x80\x9cknow\xe2\x80\x9d its contents?\n5.2.5. Note that if a recipient objects within 10 days to the written confirmation, then the\nwritten confirmation does not satisfy the statute of frauds.\n70\n\n\x0cProblem 5-3. On July 10, 2014, Jack, a farmer, made a contract over the phone to sell all of his\nwinter wheat to be harvested in August to General Milling for $7.50/bushel. On July 25, 2014,\nGeneral Milling sent an e-mail to the e-mail address provided to it by Jack, stating \xe2\x80\x9cper phone\nconversation, confirm purchase of all your 2014 winter wheat at $7.50/bushel.\xe2\x80\x9d Jack saw the email from General Milling, but he thought it was probably just an advertisement for some\nproducts, so he never opened it nor read its contents. On August 25, 2014, after the harvest, Jack\nreceived an offer of $7.95/bushel from AgraBroker, and Jack sold the winter wheat to\nAgraBroker. When General Milling brings a breach of contract claim against Jack, Jack raises the\nstatute of frauds defense, noting that he had not signed a contract with General Milling. Apply\neach element of \xc2\xa7 2-201(2). Will Jack prevail?\n5.3. Exceptions Applicable to Merchants and Non-Merchants. Subsection (3) of \xc2\xa7 2-201\nprovides three additional exceptions to the statute of frauds that apply to all contracts (and not\njust contracts involving merchants):\n5.3.1. The specially manufactured goods exception: If the contract is for specially\nmanufactured goods which are not suitable for sale to others in the ordinary course of\nbusiness, UCC \xc2\xa7 2-201(3)(a) provides that the contract will be enforced in the absence of\na writing if:\n\xef\x82\xb7\n\xef\x82\xb7\n\nthe manufacturer makes a substantial beginning of their manufacture OR\ncommitments for their procurement\nbefore any notice of repudiation AND under circumstances which reasonably\nindicate that the goods are for the buyer (i.e., some sort of identification to the\ncontract).\n\nProblem 5-4. TheaterCo places an order with DesignCo over the phone for 100 custom made\noutfits to be used in an upcoming theatrical production. DesignCo accepts the order over the\nphone and the parties agree upon a price of $10,000. The outfits are to be made with lots of\nglitter, feathers, and neon green fabric. Before a written agreement is entered into, TheaterCo\ncalls DesignCo and cancels the order.\n(1) DesignCo has taken no steps to begin making the outfits. Is there an enforceable\ncontract under UCC \xc2\xa7 2-201(3)(a)?\n(2) DesignCo has not started making any of the outfits, but in reliance on the oral\nagreement DesignCo has paid for and ordered 1,000 yards of neon green fabric. Is there\nan enforceable contract?\n\n71\n\n\x0c5.3.2. The admission exception: If a party to an agreement that does not satisfy the statute\nof fraud admits the existence of a contract in its pleadings, testimony, or other court\nproceedings, the contract is enforceable under UCC \xc2\xa7 2-201(3)(b) up to the quantity of\ngoods admitted.\nProblem 5-5. On October 1, Bonnie, a student, orally agreed to purchase her roommate\nStephanie\xe2\x80\x99s car for $6,000. When Stephanie tendered the car, Bonnie refused to pay, saying that\nher boyfriend, a law student, told her that the contract was not enforceable because it was not in\nwriting.\n(1) Stephanie sued Bonnie, alleging:\nA. On October 1, plaintiff offered to sell her car to defendant.\nB. On October 1, defendant accepted the offer and promised to pay plaintiff\n$6,000 for the car.\nC. On October 3, plaintiff tendered the car and defendant refused to pay for it.\nD. The market value of the car is $5,600.\nE. Wherefore plaintiff is damaged in the amount of $400.\nHow should Bonnie answer the complaint?\n(2) Alternatively, suppose Bonnie was questioned in a deposition as follows:\nQ: Did you and Stephanie talk about purchasing her car on October 1?\nA: Yes.\nQ: And she offered to sell it to you for $6,000?\nA: Yes.\nQ: And you accepted that offer?\nA: Yes.\nWill Bonnie prevail in her statute of frauds defense?\n5.3.3. The performance exception: Under UCC \xc2\xa7 2-201(3)(c), an agreement for the sale of\ngoods for $500 or more not otherwise satisfying the statute of frauds will nonetheless be\nenforced if there has been performance, either in the form of payment for goods or\nacceptance of goods. Many other defenses to contract formation make the contract\nvoidable, so that a party can assert the defense even if they have performed. But if you\naccept the goods or pay for them, you lose your right to later assert the statute as a\ndefense. This makes sense, for if the purpose of the statute is to prevent fraud, a person\nshould not be able to in effect admit they made a contract by performing it, and then deny\nit.\n72\n\n\x0cA more difficult question is whether a partial payment, such as a deposit, will constitute\nsufficient payment to enforce the contract. Several courts have held that a deposit is\nsufficient. See, e.g., Morris v. Perkins Chevrolet, 663 S.W.2d 785 (Mo. Ct. App. 1984),\nwhere the court enforced an oral agreement for the purchase of an \xe2\x80\x9cIndy 500 Pace Car\xe2\x80\x9d\nbecause purchaser had paid a $100 deposit by check (which was cashed by the seller). On\nthe other hand, in Jones v. Wide World of Cars, Inc., 820 F. Supp. 132 (S.D.N.Y. 1993),\nthe court held that a buyer\'s deposit towards the purchase of a car was insufficient to\nestablish an enforceable contract absent additional conduct or a writing. This court noted\nthat courts are more inclined to find a deposit sufficient when enforcement is sought\nagainst the seller rather than the buyer.\n5.4. Estoppel. If all else fails, and the contract does not meet the requirements of the statute of\nfrauds, and no exceptions apply, is there any other argument you can present to avoid the statute\nof frauds defense? Recall \xc2\xa7 1-103(b), discussed in Section 1.7 of Chapter 1, which allows\nprinciples of law and equity to supplement the UCC, specifically including \xe2\x80\x9cestoppel.\xe2\x80\x9d\n5.4.1. In Northwest Potato Sales, Inc. v. Beck, 678 P.2d 1138 (Mont. 1984), a farmer\nagreed to sell seed potatoes to a merchant. In reliance on that oral agreement, the\nmerchant re-sold the potatoes in the market (before they were delivered). Seed potato\nprices quickly escalated, and when it came time for delivery, the farmer refused, and sold\nhis seed potatoes to another merchant at double the price. When the first merchant\nbrought a breach of contract claim, the farmer raised the statute of frauds defense. The\ncourt estopped the farmer from denying the existence of the contract. The court noted\nprevious dealings between the parties which gave rise to the farmer\xe2\x80\x99s knowledge that the\nmerchant would re-sell the seed potatoes into the market in reliance on the contract.\nAnother factor noted by the court were phone conversations between the parties after the\noriginal contract was formed, in which the farmer failed to deny the existence of the\ncontract when the merchant brought it up, and even promised to send back a written\ncontract.\n5.4.2. Is UCC \xc2\xa7 2-201 the exclusive statement of the statute of frauds applicable to sales\nof goods, or should it be supplemented by the non-UCC statute of frauds? For example,\nassume that on October 1, 2017, John orally agreed with Mary to sell his Ted Williams\nautographed baseball to her for $400 on November 1, 2018. This agreement does not fall\nwithin UCC \xc2\xa7 2-201, because the price is under $500. If John refuses to perform on\nNovember 1, 2018, and Mary subsequently brings a breach of contract claim against him,\ncan he assert as a defense the non-UCC statute of frauds which, in most jurisdictions,\nprevents enforcement of an oral contract that cannot be performed within one year? One\nargument is that the UCC \xc2\xa7 2-201 is the exclusive source of the statute of frauds for the\nsale of goods, in which case the one-year rule would not apply. This is the approach used\nin Amended \xc2\xa7 2-201, which specifically addressed the issue in a new subsection (4):\n\n73\n\n\x0c(4) A contract that is enforceable under this section is not unenforceable merely\nbecause it is not capable of being performed within one year or any other period\nafter its making.\nHowever, since the Amended Code has not been enacted in any jurisdiction and has been\nwithdrawn, this question remains one where there is a split of authority.\n5.5. Writings Signed by Agents. Is a writing otherwise sufficient to meet the statute of frauds\nenforceable when signed by an agent? Yes. However, under the equal dignities rule, if the\ncontract signed by the agent must be in writing, then the agent\xe2\x80\x99s authority to enter into the\ncontract must also be in writing.\nProblem 5-6. Buffalo Bill orally authorizes his ranch manager to sell 10 head of buffalo for\n$1,000 each. The ranch manager, in turn, enters into a written agreement with a local restaurant\nfor the sale of ten buffalo at $1,000 each. Is the contract enforceable against Buffalo Bill?\n\nChapter 5 Additional Sources.\nScott J. Burnham, Glannon Guide to Sales: Learning Sales Through Multiple-Choice Questions\nand Analysis (Wolters Kluwer 2d ed., 2012), Chapter 8\nJames J. White and Robert S. Summers, Uniform Commercial Code (West 6th ed., 2010),\nChapter 2-1 to 2-8\nRandy R. Koenders, Annotation, Sales: Construction of Statute of Frauds Exception under UCC\n\xc2\xa7 2-201(2) for Confirmatory Writing Between Merchants, 82 A.L.R.4th 709 (1990)\n\n74\n\n\x0cChapter 6. Warranties Implied by Law\n6.1. Introduction to Warranties\n6.1.1 What is a warranty? Black\xe2\x80\x99s Law Dictionary includes the following definition in a\ncommercial context: \xe2\x80\x9can assurance or guaranty, either express in the form of a statement\nby a seller of goods, or implied by law, having reference to and ensuring the character,\nquality or fitness of purpose of the goods.\xe2\x80\x9d Black\xe2\x80\x99s Law Dictionary (West 6th ed. 1991).\n6.1.2 When a buyer purchases goods from the seller, the buyer generally has certain\nexpectations about the goods he or she is purchasing. Absent an agreement to the\ncontrary, the buyer will expect that the seller is transferring ownership of the goods; that\nno other party has a rightful claim to the goods; that the goods do not infringe the rights\n(generally, patent, trademark or copyright) of any third party; and that the goods meet\ncertain standards of quality. Each of these expectations is specifically addressed by one or\nmore provisions of Article 2. In Chapter 6 we consider warranties that arise or are implied\nby operation of law. Chapter 7 addresses express warranties.\n6.1.3 Warranty liability is a kind of strict liability -- if the goods do not conform to the\nwarranties made, either express or implied, the seller is liable regardless of fault. The\nbuyer need only prove that the goods did not conform to the warranty. This concept was\ndescribed in Vlases v. Montgomery Ward & Co., Inc., 377 F.2d 846, 850 (3d Cir. 1967), a\ncase in which the buyer of diseased chickens sued to recover for the breach of the implied\nwarranty of merchantability:\nThe entire purpose behind the implied warranty sections of the Code is to hold the\nseller responsible when inferior goods are passed along to the unsuspecting buyer.\nWhat the Code requires is not evidence that the defects could or should have been\nuncovered by the seller but only that the goods upon delivery were not of\nmerchantable quality. If those requisite proofs are established the only exculpatory\nrelief afforded by the Code is a showing that the implied warranties were modified\nor excluded\xe2\x80\xa6. Lack of skill or foresight on the part of the seller in discovering the\nproduct\'s flaw was never meant to bar liability. The gravamen here is not so much\nwith what precautions were taken by the seller but rather with the quality of the\ngoods contracted for by the seller.\n\n75\n\n\x0c6.1.4 It is not surprising, of course, that sellers and buyers often have different interests\nand expectations with respect to the warranties made by a seller of goods and the\nremedies available to buyers when the goods do not conform to those warranties.\nChapters 6 and 7 discuss the default rules \xe2\x80\x93 the warranties that are given in the absence of\nlimitation or disclaimer; Chapters 8 we will consider the ways that a seller may limit the\nor disclaim those warranties.\n6.2 Warranties of Title\nUnder \xc2\xa7 2-312, with every contract for sale of a good, the seller (whether merchant or nonmerchant) warrants that:\n6.2.1 The title conveyed is good, and the transfer is rightful. This warranty applies\nregardless of whether or not the seller had actual knowledge of a title problem. For\nexample, even if seller is unaware that the watch he purchased from a friend is stolen, the\nseller will nonetheless breach this warranty of title when he subsequently sells the stolen\nwatch.\n6.2.2 The goods are delivered free from any security interest or other lien, except for\nthose security interests or liens known by the buyer at the time of contracting. In order to\nfall into this exception, the buyer must have actual knowledge of a lien or other\nencumbrance at the time of contracting. The seller cannot argue that the buyer \xe2\x80\x9cshould\nhave known.\xe2\x80\x9d For example, where a security interest had been perfected by the filing of a\nUCC financing statement, but the buyer did not have actual knowledge of it, the seller\nbreached this warranty (even though the buyer could have, and probably should have,\ndone a lien search). Elias v. Dobrowolski, 412 A.2d 1035 (N.H. 1980).\nProblem 6-1. ABC Co. buys a machine from XYZ Co. Shortly thereafter, the repo man arrives\nand tells ABC that he is there to repossess the machine on behalf of a bank, which has a security\ninterest in the machine. It turns out the repo man is right. Does ABC have any recourse?\n6.3. Warranty Against Infringement. Section 2-312(3) adds an additional warranty that the\ngoods shall be delivered \xe2\x80\x9cfree of the rightful claim of any third person by way of infringement or\nthe like.\xe2\x80\x9d Official Comment 3 indicates that this warranty relates to intellectual property\ninfringement claims. Note that this warranty is given only by merchants dealing in goods of the\nkind. Suppose, for example, that you bought a Blackberry from Best Buy. Then a patent\ninfringement claim is brought against Blackberry. If the plaintiff obtains an injunction that\nprevents Blackberry from using the technology and causes your Blackberry not to work, you\nwould have a claim for breach of this warranty. Note that according to the statute, the claim for\nbreach is against the seller, in this case Best Buy, who is of course an innocent party. Does it\nmake sense that this warranty is given by the seller rather than the manufacturer?\n\n76\n\n\x0c6.3.1 If a buyer provides specifications to the seller, the buyer must hold the seller\nharmless against any infringement claim that arises out of compliance with the\nspecifications. \xe2\x80\x9cThere is, under such circumstances, a tacit representation on the part of\nthe buyer that the seller will be safe in manufacturing according to the specifications, and\nthe buyer is under an obligation in good faith to indemnify him for any loss suffered.\xe2\x80\x9d\nOfficial Comment 3.\n6.4. Implied Warranty of Merchantability. There are two implied warranties of quality that\narise by operation of law: the implied warranty of merchantability (\xc2\xa7 2-314) and the implied\nwarranty of fitness for a particular purpose (\xc2\xa7 2-315). By far, the most important warranty\nimplied by operation of law is the warranty of merchantability. Read \xc2\xa7 2-314. Note that the\nwarranty is not only given only by a merchant seller, but only by a \xe2\x80\x9cmerchant with respect to\ngoods of that kind.\xe2\x80\x9d You might want to review \xc2\xa7 2.4 on the different categories of merchant in\nArticle 2.\nProblem 6-2. Fill in the conditions that must be present to give rise to an implied warranty of\nmerchantability:\n(1) There is a contract involving _______________________________________________;\n(2) The seller is a __________________________________________________________; and\n(3) There is no valid ______________________ of the implied warranty of merchantability.\nProblem 6-3. Jay Celebrity, a city boy, recently bought a ranch in Nevada. Jay enters a farm\nsupply store, and asks the salesman for his recommendation as to which herbicide would control\na knapweed infestation that has started in one of his pastures. The farm supply store carries\nseveral lines of herbicides; Jay buys the product recommended by the salesman. It kills not only\nthe knapweed, but every green thing in sight (which, it turns out, is what the product is designed\nto do).\n(1) Is there an implied warranty of merchantability?\n(2) What if, unbeknownst to Jay, the sales clerk was new, and had little knowledge of\nherbicides. Does that fact affect the existence of the warranty?\nProblem 6-4. Joan, a hairdresser by profession, sells her Labrador retriever\xe2\x80\x99s first litter of\npuppies. One of the purchasers asks for Joan\xe2\x80\x99s advice in selecting a puppy which would be\nsuitable for show, and the purchaser relies on Joan\xe2\x80\x99s recommendations. It turns out that the\npuppy has hip dysplasia, making it unfit for show purposes. Further, because of the hip dysplasia,\nthe puppy is not suitable for breeding, which is an ordinary purpose for which female puppies are\npurchased. Is there an implied warranty of merchantability?\n77\n\n\x0cProblem 6-5. Marilyn enters a grocery store to purchase a bottle of bleach, wearing a very\nexpensive coat. Due to poor packaging, the bleach spills all over her coat and ruins it on her way\nto the checkout stand. When she brings a claim for breach of the implied warranty of\nmerchantability for inadequate packaging, the store argues that because it had not yet sold her the\nbleach, there was no contract, there was no seller, and she has no claim. Will the store prevail?\nSee Barker v. Allied Supermarket, 596 P.2d 870 (Okla. 1979).\n6.5. Merchantability Standards. In order to comply with the warranty of merchantability, the\ngoods sold must, at a minimum, meet all six of the standards set forth at UCC \xc2\xa7 2-314(2), to the\nextent those standards apply. For example, the standard requiring a good to conform to an\naffirmation of fact on a label would not apply if there is no label. The goods must:\n(a) pass without objection in the trade under the contract description;\n(b) in the case of fungible goods, such as wheat in a bin, be of fair average quality within\nthe description;\n(c) be fit for the ordinary purposes for which such goods are used;\n(d) run, within the variations permitted by the agreement (including any standards\nallowed by usage of trade) of even kind, quality and quantity within each unit and among\nall units involved;\n(e) be adequately contained, packaged, and labeled as the agreement may require; and\n(f) conform to the promise or affirmations of fact made on the container or label, if any.\nNote: these are minimum standards; additional or higher standards can be established by usage of\ntrade or course of dealing.\n6.5.1. The price paid by a consumer may establish a higher standard of merchantability.\nSee the last sentence of Comment 7 to \xc2\xa7 2-314, which states:\nIn cases of doubt as to what quality is intended, the price at which a merchant\ncloses a contract is an excellent index of the nature and scope of his obligation\nunder the present section.\nFor example, a purchaser will expect longer wear and higher quality from a $1,000 coat\nversus a $100 coat.\n6.5.2. A breach of either the implied warranty of merchantability or the implied warranty\nof fitness for a particular purpose occurs at the time of sale. However, how long a\nparticular good should last is a component of the standard of merchantability. If a\n78\n\n\x0cparticular model of toaster would be objectionable in the trade if it did not work for at\nleast three years, a purchaser can show that the warranty of merchantability was breached\nat the time of sale if the seller sells a toaster that works only six months.\nProblem 6-6. For each situation listed below, indicate which (if any) of the six minimum\nstandards above have not been met (more than one may apply):\n(1) Ann purchases wine at Liquid Planet. When she uncorks the bottle one week later,\nthere is mold in the wine.\n(2) Ann, instead of opening the wine, uses it to prop a door open. The bottle breaks under\nthe door\xe2\x80\x99s weight, and the spilled wine damages Ann\xe2\x80\x99s carpet.\n(3) Carl buys a bag of salt for his water softener. On the way out the door, the bag splits\nopen, causing Carl to slip and fall.\n(4) Dan buys three cans of eggshell paint to paint his living room. After he\xe2\x80\x99s finished, he\nnotices that the paint from the third can has left the walls slightly (but noticeably)\ndifferent than the walls painted with the first two cans.\n(5) General Milling orders one ton of hard red spring wheat, with a minimum protein\ncontent of 15%. When the shipment arrives, a sample testing shows that on average, the\nprotein content is 15%, but some grain has a higher protein content, and some has a lower\nprotein content.\n6.6 Merchantability of Used Goods. The implied warranty of merchantability applies to the sale\nof used goods by a merchant who sells goods of that kind. See Comment 3 to \xc2\xa7 2-314. However,\nthe standard of merchantability will be less for used goods than for new goods. Even among used\ngoods, a \xe2\x80\x9cnewer\xe2\x80\x9d or \xe2\x80\x9cmore expensive\xe2\x80\x9d used good will have different standards than an \xe2\x80\x9colder,\xe2\x80\x9d\n\xe2\x80\x9cless expensive\xe2\x80\x9d used good, as expressed by the court in Dale v. King Lincoln-Mercury, 676 P.2d\n744, 748 (Kan. 1984):\nA late model, low mileage car, sold at a premium price, is expected to be in far better\ncondition and to last longer than an old, high mileage, \xe2\x80\x9crough\xe2\x80\x9d car that is sold for little\nabove scrap value.\nNonetheless, a used car, in order to be merchantable, must be fit for its ordinary purpose of\ndriving, i.e., be in reasonably safe condition and operable.\nProblem 6-7. Evan buys a used Nintendo game from a local pawn shop for $10. He goes home\nand puts the game in his Nintendo; it doesn\xe2\x80\x99t work. Has the implied warranty of merchantability\nbeen breached?\n79\n\n\x0c6.7. Special Standards of Merchantability for Food. Is the warranty of merchantability\nbreached when a restaurant patron has ordered a bowl of fish chowder, and is seriously injured by\na fishbone? Or a patron breaks a tooth on a cherry pit in a cherry pie? How about a patron who\nbreaks a tooth on a bolt contained in an order of mashed potatoes? The early line of cases\ndistinguished between \xe2\x80\x9cnatural substances\xe2\x80\x9d and \xe2\x80\x9cforeign substances,\xe2\x80\x9d but today a majority of\ncourts apply a \xe2\x80\x9creasonable expectations\xe2\x80\x9d test, which considers whether the consumer reasonably\nshould have expected to find the injury-causing substance in the object, whether natural or\nforeign.\nWebster v. Blue Ship Tea Room, Inc.\n198 N.E.2d 309 (Mass. 1964)\nREARDON, Justice.\nThis is a case which by its nature evokes earnest study not only of the law but also of the\nculinary traditions of the Commonwealth which bear so heavily upon its outcome. It is an action\nto recover damages for personal injuries sustained by reason of a breach of implied warranty of\nfood served by the defendant in its restaurant. An auditor, whose findings of fact were not to be\nfinal, found for the plaintiff. On a retrial in the Superior Court before a judge and jury, in which\nthe plaintiff testified, the jury returned a verdict for her. The defendant is here on exceptions to\nthe refusal of the judge (1) to strike certain portions of the auditor\xe2\x80\x99s report, (2) to direct a verdict\nfor the defendant, and (3) to allow the defendant\xe2\x80\x99s motion for the entry of a verdict in its favor\nunder leave reserved.\nThe jury could have found the following facts: On Saturday, April 25, 1959, about 1 P.\nM., the plaintiff, accompanied by her sister and her aunt, entered the Blue Ship Tea Room\noperated by the defendant. The group was seated at a table and supplied with menus.\nThis restaurant, which the plaintiff characterized as \xe2\x80\x98quaint,\xe2\x80\x99 was located in Boston \xe2\x80\x98on\nthe third floor of an old building on T Wharf which overlooks the ocean.\xe2\x80\x99\nThe plaintiff, who had been born and brought up in New England (a fact of some\nconsequence), ordered clam chowder and crabmeat salad. Within a few minutes she received\ntidings to the effect that \xe2\x80\x98there was no more clam chowder,\xe2\x80\x99 whereupon she ordered a cup of fish\nchowder. Presently, there was set before her \xe2\x80\x98a small bowl of fish chowder.\xe2\x80\x99 She had previously\nenjoyed a breakfast about 9 A. M. which had given her no difficulty. \xe2\x80\x98The fish chowder\ncontained haddock, potatoes, milk, water and seasoning. The chowder was milky in color and not\nclear. The haddock and potatoes were in chunks\xe2\x80\x99 (also a fact of consequence). \xe2\x80\x98She agitated it a\nlittle with the spoon and observed that it was a fairly full bowl * * *. It was hot when she got it,\nbut she did not tip it with her spoon because it was hot * * * but stirred it in an up and under\nmotion. She denied that she did this because she was looking for something, but it was rather\nbecause she wanted an even distribution of fish and potatoes.\xe2\x80\x99 \xe2\x80\x98She started to eat it, alternating\n80\n\n\x0cbetween the chowder and crackers which were on the table with * * * [some] rolls. She ate about\n3 or 4 spoonfuls then stopped. She looked at the spoonfuls as she was eating. She saw equal parts\nof liquid, potato and fish as she spooned it into her mouth. She did not see anything unusual\nabout it. After 3 or 4 spoonfuls she was aware that something had lodged in her throat because\nshe couldn\xe2\x80\x99t swallow and couldn\xe2\x80\x99t clear her throat by gulping and she could feel it.\xe2\x80\x99 This\nmisadventure led to two esophagoscopies at the Massachusetts General Hospital, in the second of\nwhich, on April 27, 1959, a fish bone was found and removed. The sequence of events produced\ninjury to the plaintiff which was not insubstantial.\nWe must decide whether a fish bone lurking in a fish chowder, about the ingredients of\nwhich there is no other complaint, constitutes a breach of implied warranty under applicable\nprovisions of the Uniform Commercial Code, the annotations to which are not helpful on this\npoint. As the judge put it in his charge, \xe2\x80\x98Was the fish chowder fit to be eaten and wholesome? * *\n* [N]obody is claiming that the fish itself wasn\xe2\x80\x99t wholesome. * * * But the bone of contention\nhere-I don\xe2\x80\x99t mean that for a pun-but was this fish bone a foreign substance that made the fish\nchowder unwholesome or not fit to be eaten?\xe2\x80\x99\nThe plaintiff has vigorously reminded us of the high standards imposed by this court\nwhere the sale of food is involved (see Flynn v. First Natl. Stores Inc., 296 Mass. 521, 523, 6\nN.E.2d 814) and has made reference to cases involving stones in beans (Friend v. Childs Dining\nHall Co., 231 Mass. 65, 120 N.E. 407, 5 A.L.R. 1100), trichinae in pork (Holt v. Mann, 294\nMass. 21, 22, 200 N.E. 403), and to certain other cases, here and elsewhere, serving to bolster her\ncontention of breach of warranty.\nThe defendant asserts that here was a native New Englander eating fish chowder in a\n\xe2\x80\x98quaint\xe2\x80\x99 Boston dining place where she had been before; that \xe2\x80\x98[f]ish chowder, as it is served and\nenjoyed by New Englanders, is a hearty dish, originally designed to satisfy the appetites of our\nseamen and fishermen\xe2\x80\x99; that \xe2\x80\x98[t]his court knows well that we are not talking of some insipid\nbroth as is customarily served to convalescents.\xe2\x80\x99 We are asked to rule in such fashion that no\nchef is forced \xe2\x80\x98to reduce the pieces of fish in the chowder to miniscule size in an effort to\nascertain if they contained any pieces of bone.\xe2\x80\x99 \xe2\x80\x98In so ruling,\xe2\x80\x99 we are told (in the defendant\xe2\x80\x99s\nbrief), \xe2\x80\x98the court will not only uphold its reputation for legal knowledge and acumen, but will, as\nloyal sons of Massachusetts, save our world-renowned fish chowder from degenerating into an\ninsipid broth containing the mere essence of its former stature as a culinary masterpiece.\xe2\x80\x99\nNotwithstanding these passionate entreaties we are bound to examine with detachment the nature\nof fish chowder and what might happen to it under varying interpretations of the Uniform\nCommercial Code.\nChowder is an ancient dish pre\xc3\xabxisting even \xe2\x80\x98the appetites of our seamen and fishermen.\xe2\x80\x99\nIt was perhaps the common ancestor of the \xe2\x80\x98more refined cream soups, pur\xc3\xa9es, and bisques.\xe2\x80\x99\nBerolzheimer, The American Woman\xe2\x80\x99s Cook Book (Publisher\xe2\x80\x99s Guild Inc., New York, 1941) p.\n176. The word \xe2\x80\x98chowder\xe2\x80\x99 comes from the French \xe2\x80\x98chaudi\xc3\xa8re,\xe2\x80\x99 meaning a \xe2\x80\x98cauldron\xe2\x80\x99 or \xe2\x80\x98pot.\xe2\x80\x99 \xe2\x80\x98In\nthe fishing villages of Brittany * * * \xe2\x80\x98faire la chaudi\xc3\xa8re\xe2\x80\x99 means to supply a cauldron in which is\ncooked a mess of fish and biscuit with some savoury condiments, a hodge-podge contributed by\n81\n\n\x0cthe fishermen themselves, each of whom in return receives his share of the prepared dish. The\nBreton fishermen probably carried the custom to Newfoundland, long famous for its chowder,\nwhence it has spread to Nova Scotia, New Brunswick, and New England.\xe2\x80\x99 A New English\nDictionary (MacMillan and Co., 1893) p. 386. Our literature over the years abounds in references\nnot only to the delights of chowder but also to its manufacture. A namesake of the plaintiff,\nDaniel Webster, had a recipe for fish chowder which has survived into a number of modern\ncookbooks2 and in which the removal of fish bones is not mentioned at all. One old time recipe\nrecited in the New English Dictionary study defines chowder as \xe2\x80\x98A dish made of fresh fish (esp.\ncod) or clams, stewed with slices of pork or bacon, onions, and biscuit. \xe2\x80\x98Cider and champagne\nare sometimes added.\xe2\x80\x99\xe2\x80\x99 Hawthorne, in The House of the Seven Gables (Allyn and Bacon, Boston,\n1957) p. 8, speaks of \xe2\x80\x98[a] codfish of sixty pounds, caught in the bay, [which] had been dissolved\ninto the rich liquid of a chowder.\xe2\x80\x99 A chowder variant, cod \xe2\x80\x98Muddle,\xe2\x80\x99 was made in Plymouth in\nthe 1890s by taking \xe2\x80\x98a three or four pound codfish, head added. Season with salt and pepper and\nboil in just enough water to keep from burning. When cooked, add milk and piece of butter.\xe2\x80\x993\nThe recitation of these ancient formulae suffices to indicate that in the construction of chowders\nin these parts in other years, worries about fish bones played no role whatsoever. This broad\noutlook on chowders has persisted in more modern cookbooks. \xe2\x80\x98The chowder of today is much\nthe same as the old chowder * * *.\xe2\x80\x99 The American Woman\xe2\x80\x99s Cook Book, supra, p. 176. The all\nembracing Fannie Farmer states in a portion of her recipe, fish chowder is made with a \xe2\x80\x98fish\nskinned, but head and tail left on. Cut off head and tail and remove fish from backbone. Cut fish\nin 2-inch pieces and set aside. Put head, tail, and backbone broken in pieces, in stewpan; add 2\ncups cold water and bring slowly to boiling point * * *.\xe2\x80\x99 The liquor thus produced from the bones\nis added to the balance of the chowder. Farmer, The Boston Cooking School Cook Book (Little\nBrown Co., 1937) p. 166.\nThus, we consider a dish which for many long years, if well made, has been made\ngenerally as outlined above. It is not too much to say that a person sitting down in New England\nto consume a good New England fish chowder embarks on a gustatory adventure which may\nentail the removal of some fish bones from his bowl as he proceeds. We are not inclined to\ntamper with age old recipes by any amendment reflecting the plaintiff\xe2\x80\x99s view of the effect of the\nUniform Commercial Code upon them. We are aware of the heavy body of case law involving\nforeign substances in food, but we sense a strong distinction between them and those relative to\n2 \xe2\x80\x98Take a cod of ten pounds, well cleaned, leaving on the skin. Cut into pieces one and a half pounds thick,\npreserving the head whole. Take one and a half pounds of clear, fat salt pork, cut in thin slices. Do the same with\ntwelve potatoes. Take the largest pot you have. Fry out the pork first, then take out the pieces of pork, leaving in the\ndrippings. Add to that three parts of water, a layer of fish, so as to cover the bottom of the pot; next a layer of\npotatoes, then two tablespoons of salt, 1 teaspoon of pepper, then the pork, another layer of fish, and the remainder\nof the potatoes. Fill the pot with water to cover the ingredients. Put over a good fire. Let the chowder boil twentyfive minutes. When this is done have a quart of boiling milk ready, and ten hard crackers split and dipped in cold\nwater. Add milk and crackers. Let the whole boil five minutes. The chowder is then ready to be first-rate if you have\nfollowed the directions. An onion may be added if you like the flavor.\xe2\x80\x99 \xe2\x80\x98This chowder,\xe2\x80\x99 he adds, \xe2\x80\x98is suitable for a\nlarge fishing party.\xe2\x80\x99 Wolcott, The Yankee Cook Book (Coward-McCann, Inc., New York City, 1939) p. 9.\n3 Atwood, Receipts for Cooking Fish (Avery & Doten, Plymouth, 1896) p. 8.\n\n82\n\n\x0cunwholesomeness of the food itself, e. g., tainted mackerel (Smith v. Gerrish, 256 Mass. 183, 152\nN.E. 318), and a fish bone in a fish chowder. Certain Massachusetts cooks might cavil at the\ningredients contained in the chowder in this case in that it lacked the heartening lift of salt pork.\nIn any event, we consider that the joys of life in New England include the ready availability of\nfresh fish chowder. We should be prepared to cope with the hazards of fish bones, the occasional\npresence of which in chowders is, it seems to us, to be anticipated, and which, in the light of a\nhallowed tradition, do not impair their fitness or merchantability. While we are bouyed up in this\nconclusion by Shapiro v. Hotel Statler Corp., 132 F. Supp. 891 (S.D. Cal.), in which the bone\nwhich afflicted the plaintiff appeared in \xe2\x80\x98Hot Barquette of Seafood Mornay,\xe2\x80\x99 we know that the\nUnited States District Court of Southern California, situated as are we upon a coast, might be\nexpected to share our views. We are most impressed, however, by Allen v. Grafton, 170 Ohio St.\n249, 164 N.E.2d 167, where in Ohio, the Midwest, in a case where the plaintiff was injured by a\npiece of oyster shell in an order of fried oysters, Mr. Justice Taft (now Chief Justice) in a\nmajority opinion held that \xe2\x80\x98the possible presence of a piece of oyster shell in or attached to an\noyster is so well known to anyone who eats oysters that we can say as a matter of law that one\nwho eats oysters can reasonably anticipate and guard against eating such a piece of shell * * *.\xe2\x80\x99\n(P. 259 of 170 Ohio St., p. 174 of 164 N.E.2d.)\nThus, while we sympathize with the plaintiff who has suffered a peculiarly New England\ninjury, the order must be\nExceptions sustained.\nJudgment for the defendant.\nIn Schafer v. JLC Food Systems, Inc., 695 N.W. 2d 570, 574-75 (Minn. 2005), the court stated:\nThe bright-line rule set out in the foreign-natural test, which assumes that all\nsubstances that are natural to the food in one stage or another of preparation are in fact\nanticipated by the ordinary consumer in the final product served, has been called into\nquestion. For example, in Betehia v. Cape Cod Corp., 10 Wis.2d 323, 103 N.W.2d 64\n(1960), a restaurant patron was injured by a chicken bone in a chicken sandwich and sued\nthe restaurant for breach of implied warranty of fitness and for negligence. Id. at 65. The\ncourt concluded that it did not logically follow that consumers should expect that every\nproduct containing some chicken must as a matter of law occasionally or frequently\ncontain chicken bones or chicken-bone slivers simply because chicken bones were natural\nto chicken meat. Id. at 67. Thus, the court concluded that categorizing a substance as\nforeign or natural might have some importance in determining the degree of negligence of\nthe processor of food, but it was not determinative of what was unfit or harmful for\nhuman consumption. Id. The court further concluded that the naturalness of a substance\nto a food served was important only in determining whether the consumer might\nreasonably expect to find such substance in the particular type of food served. Id.; see\nalso Ex Parte Morrison\'s Cafeteria of Montgomery, Inc., 431 So.2d 975, 978 (Ala.1983)\n83\n\n\x0c(\xe2\x80\x9cThe undesirability of the foreign substance test lies in the artificial application at the\ninitial stage of processing the food without consideration of the expectation of the\nconsumer in the final product served.\xe2\x80\x9d); Jackson, 168 Ill. Dec. 147, 589 N.E.2d at 548-49\n(stating that the foreign-natural test was \xe2\x80\x9cunsound and should be abandoned\xe2\x80\x9d); Phillips v.\nTown of West Springfield, 405 Mass. 411, 540 N.E.2d 1331, 1332-33 (1989) (stating that\nthe foreign-natural test\'s focus on the product in its natural form failed to recognize that\nsellers might fairly be held responsible in some instances for natural substances in food\nthat caused injury).\nComparatively, the reasonable expectation test focuses on what is reasonably\nexpected by the consumer in the food product as served, not what might be foreign or\nnatural to the ingredients of that product before preparation. See Betehia, 103 N.W.2d at\n69. As applied to common-law negligence, the reasonable expectation test is related to\nthe foreseeability of harm on the part of the defendant; that is, the defendant has the duty\nof ordinary care to eliminate or remove in the preparation of the food served such harmful\nsubstance as the consumer of the food, as served, would not ordinarily anticipate and\nguard against. Id. The majority of jurisdictions that have dealt with the defective food\nproducts issue have adopted some formulation of the reasonable expectation test. See\nRestatement (Third) of Torts: Products Liability \xc2\xa7 7 rep. n. 1 to cmt. b (1998).\nProblem 6-8. Clark orders a chicken pot pie at his favorite restaurant. He sustains throat injuries\nwhen he swallows a one-inch chicken bone contained in the pie. Has the restaurant breached the\nimplied warranty of merchantability\n(1) under the natural substances theory?\n(2) under the \xe2\x80\x9creasonable expectations\xe2\x80\x9d theory?\n6.8. Merchantability of Inherently Dangerous Goods. Goods that are inherently dangerous,\nsuch as knives and strychnine, are nonetheless merchantable as long as they are \xe2\x80\x9cfit for the\nordinary purposes\xe2\x80\x9d for which they are used and otherwise meet the standards of UCC \xc2\xa7 2-314. If\na hunter injures herself when the handle of a knife falls off while she is using it, she may\nsuccessfully assert a breach of the implied warranty of merchantability.\n6.8.1. Let\xe2\x80\x99s pause and talk about the overlap between tort law and contract law as they\napply to \xe2\x80\x9cinherently dangerous\xe2\x80\x9d goods. When the UCC was promulgated in the 1950s, the\nlaw of strict liability in tort was developing. In 1964, the American Law Institute adopted\nthe influential Section 402A of the Restatement (Second) of Torts, which imposes strict\nliability on sellers of \xe2\x80\x9cdefective\xe2\x80\x9d goods that are \xe2\x80\x9cinherently dangerous.\xe2\x80\x9d Comment i states\nthat \xe2\x80\x9c[m]any products cannot possibly be made entirely safe for all consumption,\xe2\x80\x9d noting\nthat \xe2\x80\x9csugar is a deadly poison to diabetics\xe2\x80\x9d and that \xe2\x80\x9cgood whiskey\xe2\x80\x9d is \xe2\x80\x9cespecially\ndangerous to alcoholics.\xe2\x80\x9d Nonetheless, neither sugar nor whiskey are \xe2\x80\x9cunreasonably\ndangerous.\xe2\x80\x9d In order to be \xe2\x80\x9cunreasonably dangerous,\xe2\x80\x9d a good \xe2\x80\x9cmust be dangerous to an\n84\n\n\x0cextent beyond that which would be contemplated by the ordinary consumer who\npurchases it.\xe2\x80\x9d\n6.8.1.1 Frequently, consumers who are injured by a good will bring a contractual\nbreach of warranty claim, as well as negligence and/or strict liability claims under\ntort law. Recall that a breach of warranty claim is akin to a strict liability claim, in\nthat a showing of fault or negligence is not required in order to prevail.\n6.8.1.2 Is a claim for the breach of the implied warranty of merchantability\nidentical to a strict liability claim in tort? This question was certified by the\nSecond Circuit Court of Appeals to the highest court of New York in a case in\nwhich the plaintiff sustained injuries resulting from the rollover of her Ford\nBronco when she slammed on the brakes to avoid a deer. The jury had determined\nthat the Ford Bronco was not defective, because its narrow track width and high\ncenter of gravity were necessary to the vehicle\'s off-road capabilities, and thus\nFord was not liable on plaintiff\xe2\x80\x99s strict liability tort claim. However, the jury\nfound that Ford was liable for breach of the implied warranty of merchantability,\nbecause the Bronco was not fit for its ordinary purpose of driving on paved roads.\nThe New York court determined that the two claims are not identical and that the\njury\xe2\x80\x99s finding of no product defect was reconcilable with its finding of a breach of\nwarranty. Denny v. Ford Motor Co., 662 N.E.2d 730 (N.Y. 1995).\nResearch Assignment 6-1. Identify at least three differences between the procedural or\nsubstantive requirements of a contractual breach of warranty claim and a claim for strict liability\narising in tort.\n6.8.2. What about a product which causes an adverse reaction in a small group of\npurchasers, such as an after-shave that causes an allergic skin reaction in ten percent of\nthose who use it, or milk that causes an upset stomach to those who are lactose intolerant?\nThe implied warranty will not be breached if only a small number of people relative to the\ntotal number of persons using the product suffer an allergic reaction. Hafner v. Guerlain,\n34 A.D.2d 162 (1970) (less than one percent of purchasers of Shalimar perfume suffered\nan allergic reaction). With regards to the milk issue, a factor to consider is that milk is a\nnatural product; it is not anything added by the manufacturer which causes the reaction.\n6.9. Implied Warranty of Fitness for a Particular Purpose. UCC \xc2\xa7 2-315 provides that certain\ncircumstances may give rise, by operation of law, to a warranty that a good is fit for a particular\npurpose. Unlike the warranty of merchantability, which applies only to sellers of goods of the\nkind involved, the warranty of fitness for a particular purpose can arise whether the seller is a\nmerchant or a non-merchant. Read \xc2\xa7 2-315.\n\n85\n\n\x0cProblem 6-9. Fill in the conditions that must be present to give rise to an implied warranty of\nfitness for a particular purpose:\n(1) There is a contract involving __________________________________________________;\n(2) At the time of contract, seller has reason to know:\na. __________________________________________________________________; and\nb. _____________________________________________________________________.\n(3) There is no valid ___________________ of the implied warranty of fitness for a particular\npurpose.\n6.9.1. A \xe2\x80\x9cparticular purpose\xe2\x80\x9d envisages a specific use by the buyer which is \xe2\x80\x9cpeculiar\xe2\x80\x9d\nand not the ordinary purpose for which the goods are used. For example, shoes are\ngenerally used for walking on ordinary ground, but a seller may know that a particular\npair is selected for climbing mountains. Comment 2 to \xc2\xa7 2-315.\n6.9.2. The test is whether the seller \xe2\x80\x9cshould have known\xe2\x80\x9d of the particular purpose, not\nwhether the seller actually knew of the particular purpose.\n6.9.3. The buyer must, in fact, rely upon the seller\xe2\x80\x99s skill or judgment. Comment 1 to \xc2\xa7 2315.\n6.9.4. A breach of the implied warranty of fitness for a particular purpose occurs at the\ntime of sale.\nProblem 6-10. Let\xe2\x80\x99s now revisit the problems relating to the warranty of merchantability and ask\nwhether there is a breach of the implied warranty of fitness for a particular purpose in either case:\n(1) Jay Celebrity, a city boy, recently bought a ranch in Nevada. Jay enters a farm supply\nstore, and asks the salesman for his recommendation as to which herbicide would control\na knapweed infestation that has started in one of his pastures. The farm supply store\ncarries several lines of herbicides; Jay buys the product recommended by the salesman. It\nkills not only the knapweed, but every green thing in sight (which, it turns out, is what the\nproduct is designed to do). Is there an implied warranty of fitness for a particular\npurpose?\n(2) What if, unbeknownst to Jay, the sales clerk was new, and had little knowledge of\nherbicides. Does that fact affect the existence of the warranty?\n(3) Joan, a hairdresser by profession, sells her Labrador Retriever\xe2\x80\x99s first litter of puppies.\n86\n\n\x0cOne of the purchasers asks for Joan\xe2\x80\x99s advice in selecting a puppy which would be suitable\nfor show, and the purchaser relies on Joan\xe2\x80\x99s recommendations. It turns out that the puppy\nhas hip dysplasia, making it unfit for show purposes. Further, because of the hip\ndysplasia, the puppy is not suitable for breeding, which is an ordinary purpose for which\nfemale puppies are purchased. Is there an implied warranty of fitness for a particular\npurpose?\nProblem 6-11. Albert informs a clerk at Sullivan\xe2\x80\x99s Appliance Store that he needs an air\nconditioner for his office. The clerk asks for information concerning the space Albert wants to\ncool. Albert replies, \xe2\x80\x9cI don\xe2\x80\x99t have time for that. Just give me a good one.\xe2\x80\x9d The clerk sells Albert a\nmodel which would cool an average office (15\' by 15\'). A few weeks later, Albert returns the\nmodel, complaining that it didn\xe2\x80\x99t cool the office sufficiently. When he returns the air conditioner,\nAlbert explains that his office is 25\' by 25\' with high ceilings and the entire southern wall is made\nof glass.\n(1) Is there a breach of the implied warranty of fitness for a particular purpose?\n(2) Change the facts. Albert does not tell the clerk about the specifics of his office, but the\nclerk was in Albert\xe2\x80\x99s office a few months ago when he made a delivery, and he is aware\nof the general size and nature of the office. Is there a breach?\n(3) Change the facts again. Albert tells the clerk of the specifics of his office, and the\nclerk recommends a particular air conditioner. Albert talks to his father, a mechanical\nengineer, and based on that conversation decides to buy the air conditioner recommended\nby the clerk (which, it turns out, doesn\xe2\x80\x99t adequately cool the office). Is there a breach?\n6.10. Other Implied Warranties\nSection 2-314(3) refers to other implied warranties that may arise from course of dealing or usage\nof trade.\nProblem 6-12. In a particular agricultural area, it is the custom and usage of farm implement\ndealers in connection with the sale of used equipment to pay for one-half the cost of repairs\narising within a few months of sale. Does this practice give rise to an implied warranty under \xc2\xa7 2314(3)?\nThe issue of implied warranties given by \xe2\x80\x9cremote sellers\xe2\x80\x9d such as manufacturers will be\naddressed in the next chapter.\n\n87\n\n\x0cChapter 6 Additional Sources.\nScott J. Burnham, Glannon Guide to Sales: Learning Sales Through Multiple-Choice Questions\nand Analysis (Wolters Kluwer 2d ed., 2012), Chapter 9\nJames J. White and Robert S. Summers, Uniform Commercial Code (West 6th ed., 2010),\nChapter 9\n\n88\n\n\x0cChapter 7. Express Warranties and Warranties Given by Remote\nSellers\n7.1. Creation of Express Warranties. In contrast to the implied warranties, which arise\nautomatically by operation of law when the required elements set forth in UCC \xc2\xa7 2-314\n(merchantability) or \xc2\xa7 2-315 (fitness for a particular purpose) exist, an express warranty is\ncreated by the seller. Both merchant and non-merchant sellers can create an express warranty.\nThe following chart summarizes how a seller can create an express warranty under \xc2\xa7 2-313:\n\nAny (i.e., oral, written, conduct)\n- affirmation of fact or\n- promise\nmade by seller to buyer\nrelating to goods\n\nCreates a warranty: goods\nshall conform to the\naffirmation or promise\n\nwhich becomes part of\nthe basis of the bargain\nAny description of the goods (see\ncomment 5 for \xe2\x80\x9cdescription\xe2\x80\x9d \xe2\x80\x93\nneeds not be by words)\n\nCreates a warranty: goods\nshall conform to the\ndescription\n\nAny sample or model\n\nCreates a warranty: goods\nshall conform to the\nsample or model\n\n7.1.1 UCC \xc2\xa7 2-313(2) notes that a seller does not need to use formal words such as\n\xe2\x80\x9cwarrant\xe2\x80\x9d or \xe2\x80\x9cguarantee\xe2\x80\x9d to give rise to an express warranty, nor is the seller required to\nhave specific intent to make a warranty. In other words, if you advertise your car for sale\nin the classified ads with the description \xe2\x80\x9c2012 Honda Fit; single owner,\xe2\x80\x9d you are making\na warranty whether you intend to or not.\n7.1.2. UCC \xc2\xa7 2-313(2) provides that \xe2\x80\x9can affirmation merely of the value of the goods or a\nstatement purporting to be merely the seller\xe2\x80\x99s opinion or commendation of the goods does\nnot create a warranty.\xe2\x80\x9d In other words, affirmations of fact give rise to a warranty,\nwhereas a mere affirmation of the value or a seller\xe2\x80\x99s opinion does not. It is not always\neasy to distinguish between the two.\n89\n\n\x0c7.1.2.1. A number of factors may help distinguish the line between puffing and\naffirmations of fact. In Federal Signal Corp. v. Safety Factors, Inc., 886 P.2d 172,\n178-79 (Wash. 1994), the court considered whether the statements were:\n\xef\x82\xb7\n\xef\x82\xb7\n\xef\x82\xb7\n\xef\x82\xb7\n\xef\x82\xb7\n\noral rather than written,\ngeneral rather than specific,\n\xe2\x80\x9chedged\xe2\x80\x9d in some way,\nphrased in terms of opinion rather than fact, or\ncapable of objective measurement.\n\n7.1.3. Express warranties may be created in a number of contexts, both oral and written,\nincluding negotiations, promotional materials, offers, packaging, and contracts. For\nexamples of each, see the following series of annotations by Gary D. Spivey: Statement in\nContract Proposals, Contract Correspondence, or Contract Itself as Constituting\n\xe2\x80\x9cAffirmation of Fact\xe2\x80\x9d Giving Rise to Express Warranty Under U.C.C. \xc2\xa7 2-313(1)(a), 94\nA.L.R.6th 1 (2014); Oral Statement as Constituting \xe2\x80\x9cAffirmation of Fact\xe2\x80\x9d Giving Rise to\nExpress Warranty Under UCC \xc2\xa7 2-313(1)(a), 88 A.L.R.6th 1 (2013); Statement in\nProduct Packaging, User Manuals, or Other Product Documentation as Constituting\n"Affirmation of Fact" Giving Rise to Express Warranty Under UCC \xc2\xa7 2-313(1)(a), 84\nA.L.R.6th 1 (2013); Statement in Advertisements, Product Brochures or Other\nPromotional Materials as Constituting \xe2\x80\x9cAffirmation of Fact\xe2\x80\x9d Giving Rise to Express\nWarranty Under UCC \xc2\xa7 2-313(1)(a), 83 A.L.R.6th 1 (2013).\nProblem 7-1. Characterize the following in accordance with one or more sources of warranty in\n\xc2\xa7 2-313:\na. Affirmation of fact\nb. Promise\nc. Affirmation of value, opinion, or commendation (i.e., \xe2\x80\x9cpuffing\xe2\x80\x9d)\nd. Description\ne. Sample\nf. Model\n1. A tag on a necklace chain in a jewelry store states: \xe2\x80\x9csolid 14-karat gold.\xe2\x80\x9d\n2. You walk into a jewelry store and tell the clerk \xe2\x80\x9cI\xe2\x80\x99m looking for a 14-karat gold chain.\xe2\x80\x9d The\nclerk pulls out a chain and shows it to you.\n3. A jewelry store clerk tells you \xe2\x80\x9cthis chain is the finest that we sell.\xe2\x80\x9d\n4. A diamond ring bears a tag which states \xe2\x80\x9cV.V.S. quality,\xe2\x80\x9d which is a trade term indicating a\nquality classification used by gemologists.\n90\n\n\x0c5. A picture of a watch with a face that glows in the dark is on the outside of the box in which the\nwatch is packaged.\n6. In a newspaper advertisement, the jewelry store states: \xe2\x80\x9clifetime guarantee of internal parts of\nall watches sold by us.\xe2\x80\x9d This ad is not visible in the store itself.\n7. You point to a particular watch on display and tell the clerk that is the watch you want; the\nclerk doesn\xe2\x80\x99t sell you the display watch, but reaches into a cupboard with a supply of watches\nand hands you a box, saying, \xe2\x80\x9chere it is.\xe2\x80\x9d\n8. You\xe2\x80\x99re looking for loose artificial gems to incorporate into jewelry you are making. You walk\ninto a store and see a barrel full of loose gems. The clerk pulls a handful of them out for you to\nlook at, and after examining them, you ask for two pounds of gems from the barrel.\n9. A jewelry clerk scratches a glass with a gem to demonstrate its hardness.\nProblem 7-2. Are the following statements contained in an ad for a used car affirmations of fact\nor opinion? What criteria are you using to make the distinction?\n(1) best in its class\n(2) A-1 condition\n(3) superb handling\n(4) runs and drives good\n(5) top quality\n\n(6) new tires\n(7) good rubber\n(8) single owner\n(9) clean as your mom\xe2\x80\x99s car\n(10) 30,000 miles\n\n7.2. Basis of the Bargain. Not only must there be an express warranty by affirmation of fact,\npromise, description, sample or model, but according to UCC \xc2\xa7 2-313(1), the warranty must be\npart of the basis of the bargain. To what extent does a buyer have to be aware of the warranty\nprior to the purchase? If you buy a watch because you like it, and you\xe2\x80\x99re not even aware of a\ndescription that it is \xe2\x80\x9c14-karat gold,\xe2\x80\x9d can you later sue for a breach of this warranty if you\ndiscover that the watch is not made of 14-karat gold? Does the buyer have to establish that she\nwould not have purchased the product in the absence of the warranty?\n7.2.1. Official Comment 1 to \xc2\xa7 2-313 states that \xe2\x80\x9c\xe2\x80\x98express\xe2\x80\x99 warranties rest on \xe2\x80\x98dickered\xe2\x80\x99\naspects of the individual bargain,\xe2\x80\x9d giving rise to the argument that the buyer must have\nsome knowledge of the warranties in order for them to become a part of the basis of the\nbargain.\n7.2.1.1. Many courts have stated that the buyer does not have to have actual\nknowledge of the specific terms of the express warranty. However, usually in\nthese cases the buyer was generally aware that some sort of warranty was offered.\nSee, for example, Murphy v. Mallard Coach Co., 179 A.D.2d 187, 193 (N.Y.\nApp. Div. 1992), where the court stated \xe2\x80\x9c[to require knowledge of the terms of the\n91\n\n\x0cwarranty at the time of sale] is to ignore the practical realities of consumer\ntransactions wherein the warranty card generally comes with the goods, packed in\nthe box of boxed items or handed over after purchase of larger, non-boxed goods\nand, accordingly, not available to be read by the consumer until after the item is\nactually purchased and brought home. Indeed, such interpretation would, in effect,\nrender almost all consumer warranties an absolute nullity.\xe2\x80\x9d\n7.2.2. Official Comment 3 to \xc2\xa7 2-313 provides that \xe2\x80\x9cno particular reliance on such\nstatements need be shown in order to weave them into the fabric of the agreement.\nRather, any fact which is to take such [express warranties], once made, out of the\nagreement requires clear affirmative proof.\xe2\x80\x9d\n7.2.2.1. Some courts have relied on Official Comment 3 to conclude that no\nspecific reliance is required of a purchaser. See, for example, Massey-Ferguson,\nInc. v. Laird, 432 So. 2d 1259 (Ala. 1983), where a farmer purchased a combine\nbut was not given the specific terms of a warranty until after the sale, and thus\ncould not have relied specifically upon those terms in forming his decision to\npurchase the combine. However, the court noted that he was generally familiar\nwith the types of warranties provided by combine manufacturers, and had\nexpected some form of warranty.\n7.2.2.2. Some courts, relying on Comment 3 and in particular the last sentence\nthereof, have held that an express warranty made during the bargain is presumed\nto be part of the basis of the bargain unless clear, affirmative proof otherwise is\nshown. Weng v. Allison, 678 N.E.2d 1254 (Ill. App. Ct. 1997). Thus, the burden\nshifts to the seller to establish by clear, affirmative proof that the warranty did not\nbecome a part of the basis of the bargain.\n7.2.2.3. Several courts (some commentators believe a majority of courts) have\nruled that in order to become a \xe2\x80\x9cpart of the basis of the bargain,\xe2\x80\x9d the buyer must\nhave relied upon the express warranty.\n7.2.2.4. See Frank J. Wozniak, Annotation, Purchaser\'s Disbelief in, or\nNonreliance Upon, Express Warranties Made by Seller in Contract for Sale of\nBusiness as Precluding Action for Breach of Express Warranties, 7 A.L.R.5th 841\n(1992).\nSchmaltz v. Nissen\n431 N.W.2d 657 (S.D. 1988)\n[Crown Quality Seed Company processes and markets sorghum seed under the name of \xe2\x80\x9cBig Red\n#1.\xe2\x80\x9d Crown sold its seed through a chain of distributors. Farmers Schmaltz and Nible bought\nbags of Big Red #1 sorghum seed from one of these distributors. The farmers planted the\n92\n\n\x0csorghum seed, but it didn\xe2\x80\x99t grow. The bags of seed were labeled, and contained several\nwarranties, including: \xe2\x80\x9cThis quality seed is protected by Heptachlor insecticide treatment to help\nensure stronger stands, superior quality and increased yields.\xe2\x80\x9d The farmers sued Crown and its\ndistributor for breach of its express warranties. The district court ruled in favor of the farmers.\nThe Supreme Court reversed based upon its finding that the warranty had not become a part of\nthe basis of the bargain, because Schmaltz was unaware of it at the time he bought the bags of\nseed. Following is the court\xe2\x80\x99s discussion of this issue.]\nIn this case the trial court need not determine whether the language on the seed bags\nconstitutes an express warranty, since it is clear that such language did not in any way become\nthe basis of the bargain. Both Nible and Schmaltz admit that they purchased the seed prior to\nseeing the bag containing the seed. Neither read the language supposedly creating the express\nwarranty until after the sale was completed. Without having read or even known of this language,\nit is impossible to say this language was part of the basis of the bargain. For similar rulings by\nother courts, see Agricultural Services Association v. Ferry-Morse Seed Co., 551 F.2d 1057 (6th\nCir. 1977) (purchase on basis of prior satisfactory experience with product, not description, does\nnot make description part of the basis of the bargain); Chemco Industrial Applicators Co. v. E. I.\nduPont de Nemours & Co., 366 F. Supp. 278 (E.D. Mo. 1973) (new label not used until after\ndecision on purchase, could not have been part of the bargain); Jones v. Clark, 36 N.C. App. 327,\n244 S.E.2d 183 (1978) (seal of approval, attached to product after contract had been made, did\nnot become a part of the basis of the bargain).\nNible also claims that an express warranty was created when an employee of Farmers\nFeed told him that Big Red #1 was \xe2\x80\x9cgood seed.\xe2\x80\x9d An affirmation merely of the value of the goods\nor a statement purporting to be merely the seller\'s opinion or commendation of the goods does\nnot create a warranty. [UCC \xc2\xa7 2-313(2)]. General statements to the effect that goods are \xe2\x80\x9cthe\nbest\xe2\x80\x9d or are \xe2\x80\x9cof good quality,\xe2\x80\x9d or will \xe2\x80\x9clast a lifetime\xe2\x80\x9d and be \xe2\x80\x9cin perfect condition,\xe2\x80\x9d are generally\nregarded as expressions of the seller\'s opinion or \xe2\x80\x9cthe puffing of his wares\xe2\x80\x9d and do not create an\nexpress warranty. Royal Business Machines v. Lorraine Corp., 633 F.2d 34, 42 (7th Cir. 1980).\nHowever, words of this type may create express warranties when given in response to specific\nquestions or when given in the context of a specific averment of fact. The words \xe2\x80\x9cgood seed\xe2\x80\x9d in\nthe context in which they were used do not create an express warranty.\nThe trial court\'s holding of breach of express warranty is hereby reversed.\nCase Notes:\n1. White and Summers offer a succinct and compelling challenge to those who advocate\nabandoning reliance: \xe2\x80\x9cWhy should one who has not relied on the seller\'s statement have\nthe right to sue? That plaintiff is asking for greater protection than one would get under\nthe warranty of merchantability, far more than bargained for. We would send this party to\nthe implied warranties.\xe2\x80\x9d James J. White & Robert S. Summers, Handbook of the Law\nunder the Uniform Commercial Code \xc2\xa7 10-6, 463 (West 6th ed. 2010). Note: \xe2\x80\x9csending\n93\n\n\x0cthis party to the implied warranties\xe2\x80\x9d may not provide relief if implied warranties have\nbeen disclaimed, which we\xe2\x80\x99ll study in the next chapter.\n2. Another UCC scholar offers a different answer: \xe2\x80\x9cOne can answer White and Summers\'\nfinal rhetorical question with another question: Why should a seller be permitted to deny\nthe validity of statements he has made in a sale context, whether or not the buyer has\nrelied on them at the time of negotiation? To do so surely does not promote commercial\nhonesty.\xe2\x80\x9d Charles A. Heckman, \xe2\x80\x9cReliance\xe2\x80\x9d or \xe2\x80\x9cCommon Honesty of Speech\xe2\x80\x9d: The\nHistory and Interpretation of Section 2-313 of the Uniform Commercial Code, 38 Case\nW. Res. 1, 29 (1988).\n3. In the South Dakota seed case, the court did allow the farmers to bring a claim for\nbreach of implied warranties of merchantability and fitness for a particular purpose, so the\nfarmers did recover damages. The court refused to enforce disclaimers of these\nwarranties, finding the disclaimers to be unconscionable. The farmers had no bargaining\npower, and would be left without an effective remedy if the disclaimers were enforced.\n4. Some courts find that \xe2\x80\x9cbasis of the bargain\xe2\x80\x9d refers to the time when the warranties are\ngiven. When an express warranty is given after the contract for sale has been formed, the\nfollowing approaches have been taken by the courts:\na. Many (but not all) courts have ruled that such warranties do not become a part\nof the basis of the bargain. See, for example, Global Truck & Equipment Co., Inc.\nv. Palmer Mach. Works, Inc., 628 F. Supp. 641 (N.D. Miss. 1986).\nb. If a purchaser knows generally that some form of express warranty will be\nprovided (such as in a sale of a new car, where by usage of trade warranties are\ntypically given), but does not receive the actual terms of the express warranty until\nafter the sale, the warranties are a part of the basis of the bargain. Harris v. Ford\nMotor Co., 845 F. Supp. 1511 (M.D. Ala. 1994).\nc. An express warranty given after the sale may be deemed a modification of the\ncontract if the elements of UCC \xc2\xa7 2-209 regarding contract modification are\nsatisfied. Moldex, Inc. v. Ogden Engineering Corp., 652 F. Supp. 584 (D. Conn.\n1987).\nd. See Russell G. Donaldson, Annotation, Affirmations or Representations Made\nAfter the Sale is Closed as Basis of Warranty Under UCC \xc2\xa7 2-313(1)(a), 47\nA.L.R.4th 200 (1986).\nProblem 7-3. Martha goes to BigMart to purchase a new DVR. While in the store, she reads the\nbox containing a BigMart brand DVR which states on the outside: \xe2\x80\x9cLimited Warranty \xe2\x80\x93 see\ninside.\xe2\x80\x9d She purchases the DVR, but does not read the terms of the limited warranty when she\n94\n\n\x0cgets home. When the DVR breaks ten weeks later, she pulls out the warranty, and reads about a\none-year replacement guarantee. Did the limited warranty become a part of the basis of the\nbargain? List arguments in favor of both Martha and BigMart.\n7.3. Warranties Given by Remote Sellers\n7.3.1. Express Warranties of Remote Sellers. Official Comment 2 to \xc2\xa7 2-313 states that the\nexpress warranties provided for in that section are limited to those express warranties \xe2\x80\x9cmade by\nthe seller to the buyer.\xe2\x80\x9d In today\xe2\x80\x99s world, products are often made by the manufacturer,\ndistributed throughout the country by one or more distributors, and sold to the end-user by a retail\nstore. Warranties may be given by those parties as well. You need to analyze:\n\xef\x82\xb7\n\xef\x82\xb7\n\xef\x82\xb7\n\nwhether a warranty is given at each step of the transaction,\nthe type of warranty (express or implied), and\nwhether anyone else in the chain of distribution is responsible for that particular warranty.\n\nProblem 7-4. KitchenwareCo. manufactures toasters. It provides a limited express warranty with\neach toaster, and disclaims all other warranties. BeauMart stocks and sells KitchenwareCo.\ntoasters.\n(1) Can the customer sue BeauMart for a breach of the limited express warranty given\nby Kitchenware Co., the manufacturer?\n(2) Can the customer sue the manufacturer for its limited express warranty, even though\nhe did not directly purchase the toaster from the manufacturer?\n(3) Does BeauMart give an implied warranty of merchantability when it sells the toaster\nto the customer, or is the only available warranty the express warranty of the\nmanufacturer?\n7.3.1.1. Official Comment 2 to \xc2\xa7 2-313 states that express warranties \xe2\x80\x9cneed not be\nconfined either to sales contracts or to the direct parties to such a contract. They may\narise in other appropriate circumstances.... [T]he matter is left to the case law.\xe2\x80\x9d\n7.3.1.2. Most jurisdictions allow a claim by a remote purchaser against the manufacturer\nfor any express warranties made by the manufacturer. In Whitaker v. Farmhand, Inc., 567\nP.2d 916, 921 (Mont. 1977), the court stated \xe2\x80\x9ca remote manufacturer without privity with\nthe purchaser is liable for breach of warranty by advertising on radio and television, in\nnewspapers and magazines, and in brochures made available to prospective purchasers, if\nthe purchaser relies on them to his detriment.\xe2\x80\x9d\n\n95\n\n\x0c7.3.1.3. Is a remote manufacturer responsible for any express warranties made by the\ndealer? For example, what if an appliance manufacturer provides a limited one-year\nwarranty for a particular model of washing machine, and the retail store provides a threeyear warranty for all brands sold by it? If the dealer adds to or changes the express\nwarranties of the manufacturer, the manufacturer is not responsible for the additional or\nmodified express warranties, unless adopted by the manufacturer as its own. Gross v.\nSystems Engineering Corp., 36 U.C.C. Rep. Serv. (Callaghan) 42 (E.D. Pa. 1983).\n7.3.1.4. Note that the \xe2\x80\x9cbasis of the bargain\xe2\x80\x9d element of \xc2\xa7 2-313 applies to claims against\nremote manufacturers (though the courts diverge as to when an express warranty becomes\na part of the basis of the bargain, as discussed above). In other words, if a manufacturer\nprovides a warranty through brochures or other advertising, such warranty must become\nthe basis of the bargain.\n7.3.1.4.1. In Cipollone v. Liggett Group, Inc., 893 F.2d 541, 567\xe2\x80\x9368 (3rd Cir.\n1990), plaintiffs claimed that Liggett had breached an express warranty given in\nits advertisements that \xe2\x80\x9csmoking is healthy.\xe2\x80\x9d Liggett argued that the smoker had\nnot proved that this advertisement was a part of the basis of the bargain. The court\nadopted a presumption of reliance as follows:\n[A] plaintiff effectuates the \xe2\x80\x9cbasis of the bargain\xe2\x80\x9d requirement of section\n2-313 by proving that she read, heard, saw or knew of the advertisement\ncontaining the affirmation of fact or promise. Such proof will suffice \xe2\x80\x9cto\nweave\xe2\x80\x9d the affirmation of fact or promise \xe2\x80\x9cinto the fabric of the\nagreement,\xe2\x80\x9d U.C.C. Comment 3, and thus make it part of the basis of the\nbargain. We hold that once the buyer has become aware of the affirmation\nof fact or promise, the statements are presumed to be part of the \xe2\x80\x9cbasis of\nthe bargain\xe2\x80\x9d unless the defendant, by \xe2\x80\x9cclear affirmative proof,\xe2\x80\x9d shows that\nthe buyer knew that the affirmation of fact or promise was untrue.\n(footnotes omitted)\n7.3.1.5. Is a direct seller responsible for breach of any express warranties made by the\nmanufacturer? If an express warranty is made by an appliance manufacturer as to a\nspecific model of washing machine, and Home Appliance Store sells the machine to a\ncustomer, can a customer sue Home Appliance Store for breach of the manufacturer\xe2\x80\x99s\nexpress warranty? While it has been held that a seller does not adopt a manufacturer\xe2\x80\x99s\nexpress warranty merely by giving notice of that warranty, State v. Patten, 416 N.W.2d\n168 (Minn. App. 1987), adoption arises where a seller makes an affirmation about the\nmanufacturer\xe2\x80\x99s warranty by means of a statement of fact, a promise or some other action\nwhich would tend to induce the buyer to purchase the goods. Scovil v. Chilcoat, 424 P.2d\n87 (Okla. 1967).\n\n96\n\n\x0c7.3.1.5.1. In any event, Home Appliance Store, as a merchant seller, makes an\nimplied warranty of merchantability that may give rise to a separate claim by the\ncustomer against the store (unless effectively waived, as discussed in the next\nchapter).\n7.3.1.6. Amended Article 2 added provisions allowing a buyer to assert a breach of an\nexpress warranty against a \xe2\x80\x9cremote\xe2\x80\x9d seller, including warranties contained in advertising.\nSee Amended \xc2\xa7\xc2\xa7 2-313A, 2-313B.\nResearch Assignment 7-1. In your jurisdiction, can a buyer assert a breach of express warranty\nagainst a remote seller? Must the buyer have actually relied on the remote seller\xe2\x80\x99s warranty?\n\n7.3.2. Implied Warranties of Remote Sellers. Although most jurisdictions allow a remote\npurchaser to sue a manufacturer for breach of the manufacturer\xe2\x80\x99s express warranty, there is much\nmore controversy regarding whether the implied warranties of merchantability or fitness for a\nparticular purpose apply to manufacturers or others in the chain of distribution. To add to the\nconfusion, some courts do not distinguish \xe2\x80\x9cvertical privity\xe2\x80\x9d (i.e., manufacturer sells to distributor\nsells to retail store sells to consumer) from \xe2\x80\x9chorizontal privity\xe2\x80\x9d (i.e., retail store sells to\nconsumer, and a person in the consumer\xe2\x80\x99s household is injured by the product). Horizontal\nprivity is separately governed under UCC \xc2\xa7 2-318, which we will discuss in more depth in the\nnext chapter.\nPeterson v. North American Plant Breeders\n354 N.W.2d 625 (Neb. 1984)\n[Defendant produces hybrid seeds, including a hybrid corn named the \xe2\x80\x9cMigro SPX-8.\xe2\x80\x9d Plaintiffs\npurchased the hybrid corn from a dealer, and not from defendant directly. After planting, the\nseeds emerged, but 65 to 70 percent of the Migro variety corn plants had broken off around the\near level before harvest. Plaintiffs filed suit against the manufacturer alleging, among other\nclaims, breach of the implied warranty of merchantability, seeking damages for the loss of their\ncrop.]\nDefendant contends that privity of contract is an essential requirement between defendant\nseed producer and the ultimate buyer-user where a breach of warranty of merchantability is\nclaimed and there is a claim of consequential damages for economic loss. We have not\npreviously ruled on this issue.\nWe have held that an implied warranty that food products are wholesome may be asserted\nfor personal injury against a remote manufacturer if the products are shown to have reached the\nconsumer in the same condition in which they left the manufacturer. Asher v. Coca Cola Bottling\nCo., 172 Neb. 855, 112 N.W.2d 252 (1961). Privity of contract has also been removed as a\nbarrier to asserting an express warranty claim based upon statements made in advertising and\nother printed matters prepared by the manufacturer. Koperski v. Husker Dodge, Inc., 208 Neb.\n97\n\n\x0c29, 302 N.W.2d 655 (1981); Hawkins Constr. Co. v. Matthews Co., Inc., 190 Neb. 546, 209\nN.W.2d 643 (1973).\nThere is a split of authority on the question here presented. State ex rel Western Seed v.\nCampbell, 250 Or. 262, 442 P.2d 215 (1968), follows the traditional rule requiring privity of\ncontract. Hiles Co. v. Johnston Pump Co., 93 Nev. 73, 79, 560 P.2d 154, 157 (1977), represents\nthe contrary rule:\nWe perceive no reason to distinguish between recovery for personal and property injury,\non the one hand, and economic loss on the other. Cf. Santor v. A & M Karagheusian, Inc.,\n207 A.2d 305 (N.J. 1965); Randy Knitwear, Inc. v. American Cyanamid Company, 181\nN.E.2d 399 (N.Y. 1962). Instead, we believe that lack of privity between the buyer and\nmanufacturer does not preclude an action against the manufacturer for the recovery of\neconomic losses caused by breach of warranties. See: Cova v. Harley Davidson Motor\nCompany, 182 N.W.2d 800 (Mich. App. 1970); Kassab v. Central Soya, 246 A.2d 848\n(Pa. 1968); Lang v. General Motors Corporation, 136 N.W.2d 805 (N.D. 1965); Spence\nv. Three Rivers Builders & Masonry Supply, 90 N.W.2d 873 (Mich. 1958); Hoskins v.\nJackson Grain Co., 63 So.2d 514 (Fla. 1953); see also, Schwartz, The Demise of Vertical\nPrivity: Economic Loss under the Uniform Commercial Code, 2 Hofstra L. Rev. 749\n(1974); Zammit, Manufacturers\' Responsibility for Economic Loss Damages in Products\nLiability Cases, 20 N.Y.L.F. 81 (1974).\nSee, also, Cameo Curtains, Inc. v. Philip Carey Corp., 1981 Mass. Adv. Sh. 411, 416 N.E.2d\n995; Whitaker v. Farmhand, Inc., 173 Mont. 345, 567 P.2d 916 (1977); Nobility Homes of Texas,\nInc. v. Shivers, 557 S.W.2d 77 (Tex. 1977); Cova v. Harley Davidson Mtr. Co., 26 Mich. App.\n602, 182 N.W.2d 800 (1970).\nWe are persuaded that the latter Hiles Co. rule applies to the facts here.\nOur Legislature has already addressed the scope of warranty recovery for horizontal\nnonprivity plaintiffs, Neb. U.C.C. \xc2\xa7 2-318 (Reissue 1980), but it has remained silent as to vertical\nnonprivity plaintiffs seeking recovery such as presented here.\nHistorically, the privity of contract requirement in suits by an injured ultimate purchaser\nof a product was seen as necessary to prevent \xe2\x80\x9cabsurd and outrageous consequences\xe2\x80\x9d involving\nunlimited exposure of manufacturers to liability. Prosser, The Assault Upon the Citadel (Strict\nLiability to the Consumer), 69 Yale L.J. 1099 (1960). Such has not been the result in the history\nof strict liability for defective products litigation for which privity is not required.\nThe defendant argues that the privity requirement is necessary to prevent it from being\nexposed to unknown and excessive damages. Recovery for breach of implied warranty is limited\nto those damages reasonably contemplated by the parties and proximately caused by the breach.\nNeb. U.C.C. \xc2\xa7 2-715 (Reissue 1980). The defendant also argues that if its implied warranty of\n98\n\n\x0cmerchantability is extended to those it expects to ultimately use its seed, and not just to its\ndealers, then it will in effect be an insurer of its customers\' crops. Nothing in this opinion is\nintended either to suggest such a result or to include buyers dissatisfied with the seed\nperformance that was less or other than expected without regard for all Uniform Commercial\nCode requirements, \xc2\xa7 2-314, and the standard of proof required, \xc2\xa7 2-715. The liability arises and\nthat warranty extends to reasonable damages proximately caused by its placing an\nunmerchantable product in the marketplace. Also, there is no reason that the defendant cannot\ndisclaim its warranty liability by policing its dealers and making sure that its disclaimer reaches\nthe ultimate user of its product during the negotiations for the product\'s sale. We therefore hold\nthat when a producer of seed places sealed bags of hybrid seed corn in its chain of distribution, it\ncarries with it, unless effectively excluded or modified, an implied warranty of merchantability\nthat protects the ultimate buyer-user in that chain.\nCase Notes:\n1. Courts are more willing to allow a claim against a manufacturer or other remote seller\nfor personal injuries rather than property damage or economic loss. So always begin your\nanalysis with a determination of the type of damages involved. In Rupp v. Norton CocaCola Bottling Co., 357 P.2d 802 (Kan. 1960), the Kansas Supreme Court, in allowing a\nclaim for personal injuries arising from the breach of the implied warranty of\nmerchantability against the manufacturer, reasoned as follows:\n\xe2\x80\x9cUnder the law of Kansas an implied warranty is not contractual. It is an\nobligation raised by the law as an inference from the acts of the parties or the\ncircumstances of the transaction and it is created by operation of law and does not\narise from any agreement in fact of the parties. The Kansas decisions are in accord\nwith the general rule laid down in the adjudicated cases. And under the Kansas\ndecisions privity is not essential where an implied warranty is imposed by the law\non the basis of public policy.\xe2\x80\x9d (Quoting B. F. Goodrich Co. v. Hammond, 269\nF.2d 501, 504 (10th Cir. 1959).)\n2. Not all courts allow a claim for breach of implied warranties relating to personal\ninjuries. See, for example, Rose v. GMC, 323 F. Supp. 2d 1244 (N.D. Ala. 2004), in\nwhich the court refused to allow a claim for breach of implied warranty of\nmerchantability against an automobile manufacturer for personal injuries sustained as a\nresult of an airbag, due to lack of privity.\n3. Some (but not all) courts are reluctant to allow a claim for breach of the implied\nwarrant of merchantability or fitness for a particular purpose against a manufacturer or\nother remote seller where property damage or economic loss (versus personal injuries) are\nsustained. The problems of extending implied warranties to a remote manufacturer are\nexpressed by the court in Professional Lens Plan, Inc. v. Polaris Leasing Corp., 675 P.2d\n887, 898 (Kan. 1984) as follows:\n99\n\n\x0cIf contractual privity is not necessary to maintain an action for breach of an\nimplied warranty of fitness [UCC \xc2\xa7 2-315], how is it possible for a remote seller\nto have reason to know any particular purpose for which its goods are required by\nan unknown ultimate buyer? What is the time of contracting under [UCC \xc2\xa7 2-315]\nbetween a remote manufacturer and an ultimate purchaser? How does a buyer rely\nupon the skill or judgment of a seller it has never met or had any dealing with and\nmaybe doesn\'t even know the existence of? The problems do not end with [UCC\n\xc2\xa7 2-315], they only begin. For example, how is a remote manufacturer to afford\nitself of the ability to exclude or modify warranties under [UCC \xc2\xa7 2-316], when\nthe remote manufacturer does not know to whom it must exclude or modify its\nwarranties? In turn, how is an ultimate purchaser, pursuant to [UCC \xc2\xa7 2607(3)(a)], to give notice of defect to a remote manufacturer whom it does not\nknow? Further, how is [UCC \xc2\xa7 2-719] authorizing contractual modification or\nlimitation of remedy to operate between parties who have not dealt directly with\neach other? Specifically, how is a remote manufacturer to avail itself of [UCC\n\xc2\xa7 2-719(3)] which permits limitation or exclusion of consequential damage\nliability? An across-the-board extension of implied warranties to non-privity\nmanufacturers or sellers, without regard to the nature of either the involved\nproduct or the type of damage sought, would spawn numerous problems in the\noperation of Article 2 of the Uniform Commercial Code.\n4. Some courts allow breach of implied warranty claims to be pursued against\nmanufacturers or other remote sellers regardless of the type of injury involved. The\nreasoning behind this approach is explained by the court in Israel Phoenix Assurance Co.\nv. SMS Sutton, Inc., 787 F. Supp. 102, 103-04 (W.D. Pa. 1992), as follows:\nPennsylvania law on the issue of whether privity of contract is required in order to\nstate a claim for breach of warranty has developed over the years. Because breach\nof warranty claims often parallel strict liability claims, and are used to recover the\nsame damages as strict products liability claims, the development of this area of\nthe law has reflected the development of strict products liability law. This\ndevelopment came to a head, resulting in the abolition of a privity requirement in\nbreach of warranty claims asserted against manufacturers or suppliers by those\nfarther down the chain of distribution, in 1968 in Kassab v. Central Soya, 432 Pa.\n217, 246 A.2d 848 (1968), overruled on other grounds, AM/PM Franchise Assoc.\nv. Atlantic Richfield Co., 526 Pa. 110, 584 A.2d 915 (1990)[.]\nOf course, the damages claimed in Kassab, were for damage to the plaintiffs\'\ncows, which constituted their personal property. Following Kassab, there\nremained a question as to whether the Pennsylvania Supreme Court intended to\nabolish the privity requirement only in cases involving personal injury or property\ndamage as opposed to economic loss. The question arose because of the Kassab\n100\n\n\x0ccourt\'s reason for abolishing the privity requirement, which was to bring into line\nthe law governing strict products liability and breach of warranty claims. Because\nproperty damage and personal injury comprise the most usual "products liability"\ncases, there was room to argue that the Kassab court\'s reasoning would not extend\nto cases involving purely economic loss or loss to business -- types of damages\nwhich arguably arise more often in commercial breach of contract cases than in\nproducts liability cases.\nIn 1989, however, the Pennsylvania Superior Court ruled that Kassab "was\nintended to apply to all breach of warranty cases brought under the warranty\nprovisions of the Uniform Commercial Code for all types of damages, whether\nthey be personal injuries, damage to property or economic loss." Spagnol\nEnterprises, Inc. v. Digital Equipment Corp., 390 Pa. Super. 372, 568 A.2d 948,\n952 (1989).\n5. Several jurisdictions continue to require privity for claims against a seller for\neconomic loss arising from breach of an implied warranty. See, for example,\nGregory v. Atrium Door & Window Co., 415 S.E. 2d 574 (N.C. App. 1992);\nFalcon for Import and Trade Co. v. North Central Commodities, Inc., 52 U.C.C.\nRep. 2d (Callaghan) 896 (D.N.D. 2004); Tex Enterprises, Inc. v. Brockway\nStandard, Inc., 66 P.3d 625 (Wash. 2003).\nResearch Assignment 7-2. In your jurisdiction, can a buyer assert a breach of implied warranty\nagainst a remote seller? Does the success of the claim turn on whether there was a personal\ninjury?\n7.3.3. Notice of Breach. In order for a buyer to bring a breach of warranty claim against a seller,\nUCC \xc2\xa7 2-607(3) requires the buyer to provide to the seller notice of the breach within a\nreasonable time after the buyer discovers or should have discovered the breach. There is a split of\nauthority whether, when a buyer makes a claim against a remote seller, the buyer needs to give\nnotice only to the direct seller, or whether the remote seller must also receive timely notice of the\nclaim. See Jane Massey Draper, Annotation, Sufficiency and Timeliness of Buyer\'s Notice Under\nUCC \xc2\xa7 2-607(3)(a) of Seller\'s Breach of Warranty, 89 A.L.R.5th 319 (2001).\nChapter 7 Additional Sources.\nScott J. Burnham, Glannon Guide to Sales: Learning Sales Through Multiple-Choice Questions\nand Analysis (Wolters Kluwer 2d ed., 2012), Chapter 9\nJames J. White and Robert S. Summers, Uniform Commercial Code (West 6th ed., 2010),\nChapter 9\n101\n\n\x0cChapter 8. Disclaimer of Warranties; Magnuson-Moss Warranty\nAct; Third Party Beneficiaries under \xc2\xa7 2-318\n8.1. Disclaimer of Warranties\n8.1.1. Conflicting Warranties. What happens when more than one warranty is given? How are\nthey to be interpreted together? For example, in a sale there may be (1) an implied warranty of\nmerchantability, (2) a description of the goods on the package (such as \xe2\x80\x9chigh gloss enamel\npaint\xe2\x80\x9d), and (3) an oral affirmation of fact by the salesperson (\xe2\x80\x9cthis paint will only require one\ncoat\xe2\x80\x9d).\n8.1.1.1. Under UCC \xc2\xa7 2-317, \xe2\x80\x9c[w]arranties whether express or implied shall be construed\nas consistent with each other and as cumulative,\xe2\x80\x9d unless such construction is\nunreasonable. This \xe2\x80\x9ccumulative\xe2\x80\x9d concept is important. For example, an express warranty\ndoes not displace an implied warranty of merchantability if the two warranties can\nreasonably be construed as cumulative or otherwise consistent with each other.\n8.1.1.2. In those rare cases where warranties cannot reasonably be construed as\ncumulative or consistent, apply the rules of \xc2\xa7 2-317 to determine which of the express\nwarranties will prevail.\nProblem 8-1. The packaging on a particular shirt describes the shirt as \xe2\x80\x9cwrinkle free.\xe2\x80\x9d A card\nattached to the shirt reads: \xe2\x80\x9cDry at normal temperature in standard dryer; remove promptly when\ndrying cycle is finished. Manufacturer makes no warranty that fabric will be wrinkle free if handwashed, dried at high or low temperatures, or not removed promptly when drying is finished.\xe2\x80\x9d\nCan this language be read consistently with \xe2\x80\x9cwrinkle free?\xe2\x80\x9d\nProblem 8-2. A used car dealer sells a car with an express warranty that the seller will repair any\ndefect to the transmission that arises during the next 90 days. The transmission fails after 120\ndays. Does the buyer have a claim?\n8.1.2. Statutory Disclaimer of Warranties and Statutory Prohibitions. Some jurisdictions\nhave enacted nonuniform warranty statutes providing that either (1) an implied warranty is not\ngiven in certain transactions, or (2) an implied warranty may not be disclaimed in certain\ntransactions. An example of the former is Montana Code Annotated \xc2\xa7 30-2-316(3), which\nprovides:\n(d) in sales of cattle, hogs, sheep, or horses, there are no implied warranties, as defined in\nthis chapter, that the cattle, hogs, sheep, or horses are free from sickness or disease;\n102\n\n\x0c(e) in sales of any seed for planting (including both botanical and vegetative types of\nseed, whether certified or not), there are no implied warranties, as defined in this chapter,\nthat the seeds are free from disease, virus, or any kind of pathogenic organisms.\nIf you were a buyer of cattle in Montana, it would be important to know that the default rule is\nthat you are not getting an implied warranty. You could then bargain for an express warranty.\nAn example of the latter is 9A Vermont Statutes Annotated \xc2\xa7 2-316(5):\n(5) The provisions of subsections (2), (3) and (4) of this section shall not apply to sales of\nnew or unused consumer goods or services. Any language, oral or written, used by a seller\nor manufacturer of consumer goods and services, which attempts to exclude or modify\nany implied warranties of merchantability and fitness for a particular purpose or to\nexclude or modify the consumer\'s remedies for breach of those warranties, shall be\nunenforceable. For the purposes of this section, "consumer" means consumer as defined\nin chapter 63 of Title 9.\nResearch Assignment 8-1. Check the warranty law of your state to determine whether there are\nany nonuniform provisions that provide that (1) an implied warranty is not given in certain\ntransactions, or (2) an implied warranty many not be disclaimed in certain transactions.\n8.1.3. Disclaimer of Express Warranties. Having provided for warranties, implied warranties,\nand express warranties in \xc2\xa7\xc2\xa7 2-312 through 2-315, the UCC allows, under the principle of\nfreedom of contract, for the exclusion or modification of such warranties if the requirements\ncontained in \xc2\xa7 2-316 are met. These requirements as to a valid disclaimer vary based upon the\ntype of warranty involved. As a general rule, it is easier to disclaim an implied warranty than an\nexpress warranty.\n8.1.3.1. If an express warranty exists, under \xc2\xa7 2-316(1) any words or conduct negating or\nlimiting the express warranty shall:\nFirst be construed, if reasonable, as consistent with the express warranty;\nIf not consistent, they are inoperative and will not be effective to disclaim the\nexpress warranty, unless the parol evidence rule dictates a different result. (We\xe2\x80\x99ll\nget to the parol evidence rule in Chapter 9.)\nFor example, if a sales contract describes the vehicle as a \xe2\x80\x9c2010 Toyota Matrix\xe2\x80\x9d and states\nconspicuously, \xe2\x80\x9cThere are no express warranties,\xe2\x80\x9d the seller has nevertheless given an express\nwarranty that the vehicle is a 2010 Toyota Matrix. To effectively disclaim, the contract would\nhave to have specific language such as \xe2\x80\x9cseller makes no warranty or representation that the year\nor model is in fact as described.\xe2\x80\x9d\n103\n\n\x0cProblem 8-3. Bill is interested in buying Sam\xe2\x80\x99s boat. Sam told Bill that the boat had been\nwinterized. Bill agreed to buy the boat, and wrote a check for $10,000. On the bill of sale, Sam\nwrites \xe2\x80\x9cAS IS \xe2\x80\x93 NO WARRANTIES GIVEN.\xe2\x80\x9d Bill later discovers that the boat has not been\nwinterized.\n(1) Has Sam made a warranty?\n(2) If so, applying \xc2\xa7 2-316(1), what is the effect of the \xe2\x80\x9cas is\xe2\x80\x9d language in disclaiming that\nwarranty?\n8.1.4. Disclaimer of Implied Warranties.\n8.1.4.1. UCC \xc2\xa7 2-316(2) sets forth requirements that may be satisfied to exclude or\nmodify an implied warranty, summarized as follows:\n\nTo modify/disclaim implied warranty\nof merchantability:\ndisclaimer language must mention\n\xe2\x80\x9cmerchantability\xe2\x80\x9d\n\nTo modify/disclaim implied warranty\nof fitness for a particular purpose:\nno requirement of mention of \xe2\x80\x9cfitness\nfor particular purpose\xe2\x80\x9d\n\nmay be oral or written\n\ncannot be oral; must be written\n\nif written, must be conspicuous\n\nmust be conspicuous\n\nno examples of safe harbor language\n\nsafe harbor language: \xe2\x80\x9cthere are no\nwarranties which extend beyond the\ndescription on the face hereof\n\n8.1.4.1.1. \xe2\x80\x9cConspicuous\xe2\x80\x9d is defined at UCC \xc2\xa7 1-201(b)(10). To be conspicuous,\nthe language must be so written that a reasonable person would notice it, which,\naccording to Official Comment 10 to that section, is a matter of law for the court\nto decide. A non-exclusive listing of \xe2\x80\x9cconspicuous\xe2\x80\x9d terms includes:\n\xef\x82\xb7\n\xef\x82\xb7\n\xef\x82\xb7\n\xef\x82\xb7\n\na heading in capitals\na heading in contrasting type, font or color to the surrounding text of the\nsame or lesser size\nlanguage other than a heading which is in larger type than the surrounding\ntext\nlanguage other than a heading which is in contrasting type, font or color to\n104\n\n\x0c\xef\x82\xb7\n\nthe surrounding text of the same size\nlanguage set off from the surrounding text of the same size by symbols or\nother marks that call attention to the language\n\nSee William H. Danne, Jr., Annotation, Construction and Effect of UCC \xc2\xa7 2316(2) Providing That Implied Warranty Disclaimer Must be \xe2\x80\x9cConspicuous,\xe2\x80\x9d 73\nA.L.R.3d 248 (1976).\nProblem 8-4. In a contract for the purchase of a bicycle, a disclaimer of warranties is contained\non page 4 of 5 pages. There are no headings; only paragraph numbers. Whereas the surrounding\ntext is in normal letters, the disclaimer is in all capital letters. Has the conspicuousness\nrequirement been met?\n8.1.4.2. Curiously, \xc2\xa7 2-316(3) provides an alternate set of rules pursuant to which an\nimplied warranty (but not an express warranty) can be disclaimed. Your analysis of the\ndisclaimer of implied warranties should never stop at \xc2\xa7 2-316(2); if an implied\nwarranty is not effectively disclaimed there, perhaps a disclaimer exists under \xc2\xa7 2316(3).\n8.1.4.2.1. Under \xc2\xa7 2-316(3)(a), all implied warranties are excluded by expressions\nlike \xe2\x80\x9cas is,\xe2\x80\x9d \xe2\x80\x9cwith all faults,\xe2\x80\x9d or similar language that calls the buyer\xe2\x80\x99s attention to\nthe exclusion of warranties and makes plain that there is no implied warranty.\n8.1.4.2.1.1. Note that unlike \xc2\xa7 2-316(2), there is no requirement that the\ndisclaimer must be \xe2\x80\x9cconspicuous.\xe2\x80\x9d But in order to call the buyer\xe2\x80\x99s\nattention to the exclusion, all drafters are wise to use conspicuous\nlanguage when disclaiming under \xc2\xa7 2-316(3)(a). See also Comment 1 to\n\xc2\xa7 2-316, which states that implied warranties may be excluded \xe2\x80\x9conly by\nconspicuous language or other circumstances which protect the buyer from\nsurprise.\xe2\x80\x9d Compare O\xe2\x80\x99Neil v. International Harvester Co., 575 P.2d 862\n(Colo. App. 1978) (\xe2\x80\x9cas is\xe2\x80\x9d language does not need to be conspicuous) to\nWhite v. First Federal Savings & Loan Ass\xe2\x80\x99n of Atlanta, 280 S.E.2d 398\n(Ga. App. 1981)(\xe2\x80\x9cas is\xe2\x80\x9d language must be conspicuous).\n8.1.4.2.1.2. An express limitation on \xc2\xa7 2-316(3)(a) is the introductory\nphrase of \xe2\x80\x9cunless the circumstances indicate otherwise.\xe2\x80\x9d Sometimes\ncircumstances may not allow \xe2\x80\x9cas is\xe2\x80\x9d or similar language to constitute a\ndisclaimer. For example, usage of trade and course of dealing may be\ncircumstances which make an \xe2\x80\x9cas is\xe2\x80\x9d clause insufficient to disclaim an\nimplied warranty. Gindy Mfg. Corp. v. Cardinale Trucking Corp., 268\nA.2d 345 (N.J. Sup. 1970).\n\n105\n\n\x0c8.1.4.2.2. Under \xc2\xa7 2-316(3)(b), there is no implied warranty with regard to defects\nwhich an examination would have reasonably revealed, IF the buyer examined the\ngoods before entering the contract OR refused, upon the seller\xe2\x80\x99s request, to\nexamine the goods. Comment 8 explains that to bring the transaction within the\nscope of \xe2\x80\x9crefused to examine\xe2\x80\x9d in paragraph (b), it is not sufficient for the goods to\nbe merely available for inspection; there must be a demand by the seller that the\nbuyer examine the goods fully.\nProblem 8-5. Jane wants to buy a used car from Larry\xe2\x80\x99s Auto Sales. Jane takes the car for a test\ndrive. During the test drive, she stops at her mechanic\xe2\x80\x99s shop to have the engine checked. One\nmonth after the sale, Jane discovers that the catalytic converter is not working, requiring $2,000\nin repairs. Can Jane bring a claim for breach of the implied warranty of merchantability against\nLarry\xe2\x80\x99s Auto Sales?\n8.1.4.2.3. An implied warranty may be excluded under \xc2\xa7 2-316(3)(c) by course of\nperformance, course of dealing, or usage of trade. This subsection was applied in\nSpurgeon v. Jamieson, 521 P.2d 924 (Mont. 1974), where the court found that\nusage of trade in the farming industry excluded implied warranties in the sale of\nused farm equipment, with the exception of a 50/50 implied warranty under which\neach party to the transaction paid for one-half of the cost of repairs.\n8.1.4.2.4. Recall from Chapter 6 that the Code does not describe the warranties of\ngood title (\xc2\xa7 2-312(1)) or against infringement (\xc2\xa7 2-312(3)) contained in every\ncontract as implied warranties. Therefore, an effective disclaimer of implied\nwarranties under \xc2\xa7 2-316(2) or \xc2\xa7 2-316(3) does not disclaim these warranties.\n8.1.5. Disclaimer of Warranties of Title and Against Infringement.\n8.1.5.1 Although the UCC provides that the warranties of good title and against\ninfringement are found in every contract, and thus they function like an implied warranty,\nOfficial Comment 6 to \xc2\xa7 2-312 calls our attention to the fact that they are not designated\nas implied warranties! Why is this significant? If these warranties are not to be treated as\nimplied warranties, the rules of \xc2\xa7 2-316(3) allowing the exclusion of implied warranties\nin certain circumstances do not apply, nor does \xc2\xa7 2-317(c), which states that an express\nwarranty displaces an inconsistent implied warranty. Kel-Keef Enterprises v. Quality\nComponents Corp., 738 N.E. 2d 524, 536-37 (Ill. App. 2000).\n8.1.5.2. Section 2-312(2) provides that the warranties of title can be excluded or modified\nonly by:\n8.1.5.2.1 Specific language, such as \xe2\x80\x9cSeller disclaims any warranties of title;\xe2\x80\x9d\n8.1.5.2.2 Circumstances that give the buyer reason to know that the person selling\n106\n\n\x0cdoes not claim title in himself (such as a police auction of recovered but\nunclaimed stolen items); or\n8.1.5.2.3 Circumstances that give the buyer reason to know that the seller is\npurporting to sell only such right or title as he or a third person may have (such as\nan estate sale by a personal representative).\nProblem 8-6. You walk into a pawn shop to buy a used camera. As you enter, you see a blinking\nneon light that proclaims \xe2\x80\x9call sales as is.\xe2\x80\x9d Has the pawn shop effectively disclaimed the\nwarranties of title?\n8.1.5.3 The Code does not say how the warranty against infringement can be disclaimed.\nOur guess is that the seller would have to use the same methods that are used to disclaim\nthe warranty of good title. This was the approach taken by the drafters of Amended\nArticle 2. Recall that Amended Article 2 has been withdrawn and is in effect in no\njurisdiction. However, it could be cited as persuasive authority for what the Article 2\nexperts thought should be the rule when there is a gap in the present Article 2.\n8.1.6. Post-Sale Disclaimers. Susan purchases a new jacket for mountain climbing. At the time\nof purchase, there are displays surrounding the jackets, stating that they are machine washable,\nwaterproof, and are appropriate for use in weather as cold as -30\xcc\x8a F. Susan purchases one of the\njackets. When she gets home she notices a card attached to the inside of the jacket, containing\ndiffering warranties and disclaiming all other warranties, express or implied. Does the card\nattached to the jacket effectively modify or exclude the warranties made by the displays at the\ntime of sale?\n8.1.6.1. See Whitaker v. Farmhand, 567 P.2d 916, 921 (Mont. 1977), in which the court\nstated that \xe2\x80\x9ca disclaimer or limitation of warranty contained in a manufacturer\xe2\x80\x99s manual\nreceived by the purchasers subsequent to the sale does not limit recovery for implied or\nexpress warranties made prior to or at the time of sale.\xe2\x80\x9d For a discussion of the\napplication of the ProCD line of cases to disclaimers read for the first time after the\npurchase of a product, see Stephen E. Friedman, Text and Circumstance: Warranty\nDisclaimers in a World of Rolling Contracts, 46 Ariz. L. Rev. 677 (2004).\n8.1.7. Limitations of Remedy. Most sellers, instead of disclaiming all warranties, give an\nexpress warranty but limit the remedy under that warranty. For example, they may agree only to\nrepair or replace defective parts, and they may deny recovery of consequential damages. We will\ndiscuss limitations of remedy in Chapter 17.\nProblem 8-7. Bob, a rancher, visits Julie, a neighbor, who breeds and sells registered Angus\ncattle. Over a cup of coffee, Julie writes down on a tablet \xe2\x80\x9cWill sell 50 bred registered Angus\nheifers to Bob for $1250/head, to be delivered within 5 days.\xe2\x80\x9d Both parties initial the paper.\n107\n\n\x0cWhen Julie drives up with the 50 head of cattle the next day, she asks Bob to sign an\nacknowledgment that he has received 50 head of registered Angus cattle, and has accepted them\n\xe2\x80\x9cas is.\xe2\x80\x9d Bob counts the number of cattle delivered, and signs the acknowledgment. A few weeks\nlater, several of the cattle abort, and a veterinarian confirms that those cattle have brucellosis.\n(1) What, if any warranties, were created at the time the contract was formed?\n(2) Did the acknowledgment effectively disclaim those warranties?\n8.2. Magnuson-Moss Warranty Act\n8.2.1. Introduction to the Magnuson-Moss Warranty Act. The Article 2 warranty provisions\nare supplemented by a federal statute \xe2\x80\x93 the Magnuson-Moss Warranty Act, 15 U.S.C. \xc2\xa7 2301 et\nseq., which you can find at an online source such as the Legal Information Institute. The Act does\nnot require a seller to provide an express warranty in connection with the sale of a consumer\nproduct. However, if a seller of a consumer product decides to offer a written warranty, it must\ncomply with the Act. The Act only applies the marketing and sale of:\n\xef\x82\xb7\n\xef\x82\xb7\n\nconsumer products (note how that term is defined in \xc2\xa7 101(1));\naccompanied by written warranties (defined in \xc2\xa7 101(6)).\n\nThe essence of the Act is found in \xc2\xa7 102, which provides in subsection (a) that \xe2\x80\x9cany warrantor\nwarranting a consumer product to a consumer by means of a written warranty shall, to the\nextent required by rules of the Commission, fully and conspicuously disclose in simple and\nreadily understood language the terms and conditions of such warranty.\xe2\x80\x9d\nNote also that the definition of a warranty under \xc2\xa7 101(6) varies from the definition of an express\nwarranty under UCC \xc2\xa7 2-313. In particular, to fall within the Magnuson-Moss Act:\n\xef\x82\xb7\n\xef\x82\xb7\n\nwarranties must be in writing;\na warranty relating to the nature of the material or workmanship of the warranted product\nmust affirm or promise that the \xe2\x80\x9cis defect free or will meet a specified level of\nperformance over a specified period of time.\xe2\x80\x9d\n\nProblem 8-8. Answer the following questions after reading the appropriate provisions of the\nMagnuson-Moss Warranty Act.\n(1) Section 101(1): does the Act apply to these transactions:\n(a) the purchase by a corporate employer of a microwave oven for an employee break\nroom?\n108\n\n\x0c(b) the purchase by a celebrity of a Boeing 737 to fly his entourage around the world for\npleasure?\n(2) Section 101(6): do the following create a warranty under Magnusson-Moss? Under the UCC?\n(a) a television commercial showing a Ginsu knife cutting through beer cans?\n(b) a shirt label stating \xe2\x80\x9c100% cotton\xe2\x80\x9d?\n(c) a contract for the purchase of an automobile providing: \xe2\x80\x9cFor 3 years or 36,000 miles,\nwhichever comes first, manufacturer will repair or replace any defective parts\xe2\x80\x9d?\n(3) Section 104:\n(a) If a warrantor gives a written warranty of a consumer product, does the warrantor have\nto meet the Federal Minimum Standards for Warranties? Are you sure? Read \xc2\xa7 103(a).\n(b) Does a seller of a consumer product to a consumer violate the Magnuson Moss Act if\nthe seller in writing states, \xe2\x80\x9cTHESE GOODS ARE SOLD AS IS. There are no warranties,\nexpress or implied.\xe2\x80\x9d\n(4) Section 110(d):\n(a) Can you bring a claim for violation of the Magnuson Moss Act in a federal district\ncourt in the state in which you live?\n(b) If you had a claim for breach of warranty under the UCC, why would you add a claim\nfor violation of the Magnuson Moss Act?\n8.2.2. Warranties under the Act. Magnuson Moss requires a manufacturer or other person\ngiving a warranty subject to the act to classify the warranty as \xe2\x80\x9cfull\xe2\x80\x9d or \xe2\x80\x9climited.\xe2\x80\x9d See \xc2\xa7 103(a).\nThe following chart summarizes the differences between a full and a limited warranty. Why is it\nyou see few warranties designated as \xe2\x80\x9cfull\xe2\x80\x9d?\n\n109\n\n\x0cMagnuson-Moss Warranty Act\n15 USC Sections 2301 et seq.\nFull Warranty\n\nLimited Warranty\n\nmay reasonably limit duration of written (express) same as \xe2\x80\x9cfull warranty\xe2\x80\x9d\nwarranty, such as \xe2\x80\x9c12 months or 12,000 miles\xe2\x80\x9d\nmust remedy, by repair, replacement or refund of\npurchase price, a breach within a reasonable time\nand without charge (if it can\xe2\x80\x99t be repaired, must\nallow refund or replacement, at election of\nconsumer)\n\nno requirement of remedy (but see \xc2\xa7 2-719 \xe2\x80\x93 if a\nlimited remedy fails of its essential purpose, buyer\nmay pursue any remedy under UCC; i.e., if remedy\nis limited to repair, and seller is unable to repair,\nthe remedy has failed of its essential purpose)\n\nmay not exclude any UCC implied warranties\n\nsame as \xe2\x80\x9cfull warranty\xe2\x80\x9d\n\nmay not limit the duration of any UCC implied\nmay limit the duration of any UCC implied\nwarranties (may not say for example, that implied\nwarranties to the duration of the express warranty\nwarranty of merchantability is limited to 12 months\nor 12,000 miles, even though express warranty is so\nlimited)\nNote: in UCC there is no stated duration of implied\nwarranties; the query (as to merchantability) is\nwhether a failure within, for example, 12 months of\npurchase makes a good \xe2\x80\x9cobjectionable in the trade.\xe2\x80\x9d\nmay exclude or limit consequential damages ONLY\nif done so conspicuously on the face of the\nwarranty, and only to extent allowed by state law\n(see \xc2\xa7 2-719 \xe2\x80\x93 limitation of consequential damages\nfor injury to the person in the case of consumer\ngoods is prima facie unconscionable)\n\nno \xe2\x80\x9cconspicuous\xe2\x80\x9d requirement for exclusion or\nlimitation of consequential damages; \xc2\xa7 2-719\napplies \xe2\x80\x93 cannot be unconscionable (limitation of\nconsequential damages for injury to the person in\nthe case of consumer goods is prima facie\nunconscionable)\n\ncan\xe2\x80\x99t impose any unreasonable duty as a condition\nof express warranty (but can require reasonable\nnotice of defect on part of consumer); for example,\ncan\xe2\x80\x99t require consumer to send in warranty\nregistration card\n\nno specific prohibitions on creating conditions to\nexpress warranties, but remember overriding good\nfaith (\xc2\xa7 1-304) and unconscionability (\xc2\xa7 2302)requirements\n\nnot required to reimburse consumer for incidental\nexpenses incurred as a result of breach, such as cost\nof returning good to manufacturer for repair\n\nno specific prohibitions/requirements regarding\nreimbursement of incidental expenses\n\n110\n\n\x0cProblem 8-9. Read \xc2\xa7 108. What, if any portion, of the following manufacturer\xe2\x80\x99s warranty is not\nvalid for a CD player under the Magnuson-Moss Warranty Act?\nLimited Warranty\nThis product is warranted against defects for one year from the date of purchase. Within\nthis period, we will repair the CD player without charge for parts and labor, if you bring\nthe CD player to any authorized retailer along with a sales receipt or other valid proof of\nthe date of purchase. This warranty does not apply to any damage resulting from\nimproper use of the CD player, or damage inflicted by the user or any other person.\nEXCEPT FOR THIS LIMITED WARRANTY, MANUFACTURER MAKES NO\nOTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF\nMERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.\nMANUFACTURER HAS NO LIABILITY FOR ANY INCIDENTAL OR\nCONSEQUENTIAL DAMAGES.\n8.3. Third Party Beneficiaries\n8.3.1. Privity. A breach of warranty action is a contract claim. Under the common law principle\nof privity, only a party to the contract can bring a claim against another party to the contract. In\nthe area of breach of warranty, there are two types of privity, which you must be able to\ndistinguish:\n8.3.1.1. Vertical privity refers to the concept that a series of sales moves a good from the\nmanufacturer to the end purchaser, illustrated as follows:\n\nComponents Manufacturer\nManufacturer\n\nDistributor\nRetailer\nBuyer\n\n\xe2\x9e\x98\n\n111\n\n\x0cUnder a strict privity doctrine, Buyer could only sue Retailer, who in turn could sue\nDistributor, who in turn could sue Manufacturer, who in turn could sue Components\nManufacturer. Most courts have relaxed the strict privity requirement for breach of a\nwarranty claim, and allow the buyer to sue the manufacturer directly as discussed in\nChapter 7.\n8.3.1.2. Horizontal privity is quite different from vertical privity. Here we are talking\nabout someone who is not a party to any contract for sale, but who uses the good, perhaps\nas a guest of the end purchaser or an employee of the end purchaser. There is no\ncontractual relationship involved between the injured person and someone in the\ncontractual chain of distribution. For example, Grandpa purchases a lawn mower, which\ntopples over and seriously injures a grandchild who is mowing the lawn for Grandpa. Can\nthe grandchild bring a claim for breach of warranty against the seller of the lawnmower?\nHow about a claim against someone further up the chain, such as a manufacturer (this is\nwhere you see horizontal privity combining with vertical privity).\n\n8.3.2. UCC \xc2\xa7 2-318. UCC \xc2\xa7 2-318 was drafted to provide a breach of warranty claim to certain\npersons who were not in the chain of sales contracts. As originally drafted (with only Alternative\nA), \xc2\xa7 2-318 was not intended to apply to vertical relationships. The development of vertical\nprivity was a matter of common law. Comment 2 to \xc2\xa7 3-313 acknowledges that \xe2\x80\x9cthe warranty\nsections of Article 2 are not designed in any way to disturb those lines of case law growth which\nhave recognized that warranties need not be confined either to sales contracts or to the direct\nparties to such a contract.\xe2\x80\x9d Section 2-318 was originally intended to apply to horizontal\nrelationships. See Comment 3 to \xc2\xa7 2-318, which states that Alternative A \xe2\x80\x9cis neutral and is not\nintended to enlarge or restrict the developing case law on whether the seller\'s warranties, given to\nhis buyer who resells, extend to other persons in the distributive chain.\xe2\x80\x9d (emphasis added)\n8.3.2.1. See the discussion at Chapter 7.3 for case law developments extending breach of\nexpress and implied warranty claims to remote sellers under the concept of vertical\nprivity.\n8.3.2.2. When you are filing a claim against someone, such as the manufacturer, a\ndistributor, a retail store, who is in vertical privity with the purchaser, ALWAYS try to\navoid application of \xc2\xa7 2-318, and RELY INSTEAD on the concept of vertical privity.\nWhy? Because \xc2\xa7 2-318, particularly Alternative A, which is the most widely adopted\nalternative, strictly limits the type of damages awardable, and the class of persons who\nmay bring a claim.\n\n112\n\n\x0c8.3.3. Alternatives. After receiving complaints regarding the narrow scope of Alternative A, and\nin an attempt to stop states from adopting non-uniform provisions regarding third party\nbeneficiaries, in 1966 the Commissioners added Alternatives B and C to \xc2\xa7 2-318. Each state is\nfree to adopt the alternative it prefers. Alternative A is the most restrictive alternative as to who\ncan sue a seller for breach of warranty and for what damages; Alternative C is the least\nrestrictive. For various court interpretations of the three alternatives, see Diane L. Schmauder,\nAnnotation, Third-party Beneficiaries of Warranties Under UCC \xc2\xa7 2-318, 50 A.L.R.5th 327\n(1997).\n\n113\n\n\x0cResearch Assignment 8-2. Which alternative was adopted in your jurisdiction?\n\nProblem 8-10. Complete the following chart:\nWho is protected\nAlt. A\n\nFor what injury?\n\nLimits on seller\xe2\x80\x99s power\nto restrict\n\nany ___________ person\n\npersonal injury only seller may not exclude or\nlimit the class of\n\xe2\x80\x93 in buyer\xe2\x80\x99s _____________\nprotected beneficiaries or\ntype of injury protected\n\xe2\x80\x93 in buyer\xe2\x80\x99s _____________\nagainst (personal injury)\n\xe2\x80\x93guest in buyer\xe2\x80\x99s home\nIF reasonable to expect that\nsuch person may use,\nconsumer, or be affected by\nthe goods\n\nAlt. B\n\nAny natural person who\n______________________\n______________________\n\npersonal injury only may not exclude or limit\nthe class of protected\nbeneficiaries or type of\ninjury protected against\n(personal injury)\n\n______________________\nAlt. C\n\nAny person (includes\nentities) who may\nreasonably be expected to\nuse, consume or be affected\nby the goods\n\n114\n\n_______________\n_______________\n\nmay exclude or limit the\nclass of protected\nbeneficiaries or type of\ninjury protected against,\nother than injury to the\nperson of individuals\n(but, for example, could\nexclude property\ndamages or lost profits;\ncould exclude nonnatural persons as\nbeneficiaries)\n\n\x0c8.3.3.1. Under Alternative A, family members have been held to include parents, spouses,\nchildren (both minor and adult), siblings, mothers-in-law, grandchildren, nieces and nephews\n(and this is a non-exclusive list). The family member does not have to reside in the purchaser\xe2\x80\x99s\nhousehold.\n8.3.3.2. Under Alternative A, examples of household members would include a live-in\nnanny, an unmarried couple, and college roommates. This class must reside in the\npurchaser\xe2\x80\x99s household (unlike family members).\n8.3.3.3. With regard to the protected class of guests under Alternative A, they must be\nguests in the home of the purchaser (and not, for example, a guest in the purchaser\xe2\x80\x99s car\nor boat). Many courts have required there to be some connection between the visit to the\nhome and the injury; for example, injury to a guest who is jumping on a trampoline at the\npurchaser\xe2\x80\x99s residence (home including not only the building, but the premises\nsurrounding the home). On the other hand, if a purchaser gives a gift to a friend while the\nfriend is a guest in the purchaser\xe2\x80\x99s home, and the purchaser leaves and the gift results in\nan injury to the friend elsewhere, the friend may not fall in the protected class. Examples\nof persons who are not \xe2\x80\x9cguests\xe2\x80\x9d are paying customers, employees, and tenants.\n8.3.3.4. Note that an additional requirement to fall under any of the alternatives is that the\nperson must be \xe2\x80\x9creasonably expected to use, consume or be affected by the goods.\xe2\x80\x9d For\nexample, if a child is injured while opening a beer bottle, can the bottler argue that it is\nnot reasonable to expect a minor child to be opening a bottle of beer?\n8.3.3.5. As noted at Section 8.3.2, Comment 3 states that Alternative A is \xe2\x80\x9cnot intended\nto enlarge or restrict the developing case law on whether the seller\xe2\x80\x99s warranties, given to\nhis buyer who resells, extend to other persons in the distributive chain.\xe2\x80\x9d (emphasis\nadded). However, the courts in most jurisdictions have declined to extend horizontal\nprivity beyond the classes enumerated in Alternative A, believing that if a larger\nhorizontal class had been intended, the legislature would have adopted one of the other\ntwo alternatives. See, e.g., Teel v. American Steel Foundries, 529 F. Supp. 337 (E.D. Mo.\n1981) (declining to extend the Alternative A class members to an employee injured by a\nproduct purchased by his employer).\nProblem 8-11. Calvary Baptist Church purchased and installed a walk-in freezer that was\nexpressly warranted to have a safety door which could always be opened from the inside. Vicky,\na 13-year old member of the congregation, was volunteering in the kitchen, and while inside the\nwalk-in freezer the door shut behind her. She could not open it, and suffered severe frostbite\nbefore she was discovered. Can Vicky bring a claim for breach of warranty against the freezer\nmanufacturer under Alternative A? B? C?\nProblem 8-12. Landlord Bob installs a water cooler in an apartment which he owns, rented by\nTed. The water cooler leaks, and destroys Ted\xe2\x80\x99s valuable book collection. Can Ted bring a claim\n115\n\n\x0cfor breach of warranty against the water cooler manufacturer for the property damage under\nAlternative A? B? C?\nProblem 8-13. We read in Chapter 7 how an express warranty must be part of the \xe2\x80\x9cbasis of the\nbargain.\xe2\x80\x9d Many courts require some knowledge of the existence of the warranty and reliance\nthereon on the part of the purchaser. Does the \xe2\x80\x9cbasis of the bargain\xe2\x80\x9d apply to plaintiffs who are\nnot purchasers who bring a claim under UCC \xc2\xa7 2-318?\n8.3.4. Remote Sellers under UCC \xc2\xa7 2-318. Assume that you have a person who falls within the\nhorizontal protected class of one of the alternatives. For example, the wife of a purchaser is\ninjured while using a motorcycle helmet purchased by her husband. In an Alternative A state, she\nis in the protected class as a member of the purchaser\xe2\x80\x99s family, and her damages are also within\nthe allowable class of damages (personal injury). She files a claim against the manufacturer, who\nsold the helmet to a retail store, who sold the helmet to her husband. Is the manufacturer liable?\n8.3.4.1. Under Alternative A, the wife is able to bring a claim against the seller (note that\na \xe2\x80\x9cseller\xe2\x80\x99s warranty\xe2\x80\x9d extends to \xe2\x80\x9chis [the seller\xe2\x80\x99s] buyer.\xe2\x80\x9d Who is the seller? The retail\nstore, not the manufacturer. To get to the manufacturer, she will have to rely upon a\n\xe2\x80\x9cvertical\xe2\x80\x9d privity concept. Some states incorporate, on top of \xc2\xa7 2-318, the vertical privity\nanalysis discussed earlier in these materials and at Chapter 7.3 to allow the family\nmember to sue a manufacturer up the line from the immediate seller. In other words, they\nallow the wife to bring a claim under \xc2\xa7 2-318, then go to common law concepts of\nvertical privity to extend her claim past the immediate seller up the chain to the\nmanufacturer. But not all states allow this. See, for example, Williams v. Fulmer, 695\nS.W.2d 411 (Ky. 1985), which disallowed a claim brought by a wife who was injured\nwhile using the helmet purchased by her husband.\n8.3.4.2. If the wife\xe2\x80\x99s claim had been brought in a jurisdiction with Alternative B or C, she\ncould argue that on their face these sections do not limit privity to the seller\xe2\x80\x99s immediate\nbuyer. Note that Alternative A says that the seller\xe2\x80\x99s warranty extends to \xe2\x80\x9chis buyer\xe2\x80\x9d while\nAlternatives B and C say that \xe2\x80\x9cA seller\xe2\x80\x99s warranty \xe2\x80\xa6 extends to any natural person\xe2\x80\x9d in B\nand to \xe2\x80\x9cany person\xe2\x80\x9d in C. Thus, a court could find that there is no privity requirement\nunder \xc2\xa7 2-318 Alternatives B or C (instead of having to rely on common law vertical\nprivity). All that the wife has to show is that it is reasonable for a manufacturer to expect\na good to pass through a line of distribution and end up with the end purchaser, who in\nturn may reasonably be expected to allow others to use such good. However, the problem\nwith relying on \xc2\xa7 2-318 to establish vertical privity (versus common law vertical privity)\nis the limitation of the types of damages awardable under Alternative B (personal injury\nonly), although Alternative C allows any type of damage to be compensated.\n8.3.5. Interplay of Disclaimers and Privity. If a disclaimer is made somewhere along the line of\ndistribution, a person otherwise having a claim under the concepts of vertical or horizontal\nprivity may not be able to recover against the disclaiming party.\n116\n\n\x0cProblem 8-14. Jump High Inc. manufactures trampolines. Jump High Inc. has prepared a\nbrochure describing its trampolines, which includes the following statements and picture:\nWe build our trampolines to last:\nA full lifetime warranty on all our frames!\n\xef\x82\xb7 Built with stronger steel, better\nstitching, larger triangles, tougher\nsprings and thicker safety pads\n\xef\x82\xb7 Our trampoline frames will not warp or\nbuckle\n\xef\x82\xb7 Weatherproofed for use all year round\n\xef\x82\xb7 Tested to 440 lbs.\n\nJump High Inc. sells several trampolines to Big Mountain Recreational Sales, a retailer of\nsporting goods and outdoor gear, along with several copies of the brochures. Big Mountain also\nsells one other brand of trampolines. John Jacobson comes into the store looking for a\ntrampoline. The salesman provides John with copies of the manufacturer\xe2\x80\x99s brochures for both\nbrands. After reading the brochures, John purchases a Jump High trampoline. One year later,\nduring a birthday party at John\xe2\x80\x99s home for his son, Eli, the frame buckles while Eli and 5 of his\nfriends are jumping on the trampoline. The children weigh, on average, 70 pounds each. Two of\nEli\xe2\x80\x99s friends suffer serious injuries.\n(1) Do the two injured children have a breach of warranty claim against Big Mountain\nRecreational Sales?\n(2) Do the two injured children have a breach of warranty claim against Jump High Inc.?\nChapter 8 Additional Sources.\nScott J. Burnham, Glannon Guide to Sales: Learning Sales Through Multiple-Choice Questions\nand Analysis (Wolters Kluwer 2d ed., 2012), Chapters 10 and 11\nJames J. White and Robert S. Summers, Uniform Commercial Code (West 6th ed., 2010),\nChapters 11 and 12\n\n117\n\n\x0cChapter 9. Parol Evidence Rule; Contract Modification\n9.1. The Common Law Parol Evidence Rule\n9.1.1. Purpose. The parol evidence rule is based upon two foundational premises:\n\xef\x82\xb7\n\nParties who have reduced their agreement to a writing intended to be a final expression of\ntheir understanding should not be allowed to introduce evidence of prior oral or written\nterms or contemporaneous oral terms that contradict or supplement that writing.\n\n\xef\x82\xb7\n\nThe parol evidence rule gives more evidentiary weight to writings than to non-written\nstatements.\n\n9.1.2. Meaning of \xe2\x80\x9cParol\xe2\x80\x9d Evidence. Contrary to common misperceptions, \xe2\x80\x9cparol\xe2\x80\x9d when used\nin the context of the parol evidence rule does not mean \xe2\x80\x9coral.\xe2\x80\x9d The more accurate definition is\n\xe2\x80\x9cextrinsic,\xe2\x80\x9d meaning extrinsic to the written agreement between the parties. To be more precise,\nthe parol evidence rule may be used to exclude written or oral agreements made prior to the\nwritten agreement, as well as oral (but not written) agreements that are contemporaneous with\nthe written agreement. Generally, contemporaneous written agreements are not excluded by the\nparol evidence rule, even if they contain contradictory terms. See \xc2\xa7 9.2.6.1.\nFurthermore, the rule is not really a rule of \xe2\x80\x9cevidence\xe2\x80\x9d \xe2\x80\x93 it is a rule of substantive contract law.\nFor example, if objection to its introduction is not timely made, it can still be challenged. And\nwhen the trial is in federal court on diversity grounds, the state law of parol evidence will govern.\n9.1.3. Exceptions. The common law parol evidence rule does not exclude all types of extrinsic\nevidence in all situations. Parol evidence is admissible for certain purposes, including (1) the\nformation of the contract, (2) the existence of a separate enforceable agreement, (3) the\ninterpretation of the agreement, (4) the validity of the contract, and (5) a subsequent modification\nof the agreement.\n9.1.4. Final Written Expression. The common law parol evidence rule applies to written\nagreements intended to be the final expression of the parties\xe2\x80\x99 agreement.\n9.1.4.1 The common law distinguishes between final agreements that are \xe2\x80\x9ccompletely\nintegrated\xe2\x80\x9d and \xe2\x80\x9cpartially integrated.\xe2\x80\x9d Some jurisdictions create a rebuttable\npresumption that a contract reduced to writing is presumed to completely integrated. See,\ne.g., Mont. Code Ann. \xc2\xa7 28-2-905.\n9.1.4.2 A \xe2\x80\x9cpartially integrated agreement\xe2\x80\x9d is a final expression of some of the terms but is\nnot complete or exclusive as to all of the terms. While a party cannot introduce evidence\n118\n\n\x0cof a consistent additional term to a completely integrated agreement, evidence of a\nconsistent additional terms is admissible when an agreement is partially integrated.\nRestatement (Second) of Contracts \xc2\xa7 216(1) (1981).\n9.1.5. Necessary Elements. Because the parol evidence rule entails several elements, all of\nwhich must be satisfied before the rule is applied, you should always ask the following questions:\n\xef\x82\xb7\n\xef\x82\xb7\n\xef\x82\xb7\n\xef\x82\xb7\n\nIs there a written agreement intended to be the final expression of the parties\xe2\x80\x99 agreement?\nIf so, is the agreement \xe2\x80\x9ccompletely integrated\xe2\x80\x9d or \xe2\x80\x9cpartially integrated\xe2\x80\x9d?\nDoes the extrinsic evidence offered fall within one of the categories of evidence excluded\nby the parol evidence rule?\nIf so, is the extrinsic evidence being offered for an admissible purpose and thus is not\nexcluded by the parol evidence rule?\n\n9.2. UCC Parol Evidence Rule. The UCC parol evidence rule is found at UCC \xc2\xa7 2-202. Read it\ncarefully, keeping in mind the elements of the common law rule.\n9.2.1. Under \xc2\xa7 2-202, evidence of prior oral or written agreements, or contemporaneous\noral agreements, is not admissible to contradict either (1) agreed terms contained in\nconfirmatory memoranda or (2) a writing intended as the final expression of their\nagreement. This is consistent with the common law.\n9.2.2. UCC \xc2\xa7 2-202(a) allows three types of evidence -- usage of trade, course of dealing,\nand course of performance -- to explain or supplement a term contained in the writing\neven if the parties intended the writing to be complete and exclusive. This is broader than\nthe common law rule, which would not allow evidence of usage of trade, course of\ndealing, or course of performance to supplement a completely integrated agreement.\n9.2.3. The common law allows parol evidence to be admitted for issues relating to the\nformation, interpretation, or validity of the contract. UCC \xc2\xa7 2-202 is silent in these\nsituations, and thus the common law supplements under UCC \xc2\xa7 1-103(b). For example,\nevidence of prior oral or written agreements, or contemporaneous oral agreements, may\nbe introduced to interpret an ambiguous term, or to prove mistake, fraud,\nmisrepresentation, or failure of a condition precedent that would invalidate the contract.\n9.2.4. The UCC rules regarding the use of parol evidence regarding the modification of a\ncontract subsequent to its formation are found at UCC \xc2\xa7 2-209, and are discussed at\nSection 9.3.\n\n119\n\n\x0cProblem 9-1. What types of contradictory evidence are suppressed by the UCC \xc2\xa7 2-202 parol\nevidence rule, if (1) there are terms in a confirmatory memoranda to which the parties agree or\n(2) a writing intended as the final expression of their agreement?\n___ prior oral agreements\n___ prior written agreements\n___ contemporaneous oral agreements\n___ contemporaneous written agreements\n___ oral agreements arising after contract formation\n___ written agreements arising after contract formation\nProblem 9-2. A written contract for the sale of a car specifies that payments shall be made on the\n1st day of each month for 12 months. By telephone conversations afterwards, the car dealer\nagrees to accept payments on the 15th of each month. Is evidence of the telephone conversation\nsuppressed by UCC \xc2\xa7 2-202? Why or why not?\n9.2.5. In addition to the common law exceptions (see 9.1.3), the UCC itself provides two\nimportant exceptions to the parol evidence rule at UCC \xc2\xa7 2-202(a) and (b). Under \xc2\xa7 2202(a), the writings of the parties may always be explained or supplemented by course of\ndealing, usage of trade, or course of performance. This exception does not, at least on its\nface, allow contradictory terms; it only allows explanation of existing terms or\nsupplementation of existing terms. As illustrated in the following case, it is not always\neasy to distinguish between terms that \xe2\x80\x9cexplain or supplement\xe2\x80\x9d versus terms that\ncontradict.\nColumbia Nitrogen Corp. v. Royster Co.\n451 F.2d 3 (4th Cir. 1971)\n[Columbia Nitrogen Corp. entered into a contract to purchase minimum quantities of phosphate\nfrom Royster Co. over a period of several years at specified prices. The market price of\nphosphate dropped precipitously, and Columbia refused to purchase the phosphate in the\nquantities that it had agreed to in the written agreement. When Royster brought a claim for\nbreach of contract against Columbia, Columbia defended on the grounds that the contract, when\nconstrued in light of the usage of the trade and course of dealing between the parties, imposed no\nresponsibility on Columbia to accept at the quoted prices the minimum quantities stated in the\ncontract. The district court rejected Columbia\xe2\x80\x99s argument, determined that Columbia had\nbreached its agreement, and entered judgment in favor of the seller, Royster.]\n120\n\n\x0cBUTZNER, Circuit Judge\n\xe2\x80\xa6.\nColumbia assigns error to the pretrial ruling of the district court excluding all evidence on\nusage of the trade and course of dealing between the parties. It offered the testimony of witnesses\nwith long experience in the trade that because of uncertain crop and weather conditions, farming\npractices, and government agricultural programs, express price and quantity terms in contracts\nfor materials in the mixed fertilizer industry are mere projections to be adjusted according to\nmarket forces.\nColumbia also offered proof of its business dealings with Royster over the six-year period\npreceding the phosphate contract [during which Columbia, which produces nitrogen and other\nfertilizers, had repeatedly and substantially deviated from the prices and quantities at which it\nhad agreed to sell nitrogen to Royster when market prices for nitrogen changed significantly].\nThis experience, a Columbia officer offered to testify, formed the basis of an understanding on\nwhich he depended in conducting negotiations with Royster.\nThe district court held that the evidence should be excluded. It ruled that \xe2\x80\x9ccustom and\nusage or course of dealing are not admissible to contradict the express, plain, unambiguous\nlanguage of a valid written contract, which by virtue of its detail negates the proposition that the\ncontract is open to variances in its terms[.]\xe2\x80\x9d\nA number of Virginia cases have held that extrinsic evidence may not be received to\nexplain or supplement a written contract unless the court finds the writing is ambiguous. E. g.,\nMathieson Alkali Works v. Virginia Banner Coal Corp., 147 Va. 125, 136 S.E. 673 (1927). This\nrule, however, has been changed by the Uniform Commercial Code which Virginia has adopted.\nThe Code expressly states that it \xe2\x80\x9cshall be liberally construed and applied to promote its\nunderlying purposes and policies,\xe2\x80\x9d which include \xe2\x80\x9cthe continued expansion of commercial\npractices through custom, usage and agreement of the parties[.]\xe2\x80\x9d [UCC \xc2\xa7 1-103(a)(2)]. The\nimportance of usage of trade and course of dealing between the parties is shown by [UCC \xc2\xa7 1303], which authorizes their use to explain or supplement a contract. The official comment states\nthis section rejects the old rule that evidence of course of dealing or usage of trade can be\nintroduced only when the contract is ambiguous. And the Virginia commentators, noting that\n\xe2\x80\x9cthis section reflects a more liberal approach to the introduction of parol evidence \xe2\x80\xa6 than has\nbeen followed in Virginia,\xe2\x80\x9d express the opinion that Mathieson, supra, and similar Virginia cases\nno longer should be followed. (citations omitted) We hold, therefore, that a finding of ambiguity\nis not necessary for the admission of extrinsic evidence about the usage of the trade and the\nparties\xe2\x80\x99 course of dealing.\nWe turn next to Royster\'s claim that Columbia\'s evidence was properly excluded because\nit was inconsistent with the express terms of their agreement. There can be no doubt that the\n121\n\n\x0cUniform Commercial Code restates the well-established rule that evidence of usage of trade and\ncourse of dealing should be excluded whenever it cannot be reasonably construed as consistent\nwith the terms of the contract. Division of Triple T Service, Inc. v. Mobil Oil Corp., 60 Misc. 2d\n720, 304 N.Y.S.2d 191, 203 (1969), aff\'d mem., 34 A.D.2d 618, 311 N.Y.S.2d 961 (1970).\nRoyster argues that the evidence should be excluded as inconsistent because the contract contains\ndetailed provisions regarding the base price, escalation, minimum tonnage, and delivery\nschedules. The argument is based on the premise that because a contract appears on its face to be\ncomplete, evidence of course of dealing and usage of trade should be excluded. We believe,\nhowever, that neither the language nor the policy of the Code supports such a broad exclusionary\nrule. [UCC \xc2\xa7 2-202] expressly allows evidence of course of dealing or usage of trade to explain\nor supplement terms intended by the parties as a final expression of their agreement. When this\nsection is read in light of Va. Code Ann. [UCC \xc2\xa7 1-303(e)], it is clear that the test of\nadmissibility is not whether the contract appears on its face to be complete in every detail, but\nwhether the proffered evidence of course of dealing and trade usage reasonably can be construed\nas consistent with the express terms of the agreement.\nThe proffered testimony sought to establish that because of changing weather conditions,\nfarming practices, and government agricultural programs, dealers adjusted prices, quantities, and\ndelivery schedules to reflect declining market conditions. For the following reasons it is\nreasonable to construe this evidence as consistent with the express terms of the contract.\nThe contract does not expressly state that course of dealing and usage of trade cannot be\nused to explain or supplement the written contract.\nThe contract is silent about adjusting prices and quantities to reflect a declining market. It\nneither permits nor prohibits adjustment, and this neutrality provides a fitting occasion for\nrecourse to usage of trade and prior dealing to supplement the contract and explain its terms.\nMinimum tonnages and additional quantities are expressed in terms of \xe2\x80\x9cProducts\nSupplied Under Contract.\xe2\x80\x9d Significantly, they are not expressed as just \xe2\x80\x9cProducts\xe2\x80\x9d or as\n\xe2\x80\x9cProducts Purchased Under Contract.\xe2\x80\x9d The description used by the parties is consistent with the\nproffered testimony.\nFinally, the default clause of the contract refers only to the failure of the buyer to pay for\ndelivered phosphate. During the contract negotiations, Columbia rejected a Royster proposal for\nliquidated damages of $10 for each ton Columbia declined to accept. On the other hand, Royster\nrejected a Columbia proposal for a clause that tied the price to the market by obligating Royster\nto conform its price to offers Columbia received from other phosphate producers. The parties,\nhaving rejected both proposals, failed to state any consequences of Columbia\'s refusal to take\ndelivery -- the kind of default Royster alleges in this case. Royster insists that we span this hiatus\nby applying the general law of contracts permitting recovery of damages upon the buyer\'s refusal\nto take delivery according to the written provisions of the contract. This solution is not what the\nUniform Commercial Code prescribes. Before allowing damages, a court must first determine\n122\n\n\x0cwhether the buyer has in fact defaulted. It must do this by supplementing and explaining the\nagreement with evidence of trade usage and course of dealing that is consistent with the\ncontract\'s express terms. [UCC \xc2\xa7\xc2\xa7 1-303(e), 2-202]. Faithful adherence to this mandate reflects\nthe reality of the marketplace and avoids the overly legalistic interpretations which the Code\nseeks to abolish.\nRoyster also contends that Columbia\'s proffered testimony was properly rejected because\nit dealt with mutual willingness of buyer and seller to adjust contract terms to the market.\nColumbia, Royster protests, seeks unilateral adjustment. This argument misses the point. What\nColumbia seeks to show is a practice of mutual adjustments so prevalent in the industry and in\nprior dealings between the parties that it formed a part of the agreement governing this\ntransaction. It is not insisting on a unilateral right to modify the contract.\nNor can we accept Royster\'s contention that the testimony should be excluded under the\ncontract clause:\n\xe2\x80\x9cNo verbal understanding will be recognized by either party hereto; this contract\nexpresses all the terms and conditions of the agreement, shall be signed in duplicate, and\nshall not become operative until approved in writing by the Seller.\xe2\x80\x9d\nCourse of dealing and trade usage are not synonymous with verbal understandings, terms and\nconditions. [UCC \xc2\xa7 2-202] draws a distinction between supplementing a written contract by\nconsistent additional terms and supplementing it by course of dealing or usage of trade. Evidence\nof additional terms must be excluded when \xe2\x80\x9cthe court finds the writing to have been intended\nalso as a complete and exclusive statement of the terms of the agreement.\xe2\x80\x9d Significantly, no\nsimilar limitation is placed on the introduction of evidence of course of dealing or usage of trade.\nIndeed the official comment notes that course of dealing and usage of trade, unless carefully\nnegated, are admissible to supplement the terms of any writing, and that contracts are to be read\non the assumption that these elements were taken for granted when the document was phrased.\nSince the Code assigns course of dealing and trade usage unique and important roles, they should\nnot be conclusively rejected by reading them into stereotyped language that makes no specific\nreference to them. ... Indeed, the Code\'s official commentators urge that overly simplistic and\noverly legalistic interpretation of a contract should be shunned.\nWe conclude, therefore, that Columbia\'s evidence about course of dealing and usage of\ntrade should have been admitted. Its exclusion requires that the judgment against Columbia must\nbe set aside and the case retried[.]\nCase Notes:\n1. Many commentators criticize the results of this case, particularly in view of the\nhierarchy of UCC \xc2\xa7 1-303(e), which provides that express contract terms prevail if\nexpress terms cannot reasonably be construed as consistent with course of performance,\n123\n\n\x0ccourse of dealing, usage of trade. One court, refusing to apply course or dealing or usage\nof trade to negate a particular contract term, stated:\nCertainly customs of the trade should be relevant to the interpretation of certain\nterms of a contract, and should be considered in determining what variation in\nspecifications is considered acceptable, but this court does not believe that section\n2-202 was meant to invite a frontal assault on the essential terms of a clear and\nexplicit contract.\nSouthern Concrete Services, Inc. v. Mableton Contractors, Inc., 407 F. Supp. 581, 584\n(N.D. Ga. 1975).\n2. Another court enunciated the following test to determine whether the offered evidence\nis consistent with the express language of the agreement:\nAdditional terms are inconsistent with a written document if the additional terms\nare not reasonably harmonious with the \xe2\x80\x9clanguage and respective obligations of\nthe parties.\xe2\x80\x9d Terms that impose new legal obligations on or alter the existing legal\nobligations of the parties, like those proffered by MSI, are not reasonably\nharmonious with the terms of a written agreement.\nSagent Tech., Inc. v. Micros Sys., 276 F. Supp. 2d 464, 468 (D. Md. 2003).\n3. Your authors suggest this test. If parol evidence rule analysis concludes that the\nextrinsic term is part of the contract, read the contract as if that term were written into it.\nThen ask if the two terms can live together in harmony. If so, let the term in to\nsupplement the contract. For example, in Columbia Nitrogen, if the contract expressly\nsaid \xe2\x80\x9cThe price is $10,000,\xe2\x80\x9d and the admitted extrinsic evidence was trade usage to the\neffect that \xe2\x80\x9cThe price can be adjusted depending on market conditions,\xe2\x80\x9d ask if the\nlanguage would have been harmonious if it had stated:\nThe price is $10,000. The price can be adjusted depending on market conditions.\nThe answer is yes, it is harmonious. On the other hand, if the contract expressly stated\n\xe2\x80\x9cThe price is $10,000,\xe2\x80\x9d and the admitted extrinsic evidence was that \xe2\x80\x9cThe price is\n$12,000,\xe2\x80\x9d would the language have been harmonious if the contract had stated:\nThe price is $10,000. The price is $12,000.\nThe answer is no, it is not be harmonious.\n\n124\n\n\x0cProblem 9-3. Betty owns a building supplies store. She enters into a written agreement for the\npurchase of a truckload of various sizes of lumber from Sawmill. The agreement provides that\nBetty must pay the purchase price within 30 days of delivery. The written agreement says nothing\nabout the packaging of the various sizes of lumber. The truck arrives and the lumber is not\npackaged in any orderly form; various sizes of lumber are all intermixed. It requires a sizeable\namount of effort (and employee hours) on Betty\xe2\x80\x99s part to sort and stack the lumber into\nrespective piles according to size.\n(1) In an action against Sawmill, may Betty present evidence that it is customary in the lumber\nindustry to deliver an order of a truckload of lumber consisting of various sizes by stacking each\nsize of lumber on a separate pallet banded by wire? Or is such evidence barred under \xc2\xa7 2-202?\n(2) Will Betty be able to present evidence that it is customary in the lumber industry for sawmills\nto allow a 5% discount if orders are paid for within 30 days of delivery, which Betty did?\n9.2.6 UCC \xc2\xa7 2-202(b) provides an exception allowing evidence of prior oral or written\nagreements, or contemporaneous oral agreements, to provide consistent additional terms.\nHowever, there is an important exception to the exception. If the parties intended their\nagreement to be a \xe2\x80\x9ccomplete and exclusive statement of the terms of the agreement,\xe2\x80\x9d\nevidence of prior oral or written agreements or contemporaneous oral agreements is not\nadmissible to introduce any additional terms, whether consistent or not. In other words, if\nyou have a writing (or writings) which set forth some, but not all, of the terms of the\nagreement, you can introduce evidence establishing consistent (but not contradictory)\nadditional terms. This is consistent with the \xe2\x80\x9cpartial integration\xe2\x80\x9d rule of common law. On\nthe other hand, if you have a comprehensive document which the parties intended to be\nthe \xe2\x80\x9ccomplete and exclusive\xe2\x80\x9d expression of the terms of their agreement, you are not\nallowed to introduce evidence establishing additional terms, whether consistent or not.\nThis rule is consistent with the \xe2\x80\x9ccomplete integration\xe2\x80\x9d rule of common law. For a\nsummary of the \xe2\x80\x9cpartial integration\xe2\x80\x9d and \xe2\x80\x9ccomplete integration\xe2\x80\x9d rules at common law, see\nRestatement (Second) of Contracts \xc2\xa7 210 (1981).\n9.2.6.1. What factors should you consider in determining if a writing is \xe2\x80\x9cintended\nalso as a complete and exclusive statement of the terms of the agreement?\xe2\x80\x9d The\nformality of the agreement, whether lawyers drafted the agreement, its\ncomprehensiveness, the sophistication of the parties involved, and the length of\nnegotiations are factors mentioned by various courts. Another important (but not\nconclusive) fact is whether the document itself purports to be the \xe2\x80\x9ccomplete and\nexclusive\xe2\x80\x9d agreement of the parties. This is usually accomplished by the insertion\nof a \xe2\x80\x9cmerger\xe2\x80\x9d or \xe2\x80\x9cintegration\xe2\x80\x9d clause into the agreement. A merger clause might\nlook like this:\n\n125\n\n\x0cThis agreement signed by both parties constitutes a final written\nexpression of all the terms of this agreement and is a complete and\nexclusive statement of those terms.\nUnfortunately, courts sometimes regard a merger clause as relevant for a\ncompletely different purpose: to determine whether a written agreement is to be\ntreated separately from other agreements executed at the same time by the same\nparties. As a result, a traditionally drafted merger clause can have some\nunintended and undesirable consequences. For example, in Schron v. Grunstein,\n917 N.Y.S.2d 820 (N.Y. Sup. Ct. 2011), the court ruled that a credit agreement\nand a stock purchase option agreement were to be regarded as separate agreements\nin part because of the existence of a merger clause in the option agreement. On the\nother hand, in In re Clements Manufacturing Liquidation Co., LLC, 521 B.R. 231,\n(E.D. Mich. 2014), the court ruled that, despite the merger clause, the asset\npurchase agreement was an integral part of a larger transaction, thus helping to\ninsulate the asset purchase from avoidance as a fraudulent transfer. Practice tip:\nDraft the merger clause so that it makes clear that evidence of other parts of the\ntransaction is admissible. For example:\nThis agreement and [list other agreements] collectively contain the\ncomplete and exclusive understanding of the parties with respect to their\nsubject matter. There are no promises or representations of the parties not\nincluded in one or more of these documents.\n9.2.6.2. In Intershoe, Inc. v. Bankers Trust Co., 571 N.E.2d 641 (N.Y. 1991),\nIntershoe placed a telephone order with defendant concerning a foreign currency\nfutures transaction involving the exchange of Italian lira for United States dollars.\nBankers Trust Company sent a confirmation slip to Intershoe including, among\nothers, the following terms: \xe2\x80\x9cwe [Bankers] have bought from you [Intershoe] ITL\n537,750,000" and "we have sold to you USD 250,000.00.\xe2\x80\x9d The confirmation slip\nspecified a rate of 2,151 lira per dollar and called for delivery of the lira\napproximately 7 months later, between October 1 and October 31. Intershoe\xe2\x80\x99s\ntreasurer signed the slip and returned it to the bank. In mid-October, the bank sent\na reminder to Intershoe about the pending transaction, and asked for delivery of\nthe lira. At that point in time, Intershoe said \xe2\x80\x9cthis is a mistake; we meant to buy\nlira, not deliver lira,\xe2\x80\x9d and it sought to present evidence of that mistake. Although\nthe writing was only a few sentences in length, the court found that the written\nconfirmation was \xe2\x80\x9ca complete and exclusive\xe2\x80\x9d agreement of the parties, and\nrefused to admit evidence of any additional terms, stating:\nHere, the essential terms of the transaction are plainly set forth in the\nconfirmation slip: that plaintiff had sold lira to defendant, the amount of\nthe lira it sold, the exchange rate, the amount of dollars to be paid by\n126\n\n\x0cdefendant for the lira, and the maturity date of the transaction. ... Nothing\nin the confirmation slip suggests that it was to be a memorandum of some\npreliminary or tentative understanding with respect to these terms. On the\ncontrary, it is difficult to imagine words which could more clearly\ndemonstrate the final expression of the parties\' agreement than "we have\nbought from you ITL 537,750,000" and "we have sold to you USD\n250,000.00." (Emphasis supplied.)\nId. at 644.\nProblem 9-4. The following language is scribbled on a napkin over drinks by two friends and\ninitialed by both parties: \xe2\x80\x9cI, John, sell you, Frank, my 1998 Honda Prelude for $1,000, price\npayable upon delivery."\n(1) Is this a written \xe2\x80\x9cfinal expression\xe2\x80\x9d of the price?\n(2) Is this writing a \xe2\x80\x9ccomplete and exclusive statement of the terms of the agreement?\xe2\x80\x9d\n(3) Can the seller introduce into evidence a previous letter offering to sell at $1,500 instead of\n$1,000?\n(4) Can the buyer introduce evidence that seller said he would throw in a new spare tire as part of\nthe deal?\nProblem 9-5. Change the facts of the previous problem. The seller is a law student, and presents\na 15 page agreement detailing the terms of the car purchase, modifying and using a form he got\nfrom his father, who is a car dealer. Buyer is also a law student. The agreement sets forth a price\nof $1,000, but there is no discussion as to when payment will be made.\n(1) Is this writing a \xe2\x80\x9ccomplete and exclusive statement of the terms of the agreement?\xe2\x80\x9d\n(2) Can the buyer introduce evidence that seller said he would throw in a new spare tire as part of\nthe deal?\n(3) Can the buyer introduce evidence that in previous dealings between them, they had\nestablished a practice of payment within a week of delivery?\nSierra Diesel Injection Service v. Burroughs Corp., Inc.\n651 F. Supp. 1371 (D. Nev. 1987)\n[The defendant Burroughs Corporation negotiated with plaintiff Sierra Diesel Injection Service to\nprovide a computer system to meet Sierra\xe2\x80\x99s accounting needs. In the course of negotiations,\nBurroughs made both oral and written representations to Sierra regarding its systems, including a\n127\n\n\x0cwritten representation contained in a letter that the system \xe2\x80\x9ccan put your inventory, receivables,\nand invoicing under complete control.\xe2\x80\x9d Sierra, which did not have extensive knowledge or\nexperience regarding computer systems, alleged that it relied upon these representations in\nentering into a purchase agreement with Burroughs. The agreement, a standardized agreement\nprepared by Burroughs, contained an integration clause stating that the agreement constituted the\nentire agreement between the parties and superseded all prior communications. The warranties\ncontained in the final agreement were limited, and the agreement disclaimed all other express and\nimplied warranties.]\nEDWARD C. REED, Jr., Chief Judge\n\xe2\x80\xa6.\nDefendant further argues that the plaintiff\'s allegations regarding any oral warranties or\npromises made before the contracts were signed must be disregarded by virtue of the parol\nevidence rule, codified at [UCC \xc2\xa7 2-202]. This section of the U.C.C. provides that\n[t]erms with respect to which the confirmatory memoranda of the parties agree or which\nare otherwise set forth in writing intended by the parties as a final expression of their\nagreement with respect to such terms as are included therein may not be contradicted by\nevidence of any prior agreement or of a contemporaneous oral agreement but may be\nexplained or supplemented:\n[(a) by course of performance, course of dealing, or usage of trade (Section 1303); and\n(b) by evidence of consistent additional terms unless the court finds the writing to\nhave been intended also as a complete and exclusive statement of the terms of the\nagreement.]\nThis section of the Code contemplates a multifactor analysis. First, the court must determine\nwhether the writing presented to the court is \xe2\x80\x9cintended by the parties as a final expression of their\nagreement to such terms as are included therein.\xe2\x80\x9d Id., see Norwest Bank Billings v. Murnion, 210\nMont. 417, 684 P.2d 1067, 1071 (1984); see also Amoco Production Co. v. Western Slope Gas\nCo., 754 F.2d 303, 308 (10th Cir.1985), S.M. Wilson & Co. v. Smith International, Inc., 587 F.2d\n1363, 1370 (9th Cir.1978); Interform Co. v. Mitchell, 575 F.2d 1270, 1274-78 (9th Cir.1978). If\nthe court determines that the parties did not intend the writing to be a final expression of their\nagreement with respect to the terms contained therein, then parol evidence of prior and\ncontemporaneous agreements may be considered by the court. Id.\nThe defendant argues that the merger clause contained in the contracts in this case\nestablishes as a matter of law that the writings are the final expression of the parties\' agreements,\nand that the restrictions of the rule therefore come into play. The authorities hold that merger\n128\n\n\x0cclauses such as this one are strong evidence of integration, but that they are not necessarily\nconclusive. In O\'Neil v. International Harvester Co., 40 Colo. App. 369, 575 P.2d 862 (1978),\nfor example, the buyer of a truck brought an action against the seller and assignee for rescission\nof the installment purchase contract, for damages for breach of express and implied warranties,\nand for fraud. The defendants argued that all of the plaintiff\'s causes of action were barred by the\nterms of the contract itself which conspicuously disclaimed all warranties not stated in the\nagreement, and which contained a merger clause which purported to make that writing the final\nagreement of the parties. Because of the conspicuous disclaimer clause and the express merger\nclause, the defendants argued that the plaintiff was prevented from introducing any evidence of\nwarranties which were not included in the writing. The trial court had agreed with the defendant,\nand found that all evidence of oral warranties was made inadmissible by virtue of the integration\nclause in the contract.\nThe court of appeals reversed the lower court. Initially, it found that the trial court had\nproperly found no issue of fact as to the warranty disclaimer clause, in that the plaintiff had\nactually read the clause. This waiver only affected the implied warranties, however. Id., at 865.\nThe trial court had erred in this case by failing to take evidence on the parties\xe2\x80\x99 intent regarding\nthe finality of the writing. In this case, the court found, the plaintiff had alleged the existence of\noral warranties prior to the execution of the written agreement, as well as conduct following the\nsale which tended to show that such warranties were indeed made. Because of these facts, the\ncourt found that there was a genuine issue of material fact as to the parties\' intent regarding\nintegration of the writing, in spite of the existence of a merger clause. Id. In view of the existence\nof such a genuine fact issue, summary judgment was not proper, and the lower court\'s ruling was\nreversed. See also, Amoco Production, supra.\nIn the present case, there also appears to be a genuine issue of fact regarding the parties\'\nintent. Although the merger clause does lend weight to the finding of integration here, the\nplaintiff also claims that oral warranties were made prior to the execution of the contract. Further,\nthe plaintiff also contends that the defendant made numerous efforts to repair the computer\nsystem to comply with those alleged warranties. These allegations indicate the existence of a\ngenuine issue of material fact, in that the parties\' intent regarding the integration is not clear.\nWhereas it is possible that these contracts are fully integrated, the evidence presently before the\ncourt also permits the opposite conclusion. As in O\'Neil, therefore, summary judgment on parol\nevidence grounds is not proper.\nFRAUD\nIn addition, Nevada case law holds that the parol evidence rule may not operate to\nexclude evidence of fraud in the inducement of contract, even where the court finds an integrated\nagreement. See Havas v. Haupt, 94 Nev. 591, 583 P.2d 1094, 1095 (1978). See also Oak\nIndustries, Inc. v. Foxboro Co., 596 F. Supp. 601, 607 (S.D.Cal.1984). Thus, parol may always\nbe used to show fraud on the inducement of the contract, even if there has been a valid\nintegration, in that fraud in the inducement invalidates the entire contract. Id. The plaintiff must\n129\n\n\x0ctherefore be allowed to present evidence of fraud regardless of the possible integration of the\nwriting.\n[Defendants sought summary judgment on the fraud claim, asserting that its alleged\nmisrepresentations to the plaintiff were opinions and \xe2\x80\x9cpuffery\xe2\x80\x9d rather than statements of fact, and\nthus could not support a claim of fraud. The court determined that a genuine issue of material\nfact existed regarding the factual nature of these statements, and denied Burroughs\xe2\x80\x99 motion for\nsummary judgment.]\nCase Notes:\n1. Upon reconsideration, the federal district court determined that the purchaser\xe2\x80\x99s owner\nwas unsophisticated, had little knowledge of computers, and did not understand that the\nintegration clause would preclude prior representations upon which the purchaser had\nrelied. The court concluded that there was no \xe2\x80\x9cmutual intent of the parties in this case that\nthe agreement be integrated.\xe2\x80\x9d Sierra Diesel Injection Serv., Inc. v. Burroughs Corp., 656\nF. Supp. 426, 428-429 (D. Nev. 1987). Review the factors set forth in Section 9.2.6.1; do\nyou agree with the court\xe2\x80\x99s conclusion? The district court\xe2\x80\x99s ruling was affirmed. Sierra\nDiesel Injection Serv., Inc. v. Burroughs Corp., 890 F.2d 108 (9th Cir. 1989).\n2. The integration clause contained in the agreement provided:\n\xe2\x80\x9cThis Agreement constitutes the entire agreement, understanding and\nrepresentations, express or implied between the Customer and Burroughs with\nrespect to the equipment and/or related services to be furnished and this\nAgreement supersedes all prior communications between the parties including all\noral and written proposals.\xe2\x80\x9d\nWhat additional language or actions might you have added to establish the parties\xe2\x80\x99 mutual\nintent that the agreement was, in fact, the final expression of the parties\xe2\x80\x99 agreement\nregarding warranty terms?\nProblem 9-6. Review Problem. ABC and XYZ sign the following written agreement:\n\nABC Widget Corporation agrees to sell 1,000 Type B widgets to XYZ\nCorporation.\nTerms: $10,000 payable 30 days after delivery.\nDelivery date: To be determined by the parties.\nThis writing represents the complete and exclusive agreement of the\nparties.\nABC Widget Corp.\nBy Brad Jones\n\nXYZ Corp.\nBy Jane Smith\n130\n\n\x0c(1) Can the parties agree on a delivery date?\n(2) Did ABC give XYZ a warranty of merchantability?\n(3) Can XYZ introduce evidence that prior to signing the contract, ABC promised that it would\ndeliver the widgets to XYZ at no additional cost?\n(4) Can XYZ introduce evidence that in their four prior transactions, ABC delivered the widgets\nto XYZ at no additional cost?\n9.3. Contract Modification\n9.3.1. Modification. Does the UCC parol evidence rule suppress oral statements or writings\nmade after contract formation? In Trad Industries v. Brogan, 805 P.2d 54 (Mont. 1991), a\nwritten contract specified a certain delivery date for the sale of elk. In subsequent telephone\nconversations, the parties agreed to a later delivery date. The court stated: \xe2\x80\x9cThe telephone\nconversations are not barred by the parol evidence rule. These occurred after the writings and\npertain to Trad\'s assertion that the contracts were subsequently modified.\xe2\x80\x9d Id. at 58.\n9.3.1.1. UCC \xc2\xa7 2-209 governs the modification, rescission or waiver of contract terms\nafter the contract has been formed.\n9.3.1.2. There is no requirement of consideration to modify a contract. UCC \xc2\xa7 2-209(1).\nThis changes the common law \xe2\x80\x9cpre-existing duty\xe2\x80\x9d rule.\nProblem 9-7. A bakery enters into an agreement to purchase a new commercial oven at a price of\n$10,000, to be delivered and installed in 14 days. A few days after signing the agreement, the\nseller calls the bakery and states that it may not be able to meet the 14-day delivery date. The\nseller promises to deliver the oven within 21 days. The purchaser orally agrees to the revised\ndelivery date. Is this oral modification enforceable?\n9.3.1.3. Under UCC \xc2\xa7 2-209(2), the parties are free to provide that a written agreement\ncan be modified only by a signed writing (usually called a \xe2\x80\x9cno oral modification\xe2\x80\x9d or\n\xe2\x80\x9cN.O.M.\xe2\x80\x9d clause).\n9.3.1.3.1. With regard to \xe2\x80\x9cno oral modification\xe2\x80\x9d clauses in any transactions which\nare not between merchants, the \xe2\x80\x9cno oral modification\xe2\x80\x9d clause in a merchant\xe2\x80\x99s\nform must be separately signed by the non-merchant. This requirement of a\nseparate signing is intended to alert non-merchants that they should not rely upon\noral assurances. UCC \xc2\xa7 2-209(2).\n\n131\n\n\x0cProblem 9-8: A gravel company agrees to provide 25,000 tons of gravel at the rate of 1,000 tons\nper week to a construction company that is building a road in a private development. The\nagreement contains a \xe2\x80\x9cno oral modification clause.\xe2\x80\x9d Delivery is not made in accordance with the\ndelivery schedule in the written contract. In the lawsuit that follows for breach of contract, can\nthe gravel company present evidence that subsequent to the execution of the written agreement\nthe delivery schedules had been modified orally to accommodate the actual start-up and\ndiscontinuance of construction schedules on the project?\n9.3.2. Statute of Frauds. Does the statute of frauds apply to a modification? UCC \xc2\xa7 2-209(3)\nprovides that \xe2\x80\x9cthe requirements of the statute of frauds ... must be satisfied if the contract as\nmodified is within its provisions.\xe2\x80\x9d According to White & Summers, Uniform Commercial Code\n\xc2\xa7 2-7 (West 6th ed., 2010), there are at least five possible interpretations of this language:\n(1) that if the original contract was within 2-201, any modification thereof must also\nbe in writing; (2) that a modification must be in writing if the term it adds brings the\nentire deal within 2-201 for the first time, as where the price is modified from $400 to\n$500; (3) that a modification must be in writing if it falls in 2-201 on its own; (4) that\nthe modification must be in writing if it changes the quantity term of an original\nagreement that fell within 2-201; and (5) some combination of the foregoing. Given\nthe purposes of the basic statute of frauds section 2-201, we believe interpretations\n(2), (3), and (4) are each justified, subject of course to the exceptions in 2-201 itself\nand to any general supplemental principles of estoppel.\nAlthough White & Summers state their opinion that it is not \xe2\x80\x9cjustified\xe2\x80\x9d to apply UCC \xc2\xa7 2-209(3)\nto all modifications of a contract that originally falls within \xc2\xa7 2-201, the majority of courts that\nhave addressed the issue have applied the statute of frauds to oral modifications if both the\noriginal contract and the contract, as modified, are contracts involving goods with a purchase\nprice in excess of $500. See, for example, Green Construction Co. v. First Indemnity of America\nInsurance Co., 735 F. Supp. 1254, 1261 (D.N.J. 1990); Trad Industries v. Brogan, 805 P.2d 54,\n59 (Mont. 1991).\nProblem 9-9.\n(1) A law firm purchases a printer from Office Supplies for $400. The written contract provides\nthat the law firm may return the printer at any time within 30 days following the purchase, for\nany reason, in which event the full purchase price will be returned. The contract does not contain\na \xe2\x80\x9cno oral modification\xe2\x80\x9d clause. After experiencing several problems in the first week, the law\nfirm manager and Office Supplies manager orally modify the 30-day return period to a 60-day\nreturn period. The problems continue sporadically, and the law firm returns the printer on the\n59th day after its purchase. Office Supplies refuses to accept it and issue a refund, pointing out\nthe 30-day return period in the contract. Is the modification enforceable?\n\n132\n\n\x0c(2) Does your answer to the preceding question change if the purchase price of the printer under\nthe original contract is $600?\n9.3.3. Waiver. If a post-formation oral statement does not constitute an enforceable modification\neither because of a valid \xe2\x80\x9cno oral modification clause\xe2\x80\x9d or because of the statute of frauds, the oral\nstatement may nonetheless operate as a waiver under UCC \xc2\xa7 2-209(4). For example, a contract\nfor the sale of a car is signed, requiring twelve payments of $1,000 on the first of each month.\nAfter three months of making payments on the first, the buyer calls the seller and asks for\npermission to make payments on the 15th. The seller orally agrees and accepts payments on the\n15th for several months. Although this does not meet the statute of frauds requirement, and thus\nis not an effective modification, it does constitute a waiver, and the seller is estopped from\nalleging breach for payments it accepted that were not received on the first day of the month.\nMargolin v. Franklin, 270 N.E.2d 140 (Ill. Ct. App. 1971). Does this mean that every attempt at\noral modification can be construed as a waiver? No.\n9.3.3.1. Waiver is based upon the equitable doctrine of estoppel, and requires that the\nparty attempting to enforce the oral agreement has relied upon the modification to her\ndetriment. See Trad Indus. v. Brogan, 805 P.2d 54, 59 (Mont. 1991), the elk case noted at\nSection 9.3.1. above, in which the court stated: \xe2\x80\x9cWhen a promisee reasonably and\nforeseeably relies on a promise to his detriment the promise is binding if injustice can be\navoided only by enforcement of the promise.\xe2\x80\x9d\n9.3.3.2. The advantage of the waiver argument is that waivers do not need to satisfy the\nstatute of frauds.\n9.3.3.3. The disadvantage of the waiver argument is that under \xc2\xa7 2-209(5) the seller can\nunilaterally retract the waiver by providing reasonable notice to the other party \xe2\x80\x9cthat strict\nperformance will be required of any term waived,\xe2\x80\x9d unless the retraction would be unjust\nin view of a material change of position in reliance on the waiver. In contrast, valid\nmodifications cannot be unilaterally retracted.\nProblem 9-10. Let\xe2\x80\x99s go back to the law firm purchase of a printer whose original cost is $600,\nand the oral modification of a 30-day return period to a 60-day return period. The law firm\nreturns the printer on the 59th day, and Office Supplies refuses to accept it and issue a refund.\nWhen Office Supplies raises the statute of frauds defense, will the law firm nonetheless prevail\nwith a waiver argument under \xc2\xa7 2-209(5)?\n\n133\n\n\x0cChapter 9 Additional Sources.\nScott J. Burnham, Glannon Guide to Sales: Learning Sales Through Multiple-Choice Questions\nand Analysis (Wolters Kluwer 2d ed., 2012), Chapters 6 (parol evidence rule) and 7\n(modification)\nJames J. White and Robert S. Summers, Uniform Commercial Code (West 6th ed., 2010),\nSections 3-10 to 3-13 (parol evidence rule) and 2-7 (modification)\n\n134\n\n\x0cChapter 10. Delivery Terms and Title Issues\n10.1. Delivery Terms.\n10.1.1. Identification of Goods. UCC \xc2\xa7 2-501 discusses the concept of \xe2\x80\x9cidentification of\ngoods.\xe2\x80\x9d Recall that way back in Chapter 2, we saw that \xc2\xa7 2-105 defines goods as things which\nare movable \xe2\x80\x9cat the time of identification to the contract for sale.\xe2\x80\x9d It is at this point in time at\nwhich the buyer acquires certain property rights in the goods, but not necessarily title to or\npossession of the goods. The buyer might, for example, have an insurable interest in the goods on\nidentification.\nThis concept is also important in other UCC provisions to determine the rights of sellers and\nbuyers in the goods. For example:\n\xef\x82\xb7\n\xef\x82\xb7\n\xef\x82\xb7\n\xef\x82\xb7\n\nReplevin of goods in the seller\xe2\x80\x99s hands under \xc2\xa7\xc2\xa7 2-502 and 2-716(3)\nDestruction of goods in the seller\xe2\x80\x99s hands under \xc2\xa7 2-613\nBreach by buyer and seller is unable to sell the goods under \xc2\xa7 2-709\nBreach by buyer and seller can identify goods in his control at the time of breach under\n\xc2\xa7 2-704\n10.1.1.1. Establishing the point in time at which \xe2\x80\x9cidentification of the goods\xe2\x80\x9d occurs\ndepends, in part, upon the type of goods which are the subject matter of the contract. For\nexample, the subject of the sale may be:\n10.1.1.1.1. A particular thing in existence at the time the contract is formed. For\nexample, at the Charlie Russell Art Auction I walk into an artist\xe2\x80\x99s room and point\nout a particular painting I want to purchase.\n10.1.1.1.2. The item may be part of a larger stock of similar items held at some\nother location by the seller. For example, Bighorn Sports may have a canoe\ndangling from the ceiling as part of its sales display, and I want to buy that model\nof canoe. I won\xe2\x80\x99t actually buy the one dangling from the ceiling; the store has a\nstock of the canoes in its warehouse a few blocks away.\n10.1.1.1.3. The goods may not even be in existence yet. For example, I walk into a\njewelry store and ask the jeweler to design and make a ring for me.\n10.1.1.1.4. The goods may be crops not yet planted or unborn animals. For\nexample, Anheuser-Busch may enter into an agreement in September 2015 for a\nfarmer\xe2\x80\x99s 2016 barley crop which has not yet been planted.\n10.1.1.2. The process of designating a particular good as the good \xe2\x80\x9cto which the contract\n135\n\n\x0crefers\xe2\x80\x9d is \xe2\x80\x9cidentification.\xe2\x80\x9d Identification gives the buyer \xe2\x80\x9ca special property interest and\nan insurable interest\xe2\x80\x9d in the goods, but not the full bundle of rights that goes with full\nownership of the goods.\n10.1.2. When Does Identification Occur? UCC \xc2\xa7 2-501(1)(a)-(c) provides the framework for\ndetermining when identification occurs. These sections apply only in the absence of an\nagreement otherwise.\n10.1.2.1. The first rule: look at the agreement of the parties to determine if it specifies\nwhen identification of the goods occurs. For example, if an artist has made 50 numbered\nprints of a particular piece of art, the contract may specify a particular methodology for\ndetermining which of the 50 prints will be delivered to the buyer. Also remember that\nusage of trade, course of dealing and course of performance may establish some of the\nterms of the agreement. For example, if it is customary in the trade to provide the lowest\navailable numbered print, then identification of the print is established by usage of trade.\n10.1.2.2. Absent a contractual provision otherwise, \xc2\xa7 2-501(1)(a) states that in the context\nof a contract for the sale of goods already existing and identified, identification occurs\nwhen the contract is made.\n10.1.2.2.1. At the Charlie Russell Art Auction, when a buyer walks into an artist\xe2\x80\x99s\nroom and points out a particular painting and offers to purchase it for $150, and\nthe artist accepts that offer, the identification of the goods occurs when the artist\naccepts the offer. At that point in time, the buyer acquires certain rights in the\npainting, even if the buyer does not take possession of the painting immediately.\n10.1.2.2.2. A buyer walks into a drugstore, picks out a can of hairspray, and takes\nit to the check-out stand. When the check-out person accepts the buyer\xe2\x80\x99s money,\nthe contract is formed and identification of the goods occurs at the cash register.\n10.1.2.3. What about the situation where I see a canoe dangling from the ceiling in the\nstore, and I tell the salesman I want to buy a canoe of that model? When is the particular\ncanoe that is the subject of the contract identified? Is it when the stocker pulls out one of\nthe several canoes of that model in storage? Is it when the stocker loads it on top of my\ncar? Is it when I pay the purchase price at the cash register?\n10.1.2.3.1. Note that \xc2\xa7 2-501(1)(b) refers to identification \xe2\x80\x9cwhen goods are\nshipped, marked or otherwise designated by the seller.\xe2\x80\x9d However, \xc2\xa7 2-501(1)(b)\nonly applies to future goods, and thus it is not applicable to this situation, where\ngoods are in existence (see \xc2\xa7 2-105(2) for the definition of \xe2\x80\x9cfuture goods\xe2\x80\x9d).\n\n136\n\n\x0c10.1.2.3.2. So where do we go for guidance in this example? Although this\nsituation commonly occurs, the UCC is silent. First, look to see if the parties have\nexplicitly agreed to a time and manner of identification. For example, the buyer\nmay consent to allowing the store to pick out the particular canoe to be delivered.\nOr the store may agree to allow the buyer to go into the warehouse and select a\ncanoe. In the absence of a specific agreement, look to usage of trade, course of\ndealing, and course of performance for contract terms. UCC \xc2\xa7 1-201(a)(3).\n10.1.2.4. When does identification occur in connection with future goods not yet in\nexistence? For example, a buyer goes into a jewelry store and orders a custom-designed\nring, and the jeweler accepts the order. Section 2-501(1)(b) governs this situation, and\nstates that the goods are identified when they are \xe2\x80\x9cshipped, marked or otherwise\ndesignated by the seller as goods to which the contract refers.\xe2\x80\x9d Does that occur when the\njeweler sets aside the stones and gold she will use in making the ring? When she actually\nbegins making the ring? When she places the materials and beginnings of the ring in a\nbox marked with the buyer\xe2\x80\x99s name and order number? Or when the ring is completed and\ndelivered to the purchaser?\n10.1.2.4.1. Note Comment 2, which states: \xe2\x80\x9cthe general policy is to resolve all\ndoubts in favor of identification.\xe2\x80\x9d (Emphasis supplied.)\n10.1.2.5. Under \xc2\xa7 2-501(1)(c), if the contract is for the sale of (i) animals to be born\nwithin 12 months or (ii) crops to be harvested within the longer of 12 months or the next\nharvest, identification occurs when the young are conceived or the crops are planted.\n10.1.3. Tender of Delivery. Once seller agrees to sell the goods, and buyer agrees to buy, the\nseller has a duty to tender delivery of the goods to buyer. See \xc2\xa7 2-301: \xe2\x80\x9cthe obligation of the\nseller is to transfer and deliver....\xe2\x80\x9d You need to be able to identify when tender of delivery occurs,\nbecause this event determines many other obligations, such as the obligation of the buyer to pay,\nand when risk of loss passes.\n10.1.3.1. Section 2-503(1) requires that \xe2\x80\x9cseller put and hold conforming goods at the\nbuyer\xe2\x80\x99s disposition and give the buyer any notification reasonably necessary to enable\nhim to take delivery.\xe2\x80\x9d\n10.1.3.2. The manner, time and place for tender are determined by (i) the agreement and\n(ii) the applicable provisions of the UCC, including the following provisions of \xc2\xa7 2503(1):\n10.1.3.2.1. Tender must be at a reasonable hour. Comment 3 notes that \xe2\x80\x9cusage of\nthe trade and the circumstances of the particular case\xe2\x80\x9d determine what is a\nreasonable hour.\n137\n\n\x0c10.1.3.2.2. The goods must be kept available for the period reasonably necessary\nto enable the buyer to take possession. Comment 3 notes that \xe2\x80\x9cusage of the trade\nand the circumstances of the particular case\xe2\x80\x9d determine what constitutes a\nreasonable period.\n10.1.3.2.3. Unless otherwise agreed, the buyer must furnish facilities reasonably\nsuited to the receipt of the goods.\nProblem 10-1. I walk into a candy store and order 2 pounds of dark chocolate. The clerk hands\nme 2 pounds of milk chocolate. Has tender of delivery occurred? Why or why not?\nProblem 10-2. I walk into a jewelry store and purchase a watch. The clerk agrees to sell me the\none I specify, but it has to be ordered. The watch comes in a few weeks later, and the jewelry\nstore puts my name on it. Has tender of delivery occurred? Why or why not?\nProblem 10-3. On Thursday you see a painting you want to buy during an art show. The artist\nagrees to sell it to you for $200, and you both agree that you will pick it up after the show on\nSunday. The artist calls you at noon on Sunday and tells you the painting is available to pick up.\nHas the artist made an acceptable tender of delivery?\nProblem 10-4. A Law firm orders stationery from a stationery store, to be delivered by the store\nwithin the next few days to the law firm. The store delivers the stationery on a Saturday, when\nthe law firm is closed. Has the store made an acceptable tender of delivery?\n10.1.3.3. The contract terms (whether oral, written, or as determined by usage of trade,\ncourse of dealing or course of performance) should specify how delivery occurs. You\nneed to be able to distinguish between contracts (1) wherein either the seller or buyer\nagrees to be responsible for delivery, or (2) wherein the parties agree that an independent\nthird party (a \xe2\x80\x9ccommon carrier\xe2\x80\x9d) is responsible for delivery. Examples of contracts not\ninvolving a common carrier:\n\xef\x82\xb7\n\nWhen you purchase a bottle of wine at the grocery store, delivery occurs at\nthe cash register, when the buyer takes possession of the goods.\n\n\xef\x82\xb7\n\nWhen you purchase new carpet from a retail carpet store, the seller often\nagrees to deliver the carpet to your home in its own delivery truck.\n\n\xef\x82\xb7\n\nIf you purchase furniture at a self-serve furniture store, the seller agrees to\nsimply make the furniture available at its loading dock, and the buyer is\nresponsible for getting it home.\n138\n\n\x0c10.1.4. Common Carrier Contracts. When the parties agree for delivery of goods through use\nof a common carrier (i.e., an independent third party in the business of transporting goods), the\nUCC has specific rules determining the responsibilities of the seller, buyer, and common carrier.\nAnother less common situation is the use of a warehouse, such as when a farmer stores his grain\nat a grain elevator owned by a co-operative.\n10.1.4.1. When dealing with a common carrier or warehouse, \xe2\x80\x9cdocuments of title,\xe2\x80\x9d such\nas a bill of lading, are often (but not always) involved. See \xc2\xa7 1-201(b)(16). For example,\nwhen a sawmill located in Eureka, Montana delivers 1000 board feet of lumber to a\nrailway for delivery to a hardware store located in Spokane, Washington, the railway will\ngive to the sawmill a bill of lading, acknowledging the quantity and type of lumber it is\nshipping. The sawmill then forwards the bill of lading to the hardware store, and the\nhardware store must provide the bill of lading to the railyard in Spokane to pick up the\nlumber (so not just anybody can take it).\n10.1.4.2. There are two types of contracts when using a common carrier.\n10.1.4.2.1. In a destination contract, the seller agrees to be responsible for\ndelivering the goods by common carrier to the agreed-upon destination. Note: all\ndelivery contracts (whether a \xe2\x80\x9cdestination\xe2\x80\x9d or a \xe2\x80\x9cshipment\xe2\x80\x9d contract) have an\nultimate destination; it is not the presence of a specific destination that makes a\ncontract a destination contract! Instead, what makes a destination contract a\ndestination contract is that the seller takes on the responsibility of delivering to the\nspecific destination, rather than just getting it into the hands of a common carrier\nat seller\xe2\x80\x99s warehouse or place of business.\n10.1.4.2.2. All contracts which are not destination contracts are shipment\ncontracts. Comment 5 to \xc2\xa7 2-503 notes that \xe2\x80\x9cshipment\xe2\x80\x9d contracts are regarded\nas the normal (or default) contract.\n10.1.4.2.3. The seller has different duties depending upon whether a shipment\ncontract is involved or a destination contract. Following is a chart of the major\ncategories of shipment contracts and destination contracts:\nShipment Contracts\nF.O.B. place of shipment (\xc2\xa7 2-319(1)(a))\nC.I.F., C.F. (\xc2\xa7 2-320)\nF.A.S. vessel (\xc2\xa7 2-319(2))\nF.O.B. vessel port of shipment (\xc2\xa7 2-319(3))\n\nDestination Contracts\nF.O.B. place of destination (\xc2\xa7 2-319(1)(b))\n\nF.O.B. vessel port of destination (\xc2\xa7 2-319(3))\n\nOver the past several years, these UCC terms have become less frequently used as\nmany sellers, buyers, and common carriers have chosen to incorporate into their\n139\n\n\x0ccontracts the more readable and comprehensive set of INCOTERMS developed by\nthe International Chamber of Commerce. See http://www.iccwbo.org/productsand-services/trade-facilitation/incoterms-2010/the-incoterms-rules.\nProblem 10-5. Read UCC \xc2\xa7 2-504. Identify four duties of the seller under a shipment contract:\n(1)\n(2)\n(3)\n(4)\n10.1.4.3. To determine the duties of the seller under a destination contract, you need to\nrefer to various UCC sections governing specific types of destination contracts. The\nprimary destination contract which we will study is set forth at \xc2\xa7 2-319(1)(b) -- the F.O.B.\ndestination contract.\nProblem 10-6. Read \xc2\xa7 2-319(1)(b). Identify two duties of the seller under an F.O.B. destination\ncontract:\n(1)\n(2)\n10.1.5. Risk of Loss. The time at which the risk of loss transfers from the seller to the buyer is\ndependent upon the type of contract involved. The shifting of the risk of loss is very important,\nand determines who bears the risk of loss for damages to goods in transit. Whoever bears that\nrisk is the person who should pay for insurance against such risk of loss.\nProblem 10-7. Read \xc2\xa7\xc2\xa7 2-509(1) and 2-510. When does the risk of loss pass from the seller to\nbuyer:\n(1) under a shipment contract?\n(2) under a destination contract?\n(3) when the goods or the tender don\xe2\x80\x99t conform to the contract?\nThere is an important exception in UCC \xc2\xa7 2-510. If the goods or the tender do not conform to\nthe contract, then the risk remains on the seller. This makes sense, because as we will see in a\nlater chapter, the buyer has the right to reject the goods in that situation.\n\n140\n\n\x0cRheinberg-Kellerei GMBH v. Vineyard Wine Co.\n281 S.E.2d 425 (N.C. Ct. App. 1981)\nWELLS, Judge\nThe first question presented by plaintiff\'s appeal is whether the trial court was correct in\nits conclusion that the risk of loss for the wine never passed from plaintiff to defendant due to the\nfailure of plaintiff to give prompt notice of the shipment to defendant. Plaintiff made no\nexceptions to the findings of fact contained in the judgment and does not contend that the facts\nfound were unsupported by the evidence. Our review on appeal is limited to a determination of\nwhether the facts found support the court\'s conclusions and the judgment entered. Rule 10(a),\nN.C. Rules of Appellate Procedure; Swygert v. Swygert, 46 N.C. App. 173, 180-81, 264 S.E.2d\n902, 907 (1980).\nAll parties agree that the contract in question was a \xe2\x80\x9cshipment\xe2\x80\x9d contract, i.e., one not\nrequiring delivery of the wine at any particular destination. See J. White & R. Summers, Uniform\nCommercial Code \xc2\xa7 5-2, at 140-42 (1972). The Uniform Commercial Code, as adopted in North\nCarolina, dictates when the transfer of risk of loss occurs in this situation. G.S. 25-2-509(1)(a)\nprovides, in pertinent part:\nRisk of loss in the absence of breach. (1) Where the contract requires or\nauthorizes the seller to ship the goods by carrier (a) if it does not require him to deliver\nthem at a particular destination, the risk of loss passes to the buyer when the goods are\nduly delivered to the carrier even though the shipment is under reservation (25-2-505)....\nBefore a seller will be deemed to have \xe2\x80\x9cduly delivered\xe2\x80\x9d the goods to the carrier, however,\nhe must fulfill certain duties owed to the buyer. In the absence of any agreement to the contrary,\nthese responsibilities [are set forth in UCC \xc2\xa72-504].\nThe trial court concluded that the plaintiff\'s failure to notify the defendant of the shipment\nuntil after the sailing of the ship and the ensuing loss, was not \xe2\x80\x9cprompt notice\xe2\x80\x9d within the\nmeaning of G.S. 25-2-504, and therefore, the risk of loss did not pass to defendant upon the\ndelivery of the wine to the carrier pursuant to the provisions of G.S. 25-2-509(1)(a). We hold that\nthe conclusions of the trial court were correct. The seller is burdened with special responsibilities\nunder a shipment contract because of the nature of the risk of loss being transferred. See W.\nHawkland, 1 A Transactional Guide to the U.C.C. \xc2\xa7 1.2104, at 102-107 (1964). Where the buyer,\nupon shipment by seller, assumes the perils involved in carriage, he must have a reasonable\nopportunity to guard against these risks by independent arrangements with the carrier. The\nrequirement of prompt notification by the seller, as used in G.S. 25-2-504(c), must be construed\nas taking into consideration the need of a buyer to be informed of the shipment in sufficient time\nfor him to take action to protect himself from the risk of damage to or loss of the goods while in\ntransit. But see J. White & R. Summers, Uniform Commercial Code \xc2\xa7 5-2, fn. 12 (1972). It\nwould not be practical or desirable, however, for the courts to attempt to engraft onto G.S. 25-2141\n\n\x0c504 of the U.C.C. a rigid definition of prompt notice. Given the myriad factual situations which\narise in business dealings, and keeping in mind the commercial realities, whether notification has\nbeen \xe2\x80\x9cprompt\xe2\x80\x9d within the meaning of U.C.C. will have to be determined on a case-by-case basis,\nunder all the circumstances. See W. Hawkland, 1 A Transactional Guide to the U.C.C. \xc2\xa7 1.2104,\nat 106 (1964).\nIn the case at hand, the shipment of wine was lost at sea sometime between 12 December\nand 22 December 1978. Although plaintiff did notify its agent, Frank Sutton, regarding pertinent\ndetails of the shipment on or about 27 November 1978, this information was not passed along to\ndefendant. The shipping documents were not received by defendant\'s bank for forwarding to\ndefendant until 27 December 1978, days after the loss had already been incurred. Since the\ndefendant was never notified directly or by the forwarding of shipping documents within the time\nin which its interest could have been protected by insurance or otherwise, defendant was entitled\nto reject the shipment pursuant to the term of G.S. 25-2-504(c).\nProblem 10-8. Read UCC \xc2\xa7 2-509(3). If the parties are not using a common carrier or a\nwarehouse, when does the risk of loss pass from the seller to the buyer in the following\nsituations:\n(1) On Sunday, a car dealer enters into an agreement to sell an automobile to a customer.\nThe agreement provides that the customer will return and pick up the car at the dealer\xe2\x80\x99s\nlot on Monday. During the day on Monday, before the purchaser picks up the car, a\nhailstorm causes significant damage to the car. Who is responsible for paying for the hail\ndamage to the car?\n(2) On Sunday, a law student enters into an agreement to sell an automobile to another\nlaw student. The agreement provides that the buyer will pick up the car Monday; the\nseller gives the keys to the buyer Sunday night, and cleans and leaves the car in front of\nthe seller\xe2\x80\x99s home so that it is available early Monday morning for the buyer. During the\nday on Monday, before the buyer picks it up, a hailstorm hits, causing significant damage\nto the car. Who is responsible for paying for the hail damage to the car?\nProblem 10-9. Now that you understand the duties and responsibilities of sellers and buyers, and\nrisk of loss issues, explain whether a buyer would generally prefer a shipment contract or a\ndestination contract? Why?\nProblem 10-10. In preparation for the hunting season, Ted signs on to Outdoor Sporting Goods\xe2\x80\x99\nwebsite, and orders $500 worth of hunting gear, paying by credit card. The website states: \xe2\x80\x9cInstock merchandise will normally arrive in 3-6 business days after the order is received. Orders\nare shipped via UPS or USPS.\xe2\x80\x9d Fifteen days after he has placed his order, Ted still hasn\xe2\x80\x99t\nreceived the goods. When he calls the customer service hotline, the employee of Outdoor\nSporting Goods informs Ted that UPS picked up his order two days after he ordered it.\n142\n\n\x0cTed asks Outdoor Sporting Goods to track his order. The spokesperson politely points out that\nthey have completed their responsibilities, and Ted is responsible for all shipment problems. Is\nOutdoor Sporting Goods correct?\n10.1.6. Bailment Contracts. Section 2-509(2) deals with the less common bailment situation in\nwhich the goods are held by a third party bailee to be delivered without being moved. A good\nexample of this is a transaction involving agricultural commodities. The farmer delivers his crop\nto a grain silo, receiving a document of title to the grain. When the farmer sells the grain to a\nbuyer, he transfers to the buyer the document of title, allowing the buyer to obtain the grain from\nthe silo. According to \xc2\xa7 2-509(2)(a), at that point the risk of loss of the goods passes to the buyer.\n10.1.7. Choice of Law. We discussed choice of law in Chapter 1, Section 1.8. In the absence of\nthe parties\xe2\x80\x99 agreement, the general rule is that the law of the place of delivery governs contracts\nfor the sale of goods. Restatement (Second) of Conflict of Laws \xc2\xa7 191. Under a shipment\ncontract, the place of delivery will be the seller\xe2\x80\x99s place of business. For example, if a company in\nWashington orders equipment to be shipped by UPS from a company in Wisconsin, then the\nplace of delivery under this shipment contract will be Wisconsin, and absent an agreement\notherwise, Wisconsin law will govern.\nReview Problems: Delivery Terms\n(1) Buyer in Billings, Montana faxes Seller in Seattle, Washington and orders 100 widgets for\n$1,000 to be paid in 30 days. Seller faxes acceptance. At that moment there are 1000 widgets in\nSeller\xe2\x80\x99s warehouse. That night they are destroyed by a fire. Who bears the risk of loss?\n(2) Same facts except Seller put 100 of the widgets in a box and put a label on the box that said,\n\xe2\x80\x9cBuyer. Billings, MT.\xe2\x80\x9d The widgets were then destroyed by a fire. Who bears the risk of loss?\n(3) Same contract and a week later, Buyer calls and asks, \xe2\x80\x9cWhere are my widgets?\xe2\x80\x9d Seller says,\n\xe2\x80\x9cSitting in my warehouse.\xe2\x80\x9d Is Seller responsible for getting them to Buyer, or is Buyer\nresponsible for getting them from Seller?\n(4) Same as the last question, but Seller says, \xe2\x80\x9cIf you want, I\xe2\x80\x99ll have them sent by UPS to\nBillings,\xe2\x80\x9d and Buyer says, \xe2\x80\x9cYes, that\xe2\x80\x99s what I want.\xe2\x80\x9d Seller then bills Buyer $1000 plus $75 for\nshipping. Does Buyer have to pay the $75?\n(5) Same as the last question, except UPS loses the widgets. As between Buyer and Seller, who\nbears the loss?\n(6) Same as #4, except Seller said, \xe2\x80\x9cI\xe2\x80\x99ll pay for the shipping.\xe2\x80\x9d Seller then sent them by UPS and\nUPS lost them. As between Buyer and Seller, who bears the loss?\n143\n\n\x0c(7) Back to the original contract. Assume Seller agreed that the sale would be \xe2\x80\x9cF.O.B. Billings.\xe2\x80\x9d\nSeller shipped the widgets by UPS and UPS lost them. Who bears the risk of loss?\n10.2. Title\n10.2.1. Passage of Title. When does title to the goods pass from the seller to the buyer? Under\nreal property law, there is a \xe2\x80\x9cunitary\xe2\x80\x9d concept under which an entire bundle of rights passes at the\nsame time. For example, title, risk of loss, and possessory rights all transfer at a single moment in\ntime, when the deed is delivered from the seller to the buyer. In a departure from real property\nlaw, when it comes to goods, different rights can pass at different times. For example, risk of loss\ncan pass from buyer to seller before the buyer acquires title or possession of the goods. Rules\ngoverning the passage of title are found at UCC \xc2\xa7 2-401.\nIt is worth noting that \xc2\xa7 2-401(1) provides that \xe2\x80\x9c[a]ny retention or reservation by the seller of the\ntitle (property) in goods shipped or delivered to the buyer is limited in effect to a reservation of a\nsecurity interest.\xe2\x80\x9d You will see the significance of this concept when you study UCC Article 9.\nFor example, I sell you my titled automobile on credit, and we provide in our agreement that I\nwill withhold title until you have paid in full. In fact, I have sold the car to you. Recall that \xc2\xa7 2106(1) provides that a sale \xe2\x80\x9cconsists in the passing of title from the seller to the buyer for a price.\n(\xc2\xa7 2-401).\xe2\x80\x9d Therefore, you have title to the car (even though you do not have the title document)\nand I have a security interest in the car \xe2\x80\x93 the right to repossess it if you default in payment.\n10.2.1.1. First look for an agreement of the parties as to when title passes. For example,\npurchase orders often contain a clause indicating when title to the goods passes from\nseller to buyer. In addition, consider terms that may be added by usage of trade, course of\ndealing, and course of performance.\n10.2.1.2. Under \xc2\xa7 2-401(1), title cannot pass before identification of the goods has\noccurred.\n10.2.1.3. Absent specific agreement otherwise, \xc2\xa7 2-401(2) provides the default rules:\n\xef\x82\xb7\n\nFor a shipment contract, title passes at time and place of shipment.\n\n\xef\x82\xb7\n\nFor a destination contract, title passes upon tender of goods to buyer\nwhen the goods are tendered at the stated destination.\n\n\xef\x82\xb7\n\nFor contracts not involving common carriers, title passes when the seller\nhas performed his obligation to deliver, as determined by the contract.\n\n10.2.1.4. Note that under \xc2\xa7 2-401(4), if a buyer rejects non-conforming goods, or\notherwise refuses the goods (whether justified or unjustified), title revests in the seller.\n144\n\n\x0c10.2.2. Transferor\xe2\x80\x99s Title. Section 2-403 provides that a purchaser of goods acquires all of the\ntitle of transferor, unless by agreement the purchaser acquires less than the whole (such as an\nundivided one-half interest, or a leasehold interest). The term \xe2\x80\x9cpurchaser,\xe2\x80\x9d as used here, includes\ndonees. See \xc2\xa7 1-201(b)(29). In other words, the transferee receives whatever title the transferor\nhas. If the transferor has good title, the transferee will acquire good title. Similarly, if the\ntransferor has something other than good title, the general rule of \xc2\xa7 2-403 is that the transferee\ninherits the transferor\xe2\x80\x99s title problems.\n10.2.2.1. As we studied in Chapter 6, unless specifically and validly disclaimed, the seller\n(whether merchant or non-merchant) warrants that the title conveyed is good, the transfer\nis rightful, and the goods are delivered free from any security interest or other lien, except\nfor those security interests or liens known by the buyer at the time of contracting. UCC\n\xc2\xa7 2-312.\n10.2.2.2. Thus, the purchaser always has a breach of warranty claim against the seller if it\nturns out that the seller breaches this warranty. For example, if a seller sells a stolen\nwatch to the buyer, the buyer can recover from the seller. But what if the seller has\ndisappeared to Costa Rica? What are the rights of the purchaser of the watch, who paid\ngood money for a stolen watch, and the person from whom the watch was stolen? Section\n2-403 addresses the rights of a purchaser versus the rights of third parties who claim a\nright to the purchased goods.\n10.2.2.3. There are three types of title which we will study: good title, voidable title, and\nvoid title.\n10.2.3. Good Title. The concept of \xe2\x80\x9cgood title\xe2\x80\x9d (not a defined term) has developed in the real\nproperty context. It has been defined as a title \xe2\x80\x9cfree from litigation, palpable defects and grave\ndoubts, comprising both legal and equitable titles, and fairly deducible of record.\xe2\x80\x9d First Montana\nTitle Co. v. North Point Square Assoc., 782 P.2d 376, 379 (Mont. 1989). Good title is a title free\nfrom all liens, encumbrances, and claims of third parties. It vests full rights of ownership in the\nowner (unless the transferee acquires a partial interest, such as an undivided one-half interest).\n10.2.4. Voidable Title. The second sentence of \xc2\xa7 2-403 addresses the concept of voidable title,\nand lists a nonexclusive list of situations giving rise to voidable title. When a person with\nvoidable title transfers to a good faith purchaser for value, the transferor\xe2\x80\x99s \xe2\x80\x9cvoidable title\xe2\x80\x9d\nbecomes \xe2\x80\x9cgood title\xe2\x80\x9d in the hands of the purchaser.\n10.2.4.1. If a transferee of property acquires \xe2\x80\x9cvoidable title,\xe2\x80\x9d the transferor has a right to\nrecover the goods from the transferee. For example, if a purchaser buys a new car, and the\ncheck bounces, the purchaser has acquired \xe2\x80\x9cvoidable title,\xe2\x80\x9d and as against the purchaser,\nthe seller has superior rights. But once the transferee, in turn, transfers the goods to a\ngood faith purchaser for value, the new transferee acquires good title, and the original\n145\n\n\x0ctransferor\xe2\x80\x99s right to recover the goods is cut off. UCC \xc2\xa7 2-403(1)(a)-(d) includes a list of\nsituations where a transferee of goods acquires \xe2\x80\x9cvoidable title.\xe2\x80\x9d\na. The transferor was deceived as to the identity of the purchaser;\nb. The goods were delivered in exchange for a check which later is dishonored;\nc. It was agreed that the transaction was to be a \xe2\x80\x9ccash sale;\xe2\x80\x9d\nd. The delivery was procured through fraud punishable as larcenous under the\ncriminal law, such as theft by trickery, where the transferor voluntarily\nrelinquishes goods, but has been tricked (versus theft, where goods are taken\nwithout participation by the transferor).\nNote that this list is non-exclusive. As you recall from your contracts class, other\ninstances where a transferee acquires voidable title include purchase from a minor or a\nperson later claiming mental incompetence.\n10.2.5. Void Title. In contrast to voidable title, which can morph into good title when the goods\nhave subsequently been transferred to a good faith purchaser for value, void title is always void.\nWhere title is void, the rightful owner will prevail against someone who has acquired the goods\ndown the line, even if the current owner was a good faith purchaser for value. Recall your\ncontracts class, for example, that contracts entered into by a person whose mental incapacity has\nbeen judicially determined are void. Note, however, that the statute of limitations might bar the\nrightful owner\xe2\x80\x99s claim against the purchaser. An example is the defense mounted by museums\nagainst the claimants of art works that were stolen during World War II.\nInmi-Etti v. Aluisi\n492 A.2d 917 (Md. App. 1985)\n[Inmi-Etti, while visiting in the United States, decided to buy a car and have it shipped back to\nNigeria. With the aid of an acquaintance, Butler, she placed an order for a new 1981 Honda\nPrelude with Wilson Pontiac for a purchase price of $ 8,500. After making a $200 down\npayment, Inmi-Etti returned to Nigeria, entrusting the cash balance of the purchase price to her\nsister. In a few weeks, the car came in, the sister paid the balance of the purchase price for InmiEtti, and the car was delivered to a sister\xe2\x80\x99s home pending shipment to Nigeria. However, Butler\ntook the automobile, claiming that he was entitled to the car because Inmi-Etti owed him some\nmoney. He filed a suit against Inmi-Etti, and obtained a default judgment for these alleged\namounts owed to him, and sought to execute against the car to satisfy the judgment. This\njudgment was later set aside, but between obtaining the judgment and receiving notice that it had\nbeen set aside, Butler sold the car to a local car dealer, Pohanka, for the discount price of $7,200.\nPohanka turned around and sold the car to another purchaser for $8200. Inmi-Etti brought a suit\nfor conversion against Butler and Pohanka. (The defendant Aluisi is the County Sheriff who\n146\n\n\x0clevied on the car on behalf of Butler).]\nKARWACKI, Judge\n\xe2\x80\xa6.\nAt common law the maxim was: "He who hath not cannot give (nemo dat qui non\nhabet)." Black\'s Law Dictionary 935 (5th ed. 1979). Although at times the Uniform Commercial\nCode may seem to the reader as unintelligible as the Latin phrases which preceded it, we find in\n\xc2\xa7 2-403 of the Code a definite modification of the above maxim. That section states:\n(1) A purchaser of goods acquires all title which his transferor had or had power to\ntransfer except that a purchaser of a limited interest acquires rights only to the extent of\nthe interest purchased. A person with voidable title has power to transfer a good title to a\ngood faith purchaser for value. . . .\nIn short, the answer to the appellant\'s claim against Pohanka depends on whether Butler\nhad "void" or "voidable" title at the time of the purported sale to Pohanka. If Butler had voidable\ntitle, then he had the power to vest good title in Pohanka. If, on the other hand, Butler possessed\nvoid title (i.e., no title at all), then Pohanka received no title and is liable in trover for the\nconversion of the appellant\'s automobile. Preliminarily, we note that there was no evidence that\nButler was a "merchant who deals in goods of that kind" (i.e. automobiles). Md. Code, supra,\n\xc2\xa7\xc2\xa7 2-403(2) and 2-104(1). Therefore the entrustment provisions of \xc2\xa7\xc2\xa7 2-403(2)-(3) do not apply.\nIt has been observed that:\nUnder 2-403, voidable title is to be distinguished from void title. A thief, for example,\n"gets" only void title and without more cannot pass any title to a good faith purchaser.\n"Voidable title" is a murky concept. The Code does not define the phrase. The comments\ndo not even discuss it. Subsections (1)(a)-(d) of 2-403 clarify the law as to particular\ntransactions which were "troublesome under prior law." Beyond these, we must look to\nnon-Code state law.\nJ. White & R. Summers, Handbook of the Law Under the Uniform Commercial Code \xc2\xa7 3-11 (2d\ned. 1980) (footnote omitted). White and Summers further explain that: subsection (a) of \xc2\xa7 2403(1) deals with cases where the purchaser impersonates someone else; subsection (b) deals\nwith "rubber checks"; subsection (c) deals with "cash sales"; and subsection (d) deals with cases\nof forged checks and other acts fraudulent to the seller. Id. None of these subsections apply to the\nfacts of the present case and we, therefore, must turn to "non-Code state law" to determine\nwhether Butler had voidable title.\nHawkland, supra, \xc2\xa7 403:04, suggests that "voidable title" may only be obtained when the\nowner of the goods makes a voluntary transfer of the goods. He reaches that conclusion from the\n147\n\n\x0cCode definitions of the words "delivery" and "purchase" and summarizes:\nSection 2-403(1)(d) does not create a voidable title in the situation where the goods are\nwrongfully taken, as contrasted with delivered voluntarily because of the concepts of\n"delivery" and "purchaser" which are necessary preconditions. "Delivery" is defined by\nsection 1-201(14) "with respect to instruments, documents of title, chattel paper or\nsecurities" to mean "voluntary transfer of possession." By analogy, it should be held that\ngoods are not delivered for purposes of section 2-403 unless they are voluntarily\ntransferred. Additionally, section 2-403(1)(d) is limited by the requirement that the goods\n"have been delivered under a transaction of purchase." "Purchase" is defined by section 1201(32) to include only voluntary transactions. A thief who wrongfully takes goods is not\na purchaser within the meaning of this definition, but a swindler who fraudulently induces\nthe victim to voluntarily deliver them is a purchaser for this purpose. This distinction,\nreminiscent of the distinction between larceny and larceny by trick made by the common\nlaw, is a basic one for the understanding of the meaning of section 2-403(1)(d).\nHawkland later states that the above language applies generally to \xc2\xa7 2-403(1) and not merely to\nsubsection (1)(d). See Hawkland, supra, \xc2\xa7\xc2\xa7 2-403:05. The following cases and, indeed, (a)\nthrough (d) of \xc2\xa7\xc2\xa7 2-403(1) seem to support Hawkland\'s theory that only a voluntary transfer by\nthe owner can vest "voidable title" in a "person." In Mowan v. Anweiler, 454 N.E.2d 436 (1983)\nthe Court of Appeals of Indiana held that the purchaser of an automobile gained title from his\nseller who had purchased the car with a bad check and then declared bankruptcy. The transfer\nfrom the original owner to the bankrupt seller was clearly voluntary. That same court in\nMcDonald\'s Chevrolet, Inc. v. Johnson, 176 Ind. App. 399, 376 N.E.2d 106 (1978), held that the\npurchaser of a motor home obtained no title because the motor home was stolen from its original\nowner by a person who was renting it for a short period of time. The court reasoned that the thief\npossessed void title (even though at the time of the theft he was in lawful possession), and his\ntransfer to the defendant could not convey good title. Therefore, the plaintiff could recover for\nthe defendant\'s breach of warranty of title. Another point of interest to the case sub judice was the\nfact that the defendant in McDonald\'s Chevrolet received from the thief, his seller, a facially\nvalid title certificate. The court specifically noted that the defendant\'s diligence in checking the\ntitle and his status as a good faith purchaser were "not determinative" since his seller did not\npossess "voidable title."\nIn Allstate Ins. Co. v. Estes, 345 So.2d 265 (1977) the Supreme Court of Mississippi held\nthat a good faith purchaser for value could not obtain title to an automobile from his transferor.\nThe court explained:\nAppellee contends that the facially valid Mississippi title, ultimately based upon an\nAlabama tag receipt issued pursuant to a forged bill of sale, resulted in "voidable title" in\nHoward [appellee\'s seller] with its concomitant power. The appellant, Allstate Insurance\nCompany, who obtained valid title subsequent to paying the Florida dealer\'s loss,\n148\n\n\x0ccontends its ownership was unaffected by the intervening good faith "equities" of Estes\n[the appellee].\nThe dictate of Section 75-2-403 is clear. Regardless of the number of transactions, one\ncannot remove himself from the confines of the rule: A purchaser can take only those\nrights which his transferor has in the subject goods; a thief has neither title nor the power\nto convey such. Gurley v. The Phoenix Ins. Co., 233 Miss. 58, 101 So.2d 101 (1958).\nAccordingly, title remained in Allstate and the circuit court order granting possession to\nEstes was erroneous.\nId. at 266.\nIn Schrier v. Home Indemnity Co., 273 A.2d 248 (D.C. App.1971) the District of\nColumbia Court of Appeals held that "voidable title" could only be obtained by "persons who\nhave been entrusted with the possession of the goods they sell by consignors, creditors with\nunrecorded security interests, and certain other kinds of bailors." Id. at 250 (citation and footnote\nomitted). That court continued: "But a possessor of stolen goods, no matter how innocently\nacquired, can never convey good title." Id.\nWithout attempting to specify all the situations which could give rise to a voidable title\nunder \xc2\xa7 2-403 of the Uniform Commercial Code, we refer to the above authorities to support our\nconclusion that voidable title under the Code can only arise from a voluntary transfer or delivery\nof the goods by the owner. If the goods are stolen or otherwise obtained against the will of the\nowner, only void title can result.\nUnder the undisputed facts of the present case Butler possessed void title when Pohanka\ndealt with him. Although the record simply is not sufficient for us to decide whether Butler\nactually stole the appellant\'s vehicle, it is undisputed that the appellant at no time made a\nvoluntary transfer to Butler. Thus, Pohanka obtained no title, and its sale of the vehicle\nconstituted a conversion of the appellant\'s property. We believe the above analysis sufficient to\nimpose liability upon Pohanka. . . . .\nImplicit in all that we have said so far is the fact that Butler did not obtain title (voidable\nor otherwise) merely from the fact that he was able to convince the Motor Vehicle\nAdministration to issue a certificate of title for the automobile to him [which he obtained through\na falsified affidavit after having delivered the car to Pohanka.] Although "[a] certificate of title\nissued by the Administration is prima facie evidence of the facts appearing on it," Md. Code\n(1977, 1984 Repl. Vol.), \xc2\xa7 13-107 of the Transportation Article, the erroneous issuance of such a\ncertificate cannot divest the title of the true owner of the automobile. Metropolitan Auto Sales v.\nKoneski, 252 Md. 145, 249 A.2d 141 (1969); Huettner v. Sav. Bank of Balto., 242 Md. 477, 219\nA.2d 559 (1966); Lawrence v. Graham, 29 Md. App. 422, 349 A.2d 271 (1975).\n\n149\n\n\x0cLikewise, we find unpersuasive Pohanka\'s argument that since Butler had possession of\nthe automobile and a duly issued certificate of title in his name, Pohanka should be protected as a\n"good faith purchaser for value" under \xc2\xa7 2-403 of the Commercial Law Article, supra. Such\nstatus under that section of the Uniform Commercial Code is relevant in situations where the\nseller (transferor) is possessed of voidable title. It does not apply to the situation presented by the\ninstant case where the seller had no title at all. McDonald\'s Chevrolet, 376 N.E.2d at 109110. . . .\nAccordingly, we shall reverse the summary judgment in favor of Pohanka and enter\njudgment in favor of the appellant against Pohanka for $ 8,200, an amount representing the\nagreed fair market value of the appellant\'s automobile at the time of its conversion. . . .\nCase Note. Does Pohanka have any remedy? Hint: review UCC \xc2\xa7 2-312(1)(a).\nProblem 10-11. Claude inherited a valuable piece of western art from his aunt. While packing\nhis aunt\xe2\x80\x99s belongings after her death, the painting was inadvertently placed in a box of goods to\nbe donated to the Salvation Army. Without realizing that the painting was in the box, Claude\ndropped off the box at the Salvation Army. After unpacking all of the boxes a few weeks later,\nClaude realized the painting was missing, tracked it down to the Salvation Army, and sought its\nreturn. However, the Salvation Army had sold the painting to Bob for $25.00. Did the Salvation\nArmy have void or voidable title? See Kenyon v. Abel, 36 P.3d 1161 (Wyo. 2001).\n10.2.6. Good Faith Purchaser for Value. Read UCC \xc2\xa7 2-403. If a person acquires voidable title,\nfor example, by use of trickery against the rightful owner, and that person then transfers the\ngoods to a good faith purchaser for value, the good faith purchaser for value acquires good title,\nand cuts off the original owner\xe2\x80\x99s rights to the goods.\n10.2.6.1. \xe2\x80\x9cGood faith\xe2\x80\x9d is defined at \xc2\xa7 1-201(b)(20) as \xe2\x80\x9chonesty in fact and the observance\nof reasonable commercial standards of fair dealing.\xe2\x80\x9d\n10.2.6.2. \xe2\x80\x9cPurchaser\xe2\x80\x9d is defined at \xc2\xa7 1-201(b)(30) as a person who takes by \xe2\x80\x9cpurchase,\xe2\x80\x9d\nwhich is defined at \xc2\xa7 1-201(b)(29) to include taking by sale, lease, discount, negotiation,\nmortgage, pledge, lien, security interest, issue, gift, or any other voluntary transaction\ncreating an interest in property.\n10.2.6.3. \xe2\x80\x9cValue\xe2\x80\x9d is defined at \xc2\xa7 1-204 to include \xe2\x80\x9cany consideration sufficient to support\na simple contract.\xe2\x80\x9d\n10.2.6.4. There is a lot of litigation over what constitutes a \xe2\x80\x9cgood faith purchaser for\nvalue.\xe2\x80\x9d For example, what if someone offers to sell to you for $2,000 a painting which\nyou know is worth $20,000. Should the bargain price put you on notice that there may be\nproblems with the title to the painting? What constitutes "good faith" was considered in\n150\n\n\x0cHollis v. Chamberlin, 419 S.W.2d 116 (Ark. 1967). Joe purchased a new pick-up camper\ntop from a local dealer, and paid for it with a $1750 check that bounced, thus acquiring\n\xe2\x80\x9cvoidable title.\xe2\x80\x9d Joe then took the camper to another dealer, and sold it to that dealer for\n$500 cash. Joe advised the second dealer that he wanted to sell the camper because it did\nnot fit properly on his truck, and it obviously did not. It was not even tied down. The\ncamper looked new. No questions were asked as to why it was not tied down. Joe had no\nbill of sale. The court felt that there were "facts and circumstances which were calculated\nto have aroused \xe2\x80\xa6 curiosity" as to ownership of the camper, stating "[i]nadequacy of the\nprice, when very great, is of itself evidence \xe2\x80\xa6 of an infirmity in [the] seller\'s title and\nconsideration is to be given it, in connection with other circumstances, in determining\nwhether a buyer is a purchaser without notice." Id. at 119. The court concluded that the\nsecond dealer was not a \xe2\x80\x9cgood faith purchaser for value,\xe2\x80\x9d and thus he did not acquire\n\xe2\x80\x9cgood title\xe2\x80\x9d but \xe2\x80\x9cvoidable title,\xe2\x80\x9d against which the original dealer prevailed.\n10.2.7. Entrustment. What if you take your skis to the ski shop for waxing, and an\ninexperienced employee sells the skis to a customer in the store who wants to buy a good pair of\nused skis. Does the purchaser acquire good title? This situation is governed by UCC \xc2\xa7 2-403(2).\nWhen goods are entrusted to a merchant who deals in goods of that kind, the merchant has the\npower to transfer all rights of the owner to a buyer in ordinary course of business.\n10.2.7.1. Notice that this only applies when you have entrusted goods to a merchant who\ndeals in goods of that kind. So if I take my skis to a friend to be waxed, the friend, not\nbeing a merchant of skis, has no power to transfer title to my skis.\n10.2.7.2. The purchaser must be a \xe2\x80\x9cbuyer in ordinary course of business,\xe2\x80\x9d which is\ndefined at \xc2\xa7 1-201(b)(9) as a \xe2\x80\x9cperson that buys goods in good faith, without knowledge\nthat the sale violates the rights of another person in the goods, and in the ordinary course\nfrom a person, other than a pawnbroker, in the business of selling goods of that kind.\xe2\x80\x9d In\nother words, the goods have to look like the regular inventory of the seller.\n10.2.7.2.1. Notice the exclusion of purchases from \xe2\x80\x9cpawnbrokers.\xe2\x80\x9d You cannot\nqualify as a \xe2\x80\x9cbuyer in ordinary course of business\xe2\x80\x9d when buying at a pawn shop,\npresumably because everyone knows that thieves often try to sell stolen goods\nthrough pawn shops.\n10.2.7.3. The statute says that the entruster has the power to transfer title, not the right to\ntransfer title. Therefore, the person who left his or her skis at the ski shop has a claim\nagainst the ski shop itself, but not against the person who bought the skis in ordinary\ncourse of business from the ski shop.\n\n151\n\n\x0cChapter 10 Additional Sources.\nScott J. Burnham, Glannon Guide to Sales: Learning Sales Through Multiple-Choice Questions\nand Analysis (Wolters Kluwer 2d ed., 2012), Chapter 13\nJames J. White and Robert S. Summers, Uniform Commercial Code (West 6th ed., 2010),\nChapter 5\n\n152\n\n\x0cChapter 11. Impracticability (Excuse by Failure of Presupposed\nConditions)\n11.1. Common Law. At common law, a party to a contract is excused from performing his or her\nobligations if, \xe2\x80\x9cafter a contract is made, a party\'s performance is made impracticable without his\nfault by the occurrence of an event the non-occurrence of which was a basic assumption on\nwhich the contract was made.\xe2\x80\x9d Restatement (Second) of Contracts \xc2\xa7 261.\n11.1.1. Initially, many courts imposed the strict standard of impossibility of performance\nbefore excusing a party from its contractual obligations. In more recent years, courts have\nshifted to the adoption and application of the standard of impracticability (rather than\nimpossibility) as set forth above in \xc2\xa7 261 of the Restatement.\n11.1.2. The UCC was a forerunner in the development of the shift from \xe2\x80\x9cimpossibility\xe2\x80\x9d to\n\xe2\x80\x9cimpracticability.\xe2\x80\x9d The drafters sought to codify "the ever-shifting line, drawn by courts\nhopefully responsive to commercial practices and mores, [under] which the community\'s\ninterest in having contracts enforced according to their terms is outweighed by the\ncommercial senselessness of requiring performance." Transatlantic Financing Corp. v.\nUnited States, 363 F.2d 312, 315 (D.C. Cir. 1966).\n11.1.3. Under the principle of freedom of contract, the parties may specifically agree to a\ndischarge of their obligations in the event of certain occurrences. These are typically\nknown as force majeure clauses, and the use of such clauses may preempt application of\nthe common law or the default rules set forth in the UCC.\n11.1.4. For a history of the development of the doctrine of impracticability, see J. Wladis,\nImpracticability as Risk Allocation: The Effect of Changed Circumstances upon Contract\nObligations for the Sale of Goods, 22 Ga. L. Rev. 503 (1988). For its development in an\ninternational context, see M. Baker, "A Hard Rain\'s A-Gonna Fall" - Terrorism and\nExcused Contractual Performance in a Post September 11th World, 17 Transnatl. Law. 1\n2004).\n11.1.5. Note that the consequence of excuse is that a party is not in breach. It may be\nnecessary after excuse to make some adjustment between the parties using principles of\nreliance and restitution. See Restatement (Second) of Contracts \xc2\xa7 272.\n11.2. The UCC Scheme: \xc2\xa7 2-615. Four sections in the UCC address changes in circumstances\nafter the formation of a contract for the sale of goods: \xc2\xa7 2-613 (Casualty to Identified Goods),\n\xc2\xa7 2-614 (Substituted Performance), \xc2\xa7 2-615 (Excuse by Failure of Presupposed Conditions), and\n\xc2\xa7 2-616 (Procedure on Notice Claiming Excuse). We\xe2\x80\x99ll start our analysis with \xc2\xa7 2-615.\n153\n\n\x0cProblem 11-1.\n(1) Which party is entitled to excuse under UCC \xc2\xa7 2-615?\n(2) From what aspect of performance is that party excused?\n(3) After reading \xc2\xa7 2-615(a), define the elements which must be established:\nperformance has been made _____________________\nby either (1):\nthe occurrence of a __________________\nthe non-occurrence of which was a _____________________________ on which\nthe contract was made.\nOr by (2)\nGood faith compliance with a foreign or domestic _______________________,\neven if it is later determined to be invalid.\n11.2.1. Although UCC \xc2\xa7 2-615 specifically refers to a seller whose performance has\nbecome impracticable, most courts have stated that the doctrine of impracticability is\navailable to excuse buyers as well, if the buyer otherwise establishes the elements of \xc2\xa7 2615. Lawrance v. Elmore Bean Warehouse, 702 P.2d 930 (Id. App. 1985). See also the\nlast sentence of Comment 9 -- \xe2\x80\x9cthe reason of the present section may well apply and\nentitle the buyer to the exemption.\xe2\x80\x9d\n11.2.2. The governmental action excuse, which has been expanded from common law\nunder the UCC to include action by a foreign government, has been traditionally applied\nby the courts. As noted in Comment 10, the seller\xe2\x80\x99s \xe2\x80\x9cgood faith belief in the validity of\nthe regulation is the test ... and the best evidence of his good faith is the general\ncommercial acceptance of the regulation.\xe2\x80\x9d In a case involving a contract dispute between\nan American radio manufacturer and a Swedish company serving as its exclusive\ndistributor to Iran, the court excused the manufacturer from performing its obligations as\na result of the U.S. government\'s informal requirements prohibiting all sales to Iran of\ngoods. Harriscom Svenska, AB v Harris Corp., 3 F.3d 576 (2d Cir. 1993).\n11.2.3. As noted in Comment 4 to \xc2\xa7 2-615, the concepts of "failure of basic assumption"\nand "impracticability" are fundamental to an understanding of subsection 2-615(a). Both\nelements must be present before a seller is excused.\n154\n\n\x0c11.3. Failure of Basic Assumption. As discussed above, in order to be excused under \xc2\xa7 2615(a), a contingency must occur, the non-occurrence of which was a basic assumption on\nwhich the contract was made.\n11.3.1. First, the Comments indicate that a contingency must occur which was\n"unforeseen." Comment 1 refers to "unforeseen supervening circumstances not within the\ncontemplation of the parties at the time of contracting." Comment 4 refers to an\n"unforeseen contingency which alters the essential nature of the performance." However,\ncomplete non-foreseeability is not the test. "After all, as Williston has said, practically\nany occurrence can be foreseen but whether the foreseeability is sufficient to render\nunacceptable the defense of impossibility is \'one of degree\'. . . ." Opera Co. of Boston v.\nWolf Trap Foundation for the Performing Arts, 817 F.2d 1094, 1101-02 (4th Cir. 1987).\n11.3.2. Second, as noted by the court in Transatlantic Financing Corp. v. United States,\n363 F.2d 312, 315 (D.C. Cir. 1966), even if there is an unforeseen contingency, the risk of\nthe non-occurrence of that contingency \xe2\x80\x9cmust not have been allocated either by agreement\nor by custom.\xe2\x80\x9d If one or the other of the parties assume a risk, even if all of the particulars\nof that risk are not discussed or known in advance, \xe2\x80\x9cthis fact should legitimately cause us\nto judge the impracticability of performance ... in stricter terms than we would were the\ncontingency unforeseen.\xe2\x80\x9d\n11.3.3. Other courts have also noted that in order to successfully assert the affirmative\ndefense of commercial impracticability, the party must show that the unforeseen event\nupon which excuse is predicated is due to factors beyond the party\'s control. Roth Steel\nProducts v. Sharon Steel Corp., 705 F.2d 134, 149-50 (6th Cir. 1983).\n11.3.4. Two relatively frequent \xe2\x80\x9ccontingencies\xe2\x80\x9d which give rise to the applicability of\nUCC \xc2\xa7 2-615 include failure of a source of supply and unexpected increases in costs. For\nexample, Hunts agrees to deliver 1000 tons of tomato paste to Krogers. Due to\nunexpected frosts in California, its tomato suppliers are unable to deliver the tomatoes\nrequired to manufacture the tomato paste. Or what if, as a result of the frost, tomato\nprices increase tenfold, making it unprofitable to manufacture the tomato paste? Is the\nfrost an unforeseen contingency the non-occurrence of which was a basic assumption on\nwhich the contract was made which will excuse Hunts from its obligation to provide the\ntomato paste at the agreed-upon price? Read Comments 4 and 5 to \xc2\xa7 2-615 and the\nfollowing cases.\n\n155\n\n\x0cAlamance County Bd. of Educ. v. Bobby Murray Chevrolet, Inc.\n465 S.E.2d 306 (N.C. App. 1996)\n[Bobby Murray Chevrolet, an authorized dealer of General Motors products, agreed to sell 1,200\nschool bus chassis to the State of North Carolina. Unfortunately, Bobby Murray Chevrolet was\nunable to obtain a sufficient number of chassis from General Motors. The purchaser covered by\nbuying the chassis elsewhere, and sued Bobby Murray Chevrolet for the added cost of\napproximately $150,000. Bobby Murray Chevrolet argued that it was excused from its obligation\nto deliver the chassis, because its sole source, General Motors, was unable to deliver the chassis\nto Bobby Murray Chevrolet.]\nBobby Murray admits the bus chassis ordered by plaintiff school boards were never\ndelivered. However, Bobby Murray contends its lack of performance should be excused pursuant\nto [\xc2\xa7 2-615] . . . .\nBobby Murray asserts two arguments based upon the foregoing statute. It contends the\nfailure of GM to supply the bus chassis was "a contingency the nonoccurrence of which" was a\nbasic assumption of the underlying contracts between Bobby Murray and plaintiffs. Second,\nBobby Murray claims governmental regulation [reducing emissions] after 1 January 1991 was an\nintervening factor which should operate as an excuse. . . .\nU.C.C. \xc2\xa7 2-615 has its roots in the relatively recent common law doctrines of\nimpossibility of performance and frustration of purpose, which evolved from the original\ncommon law rule that parties to a contract were to be held absolutely to its terms. Thomas R.\nHurst, Freedom of Contract in an Unstable Economy: Judicial Reallocation of Contractual Risks\nUnder U.C.C. Section 2-615, 54 N.C. L. Rev. 545, 549 (1976). The official comments to \xc2\xa7 2-615\nindicate that both doctrines were intended to be embraced within a U.C.C. concept denominated\n"commercial impracticability." Id. at 554.\nCommentators have asserted that the drafters of the U.C.C. intended "commercial\nimpracticability" to allow a more liberal standard in releasing promisors from contracts than the\ncommon law had afforded, but have also noted that courts generally have declined to heed such\nalleged intent. Paula Walter, Commercial Impracticability in Contracts, 61 St. John\'s L. Rev.\n225, 227 (Winter 1987).\nIn order to be excused under \xc2\xa7 2-615, a seller of goods must establish the following\nelements:\n(1) performance has become "impracticable";\n(2) the impracticability was due to the occurrence of some contingency which the parties\nexpressly or impliedly agreed would discharge the promisor\'s duty to perform;\n(3) the promisor did not assume the risk that the contingency would occur;\n156\n\n\x0c(4) the promisor seasonably notified the promisee of the delay in delivery or that delivery\nwould not occur at all[.]\nHurst, supra, at 553-554.\nUtilizing the foregoing criteria as well as the official commentary to \xc2\xa7 2-615 and case law\nfrom other jurisdictions, we now consider Bobby Murray\'s arguments on appeal.\nInitially, Bobby Murray contends an implied condition of its contract with plaintiffs was\nthe ability of GM to manufacture and supply the ordered bus chassis. We agree that when an\nexclusive source of supply is specified in a contract or may be implied by circumstances to have\nbeen contemplated by the parties, failure of that source may excuse the promisor from\nperformance. N.C.G.S. \xc2\xa7 25-2-615, Official Comment 5. However, neither contingency is\nreflected in the record herein.\nBobby Murray insists in its brief that "appellant disclosed in the bid that the chassis\nwould be manufactured by Chevrolet and Plaintiff-Appellees had knowledge that Appellant\'s\nsole source of supply was General Motors." However, Bobby Murray points to no record\nevidence of such knowledge on the part of plaintiffs, and appears to rely solely upon its status as\na GM franchisee to support its assertion.\nBy contrast, we note that the "General Contract Terms and Conditions" on Form TC-1,\nincorporated into the bid document, contain the following section entitled\n"MANUFACTURER\'S NAMES":\nAny manufacturers\' names, trade names, brand names, information and/or catalog\nnumbers used herein are for purpose(s) of description and establishing general quality\nlevels. Such references are not intended to be restrictive and products of any manufacturer\nmay be offered.\nFurther, no clause in the contract between plaintiffs and Bobby Murray conditioned the\nlatter\'s performance on its ability to obtain bus chassis from its manufacturer. See William H.\nHenning & George I. Wallach, The Law of Sales Under the Uniform Commercial Code, P\n5.10[2], S5-4 (1994 Supplement)(generally, where seller fails to make contract with buyer\ncontingent on adequate supply, courts reluctant to excuse seller). Plaintiffs aptly point to Richard\nM. Smith and Donald F. Clifford, Jr., North Carolina Practice, Uniform Commercial Code\nForms Annotated, Vol. 1, \xc2\xa7 2-615, Form 3 (1968), which indicates a seller of goods may limit its\nliability by inclusion of the following "Single Source Clause":\nIt is expressly understood that the seller has available only one source, [name of single\nsource], of [address], for the [name or identify the raw materials obtained by the seller\nfrom the single source] used by the seller in the manufacture of the goods for the buyer\nunder this contract. In the event of any interference or cessation of the supply from the\n157\n\n\x0cseller\'s source of supply, the seller shall be temporarily, proportionately, or permanently\nrelieved of liability under this contract, depending upon whether the interruption of the\nsource of supply is a temporary interruption, a reduced delivery of materials, or a\npermanent cessation of supply.\nMoreover, assuming arguendo GM was contemplated by the parties as Bobby Murray\'s\nexclusive source, the record reflects that Bobby Murray assumed the risk of its failure to supply\nthe vehicles, as it was foreseeable that GM might not supply the bus chassis. Failure to make\nexpress provision for a foreseeable contingency in a sales contract implicitly places the burden of\nloss on the seller when the contingency comes to fruition. Barbarossa & Sons, Inc. v. Iten\nChevrolet, Inc., 265 N.W.2d 655, 659 (Minn. 1978)(contingency that seller would be unable to\nprocure truck from General Motors "was clearly . . . foreseen . . . before entering the contract,"\nand thus seller not excused).\nForeseeability under \xc2\xa7 2-615 is an objective standard; it matters not whether the seller\nthought a certain event would or would not occur, but what contingencies were reasonably\nforeseeable at the time the contract was made. Henning & Wallach, supra, at P 5.10[2], 5-36\n(1992). Examination of the record reveals that cancellation of chassis orders by GM was a risk\nreasonably foreseeable to Bobby Murray. . . .\nOfficial Comment 5 of N.C.G.S. \xc2\xa7 25-2-615, regarding failure of sources of supply,\nwarns: "There is no excuse under this section, however, unless the seller has employed all due\nmeasures to assure himself that his source will not fail." The comment cites Canadian Industrial\nAlcohol Co. v. Dunbar Molasses Co., 258 N.Y. 194, 179 N.E. 383 (1932), in which a middleman\ncontracted to supply a buyer with molasses. When the middleman\'s source was unable to deliver\nthe required amount of molasses, the former claimed the excuse of impossibility. The court\ndeclined "to accept this defense because the middleman had not even bothered to obtain a\ncontract from the refinery to cover his obligations." Henning & Wallach, supra, at P 5.10[1], 535 (1992); cf. Lane v. Coe, 262 N.C. 8, 136 S.E.2d 269 (1964)(when defendant\'s ability to\nperform depends upon cooperation of third party, defendant cannot rely on third party\'s later\nrefusal to cooperate to claim impossibility).\nSimilarly, the record herein contains no evidence of a contract between Bobby Murray\nand GM to ensure delivery of the ordered chassis. Robin J. Fleming, fleet sales manager of\nBobby Murray, in deposition simply claimed GM had never before failed to produce vehicles for\nwhich it had taken orders while he had been with Bobby Murray, notwithstanding provisions in\nthe "Dealer Sales and Service Agreement" to the effect that orders did not bind GM until the\nvehicles were "Released to Production" and that certain specified factors might affect production.\nMoreover, during the time orders were accepted from plaintiffs, Bobby Murray also\nreceived a DCS message revealing that GM was experiencing shortages of Allison automatic\ntransmissions. Bobby Murray therefore also had actual notice its source of supply might fail.\n158\n\n\x0c[The court also rejected Bobby Murray\xe2\x80\x99s argument that government regulations requiring\nreduced emissions excused its performance of the contract, noting that Bobby Murray, by terms\nof the parties\' agreement, accepted responsibility for keeping abreast of governmental regulations\nbearing upon the contract.]\nCase Notes:\n1. As noted in the case, if it is your intent to allow your client to walk away from its\nobligations under a contract if your client\xe2\x80\x99s intended source of supply dries up, it is very\nimportant to insert a clause in the agreement to that effect. Even then, as noted in\nComment 5, the seller must employ \xe2\x80\x9call due measures to assure himself that his source\nwill not fail.\xe2\x80\x9d\n2. Courts have come to varied conclusions about whether crop failures are foreseeable. In\nCliffstar Corp. v. Riverbend Prod., Inc., 750 F. Supp. 81 (W.D.N.Y. 1990), the court\nreversed a summary judgment opinion that a tomato crop failure was foreseeable, and\nremanded for a jury trial. In Clark v. Wallace County Cooperative Equity Exchange, 986\nP.2d 391 (Kan. Ct. App. 1999), the court ruled that a corn crop failure was not sufficient\nto excuse a seller from delivering the agreed-upon amount of corn.\nLawrance v. Elmore Bean Warehouse\n702 P.2d 930 (Id. App. 1985)\nAppellant Elmore Bean Warehouse, Inc., had contracted to purchase pinto beans from a\ngrower, Lawrance, at a fixed price. When the market price of the beans dropped dramatically\nbelow the contract price, Elmore attempted to avoid paying the agreed price for the beans on the\ngrounds of "commercial impracticability." The grower sued in the magistrate division and\nrecovered judgment for the balance due on the contract. Elmore appealed from the judgment to\nthe district court, but was unsuccessful there. A second appeal was taken to this court. We agree\nwith the two prior decisions holding that the doctrine of "commercial impracticability" is not an\navenue by which Elmore can escape its contractual obligation. We affirm the order of the district\ncourt.\nOn May 14, 1981, a representative from Elmore Bean Warehouse (hereinafter referred to\nas Elmore) approached Lawrance about growing pinto bean seed. That day a written contract was\nentered into by the parties whereby Lawrance agreed to grow and sell to Elmore eighteen and a\nhalf acres of pinto beans and Elmore agreed in turn to pay $ 25 per hundredweight for the beans\nif they were of commercial quality. An additional $ 3 per hundredweight was to be paid when the\npinto beans were certified and another $ 2 per hundredweight was to be added if Lawrance\nwaited until February 15, 1982 for payment.\nThat fall Lawrance harvested and delivered 240 hundredweight "sacks" of beans. The\nbeans were accepted by Elmore and remained in Elmore\'s possession. By the fall of 1981 the\n159\n\n\x0cmarket price for pinto bean seed had dropped well below the contract price. In January, Elmore\nasked Lawrance if he would accept $ 18 per hundredweight for the pinto beans. Lawrance\ndeclined. The parties did agree orally to extend the time for payment until July 1, 1982. Elmore\npaid Lawrance $ 1,137.60, fifteen percent of the amount owing on the contract, but the remaining\namount due on July 1, 1982 was not paid. Lawrance brought suit to collect the remaining eightyfive percent.\nA trial before a magistrate was held. After hearing testimony, the magistrate held Elmore\nshould be held accountable for the full contract price -- $ 30 per hundred-weight.... The\nmagistrate also held that the decrease in the market price was foreseeable and a risk associated\nwith the business; therefore, performance of the contract was not commercially impractical. . . .\nThis judgment was upheld when Elmore appealed to the district court. Elmore now\nappeals the district court\'s decision upholding the magistrate\'s findings of fact and conclusions of\nlaw. The only issue raised in this appeal is whether the lower court erred in failing to rule that\nElmore was entitled to relief from the terms of the contract because of commercial\nimpracticability.\nElmore asserts that payment of $ 30 per hundredweight is commercially impractical\nbecause of the tremendous drop in the market price and the lack of a market for pinto bean seeds.\nCommercial impracticability is defined in I.C. \xc2\xa7 28-2-615:\nExcept so far as a seller may have assumed a greater obligation and subject to the\npreceding section on substituted performance:\n(a) Delay in delivery or nondelivery in whole or in part by a seller who complies with\nparagraphs (b) and (c) is not a breach of his duty under a contract for sale if performance\nas agreed has been made impracticable by the occurrence of a contingency the\nnonoccurrence of which was a basic assumption on which the contract was made or by\ncompliance in good faith with any applicable foreign or domestic governmental\nregulation or order whether or not it later proves to be invalid. [Emphasis added.]\nWhile this language expressly frees only sellers from their obligations, the last sentence of\ncomment 9 to this section of the Idaho/Uniform Commercial Code states that in certain\ncircumstances at least "the reason of the present section may well apply and entitle the buyer to\nthe exemption." Therefore, the provisions are applicable to buyers as long as there is compliance\nwith the statutory requirements. Hancock Paper Co. v. Champion International Corp., 424 F.\nSupp. 285 (E.D.Pa.1976). See Northern Illinois Gas Co. v. Energy Cooperative, Inc., 122\nIll.App.3d 940, 78 Ill. Dec. 215, 461 N.E.2d 1049 (1984); see also J. WHITE & R. SUMMERS,\nHANDBOOK OF THE LAW UNDER THE UNIFORM COMMERCIAL CODE \xc2\xa7\xc2\xa7 3-9, at 128\n(2d ed. 1980); Annot., 93 A.L.R.3d 584 \xc2\xa7\xc2\xa7 7 (1979).\nTo prevail under I.C. \xc2\xa7 28-2-615 a buyer must prove that his performance was made\nimpracticable by "(1) the occurrence of a contingency; (2) the nonoccurrence of which was a\nbasic assumption on which the contract was made; and (3) by which occurrence further\n160\n\n\x0cperformance has become commercially impracticable." Missouri Public Service Company v.\nPeabody Coal Company, 583 S.W.2d 721, 726 (Mo.Ct.App.1979); cert. denied, 444 U.S. 865,\n100 S.Ct. 135, 62 L.Ed.2d 88 (1979) (emphasis original); J. WHITE & R. SUMMERS,\nHANDBOOK OF THE LAW UNDER THE UNIFORM COMMERCIAL CODE \xc2\xa7\xc2\xa7 3-9, at 129\n(2d ed. 1980). Elmore must show the contract was based on the assumption that the price for\npinto bean seed would not decline or that the market would not "dry up." Therefore, whether the\nnonoccurrence of that event was a basic contract assumption is a question of foreseeability. See\nNorthern Illinois Gas Company v. Energy Cooperative, Inc., supra.\nShifting and changing market conditions appear to be the norm of the business world.\nTherefore, more often than not they are foreseeable. Comment 4 to I.C. \xc2\xa7 28-2-615 sheds further\nlight on that subject.\nIncreased cost alone does not excuse performance unless the rise in cost is due to some\nunforeseen contingency which alters the essential nature of the performance. Neither is a\nrise or a collapse in the market in itself a justification, for that is exactly the type of\nbusiness risk which business contracts made at fixed prices are intended to cover. But a\nsevere shortage of raw materials or of supplies due to a contingency such as war,\nembargo, local crop failure, unforeseen shutdown of major sources of supply or the like,\nwhich either causes a marked increase in cost or altogether prevents the seller from\nsecuring supplies necessary to his performance, is within the contemplation of this\nsection. [Citation omitted.] [Emphasis added.]\nIn the case before us, testimony showed that the market for the pinto bean seed was very\nfavorable at planting time. However, for a variety of reasons, the market price decreased forty\npercent by the following January. A representative of Elmore admitted the reason he had\ncontracted out for the production of the pinto beans was because "there was a chance of making a\nprofit. . . ." Furthermore, the contract contained no provision to protect him from such a drop in\nthe market price. It appears Elmore risked a change in the market price by signing to buy the\nbeans at a fixed price. The language of comment 4 makes it incumbent upon Elmore to show it\ncan operate only at a loss and that loss will be so severe and unreasonable that failure to excuse\nperformance would result in a grave injustice. Northern Illinois Gas Co. v. Energy Cooperative,\nInc., supra; see Louisiana Power & Light Co. v. Allegheny Ludlum Industries, Inc., 517 F. Supp.\n1319 (E.D. La.1981). Elmore asserted that if it were required to pay $ 30 per hundred-weight it\nwould be driven into bankruptcy. However, it has failed to furnish specific facts to support that\nassertion. Therefore, as a matter of law, Elmore was unable to show the decline in the price of\npinto bean seed was not reasonably foreseeable.\nAnalyzing the problem under the common law of impracticality, we turn to \xc2\xa7 261 of the\nRESTATEMENT (2d) OF CONTRACTS (1981). That section states:\nWhere, after a contract is made, a party\'s performance is made impracticable without his\nfault by the occurrence of an event the nonoccurrence of which was a basic assumption\n161\n\n\x0con which the contract was made, his duty to render that performance is discharged unless\nthe language or the circumstances indicate the contrary.\nComment b, which discusses the meaning of basic assumption, refers to UCC \xc2\xa7\xc2\xa7 2-615, codified\nas I.C. \xc2\xa7 28-2-615 in Idaho. Comment b also notes that mere market shifts or financial inability\nusually do not discharge one\'s performance. Therefore, the result under I.C. \xc2\xa7 28-2-615 and \xc2\xa7 261\nof the RESTATEMENT (2d) OF CONTRACTS is the same: no relief for Elmore.\nThe tough stance we are taking in this case is in view of the fact that virtually all contracts\nwhich are based upon a fixed price could be subject to modification if a change in the market\nprice would occur. Interpreting the law as appellant suggests would invite countless suits by\nspeculators in the market as well as by persons merely disappointed in their bargains. Few\ncontractual agreements would be secure. As stated in comment 4 to I.C. \xc2\xa7 28-2-615, an increase\nor decrease in prices, even a radical change, is just the thing that fixed price contracts are\ndesigned to protect against.\nBased upon the foregoing analysis, we affirm the district court\'s order upholding the\nmagistrate.\n11.4. Impracticability. If you are able to establish that a contingency has occurred, the nonoccurrence of which was a basic assumption of the agreement, you must also show that the\noccurrence of such contingency renders performance impracticable. Comment d to Restatement\n(Second) of Contracts \xc2\xa7 261 states:\nPerformance may be impracticable because extreme and unreasonable difficulty, expense,\ninjury, or loss to one of the parties will be involved. A severe shortage of raw materials or\nof supplies due to war, embargo, local crop failure, unforeseen shutdown of major\nsources of supply, or the like, which either causes a marked increase in cost or prevents\nperformance altogether may bring the case within the rule stated in this Section.\nPerformance may also be impracticable because it will involve a risk of injury to person\nor to property, of one of the parties or of others, that is disproportionate to the ends to be\nattained by performance. However, "impracticability" means more than "impracticality."\nA mere change in the degree of difficulty or expense due to such causes as increased\nwages, prices of raw materials, or costs of construction, unless well beyond the normal\nrange, does not amount to impracticability since it is this sort of risk that a fixed-price\ncontract is intended to cover. Furthermore, a party is expected to use reasonable efforts to\nsurmount obstacles to performance (see \xc2\xa7 205), and a performance is impracticable only\nif it is so in spite of such efforts.\n\n162\n\n\x0cTransatlantic Financing Corp. v. United States\n363 F.2d 312 (D.C. App. 1966)\n[Several months after the nationalization of the Suez Canal, Plaintiff contracted with defendant\nto deliver a cargo of wheat from Texas to Iran via the Suez Canal for a flat rate. The contract did\nnot specify the route, but the voyage would normally be through the Straits of Gibraltar and the\nSuez Canal, a distance of 10,000 miles. A month later, and several days after the ship has left\nGalveston, the Suez Canal was closed by an outbreak of hostilities, so that the only route to Iran\nwas the longer 13,000 mile voyage around the Cape of Good Hope. Plaintiff argued that the\nunforeseen contingency discharged it from performing at the contract price, and instead it sought\nremuneration on a quantum meruit basis. The court determined that the closure of the Suez Canal\nhad not specifically been discussed by the parties, nor were there any express terms specifically\nallocating such a risk to the shipping company. After noting that the shipping company had\nassumed at least some general risks of shipping problems, the court turned to discuss whether the\nplaintiff\xe2\x80\x99s performance had been rendered impracticable.]\nWe turn then to the question whether occurrence of the contingency rendered\nperformance commercially impracticable under the circumstances of this case. The goods\nshipped were not subject to harm from the longer, less temperate Southern route. The vessel and\ncrew were fit to proceed around the Cape. Transatlantic was no less able than the United States to\npurchase insurance to cover the contingency\'s occurrence. If anything, it is more reasonable to\nexpect owner-operators of vessels to insure against the hazards of war. They are in the best\nposition to calculate the cost of performance by alternative routes (and therefore to estimate the\namount of insurance required), and are undoubtedly sensitive to international troubles which\nuniquely affect the demand for and cost of their services. The only factor operating here in\nappellant\'s favor is the added expense, allegedly $43,972.00 above and beyond the contract price\nof $305,842.92, of extending a 10,000 mile voyage by approximately 3,000 miles. While it may\nbe an overstatement to say that increased cost and difficulty of performance never constitute\nimpracticability, to justify relief there must be more of a variation between expected cost and the\ncost of performing by an available alternative than is present in this case, where the promisor can\nlegitimately be presumed to have accepted some degree of abnormal risk, and where\nimpracticability is urged on the basis of added expense alone. [A footnote here states: See \xc2\xa7 2615, comment 4: "Increased cost alone does not excuse performance unless the rise in cost is due\nto some unforeseen contingency which alters the essential nature of the performance."]\nWe conclude, therefore, as have most other courts considering related issues arising out\nof the Suez closure, that performance of this contract was not rendered legally impossible. Even\nif we agreed with appellant, its theory of relief seems untenable. When performance of a contract\nis deemed impossible it is a nullity. In the case of a charter party involving carriage of goods, the\ncarrier may return to an appropriate port and unload its cargo, The Malcolm Baxter, Jr., 277 U.S.\n323, 48 S.Ct. 516, 72 L.Ed. 901 (1928), subject of course to required steps to minimize damages.\nIf the performance rendered has value, recovery in quantum meruit for the entire performance is\nproper. But here Transatlantic has collected its contract price, and now seeks quantum meruit\n163\n\n\x0crelief for the additional expense of the trip around the Cape. If the contract is a nullity,\nTransatlantic\'s theory of relief should have been quantum meruit for the entire trip, rather than\nonly for the extra expense. Transatlantic attempts to take its profit on the contract, and then force\nthe Government to absorb the cost of the additional voyage. When impracticability without fault\noccurs, the law seeks an equitable solution, see 6 Corbin, supra, \xc2\xa7 1321, and quantum meruit is\none of its potent devices to achieve this end. There is no interest in casting the entire burden of\ncommercial disaster on one party in order to preserve the other\'s profit. Apparently the contract\nprice in this case was advantageous enough to deter appellant from taking a stance on damages\nconsistent with its theory of liability. In any event, there is no basis for relief.\nCase Notes:\n1. The courts interpreting the \xe2\x80\x9cimpracticability\xe2\x80\x9d component of UCC \xc2\xa7 2-615 have almost\nuniversally ruled that an increase in price alone does not render performance\nimpracticable. Note that the increase in this case was approximately 14%. For an\nexpanded discussion of the requirement of something more than a price increase, see\nAmerican Trading & Production Corp. v. Shell International Marine, 453 F.2d 939 (2d\nCir. 1972) (where a 75% increase in costs was insufficient to render performance\n\xe2\x80\x9cimpracticable.\xe2\x80\x9d).\n2. All courts agree that \xe2\x80\x9cthe standard by which impracticability should be judged is an\nobjective one,\xe2\x80\x9d Alimenta (U.S.A.), Inc. v. Gibbs Nathaniel (Canada) Ltd., 802 F.2d 1362\n(11th Cir. 1986). Commercial impracticability under UCC \xc2\xa7 2-615 focuses upon the "the\nreasonableness of the expenditure at issue, not upon the ability of a party to pay the\ncommercially unreasonable expense." Asphalt International, Inc. v. Enterprise Shipping\nCorp., 667 F.2d 261, 266 (2d Cir. 1981). Under this objective standard, \xe2\x80\x9cthe focus of the\nimpracticability analysis is upon the nature of the agreement and the expectations of the\nparties, not to the size and financial ability of the parties.\xe2\x80\x9d Alimenta (U.S.A.), Inc. v.\nCargill, Inc., 861 F.2d 650, 652 (11th Cir. 1988).\n3. Impracticability more often arises when continued performance will result in a legal\nviolation due to a change in laws. For example, in International Minerals & Chemical\nCorp. v. Llano, Inc., 770 F.2d 879 (10th Cir. 1985), a buyer was excused from its\nobligation to buy a stated quantity of natural gas, because environmental regulations\ncaused it to modify its operations to require less natural gas than it had originally\ncontracted to purchase. See also Eastern Air Lines, Inc. v. McDonnell Douglas\nCorporation, 532 F.2d 957 (5th Cir. 1976), where an aircraft manufacturer was excused\nfrom its contractual obligation to deliver commercial jet airliners on certain scheduled\ndates because it had voluntarily complied with government requests to expedite\nproduction of military equipment needed for the war in Vietnam. And in a non-UCC case,\nthe Montana Supreme Court excused a contractual obligation because of possible\nenvironmental contamination if the obligation of drilling a water well were performed.\nCape-France Enters. v. In re Estate of Peed, 29 P.3d 1011 (Mont. 2001).\n164\n\n\x0c4. See Lee Russ, Annotation, Impracticability of Performance of Sales Contract under\nUCC \xc2\xa7 2-615, 55 A.L.R.5th 1 (1998).\n11.5. Notice. In order to rely upon the excuse defense, UCC \xc2\xa7 2-615(c) requires a seller to\nseasonably notify the buyer that there will be delay or non-delivery. As one hornbook notes:\nIn any given case, however, it may be difficult to know whether the excusing contingency\nwill merely cause a delay in delivery or absolutely preclude it. In that circumstance the\nseller faces a problem as to what kind of notice he must give and whether and when he\nshould begin a plan of allocation. The seller should be protected if he gives seasonable\nnotice of the delay and indicates in good faith that he is uncertain as to whether the delay\nwill ripen into nondelivery and that he will keep the buyer informed of developments as\nthey unfold. Of course, the seller must, thereafter, make good on his promise to keep the\nbuyer informed, and as soon as the seller knows that nondelivery will occur he must\nnotify the buyer of this fact.\n3 W. Hawkland, Uniform Commercial Code Series \xc2\xa7 2-615:13.\n11.5.1. UCC \xc2\xa7 1-201(b)(26) states that a person \xe2\x80\x9cnotifies\xe2\x80\x9d another by taking such steps as\nmay be reasonably required to inform the other in ordinary course whether or not such\nother actually comes to know of it.\n11.6. Allocation. Under UCC \xc2\xa7 2-615(b), if an unforeseen contingency, such as a crop failure,\naffects only a part of the seller\xe2\x80\x99s capacity to perform, the seller must allocate production and\ndeliveries among his customers in any manner which is fair and reasonable. For example, if a\nfarmer has contracted to sell his anticipated crop of 100,000 bushels of barley to be grown on\nspecified land among two purchasers, and as a result of drought the farmer only produces 40,000\nbushels, the farmer must allocate the 40,000 bushels in a fair and reasonable manner among the\ntwo purchasers.\n11.6.1. Professors White and Summers offer a lengthy note about the factors that may be\nproperly considered in a fair allocation:\nOne should note that a direction to allocate pro rata is far from an explicit and\nrigid set of allocation rules. Seller may choose to prorate based upon historic\ndeliveries, historic contract amounts, current needs, current contract amounts and\npossibly other grounds. By choosing one or another scheme to establish its\nproration, the seller may be able to favor one set of customers over another to a\nconsiderable extent. Moreover if we allow further deviations in the pro rata\nscheme based upon appropriate priority rules either because of the social utility of\ncertain uses or because of the more serious injuries that some buyers would suffer\nif they did not receive more than a pro rata share, we leave the seller with a great\n165\n\n\x0cdeal of flexibility. We believe that the seller should have considerable flexibility\nand that courts will not often improve things by putting their oar in. The seller\'s\nselfish long-term interest in maintaining a cadre of customers will usually induce\na seller to treat most of its customers as it should.\nJames J. White and Robert S. Summers, Uniform Commercial Code (6th ed.), \xc2\xa7 4-10.\n11.7. Section 2-616. UCC \xc2\xa7 2-616 lays out the buyer\xe2\x80\x99s options when the seller\xe2\x80\x99s duties have been\nexcused under \xc2\xa7 2-615. Assuming the buyer has received notice that the seller will make an\nallocation or be delayed under that section, if the deficiency \xe2\x80\x9csubstantially impairs the value of\nthe whole contract\xe2\x80\x9d under \xc2\xa7 2-612, then the buyer can either terminate the contract or modify it\nby agreeing to take the allocation. If the buyer does not respond within a reasonable time not\nexceeding 30 days, the seller can assume the contract has lapsed.\nProblem 11-2. Buyer law school has agreed to purchase 150 t-shirts with the law school\xe2\x80\x99s logo\nfor its entering 1-L class. The seller informs the buyer that due to an unanticipated event, its\nmanufacturing ability has been impaired and it will be able to ship only 100 of the t-shirts. What\nare the law school\xe2\x80\x99s options? What if the law school does not respond to the seller?\n11.8. Section 2-613. UCC \xc2\xa7 2-613 governs the situation where a contract requires delivery of\ngoods that have been identified when the contract is made, for example, a particular horse or car.\nAs a prerequisite to the application of this section, the goods must be identified when the\ncontract is made. In addition to the identification requirement, the goods also must suffer casualty\nwithout the fault of either party, and the risk of loss must not yet have passed to the buyer. If the\nelements are satisfied, then the contract is avoided if the loss is total.\nValley Forge Flag Co. v. New York Dowel & Moulding Import Co.\n395 N.Y.S.2d 138 (N.Y. City Civ. Ct. 1977)\nIn a classic contract action, the plaintiff buyer sues the seller for failure to deliver. The\nplaintiff then purchased goods on the open market and seeks as damages the difference between\nthe contract price and the subsequent purchase price. These facts are undisputed. However, the\ndefendant alleges that the goods were totally destroyed on shipboard during a heavy storm in\ntransit from Malaysia and therefore it is not liable under the contract. It relies upon section 2-613\nof the Uniform Commercial Code which states in pertinent part: "Where the contract requires for\nits performance goods identified when the contract is made, and the goods suffer casualty\nwithout fault of either party before the risk of loss passes to the buyer \xe2\x80\xa6 then (a) if the loss is\ntotal the contract is avoided.\xe2\x80\x9d\nAssuming the defendant\'s claim of total loss is true, the remaining question is whether the\ngoods destroyed were identified when the contract was made.\n166\n\n\x0cThe facts are that the parties entered into a contract of sale on August 5, 1975. The\nplaintiff agreed to purchase "30,000 5/16 x 24" Ramin dowels and "100,000 3/8 x 30" Ramin\ndowels. Delivery was to be in August from Malaysia. A subsequent confirmation order describes\nthe goods as "5/16 x 24" natural dowels and "3/8 x 30" natural dowels.\nSection 2-613 of the Uniform Commercial Code conforms to the general rule of contracts\nthat if performance is dependent upon the existence of a specific thing and it is destroyed before\nthe time of performance without fault, a breach by a seller will be excused. (See cases cited 10\nNY Jur, Contracts, \xc2\xa7\xc2\xa7 365.) For there is an implied condition that impossibility excused\nperformance. (Dexter v Norton, 47 NY 62.) However, section 2-613 "has application in the\nlimited situations where the continued existence of identified goods is a presupposition of the\nagreement. The sale of a unique chattel comes within its scope, but not the sale of chattels, any\none of which fitting the description of the contract may be delivered." (Duesenberg and King\nCommentaries, Bender\'s Uniform Commercial Code Serv, vol 3A, \xc2\xa7 14.13 [3].) Thus, with\nrespect to fungible goods more than just an identification in a sales contract by kind and amount\nis necessary to come within the meaning of the section. (Bunge Corp. v Recker, 519 F2d 449.)\nThere must be a meeting of the minds by the parties as to the particular or actual goods\ndesignated to be bought and sold. (Cf. Dexter v Norton, 47 NY 62, supra; Kirsch & Co. v\nBenyunes, 105 Misc 648; International Paper Co. v Rockefeller, 161 App Div 180.)\nThe court finds as a fact that the goods in this action were fungible. A dowel is a round\nwooden rod or stick and interchangeable. Nor is a particular type of wood required. Indeed, the\ndefendant admitted that it could have replaced the dowels by purchasing them on the open\nmarket. The plaintiff did. Moreover, the defendant had not entered into a contract with its own\nsupplier until after the sale. The goods had not been shipped, marked, segregated or otherwise\ndesignated at the time the sale was made. Therefore, section 2-613 of the Uniform Commercial\nCode is not applicable because the goods were not "identified" within its meaning. Nor did the\ndefendant generally prove its affirmative defense. Accordingly, plaintiff shall have judgment in\nthe sum of $ 1,265, with interest from October 1, 1975 and costs.\nCase Note: UCC \xc2\xa7 2-613 is often relied upon by farmers as an excuse for failing to perform if the\ncrops which they have contracted to sell are destroyed. The legal reality is that most crops are\nfungible and if the specific land upon which they are to be grown is not identified with\nparticularity in the contract, they may not take advantage of \xc2\xa7 2-613. They must rely upon \xc2\xa7 2615 instead, and if a particular source is not identified in the contract, they will most likely not\nprevail under \xc2\xa7 2-615 either. See, for example, Bunge Corporation v. Recker, 519 F.2d 449 (8th\nCir. 1975) (where contract did not identify beans other than by kind and amount, destruction of\nportion of farmer\'s crop by weather did not constitute act of God which would excuse\nperformance); Ralston Purina Company v. McNabb, 381 F. Supp. 181 (W.D. Tenn. 1974) (in\nabsence of showing contract was to sell crop from specified land, defense of impossibility due to\nbad weather and flooding unavailable); Wickliffe Farms, Inc. v. Owensboro Grain Co., 684\nS.W.2d 17 (Ky. App. 1984) (statutory defense of impossibility not available to seller contracting\nfor delivery of white corn despite drought which struck seller\'s farm, since contract merely called\n167\n\n\x0cfor delivery of 35,000 bushels of white corn without specifying where such corn was to be\ngrown); Semo Grain Co. v. Oliver Farms, Inc., 530 S.W.2d 256 (Mo. App. 1975) (where contract\nmade no reference to soybeans grown by seller, seller could have fulfilled obligation to deliver\nsoybeans to buyer by acquiring beans from any place or source).\n11.9. Section 2-614. UCC \xc2\xa7 2-614 allows a party to substitute performance in two situations.\n11.9.1. Under \xc2\xa7 2-614(1), if the agreed-upon shipping method becomes unavailable or\ncommercially impracticable and a commercially reasonable substitute is available, such\nsubstitute performance must be tendered and accepted. For example, if a seller has agreed\nto ship by rail, and a rail strike occurs, the seller may ship by any other commercially\nreasonable method. On the other hand, a mere increase in the price of shipping by rail\nwould not trigger application of this provision.\n11.9.2. Under \xc2\xa7 2-614(2), if the agreed payment method fails because of governmental\nregulation, the seller may withhold or stop delivery unless the buyer provides a means or\nmanner of payment which is commercially a substantial equivalent. If seller has already\ndelivered the goods, seller must accept the agreed payment, unless the regulation is\ndiscriminatory, oppressive or predatory.\n11.10. Use of Force Majeure Clauses. UCC \xc2\xa7\xc2\xa7 2-613 through 2-615 offer limited and narrow\nopportunities to excuse a party from performance. For example, \xc2\xa7 2-615 requires that a\ncontingency be unforeseen and render performance impracticable. Courts have said that such\nthings as strikes, droughts, shipping failures, and government actions are often foreseeable, and\nthus such events do not necessarily trigger relief under these UCC provisions. However, under\nthe principle of freedom of contract, the parties are free to enlarge the situations where one of the\nparties may be excused from performance. These types of clauses are referred to as force\nmajeure clauses. Comment 8 recognizes the ability of the parties to enter such agreements, but\ncautions that \xe2\x80\x9cthey are to be read in the light of mercantile sense and reason, for [\xc2\xa7 2-615] sets up\nthe commercial standard for normal and reasonable interpretation and provides a minimum\nbeyond which agreement may not go.\xe2\x80\x9d\n\n168\n\n\x0cWatson Labs., Inc. v. Rhone-Poulenc Rorer, Inc.\n178 F. Supp. 2d 1099 (C.D. Cal. 2001)\n[The parties entered into related contracts effecting the transfer by the Rhone-Poulenc Rorer\n(RPR) entities to Watson Labs of exclusive rights to Dilacor XR, a hypertension drug. RPR\nrelied on a third-party, Centeon, as a source of supply to fulfill its obligations to Watson. Centeon\nhad failed some Federal Drug Administration inspections, and was operating under an FDA\nconsent decree. When Centeon failed to fix its various problems, the FDA shut it down, and RPR\nlost its major source of Dilacor, and thus was unable to meet its obligations to Watson. It notified\nWatson of this fact, and sought to be excused from further performance under the force majeure\nclause contained in the contracts.]\nArticle VIII of the Supply Agreement provides:\nThe obligations of RPR and Watson hereunder shall be subject to any delays or\nnon-performance caused by: acts of God, earthquakes, fires, floods, explosion, sabotage,\nriot, accidents; regulatory, governmental, or military action or inaction; strikes, lockouts\nor labor trouble; perils of the sea; or failure or delay in performance by third parties,\nincluding suppliers and service providers; or any other cause beyond the reasonable\ncontrol of either party ("Force Majeure Event"). The party which is not performing its\nobligations under this Agreement as a result of any such event of Force Majeure shall use\ncommercially reasonable efforts to resume compliance with this Agreement as soon as\npossible.\n....\nDefendants\' Third Motion appears to argue that as a matter of law they are not liable for\nbreach of the Supply Agreement because Article VIII excused their performance obligations.\nThey contend that after the FDA shutdown of the Centeon facility they were not required to\nperform under the Supply Agreement because of "an unambiguous term in the agreement that\nprovides that a party\'s nonperformance due to supervening governmental action is excused . . . ."\nIt is not disputed that the FDA shutdown of Centeon was "governmental action" that at\nsome level caused, or at least contributed to, RPR\'s nonperformance under the Supply\nAgreement. RPR argues that therefore the Court should simply give effect to the specificallyenumerated excusing events ("regulatory, governmental \xe2\x80\xa6 action") agreed to by the parties. . . .\nIt is not clear whether the parties intended to apply the common law doctrine of force\nmajeure or instead intended to supersede that doctrine with the express terms of Article VIII. The\nCourt need not resolve this question because under either the common law of force majeure or\nthe express terms of the contract, construed under California law, Defendants may only escape\nliability if the Centeon shutdown was "beyond the reasonable control of either party." This is so\nbecause the plain language of Article VIII requires that any qualifying event, whether specifically\nenumerated or not, be "beyond the reasonable control of either party." See Unicover World Trade\n169\n\n\x0cCorp. v. Tri\xe2\x80\x93State Mint, Inc., No. 91\xe2\x80\x93CV\xe2\x80\x930255\xe2\x80\x93B, 1994 WL 383244, at *10 (D.Wyo.1993)\n(\xe2\x80\x9cAfter considering the clause as a whole, the Court finds that \xe2\x80\x98beyond its control\xe2\x80\x99 modifies all of\nthe listed causes in the clause.\xe2\x80\x9d). Moreover, California law reads that element into express force\nmajeure clauses anyway:\nWe can not [sic] always be sure what \xe2\x80\x98causes are beyond the control\xe2\x80\x99 of the contractor\xe2\x80\xa6.\nNo contractor is excused under such an express provision unless he shows affirmatively\nthat his failure to perform was proximately caused by a contingency within its terms; that,\nin spite of skill, diligence and good faith on his part, performance became impossible or\nunreasonably expensive. [citations omitted]\nBecause Article VIII requires that each and every excusing event be \xe2\x80\x9cbeyond the\nreasonable control of either party,\xe2\x80\x9d Defendants\' Third Motion seeking a determination that the\nCenteon shutdown is a qualifying force majeure event under Article VIII must be DENIED.\nHowever, the Court declines to find as a matter of law that the Centeon shutdown was within the\n"reasonable control" of Defendants, although it appears likely that Plaintiff can establish at trial\nthat RPR could "control" Centeon. . . . But whether the Centeon shutdown was "beyond the\nreasonable control" of Defendant nevertheless is a factual question that the Court cannot resolve\non a motion for summary judgment. . . .\nA closer question is whether, as Plaintiff contends, an event must be "unforeseeable" to\nexcuse performance under Article VIII. Defendants vigorously argue that such a requirement\ncannot be read into Article VIII. However, as demonstrated above, California law requires (not\n"permits") that each event claimed to be a "force majeure" be beyond the control of the breaching\nparty. See Nissho-Iwai, 729 F.2d at 1540. Plaintiff relies upon URI Cogeneration Partners, L.P.\nv. Board of Governors for Higher Education, 915 F. Supp. 1267 (D.R.I. 1996), for the related but\nseparate proposition that a foreseeability requirement may be read into a contractual force\nmajeure provision that does not expressly contain any such requirement. In URI, the court found\nthat the failure to obtain zoning approval did not fall within one of the specifically enumerated\nforce majeure events. Because Rhode Island law "provided little guidance," the court cited New\nYork cases to construe the rather elaborate force majeure clause narrowly:\nWhat distinguishes the Biblical plagues described in [the force majeure provision] from a\nfailure to procure zoning permission is the question of foreseeability. As the Board points\nout, force majeure clauses have traditionally applied to unforeseen circumstances-typhoons, citizens run amok, Hannibal and his elephants at the gates--with the result that\nthe Court will extend [the force majeure provision] only to those situations that were\ndemonstrably unforeseeable at the time of contracting.\nId. at 1287 (emphasis added).\nIn URI, because "zoning was an issue long before" the contract was signed and because\nthe defendant was the party who bore the risk that the lack of governmental approval would\n170\n\n\x0cpreclude performance under the contract, the court held that "failure to win zoning permission\nwas a foreseeable event \xe2\x80\xa6 and not ... excused by force majeure \xe2\x80\xa6." Id.\nOther courts have found that contractual force majeure provisions which are silent on the\nissue of whether the excusing event must be unforeseeable should be construed to require\nunforeseeability. E.g., Gulf Oil Corporation v. Federal Energy Regulatory Commission, 706 F.2d\n444, 453-54 (3d Cir. 1983) ("we conclude that in order to invoke the use of force majeure as an\nexcuse under the warranty contract, Gulf as the nonperforming party must show that even though\nthe events which delayed its performance were unforeseeable and infrequent that it had available\nat the time of their occurrence more than the maximum warranted quantity of gas"). Under\nUniform Commercial Code \xc2\xa7 2-615, contract performance will only be excused due to\nimpracticability when the purportedly excusing events were unforeseen at the time the contract\nwas executed. Interpetrol Bermuda v. Kaiser Aluminum, 719 F.2d 992, 999.\nOn the other hand, yet other cases indicate that a qualifying event need not be\nunforeseeable. See, e.g., Perlman, 918 F.2d at 1248 ("Because the clause labeled \'force majeure\'\nin the Lease does not mandate that the force majeure event be unforeseeable or beyond the\ncontrol of [the nonperforming party] before performance is excused, the district court erred when\nit supplied those terms as a rule of law."); Sabine Corporation v. ONG Western, Inc., 725\nF. Supp. 1157, 1170 (W.D. Okla. 1989) ("Plaintiff\'s argument that an event of force majeure\nmust be unforeseeable must be rejected. Nowhere does the force majeure clause specify that an\nevent or cause must be unforeseeable to be a force majeure event. "); Kodiak 1981 Drilling\nPartnership v. Delhi Gas Pipeline Corporation, 736 S.W.2d 715, 720-21 (Tex. Ct. App. 1987)\n(judicially inserting into a contractual force majeure provision "the requirement of\nunforeseeablility has not been approved by any Texas court, state or federal"). None of these\ncases applies California law.\nThe case that the parties have focused on most vigorously, especially at the hearing, is\nEastern Airlines, Inc. v. McDonnell Douglas Corporation, 532 F.2d 957 (5th Cir. 1976). Plaintiff\nEastern Airlines sued the aircraft manufacturer McDonnell Douglas for breach of contract. The\ncrux of the breach was that the defendant failed to deliver 99 airplanes in time. Defendant\nattributed the delay to a change in concerted governmental policies arising out of the Vietnam\nWar, which caused production of military aircraft to be given priority. Plaintiff thus claimed the\nbreach was excused. The parties agreed to apply California law to the interpretation and\nenforcement of the contract. The jury awarded more than $ 24 million in damages to Eastern\nAirlines. The Court of Appeals reversed. In a lengthy analysis of what it characterized as "The\nForeseeability Issue," the Court made several observations that favor Watson.\n\xef\x82\xb7\n\nExculpatory provisions which are phrased merely in general terms have long been\nconstrued as excusing only unforeseen events which make performance impracticable. . . .\nCourts have often held, therefore, that if a promisor desires to broaden the protections\navailable under the excuse doctrine he should provide for the excusing contingencies with\nparticularity and not in general language \xe2\x80\xa6. We will adhere to the established rule of\n171\n\n\x0cconstruction because it continues to reflect prevailing commercial practices." Eastern\nAirlines, 532 F.2d at 990-91.\n\xef\x82\xb7\n\n"Because the purpose of a contract is to place the reasonable risk of performance on the\npromisor, he is presumed, in the absence of evidence to the contrary, to have agreed to\nbear any loss occasioned by an event which was foreseeable at the time of contracting \xe2\x80\xa6.\nUnderlying this presumption is the view that a promisor can protect himself against\nforeseeable events by means of an express provision in the agreement \xe2\x80\xa6. Therefore,\nwhen the promisor has anticipated a particular event by specifically providing for it in a\ncontract, he should be relieved of liability for the occurrence of such event regardless of\nwhether it was foreseeable." Id. at 991-92.\n\nDespite these observations, the Court of Appeals held that the trial court\'s instruction (not quoted\nin the opinion) was erroneous. The instruction was to the effect that "no event could be an excuse\nunless it was not reasonably foreseeable at the time the particular contract was entered into." Id.\nat 965, 991. This holding is what Defendants tout, of course. They argue that Watson knew about\nthe Centeon risk and that (as Justice Traynor stated, in language quoted by the Fifth Circuit in\nEastern Airlines): "When a risk has been contemplated and voluntarily assumed \xe2\x80\xa6 foreseeability\nis not an issue and the parties will be held to the bargain they made." Id at 992.\nThe problem for Defendants is that the force majeure clause here does not even permit,\nmuch less entitle, them to point to the Centeon shutdown as an event giving rise to a force\nmajeure defense even though it was foreseeable. The language referring to "regulatory,\ngovernmental . . . action" is vague and boilerplate. These words cannot reasonably be construed\nto reflect that the parties considered that the shutdown of the Centeon plant would be\nencompassed. In contrast, the clause in the Eastern Airlines-McDonnell Douglas contract was\nspecific. It referred to precisely the kind of governmental action that (according to McDonnell\nDouglas) caused the delay: "any act of government, governmental priorities, allocation\nregulations or orders affecting materials, equipment, facilities or completed aircraft \xe2\x80\xa6." Id. at\n963.\nThe Court holds that under these facts and as a matter of law, Defendants cannot rely on\nArticle VIII to excuse their performance because the shutdown of the Centeon plant was both\nentirely foreseeable and not encompassed within the force majeure clause. In reaching this result,\nthe Court is persuaded by the following factors:\n1. Defendants have presented the Court with no evidence to overcome the presumption\nthat RPR "agreed to bear any loss occasioned by an event which was foreseeable at the\ntime of contracting," as was the Centeon shutdown. . . .\n\n172\n\n\x0c2. RPR\'s express obligation under Paragraph 9.1 of the Supply Agreement to maintain\n"the manufacturing capacity and capabilities which shall allow it to satisfy the provisions\nof this Agreement" is inconsistent with allowing it to be excused from performance when\nthe failure resulted (at least in part) from the foreseeable government shutdown of\nCenteon.\n3. Most of the events enumerated in Article VIII are standard, boilerplate force majeure\noccurrences. True, some of the enumerated events, such as natural disasters, are a\nforeseeable possibility, especially in Southern California (albeit no one can be sure when\n"the Big One" will hit). But they also are "beyond the reasonable control of either party."\nIn contrast, when parties expressly contemplate a known risk of a regulatory prohibition,\nthey should be expected to allocate that risk expressly, rather than rely upon a boilerplate\nclause enumerating a parade of horribles that are so unlikely to occur as to make them\nqualitatively different. In the absence of such allocation, only governmental action not\npreviously contemplated could qualify as force majeure. . . .\n\nProblem 11-3. Power Engineering agreed to supply equipment to a company in Iraq, which\nwould use the equipment to train Iraqi jet pilots. To manufacture the product it had agreed to sell\nto the Iraqi company, Power Engineering entered into an agreement for component parts with\nKrug. In August 1990, the United Nations imposed an embargo on sales of goods to companies\nin Iraq, and thus Power Engineering was no longer able to sell its product. It notified Krug that it\nwas canceling its contract with Krug.\n(1) Under \xc2\xa7 2-615, will Power Engineering prevail in its argument that the embargo against Iraq\nis an unforeseen contingency which renders the performance of its obligations to buy parts from\nKrug impracticable? Why or why not?\n(2) Would use of a force majeure clause similar to the one used in the Watson Labs case\ndischarge Power Engineering\xe2\x80\x99s obligations under the Krug contract? Why or why not?\nChapter 11 Additional Sources.\nScott J. Burnham, Glannon Guide to Sales: Learning Sales Through Multiple-Choice Questions\nand Analysis (Wolters Kluwer 2d ed., 2012), Chapter 14\nJames J. White and Robert S. Summers, Uniform Commercial Code (West 6th ed., 2010),\nChapters 3-9\n\n173\n\n\x0cChapter 12. UCC Perfect Tender Rule; Seller\xe2\x80\x99s Right to Cure\n12.1. Material Breach versus Immaterial Breach. Under common law, a buyer may terminate\na contract and his obligation to pay for what he has agreed to buy only if the seller materially\nbreaches. If the breach is not material, the buyer still has a remedy for damages, but he cannot\nterminate the contract or refuse to perform altogether.\n12.1.1. The other side of the coin of \xe2\x80\x9cmaterial breach\xe2\x80\x9d is \xe2\x80\x9csubstantial performance.\xe2\x80\x9d If a\nnon-breaching party asserts a material breach on the part of the other party, the breaching\nparty most commonly defends with the argument of \xe2\x80\x9csubstantial performance.\xe2\x80\x9d\n12.1.2. For example, a seller agrees to sell a home, and also agrees before the sale to paint\nthe house and clean all the carpets. As of the day of closing, the house has been painted\nand five of six carpets have been cleaned. The seller has substantially performed, her\nbreach in not cleaning one of the six carpets is immaterial, and the buyer will have to\nclose the purchase. Buyer can, of course, recover the cost she incurs in having the sixth\ncarpet cleaned, but she cannot avoid the contract entirely.\n12.1.2.1. How do you protect your buyer client to allow the buyer to walk away\nfrom the purchase of the home if all of the carpets are not cleaned? Instead of\nframing the cleaning of the carpets as an obligation, you frame it as an express\ncondition; e.g., \xe2\x80\x9cBuyer\xe2\x80\x99s obligation to close is expressly conditioned upon Seller\xe2\x80\x99s\ncleaning each and every carpet in the house prior to closing.\xe2\x80\x9d Express conditions\nmust be strictly complied with; substantial performance will not do.\n12.2. Perfect Tender Rule. Having set forth the common law general rule that only a material\nbreach gives rise to the remedy of terminating the contract and discharging the non-breaching\nparty from his obligation to perform, of course there is an exception. Even under the common\nlaw, when goods were involved (versus land or services), the buyer had a right to terminate the\ncontract and was discharged from his or her obligation to pay the purchase price if the goods\ntendered did not perfectly conform to the contract. In other words, with regard to goods, a buyer\ncan reject the goods even for an immaterial defect, or immaterial breach. This is known as the\nperfect tender rule. Section 2-601 provides that if the goods or the tender \xe2\x80\x9cfail in any respect\xe2\x80\x9d to\nconform to the contract, the buyer has the right to reject the goods and terminate the contract, in\nwhich event the buyer is discharged from his obligation to pay for the goods.\n12.3. Qualifications to the Perfect Tender Rule. Does this sound too good to be true if you\nrepresent a buyer? If a buyer orders a new car and when it arrives the spare tire is missing, can\nthe buyer reject the car and refuse to pay? If you read \xc2\xa7 2-601 alone, it would appear so. But \xc2\xa7 2601 has limitations.\n\n174\n\n\x0c12.3.1. Section 2-602 sets out rules governing a buyer\xe2\x80\x99s rightful rejection of goods.\nProblem 12-1. Read \xc2\xa7 2-602(1) and scan the comments. In order for a buyer\xe2\x80\x99s rejection of goods\nto be rightful, what must the buyer do under \xc2\xa7 2-602(1)? See also \xc2\xa7 2-606.\n12.3.1.1. As discussed in more detail at Section 12.7 below, once a buyer\nrightfully rejects goods, \xc2\xa7\xc2\xa7 2-602(2), 2-603 and 2-604 impose certain duties upon\na buyer with regard to the rejected goods.\n12.3.2. The second limitation on the buyer\xe2\x80\x99s absolute right to reject is found at \xc2\xa7 2-508,\nwhich gives the seller a right to cure in certain circumstances. The seller\xe2\x80\x99s right to cure is\na significant limitation on the buyer\xe2\x80\x99s right to reject a good for any non-conformity, and\nwe\xe2\x80\x99ll review that right in more detail in just a moment.\n12.3.3. The third limitation on the perfect tender rule relates to installment contracts. We\nwill review the installment contract rules in more detail later in this chapter.\n12.3.4. A fourth limitation on the perfect tender rule is the effect of buyer\xe2\x80\x99s acceptance\nof non-conforming goods. Once a party has accepted the goods, the right to reject for any\nnon-conformity disappears. After acceptance, if a buyer discovers a non-conformity,\nacceptance can be revoked only in certain situations (we\xe2\x80\x99ll discuss revocation of\nacceptance in the next chapter).\n12.3.5. Finally, in rejecting goods, a buyer is subject to the obligation of good faith, as set\nforth in \xc2\xa7 1-304. For example, a buyer orders 100 buffalo hides, and 99 arrive in the\nshipment. If the real reason for rejection of the 99 hides is a drop in the market price of\nbuffalo hides, rather than the fact that the buyer received only 99, then buyer may not be\nnot acting in good faith, which requires \xe2\x80\x9chonesty in fact.\xe2\x80\x9d\n12.3.6. So what is left of the perfect tender rule? White and Summers, Uniform\nCommercial Code (West 6th ed., 2010) state at \xc2\xa7 9-3(b):\nSection 2-601, the only section applicable to one-shot contracts, states a \xe2\x80\x9cperfect\ntender\xe2\x80\x9d rule; seller must conform perfectly to its obligation, for the buyer may\nreject any time \xe2\x80\x9cthe goods or the tender of delivery fail in any respect to conform\nto the contract.\xe2\x80\x9d We are skeptical of the real importance of the perfect tender\nrule[.]\nWe conclude, and the cases decided to date suggest, that the Code changes and the\ncourts\xe2\x80\x99 manipulation have so eroded the perfect tender rule that the law would be\nlittle changed if 2-601 gave the right to reject only upon \xe2\x80\x9csubstantial\xe2\x80\x9d\n175\n\n\x0cnonconformity. Of the reported Code cases on rejection, few actually grant\nrejection on what could fairly be called an insubstantial nonconformity, despite\nlanguage in some cases allowing such rejection.\n12.4. Timing and Notice of Rejection. Section 2-602(1) requires a buyer to reject goods within\na reasonable time after their delivery or tender, and to seasonably notify the seller of the\nrejection. If a buyer fails to reject within a reasonable time or to seasonably notify the seller of\nher rejection of the goods, she is deemed to have accepted the goods (see \xc2\xa7 2-606(1)(b)). After\nacceptance, a buyer is precluded from rejecting the goods (see \xc2\xa7 2-607(2)), and can only \xe2\x80\x9crevoke\nacceptance,\xe2\x80\x9d which is much more difficult to do than rejecting the goods, as we will discuss in\nChapter 13.\n12.4.1. Section 1-205 states that what is reasonable \xe2\x80\x9cdepends on the nature, purpose and\ncircumstances\xe2\x80\x9d in the particular matter. Notice is \xe2\x80\x9cseasonable\xe2\x80\x9d if (i) taken within the time\nagreed or, if no time is agreed, (ii) within a reasonable time.\n12.4.2. Section 1-202(d) states that a person \xe2\x80\x9cnotifies\xe2\x80\x9d another person \xe2\x80\x9cby taking such\nsteps as may be reasonably required to inform the other person in ordinary course,\nwhether or not the other person actually comes to know of it.\xe2\x80\x9d\n12.4.3. Comment 1 to \xc2\xa7 2-602 adds that \xe2\x80\x9creasonable time\xe2\x80\x9d must be understood in\nconnection with the buyer\xe2\x80\x99s right to inspect the goods, as set forth in \xc2\xa7 2-513.\nMiron v. Yonkers Raceway, Inc.\n400 F.2d 112 (2d Cir. 1968)\n[The Mirons delivered their race horse \'Red Carpet\' to an auction sponsored by Yonkers\nRaceway. On October 19, Mr. Finkelstein placed the high bid for the horse at the auction, which\nwas $32,000. By about 3:00 p.m. that day, Yonkers Raceway delivered possession of Red Carpet\nto Finkelstein, who immediately had the horse transported to his barn. The next morning,\nFinkelstein\xe2\x80\x99s trainer noticed some swelling of the horse\'s left hind leg, and when the horse was\ncaused to walk and trot, it limped and favored its left hind leg. A veterinarian came out to inspect\nthe horse, and within 24 hours of the horse\xe2\x80\x99s delivery, at 11:30 a.m. on October 20, Finkelstein\nnotified Yonkers Raceway that he rejected the horse. Neither Raceway nor Finkelstein paid the\nMirons any part of the purchase price for Red Carpet, so they brought a suit seeking the purchase\nprice. The District Court awarded the purchase price to plaintiffs.]\nJ. JOSEPH SMITH, Circuit Judge\n\xe2\x80\xa6. [W]e think the trial judge was right in finding that Finkelstein failed to make an effective\nrejection of the horse under U.C.C. \xc2\xa7\xc2\xa7 2-602(1), thereby accepting it under subsection (b).\nU.C.C. \xc2\xa7\xc2\xa7 2-602(1) provides: \xe2\x80\x98Rejection of goods must be within a reasonable time after their\n176\n\n\x0cdelivery or tender. It is ineffective unless the buyer seasonably notifies the seller.\xe2\x80\x99\nFinkelstein accepted the horse, then, if having had a reasonable opportunity to inspect it,\nhe did not reject it within a reasonable time.14 What is reasonable depends upon an evaluation of\nall of the circumstances, and we would therefore be reluctant to overturn the findings and\nconclusions of the trial judge on these issues. He has a feel for the circumstances of the case\nwhich we could not possibly have.15 Moreover, the finding that Finkelstein did not reject the\nhorse within a reasonable time16 seems to us to be clearly correct.\nAs the trial judge rightly pointed out, \'The fact that the subject matter of the sale in this\ncase was a live animal \xe2\x80\xa6 bears on what is a reasonable time to inspect and reject.\' Finkelstein\'s\nown testimony showed that it is customary, when buying a racehorse, to have a veterinarian or\ntrainer examine the horse\'s legs, and we agree that the existence of this custom is very important\nin determining whether there was a reasonable opportunity to inspect the horse. See Official\nComment to U.C.C. \xc2\xa7 1-204, para. 2. We gather from the record that the reason it is customary to\nexamine a racehorse\'s legs at the time of sale is that a splint bone is rather easily fractured (there\nwas testimony that a fracture could result from the horse kicking itself), and although the judge\nmade no specific findings as to this, we assume that is generally what he had in mind when he\npointed out that \'a live animal is more prone to rapid change in condition and to injury than is an\ninanimate object.\' As we have said, Finkelstein did not have the horse examined either at the\nplace of sale or at his barn later the day of the sale. He thus passed up a reasonable opportunity to\ninspect Red Carpet.\nFinkelstein having had a reasonable opportunity to inspect Red Carpet on the day of the\nsale, we have no problem with the finding that the attempted rejection on the next day did not\ncome within a reasonable time. In addition to our reluctance to question the trial judge\'s finding\nas to what is a reasonable time, we take into account that what is a reasonable time for rejection\ndepends on the purpose of rejection. See U.C.C. \xc2\xa7 1-204(2). Where goods are effectively rejected\nfor breach of warranty, the burden of proving that they conform presumably remains on the\nseller,17 whereas upon acceptance the buyer has the burden to establish any breach. U.C.C. \xc2\xa7 214 A \xe2\x80\x98reasonable opportunity to inspect,\xe2\x80\x99 U.C.C. \xc2\xa7\xc2\xa7 2-606(1)(b), may of course encompass more than merely a\nreasonable time to inspect; here, there is no question that Finkelstein had the facilities for inspection available, and\nthe only question on appeal was whether he waited too long.\nA reasonable period for rejection overlaps a reasonable opportunity to inspect under U.C.C. \xc2\xa7\xc2\xa7 2606(1)(b). Thus if inspection discloses a defect, there remains the obligation to reject within a reasonable time. But\nin many cases where the buyer passes up a reasonable opportunity to inspect, he thus fails to reject within a\nreasonable time, and we think that this is one of those cases, for reasons stated in the text.\n15 Cf. the cases in which it has been said that what is a reasonable time for inspection is a question of fact for the\njury\xe2\x80\xa6. Anderson Hosiery Co. v. Dixie Knitting Mills, Inc. 204 F.2d 503, 505 (4th Cir. 1953) [other cites omitted]\n16 There is no specific finding, as such, to that effect, but the District Court\'s opinion makes it clear that the court\nfound that there was no rejection within a reasonable time.\n17 The official comment to U.C.C. \xc2\xa7 2-602, para. 3, states that the section applies only to rightful rejection by the\n\n177\n\n\x0c607(4). In this case, the subject of the sale is a racehorse warranted to be sound, and the record\nclearly shows that an injury such as occurred here, rendering a horse unsound, may be a matter of\nchance, proof of the exact time of injury being very difficult to make. In these circumstances, the\nburden of proof on the issue of soundness at the time of sale cannot fairly rest on the seller where\nthe buyer has taken possession of the horse, transported it to his barn, and kept it overnight\nbefore discovering the injury and informing the seller of it. We conclude that rejection did not\ntake place within a reasonable time after delivery, and Finkelstein thus accepted the horse. In\nshort, since one of the consequences of acceptance is that the buyer bears the burden of proving\nany breach, the fairness of allocating the burden one way or the other is relevant in determining\nwhether acceptance has occurred-- here, whether rejection took place within a reasonable time.\nThe defendants have argued strenuously that inspection and rejection on the day after the\nsale is certainly soon enough, and the argument would gain substantial strength if another sort of\ndefect were involved and we took into account that the customary type of inspection at the time\nof sale might not disclose aspects of a horse\'s soundness other than the condition of its legs, and\nthat these aspects, unlike the condition of the legs, would be very unlikely to change overnight.\nThere is nothing in the record as to how much the customary inspection at the time of sale would\nshow; Finkelstein testified only that he has a trainer or veterinarian examine the legs of horses he\nbuys. In any case, if there are defects which are not discoverable by the inspection which the\nDistrict Court found Finkelstein had a reasonable opportunity to make, the problem is taken care\nof by U.C.C. \xc2\xa7 2-608(1), which provides in relevant part:\nThe buyer may revoke his acceptance of a lot or commercial unit whose non-conformity\nsubstantially impairs its value to him if he has accepted it\n(b) without discovery of such nonconformity if his acceptance was reasonably induced\neither by the difficulty of discovery before acceptance or by the seller\'s assurances.\nThe answer to the argument is that inspection is not necessarily final; where there are\ndefects discoverable by a customary inspection at the time of sale, a buyer in Finkelstein\'s\nposition will not be excused from making that inspection and rejecting the goods within a\nreasonable time, if a defect is disclosed, on the ground that there are possible critical defects\nwhich only a more thorough inspection would disclose....\nThe defendants argue that the provision in the Terms and Conditions of Sale that any\nwarranty of the consignor \'shall not extend beyond 24 hours after the fall of the Auctioneer\'s\nhammer or until final payment has been made, whichever is sooner,\' fixes by agreement, a\nbuyer. Yet acceptance may depend upon whether there has been a rejection under that section, and the allocation of\nthe burden of proving whether there was a defect, and thus whether or not there was \'rightful rejection,\' depends upon\nwhether there has been acceptance. See U.C.C. \xc2\xa7\xc2\xa7 2-606(1)(b) and 2-607(4). The only sensible construction of these\nsections would seem to be that non-acceptance, consisting of attempted rejection within a reasonable time after\ndelivery or tender, amounts to rightful rejection if the seller fails to prove that the goods conform, but is a breach if\nthe seller proves conformity.\n\n178\n\n\x0creasonable time for rejection, U.C.C. \xc2\xa7 1-204(1)....\nWe think this provision must be construed simply as setting a time within which defects\nmust be reported in order for the warranty to be valid. The setting of such a deadline does not\nnecessarily mean that any unreasonable delay in inspection or rejection is acceptable so long as it\ndoes not extend past the deadline. Had Red Carpet been obviously lame, hobbling badly at the\ntime he was delivered to Finkelstein, and had Finkelstein nonetheless taken the horse away to his\nbarn without comment, it would be unreasonable to say that Finkelstein nonetheless had twentyfour hours to report the defect, because of this provision. On our view of the case, whether\nrejection was within a reasonable time must be answered with reference to what inspection for\ndefects is customary, and it appears that Finkelstein had no more excuse for taking the horse\naway without giving its legs the customary inspection than he would have had for taking it away\nwithout comment if it had been hobbling. We will not construe a provision which by its terms\nsets a maximum time for reporting defects to set a minimum time as well, for some defects may\nbe more readily discoverable than others.\nWe conclude, then, that Finkelstein accepted the horse by failing to reject it within a\nreasonable time, and thus had the burden of proving any breach of warranty. As we have already\nsaid, we find ample support for the finding that he failed to prove a breach by a fair\npreponderance of the credible evidence....\nCase Note:\nSeveral factors are important in determining whether there has been a reasonable time to\ninspect, and whether rejection has occurred within a reasonable time of tender of delivery.\nThese factors include the contract terms, trade usage, the nature of the goods (i.e.,\nwhether they are perishable or easily damaged), the nature of the defect (is it difficult to\ndiscover?), the sophistication of the buyer, and whether delay makes it more difficult for\nthe seller to exercise its right to cure.\nProblem 12-2. On February 1, a friend of yours purchased a 2010 Toyota Corolla with 90,000\nmiles from Hot Deal Autos for $2,499. Before driving the car off the lot, your friend took a 10mile test drive in the car with the salesman, and didn\xe2\x80\x99t notice any problems. On February 10, the\ncar began to stall and didn\xe2\x80\x99t shift easily. When he took it to his auto mechanic, the mechanic told\nhim the transmission needed to be replaced. Your friend called you (an attorney), asking if he can\nnow reject the car and get his money back. What is your advice?\n12.5. Seller\xe2\x80\x99s Right to Cure. The seller\xe2\x80\x99s right to cure, set forth at UCC \xc2\xa7 2-508, is a significant\nlimitation on the buyer\xe2\x80\x99s right to reject a good for any non-conformity. The extent of a seller\xe2\x80\x99s\nright to cure depends, in part, upon whether the time for seller\xe2\x80\x99s performance has expired.\n12.5.1. A seller has an absolute right to cure under \xc2\xa7 2-508(1) if the time for delivery has\nnot yet expired. For example, Downtown Motors has delivered the car Joe ordered 3 days\n179\n\n\x0cbefore the agreed upon delivery date of May 1, and it is the wrong color. In this situation,\nDowntown Motors has the right to deliver to Joe by May 1 a car which is the right color,\nif the following two conditions are met:\n(a) the seller notifies buyer of its intent to cure and\n(b) the seller in fact cures within the time for performance by making a\nconforming delivery.\n12.5.2. Section 2-508(2) sets forth the conditions under which a seller may cure a nonconforming tender after the time for seller\xe2\x80\x99s performance has passed.\nProblem 12-3. Identify the three requirements which must be met in order for a seller to be\nallowed to cure a non-conforming tender under UCC \xc2\xa7 2-508(2):\n(1)\n(2)\n(3)\nBartus v. Riccardi\n284 N.Y.S.2d 222 (City Ct. 1967)\nThe plaintiff is a franchised representative of Acousticon, a manufacturer of hearing aids.\nOn January 15, 1966, the defendant signed a contract to purchase a Model A-660 Acousticon\nhearing aid from the plaintiff. The defendant specified Model A-660 because he had been tested\nat a hearing aid clinic and had been informed that the best hearing aid for his condition was this\nAcousticon model. An ear mold was fitted to the defendant and the plaintiff ordered Model A660 from Acousticon.\nOn February 2, 1966, in response to a call from the plaintiff the defendant went to the\nplaintiff\'s office for his hearing aid. At that time he was informed that Model A-660 had been\nmodified and improved, and that it was now called Model A-665. This newer model had been\ndelivered by Acousticon for the defendant\'s use. The defendant denies that he understood this\nwas a different model number. The hearing aid was fitted to the defendant. The defendant\ncomplained about the noise, but was assured by the plaintiff that he would get used to it.\nThe defendant tried out the new hearing aid for the next few days for a total use of 15\nhours. He went back to the hearing clinic, where he was informed that the hearing aid was not the\nmodel that he had been advised to buy. On February 8, 1966, he returned to the plaintiff\'s office\ncomplaining that the hearing aid gave him a headache, and that it was not the model he had\nordered. He returned the hearing aid to the plaintiff, for which he received a receipt. At that time\nthe plaintiff offered to get Model A-660 for the defendant. The defendant neither consented to\n180\n\n\x0cnor refused the offer. No mention was made by either party about canceling the contract, and the\nreceipt given by the plaintiff contained no notation or indication that the plaintiff considered the\ncontract canceled or rescinded.\nThe plaintiff immediately informed Acousticon of the defendant\'s complaint. By letter\ndated February 14, 1966, Acousticon, writing directly to the defendant, informed him that Model\nA-665 was an improved version of Model A-660, and that they would either replace the model\nthat had been delivered to him or would obtain Model A-660 for him. He was asked to advise the\nplaintiff immediately of his decision so that they could effect a prompt exchange. After receiving\nthis letter the defendant decided that he did not want any hearing aid from the plaintiff, and he\nrefused to accept the tender of a replacement, whether it be Model A-665 or A-660.\nThe plaintiff is suing for the balance due on the contract. . . .\nThe question before the court is whether or not the plaintiff, having delivered a model\nwhich admittedly is not in exact conformity with the contract, can nevertheless recover in view of\nhis subsequent tender of the model that did meet the terms of the contract.\nThe defendant contends that since there was an improper delivery of goods, the buyer has\nthe right to reject the same under sections 2-601 and 2-602[(2)(c)] of the Uniform Commercial\nCode. . . .\nThe defendant, however, has neglected to take into account section 2-508 of the Uniform\nCommercial Code which has added a new dimension to the concept of strict performance. This\nsection permits a seller to cure a nonconforming delivery under certain circumstances.\nSubdivision (1) of this section enacts into statutory law what had been New York case law. This\npermits a seller to cure a nonconforming delivery before the expiration of the contract time by\nnotifying the buyer of his intention to so cure and by making a delivery within the contract\nperiod. This has long been the accepted rule in New York. [cites omitted]\nHowever, subdivision (2) of section 2-508 of the Uniform Commercial Code goes further\nand extends beyond the contract time the right of the seller to cure a defective performance.\nUnder this provision, even where the contract period has expired and the buyer has rejected a\nnonconforming tender or has revoked an acceptance, the seller may "substitute a conforming\ntender" if he had "reasonable grounds to believe" that the nonconforming tender would be\naccepted and "if he seasonably notifies the buyer" of his intention "to substitute a conforming\ntender." (51 N.Y. Jur., Sales, p. 41.)\nThis in effect extends the contract period beyond the date set forth in the contract itself\nunless the buyer requires strict performance by including such a clause in the contract.\n"The section [\xc2\xa7 2-508(2)] rejects the time-honored, and perhaps time-worn notion, that\nthe proper way to assure effective results in commercial transactions is to require strict\n181\n\n\x0cperformance. Under the Code a buyer who insists upon such strict performance must rely on a\nspecial term in his agreement or the fact that the seller knows as a commercial matter that strict\nperformance is required." (48 Cornell L. Q. 13; 29 Albany L. Rev. 260.)\nThis section seeks to avoid injustice to the seller by reason of a surprise rejection by the\nbuyer. (Official Comment, McKinney\'s Cons. Laws of N. Y., Book 62 \xc2\xbd, Uniform Commercial\nCode, \xc2\xa7 2-508.)\nAn additional burden, therefore, is placed upon the buyer by this section. "As a result a\nbuyer may learn that even though he rejected or revoked his acceptance within the terms of\nSections 2-601 and 2-711, he still may have to allow the seller additional time to meet the terms\nof the contract by substituting delivery of conforming goods." (3 Bender\'s Uniform Commercial\nCode Serv., Sales and Bulk Transfers, \xc2\xa714-02 [1] [a] [ii].)\nHas the plaintiff in this case complied with the conditions of section 2-508?\nThe model delivered to the defendant was a newer and improved version of the model\nthat was actually ordered. Of course, the defendant is entitled to receive the model that he\nordered even though it may be an older type. But, under the circumstances, the plaintiff had\nreasonable grounds to believe that the newer model would be accepted by the defendant.\nThe plaintiff acted within a reasonable time to notify the defendant of his tender of a\nconforming model. [UCC \xc2\xa7 1-205.] The defendant had not purchased another hearing aid\nelsewhere. His position had not been altered by reason of the original nonconforming tender.\nThe plaintiff made a proper subsequent conforming tender pursuant to subdivision (2) of\nsection 2-508 of the Uniform Commercial Code.\nJudgment is granted to plaintiff.\nProblem 12-4. Would the court in Bartus have reached a different conclusion if Mr. Riccardi had\nspecifically stated in the purchase agreement that he would not accept any model other than the\nModel 660 hearing aid? Why or why not?\n12.6. Installment Contracts. Recall the default rule of UCC \xc2\xa7 2-307: \xe2\x80\x9c[u]nless otherwise agreed\nall goods called for by a contract for sale must be tendered in a single delivery.\xe2\x80\x9d An installment\ncontract is one where the parties have contracted around that default rule \xe2\x80\x93 it is a contract which\n\xe2\x80\x9crequires or authorizes the delivery of goods in separate lots to be separately accepted.\xe2\x80\x9d For\nexample, if a sawmill agrees to provide 10,000 feet of lumber to a hardware store per month, for\na period of twelve months, the parties have entered into an installment contract, even if they try\nto call it something else. The perfect tender rule generally does not apply to installment\ncontracts. It is much more difficult for a buyer to cancel an installment contract. Section 2612(2) governs when a buyer can reject a single installment; and \xc2\xa7 2-612(3) governs when the\n182\n\n\x0cbuyer can reject the entire contract, including any remaining installments.\nWhere the non-conformity relates to documents, the buyer can reject an installment for\nany non-conformity, subject to the seller\xe2\x80\x99s right to cure if appropriate documents are readily\nprocurable. Comment 4 gives as examples of non-conforming documents the absence of\ninsurance documents under a C.I.F. contract, falsity of a bill of lading, or a bill of lading failing\nto show shipment within the contract period or to the contract destination.\n12.6.1. Section 2-612(2) sets forth the general rule that a buyer may reject a single\ninstallment only if (i) the non-conformity substantially impairs the value of that\ninstallment and (ii) the non-conformity cannot be cured.\n12.6.1.1. If a single installment is non-conforming, and the non-conformity does\nnot substantially impair the value of that installment, the buyer must accept it,\nregardless of whether the seller offers to cure the non-conformity. The buyer has a\nremedy for damages for the breach.\n12.6.1.2. If there is a substantial impairment to a single shipment, there is an\nobligation on the part of the seller to give adequate assurance of a cure. If\nadequate assurance of a cure is not forthcoming, the buyer can reject the\ninstallment (but not necessarily the entire contract, which we\xe2\x80\x99ll discuss in a bit).\nComment 5 notes that adequate cures may consist of an \xe2\x80\x9callowance against the\nprice\xe2\x80\x9d or of \xe2\x80\x9ca further delivery.\xe2\x80\x9d If the seller gives adequate assurance of a cure,\nthen the buyer must accept that installment, even though its value is substantially\nimpaired, unless the non-conformity is so great that it substantially impairs the\nvalue of the whole contract.\n12.6.2. Section 2-612(3) allows the buyer to reject the entire contract, including future\ninstallments, when a non-conformity with respect to one or more installments\nsubstantially impairs the value of the whole contract. Comment 6 notes that \xe2\x80\x9cdefects in\nprior installments are cumulative in effect.\xe2\x80\x9d The buyer must seasonably notify the seller\nof the cancellation.\n12.6.3. What is \xe2\x80\x9csubstantial impairment?\xe2\x80\x9d This is UCC parlance for \xe2\x80\x9cmaterial breach.\xe2\x80\x9d\nComment 4 indicates that factors to consider include \xe2\x80\x9cthe quality of the goods . . . , time,\nquantity, assortment, and the like. It must be judged in terms of the normal or specifically\nknown purposes of the contract.\xe2\x80\x9d\n12.6.3.1. Can the norm \xe2\x80\x9csubstantial impairment\xe2\x80\x9d be determined by the agreement\nof the parties? Yes: Comment 4 indicates that the agreement \xe2\x80\x9cmay require\naccurate conformity,\xe2\x80\x9d but \xe2\x80\x9cmust have some basis in reason, must avoid imposing\nhardship by surprise and is subject to waiver or to displacement by practical\nconstruction.\xe2\x80\x9d For example, you could define \xe2\x80\x9csubstantial impairment\xe2\x80\x9d in the\n183\n\n\x0ccontract to include a deviation in quantity exceeding 5%.\nProblem 12-5. A law firm enters into an agreement with The Stationery Store to purchase 10\nreams of customized stationery a month for a period of twelve months, at $20.00 per ream. Under\nindustry standards, a ream consists of 500 sheets of paper, and the 500 sheets are wrapped or\nboxed as a unit. Delivery is to occur on the first Monday of each month.\nMonth 1: 10 reams of conforming stationery are delivered.\nMonth 2: 9 reams of conforming stationery are delivered. When notified by the law firm\nof the shortage, the Stationery Store reduces the purchase price for the missing ream.\nMonth 3: The Stationery Store fails to deliver any stationery on the first Monday, due to\na breakdown of its printing machinery. On Thursday, the firm runs out of stationery.\nAfter a frantic call to The Stationery Store, the Store promises to deliver 10 reams of\nconforming stationery the next day, which it does.\nMonth 4: 10 reams of conforming stationery are delivered.\nMonth 5: 10 reams of stationery are delivered, but instead of being packaged 500 sheets\nper unit, 5,000 sheets of stationery are delivered loose in a single large box.\nAs the law clerk for the law firm, you are asked to give your opinion whether the law firm can\nterminate the entire contract. What will you advise?\n12.7. Buyer\xe2\x80\x99s Duties in Event of Rejection. After a buyer rightfully rejects goods, the buyer has\ncertain duties, as set forth in \xc2\xa7\xc2\xa7 2-602 through 2-605. The principal purpose of these provisions is\nto prevent waste.\n12.7.1. Under \xc2\xa7 2-602(1), after rejection, any exercise of ownership by the buyer with\nrespect to the goods or any commercial unit thereof is wrongful as against the seller. If a\nbuyer does exercise ownership, what is the result? Many courts treat an \xe2\x80\x9cexercise of\nownership\xe2\x80\x9d as an acceptance, giving rise to the corresponding obligation to pay for the\ngoods. For example, a company which rejects a copy machine as non-conforming may\nnot then use the machine to make 60,000 copies. W.M. Hobbs, Ltd. v. Accusystems of\nGeorgia, Inc., 339 S.E.2d 646 (Ga. App. 1986).\n12.7.1.1. Not all uses constitute an \xe2\x80\x9cexercise of ownership\xe2\x80\x9d which is \xe2\x80\x9cwrongful\xe2\x80\x9d\nas against the seller. Sometimes the seller puts the buyer in a situation where the\nbuyer has no choice but to use the rejected goods. For example, if a seller installs\nnon-conforming carpet, and after receiving notice of the buyer\xe2\x80\x99s rejection fails to\nremove it, the buyer\xe2\x80\x99s continued use of the carpet is not wrongful. Garfinkel v.\nLehman Floor Covering Co., 302 N.Y.S.2d 167 (N.Y. Dist. Ct. 1969).\n184\n\n\x0c12.7.2. Under \xc2\xa7 2-602(2)(b), if the buyer has not paid for the goods and is in possession\nof the goods at the time of rejection, he must hold the rejected goods with reasonable\ncare at the seller\xe2\x80\x99s disposition for a time sufficient to permit the seller to remove them.\n\xe2\x80\x9cReasonable care\xe2\x80\x9d and \xe2\x80\x9csufficient time\xe2\x80\x9d are questions of fact, determined, in part by the\nnature of the goods. For example, vegetables should not be left to sit in the hot sun if the\nbuyer has refrigerated storage available. If the buyer has paid any portion of the price, the\nbuyer has a security interest in the goods and has certain remedies, such as the right to resell the goods, as set forth in \xc2\xa7 2-711.\n12.7.3. Section 2-603 imposes additional requirements on a merchant buyer in\npossession of rejected goods.\n12.7.3.1. If the seller has no agent or place of business at the market of rejection, a\nmerchant buyer is under a duty after rejection of goods in his possession to follow\nany reasonable instructions of the seller with respect to the goods.\n12.7.3.2. In the absence of such instructions, the merchant buyer must make\nreasonable efforts to sell the rejected goods for the seller if they are perishable or\nthreaten to decline in value speedily.\n12.7.3.3. The merchant buyer who sells goods is entitled to reimbursement from\nthe seller or out of the sales proceeds for reasonable expenses of caring for and\nselling the goods, including a reasonable commission not to exceed 10% of the\ngross proceeds.\n12.7.4. Under \xc2\xa7 2-604, even if the goods are not perishable, if the seller gives no\nreasonable instructions as to the disposition of the rejected goods, the buyer may store the\nrejected goods for the seller\xe2\x80\x99s account or reship them to the seller or resell them for the\nseller\xe2\x80\x99s account, with reimbursement for reasonable expenses. This section is not limited\nto merchant buyers.\n12.7.5. Section 2-602 states that a rejection \xe2\x80\x9cis ineffective unless the buyer seasonably\nnotifies the seller.\xe2\x80\x9d Additional notice requirements are set forth at \xc2\xa7 2-605. This section\nrequires that the buyer identify the particular defect upon which the rejection is based.\n12.7.5.1. Failure to provide notice of a particular defect precludes the buyer from\nrelying on the unstated defect to justify rejection or to establish a breach, if the\nseller could have seasonably cured the defect.\n12.7.5.2. Between merchants, if the seller has made a request in writing for a \xe2\x80\x9cfull\nand final written statement of all defects\xe2\x80\x9d on which the buyer proposes to rely, and\n185\n\n\x0cthe buyer fails to provide such statement, the buyer is precluded from relying on\nthe unstated defects to justify rejection or to establish a breach.\n12.8. Summary: The Code Scheme for Delivery\nSeller tenders the goods (\xc2\xa7 2-601).\nBuyer inspects for non-conformity (\xc2\xa7\xc2\xa7 2-513(1), 2-606(1)(b)).\nIf a non-conformity is discovered:\nBuyer rejects (\xc2\xa7 2-602), subject to seller\xe2\x80\x99s right to cure (\xc2\xa7 2-508), or\nBuyer accepts on the assumption it will be cured (\xc2\xa7 2-608(1)), or\nBuyer accepts.\nIf no non-conformity is discovered:\nBuyer accepts (\xc2\xa7 2-606) and pays contract price (\xc2\xa7 2-607).\nIf a non-conformity is discovered after acceptance:\nBuyer revokes acceptance (\xc2\xa7 2-608), or\nBuyer recovers for breach of contract or breach of warranty\n(\xc2\xa7\xc2\xa7 2-607, 2-714, 2-717).\nChapter 12 Additional Sources.\nScott J. Burnham, Glannon Guide to Sales: Learning Sales Through Multiple-Choice Questions\nand Analysis (Wolters Kluwer 2d ed., 2012), Chapter 12\nJames J. White and Robert S. Summers, Uniform Commercial Code (West 6th ed., 2010),\nChapter 9\n\n186\n\n\x0cChapter 13. Acceptance; Revocation of Acceptance\n13.1. Acceptance. Note that as used in this chapter, the term \xe2\x80\x9cacceptance\xe2\x80\x9d refers to the buyer\xe2\x80\x99s\nacceptance of the goods which the buyer has agreed to purchase under a previously formed\ncontract. It does not refer to acceptance of an offer which leads to formation of a contract.\nAs discussed in Chapter 12, the perfect tender rule favors the buyer, and allows the buyer to\nreject for any non-conformity, subject to certain important limitations (including the obligation to\nnotify the seller of rejection and the seller\xe2\x80\x99s right, in certain circumstances, to cure the defect).\nOnce a buyer has accepted the goods, the rules shift to favor the seller. After acceptance, the\nbuyer may no longer reject the goods for any non-conformity. Section 2-607(2). The buyer does\nhave a more limited right, described as revocation of acceptance (the more stringent elements of\nwhich are discussed at \xc2\xa7 13.3 below). Under \xc2\xa7 2-606(1), acceptance occurs in one of three ways:\n13.1.1. Acceptance occurs after a reasonable opportunity to inspect the goods, if the\nbuyer signifies to the seller that either (i) the goods are conforming or (ii) that the buyer\nwill take or retain the goods in spite of their non-conformity.\n13.1.1.1. Comment 3 states that \xe2\x80\x9cpayment made after tender is always one\ncircumstance tending to signify acceptance of the goods but in itself it can never\nbe more than one circumstance and is not conclusive.\xe2\x80\x9d (Emphasis supplied.)\n13.1.1.2. As we discussed in Chapter 12, what constitutes a \xe2\x80\x9creasonable\nopportunity to inspect\xe2\x80\x9d is a question of fact. Comment 2 states that course of\nperformance, course of dealing, and usage of trade will be important in\ndetermining what is \xe2\x80\x9creasonable.\xe2\x80\x9d\n13.1.1.3. Note that if a buyer accepts the goods in spite of their non-conformity,\nthe buyer is not out of luck. The buyer may have a claim for damages arising from\nthe non-conformity or, as we shall see in \xc2\xa7 13.3, may have the right to revoke\nacceptance.\n13.1.2. Acceptance occurs after the buyer has had a reasonable opportunity to inspect the\ngoods, if the buyer fails to make an effective rejection under UCC \xc2\xa7 2-602. Recall Miron\nv. Yonkers Raceway, Inc., 400 F.2d 112 (2d Cir. 1968) in \xc2\xa7 12.4, where the court held that\nfailure to timely inspect and reject a racehorse resulted in acceptance.\n13.1.3. The buyer accepts goods if the buyer does any act inconsistent with the seller\xe2\x80\x99s\nownership. This concept is parallel to the buyer\xe2\x80\x99s obligation under UCC \xc2\xa7 2-602 not to\n\xe2\x80\x9cexercise ownership\xe2\x80\x9d after the buyer has rejected the goods. However, not all uses\nconstitute \xe2\x80\x9can act inconsistent with seller\xe2\x80\x99s ownership\xe2\x80\x9d or an \xe2\x80\x9cexercise of ownership.\xe2\x80\x9d\nFor example, if the buyer only uses the goods for purposes of inspection, such as the test187\n\n\x0cdrive of a car which the buyer is interested in purchasing, such use is not inconsistent\nwith the seller\xe2\x80\x99s ownership. Furthermore, the seller may put the buyer in a position where\nthe buyer has no choice but to use the goods after rejection, such as continued use of a\nnon-conforming carpet which seller has installed and refuses to remove after the buyer\nrejects the carpet.\nProblem 13-1. A farmer buys an irrigation system pump from an implement dealer. He takes it\nhome and immediately installs it. The pump doesn\xe2\x80\x99t work well, but for a period of two weeks the\nfarmer keeps trying different things (such as repositioning the pump, cleaning the pump) to get it\nto work. After two weeks, the farmer notifies the seller of his rejection of the pump. Does buyer\xe2\x80\x99s\nuse of the pump for two weeks constitute an acceptance, which cuts off buyer\xe2\x80\x99s right to reject?\nWhy or why not?\n13.2. Effect of Acceptance. If the buyer accepts the goods, turn to \xc2\xa7 2-607 for the effect of\nacceptance.\n13.2.1. After acceptance, the buyer must pay the contract price. UCC \xc2\xa7 2-607(1). If the\nbuyer has accepted in spite of a non-conformity, under \xc2\xa7 2-717 the buyer may deduct the\ndamages resulting from the non-conformity from the purchase price.\n13.2.2. Under \xc2\xa7 2-607(2), if a buyer accepts the goods, the buyer no longer has the right\nto reject the goods.\n13.2.3. Although the buyer may have lost his right to reject the goods as a result of\nacceptance, the buyer still has a claim for damages if there is a non-conformity. Under\n\xc2\xa7 2-607(3)(a), after acceptance, the buyer must within a reasonable time after discovery\nof a breach notify the seller of the breach or be barred from any remedy.\n13.2.3.1. See Comment 4: the \xe2\x80\x9ccontent of the notification need merely be\nsufficient to let the seller know that the transaction is still troublesome and must\nbe watched.\xe2\x80\x9d\n13.2.3.2. The courts are split on whether \xe2\x80\x9cremote sellers\xe2\x80\x9d are also required to\nreceive notice of a breach, or if the buyer only needs to give notice of breach to\nher immediate seller. See Jane Massey Draper, Annotation, Sufficiency and\nTimeliness of Buyer\'s Notice Under UCC \xc2\xa7 2-607(3)(a) of Seller\'s Breach of\nWarranty, 89 A.L.R.5th 319 (2001).\nProblem 13-2. Buyer buys an air conditioner in July from Sears. A few days after using it, buyer\ndiscovers pools of water standing on the floor. He waits until September to notify Sears of the\nproblem. Is notice reasonable? What if buyer purchases the air conditioner in November on sale,\nand doesn\xe2\x80\x99t use it until June, at which time he notices the pools of water and immediately calls\nSears and complains.\n188\n\n\x0c13.2.4. After acceptance, the burden is on the buyer to establish any breach with respect\nto the goods accepted.\n13.3. Revocation of Acceptance. At this point, you are well aware that if a buyer accepts goods,\nthe buyer may no longer reject the goods for any non-conformity. After acceptance, is the buyer\nstuck with a product that turns out to be defective? That is, although the buyer still has the right\nto other remedies, can the buyer rescind the contract and be excused from paying the purchase\nprice for the goods? Section 2-608 provides limited circumstances where a buyer may revoke\nacceptance, return the goods, and be relieved from his obligation to pay. Turn to UCC \xc2\xa7 2-608.\n13.3.1. In order to revoke acceptance, the non-conformity must substantially impair the\nvalue of the good to the buyer \xe2\x80\x9cto him\xe2\x80\x9d\nAND EITHER\na. The buyer accepted aware of the non-conformity, but reasonably assuming that\nit would be cured (and it hasn\xe2\x80\x99t been seasonably cured);\nOR\nb. The buyer had not discovered the non-conformity at the time of acceptance,\neither because (i) the non-conformity was difficult to discover, or (ii) her\nacceptance was reasonably induced by seller\xe2\x80\x99s assurances (which, for example,\nmay have caused her not to inspect).\nMany of the cases explore whether the language \xe2\x80\x9cto him\xe2\x80\x9d creates a subjective test of nonconformity, which might allow the buyer to claim that a trivial defect was important to\nthe particular buyer. For example, in Harper v. Mitchell, 1985 WL 4040 (Tenn. App.), the\ncourt stated: \xe2\x80\x9cWhile it is true that [\xc2\xa7 2-608] creates a subjective test in the sense that the\nrequirements of a particular buyer must be examined and deferred to, the evidence with\nregard to the substantial impairment to a particular buyer must be measured in objective\nterms\xe2\x80\xa6. Thus, the \xe2\x80\x98substantial impairment\xe2\x80\x99 requirement should be construed to exclude\nattempted revocations based upon trivial defects or defects that can be easily repaired.\xe2\x80\x9d\nProblem 13-3. Helen, a rancher, enters into an agreement for the purchase of a new pick-up. The\ncontract specifically provides that the pick-up will come with a full-sized spare tire, because\nHelen lives 30 miles out of town on a gravel road, and she doesn\xe2\x80\x99t trust that a puny spare tire\nwould hold up on such roads. When the pick-up arrives, Helen forgets to check on the spare tire.\nA month later, while crawling under the pick-up to get a puppy that has scrambled under it, she\nlooks up and notices that the spare tire (attached to the undercarriage) is one of those puny things.\n\n189\n\n\x0c(1) Can Helen reject the pick-up at this point in time under \xc2\xa7\xc2\xa7 2-601 and 2-602 for the nonconforming spare tire? Why or why not?\n(2) Assume that Helen has, in fact, accepted the pick-up, and her right to reject has been cut off.\nMay Helen now revoke her acceptance on the ground that the non-conforming spare tire\nsubstantially impairs the value of the pick-up to her?\n(3) Assume that you have concluded that the non-conforming spare tire is a substantial\nimpairment. Which one of the remaining requirements for revocation as set forth in \xc2\xa7 2-608(1)(a)\nor (b) has been met (if any)?\n(4) If Helen cannot revoke her acceptance, are there any other remedies available to her?\n13.3.1.1. Note that a buyer may not revoke acceptance based upon defects which\nwere not known to him at the time of acceptance because of his own failure to\nmake a reasonable investigation. In Hummel v. Skyline Dodge, Inc., 589 P.2d 73\n(Colo. App. 1978), a used car dealer was interested in buying a car for re-sale on\nhis lot. He was aware that it had been in a previous accident. He kicked the\nwheels, opened the hood, and took it for a spin around the block. He then bought\nthe car. A few weeks later, he took it to a mechanic who told him the frame was\nbent and there was a crack in the engine mount. The court would not allow him to\nrevoke acceptance, noting that he \xe2\x80\x9chad an unlimited opportunity to inspect the car\nprior to agreeing to purchase it.\xe2\x80\x9d\n13.3.1.2. Note also that if a purchaser knowingly buys something with a defect,\nthe purchaser cannot subsequently revoke acceptance based upon that defect,\nunless the purchaser had reason to believe that the defect would be cured.\n13.3.1.3. See Lee R. Russ, Annotation, What Constitutes "substantial impairment"\nEntitling Buyer to Revoke his Acceptance of Goods Under UCC \xc2\xa7 2-608(1), 38\nA.L.R. 5th 191 (1996).\n13.3.2. Under UCC \xc2\xa7 2-608(2), revocation of acceptance must occur within a reasonable\ntime after the buyer discovers (or should have discovered) the defect and before any\nsubstantial change in the condition of the goods not attributable to the defect.\n13.3.2.1. Comment 4 indicates that attempts to repair should be taken into account\nin determining what constitutes a \xe2\x80\x9creasonable time\xe2\x80\x9d within which to revoke. For\nexample, if a car dealer repeatedly attempts to repair a car, and fails to do so, the\nperiod of repair will extend the time within which a buyer may reasonably revoke.\nSee, for example, McCullough v. Bill Swad Chrysler-Plymouth, Inc., 449 N.E.2d\n1289 (Oh. 1983), where revocation nine months after acceptance was timely,\nbecause of the seller\xe2\x80\x99s repeated (but failed) attempts at repair during that period.\n190\n\n\x0c13.3.2.2. Another important factor is the difficulty in discovering the defect. In\nSmith v. Penbridge Assocs., Inc., 665 A.2d 1015 (Pa. Sup. Ct. 1995), Donna\nSmith purchased a breeding pair of emus in August 1992. In October, as the\nbreeding season commenced, both emus started to grunt. Donna became\nsuspicious, because typically only male emus grunt. She called the seller, who\nrecommended that Donna do an internal exam of the emus to determine their\ngender. As a result of this exam, Donna discovered that both emus were male, and\nshe immediately provided sellers with notice of revocation of her acceptance of\nthe breeding pair. The seller argued that Donna should have discovered the\nproblem sooner, but the court disagreed, noting the difficulty of determining the\ngender of an emu.\n13.3.3. The buyer must notify the seller of the revocation within a reasonable time after\ndiscovery of the grounds for revocation. Comment 4 to \xc2\xa7 2-608 notes that the parties may\nby their agreement limit the time for notification.\n13.3.3.1. At least one court has ruled that notice one year after discovery of a\ndefect is unreasonable as a matter of law. Sstech Ry. Tech. Proprietary, Ltd. v.\nHerzog Servs., Inc., 1996 WL 362956 (D. Mo. 1996).\nWilk Paving, Inc. v. Southworth-Milton, Inc.\n649 A.2d 778 (Vt. 1994)\nOpinion by ALLEN, C.J.\nDefendant Southworth-Milton, Inc., appeals from a judgment in favor of plaintiff, Wilk\nPaving, Inc., in the amount of the purchase price of an asphalt roller that plaintiff had purchased\nfrom defendant. After a bench trial, the court ruled that plaintiff was entitled to revoke\nacceptance and effectively had revoked acceptance under the Uniform Commercial Code (UCC),\nsee 9A V.S.A. \xc2\xa7\xc2\xa7 2-101 to 2-725 (Article 2, Sales). We affirm.\nOn October 10, 1989, plaintiff purchased the roller, relying in part on representations in a\nbrochure provided by defendant that the machine was versatile, well-suited for plaintiff\'s typical\npaving jobs, reliable, and easy to maintain. As part of the purchase contract, defendant warranted\nrepair and replacement of defective parts for one year and disclaimed all other warranties. On\nDecember 8, 1989, plaintiff discovered that the right rear vibratory motor was leaking oil and\nthat the electrical system required repair. Plaintiff was advised to deliver the roller to defendant\'s\nplace of business, and on December 18, 1989, the repair work was done to correct the foregoing\nproblems. In addition, defendant replaced a blown fuse, tightened loose hydraulic lines that were\nleaking oil, resealed a hydraulic feedline to the vibratory motor, and gave the roller a general\ntune-up. Thereafter, plaintiff did not use the roller until the spring, when weather permitted\nresumption of paving projects.\n191\n\n\x0cOn June 7, 1990, oil was observed to be leaking from the brake housing, requiring\nreplacement of the housing and seals. On June 21, 1990, defendant found that the front drive\nmotor was leaking oil from the parking brake piston. On June 29, 1990 the water pump seal was\nleaking and required disassembly, cleaning, and resealing. On August 16, 1990, the starter failed\nbecause of loose wiring in the principal wiring harness and starter. On August 28, 1990, the oil\nplug broke off, causing oil to leak over the surface of the pavement being applied. As a result,\nplaintiff had to replace the affected surface. All but the last of these problems were reported to\ndefendant. Plaintiff also complained that the problems with the internal hydraulics made it\ndifficult to drive the roller onto a trailer for transporting.\nIn September 1990, plaintiff\'s president informed defendant that he no longer wanted the\nmachine and requested a return of the purchase price, less a reasonable rental fee for the time\nplaintiff used the roller during the summer. In November 1990, the roller was parked in plaintiff\'s\nlot and covered with a tarp. Examinations of the roller by experts in 1992 in preparation for trial\ndisclosed that it was still leaking oil.\nAfter trial, plaintiff was awarded the purchase price of the roller, but was denied recovery\nfor consequential damages. Defendant then moved to alter or amend the judgment to provide\ndefendant a setoff of the reasonable rental value of the roller. Defendant also moved to amend its\nanswer to assert setoff as an affirmative defense. Both motions were denied.\nOn appeal, defendant contends that it was not afforded an opportunity to cure the roller\'s\ndefects, that plaintiff failed to prove a nonconformity sufficient to create a right of revocation of\nacceptance, and that any such right to revoke was waived when plaintiff continued to use the\nroller. Defendant also challenges the trial court\'s ruling regarding the right to setoff. Plaintiff\ncross-appeals the denial of consequential damages.\nDefendant first argues that plaintiff should be barred from any recovery for revoking\nacceptance without first giving defendant an opportunity to cure defects in the roller. As a\ngeneral rule, once a buyer accepts tender the buyer must, within a reasonable time after discovery\nof a breach, notify the seller of the breach or be barred from any remedy. 9A V.S.A. \xc2\xa7 2607(3)(a). This notice requirement affords a seller the opportunity to cure the claimed defects or\nminimize the buyer\'s losses. Desilets Granite Co. v. Stone Equalizer Corp., 133 Vt. 372, 375,\n340 A.2d 65, 67 (1975). The right to cure has limits, however: "the buyer . . . is not bound to\npermit the seller to tinker with the article indefinitely in the hope that it may ultimately be made\nto comply with the warranty." Orange Motors of Coral Gables, Inc. v. Dade County Dairies,\nInc., 258 So. 2d 319, 321 (Fla. Dist. Ct. App. 1972).\nThe record amply supports the trial court\'s conclusion that defendant had a reasonable\nopportunity to cure but failed to do so. The court\'s findings are based on evidence that a series of\nmechanical problems plagued the roller from the start of plaintiff\'s ownership. Almost without\nexception, plaintiff reported the problems to defendant, who, at various times over nine months,\n192\n\n\x0cattempted repairs sufficient to keep the roller working as promised. Under the circumstances of\nthis case, plaintiff afforded defendant adequate opportunity to make good on its representations\nbefore revoking acceptance.\nDefendant next asserts that plaintiff failed to prove a nonconformity sufficient to create a\nright of revocation. Revocation of acceptance is governed by UCC \xc2\xa7 2-608(1), which provides:\nThe buyer may revoke his acceptance of a . . . commercial unit whose non-conformity\nsubstantially impairs its value to him if he has accepted it. . . .\n(b) without discovery of such non-conformity if his acceptance was reasonably induced\neither by the difficulty of discovery before acceptance or by the seller\'s assurances.\n9A V.S.A. \xc2\xa7 2-608(1).\nDefendant argues that the warranty was not breached because each oil leak was from a\ndifferent seal, and defendant repaired or was prepared to repair all such leaks within the warranty\nperiod. The trial court took a broader view of the evidence, and concluded that defendant\nbreached the express warranty that the roller required only simple and light maintenance, was\nideal for base surface application, and would perform exceptionally well on plaintiff\'s usual jobs.\nThis conclusion is amply supported by the findings with respect to the deficiencies. A seller\ncannot bar revocation by repairing or agreeing to repair numerous defects; at some point a buyer\nmay say "enough is enough" and revoke acceptance. Rester v. Morrow, 491 So. 2d 204, 210\n(Miss. 1986). Defendant\'s argument that it never repaired or replaced the same part twice is not\npersuasive because the string of malfunctions substantially impaired the value of the roller.\nMoreover, the breakdowns undermined plaintiff\'s confidence in the ability of the machine to do\nthe job. In light of these findings, the court reasonably concluded that the roller did not conform\nto defendant\'s warranties, notwithstanding defendant\'s repair efforts.\nDefendant also contends that plaintiff waived any right to revoke acceptance by\ncontinuing to use the roller after giving notice of revocation. Defendant asserts that the trial court\nerred in finding that revocation occurred in November 1990, when the machine was parked, and\nin finding that the roller was used only once thereafter, inadvertently, by one of plaintiff\'s\nemployees. According to defendant, plaintiff revoked acceptance in June 1990, when plaintiff\'s\npresident telephoned the manufacturer and offered to pay a reasonable rental fee in exchange for\na return of the roller. The record shows, however, that after additional repairs during the summer\nof 1990, this offer was communicated to the defendant on August 27, 1990. Plaintiff\'s president\ntestified that he made the call "to see what they wanted to do for me." In late September,\nplaintiff\'s president just demanded the return of his money. The court found that defendant made\nrepairs to the roller during the summer of 1990 and continued to assure plaintiff that the\nproblems would be corrected up to and after revocation. In August 1990, plaintiff\'s mechanic\nreplaced a broken oil plug, a burnt-out starter and wiring. Plaintiff\'s president testified that the\nroller was used on two subsequent jobs in October of that year.\n193\n\n\x0cA buyer who revokes acceptance has the same rights and duties with regard to the goods\ninvolved as if they had been rejected. 9A V.S.A. \xc2\xa7 2-608(3). With limited exceptions, a buyer\'s\nexercise of ownership after rejection is wrongful as against the seller. Id. \xc2\xa7 2-602(2)(a); see id.\n\xc2\xa7 2-603(1) (buyer under duty to attempt to sell rejected perishable goods on seller\'s account if\nseller has no agent or place of business at market of rejection), id. \xc2\xa7 2-604 (if seller gives no\ninstructions within reasonable time after buyer\'s rejection, buyer may store, reship, or sell on\nseller\'s account). Nevertheless, continued use of goods whose acceptance has been revoked does\nnot vitiate the revocation if the use was reasonable. McCullough v. Bill Swad Chrysler-Plymouth,\nInc., 5 Ohio St. 3d 181, 449 N.E.2d 1289, 1292 (Ohio 1983). Reasonable use is a question of fact\nthat depends on whether: (1) the seller tendered instructions concerning return of the rejected\ngoods upon notice of the revocation; (2) business needs or personal circumstances compelled the\nbuyer\'s continued use; (3) the seller continued to offer assurances that the nonconformities would\nbe cured or that the buyer would be recompensed for dissatisfaction and inconvenience during\nthe period of continued use; (4) the seller acted in good faith; and (5) the seller suffered undue\nprejudice as a result of the continued use. Id. at 1293.\nThe court found that the continued use after revocation was a good faith attempt to\nmitigate damages, that defendant continued to assure plaintiff that repairs would be successful\nand that the use was reasonable under the circumstances. The record does not disclose any\ninstructions by the defendant to plaintiff regarding permanent return of the roller, or evidence of\nprejudice from continued use. We agree with the trial court that the use of the roller during the\nmonth of October, after buyer had given notice, was not unreasonable. Therefore, plaintiff\'s postrevocation use did not waive the revocation of acceptance.\nFinally, defendant contends it was entitled to a setoff against plaintiff\'s recovery in the\namount of the reasonable value of plaintiff\'s use of the roller. Defendant did not request a setoff\nin its pleadings or at trial. Defendant maintains that the right to setoff need not be explicitly pled,\nbecause the notion of a setoff inheres in the common-law remedy of rescission imposed by the\ntrial court. Setoff, however, is an affirmative defense that is waived if a party fails to plead it.\nWursthaus, Inc. v. Cerreta, 149 Vt. 54, 57, 539 A.2d 534, 536 (1987); see V.R.C.P. 8(c)....\nCase Notes:\n1. What event is the measuring date from which the buyer must reasonably notify the\nseller of the buyer\xe2\x80\x99s revocation of acceptance? In this case, when did revocation of\nacceptance occur? How much time had elapsed? What factors should a court consider in\nits determination of whether a buyer has waited too long to notify seller of its revocation\nof acceptance?\n2. Once a buyer has revoked acceptance of the goods, it is never a recommended practice\nto continue to use them. See, for example, Griffith v. Stovall Tire & Marine, Inc., 329\nS.E.2d 234 (Ga. App. 1985), where a buyer\xe2\x80\x99s continued use of an automobile for 120,000\n194\n\n\x0cmiles after revocation was found to constitute a re-acceptance under \xc2\xa7 2-606(1)(c), and\nWadsworth Plumbing & Heating Co. v. Tollycraft Corp., 560 P.2d 1080 (Or. 1977),\nwhere a buyer\xe2\x80\x99s continued use of a boat after revocation for fishing trips (right up to the\ntime of trial) constituted re-acceptance after revocation. However, not all post-revocation\nuse is fatal. In Fablok Mills, Inc. v. Cocker Machine & Foundry Co., 310 A.2d 491 (N.J.\n1973), the court stated:\nAvoidance of an absolute rule against continued use is counseled by the\noverriding requirement of reasonableness which permeates the Code. We\nconceive that in certain situations, continued use of goods by the buyer may be the\nmost appropriate means of achieving mitigation.\nWhat sort of factors or circumstances would be important for a court to consider in\ndetermining the reasonableness of post-revocation use by a buyer?\n3. This court stated that the \xe2\x80\x9cnotice requirement [of \xc2\xa7 2-608(2)] affords a seller the\nopportunity to cure the claimed defects or minimize the buyer\'s losses.\xe2\x80\x9d Take a look again\nat UCC \xc2\xa7 2-508. Both \xc2\xa7 2-508(1) and (2) refer to a seller\xe2\x80\x99s right to cure in the context of\n\xe2\x80\x9crejection\xe2\x80\x9d of goods. Section 2-508 does not refer to \xe2\x80\x9crevocation of acceptance\xe2\x80\x9d as an\nevent giving rise to a right to cure. Several courts have held that a seller\xe2\x80\x99s right to cure\nonly arises in the context of rejection of goods under the perfect tender rule, and not in\nthe context of revocation of acceptance. See, for example, Gappelberg v. Landrum, 666\nS.W.2d 88 (Tex. 1984) where a customer bought a large-screen television on September\n5. When the television stopped working on September 26, the buyer revoked his\nacceptance. The store offered to cure by replacing the television. The buyer insisted on\nthe return of his purchase price. Off to court they went. The court ruled that the buyer was\nentitled to a return of his purchase price, stating that seller\xe2\x80\x99s right to cure only arose after\nrejection, and not after revocation of acceptance. This is likewise the conclusion of White\n& Summers, Handbook of the Law under the Uniform Commercial Code \xc2\xa7 9-5. See also\nBonebrake v. Cox, 499 F.2d 951 (8th Cir. 1974), which limited a seller\xe2\x80\x99s right to cure to\ncases of rejection.\n4. Another condition to a proper revocation of acceptance is that revocation occur \xe2\x80\x9cbefore\nany substantial change in condition of the goods which is not caused by their own\ndefects.\xe2\x80\x9d The "substantial change in condition" is intended to protect a seller from being\nrequired to take back used or mistreated goods. White & Summers, Handbook of the Law\nunder the Uniform Commercial Code \xc2\xa7 9-4. In Lackawanna Leather Co. v. Martin &\nStewart, Ltd., 730 F.2d 1197 (8th Cir. 1984), a buyer purchased cattle hides, and began to\nprocess them by chemically treating them and splitting them. During this process, the\npurchaser discovered that the hides were defective, and revoked acceptance. The seller\npursued an action to recover the purchase price. The seller asserted that the hides had\nbeen "substantially changed" as a matter of law and that no instruction concerning\nrevocation of acceptance should have been given to the jury. The court ruled in favor of\n195\n\n\x0cthe buyer, noting that the defect could only be discovered during the processing, the seller\nwas aware that the processing was required to make the hides usable, and the processing\nenhanced rather than impaired the value of the hides.\n13.4. Return of Goods after Revocation. After acceptance has been revoked, must the buyer\nreturn the goods to the seller? UCC \xc2\xa7 2-608(3) states that a buyer who rightfully revokes\nacceptance \xe2\x80\x9chas the same rights and duties with regard to the goods involved as if he had rejected\nthem.\xe2\x80\x9d Those rules are found at UCC \xc2\xa7\xc2\xa7 2-602(2) - (3), 2-603, 2-604, and 2-605. Turn back to\n\xc2\xa7 12.7 for a review of these obligations.\n13.4.1. Under UCC \xc2\xa7 2-711(3), where a buyer has rightfully rejected goods or revoked\nacceptance, the buyer has a security interest in any goods in her possession, to the extent\nthe buyer has paid all or a portion of the purchase price, and to the extent the buyer\nincurred costs in their inspection, receipt, transportation, or care. The buyer may re-sell\nthe goods to satisfy this security interest.\n13.4.2. In J.F. Daley Int\'l, Ltd. v. Midwest Container & Indus. Supply Co., 849 S.W.2d\n260 (Mo. App. 1993), the buyer revoked acceptance of thousands of plastic bottles which\nit purchased from seller, after it was discovered that the bottles leaked. The buyer failed\nto return the bottles to the seller. In upholding the appropriateness of the buyer\xe2\x80\x99s conduct,\nthe court noted:\nIn this case, however, there was no evidence of any instructions by [seller] other\nthan to ship the bottles back to [seller] at [buyer\xe2\x80\x99s] expense. As [buyer] points out,\n\xc2\xa7 400.2-603(1) further provides that a seller\'s instructions are not reasonable if, on\ndemand, indemnity for expenses is not forthcoming. [Seller] repeatedly declined\nto pay for return shipment of the bottles. Thus, [buyer] had no obligation to abide\nby [seller\xe2\x80\x99s] instructions. Further, according to [seller\xe2\x80\x99s employee], [seller] would\nhave ground the bottles up for remanufacture. Thus, the evidence supports the\ninference that the remaining bottles were of little or no value to anyone else,\nthereby excusing any effort by [buyer] to sell them on the open market.\nId. at 265.\n13.5. Effect of Breach on Risk of Loss. The normal risk of loss rules set forth at \xc2\xa7 2-509\n(discussed in Chapter 10) are displaced by \xc2\xa7 2-510, if there is a breach giving rise to the right to\nreject, or if there is a rightful revocation of acceptance.\n13.5.1. Under \xc2\xa7 2-510, if a tender or delivery of goods fails to conform to the contract and\ngives rise to a right of rejection under the perfect tender rule (\xc2\xa7 2-601), the risk of loss\nremains on the seller until cure or acceptance.\n196\n\n\x0cProblem 13-4. Whoopie Cereals purchases corn from AgraCorn, F.O.B. AgraCorn\xe2\x80\x99s place of\nbusiness (to be shipped via railcar). AgraCorn agrees to deliver the corn to the carrier (a shipment\ncontract). During shipment, the railcar topples over, destroying the corn.\n(1) Who bears the risk of loss if the corn conformed to the contract at the time of delivery by\nAgraCorn of the corn to the carrier? See UCC \xc2\xa7 2-509(1)(a).\n(2) Who bears the risk of loss if the corn, at the time it was delivered by AgraCorn to the railcar,\nwas infested with bugs?\n13.5.2. Under UCC \xc2\xa7 2-510(2), if there is acceptance, which the buyer then revokes, the\nbuyer bears the risk of loss to the extent of the buyer\xe2\x80\x99s insurance coverage, but the seller\nis responsible for any deficiency in the buyer\xe2\x80\x99s insurance coverage.\nProblem 13-5. Law Firm purchases a new computer from Office Supply. After one week of use,\nit determines that the computer has a defective motherboard, and the Law Firm faxes a notice of\nrevocation of its acceptance to Office Supply. While Office Supply is arranging for the computer\nto be picked up, an electrical storm causes a surge which totally destroys the computer. The law\nfirm\xe2\x80\x99s insurance coverage will pay up to 80% of its value. Who pays for the remaining 20%?\nChapter 13 Additional Sources\nScott J. Burnham, Glannon Guide to Sales: Learning Sales Through Multiple-Choice Questions\nand Analysis (Wolters Kluwer 2d ed., 2012), Chapter 12\nJames J. White and Robert S. Summers, Uniform Commercial Code (West 6th ed., 2010)\n\n197\n\n\x0cChapter 14. Anticipatory Repudiation\n14.1. Common Law Development of Anticipatory Repudiation. Logically, can you have an\nactual breach of the contract before the performance is due? No. But if a person who has\npromised to perform \xe2\x80\x9crepudiates\xe2\x80\x9d by telling you (expressly or impliedly) that he does not intend\nto perform when the time comes for performance, you have an \xe2\x80\x9canticipatory repudiation.\xe2\x80\x9d (A\n\xe2\x80\x9crepudiation\xe2\x80\x9d is a refusal to perform.)\n14.1.1. The concept of anticipatory repudiation developed under common law. At\ncommon law, an express repudiation is a clear, positive, unequivocal refusal to perform\n(orally or in writing) prior to the date performance is due.\n14.1.1.1. An example of a clear and unequivocal repudiation would be: \xe2\x80\x9cI\xe2\x80\x99m not\ngoing to perform at the concert as I promised to do.\xe2\x80\x9d\nProblem 14-1. Bette Midler has agreed to perform at a concert on May 1. On April 15, she sends\na fax stating: \xe2\x80\x9cI\xe2\x80\x99m not sure if I will be able to perform on May 1. Will keep you posted.\xe2\x80\x9d Is this\nan express repudiation at common law? Why or why not?\n14.1.2. In addition to an express repudiation, common law recognizes an implied\nrepudiation. An implied repudiation results from voluntary conduct \xe2\x80\x9cwhere the promisor\nputs it out of his power to perform so as to make substantial performance of his promise\nimpossible.\xe2\x80\x9d Taylor v. Johnston, 539 P.2d 425 (Cal. 1975). For example, if I have a\ncontract to sell you my car, and then I sell it to someone else, I have impliedly repudiated.\nNote that Restatement (Second) of Contracts \xc2\xa7 250 refers to \xe2\x80\x9ca voluntary affirmative act\nwhich renders the obligor unable or apparently unable to perform. . . .\xe2\x80\x9d In other words, as\nlong as a reasonable person would believe performance is not possible, the conduct may\nbe treated as an anticipatory repudiation.\nProblem 14-2. Lindsay Lohan agreed to perform in a movie that would start filming on May 1.\nOn April 15, the producer read in an industry newsletter that Lindsay had checked into a sixweek in-patient drug rehabilitation program. Is this an implied repudiation at common law? Why\nor why not?\n14.1.3. At common law, the prospective breach must be serious enough to qualify as a\nmaterial breach of the contract. An indication of intent to deviate in some minor way\nfrom the promised performance may not be sufficient.\n\n198\n\n\x0cProblem 14-3. Sally has agreed to perform at a concert on May 1 at 8:00 p.m. She agreed to\narrive 30 minutes early to rehearse with the band. On April 28, she calls the concert hall and\nadvises them that she will not be able to arrive until 7:50 (instead of 7:30), due to a change in\nairline schedules. Can the concert hall treat this as an anticipatory repudiation at common law?\n14.2. Remedies at Common Law. What rights does the non-breaching party have at common\nlaw when the other party repudiates the contract?\n14.2.1. The non-breaching party may treat the repudiation as an anticipatory breach, and\nimmediately cancel the contract and seek damages. The non-breaching party is also\nexcused from further performance.\n14.2.2. In the alternative, the non-breaching party may wait until the time for\nperformance, and exercise his remedies for actual breach at that time.\n14.2.3. If the non-breaching party elects to await performance, the repudiating party may\nretract its repudiation. See Restatement (Second) of Contracts \xc2\xa7 256.\n14.3. UCC Rules Governing Anticipatory Repudiation.\n14.3.1. Overview. A bit of vocabulary. In Code usage, repudiation is a bad thing. If one\nparty repudiates, the issue is whether the other party may cancel because there has been a\nbreach. The Code reserves termination for putting an end to the contract for a reason\nother than breach. See \xc2\xa7 2-106(4).\nThe UCC has specific provisions governing anticipatory repudiation (see \xc2\xa7\xc2\xa7 2-609\nthrough 2-611). Section 2-610 provides for what happens when there is an anticipatory\nrepudiation. Recognizing that it is difficult under common law to determine whether an\nanticipatory repudiation has, in fact, occurred, the UCC adopted \xc2\xa7 2-609, which provides\na process by which a party can determine whether there has been an anticipatory\nrepudiation by requesting adequate assurance of performance. Thus, where there is not a\nclear, unequivocal repudiation, \xc2\xa7 2-609 provides a seller or buyer who has become\nconcerned about the other party\xe2\x80\x99s words, conduct, or reputation with a mechanism to\nestablish an actual repudiation, and thereby have a right to cancel.\nUsing the UCC as a forerunner, many courts have applied the \xe2\x80\x9cadequate assurance\xe2\x80\x9d\nconcept to non-UCC cases. See Restatement (Second) of Contracts \xc2\xa7 251.\n14.3.2. Under \xc2\xa7 2-609(1), if reasonable grounds for insecurity arise with respect to the\nperformance of a party, the other party may in writing demand adequate assurance of due\nperformance. Until she receives such assurance, the party requesting adequate assurance may\n199\n\n\x0csuspend performance if commercially reasonable. See Matthew C. Brenneman, Sales: What\nConstitutes "Reasonable Grounds for Insecurity" Justifying Demand for Adequate Assurance of\nPerformance Under UCC \xc2\xa7 2-609, 37 A.L.R. 5th 459 (2015).\n14.3.2.1. It is essential to be able to analyze whether \xe2\x80\x9creasonable grounds for\ninsecurity\xe2\x80\x9d exist before relying upon \xc2\xa7 2-609. Under \xc2\xa7 2-609(2), between\nmerchants, reasonableness is to be ascertained by commercial (and not legal)\nstandards. If you do not have reasonable grounds to make a demand, your demand\nwill not be justified, and a failure to respond to an unjustified demand will not\nripen into a repudiation. See Comment 3 to \xc2\xa7 2-609.\n14.3.2.2. Although \xc2\xa7 2-609 requires that a demand for adequate assurance be\nmade in writing, some courts have overlooked the writing requirement, and have\nallowed an oral demand to satisfy the statutory requirements. AMF, Inc. v.\nMcDonald\xe2\x80\x99s Corp., 536 F.2d 1167 (7th Cir. 1976).\n14.3.2.3. If the demand is justified, the party making the demand may suspend\nperformance until assurance is given. See Comment 2 to \xc2\xa7 2-609.\nProblem 14-4. In March 2012, Farmer Fred entered into a contract to sell 10,000 bushels of\nmalting barley to Mike\xe2\x80\x99s Microbrew, a regional beer brewery located in Missoula. The purchase\nprice is $3.00/bushel, to be delivered to the Fairfield elevator by Farmer Fred on or before\nSeptember 30, 2012. In the middle of August 2012, shortly before harvest, Farmer Fred receives\nthe following letter from Mike\xe2\x80\x99s Microbrew:\nDear Fred,\nWe spent a lot of money launching our most recent micro-brew, Beergeek, aimed at\nlawyers, accountants and other professionals. Unfortunately, it hasn\xe2\x80\x99t been as well\nreceived as we had hoped. It looks like we might not be needing the 10,000 bushels of\nbarley we agreed to buy from you.\nSincerely yours,\nMike\nWhen he receives this letter from Mike\xe2\x80\x99s Microbrew, Farmer Fred comes in to see you for\nadvice.\nIs this a repudiation?\nWhat is the best advice for you to give at this point in time?\nProblem 14-5. Mattel has entered into a one-year contract to provide Barbie Dolls to a regional\ntoy store chain on credit. At a recent toy convention, an officer of Mattel hears that this store\nchain is in trouble financially. At least one other toy manufacturer tells the Mattel officer,\nconfidentially, that this retailer has not paid its bills in a timely fashion. Does this information\n200\n\n\x0cconstitute reasonable grounds which would allow Mattel to request adequate assurance of the\nretailer\xe2\x80\x99s performance under its contract with Mattel?\n14.3.3. If a party receiving a justified demand fails to provide within a reasonable time\n(not to exceed thirty days) adequate assurance of due performance, the party making the\ndemand may treat such failure as a repudiation of the contract. Section 2-609(4).\n14.3.3.1. Read Comment 4, which explains what constitutes \xe2\x80\x9cadequate\xe2\x80\x9d\nassurance.\nProblem 14-6. Mattel decides to send a letter to the regional store chain, requesting adequate\nassurance that the store chain is able to perform its obligations (including timely payment) under\nthe one-year contract. The store chain responds by writing: \xe2\x80\x9cYou have nothing to worry about.\nWe\xe2\x80\x99ve lined up a loan with our bank, and will be able to pay you on time. Please ship as agreed\nin our contract.\xe2\x80\x9d Is this assurance adequate?\n14.3.3.2. Read Comment 5 regarding the 30-day period. Can there be some\nsituations in which a reasonable period is less than 30 days?\nProblem 14-7. Assume that, unbeknownst to Mattel, the rumors heard by Mattel at the toy\nconvention were in fact unfounded. Mattel sends its letter seeking adequate assurance, and the\nstore chain, incensed at the insulting inference that it is financially troubled, refuses to answer. Is\nthe store chain\xe2\x80\x99s failure to respond a repudiation under \xc2\xa7 2-609?\nAMF, Inc. v. McDonald\xe2\x80\x99s Corp.\n536 F.2d 1167 (7th Cir. 1976)\nCUMMINGS, Circuit Judge\nAMF, Incorporated, filed this case in the Southern District of New York in April 1972. It\nwas transferred to the Northern District of Illinois in May 1973. AMF seeks damages for the\nalleged wrongful cancellation and repudiation of McDonald\'s Corporation\'s ("McDonald\'s")\norders for sixteen computerized cash registers for installation in restaurants owned by whollyowned subsidiaries of McDonald\'s and for seven such registers ordered by licensees of\nMcDonald\'s for their restaurants. In July 1972, McDonald\'s of Elk Grove, Inc. sued AMF to\nrecover the $20,385.28 purchase price paid for a prototype computerized cash register and losses\nsustained as a result of failure of the equipment to function satisfactorily. Both cases were tried\ntogether during a fortnight in December 1974. A few months after the completion of the bench\ntrial, the district court rendered a memorandum opinion and order in both cases in favor of each\ndefendant. The only appeal is from the eight judgment orders dismissing AMF\'s complaints\nagainst McDonald\'s and the seven licensees. We affirm.\n201\n\n\x0cIn 1966, AMF began to market individual components of a completely automated\nrestaurant system, including its model 72C computerized cash register involved here. The 72C\ncash register then consisted of a central computer, one to four input stations, each with a\nkeyboard and cathode ray tube display, plus the necessary cables and controls.\nIn 1967 McDonald\'s representatives visited AMF\'s plant in Springdale, Connecticut, to\nview a working "breadboard" model 72C to decide whether to use it in McDonald\'s restaurant\nsystem. Later that year, it was agreed that a 72C should be placed in a McDonald\'s restaurant for\nevaluation purposes.\nIn April 1968, a 72C unit accommodating six input stations was installed in McDonald\'s\nrestaurant in Elk Grove, Illinois. This restaurant was a wholly- owned subsidiary of McDonald\'s\nand was its busiest restaurant. Besides functioning as a cash register, the 72C was intended to\nenable counter personnel to work faster and to assist in providing data for accounting reports and\nbookkeeping. McDonald\'s of Elk Grove, Inc. paid some $20,000 for this prototype register on\nJanuary 3, 1969. AMF never gave McDonald\'s warranties governing reliability or performance\nstandards for the prototype.\nAt a meeting in Chicago on August 29, 1968, McDonald\'s concluded to order sixteen\n72C\'s for its company-owned restaurants and to cooperate with AMF to obtain additional orders\nfrom its licensees. In December 1968, AMF accepted McDonald\'s purchase orders for those\nsixteen 72C\'s. In late January 1969, AMF accepted seven additional orders for 72C\'s from\nMcDonald\'s licensees for their restaurants. Under the contract for the sale of all the units, there\nwas a warranty for parts and service. AMF proposed to deliver the first unit in February 1969,\nwith installation of the remaining twenty-two units in the first half of 1969. However, AMF\nestablished a new delivery schedule in February 1969, providing for deliveries to commence at\nthe end of July 1969 and to be completed in January 1970, assuming that the first test unit being\nbuilt at AMF\'s Vandalia, Ohio, plant was built and satisfactorily tested by the end of July 1969.\nThis was never accomplished.\nDuring the operation of the prototype 72C at McDonald\'s Elk Grove restaurant, many\nproblems resulted, requiring frequent service calls by AMF and others. Because of its poor\nperformance, McDonald\'s had AMF remove the prototype unit from its Elk Grove restaurant in\nlate April 1969.\nAt a March 18, 1969, meeting, McDonald\'s and AMF personnel met to discuss the\nperformance of the Elk Grove prototype. AMF agreed to formulate a set of performance and\nreliability standards for the future 72C\'s, including "the number of failures permitted at various\ndegrees of seriousness, total permitted downtime, maximum service hours and cost." Pending\nmutual agreement on such standards, McDonald\'s personnel asked that production of the twentythree units be held up and AMF agreed.\n202\n\n\x0cOn May 1, 1969, AMF met with McDonald\'s personnel to provide them with\nperformance and reliability standards. However, the parties never agreed upon such standards. At\nthat time, AMF did not have a working machine and could not produce one within a reasonable\ntime because its Vandalia, Ohio, personnel were too inexperienced. After the May 1st meeting,\nAMF concluded that McDonald\'s had cancelled all 72C orders. The reasons for the cancellation\nwere the poor performance of the prototype, the lack of assurances that a workable machine was\navailable and the unsatisfactory conditions at AMF\'s Vandalia, Ohio, plant where the twentythree 72C\'s were to be built.\nOn July 29, 1969, McDonald\'s and AMF representatives met in New York. At this\nmeeting it was mutually understood that the 72C orders were cancelled and that none would be\ndelivered.\nIn its conclusions of law, the district court held that McDonald\'s and its licensees had\nentered into contracts for twenty-three 72C cash registers but that AMF was not able to perform\nits obligations under the contracts. Citing Section 2-610 of the Uniform Commercial Code and\nComment 1 thereunder, the court concluded that on July 29, McDonald\'s justifiably repudiated\nthe contracts to purchase all twenty-three 72C\'s.\nRelying on Section 2-609 and 2-610 of the Uniform Commercial Code, the court decided\nthat McDonald\'s was warranted in repudiating the contracts and therefore had a right to cancel\nthe orders by virtue of Section 2- 711 of the Uniform Commercial Code. Accordingly, judgment\nwas entered for McDonald\'s.\nThe findings of fact adopted by the district court were a mixture of the court\'s own\nfindings and findings proposed by the parties, some of them modified by the court. AMF has\nassailed ten of the 124 findings of fact, but our examination of the record satisfies us that all have\nadequate support in the record and support the conclusions of law.\nWhether in a specific case a buyer has reasonable grounds for insecurity is a question of\nfact. Comment 3 to UCC \xc2\xa7 2-609; Anderson, Uniform Commercial Code, \xc2\xa7 2-609 (2d Ed. 1971).\nOn this record, McDonald\'s clearly had "reasonable grounds for insecurity" with respect to\nAMF\'s performance. At the time of the March 18, 1969, meeting, the prototype unit had\nperformed unsatisfactorily ever since its April 1968 installation. Although AMF had projected\ndelivery of all twenty-three units by the first half of 1969, AMF later scheduled delivery from the\nend of July 1969 until January 1970. When McDonald\'s personnel visited AMF\'s Vandalia, Ohio,\nplant on March 4, 1969, they saw that none of the 72C systems was being assembled and learned\nthat a pilot unit would not be ready until the end of July of that year. They were informed that the\nengineer assigned to the project was not to commence work until March 17th. AMF\'s own\npersonnel were also troubled about the design of the 72C, causing them to attempt to reduce\nMcDonald\'s order to five units. Therefore, under Section 2-609 McDonald\'s was entitled to\n\n203\n\n\x0cdemand adequate assurance of performance by AMF.7\nHowever, AMF urges that Section 2-609 of the UCC (note 5 supra) is inapplicable\nbecause McDonald\'s did not make a written demand of adequate assurance of due performance.\nIn Pittsburgh-Des Moines Steel Co. v. Brookhaven Manor Water Co., 532 F.2d 572, 581 (7th Cir.\n1976), we noted that the Code should be liberally construed8 and therefore rejected such "a\nformalistic approach" to Section 2-609. McDonald\'s failure to make a written demand was\nexcusable because AMF\'s Mr. Dubosque\'s testimony and his April 2 and 18, 1969, memoranda\nabout the March 18th meeting showed AMF\'s clear understanding that McDonald\'s had\nsuspended performance until it should receive adequate assurance of due performance from AMF\n(Tr. 395; AMF Exhibit 79; McD. Exhibit 232).\nAfter the March 18th demand, AMF never repaired the Elk Grove unit satisfactorily nor\nreplaced it. Similarly, it was unable to satisfy McDonald\'s that the twenty-three machines on\norder would work. At the May 1st meeting, AMF offered unsatisfactory assurances for only five\nunits instead of twenty- three. The performance standards AMF tendered to McDonald\'s were\nunacceptable because they would have permitted the 72C\'s not to function properly for 90 hours\nper year, permitting as much as one failure in every fifteen days in a busy McDonald\'s restaurant.\nAlso, as the district court found, AMF\'s Vandalia, Ohio, personnel were too inexperienced to\nproduce a proper machine. Since AMF did not provide adequate assurance of performance after\nMcDonald\'s March 18th demand, UCC Section 2-609(1) permitted McDonald\'s to suspend\nperformance. When AMF did not furnish adequate assurance of due performance at the May 1st\nmeeting, it thereby repudiated the contract under Section 2-609(4). At that point, Section 2610(b) (note 3 supra ) permitted McDonald\'s to cancel the orders pursuant to Section 2-711 (note\n6, supra ), as it finally did on July 29, 1969.\nIn seeking reversal, AMF relies on Pittsburgh-Des Moines Steel Co. v. Brookhaven\nManor Water Co., supra, 532 F.2d at 581. There we held a party to a contract could not resort to\nUCC Section 2-609 since there was no demonstration that reasonable grounds for insecurity were\npresent. That case is inapt where, as here, McDonald\'s submitted sufficient proof in that respect.\nBut that case does teach that McDonald\'s could cancel the orders under Sections 2-610 and 2-711\nbecause of AMF\'s failure to give adequate assurance of due performance under Section 2-609.\nJudgment Affirmed.\n7 McDonald\'s was justified in seeking assurances about performance standards at the March 18th meeting. The parts\nand service warranty in the contracts for the twenty-three 72C\'s was essentially a limitation of remedy provision.\nUnder UCC \xc2\xa7 2-719(2) if the 72C cash registers failed to work or could not be repaired within a reasonable time, the\nlimitation of remedy provision would be invalid, and McDonald\'s would be entitled to pursue all other remedies\nprovided in Article 2. Because McDonald\'s would have a right to reject the machines if they proved faulty after\ndelivery and then to cancel the contract, it was consistent with the purposes of Section 2-609 for McDonald\'s to\nrequire assurances that such eventuality would not occur. See Comment 1 to UCC \xc2\xa7 2-719.\n8 UCC Section 1-102(1) provides that the Code "shall be liberally construed and applied to promote its underlying\npurposes and policies."\n\n204\n\n\x0cCase Notes:\n1. When did someone first think about applying UCC \xc2\xa7 2-609 to this situation?\n2. Was the court correct to \xe2\x80\x9cliberally construe\xe2\x80\x9d \xc2\xa7 2-609? See \xc2\xa7 1-102.\n3. If a more literal court had found that \xc2\xa7 2-609 was not complied with under these facts,\nwould McDonald\xe2\x80\x99s have lost the case?\n4. Consider footnote 7. If at the May meeting, AMF had said, \xe2\x80\x9cWe absolutely, positively,\nare going to be able to deliver only 20 of the 23 cash registers on time,\xe2\x80\x9d would\nMcDonald\xe2\x80\x99s have been justified in terminating the contract?\n14.4. Common Law Still Relevant. Section 2-609 provides one basis for anticipatory\nrepudiation \xe2\x80\x93 failure to provide adequate assurance within a reasonable time of receiving a\nwritten justified demand for adequate assurance. However, this is not the only situation which\nmay give rise to anticipatory repudiation under the UCC. For example, you may have a clear and\nunequivocal refusal to perform under a contract for the sale of goods. Where you have a clear and\nunequivocal refusal to perform, you do not need to go through the \xe2\x80\x9cadequate assurance\xe2\x80\x9d process\nof \xc2\xa7 2-609; you can immediately treat the refusal to perform as an anticipatory repudiation.\nComment 2 suggests that it may be easier to establish an anticipatory repudiation under the UCC\nthan under the common law:\nIt is not necessary for repudiation that performance be made literally and utterly\nimpossible. Repudiation can result from action which reasonably indicates a rejection of\nthe continuing obligation.\n14.4.1. In summary, you can have an anticipatory repudiation in the context of the sale of\ngoods (i) under common law by virtue of an unequivocal express repudiation or conduct\nmaking performance impossible (an implied repudiation), or (ii) by using the \xc2\xa7 2-609\nadequate assurance process to morph an uncertainty about performance into a repudiation.\n14.4.2. Once you have a repudiation under common law principles of express or implied\nrepudiation, or by virtue of a failure to provide timely adequate assurance under \xc2\xa7 2-609,\nyou then move to \xc2\xa7 2-610 to determine the rights of the non-repudiating party.\nProblem 14-8. In January 2012 Liz Claiborne, a clothing manufacturer, contracts to buy a large\namount of woolen fabric from Montana Wool Company. The contract specifies the price as\n$4/yard, payable 30 days after Liz receives delivery. The date of delivery is specified as March\n15. In February, Liz receives a letter from Montana Wool stating \xe2\x80\x9cWe are so sorry, but we must\nrescind our agreement. I hope this doesn\xe2\x80\x99t stop you from doing business with us in the future.\xe2\x80\x9d\nCan you go straight to the remedies for repudiation at \xc2\xa7 2-610, or must you first request adequate\nassurance under \xc2\xa7 2-609?\n205\n\n\x0cSuppose that Montana Wool writes to Liz: \xe2\x80\x9cThe woolen fabric is ready and will be timely\nshipped. However, due to unforeseen increases in our price of wool, we are increasing the price\nfrom $4.00/yard to $4.50 yard.\xe2\x80\x9d Repudiation?\n14.5. Rights of Non-Repudiating Party under \xc2\xa7 2-610. After determining that an anticipatory\nrepudiation has occurred (either under \xc2\xa7 2-609 or by other express or implied conduct), move to\n\xc2\xa7 2-610 to determine the non-repudiating party\xe2\x80\x99s rights.\n14.5.1. Note that these rights arise only if the repudiation will substantially impair the\nvalue of the contract to the non-repudiating party.\nProblem 14-9. Suppose instead that Montana Wool\xe2\x80\x99s letter had said: \xe2\x80\x9cDue to machinery\nproblems that have since been fixed, we are writing to inform you that we will not be able to\ndeliver the woolen fabric by March 15. We will guarantee delivery by March 20 at the latest.\xe2\x80\x9d Is\nthis a repudiation which substantially impairs the value of the contract to Liz Claiborne?\n14.5.2. If there has been a repudiation which will substantially impair the value of the\ncontract to the non-repudiating party, the non-repudiating party may choose between two\nalternatives:\n14.5.2.1. Await performance for a commercially reasonable time (\xc2\xa7 2-610(a)); or\n14.5.2.2. Resort to any remedy for breach (including cancellation of the contract),\neven if the non-breaching party has urged retraction or has indicated she would\nawait performance. Section 2-610(b).\n14.5.3. Under either option, the non-breaching party may elect to suspend his own\nperformance or salvage unfinished goods. Section 2-610(c).\n14.5.4. If the non-repudiating party elects to wait, it incurs the risk of retraction\n(discussed below); retraction will cut off the non-repudiating parties\xe2\x80\x99 right to resort to\nother remedies.\n14.6. Retraction.\n14.6.1. Under \xc2\xa7 2-611(1), before performance is due, the repudiating party may retract\nher repudiation unless:\nThe non-breaching party has resorted to its available remedy of canceling the\ncontract; or\nThe non-breaching party has materially changed her position or otherwise\nindicated that she considers the repudiation final.\n206\n\n\x0c14.6.2. An effective retraction reinstates the repudiating party\xe2\x80\x99s rights under the contract\n(although the non-breaching party may sue for any damages caused by any delay\noccasioned by the repudiation). Section 2-611(3).\n14.6.3. Retraction may be by any reasonable method which clearly indicates that the\nrepudiating party intends to materially perform. If the non-breaching party has made a\njustified demand for adequate assurance, the retraction must include adequate assurance.\nSection 2-611(2).\nProblem 14-10. The Downtown Bar orders a specially manufactured machine from Specialty\nManufacturing to chip ice, to be used in its famous recipe for mint juleps. The order is placed in\nJanuary, with delivery specified by May 1, so that it will be in place prior to the Kentucky Derby.\nOn March 1, Specialty Manufacturing writes to the Downtown Bar, stating that because of labor\nproblems at its plant, it will not be able to deliver the machinery by May 1. The Downtown Bar\nstarts looking for a replacement machine, but not certain if it will be able to find a replacement, it\ndoesn\xe2\x80\x99t say anything to Specialty Manufacturing yet. On March 7, Specialty Manufacturing\nwrites to the Downtown Bar that the labor problems are over, and it will be able to deliver by\nMay 1. A few days after receiving this second letter, the Downtown Bar finds a company willing\nto manufacture the machine.\nCan the Downtown Bar cancel the contract now? Why or why not?\nWould your answer change if prior to receiving the second letter from Specialty Manufacturing\n(but still without having said anything directly to Specialty Manufacturing), the Downtown Bar\nentered into a contract with a new manufacturing company and paid $1,000 down for the\nreplacement machine?\n14.7. Seller\xe2\x80\x99s Right of Reclamation. If a seller ships goods to a buyer on credit and then\ndiscovers that the buyer is unlikely to be able to pay, it is too late for the seller to suspend\nperformance and demand assurances. But under \xc2\xa7 2-702, the seller may have a right to reclaim\nthe goods.\nThe seller has the right only if the buyer is insolvent, a term defined at \xc2\xa7 1-201(b)(23).\nThe seller\xe2\x80\x99s right is subordinate to the rights of a good faith purchaser, which includes a\nsecured creditor. For example, The Bank has a perfected security interest in Retailer\xe2\x80\x99s\ninventory. Seller sells goods on credit to Retailer and the goods are inventory in the hands\nof Retailer. Retailer was insolvent during this time and then goes bankrupt within 10 days\nof delivery of the goods. Seller has a right of reclamation as against Retailer, but The\nBank\xe2\x80\x99s security interest in the goods has priority over Seller\xe2\x80\x99s claim.\n207\n\n\x0cChapter 14 Additional Sources\nScott J. Burnham, Glannon Guide to Sales: Learning Sales Through Multiple-Choice Questions\nand Analysis (Wolters Kluwer 2d ed., 2012), Chapter 15\nJames J. White and Robert S. Summers, Uniform Commercial Code (West 6th ed., 2010),\nChapter 6-2\n\n208\n\n\x0cChapter 15. Common Law Remedy Principles and Seller\xe2\x80\x99s Remedies\nunder the UCC\n15.1. Common Law Remedy Principles\n15.1.1. Basic Common Law Remedy Concepts. To the extent not displaced by the UCC,\ncommon law principles governing remedies continue to apply to both buyers and sellers. Let us\nreview some of those principles. At common law, you must first establish that one of the parties\nhas breached the agreement. If a breach exists, the non-breaching party is entitled to be\ncompensated for the losses suffered by the non-breaching party as a result of the breach. See \xc2\xa7 1305. However, the following common law principles may limit the non-breaching party\xe2\x80\x99s ability\nto recover damages: causation, foreseeability, certainty, and mitigation.\n15.1.1.1. The non-breaching party must establish that the breach caused the damage (i.e.,\ncausation).\n15.1.1.2. The damages must have been reasonably foreseeable at the time of contracting.\nThis limitation often makes it difficult to obtain consequential damages. As stated in\nRestatement (Second) of Contracts \xc2\xa7 351, damages \xe2\x80\x9care not recoverable for loss that the\nparty in breach did not have reason to foresee as a probable result of the breach when the\ncontract was made.\xe2\x80\x9d\n15.1.1.2.1. Section 2-715(2) adopts the principle of foreseeability by limiting\nbuyer\xe2\x80\x99s consequential damages to \xe2\x80\x9cany loss resulting from general or particular\nrequirements and needs of which the seller at the time of contracting had reason to\nknow....\xe2\x80\x9d\nProblem 15-1. Missoula Music Shop agreed to sell a violin to Brenda, which Brenda intended to\nuse in an upcoming audition for a scholarship to be awarded by the University of Montana. The\nMusic Shop had to special order the violin, and promised to deliver it on February 1. The\naudition was scheduled for February 10. On January 31, the Music Shop informed Brenda that it\nwould not be able to deliver the violin until February 15, after the audition. Brenda used her old\nviolin at the audition, and did not receive the scholarship. Brenda sues Missoula Music Shop for\nthe $10,000 scholarship she would have been awarded if she had won the competition. Is the\nMusic Shop liable for these damages?\nProblem 15-2. On February 1, Farmer Bob ordered a new tractor from the local implement\ndealer, which he intended to use to plant his spring wheat crop in May. The implement dealer\npromised to deliver the tractor by May 1. However, the implement dealer did not deliver the\ntractor until May 15. As a result of the delay, Farmer Bob was unable to plant 500 of his 2000\nacres. He seeks damages from the implement dealer for his lost profits on the 500 acres. Will\n209\n\n\x0cBob be able to establish that the damages were foreseeable?\n15.1.1.3. The non-breaching party must be able to prove the amount of the damages with\nreasonable certainty.\n15.1.1.3.1. Damages need not be calculated with mathematical accuracy. See\nComment 1 to \xc2\xa7 1-305, which \xe2\x80\x9crejects any doctrine that damages must be\ncalculable with mathematical accuracy.\xe2\x80\x9d You can estimate or approximate\ndamages, as long as there is some certainty involved.\nProblem 15-3. Let\xe2\x80\x99s go back to Farmer Bob. What sort of evidence would you submit to\nestablish Bob\xe2\x80\x99s lost profits on the 500 acres?\n15.1.1.4. The breaching party may raise the affirmative defense of mitigation, pursuant to\nwhich the non-breaching party has an obligation to reasonably mitigate his/her damages.\n15.1.1.4.1. The only explicit reference to mitigation in Article 2 appears in \xc2\xa7 2715(2), which adopts the principle of mitigation by limiting buyer\xe2\x80\x99s consequential\ndamages to those \xe2\x80\x9cwhich could not reasonably be prevented by cover or\notherwise.\xe2\x80\x9d Nevertheless, the common law principle must always be applied.\nProblem 15-4. Let\xe2\x80\x99s go back to Farmer Bob. If you represented the implement dealer, what\narguments would you make regarding mitigation?\n15.1.1.5. Under the principle of freedom of contract, the parties, by agreement, may to\nsome extent expand or limit otherwise available remedies or the measure of damages.\nHowever, because many of the principles are so strong, we will say that such provisions\nare not always enforceable.\nProblem 15-5. What if the purchase agreement between the implement dealer and Farmer Bob\ncontained a clause specifically stating that seller was not responsible for any consequential\ndamages resulting from a breach, including lost profits? See \xc2\xa7 2-719.\n15.1.2. Purpose of Remedies. The primary purpose of a contract remedy is to put the nonbreaching party in as good a position as that party would have been in had the contract been\nperformed. This is often referred to as the non-breaching party\xe2\x80\x99s expectation interest, or the rule\nof the expectancy. See Restatement (Second) of Contracts \xc2\xa7 347. We will see that even though\nthe Code contains a lot of formulas for calculating damages, these are just ways of computing the\nexpectancy.\n15.1.2.1. Section 1-305 incorporates the concept of fulfilling a party\xe2\x80\x99s expectation interest\nby stating that the \xe2\x80\x9cremedies provided by [the UCC] must be liberally administered to the\n210\n\n\x0cend that the aggrieved party may be put in as good a position as if the other party had\nfully performed....\xe2\x80\x9d\n15.1.2.2. Sometimes a plaintiff may not be able to prove the value of the expectation\ninterest with certainty or may conclude that another measure would be more favorable. In\nthose situations, a party may seek two other measures of damages:\n15.1.2.2.1. Reliance Interest. The purpose of this interest is to reimburse the nonbreaching party for losses incurred by reliance on the contract, such as expenses\nincurred in preparing to perform. The rationale is to put the non-breaching party in\nthe same position as if the contract had not been made rather than as if the\ncontract had been performed.\n15.1.2.2.2. Restitution Interest. The purpose of this interest is to restore to the\nnon-breaching party any benefit conferred by her on the other party.\n15.1.3. Material versus Immaterial Breach and Effect on Remedies. At common law, it is\nimportant to classify a breach as material or immaterial, because the remedies available depend\nupon the materiality of the breach. In both cases, damages are available as a remedy. However, it\nis only when a breach is material that the non-breaching party may be fully excused from further\nperformance of his or her obligations, and may terminate the contract. Except for certain\nsituations, such as installment contracts, the concept of materiality is not determinative of\nremedies under the UCC. For example, recall from \xc2\xa7 12.2 that the perfect tender rule of \xc2\xa7 2-601\nallows the buyer to reject goods for any non-conformity (subject to the seller\xe2\x80\x99s right to cure and\ncertain other limitations); and \xc2\xa7 2-607(1) requires the buyer to pay at the contract price for any\ngoods accepted rather than claim that its obligation to pay under the contract was discharged on\ngrounds that the breach was material.\n15.1.4. Terminology. Different terms are used to describe different types of damages.\n15.1.4.1. Direct damages: Damages that flow directly and immediately from a breach. In\nthe context of the sale of goods, a seller\xe2\x80\x99s direct damages include the lost profit that a\nseller would have made upon the sale of the goods. A buyer\xe2\x80\x99s direct damages would\ninclude any increase in price the buyer would have to pay to replace goods that seller fails\nto deliver.\n15.1.4.2. Incidental damages: Damages reasonably associated with or related to actual\ndamages.\n15.1.4.2.1. A seller\xe2\x80\x99s incidental damages include costs reasonably incurred in\nstopping delivery, in transporting or storing the goods after the buyer\xe2\x80\x99s breach, or\ncosts incurred in connection with the return or resale of the goods. Section 2-710.\n211\n\n\x0c15.1.4.2.2. A buyer\xe2\x80\x99s incidental damages include costs reasonably incurred in\ninspection, receipt, transportation and storage of goods rightfully rejected; and\nreasonable expenses incurred in connection with effecting cover. Section 2715(1). See John S. Herbrand, Annotation, Buyer\'s Incidental and Consequential\nDamages from Seller\'s Breach Under UCC \xc2\xa7 2-715, 96 A.L.R. 3d 299 (1979).\n15.1.4.3. Consequential damages: Consequential damages include losses that do not\nflow directly and immediately from a breach, but that result indirectly from the breach.\n15.1.4.3.1. Section 2-715(2) defines a buyer\xe2\x80\x99s consequential damages to include:\ni. any loss resulting from general or particular requirements and needs of\nwhich the seller knew (or had reason to know) at the time of contracting,\nand which could not have been reasonably prevented by cover or\notherwise; and\nii. injury to person or property proximately resulting from any breach of\nwarranty.\n15.1.4.3.2. The UCC does not include a provision allowing consequential\ndamages for sellers. See, for example, \xc2\xa7 2-708(1), which allows incidental but not\nconsequential damages to a seller. Section 1-305 states that consequential\ndamages are not allowed unless as specifically provided elsewhere in the UCC.\nBased on \xc2\xa7 1-305, several courts have held that the lack of a provision specifically\nallowing consequential damages to seller does, in fact, prevent the seller from\nrecovering any consequential damages. See, for example, Firewood Mfg. Co. v.\nGeneral Tire, Inc., 96 F.3d 163 (6th Cir. 1996) (court disallowed interest as a\nconsequential damage for seller). Amended \xc2\xa7 2-708 would have allowed\nconsequential damages for sellers.\n15.1.4.3.3. In most jurisdictions, attorney\xe2\x80\x99s fees are not allowed as part of\nincidental or consequential damages. Exception: if a party has to defend a\nforeseeable claim by a third party because of the breach, the breaching party may\nbe held responsible for attorney\xe2\x80\x99s fees incurred.\nFor example, Seller agreed to sell widgets to Buyer, knowing that Buyer planned\nto resell them to Third Party. Seller repudiated and Buyer was not able to provide\nwidgets to Third Party, which sued Buyer. In its claim against Seller, Buyer\ncannot recover attorney\xe2\x80\x99s fees expended in pursuing that claim. However, Buyer\ncan recover from Seller attorney\xe2\x80\x99s fees it expended defending the claim of Third\nParty.\n\n212\n\n\x0c15.1.4.4. The terms \xe2\x80\x9cgeneral damages\xe2\x80\x9d and \xe2\x80\x9cspecial damages\xe2\x80\x9d are the terms used in\npleading for direct and consequential damages. A plaintiff does not have to notify the\ndefendant of general damages because they are, as defined in Black\xe2\x80\x99s Law Dictionary,\n\xe2\x80\x9cdamages that the law presumes follow from the type of wrong complained of.\xe2\x80\x9d In other\nwords, one would generally be aware that such damages would naturally arise from a\nbreach; they could have been fairly and reasonably contemplated by both parties at the\ntime the contract was made. But because special damages do not naturally arise from a\nbreach, the plaintiff must plead them with particularity so the defendant has notice of\nthem.\nProblem 15-6. Wilbur Reed operates a small greenhouse in Missoula known as Reed\'s\nGreenhouse. In May, Reed\xe2\x80\x99s Greenhouse received orders from various Missoula retail outlets,\nsuch as K-Mart, for Christmas poinsettias. On June 2, Reed then ordered 5,000 poinsettia\ncuttings from McCalif, a large California grower of poinsettias, for $1.00 each. The shipment of\npoinsettia cuttings were received by Reed on August 11. When the boxes were opened, it was\nclear that all but 500 of the cuttings were ruined because they had not been packed properly.\nBecause it was so late in the season, McCalif could not provide replacement plants to Reed.\nClassify the following damages incurred by Reed as direct, incidental or consequential:\n1. the purchase by Reed from a Seattle grower of 3,000 poinsettia cuttings at $1.75/each\n(which was the most he could find at this point in time, and the lowest price he could\nfind)\n2. the lost profit of $5.00 per plant on the sale of 2,000 poinsettias which Reed was\nunable to replace\n3. the cost of transporting the 3,000 replacement poinsettias to Missoula\nProblem 15-7. Now let\xe2\x80\x99s classify damages when the seller is the non-breaching party. John is an\nappliance salesman. At noon on March 15, a customer comes into the store and agrees to\npurchase a washing machine for $500. John is very excited, because if he delivers 125 major\nappliances to buyers between January 1 and March 15, he qualifies for a free trip to the NCAA\nbasketball championships (valued at $2,500), sponsored by the appliance manufacturer. This sale\nwould be his 125th, and John enthusiastically explains these facts to the customer as they are\nsigning the purchase agreement. After the contract is signed, John closes early and goes out to\ncelebrate with a few beers. That afternoon, when the appliance is delivered, the customer refuses\ndelivery, telling the carrier that he has changed his mind, and he is not going to buy the washing\nmachine. John learns of these facts the next day. Classify each of the following damages as\ndirect, incidental or consequential:\n1. the cost of delivering the washing machine back to the store\n2. the lost profit on the sale of the appliance\n213\n\n\x0c3. the lost trip to the NCAA\n15.1.5. Non-compensatory Damages. Tort law is often solicitous of injured feelings, but\ncontract law is not. Except in unusual cases, contract law does not compensate for non-economic\ninjuries, nor does contract law allow punitive damages.\n15.1.5.1. One of the principles of contract law is that of efficient breach. This principle\nprevents a party from having to perform an inefficient contract. The party may\ndeliberately breach a contract, as long as the breaching party pays compensatory (versus\npunitive) damages arising from its breach. In other words, the breaching party is allowed\nto breach a contract, if it decides that it is cheaper to breach than to continue performing\nunder the contract. Punitive damages discourage parties to a contract from committing\nefficient breaches. Section 1-305 provides that punitive (\xe2\x80\x9cpenal\xe2\x80\x9d) damages may not be\nhad unless specifically provided by the UCC.\n15.1.5.2. With regard to non-economic injuries, such as emotional distress, such damages\nare excluded \xe2\x80\x9cunless the breach also caused bodily harm or the contract ... is of such a\nkind that serious emotional disturbance was a particularly likely result.\xe2\x80\x9d Restatement\n(Second) of Contracts \xc2\xa7 353. A contract for the sale of a casket is one of those rare\ncontracts which could give rise to a cause of action for liability based on mental suffering.\nSee, e.g., Hirst v. Elgin Metal Casket Co., 438 F. Supp. 906 (D. Mont. 1977).\n15.1.6. Burden of Proof. The party seeking damages has the burden of proof to establish\ndamages caused by a breach.\n15.2. UCC Seller Remedies\n15.2.1. Summary of Seller Remedies. Section 2-703 sets forth seller\xe2\x80\x99s remedies in general. The\nremedies are cumulative; for example, the seller can withhold delivery of the goods, cancel the\ncontract, and sue for damages. See Comment 1 to \xc2\xa7 2-703. Note, however, that the seller is not\nentitled to be over-compensated. See \xc2\xa7 1-305. The remedies available to an aggrieved seller\ninclude:\n\xef\x82\xb7\n\nthe right to withhold or stop delivery of goods;\n\n\xef\x82\xb7\n\nthe right to resell the goods and recover damages as provided at \xc2\xa7 2-706;\n\n\xef\x82\xb7\n\nthe right to recover damages for nonacceptance as provided at \xc2\xa7 2-708, using the market\nprice as the measure of damages or, in appropriate cases, the lost profit on the sale;\n214\n\n\x0c\xef\x82\xb7\n\nin certain circumstances, the right to recover the purchase price of the goods as provided\nat \xc2\xa7 2-709; or\n\n\xef\x82\xb7\n\nthe right to cancel the contract.\n\n15.2.2. Recovery of Purchase Price. See \xc2\xa7 2-709.\n15.2.2.1. There are only three situations which allow a seller to recover the purchase price\nfrom the buyer:\n\xef\x82\xb7\n\nWhere the buyer has accepted the goods (\xc2\xa7 2-709(1)(a))(and most courts interpret\nthis provision to mean that the buyer is in possession of the goods);\n\n\xef\x82\xb7\n\nWhere the goods have been destroyed after the risk of loss has passed to the buyer\n(\xc2\xa7 2-709(1)(a)); and\n\n\xef\x82\xb7\n\nWhere the seller is unable to re-sell goods identified to the contract at a\nreasonable price (\xc2\xa7 2-709(1)(b)).\n\n15.2.2.2. If the seller has the goods and successfully sues for the price, he must hold any\ngoods which have been identified to the contract and which are still in his control for the\nbuyer. Section 2-709(2).\n15.2.2.3. For situations giving rise to the right to sue for the purchase price, see the cases\nnoted in John S. Herbrand, Annotation, Seller\'s Recovery of Price of Goods from Buyer\nUnder UCC \xc2\xa7 2-709, 90 A.L.R. 3d 1141 (1979).\nProblem 15-8. Susan owns and operates a jewelry store. Betty comes into the store and agrees to\npurchase a large emerald ring for $12,000. Betty agrees to pick up the ring the next day, and\ndeliver a check for the purchase price at that time. The next day, Betty calls and cancels the\ncontract. Can Susan sue for the purchase price under \xc2\xa7 2-709? Why or why not?\nProblem 15-9. A Montana farmer agrees to sell a carload of grain to a specialty bakery located in\nSpokane, Washington. The contract is F.O.B. Collins, Montana elevator. After the grain is\ndelivered to the Collins elevator with notice to buyer and it has been loaded onto the train, there\nis a derailment on its way to Spokane that renders the grain worthless. Can the farmer sue for the\npurchase price? Why or why not? (Hint: review the seller\xe2\x80\x99s obligations under this contract and\nwhen the risk of loss passes in \xc2\xa7\xc2\xa7 10.1.4 and 10.1.5.)\n\n215\n\n\x0cProblem 15-10.\n1. The sponsors of the annual Conrad Whoop-up Rodeo enter into a contract with Sam\xe2\x80\x99s Silver\nDesigns to design and manufacture 10 custom-made silver-plated belt buckles to award to the\nwinner of each rodeo event, at the price of $200 each. Before Sam has begun work on the belt\nbuckles, the rodeo sponsors call and repudiate the contract. Can Sam sue for the $2,000 purchase\nprice of the buckles under \xc2\xa7 2-709?\n2. Suppose that Sam orders the metal and starts work. After pouring and molding all of the belt\nbuckles, but before stamping them with the words \xe2\x80\x9cWhoop-up Champion,\xe2\x80\x9d the rodeo sponsors\ncancel the contract due to low ticket sales for the rodeo. Can Sam sue the rodeo sponsors for the\n$2,000 purchase price of the buckles under \xc2\xa7 2-709?\n3. Assume that Sam has completed the belt buckles with the words \xe2\x80\x9cWhoop-up Champion\xe2\x80\x9d\nstamped on them and then the rodeo sponsors repudiate the contract. Sam successfully sues for\nthe purchase price under \xc2\xa7 2-709. What must Sam do with the belt buckles in his possession?\n15.2.3. Remedy of Resale. Under \xc2\xa7 2-706, a seller may resell goods identified to the contract in\ngood faith and in a commercially reasonable manner at either a private sale or a public sale\n(auction) and recover damages under the following formula:\nContract price\n- Resale price\n+ incidental damages\n- expenses saved by seller\n15.2.3.1. In addition, \xc2\xa7 2-706 requires that the seller give the buyer notice of his intent to\nresell. Since the remedy gives the seller the difference between the contract price and the\nresale price, the buyer has an interest in seeing that the seller gets as a high a resale price\nas possible.\n15.2.3.1.1. Under \xc2\xa7 2-709(3), for a private sale, the seller must give the buyer\nreasonable notification of his intention to resell. Although some sellers have\nargued that the buyer should have reasonably known that the seller would resell,\nmost courts have required strict compliance with the notice provision.\n15.2.3.1.2. Under \xc2\xa7 2-709(4), for a public sale, the seller must give the buyer\nreasonable notice of the time and place of the auction, unless the goods are\nperishable or threaten to decline quickly in value.\n15.2.3.2. Needless to say, there is lots of litigation over whether the method, manner,\ntime, place and terms of re-sale were commercially reasonable. These issues are very\nsimilar to the issues that arise in secured transactions (Article 9) when the creditor sells\nthe repossessed goods. See Carolyn Kelly MacWilliam, Annotation, Resale of Goods\nUnder UCC \xc2\xa7 2-706, 101 A.L.R.5th 563 (2002).\n216\n\n\x0cProblem 15-11. Dollar Store decides to go out of business, and enters into an agreement to sell\nall of the inventory and shelving to Bargain Buyers for $48,000. Dollar will have to pay $2,000 to\nship the goods to Bargain. A few days prior to the closing, Bargain Buyers repudiates the\ncontract.\n1. Dollar pays a broker who found the buyer a commission of $2,500 to find a private buyer who\nwill pay $44,000 for the goods. The buyer is closer to Dollar and it will have to pay only $1,000\nin shipping. Dollar notifies Bargain of its intention to resell. How much can Dollar recover from\nBargain under \xc2\xa7 2-706?\n2. Assume instead Dollar sells the inventory and shelving at a public auction, but fails to give any\nnotice of the auction to Bargain Buyers. The auction generates $35,000 in sales proceeds, and\nDollar Store sues Bargain Buyers for the $15,000 difference, plus costs of the auction. Will\nDollar prevail under \xc2\xa7 2-706? Why or why not? If it does not prevail, are any other remedies\navailable to it?\nWhat if the remedy provisions of the purchase agreement allowed the sellers to re-sell the goods\nat private or public auction, without notice to buyers? In other words, is the notice requirement a\ndefault rule that the parties are free to change. In this situation, can Dollar Store collect $15,000\n(plus the cost of the auction) from Bargain Buyers?\n15.2.4. Market Price Remedy. Under \xc2\xa7 2-708(1), instead of re-selling the goods and seeking\ndamages under \xc2\xa7 2-706, a seller may seek damages from a breaching buyer based upon the\nmarket price of the goods, applying the following formula:\nContract price\n- market price at the time and place for tender\n+ incidental damages\n- expenses saved by seller\nProblem 15-12. Salmons of Seattle has on hand a quantity of processed frozen salmon fillets. On\nAugust 1 it contracts to sell a large quantity of these fillets to Better Foods of Boise, Idaho for a\nprice of \xe2\x80\x9c$2/pound F.O.B. Boise.\xe2\x80\x9d Delivery is to be made by rail on August 21. On August 4,\nbefore the shipment has been delivered by Salmons of Seattle to the railroad, Better Foods\ncancels the contract. Review \xc2\xa7 10.1.4 if you are not clear on the meaning of the shipping terms.\nAdditional facts that you may (or may not) need to answer the questions follow (prices per\npound):\nMarket price of fillets at Boise on August 1\nMarket price of fillets at Seattle on August 1\nMarket price at Boise on August 4\nMarket price at Seattle on August 4\nMarket price at Boise on August 21\n217\n\n$2.04\n$1.54\n$1.92\n$1.40\n$1.14\n\n\x0cMarket price at Seattle on August 21\n$1.00\nCost of shipping from Seattle to Boise (per pound) $ .05\n1. If Salmons sues Better Foods under \xc2\xa7 2-708(1), what amount should it receive?\n2. What if instead the contract price had been agreed to as \xe2\x80\x9c$1.95 F.O.B. Seattle?\xe2\x80\x9d\n3. What if Better Foods could demonstrate that upon hearing of the cancelation, Salmons had\nvery quickly been able to arrange sale of the shipment to another buyer at $1.50/lb?\n15.2.4.1. How do you establish market price if there is no readily available market price\nat the time and place of tender? Go to \xc2\xa7 2-723, which provides that where market prices\nare not readily available, \xe2\x80\x9cthe price prevailing within any reasonable time before or after\nthe time described or at any other place which in commercial judgment or under usage of\ntrade would serve as a reasonable substitute for the one described may be used, making\nany proper allowance for the cost of transporting the goods to or from such other place.\xe2\x80\x9d\n15.2.5. Lost Profit. If the measure of damages under \xc2\xa7 2-708(1) is inadequate, then the seller\ncan seek recovery under \xc2\xa7 2-708(2), which allows as damages the seller\xe2\x80\x99s lost profit on the sale,\nincluding reasonable overhead, plus incidental damages.\nProblem 15-13. Sonic Sales sells a wide-screen television set to Barbara for $1,500, to be\ndelivered the next day. It has several of this model in stock, and can always order more from the\nmanufacturer. This model is going for the same price at other appliance dealers around town.\nBefore the television is delivered, Barbara calls and repudiates the contract. Sonic Sales re-sells\nthe television for $1,500 within a few days to another buyer.\n1. What would the measure of damages be under \xc2\xa7 2-706, assuming notice of re-sale had been\ngiven to Barbara (and no other costs or savings are involved)?\n2. What would the measure of damages be under \xc2\xa7 2-708(1), assuming that the market price is\n$1,500, and there are no other costs or savings involved?\n3. Is the measure of damages under \xc2\xa7\xc2\xa7 2-706 and 2-708(1) inadequate? Why or why not?\nKenco Homes, Inc. v. Williams\n972 P.2d 125 (Wash. App. 1999)\nOpinion by Morgan, J.\nKenco Homes, Inc., sued Dale E. Williams and Debi A. Williams, husband and wife, for\nbreaching a contract to purchase a mobile home. After a bench trial, the trial court ruled primarily\nfor Williams. Kenco appealed, claiming the trial court used an incorrect measure of damages. We\n218\n\n\x0creverse.\nKenco buys mobile homes from the factory and sells them to the public. Sometimes, it\ncontracts to sell a home that the factory has not yet built. It has "a virtually unlimited supply of\nproduct," according to the trial court\'s finding of fact.\nOn September 27, 1994, Kenco and Williams signed a written contract whereby Kenco\nagreed to sell, and Williams agreed to buy, a mobile home that Kenco had not yet ordered from\nthe factory. The contract called for a price of $ 39,400, with $ 500 down. [Before a necessary\nappraisal of the site had taken place, Williams stopped payment and repudiated the contract. He\ntold the trial court he did so because he \xe2\x80\x9cfound a better deal elsewhere.\xe2\x80\x9d]\nWhen Williams repudiated, Kenco had not yet ordered the mobile home from the factory.\nAfter Williams repudiated, Kenco simply did not place the order. As a result, Kenco\'s only outof-pocket expense was a minor amount of office overhead.\nOn November 1, 1994, Kenco sued Williams for lost profits. After a bench trial, the\nsuperior court found that Williams had breached the contract; that Kenco was entitled to\ndamages; and that Kenco had lost profits in the amount of $ 11,133 ($ 6,720 on the mobile home,\nand $ 4,413 on the site improvements). The court further found, however, that Kenco would be\nadequately compensated by retaining Williams\xe2\x80\x99 $ 500 down payment.... [Author\xe2\x80\x99s note \xe2\x80\x93 we will\nsee in Chapter 17 where the court got the $500 figure.]\nUnder the Uniform Commercial Code (UCC), a nonbreaching seller may recover\n"damages for non-acceptance" from a breaching buyer. The measure of such damages [in \xc2\xa7 2708] is as follows:\n(1) Subject to subsection (2) and to the provisions of this Article with respect to proof of\nmarket price (RCW 62A.2-723), the measure of damages for non-acceptance or\nrepudiation by the buyer is the difference between the market price at the time and place\nfor tender and the unpaid contract price together with any incidental damages provided in\nthis Article (RCW 62A.2-710), but less expenses saved in consequence of the buyer\'s\nbreach.\n(2) If the measure of damages provided in subsection (1) is inadequate to put the seller in\nas good a position as performance would have done then the measure of damages is the\nprofit (including reasonable overhead) which the seller would have made from full\nperformance by the buyer, together with any incidental damages provided in this Article\n(RCW 62A.2-710), due allowance for costs reasonably incurred and due credit for\npayments or proceeds of resale.\nAs the italicized words demonstrate, the statute\'s purpose is to put the nonbreaching seller in the\nposition that he or she would have occupied if the breaching buyer had fully performed (or, in\nalternative terms, to give the nonbreaching seller the benefit of his or her bargain). A party\n219\n\n\x0cclaiming damages under subsection (2) bears the burden of showing that an award of damages\nunder subsection (1) would be inadequate. [cites omitted]\nIn general, the adequacy of damages under subsection (1) depends on whether the\nnonbreaching seller has a readily available market on which he or she can resell the goods that\nthe breaching buyer should have taken. When a buyer breaches before either side has begun to\nperform, the amount needed to give the seller the benefit of his or her bargain is the difference\nbetween the contract price and the seller\'s expected cost of performance. Using market price, this\ndifference can, in turn, be subdivided into two smaller differences: (a) the difference between the\ncontract price and the market price, and (b) the difference between the market price and the\nseller\'s expected cost of performance. So long as a nonbreaching seller can reasonably resell the\nbreached goods on the open market, he or she can recover the difference between contract price\nand market price by invoking subsection (1), and the difference between market price and his or\nher expected cost of performance by reselling the breached goods on the open market. Thus, he\nor she is made whole by subsection (1), and subsection (1) damages should be deemed\n"adequate." But if a nonbreaching seller cannot reasonably resell the breached goods on the open\nmarket, he or she cannot recover, merely by invoking subsection (1), the difference between\nmarket price and his or her expected cost of performance. Hence, he or she is not made whole by\nsubsection (1); subsection (1) damages are "inadequate to put the seller in as good a position as\nperformance would have done;" and subsection (2) comes into play.\nThe cases illustrate at least three specific situations in which a nonbreaching seller cannot\nreasonably resell on the open market. In the first, the seller never comes into possession of the\nbreached goods; although he or she plans to acquire such goods before the buyer\'s breach, he or\nshe rightfully elects not to acquire them after the buyer\'s breach. In the second, the seller\npossesses some or all of the breached goods, but they are of such an odd or peculiar nature that\nthe seller lacks a post- breach market on which to sell them; they are, for example, unfinished,\nobsolete, or highly specialized. In the third situation, the seller again possesses some or all of the\nbreached goods, but because the market is already oversupplied with such goods (i.e., the\navailable supply exceeds demand), he or she cannot resell the breached goods without displacing\nanother sale. Frequently, these sellers are labeled "jobber," "components seller," and "lost volume\nseller," respectively; in our view, however, such labels confuse more than clarify.\nTo illustrate the first situation, we examine Copymate Marketing v. Modern\nMerchandising, 660 P.2d 332 (Wash. App. 1983), a case cited and discussed by both parties. In\nthat case, Copymate had an option to purchase three thousand copiers from Dowling for $\n51,750. Before Copymate had exercised its option, it contracted to sell the copiers to Modern for\n$ 165,000. It also promised Modern that it would spend $ 47,350 for advertising that would\nbenefit Modern. It told Dowling it was exercising its option, but before it could finish its\npurchase from Dowling, Modern repudiated. Acting with commercial reasonableness, Copymate\nresponded by canceling its deal with Dowling and never acquiring the copiers. It then sued\nModern for its lost profits and prevailed in the trial court. Modern appealed, but this court\naffirmed. Because Copymate had rightfully elected not to acquire the copiers, it had no way to\n220\n\n\x0cresell them on the open market; subsection (1) was inadequate; and subsection (2) applied.\nTo illustrate the second situation, we again examine Copymate. Based on substantial\nevidence, the Copymate trial court found that after Modern\'s repudiation, Copymate had "no\nactive or reasonably available market for the resale of the . . . copiers." One reason was that the\ncopiers had been in storage in Canada for nine years; thus, they seem to have been obsolete.\nAgain, then, Copymate could not resell the copiers on the open market; subsection (1) was\ninadequate; and subsection (2) provided for an award of "lost profits."\nTo illustrate the third situation, we examine R.E. Davis Chemical Corp. v. Diasonics, 826\nF.2d 678 (7th Cir. 1987). In that case, Davis breached his contract to buy medical equipment\nfrom Diasonics. Diasonics was in possession of the equipment, which it soon resold on the open\nmarket. Diasonics then sued Davis for "lost profits" under subsection (2), arguing that "it was a\n\'lost volume seller,\' and, as such, it lost the profit from one sale when Davis breached its\ncontract." The trial court granted summary judgment to Davis, but the appellate court reversed\nand remanded for trial. Other courts, the appellate court noted, "have defined a lost volume seller\nas one that has a predictable and finite number of customers and that has the capacity either to\nsell to all new buyers or to make the one additional sale represented by the resale after the\nbreach." This definition, the appellate court ruled, lacks an essential element: whether the seller\nwould have sold an additional unit but for the buyer\'s breach. On remand, then, Diasonics would\nhave to prove (a) that it could have produced and sold the breached unit in addition to its actual\nvolume, and (b) that it would have produced and sold the breached unit in addition to its actual\nvolume.\nIn this case, Kenco did not order the breached goods before Williams repudiated. After\nWilliams repudiated, Kenco was not required to order the breached goods from the factory; it\nrightfully elected not to do so; and it could not resell the breached goods on the open market.\nHere, then, "the measure of damages provided in subsection (1) is inadequate to put [Kenco] in\nas good a position as [Williams\'] performance would have done;" subsection (2) states the\napplicable measure of damages; and Kenco is entitled to its lost profit of $ 11,133\xe2\x80\xa6.\n15.2.6. Unfinished Goods. Under \xc2\xa7 2-704(2), the seller may complete the manufacture of\nunfinished goods if the seller reasonably believes that will mitigate the damages caused by the\nbuyer\xe2\x80\x99s breach. It is instructive to compare this section with the common law rule exemplified in\nthe case of Rockingham Co. v. Luten Bridge Co., 35 F.2d 301 (4th Cir. 1929). In that case, after\nthe County contracted for the building of a bridge, it breached the contract by telling the\ncontractor it did not want the bridge. The contractor nevertheless completed the bridge and\nclaimed the contract price. The court held that after repudiation, a party may not continue to\nperform and thereby increase the damages. What is the difference between a contractor being told\nto stop construction on a bridge and a seller being told to stop construction on a good?\n\n221\n\n\x0cProblem 15-14. Buyer asked Seller to build a custom machine for it. The price was $100,000, of\nwhich $90,000 is cost and $10,000 is anticipated profit. Seller ordered $50,000 worth of parts\nand began assembly of the machine. At that point Buyer repudiated the contract.\n1. Assuming Seller can sell what it has built for scrap worth $5,000, what can Seller recover as\ndamages?\n2. At the time of repudiation, Seller reasonably believes it can complete the machine and find a\nbuyer for it. It does, and sells the completed machine for $90,000. What can Seller recover as\ndamages?\n3. Same facts as #2 except Seller can\xe2\x80\x99t find a buyer for the completed machine and has to sell it\nfor scrap worth $10,000. What can Seller recover as damages?\nChapter 15. Additional Sources\nScott J. Burnham, Glannon Guide to Sales: Learning Sales Through Multiple-Choice Questions\nand Analysis (Wolters Kluwer 2d ed., 2012), Chapter 16\nJames J. White and Robert S. Summers, Uniform Commercial Code (West 6th ed., 2010),\nChapter 7\n\n222\n\n\x0cChapter 16. Buyer Remedies under the UCC\n16.1. Summary of Buyer Remedies. Under \xc2\xa7\xc2\xa7 2-711 through 2-716, different remedies are\navailable to a buyer, depending upon whether (1) the buyer accepts the goods, or (2) the buyer\ndoes not have the goods because either (i) the buyer rightfully rejects or revokes acceptance of\ngoods, or (ii) the seller fails to deliver or otherwise repudiates the contract.\n16.1.1. If a buyer accepts and keeps non-conforming goods, a buyer may:\n\xef\x82\xb7\n\nRecover damages for the non-conformity, including damages for any breach of\nwarranty (\xc2\xa7 2-714); and\n\n\xef\x82\xb7\n\nUpon notice, deduct his damages from any part of the purchase price still due\n(\xc2\xa7 2-717).\n\n16.1.2. If the seller fails to make delivery or otherwise repudiates (i.e., buyer never gets\nthe goods), or if the buyer rightfully rejects goods or rightfully revokes acceptance of\ngoods, (i.e. gets the goods but returns them to the seller), the buyer may cancel the\ncontract, recover any portion of the price paid, and either:\n\xef\x82\xb7\n\n"cover" and pursue damages under \xc2\xa7 2-712;\n\n\xef\x82\xb7\n\nrecover damages for nondelivery based on market price as provided in \xc2\xa7 2-713; or\n\n\xef\x82\xb7\n\nin certain circumstances, seek specific performance or recovery of the goods, as\nallowed under \xc2\xa7\xc2\xa7 2-502 or 2-716.\n\nIn addition, a buyer has a security interest in goods in his possession to the extent of (i)\nany payments made on their price and (ii) any expenses reasonably incurred in their\ninspection, receipt, transportation, care and custody. This means that the buyer may hold\nsuch goods and resell them to satisfy the amounts secured, remitting any balance to the\nseller.\n16.2. Remedies Where Buyer Accepts Non-conforming Goods. Recall from Chapter 12 that\nthe buyer may have a right to reject nonconforming goods. However, if the buyer accepts them,\nthe buyer still has a remedy. Section 2-714 is the starting point to determine the measure of\ndamages when a buyer accepts and keeps non-conforming goods.\n16.2.1. The measure of damages is different, depending upon the basis of the claim.\n16.2.1.1. Under \xc2\xa7 2-714(1), if the damages result from a claim other than breach\nof warranty (a common example is a failure to deliver on time) the measure of\n223\n\n\x0cdamages is \xe2\x80\x9cthe loss resulting in the ordinary course of events from the seller\xe2\x80\x99s\nbreach as determined in any manner which is reasonable.\xe2\x80\x9d In addition, the buyer\nmay pursue \xe2\x80\x9cany incidental and consequential damages\xe2\x80\x9d as allowed in \xc2\xa7 2-715.\nProblem 16-1. Darla ordered eight bridesmaid dresses, to be delivered one day prior to her\nwedding, at a cost of $100 per dress. The seller did not deliver the dresses until two hours after\nthe scheduled hour of the wedding, causing a three-hour delay of the wedding. The delay\nadversely affected other contracted services, including the limousine rental, the video and\nphotography service contract, and the rental of the church and of an adjacent area for the wedding\nreception. Needless to say, all this caused the bride emotional distress. As Darla\xe2\x80\x99s attorney, what\ndamages would you seek?\n16.2.1.2. In Chapters 6 and 7, we identified the warranties that a buyer may get\nunder the Code. Under \xc2\xa7 2-714(2), if the damages arise from a breach of one of\nthese warranties, the measure of damages is the difference at the time and place of\nacceptance between the value of the goods accepted and the value they would\nhave had if they had been as warranted, unless special circumstances show\nproximate damages of a different amount. In addition, the buyer may recover\nincidental and consequential damages under \xc2\xa7 2-715.\nAs we will see in Chapter 17, we are accustomed to sellers using their freedom of\ncontract to provide for a different remedy for breach of warranty, such as repairing\nor replacing the defective part. Nevertheless, it is important to keep in mind that\nthe default rule gives the buyer money damages for a breach of warranty.\nProblem 16-2. Buyer orders a solar panel for $25,000 and pays for it. As part of the contract,\nSeller promises that the solar panel has characteristics that are found only in solar panels that sell\nfor $75,000. In fact, the panel as delivered does not perform as promised, and is worth only\n$20,000. Buyer decides to keep the solar panel and sue for damages. How much can Buyer\nrecover?\nA. $55,000.\nB. $50,000.\nC. $20,000\nD. $5,000.\n\n224\n\n\x0cSchroeder v. Barth, Inc.\n969 F.2d 421 (7th Cir. 1992)\nBAUER, Chief Judge\nLester and Viola Schroeder, an elderly couple, wanted nothing more than a reliable,\ncomfortable motor home to provide them with transportation and housing on their leisurely\ntravels around the country. With that in mind, on March 13, 1981, they bought a 1981 Barth\nMCC Model 35 motor home from Motor Vacations Unlimited, of Elgin, Illinois, for\n$146,705.00. The Schroeders took delivery of the vehicle in July 1981. It came with a\nmanufacturer\'s one year limited warranty. Barely 2,600 miles and five months later, on December\n3, 1981, Lester Schroeder wrote a letter to Charles Dolan of Motor Vacations Unlimited\ncataloguing sixty-one separate problems he had experienced with the motor home since taking\ndelivery. Dolan sent a copy of the letter and list to Richard Bibler, Assistant to the President of\nBarth, Incorporated ("Barth"), the manufacturer ....\nOn March 7, 1985, the Schroeders, citizens of Florida, filed a complaint against Barth, an\nIndiana corporation, in the United States District Court for the Northern District of Indiana. [The\nSchroeders sought damages of $146,705.] On March 15, 1991, nearly ten years after the\nSchroeders purchased the motor home, the court granted Barth\'s motion for summary judgment\non damages, and entered judgment for the Schroeders in the amount of $2,113 plus costs.\nBecause there is no dispute that a breach of Barth\'s express warranty occurred, and that\nthe Schroeders sustained damages as a result of that breach, the only issue is the amount of those\ndamages. Indiana\'s Uniform Commercial Code provides that the appropriate measure of damages\nfor breach of an express warranty "is the difference at the time and place of acceptance between\nthe value of the goods accepted and the value they would have had if they had been as warranted,\nunless special circumstances show proximate damages of a different amount." IND. CODE \xc2\xa7 261-2-714(2). The alternative methods to calculate those damages, set out in Michiana Mack, Inc.\nv. Allendale Rural Fire Protection District, 428 N.E.2d 1367 (Ind. App. 1981), are (1) the cost to\nrepair, (2) the fair market value of the goods as warranted less the salvage value of the goods, or\n(3) the fair market value of the goods as warranted at the time of acceptance less the fair market\nvalue of the goods as received at the time of acceptance. Id. at 1370. It is the Schroeders\' burden\nto prove the amount of their damages, and theirs alone. "It is not the function of the trial court to\nfashion equitable remedies to relieve [them] of that burden." Id. at 1371.\nNowhere in the two-inch thick record of the seven years of proceedings below do the\nSchroeders indicate under which of Michiana Mack\'s alternative methods they calculate their\ndamages. They simply, adamantly, insist their damages are $ 146,705, which coincidentally is the\nprice of the motor home. Unfortunately for the Schroeders, however, recapture of the purchase\nprice is not an available remedy under \xc2\xa7 26-1-2-714(2). It is appropriate only when the buyer has\nrejected the goods or revoked acceptance. Michiana Mack, 428 N.E.2d at 1372. And despite\nrepeated opportunities to offer more, the only evidence of damages they proffered was Lester\n225\n\n\x0cSchroeder\'s subjective opinion that the motor home was worthless.\nIn its memorandum in support of its motion for summary judgment, Barth argued that\nalthough the cost to repair is not the only method to calculate breach of express warranty\ndamages, it is the preferred method. More importantly, as Barth pointed out, it was the only\nmethod for which there was supporting evidence. That evidence, provided in the affidavit of\nBarth\'s Assistant to the President, Richard Bibler, was an itemized list of the Barth-warranted\ncomponents of the motor home the Schroeders claimed were defective. Bibler gave a dollar\nfigure, based on personal knowledge, for each item, "with a generous time allowance for each\nrepair, at a retail labor rate of $ 35.00 per hour and, where applicable, a part or parts at retail\nprice." Bibler Affidavit, Exhibit A to Defendant\'s Memorandum in Support of its Motion for\nSummary Judgment, Rec. Doc. No. 48, at 2 & 3. Contrary to the Schroeders\' contention, Barth\nmet its burden to identify for the court the absence of any genuine issue of material fact: it\nadmitted liability, it admitted the Schroeders sustained damages, and using the preferred method,\nit provided the court with sufficient evidence to calculate those damages.\nSo the burden shifted to the Schroeders. "When a moving party has carried its burden\nunder Rule 56(c), its opponent must do more than simply show that there is some metaphysical\ndoubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio, 475 U.S. 574, 586\n(1986). But once again, in their response to Barth\'s motion, the Schroeders offered only Lester\'s\naffidavit and argued that the owner of a motor home is competent to testify as to its value. In\ntheir statement of genuine issues of fact, the Schroeders offered that "Mr. Bibler may be entitled\nto his opinion that the Schroeders\' damages are limited to the cost of repair, which he claims to\nbe $ 2,211.25. Mr. and Mrs. Schroeder have their own opinion. The motor home was worthless."\nPlaintiffs\' Statement of Genuine Issues, Rec. Doc. No. 51, at 2. The problem with this response is\nthat it offers only subjective opinion, not the kind of documentary evidence that [the nonmovant\nmust produce to support his contentions].\nAlthough Lester\'s opinion may be competent evidence of the value of the motor home to\nthe Schroeders, it is not sufficient to meet their burden of proving damages under any of\nMichiana Mack\'s alternative methods....\nMoreover, fixing damages at the cost to repair also was appropriate. The Schroeders\nwholly failed to meet their burden to establish their damages, under any one of Michiana Mack\'s\nalternative methods, and as we noted above, a trial court will not relieve them of that burden. As\nodd as it may be, Barth provided the only evidence of damages in the record, and that is the cost\nto repair.\nThe Schroeders also argue that the district court erred in failing to award them incidental\nand consequential damages. Ever since Hadley v. Baxendale5 [5The case, 9 Ex. 341, 156 Eng.\nRep. 145 (1854), not the screen actor, whose credits include Behind the Green Door.] courts\nhave allowed recovery in breach of contract actions for all damages that were reasonably\nforeseeable to the parties at the time of contract formation. Indiana\'s courts are among them. See,\n226\n\n\x0ce.g., Indiana Ins. Co. v. Plummer Power Mower, 590 N.E.2d 1085 (Ind. App. 1992). In their\ncomplaint, in addition to the $146,705 damages, the Schroeders asked for "expenses reasonably\nincurred." But as with their breach of warranty damages, they fail to prove exactly what expenses\nthey reasonably incurred in connection with the defective Barth-warranted components of the\nmotor home. The only evidence they offer is contained in a letter from Lester to Charles Dolan of\nMotor Vacations Unlimited. In it, Lester says:\nWe signed the contract in March, took delivery in July and still can\'t use it. My insurance\ncosts me $150.00 a month, telephone calls mount up and I am doing a lot of this work\nmyself, and communications are not getting the job done.\nHave already made one trip to Globe, 250 miles. Next trip they want me to leave the\nvehicle for a week, that\'s another 250 miles. To stay in a motel gets to [sic] expensive,\nwill have to drive a car up and back, that\'s another 250 miles. Then the return trip to pick\nup the motor home will be another 250 miles and then will the work be done that time. It\nis 1200 miles to the factory, these trips to Globe come to 1000 miles. Why don\'t [sic] the\nfactory pay for fuel and let this vehicle get the repairs it needs at the factory. And yet it\nhad been at the factory for about 3 weeks the last time and the work still was not finished\nand had to wait.\nThese statements are wholly insufficient for the Schroeders to carry their burden of establishing\ntheir damages as a consequence of, and incidental to, defects of the Barth-warranted components.\nFor the foregoing reasons, the judgment of the district court is\nAFFIRMED.\nCase Note. The Schroeders wanted as damages the amount they paid for the vehicle. What are\nthe alternatives for obtaining that remedy?\n16.3. Notice. Before a buyer can seek damages under \xc2\xa7 2-714, the buyer must give notification of\nthe non-conformity to the seller as required under \xc2\xa7 2-607(3).\n16.3.1. Turn to \xc2\xa7 2-607(3). The notice must be within a reasonable time after the buyer\ndiscovers or should have discovered the breach.\n16.3.2. Comment 4 to \xc2\xa7 2-607(3) states that the purpose of the notification requirement is\n\xe2\x80\x9cto defeat commercial bad faith, not to deprive a good faith consumer of his remedy.\xe2\x80\x9d\n(Emphasis supplied.) Comment 4 also notes that \xe2\x80\x9ca reasonable time\xe2\x80\x9d for notification from\na retail consumer is to be judged by different standards than the time period applicable to\na merchant.\n227\n\n\x0c16.3.3. Comment 4 also explains that the content of the notification need not include a\n\xe2\x80\x9cclear statement of all the objections,\xe2\x80\x9d but \xe2\x80\x9cneed merely be sufficient to let the seller\nknow that the transaction is still troublesome and must be watched.\xe2\x80\x9d However, several\ncourts have required much more than some notice that a transaction is \xe2\x80\x9ctroublesome.\xe2\x80\x9d In\nfact, one court has said that Comment 4 is flat wrong in stating that mere notice that a\ntransaction is \xe2\x80\x9ctroublesome\xe2\x80\x9d is sufficient. That court required a clear statement informing\nthe seller that the \xe2\x80\x9ctrouble\xe2\x80\x9d experienced by a buyer constitutes a breach. K&M Joint\nVenture v. Smith Int\xe2\x80\x99l, Inc., 669 F.2d 1106 (6th Cir. 1981).\n16.3.4. To whom must the notice be sent? If a buyer purchases a defective product, and\nintends to bring a claim against both the seller and the manufacturer, must the buyer\nnotify both of the breach?\nCooley v. Big Horn Harvestore Systems, Inc.\n813 P.2d 736 (Colo. 1991)\nIn July 1980, plaintiffs Robert Cooley and Rita Cooley executed two agreements with\ndefendant Big Horn Harvestore Systems, Inc. (hereinafter Big Horn), in connection with their\npurchase of a Harvestore automated grain storage and distribution system for use in their dairy\noperation. Big Horn is an independent distributor of Harvestore systems pursuant to agreements\nwith defendant A.O. Smith Harvestore Products, Inc. (hereinafter AOSHPI), the manufacturer of\nthe Harvestore system. The Cooleys purchased the Harvestore system to improve the efficiency\nand productivity of their dairy....\nIn early 1981, the Cooleys began to feed their herd with grain stored in the Harvestore\nsystem. Shortly thereafter, the health of the herd began to deteriorate and milk production\nsubstantially declined. The Cooleys informed Big Horn of these developments, and over the\nsucceeding eighteen months Big Horn representatives made repairs to the structure, gave advice\nto the Cooleys concerning feed ratios, and assured the Cooleys that the system was functioning\nproperly.\nThe health of the cows continued to deteriorate. Some died, and the Cooleys ultimately\nsold the remainder of the herd in 1983. The plaintiffs then filed this action against Big Horn and\nAOSHPI seeking damages based on claims of breach of implied warranties of merchantability\nand fitness for a particular purpose, breach of express warranties, breach of contract because of\nthe failure of essential purpose of a limited remedy of suit for breach of warranty to repair or\nreplace any defective part thereof (hereinafter referred to as the "failure of essential purpose"\nclaim) [see \xc2\xa7 2-719(2)], negligence, deceit, and revocation of acceptance \xe2\x80\xa6.\nThe Court of Appeals held that a commercial buyer seeking recovery from a manufacturer\nfor a breach of contract claim resulting in property damage alone must, pursuant to the provisions\nof \xc2\xa7 4-2-607(3)(a), 2 C.R.S. (1973), give the manufacturer timely notice of the claimed breach as\n228\n\n\x0ca condition precedent to any recovery. The plaintiffs contend that they complied with the notice\nprovisions of the statute by giving timely notice of their failure of essential purpose claim to Big\nHorn. We agree with the plaintiffs\' contention.\nSection 4-2-607(3)(a), 2 C.R.S. (1973), provides that "where a tender has been accepted:\n(a) the buyer must within a reasonable time after he discovers or should have discovered any\nbreach, notify the seller of breach or be barred from any remedy \xe2\x80\xa6." This provision serves as a\ncondition precedent to a buyer\'s right to recover for breach of contract under the statute. Palmer\nv. A.H. Robins Co., 684 P.2d 187, 206 (Colo. 1984). The question of what constitutes a\nreasonable time is dependent on the circumstances of each case. White v. Mississippi Order\nBuyers, Inc., 648 P.2d 682 (Colo. App. 1982). The parties agree that the plaintiffs gave timely\nnotice to Big Horn of their claim but did not directly notify AOSHPI of such claim.\nThe notice provision of \xc2\xa7 4-2-607(3)(a) serves three primary purposes. It provides the\nseller with an opportunity to correct defects, gives the seller time to undertake negotiations and\nprepare for litigation, and protects the seller from the difficulties of attempting to defend stale\nclaims. Palmer v. A.H. Robins Co.; Prutch v. Ford Motor Co., 618 P.2d 657 (Colo. 1980). See\ngenerally White and Summers, Uniform Commercial Code \xc2\xa7 11-10 at 481 (3d ed. 1980). The\nCode defines \'seller\' as "a person who sells or contracts to sell goods." \xc2\xa7 4-2-103(1)(d), 2 C.R.S.\n(1973). The official comment to the Code states in pertinent part that "the rule of requiring\nnotification is designed to defeat commercial bad faith, not to deprive a good faith consumer of\nhis remedy." \xc2\xa7 4-2-607, 2 C.R.S. comment 4 (1973).\nIn Palmer v. A.H. Robins Co., 684 P.2d 187, this court construed the statute\'s notice\nprovision in the context of a product liability action. In Palmer, a consumer injured through use\nof a defective intrauterine device sought recovery for damages against the manufacturer of the\nproduct, A.H. Robins Co. Although the plaintiff, prior to initiating litigation, notified the\nimmediate seller, her doctor, of the fact that she allegedly sustained injuries as a result of defects\nin the product, she did not so notify Robins. Robins argued that the plaintiff\'s claims against it\nshould be dismissed for failure to comply with \xc2\xa7 4-2-607(3)(a).\nWe rejected that argument. We construed the term "seller" as used in \xc2\xa7 4-2-607(3)(a) to\n"refer only to the immediate seller who tendered the goods to the buyer." Palmer at 206. We\nexplained that "under this construction, as long as the buyer has given notice of the defect to his\nor her immediate seller, no further notification to those distributors beyond the immediate seller\nis required." Id. We also observed that a relaxed notification requirement was especially\nappropriate in Palmer because the plaintiff was a lay consumer who "would not ordinarily know\nof the notice requirement." Id. at 207 n.3.\nThe Court of Appeals concluded that the plaintiffs here were commercial purchasers who\nsuffered only economic loss, as distinguished from the lay consumer who sought relief in\nPalmer. Assuming, arguendo, that the plaintiffs here were commercial purchasers, it must be\nobserved that our decision in Palmer required construction of a statute adopted by the General\n229\n\n\x0cAssembly for application in all commercial contexts. The language of \xc2\xa7 4-2-607(3)(a) is\nunambiguous: it requires a buyer to give notice of a defective product only to the "seller." See 2\nAnderson, Uniform Commercial Code \xc2\xa7 2.607:24. The General Assembly has not elected to\nrequire advance notice to a manufacturer of litigation for breach of the manufacturer\'s warranty\nof a product, and we find no compelling reason to create such a condition precedent judicially in\nthe context of commercial litigation. The filing of a lawsuit is sufficient notice to encourage\nsettlement of claims, and applicable statutes of limitation protect manufacturers from the\ndifficulties of defending against stale claims. [Citations omitted.]\nSeveral courts considering whether a purchaser seeking recovery under a manufacturer\'s\nwarranty must give notice to the manufacturer as well as to the seller of the product under\nstatutory provisions similar to \xc2\xa7 4-2-607(3)(a) have reached a similar result. See, e.g., Firestone\nTire and Rubber Co. v. Cannon, 53 Md. App. 106, 452 A.2d 192 (1982), aff\'d, 295 Md. 528, 456\nA.2d 930 (1983). Some courts have reached contrary results. See Morrow v. New Moon Homes,\nInc., 548 P.2d 279 (Alaska 1976); Branden v. Gerbie, 62 Ill. App. 3d 138, 379 N.E.2d 7, 19 Ill.\nDec. 492 (1978); Western Equip. Co. v. Sheridan Iron Works, Inc., 605 P.2d 806 (Wyo. 1980).\nMany such courts have recognized that in most nationwide product distribution systems, the\nseller/representative dealer may be presumed to actually inform the manufacturer of any major\nproduct defects. Goldstein v. G.D. Searle & Co., 62 Ill. App. 3d 344, 347-48, 378 N.E.2d 1083,\n1086-87, 19 Ill. Dec. 208 (1978); see also Prince, Overprotecting the Consumer? \xc2\xa7 2-607(3)(a).\nNotice of Breach in Non-Privity Contexts, 66 N.C.L. Rev. 107, 151 (1987). Furthermore, as one\ncommentator has noted, "it is perhaps more reasonable to treat notice to an immediate seller as\nsufficient against a remote seller than vice versa, in view of the immediacy of relation that exists\nin the one instance but not in the other." Phillips, Notice of Breach in Sales and Strict Tort\nLiability Law: Should There be a Difference?, 47 Ind. L.J. 457, 473 (1971); see also Snell v. G.D.\nSearle & Co., 595 F. Supp. 654, 656 (N.D. Ala. 1984) (applying Alabama law); Firestone Tire\nand Rubber Co. v. Cannon, 53 Md. App. 106, 452 A.2d 192 (1982), aff\'d, 295 Md. 528, 456\nA.2d 930 (1983). This presumption forms the basis of the principle that a remote manufacturer\nmay raise as its own defense the buyer\'s failure to give timely notice to the immediate seller. See,\ne.g., Snell v. G.D. Searle & Co., 595 F. Supp. 654, 656 (N.D. Ala. 1984) (applying Alabama\nlaw); Owens v. Glendale Optical Co., 590 F. Supp. 32, 36 (S.D. Ill. 1984) (applying Illinois law);\nGoldstein v. G.D. Searle & Co., 62 Ill. App. 3d 344, 347-48, 378 N.E.2d 1083, 1086-87, 19 Ill.\nDec. 208 (1978). In view of the unambiguous language of \xc2\xa7 4-2-607(3)(a), we conclude that a\npurchaser injured by a product is not required to give notice of such injury to a remote\nmanufacturer prior to initiating litigation against such manufacturer.\nAOSHPI urges us to adopt the rationale expressed in Carson v. Chevron Chemical Co., 6\nKan. App. 2d 776, 635 P.2d 1248 (1981). In that case three farmers brought suit against a\nherbicide manufacturer and dealer to recover damages for breach of warranties. Observing that in\nordinary buyer-seller relationships the Kansas Commercial Code equivalent of \xc2\xa7 4-2-607(3)(a)\nrequires that notice of an alleged breach need only be given to the buyer\'s immediate seller,\nCarson at 1256, the Kansas Court of Appeals concluded that the plaintiffs were required to notify\n230\n\n\x0cthe manufacturer under the particular circumstances of that case. The court explained its holding\nas follows:\nIn those instances, however, where the buyer and the other parties to the manufacture,\ndistribution and sale of the product are closely related, or where the other parties actively\nparticipate in the consummation of the actual sale of the product, the reasons for the\nexclusion of such other parties from the K.S.A. 84-2-607(3)(a) notice provision cease to\nexist.\nId.\nIn our view, the rationale of Carson supports the result we reach. The Kansas Court of\nAppeals emphasized that under the circumstances disclosed by the evidence the defendant was in\neffect a direct seller to the plaintiffs. Here, AOSHPI, the manufacturer, was isolated and insulated\nfrom the plaintiffs. The contract specified that Big Horn was the seller. AOSHPI, if a seller, was\na seller to Big Horn, not to the plaintiffs. As far as the plaintiffs were concerned, the only direct\nrelationship established by the contract and by the conduct of the parties was their relationship\nwith Big Horn. Under these circumstances, to require the plaintiffs to give statutory notice to\nAOSHPI when not specifically required to do so by statute would unreasonably promote\ncommercial bad faith and inequitably deprive good faith consumers of a remedy, contrary to the\npurpose of the statute. We reject such a construction.\nCase Notes:\n1. What about a plaintiff who is not a purchaser, but a third party beneficiary of a\nwarranty claim under \xc2\xa7 2-318, such as a member of the purchaser\xe2\x80\x99s family? Must the\nthird party beneficiary give notice under \xc2\xa7 2-607(3) before she can bring a claim against\neither the seller or the manufacturer? Several courts have not required a third party\nbeneficiary bringing a horizontal claim under \xc2\xa7 2-318 to provide notice, even to the seller.\nSee Taylor v. American Honda Motor Co., Inc., 555 F. Supp. 59 (D. Fl. 1982).\n2. Some courts have found that notice upon a seller constituted notice against the\nmanufacturer, on the rationale that the seller was the agent of the manufacturer. See, for\nexample, Church of Nativity of Our Lord v. WatPro, Inc., 491 N.W.2d 1 (Minn. 1992).\n3. For more cases discussing the notice requirements under \xc2\xa7 2-607(3), see Jane Massey\nDraper, Annotation, Sufficiency and Timeliness of Buyer\'s Notice Under UCC \xc2\xa7 2607(3)(a) of Seller\'s Breach of Warranty, 89 A.L.R.5th 319 (2001), and Wanda Ellen\nWakefield, Annotation, Necessity that Buyer of Goods Give Notice of Breach of Warranty\nto Manufacturer Under UCC \xc2\xa7 2-607, Requiring Notice to Seller of Breach, 24 A.L.R.4th\n277 (1983).\n231\n\n\x0c16.4. Buyer\xe2\x80\x99s Remedy of \xe2\x80\x9cCover.\xe2\x80\x9d Section 2-712 provides the buyer\xe2\x80\x99s remedy of \xe2\x80\x9ccover,\xe2\x80\x9d or\nprocuring substitute goods. Where the buyer has rightfully rejected or revoked acceptance, or if\nthe seller has failed to deliver or otherwise repudiates the contract, the buyer may cancel the\ncontract and recover any portion of the purchase price paid. In addition, the buyer may\nreasonably purchase substitute goods, but in doing so the buyer must act in good faith and\nwithout unreasonable delay. After covering, the buyer may recover damages from seller under\nthe following formula:\nCost of cover\n- Contract price\n+ incidental and consequential damages\n- expenses saved by buyer\n16.4.1. The substitute goods do not have to be identical with those called for under the\ncontract. Comment 2 to \xc2\xa7 2-712 specifies that the goods must be \xe2\x80\x9ccommercially usable as\nreasonable substitutes under the circumstances of the particular case.\xe2\x80\x9d\n16.4.2. The buyer is not obligated to cover; the buyer may choose another remedy.\nHowever, if buyer fails to cover, buyer will not be able to recover those consequential\ndamages which could have been mitigated by cover. See Comment 3 to \xc2\xa7 2-712.\n16.4.3. See generally Annotation, What Constitutes \xe2\x80\x9ccover\xe2\x80\x9d Upon Breach by Seller\nUnder UCC \xc2\xa7 2-712(1), 79 A.L.R. 4th 844 (1990).\nProblem 16-3. Brianna has agreed to purchase a temperature-regulated wine storage unit, the\nVintner\xe2\x80\x99s Deluxe, for $1,000 plus a $50 delivery fee from Serena\xe2\x80\x99s Cellars, payable on delivery.\nThe unit has a glass door, black framing, and a burgundy interior, to match Brianna\xe2\x80\x99s redecorated\nkitchen. The temperature is 68\xcc\x8a at the top (for red wine), and 48\xcc\x8a at the bottom (for white wine).\nThe delivery crew arrives the next day with a large box marked \xe2\x80\x9cVintner\xe2\x80\x99s Deluxe,\xe2\x80\x9d but when the\nunit is removed, it turns out to have a burnt orange interior instead of a burgundy interior, which\nclashes terribly with Brianna\xe2\x80\x99s decor. Brianna rejects the cooler. Serena calls later in the day and\ntells Brianna that she can\xe2\x80\x99t find any units with a burgundy interior; the manufacturer has stopped\nmaking that color line. Desperate to have the wine storage unit installed by the time of her\nscheduled \xe2\x80\x9ckitchen warming\xe2\x80\x9d party next weekend, Brianna starts looking on E-bay. After hours\nof searching, she finally finds a Vintner\xe2\x80\x99s Deluxe with a burgundy interior. She purchases it for\n$1,200, plus $25 in shipping and insurance costs.\n1. What is the measure of Brianna\xe2\x80\x99s damages against Serena\xe2\x80\x99s Cellars under \xc2\xa7 2-712(2)?\n2. What if the cooling unit which Brianna eventually bought for $1,200 was not the exact same\nmodel as she had originally contracted for with Serena\xe2\x80\x99s Cellars; instead, it has capacity for 15\n232\n\n\x0cbottles of wine instead of 12 bottles of wine, but it was the only model she could find in the right\ncolors?\n16.5. Buyer\xe2\x80\x99s Remedy of Market Price Damages. As an alternative to the remedy of cover,\n\xc2\xa7 2-713 allows buyer to recover damages for seller\xe2\x80\x99s failure to deliver or repudiation. The\nmeasure of damages is calculated using the following formula:\nMarket price at the time buyer learned of breach\n- Contract price\n+ incidental and consequential damages\n- expenses saved by buyer\n16.5.1. Comment 1 states that the appropriate market to refer to in determining the market\nprice is the place where the buyer would have obtained cover had she pursued that\nremedy. Comment 1 proceeds to state that this would be the place of tender, unless the\ngoods are rejected or acceptance is revoked after delivery, in which event the market\nwould be the place of arrival.\n16.5.2. If the market price is difficult to prove, \xc2\xa7 2-723 provides that you can refer to the\nprice prevailing within any reasonable time or at any other place which in commercial\njudgment or under usage of trade would serve as a reasonable substitute. However, notice\nmust be given to the seller if buyer intends to use a time or place other than those\ndescribed in \xc2\xa7 2-713.\nProblem 16-4. Let\xe2\x80\x99s go back to Brianna and the wine storage unit which she had agreed to\npurchase for $1,000, plus $50 delivery. What if the average retail price for the exact same unit\nwas $1,200 (plus $50 delivery), but Brianna was able to find the same unit on clearance at a store\ngoing out of business for $900 (which did not offer delivery, so she borrowed a friend\xe2\x80\x99s pick-up\nand brought it home herself). Calculate her damages under \xc2\xa7 2-712 (cover) and \xc2\xa7 2-713 (market\nprice). Which choice of remedies would you recommend she pursue?\nTongish v. Thomas\n840 P.2d 471 (Kan. 1992)\n[Tongish agreed to deliver to Decator Co-op Association [Co-op] an agreed upon amount of\nsunflower seeds at a specified price of $8 to $13 per hundredweight, depending upon the size of\nthe seeds. Co-op, in turn, had agreed to deliver these seeds to Bambino Bean & Seed, Inc., for the\nprice it paid to Tongish plus $.55 per hundredweight handling fee. Its total profit on the re-sale of\nthe sunflower seeds would have been $ 455.51. Due to a short crop, bad weather, and other\nfactors, the market price of sunflower seeds quickly doubled from the prices set forth in the\nTongish/Co-op contract. After partially fulfilling the contract, Tongish notified Co-op he would\nnot deliver any more sunflower seeds to Co-op and instead sold the seeds to Thomas. Tongish\n233\n\n\x0cinitially sued Thomas, but Thomas was dismissed as a defendant. Co-op intervened as a thirdparty defendant and claimed breach of contract by Tongish. Computation of Co-op\xe2\x80\x99s damages\nunder \xc2\xa7 2-713 (market price of $16 to $26 per hundredweight) would have amounted to\napproximately $8,000 in damages, versus the Co-op\xe2\x80\x99s actual lost profit of $455.51.]\nThis case presents the narrow issue of whether damages arising from the nondelivery of\ncontracted-for sunflower seeds should be computed on the basis of K.S.A. 84-1-106 [now \xc2\xa7 1305] or K.S.A. 84-2-713. That is, whether the buyer is entitled to its actual loss of profit or the\ndifference between the market price and the contract price. The trial court awarded damages on\nthe basis of the buyer\'s actual loss of profit. The Court of Appeals reversed the judgment, holding\nthat the difference between the market price and the contract price was the proper measure of\ndamages (Tongish v. Thomas, 16 Kan. App. 2d 809, 829 P.2d 916 [1992]). The matter is before\nus on petition for review\xe2\x80\xa6.\nFollowing a bench trial, the district court held that Tongish had breached the contract\nwith no basis therefor. Damages were allowed in the amount of $ 455.51, which was the\ncomputed loss of handling charges. Co-op appealed from said damage award. The Court of\nAppeals reversed the district court and remanded the case to the district court to determine and\naward damages pursuant to K.S.A. 84-2-713 (the difference between the market price and the\ncontract price).\nThe analyses and rationale of the Court of Appeals utilized in resolving the issue are\nsound and we adopt the following portion thereof:\n"The trial court decided the damages to Co-op should be the loss of expected profits. Coop argues that K.S.A. 84-2-713 entitles it to collect as damages the difference between the\nmarket price and the contract price. Tongish argues that the trial court was correct and cites\nK.S.A. 84-1-106 as support for the contention that a party should be placed in as good a position\nas it would be in had the other party performed. Therefore, the only disagreement is how the\ndamages should be calculated.\n"The measure of damages in this action involves two sections of the Uniform\nCommercial Code: K.S.A. 84-1-106 and K.S.A. 84-2-713. The issue to be determined is which\nstatute governs the measure of damages. Stated in another way, if the statutes are in conflict,\nwhich statute should prevail? The answer involves an ongoing academic discussion of two\ncontending positions. The issues in this case disclose the problem.\n\xe2\x80\x9cIf Tongish had not breached the contract, he may have received under the contract terms\nwith Coop about $5,153.13 less than he received from Danny Thomas. Coop in turn had an oral\ncontract with Bambino to sell whatever seeds it received from Tongish to Bambino for the same\nprice Coop paid for them. Therefore, if the contract had been performed, Coop would not have\nactually received the extra $5,153.13.\n234\n\n\x0c"We first turn our attention to the conflicting statutes and the applicable rules of statutory\nconstruction. K.S.A. 84-1-106(1) [now \xc2\xa7 1-305] states:\n\'The remedies provided by this act shall be liberally administered to the end that the\naggrieved party may be put in as good a position as if the other party had fully performed\nbut neither consequential or special nor penal damages may be had except as specifically\nprovided in this act or by other rule of law.\'\n"If a seller breaches a contract and the buyer does not \'cover,\' the buyer is free to pursue\nother available remedies. K.S.A. 84-2-711 and 84-2-712. One remedy, which is a complete\nalternative to \'cover\' (K.S.A. 84-2-713, Official comment, para. 5), is K.S.A. 84-2-713(1), which\nprovides:\n\'Subject to the provisions of this article with respect to proof of market price (\xc2\xa7 84-2723), the measure of damages for nondelivery or repudiation by the seller is the\ndifference between the market price at the time when the buyer learned of the breach\nand the contract price together with any incidental and consequential damages\nprovided in this article (\xc2\xa7 84-2-715), but less expenses saved in consequence of the\nseller\'s breach.\'\n"Neither party argues that the Uniform Commercial Code is inapplicable. Both agree that\nthe issue to be determined is which provision of the UCC should be applied. As stated by the\nappellee: \'This is really the essence of this appeal, i.e., whether this general rule of damages\n[K.S.A. 84-1-106] controls the measure of damages set forth in K.S.A. 84-2-713.\' However,\nTongish then offers no support that K.S.A. 84-1-106 controls over K.S.A. 84-2-713. The\nauthority he does cite (M & W Development, Inc. v. El Paso Water Co., 6 Kan. App. 2d 735, 634\nP.2d 166 [1981]) is not a UCC case and K.S.A. 84-2-713 was not applicable.\n"The statutes do contain conflicting provisions. On the one hand, K.S.A. 84-1-106 offers\na general guide of how remedies of the UCC should be applied, whereas K.S.A. 84-2-713\nspecifically describes a damage remedy that gives the buyer certain damages when the seller\nbreaches a contract for the sale of goods.\n"The cardinal rule of statutory construction, to which all others are subordinate, is that the\npurpose and intent of the legislature govern. [cites omitted] When there is a conflict between a\nstatute dealing generally with a subject and another statute dealing specifically with a certain\nphase of it, the specific statute controls unless it appears that the legislature intended to make the\ngeneral act controlling.... The Kansas Supreme Court stated in Kansas Racing Management, Inc.\nv. Kansas Racing Comm\'n, 244 Kan. 343, 353, 770 P.2d 423 (1989): \'General and special statutes\nshould be read together and harmonized whenever possible, but to the extent a conflict between\nthem exists, the special statute will prevail unless it appears the legislature intended to make the\ngeneral statute controlling.\'\n"K.S.A. 84-2-713 allows the buyer to collect the difference in market price and contract\n235\n\n\x0cprice for damages in a breached contract. For that reason, it seems impossible to reconcile the\ndecision of the district court that limits damages to lost profits with this statute.\n"Therefore, because it appears impractical to make K.S.A. 84-1-106 and K.S.A. 84-2-713\nharmonize in this factual situation, K.S.A. 84-2-713 should prevail as the more specific statute\naccording to statutory rules of construction.\n"As stated, however, Co-op protected itself against market price fluctuations through its\ncontract with Bambino. Other than the minimal handling charge, Co-op suffered no lost profits\nfrom the breach. Should the protection require an exception to the general rule under K.S.A. 842-713?\n"In Panhandle Agri-Service, Inc. v. Becker, 231 Kan. 291, 292, 644 P.2d 413 (1982), a\nfarmer agreed to sell 10,000 tons of alfalfa to the buyer for $ 45 per ton. At the time the seller\nbreached the contract, the market price was $ 62 per ton. 231 Kan. at 293. The court found,\npursuant to K.S.A. 84-2-713, that the damages amounted to $ 17 per ton or the difference\nbetween the market price and the contract price. The court stated: \'We find nothing which would\njustify the trial court in arriving at damages using loss of business profits which are consequential\ndamages.\' 231 Kan. at 298.\n"In Baker v. Ratzlaff, 1 Kan. App. 2d 285, 564 P.2d 153 (1977), the seller contracted to\nsell all the popcorn planted on 380 acres for $ 4.75 per hundredweight. The seller breached, and\nthe trial court found that the market price for popcorn was $ 8 per hundredweight when the buyer\nlearned of the breach. The court held that the proper measure of damages would be the difference\nbetween the market price and the contract price as provided in K.S.A. 84-2-713. 1 Kan. App. 2d\nat 290.\n"Neither Panhandle nor Baker involved a conflict between the two UCC provisions. The\ndifference between the market price and the contract price placed the nonbreaching party in as\ngood a position as that party would have been if the contract had been performed. The decisions\ncan be distinguished from this case, however, in that Co-op protected itself against market price\nfluctuations with the Bambino contract.\n"There is authority for appellee\'s position that K.S.A. 84-2-713 should not be applied in\ncertain circumstances. In Allied Canners & Packers, Inc. v. Victor Packing Co., 162 Cal. App. 3d\n905, 209 Cal. Rptr. 60 (1984), Allied contracted to purchase 375,000 pounds of raisins from\nVictor for 29.75 cents per pound with a 4% discount. Allied then contracted to sell the raisins for\n29.75 cents per pound expecting a profit of $ 4,462.50 from the 4% discount it received from\nVictor. 162 Cal. App. 3d at 907-08.\n"Heavy rains damaged the raisin crop and Victor breached its contract, being unable to\nfulfill the requirement. The market price of raisins had risen to about 80 cents per pound. Allied\'s\nbuyers agreed to rescind their contracts so Allied was not bound to supply them with raisins at a\n236\n\n\x0csevere loss. Therefore, the actual loss to Allied was the $ 4,462.50 profit it expected, while the\ndifference between the market price and the contract price was about $ 150,000. 162 Cal. App.\n3d at 909.\n"The California appellate court, in writing an exception, stated: \'It has been recognized\nthat the use of the market-price contract-price formula under \xc2\xa7 2-713 does not, absent pure\naccident, result in a damage award reflecting the buyer\'s actual loss. [Citations omitted.]\' 162 Cal.\nApp. 3d at 912. The court indicated that \xc2\xa7 2-713 may be more of a statutory liquidated damages\nclause and, therefore, conflicts with the goal of \xc2\xa7 1-106. The court discussed that in situations\nwhere the buyer has made a resale contract for the goods, which the seller knows about, it may be\nappropriate to limit 2-713 damages to actual loss. However, the court cited a concern that a seller\nnot be rewarded for a bad faith breach of contract. 162 Cal. App. 3d at 912-14.\n"In Allied, the court determined that if the seller knew the buyer had a resale contract for\nthe goods, and the seller did not breach the contract in bad faith, the buyer was limited to actual\nloss of damages under \xc2\xa7 1-106. 162 Cal. App. 3d at 915.\n"The similarities between the present case and Allied are that the buyer made a resale\ncontract which the seller knew about. (Tongish knew the seeds eventually went to Bambino,\nalthough he may not have known the details of the deal.) However, in examining the breach\nitself, Victor could not deliver the raisins because its crop had been destroyed. Tongish testified\nthat he breached the contract because he was dissatisfied with dockage tests of Co-op and/or\nBambino. Victor had no raisins to sell to any buyer, while Tongish took advantage of the\ndoubling price of sunflower seeds and sold to Danny Thomas. Although the trial court had no\nneed to find whether Tongish breached the contract in bad faith, it did find there was no valid\nreason for the breach. Therefore, the nature of Tongish\'s breach was much different than Victor\'s\nin Allied.\n"Section 2-713 and the theories behind it have a lengthy and somewhat controversial\nhistory. In 1963, it was suggested that 2-713 was a statutory liquidated damages clause and not\nreally an effort to try and accurately predict what actual damages would be. Peters, Remedies for\nBreach of Contracts Relating to the Sale of Goods Under the Uniform Commercial Code: A\nRoadmap for Article Two, 73 Yale L.J. 199, 259 (1963).\n"In 1978, Robert Childres called for the repeal of \xc2\xa7 2-713. Childres, Buyer\'s Remedies:\nThe Danger of Section 2-713, 72 Nw. U. L. Rev. 837 (1978). Childres reflected that because the\nmarket price/contract price remedy \'has been the cornerstone of Anglo-American damages\' that it\nhas been so hard to see that this remedy \'makes no sense whatever when applied to real life\nsituations.\' 72 Nw. U. L. Rev. at 841-42.\n"In 1979, David Simon and Gerald A. Novack wrote a fairly objective analysis of the two\narguments about \xc2\xa7 2-713 and stated:\n237\n\n\x0c\'For over sixty years our courts have divided on the question of which measure of damages is\nappropriate for the supplier\'s breach of his delivery obligations. The majority view, reinforced\nby applicable codes, would award market damages even though in excess of plaintiff\'s loss. A\npersistent minority would reduce market damages to the plaintiff\'s loss, without regard to\nwhether this creates a windfall for the defendant. Strangely enough, each view has generally\ntended to disregard the arguments, and even the existence, of the opposing view.\' Simon and\nNovack, Limiting the Buyer\'s Market Damages to Lost Profits: A Challenge to the\nEnforceability of Market Contracts, 92 Harv. L. Rev. 1395, 1397 (1979).\n"Although the article discussed both sides of the issue, the authors came down on the side\nof market price/contract price as the preferred damages theory. The authors admit that market\ndamages fly in the face \'of the familiar maxim that the purpose of contract damages is to make\nthe injured party whole, not penalize the breaching party.\' 92 Harv. L. Rev. at 1437. However,\nthey argue that the market damages rule discourages the breach of contracts and encourages a\nmore efficient market. 92 Harv. L. Rev. at 1437.\n"The Allied decision in 1984, which relied on the articles cited above for its analysis to\nreject market price/contract price damages, has been sharply criticized. In Schneider, UCC \xc2\xa7 2713: A Defense of Buyers\xe2\x80\x99 Expectancy Damages, 22 Cal. W. L. Rev. 233, 266 (1986), the author\nstated that Allied \xe2\x80\x98adopted the most restrictive [position] on buyer\'s damages. This Article is\nintended to reverse that trend.\' Schneider argued that by following \xc2\xa7 1-106, \'the court ignored the\nclear language of \xc2\xa7 2-713\'s compensation scheme to award expectation damages in accordance\nwith the parties\' allocation of risk as measured by the difference between contract price and\nmarket price on the date set for performance.\' 22 Cal. W. L. Rev. at 264.\n"Recently in Scott, The Case for Market Damages: Revisiting the Lost Profits Puzzle, 57\nU. Chi. L. Rev. 1155, 1200 (1990), the Allied result was called \'unfortunate.\' Scott argues that\n\xc2\xa7 1-106 is \'entirely consistent\' with the market damages remedy of 2-713. 57 U. Chi. L. Rev. at\n1201. According to Scott, it is possible to harmonize \xc2\xa7\xc2\xa7 1-106 and 2-713. Scott states, \'Market\ndamages measure the expectancy ex ante, and thus reflect the value of the option; lost profits, on\nthe other hand, measure losses ex post, and thus only reflect the value of the completed\nexchange.\' 57 U. Chi. L. Rev. at 1174. The author argues that if the nonbreaching party has laid\noff part of the market risk (like Co-op did) the lost profits rule creates instability because the\nother party is now encouraged to breach the contract if the market fluctuates to its advantage. 57\nU. Chi. L. Rev. at 1178.\n"We are not persuaded that the lost profits view under Allied should be embraced. It is a\nminority rule that has received only nominal support. We believe the majority rule or the market\ndamages remedy as contained in K.S.A. 84-2-713 is more reasoned and should be followed as the\npreferred measure of damages. While application of the rule may not reflect the actual loss to a\nbuyer, it encourages a more efficient market and discourages the breach of contracts." Tongish v.\nThomas, 16 Kan. App. 2d at 811-17.\n238\n\n\x0cAt first blush, the result reached herein appears unfair. However, closer scrutiny\ndissipates this impression. By the terms of the contract Co-op was obligated to buy Tongish\'s\nlarge sunflower seeds at $ 13 per hundredweight whether or not it had a market for them. Had the\nprice of sunflower seeds plummeted by delivery time, Co-op\'s obligation to purchase at the\nagreed price was fixed. If loss of actual profit pursuant to K.S.A. 84-1-106(1) would be the\nmeasure of damages to be applied herein, it would enable Tongish to consider the Co-op contract\nprice of $ 13 per hundredweight plus 55 cents per hundredweight handling fee as the "floor"\nprice for his seeds, take advantage of rapidly escalating prices, ignore his contractual obligation,\nand profitably sell to the highest bidder. Damages computed under K.S.A. 84-2-713 encourage\nthe honoring of contracts and market stability.\nAs an additional argument, Tongish contends that the application of K.S.A. 84-2-713\nwould result in the unjust enrichment of Co-op. This argument was not presented to the trial\ncourt.\nEven if properly before us, the argument lacks merit. We discussed the doctrine of unjust\nenrichment in J. W. Thompson Co. v. Welles Products Corp., 243 Kan. 503, 758 P.2d 738 (1988),\nstating:\n"The basic elements on a claim based on a theory of unjust enrichment are threefold: (1) a\nbenefit conferred upon the defendant by the plaintiff; (2) an appreciation or knowledge of\nthe benefit by the defendant; and (3) the acceptance or retention by the defendant of the\nbenefit under such circumstances as to make it inequitable for the defendant to retain the\nbenefit without payment of its value." 243 Kan. at 512.\nBefore us is which statutory measure of damages applies. This is not a matter of one party\nconferring a benefit upon another.\nThe judgment of the Court of Appeals reversing the district court and remanding the case\nfor the determination and award of damages pursuant to the provisions of K.S.A. 84-2-713 is\naffirmed. The judgment of the district court is reversed.\n16.6. Specific Performance. Specific performance is an equitable remedy, exercisable within\nthe discretion of the court, if damages are inadequate. Since the remedy requires the court to\norder the seller to perform the contract, courts are reluctant to order it since it may require court\nsupervision. Also note that when a court awards money damages, it does not order the defendant\nto pay the damages. If the defendant does not pay, the plaintiff must attempt to collect the\njudgment. But if a court orders specific performance, then the non-complying defendant may be\nin contempt of court. Specific performance is often granted with respect to enforcement of a\ncontract to buy or sell real property since each parcel of real property is unique and the court can\ntransfer the property if the defendant refuses. The UCC employs a slightly more liberal attitude\nfor granting specific performance. Section 2-716 provides that specific performance may be\n239\n\n\x0cdecreed \xe2\x80\x9cwhere the goods are unique\xe2\x80\x9d or \xe2\x80\x9cin other proper circumstances.\xe2\x80\x9d\n16.6.1. If specific performance is a remedy which your client will want to pursue, you\nmay increase your client\xe2\x80\x99s chances of obtaining specific performance if you include a\nprovision in the contract allowing a non-breaching party to seek specific performance.\nHowever, the parties\xe2\x80\x99 agreement is not binding on the court.\n16.6.2. See generally Andrea G. Nadel, Annotation, Specific Performance of Sale of\nGoods Under UCC \xc2\xa7 2-716, 26 A.L.R.4th 294 (1983).\nProblem 16-5. In early February Bill agrees to purchase an original painting from Russell\nChatham for $15,000. The agreement provides that Bill will pick up the painting on February 28,\nand will pay the purchase price at that time. On February 15, the artist writes to Bill and advises\nBill that he has decided to donate the painting to a charitable auction. For this reason, he will not\nbe delivering the painting. Would you advise Bill to file a lawsuit seeking specific performance?\nWhy or why not?\nChapter 16. Additional Sources\nScott J. Burnham, Glannon Guide to Sales: Learning Sales Through Multiple-Choice Questions\nand Analysis (Wolters Kluwer 2d ed., 2012), Chapter 17\nJames J. White and Robert S. Summers, Uniform Commercial Code (West 6th ed., 2010),\nChapter 6\n\n240\n\n\x0cChapter 17. Limitation of Remedies\n17.1. Freedom of Contract. Under the principle of \xe2\x80\x9cfreedom of contract,\xe2\x80\x9d the parties to a\ncontract may agree to expand or limit otherwise available remedies. However, as we will discuss\nin more detail below, the principle of freedom of contract is not without limitations. For\nexample, an unconscionable limitation of a remedy is not enforceable.\n17.1.1. Parties to a contract may agree to expand or limit remedies otherwise available\n(\xc2\xa7 2-719(1)(a)). For example, a pizza restaurant owner who orders a custom-built brick\noven may agree to the limited remedy of repair or replacement if the oven doesn\xe2\x80\x99t work\nproperly.\nProblem 17-1. Section 2-709 allows a seller to sue for the purchase price in only a few\nsituations. Can the buyer agree to a clause allowing an action for the price in circumstances other\nthan those listed in \xc2\xa7 2-709?\n17.1.2. Parties to a contract may agree to expand or limit damages (\xc2\xa7 2-719(1)(a)). For\nexample, the parties can agree to cap damages to the purchase price of the goods\ninvolved.\nProblem 17-2. The various seller remedy provisions of the UCC, such as \xc2\xa7 2-708, limit a seller\xe2\x80\x99s\ndamages to direct and incidental damages; consequential damages are excluded. Under the\nprinciple of \xe2\x80\x9cfreedom of contract,\xe2\x80\x9d will an agreement allowing a seller to seek consequential\ndamages be enforced?\n17.1.3. Parties to a contract may agree (i) to specify how damages will be calculated, or\n(ii) to the liquidation of damages (\xc2\xa7 2-718(1)). For example, if a supplier fails to timely\ndeliver a pre-fabricated concrete form necessary to complete construction of a bridge, the\ncontractor and supplier can agree to liquidated damages of $500 per day of delay.\n17.1.4. Parties to a contract may agree to expand or limit warranties otherwise\napplicable. By limiting a warranty, you, in effect, limit a remedy. For example, a dealer\nselling a used car may properly disclaim any and all express and implied warranties\nrelating to the car.\n17.2. Liquidated Damages Clauses. Both common law and the UCC allow the parties to\ndetermine in advance what damages are payable in the event of breach, referred to as a\n\xe2\x80\x9cliquidated damages\xe2\x80\x9d clause. However, limitations apply.\n\n241\n\n\x0c17.2.1. Under \xc2\xa7 2-718(1), an agreement to liquidate damages must be reasonable in light\nof:\n\xef\x82\xb7\n\nThe actual harm caused by the breach (i.e., is the liquidated damages amount\nproportionate to the anticipated actual damages);\n\n\xef\x82\xb7\n\nThe difficulties of proof of loss (i.e., are damages otherwise difficult to prove);\nand\n\n\xef\x82\xb7\n\nThe inconvenience or nonfeasability of otherwise obtaining an adequate remedy\n(i.e., would it be difficult, due, for example, to the nature of the goods involved,\ncourt costs or the non-residency of a defendant, to pursue other remedies).\n\n17.2.2. Section 2-718(1) provides that \xe2\x80\x9ca term fixing unreasonably large liquidated\ndamages is void as a penalty.\xe2\x80\x9d This limitation protects the doctrine of efficient breach,\nwhich allows, even encourages, a party to be able to deliberately breach an agreement\nwhich may no longer make economic sense to perform, as long as the breaching party\npays actual (versus punitive) damages.\n17.2.2.1. See generally Kristine Cordier Karnezis, Annotation, Contractual\nLiquidated Damages Provisions Under UCC Art 2, 98 A.L.R.3d 586 (1980).\n17.2.3. The \xe2\x80\x9chindsight\xe2\x80\x9d problem. Many courts are troubled when the liquidated damages\nturn out to be unreasonable in light of the actual harm caused by the breach. The\nfollowing case discusses this problem.\nCalifornia and Hawaiian Sugar Co. v. Sun Ship, Inc.\n794 F.2d 1433 (9th Cir. 1986)\nNOONAN, Circuit Judge\nBACKGROUND\n\xe2\x80\xa6.\nC and H is an agricultural cooperative owned by fourteen sugar plantations in Hawaii. Its\nbusiness consists in transporting raw sugar-the crushed cane in the form of coarse brown crystalto its refinery in Crockett, California. Roughly one million tons a year of sugar are harvested in\nHawaii. A small portion is refined there; the bulk goes to Crockett. The refined sugar \xe2\x80\x93 the white\nstuff \xe2\x80\x93 is sold by C and H to groceries for home consumption and to the soft drink and cereal\ncompanies that are its industrial customers.\nTo conduct its business, C and H has an imperative need for assured carriage for the raw\nsugar from the islands. Sugar is a seasonal crop, with 70 percent of the harvest occurring between\n242\n\n\x0cApril and October, while almost nothing is harvestable during December and January.\nConsequently, transportation must not only be available, but seasonably available. Storage\ncapacity in Hawaii accommodates not more than a quarter of the crop. Left stored on the ground\nor left unharvested, sugar suffers the loss of sucrose and goes to waste. Shipping ready and able\nto carry the raw sugar is a priority for C and H.\nIn 1979 C and H was notified that Matson Navigation Company, which had been\nsupplying the bulk of the necessary shipping, was withdrawing its services as of January 1981.\nWhile C and H had some ships at its disposal, it found a pressing need for a large new vessel, to\nbe in service at the height of the sugar season in 1981. It decided to commission the building of a\nkind of hybrid-a tug of catamaran design with two hulls and, joined to the tug, a barge with a\nwedge which would lock between the two pontoons of the tug, producing an \xe2\x80\x9cintegrated tug\nbarge.\xe2\x80\x9d In Hawaiian, the barge and the entire vessel were each described as a Mocababoo or push\nboat.\nC and H relied on the architectural advice of the New York firm, J.J. Henry. It solicited\nbids from shipyards, indicating as an essential term a \xe2\x80\x9cpreferred delivery date\xe2\x80\x9d of June 1981. It\ndecided to accept Sun\'s offer to build the barge and Halter\'s offer to build the tug.\nIn the fall of 1979 C and H entered into negotiations with Sun on the precise terms of the\ncontract. Each company was represented by a vice-president with managerial responsibility in the\narea of negotiation; each company had a team of negotiators; each company had the advice of\ncounsel in drafting the agreement that was signed on November 14, 1979. This agreement was\nentitled \xe2\x80\x9cContract for the Construction of One Oceangoing Barge for California and Hawaiian\nSugar Company By Sun Ship, Inc.\xe2\x80\x9d The \xe2\x80\x9cWhereas\xe2\x80\x9d clause of the contract identified C and H as\nthe Purchaser, and Sun as the Contractor; it identified \xe2\x80\x9cone non-self-propelled oceangoing barge\xe2\x80\x9d\nas the Vessel that Purchaser was buying from Contractor. Article I provided that Contractor\nwould deliver the Vessel on June 30, 1981. The contract price was $25,405,000.\nUnder Article I of the agreement, Sun was entitled to an extension of the delivery date for\nthe usual types of force majeure and for \xe2\x80\x9cunavailability of the Tug to Contractor for joining to the\nVessel, where it is determined that Contractor has complied with all obligations under the\nInterface Agreement.\xe2\x80\x9d (The Interface Agreement, executed the same day between C and H, Sun,\nand Halter provided that Sun would connect the barge with the tug.) Article 17 \xe2\x80\x9cDelivery\xe2\x80\x9d\nprovided that \xe2\x80\x9cthe Vessel shall be offered for delivery fully and completely connected with the\nTug.\xe2\x80\x9d Article 8, \xe2\x80\x9cLiquidated Damages for Delay in Delivery\xe2\x80\x9d provided that if \xe2\x80\x9cDelivery of the\nVessel\xe2\x80\x9d was not made on \xe2\x80\x9cthe Delivery Date\xe2\x80\x9d of June 30, 1981, Sun would pay C and H \xe2\x80\x9cas perday liquidated damages, and not as a penalty\xe2\x80\x9d a sum described as \xe2\x80\x9ca reasonable measure of the\ndamages\xe2\x80\x9d \xe2\x80\x93 $17,000 per day.\nSun did not complete the barge until March 16, 1982. Although Sun paid C and H\n$17,000 per day from June 30, 1981 until January 10, 1982, it ultimately denied liability for any\ndamages, and this lawsuit resulted.\n243\n\n\x0cANALYSIS\n\xe2\x80\xa6.\nRepresented by sophisticated representatives, C and H and Sun reached the agreement\nthat $17,000 a day was the reasonable measure of the loss C and H would suffer if the barge was\nnot ready. The anticipated damages were what might be expected if C and H could not transport\nthe Hawaiian sugar crop at the height of the season. Those damages were clearly before both\nparties. As Joe Kleschick, Sun\'s chief negotiator, testified, he had \xe2\x80\x9ca vision\xe2\x80\x9d of a \xe2\x80\x9cmountain of\nsugar piling up in Hawaii\xe2\x80\x9d - a vision that C and H conjured up in negotiating the damage clause.\nGiven the anticipated impact on C and H\'s raw sugar and on C and H\'s ability to meet the\ndemands of its grocery and industrial customers if the sugar could not be transported, liquidated\ndamages of $17,000 a day were completely reasonable.\nThe situation as it developed was different from the anticipation. C and H was in fact able\nto find other shipping. The crop did not rot. The customers were not left sugarless. Sun argues\nthat, measured by the actual damages suffered, the liquidated damages were penal.\nWe look to Pennsylvania law for guidance. Although no Pennsylvania case is squarely on\npoint, it is probable that Pennsylvania would interpret the contract as a sale of goods governed by\nthe Uniform Commercial Code. Belmont Industries, Inc. v. Bechtel Corp., 425 F. Supp. 524, 527\n(E.D. Pa.1976). The governing statute provides that liquidated damages are considered\nreasonable \xe2\x80\x9cin the light of anticipated or actual harm.\xe2\x80\x9d 12A Pa. Cons. Stat. Ann. 2-718(1)\n(Purdon 1970) (Pennsylvania\'s adoption of the Uniform Commercial Code).\nThe choice of the disjunctive appears to be deliberate. The language chosen is in harmony\nwith the Restatement (Second) of Contracts \xc2\xa7 356 (1979), which permits liquidated damages in\nthe light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss.\nSection 356, Comment b declares explicitly: \xe2\x80\x9cFurthermore, the amount fixed is reasonable to the\nextent that it approximates the loss anticipated at the time of the making of the contract, even\nthough it may not approximate the actual loss.\xe2\x80\x9d\nDespite the statutory disjunctive and the Restatement\'s apparent blessing of it, the\nquestion is not settled by these authorities which must be read in the light of common law\nprinciples already established and accepted in Pennsylvania. Carpel v. Saget Studios, Inc., 326 F.\nSupp. 1331, 1333 (E.D. Pa.1971); 13 Pa.C.S.A. \xc2\xa7 1103. Prior to the adoption of the Uniform\nCommercial Code, Pennsylvania enforced liquidated damage clauses that its courts labeled as\nnonpenal, but equitable considerations relating to the actual harm incurred were taken into\naccount along with the difficulty of proving damages if a liquidated damage clause was rejected,\ne.g. Emery v. Boyle, 200 Pa. 249, 49 A. 779 (1901). We do not believe that the U.C.C. overrode\nthis line of reasoning. Indeed, in a lower court case, decided after the U.C.C.\'s enactment, it was\nstated that if liquidated damages appear unreasonable in light of the harm suffered, \xe2\x80\x9cthe\ncontractual provision will be voided as a penalty.\xe2\x80\x9d Unit Vending Corp. v. Tobin Enterprises, 194\n244\n\n\x0cPa. Super. 470, 473, 168 A.2d 750, 751 (1961). That case, however, is not on all fours with our\ncase: Unit Vending involved an adhesion contract between parties of unequal bargaining power;\nthe unfair contract was characterized by the court as \xe2\x80\x9ca clever attempt to secure both the penny\nand the cake\xe2\x80\x9d by the party with superior strength. Id. at 476, 168 A.2d at 753. Mechanically to\nread it as Pennsylvania law governing this case would be a mistake. The case, however, does\nshow that Pennsylvania courts, like courts elsewhere, attempt to interpret the governing statute\nhumanely and equitably\xe2\x80\xa6.\nThe net actual damages suffered by C and H were $368,000. As a matter of law, Sun\ncontends that the liquidated damages are unreasonably disproportionate to the net actual\ndamages.\nC and H urges on us the precedent of Bellefonte Borough Authority v. Gateway\nEquipment & Supply Co., 442 Pa. 492, 277 A.2d 347 (1971), forfeiting a bid bond of $45,000 on\nthe failure of a contractor to perform a municipal contract, even though the loss to the\nmunicipality was $1,000; the disproportion was 45 to 1. But that decision is not decisive here. It\ndid not purport to apply the Uniform Commercial Code. Rules appropriate for bids to the\ngovernment are sufficiently different from those applicable between private parties to prevent\ninstant adoption of this precedent. A fuller look at relevant contract law is appropriate.\nLitigation has blurred the line between a proper and a penal clause, and the distinction is\n\xe2\x80\x9cnot an easy one to draw in practice.\xe2\x80\x9d Lake River Corp. v. Carborundum Co., 769 F.2d 1284,\n1290 (7th Cir.1985) (per Posner, J.). But the desire of courts to avoid the enforcement of\npenalties should not obscure common law principles followed in Pennsylvania. Contracts are\ncontracts because they contain enforceable promises, and absent some overriding public policy,\nthose promises are to be enforced. \xe2\x80\x9cWhere each of the parties is content to take the risk of its\nturning out in a particular way\xe2\x80\x9d why should one \xe2\x80\x9cbe released from the contract, if there were no\nmisrepresentation or other want of fair dealing?\xe2\x80\x9d Ashcom v. Smith, 2 Pen. & W. 211, 218-219\n(Pa. 1830) (per Gibson, C.J.). Promising to pay damages of a fixed amount, the parties normally\nhave a much better sense of what damages can occur. Courts must be reluctant to override their\njudgment. Where damages are real but difficult to prove, injustice will be done the injured party\nif the court substitutes the requirements of judicial proof for the parties\' own informed agreement\nas to what is a reasonable measure of damages. Pennsylvania acknowledges that a seller is bound\nto pay consequential damages if the seller had reason to know of the buyer\'s special\ncircumstances. Keystone Diesel Engine Co. v. Irwin, 411 Pa. 222, 191 A.2d 376 (1963). The\nliquidated damage clause here functions in lieu of a court\'s determination of the consequential\ndamages suffered by C and H\xe2\x80\xa6.\nProof of this loss is difficult \xe2\x80\x93 as difficult, perhaps, as proof of loss would have been if\nthe sugar crop had been delivered late because shipping was missing. Whatever the loss, the\nparties had promised each other that $17,000 per day was a reasonable measure. The court must\ndecline to substitute the requirements of judicial proof for the parties\' own conclusion. The Moku\nPahu, available on June 30, 1981, was a great prize, capable of multiple employments and\n245\n\n\x0cenlarging the uses of the entire C and H fleet. When sophisticated parties with bargaining parity\nhave agreed what lack of this prize would mean, and it is now difficult to measure what the lack\ndid mean, the court will uphold the parties\' bargain. C and H is entitled to keep the liquidated\ndamages of $3,298,000 it has already received and to receive additional liquidated damages of\n$1,105,000 with interest thereon, less setoffs determined by the district court\xe2\x80\xa6.\n17.2.4. Deposits. Section 2-718(2) governs situations where a buyer has made a deposit\non goods, and then breaches before delivery, and there is no liquidated damages clause in\nthe agreement. In that situation, the seller may retain 20% of the purchase price or $500,\nwhichever is smaller, and must return the balance of the deposit to the purchaser.\nHowever, \xc2\xa7 2-718(3) provides that if the seller\xe2\x80\x99s damages under other Code sections are\ngreater than those provided by \xc2\xa7 2-718(2), the seller is free to recover damages under\nthose sections.\nProblem 17-3. A corporation entered into an agreement to purchase a used plane for $75,000,\nmaking a $10,000 down payment at the time of signing. The agreement contained a clause\nproviding that \xe2\x80\x9cthe deposit shall be retained by the seller as liquidated damages in the event of a\nbreach by buyer.\xe2\x80\x9d The buyer repudiated the contract before taking delivery of the plane. Will a\ncourt allow the seller to retain the $10,000 down payment as liquidated damages?\nProblem 17-4: Nancy orders a new dryer from White\xe2\x80\x99s Appliance Store for a total purchase price\nof $600. She pays a deposit of $200. There is no liquidated damages clause in the purchase\nagreement. She later repudiates the contract.\n1. How much of the deposit, if any, may White\xe2\x80\x99s retain as liquidated damages under \xc2\xa7 2-718(2)?\n2. If it has incurred damages in the amount of $200, may White\xe2\x80\x99s retain the entire deposit?\n17.2.5. Section 2-302 also provides that a court may refuse to enforce an unconscionable\ncontract. Is it possible that a clause that otherwise meets the requirements of \xc2\xa7 2-718 may\nnonetheless be found to be unconscionable under \xc2\xa7 2-302?\n17.2.5.1. Comment 1 to \xc2\xa7 2-302 states that the test for unconscionability is\n\xe2\x80\x9cwhether, in the light of the general commercial background and the commercial\nneeds of the particular trade or case, the clauses involved are so one-sided as to be\nunconscionable under the circumstances existing at the time of the making of the\ncontract.... The principle is one of the prevention of oppression and unfair surprise\n... and not of disturbance of allocation of risks because of superior bargaining\npower.\xe2\x80\x9d\n17.2.5.2. A novel solution to the liquidated damages problem is found in the\nCalifornia Civil Code (but not applicable to UCC transactions):\n246\n\n\x0cCalifornia Civil Code \xc2\xa7 1671. Validity; standards for determination; applicability of section\n(a) This section does not apply in any case where another statute expressly applicable to the\ncontract prescribes the rules or standard for determining the validity of a provision in the contract\nliquidating the damages for the breach of the contract.\n(b) Except as provided in subdivision (c), a provision in a contract liquidating the damages for\nthe breach of the contract is valid unless the party seeking to invalidate the provision establishes\nthat the provision was unreasonable under the circumstances existing at the time the contract was\nmade.\n(c) The validity of a liquidated damages provision shall be determined under subdivision (d) and\nnot under subdivision (b) where the liquidated damages are sought to be recovered from either:\n(1) A party to a contract for the retail purchase, or rental, by such party of personal\nproperty or services, primarily for the party\'s personal, family, or household purposes; or\n(2) A party to a lease of real property for use as a dwelling by the party or those\ndependent upon the party for support.\n(d) In the cases described in subdivision (c), a provision in a contract liquidating damages for the\nbreach of the contract is void except that the parties to such a contract may agree therein upon an\namount which shall be presumed to be the amount of damage sustained by a breach thereof,\nwhen, from the nature of the case, it would be impracticable or extremely difficult to fix the\nactual damage.\n17.3. Limitation of Remedies under \xc2\xa7 2-719. Section 2-719(1)(a) specifically allows the parties\nto (i) expand or limit remedies or (ii) limit or alter the measure of damages. However, \xc2\xa7 2-719\nalso imposes restrictions on this contractual freedom.\n17.3.1. Comment 1 states that \xe2\x80\x9cat least minimum adequate remedies\xe2\x80\x9d must be available\nunder the contract. If a limitation of remedies or damages is such as to effectively deprive\na party of any remedy, such limitation will not be enforceable. There must be \xe2\x80\x9cat least a\nfair quantum of remedy for breach\xe2\x80\x9d available. For example, a clause in a purchase\nagreement for a computer limiting damages to $1.00 would effectively deprive the buyer\nof any adequate remedy.\n17.3.2. As with all contract clauses, \xc2\xa7 2-302 also requires that any limitation or\nmodification of remedies or damages not be unconscionable. See Comment 1 to \xc2\xa7 2-719.\n17.3.3. Another limitation is found at \xc2\xa7 2-719(1)(b), which provides that any remedies\nmentioned are optional unless the remedy is expressly agreed to be exclusive, in which\n247\n\n\x0ccase it is the sole remedy available. In other words, you need to clearly make a limited\nremedy the exclusive remedy, or it will only be one of many available.\nProblem 17-5. Kodak provides, in its standard sales terms, that \xe2\x80\x9cIf your camera is defective in\nmaterials or workmanship, we will repair your camera at no extra charge within one year after\npurchase. No other warranties apply.\xe2\x80\x9d A buyer who purchased a Kodak camera which was\ndefective sought to recover his purchase price. Applying \xc2\xa7 2-719(1)(b), is the purchaser limited\nto a repair of the camera? Why or why not?\n17.3.4. Another limitation on a party\xe2\x80\x99s ability to limit remedies is set forth at \xc2\xa7 2-719(2).\nIf an exclusive or limited remedy is provided, and the remedy fails of its essential\npurpose, then the buyer may resort to any remedy as provided under the UCC. In other\nwords, the parties are not free to provide an exclusive remedy that does not work!\nProblem 17-6. Let\xe2\x80\x99s go back to the Kodak camera in Problem 5. Assume that the contract\nprovided that \xe2\x80\x9cBuyer\xe2\x80\x99s sole and exclusive remedy in the event of a breach is the repair of the\ncamera by manufacturer.\xe2\x80\x9d If a buyer returns a defective camera and the manufacturer is not able\nto repair the camera, may the buyer seek a return of his purchase price? Why or why not?\n17.3.5. Another limitation on the ability of the parties to limit remedies or damages by\nagreement is found at \xc2\xa7 2-719(3). This provision allows consequential damages to be\nlimited or excluded unless the limitation or exclusion is unconscionable. It goes on to\nsay that \xe2\x80\x9climitation of consequential damages for injury to the person in the case of\nconsumer goods is prima facie unconscionable,\xe2\x80\x9d whereas the limitation of consequential\ndamages in a commercial setting is not.\n17.3.5.1. Notice that \xc2\xa7 2-719(3) allows the limitation or exclusion of\nconsequential damages if such limitation is not unconscionable. Can you limit\ndirect damages? Incidental damages? Yes, if such limitation is consistent with\n\xc2\xa7 2-719(1). Of course, under \xc2\xa7 2-302, any limitation of direct or incidental\ndamages is also subject to the test of unconscionability.\n17.3.5.2. The limitation or exclusion of consequential damages when personal\ninjuries arise in connection with the sale of consumer goods is prima facie\nunconscionable. Section 1-201(b)(11) defines consumer to mean \xe2\x80\x9can individual\nwho enters into a transaction primarily for personal, family or household\npurposes.\xe2\x80\x9d\n17.3.5.3. See Milton Roberts, Annotation, Unconscionability, Under UCC \xc2\xa7 2302 or \xc2\xa7 2-719(3), of Disclaimer of Warranties or Limitation or Exclusion of\nDamages in Contract Subject to UCC Article 2 (Sales), 38 A.L.R.4th 25 (1985).\n248\n\n\x0cProblem 17-7. An 18-year old high school student wants to earn some extra money, so she buys\na lawn mower for $300 and does lawn work for her neighbors after school. The lawn mower\ncomes with a one-year warranty, but limits any damages (including consequential damages) for\nbreach of the warranty to the retail list price of the lawn mower. As a result of a defective blade,\nthe blade shatters while the student is using it and she suffers serious personal injuries, as well as\nother losses, such as the lost opportunity to earn money.\nIs the limitation of damages, including consequential damages, prima facie unconscionable?\nWhy or why not?\nProblem 17-8. George owns and stores a valuable gun collection in his house, and he purchases\nan alarm system to install in his home for the protection of this collection. The alarm system was\nsold with the sole and exclusive remedy of \xe2\x80\x9crepair or replacement of parts or the system.\xe2\x80\x9d When\na burglar arrived, the siren did not go off, nor did the system alert the monitoring agency as\npromised, all because of a defective battery. The manufacturer of the alarm system replaced the\ndefective battery.\n1. Is the \xe2\x80\x9crepair or replacement of parts or the system\xe2\x80\x9d a minimum adequate remedy?\n2. Did the remedy fail of its essential purpose?\n3. Is George entitled to recover the value of his stolen gun collection?\n17.3.6. Often, a purchase agreement will contain a single clause which contains (i) a\nlimited warranty, (ii) a limitation of remedy (such as repair or replacement), and (iii) a\nlimitation of damages. The following language, which is typical of that found in purchase\nagreements, is based on the contractual provisions at issue in the case of Cooley v. Big\nHorn Harvestore Systems, Inc., 813 P.2d 736 (Colo. 1991):\nIf within one year from the date of sale, any product sold under this purchase\norder, or any part thereof, shall prove to be defective in material or workmanship\nupon examination by the Manufacturer, the Manufacturer will supply an identical\nor substantially similar replacement part f.o.b. the Manufacturer\'s factory, or the\nManufacturer, at its option, will repair or allow credit for such part. NO OTHER\nWARRANTY, EITHER EXPRESS OR IMPLIED AND INCLUDING A\nWARRANTY OF MERCHANTABILITY AND FITNESS FOR A\nPARTICULAR PURPOSE HAS BEEN OR WILL BE MADE BY OR ON\nBEHALF OF THE MANUFACTURER OR THE SELLER OR BY OPERATION\nOF LAW WITH RESPECT TO THE EQUIPMENT AND ACCESSORIES OR\nTHEIR INSTALLATION, USE, OPERATION, REPLACEMENT OR REPAIR.\nNEITHER THE MANUFACTURER NOR THE SELLER SHALL BE LIABLE\nBY VIRTUE OF THIS WARRANTY, OR OTHERWISE, FOR ANY SPECIAL\nOR CONSEQUENTIAL LOSS OR DAMAGE RESULTING FROM THE USE\n249\n\n\x0cOR LOSS OF THE USE OF EQUIPMENT AND ACCESSORIES. THE BUYER\nRECOGNIZES THAT THE EXPRESS WARRANTY SET FORTH ABOVE IS\nTHE EXCLUSIVE REMEDY TO WHICH HE IS ENTITLED AND HE\nWAIVES ALL OTHER REMEDIES, STATUTORY OR OTHERWISE.\nThe question which has been presented to several courts is the following: If the\nmanufacturer is unable to repair or replace the defective goods, and thus the limited\nremedy has failed of its essential purpose, does the separate limitation on consequential\ndamages fail with it? Or should the limitation on damages be enforced unless it fails on\nits own merits; i.e., if it is found to be unconscionable?\n17.3.6.1. The majority of jurisdictions have concluded that a limitation of remedy\nclause is distinct from a limitation of damages clause, even if they are\ncommingled in a single contract provision (as above). The limitation of remedy\nclause must be analyzed under \xc2\xa7 2-719(2), and if it \xe2\x80\x9cfails of its essential purpose,\xe2\x80\x9d\nthe buyer may then pursue any other available remedy. However, when the buyer\npursues other available remedies, the second clause limiting consequential\ndamages will be enforced, unless it fails the unconscionability test of \xc2\xa7 2-719(3).\nSee, for example, Rheem Manufacturing Co. v. Phelps Heating & Air\nConditioning, 746 N.E. 2d 941 (Ind. 2001).\n17.3.6.2. A minority of jurisdictions have ruled that if a limited remedy fails of its\nessential purpose, all other limitations stated in connection with it (such as a\nlimitation of damages) also fail. For example, in Cooley v. Big Horn Harvestore\nSystems, Inc., 813 P.2d 736 (Colo. 1991), from which the above language is\nadapted, the manufacturer could not repair the equipment as promised, and thus\nthe remedy failed of its essential purpose. The court found that the limitation on\ndamages was written in the context of the limitation of remedy, that they were\ndependent upon each other, and because the limitation of remedy failed, the\nlimitation on consequential damages also failed.\n17.3.6.3. A subminority of jurisdictions that strike the limited remedy also strike\nthe limitation on damages if it is in the same paragraph, but not if it is in a\nseparate paragraph.\nResearch Assignment 17-1. What is the rule in your jurisdiction? When a court strikes a\nlimitation of remedy clause, does it also strike the limitation on consequential damages?\nProblem 17-9. Chapter 17 Review Problem.\nThe following facts are taken from Schlenz, v. John Deere Co., 511 F. Supp. 224 (D. Mont.\n1981). What issues arise and how would you analyze them?\n250\n\n\x0cIn May, 1976, plaintiff LeVon Schlenz purchased a round hay baler that was manufactured and\nmarketed by defendants. On or about June 26, 1976, LeVon Schlenz\'s right forearm was severed\nwhen his arm became caught in the round hay baler. LeVon Schlenz seeks $15 million in\ncompensatory and punitive damages. Plaintiff Delores Schlenz, the wife of LeVon Schlenz, seeks\n$1 million for loss of consortium.\nPlaintiffs filed their complaint on April 24, 1980, slightly less than four years after the injury.\nIn the purchase order, defendants included language which \xe2\x80\x9cEXPRESSLY DISCLAIMS THE\nIMPLIED WARRANTIES OF MERCHANTIBILITY AND FITNESS.\xe2\x80\x9d The accompanying\nwarranty for the round hay baler specifically provided that defendants do \xe2\x80\x9cNOT MAKE ANY\nIMPLIED WARRANTY OF MERCHANTIBILITY OR FITNESS.\xe2\x80\x9d In each case, the warranty\ndisclaimers were printed in significantly larger typeface than the other printing in the body of the\ntext. In each case, the warranty disclaimers were the only words in the body of the text printed in\ncapital letters.\nPlaintiffs state that, prior to the purchase of the round hay baler, plaintiff LeVon Schlenz\nreceived John Deere Company advertising and promotional materials, including an operator\'s\nmanual for the John Deere 500 round baler. LeVon Schlenz claims that he relied on the\nstatements in the promotional materials in deciding to purchase the John Deere 500 round baler.\nThe John Deere 500 round baler operator\'s manual specifically provides that:\nThe safety of the operator was one of the prime considerations in the minds of John Deere\nengineers when this baler was designed. Shielding, simple adjustments, and other safety\nfeatures were built into the baler wherever possible.\nDefendants, by means of conspicuous language, both in the purchase order and in the attached\nwarranty, disclaimed all express warranties.\nDefendants issued a printed warranty on the John Deere 500 round baler. The warranty limited\npurchaser remedies to replacement or repair of defective parts. The warranty provided: \xe2\x80\x9c[i]n no\nevent will the dealer, John Deere or any company affiliated with John Deere be liable for\nincidental or consequential damages or injuries....\xe2\x80\x9d\nChapter 17. Additional Sources\nScott J. Burnham, Glannon Guide to Sales: Learning Sales Through Multiple-Choice Questions\nand Analysis (Wolters Kluwer 2d ed., 2012), Chapter 18\nJames J. White and Robert S. Summers, Uniform Commercial Code (West 6th ed., 2010),\nChapter 13-8 to 13-12\n251\n\n\x0cChapter 18. Statute of Limitations\n18.1. Introduction. The Article 2 Statute of Limitation provision, \xc2\xa7 2-725, is not a model of\nclarity. As noted by Professor Larry Garvin in Uncertainty and Error in The Law of Sales: The\nArticle Two Statute of Limitations, 83 B.U. L. Rev. 345 (2003), many courts have interpreted the\nvarious portions of \xc2\xa7 2-725 differently. See also David J. Marchitelli, Annotation, Causes of\nAction Governed by Limitations Period in UCC \xc2\xa7 2-725, 49 A.L.R.5th 1 (1997). A look at\nAmended \xc2\xa7 2-725 indicates some of the problems that the revisers addressed and how they might\nbe resolved. Recall that the Amendments have been withdrawn, but they could be cited as\npersuasive authority on the issue.\nWe will heed the advice of White & Summers, Handbook of the Law under the Uniform\nCommercial Code \xc2\xa7 12-9, who say, \xe2\x80\x9cIn summary, we can do little more than warn the lawyer not\nto make hasty judgments about the applicable statute of limitations or about when it will\ncommence to run.\xe2\x80\x9d The variables we will look at are 1) how long is its duration? 2) what event\nstarts it running? and 3) what events toll it (keep it from running)?\n18.2. Duration \xe2\x80\x93 How long is it? The duration of the statute of limitations under \xc2\xa7 2-725 is four\nyears. However, by agreement, the parties may reduce the statute of limitations to not less than\none year, but they may not extend the statutory period. The revision would add a qualification\nfor consumers: \xe2\x80\x9cin a consumer contract, the period of limitation may not be reduced.\xe2\x80\x9d\n18.2.1. Many states have adopted a non-uniform version of \xc2\xa7 2-725. Note also that the\ngeneral statute of limitations for a contract in many jurisdictions has a limitations period\nthat is longer than four years; furthermore, unlike \xc2\xa7 2-725, it might have one statute for\nwritten contracts and another for oral contracts.\nResearch Assignment 18-1. Check the language of \xc2\xa7 2-725 in your jurisdiction to see if it varies\nfrom the uniform version. Also find the statute of limitations for contracts and determine how\nlong it is and whether there is a separate statute for oral contracts.\n18.2.2. What statute of limitations applies when a contract involves both the sale of goods\nand the sale of non-UCC items (such as an agreement for the sale of a ranch, including\nland, equipment and cattle)? First, under the principle of freedom of contract, the parties\ncould agree whether the UCC or non-UCC law applies. Absent such an agreement, in a\nmixed transaction such as this, the court will apply either the \xe2\x80\x9cpredominant factor\xe2\x80\x9d or\n\xe2\x80\x9cgravamen\xe2\x80\x9d test to determine which statute of limitations applies (see \xc2\xa7 1.4).\n18.2.3. Often a claim sounds in both tort and contract. For example, a purchaser of a good\nmay assert a breach of warranty claim, a product liability claim, and a fraudulent\nmisrepresentation claim. In that situation, which statute of limitations applies? In many\njurisdictions, the injured party may elect the theory he will pursue and the statute of\n252\n\n\x0climitations governing the elected theory will apply. Weibel v. Ronan State Bank, 776 P.2d\n837 (Mont. 1989). Other jurisdictions are not as generous. Some require a lawsuit\nsounding in both tort and contract to be filed within the shorter statutory period of\nlimitations. See, for example, Becker v. Volkswagen of America, Inc., 125 Cal. Rptr. 326\n(Ct. App. 1975), where the California court held that in a breach of warranty claim that\nalso sounded in negligence, the shorter one-year period of limitations for negligence\napplied.\nA person who suffers a personal injury sometimes brings a claim in tort and sometimes\nbrings a claim for consequential damages for breach of warranty (recall Schlenz v. John\nDeere in Chapter 17 Problem 9). But if the only injury is to the goods themselves, can the\nclaim be brought in tort? The states are split. In National Union Fire Ins. Co. of\nPittsburgh, Pa. v. Pratt and Whitney Canada, Inc., 815 P.2d 601 (Nev. 1991), the Nevada\nSupreme Court stated:\nIn a well-reasoned case, a unanimous United States Supreme Court expressed\nwhat is essentially the basis for our ruling in the instant case. The factual predicate\nfor the court\'s decision in East River S.S. Corp. v. Transamerica Delaval, 476\nU.S. 858 (1985), involved a defective first-stage steam reversing ring within one\nof the ship\'s turbines that had nearly disintegrated. The defective component\ndamaged the turbine. Thus, although the ship itself was not damaged, property\nother than the defective component was damaged. The court denied liability,\nstating:\nWhen a product injures only itself the reasons for imposing a tort duty are\nweak and those for leaving the party to its contractual remedies are strong.\nThe tort concern with safety is reduced when an injury is only to the\nproduct itself. When a person is injured, the "cost of an injury and the loss\nof time or health may be an overwhelming misfortune," and one the person\nis not prepared to meet.\nQuery: Why isn\xe2\x80\x99t the decision of the U.S. Supreme Court mandatory authority that the\nstates must follow? In some jurisdictions, the matter is addressed by statute. See, e.g.,\nRCW 7.72.030.\n18.3. Accrual -- What event starts it running? Under \xc2\xa7 2-725(1), an action must be\ncommenced within four years after the cause of action has accrued. Section \xc2\xa7 2-725(2) provides\nthat \xe2\x80\x9ca cause of action accrues when the breach occurs.\xe2\x80\x9d When does the breach occur? That\ndepends upon the type of claim involved. You may recall that in tort, the cause of action\ngenerally accrues when the wrong is or should have been discovered. Warranty law, however,\ndoes not necessarily follow that rule.\n\n253\n\n\x0cProblem 18-1. Answer the questions below pursuant to \xc2\xa7 2-725(2):\n1. For what type of claim does the cause of action accrue when the breach is or should have been\ndiscovered?\n2. For what type of claim does the cause of action accrue when tender of delivery occurs?\n3. For what type of claim does the cause of action accrue when the breach occurs?\nProblem 18-2. When does the cause of action accrue in the following situations?\n1. The goods are delivered on October 1 but the buyer does not pay for them.\n2. The goods are delivered on October 1. The buyer charges the purchase to his credit card, then\ndoes not pay the credit card debt.\n3. The seller has promised to deliver the goods on October 1, but on August 1 the seller tells the\nbuyer, \xe2\x80\x9cI absolutely positively will not deliver on October 1.\xe2\x80\x9d See Amended \xc2\xa7 2-725(2)(b).\nProblem 18-3. When does the cause of action accrue for breach of the following warranties?\n1. 15 year paint\n2. This boat is unsinkable\n3. Muffler guaranteed as long as you own your car\n4. Goods are warranted to be free from defects for a period of 12 months from purchase\n5. These hiking boots will survive even the toughest trail\n6. Seller will repair or replace all defective parts for a period of one year from the date of delivery\n7. This work was painted by John Singer Sargent.\nProblem 18-4. When does a claim for breach of warranty of title and against infringement occur?\nFor example, in January, 2008, you purchase a Blackberry. In June, 2011, you learn that Research\nin Motion has brought an infringement claim against Blackberry. See Amended \xc2\xa7 2-725(3)(d).\n\n254\n\n\x0c18.4. Suits against Manufacturers and Remote Sellers. We discussed in Chapters 7 and 8 the\nissue of whether a buyer has a warranty claim against a remote seller; e.g. the claim of a buyer\nagainst the manufacturer or distributor rather than the immediate seller, such as the store she\nbought it from. For a breach of warranty claim (other than a warranty of future performance), the\ncause of action accrues when tender of delivery occurs. Often, a company manufactures a good,\nthen delivers it to a distributor, who delivers it to a retailer, who delivers it to the end-user.\nWhich of these deliveries is the relevant delivery? What are the policy reasons for each view?\nSee the Official Comment and Amended \xc2\xa7 725(3)(b).\nProblem 18-5. On September 24, 1999 Martha buys a pair of kids\xe2\x80\x99 pajamas from Discount\nSellers. She puts them in a drawer, and they are not worn for the first time until October 11,\n2000. While the daughter wearing the pajamas is putting a log in the fireplace, a spark hits the\npajamas, and they go up in flames, causing serious injuries to the daughter. Which of the\nfollowing events starts the running of the statute of limitations for a claim for breach of the\nimplied warranty of merchantability against the manufacturer:\nJanuary 10, 1995\nMarch 1, 1997\n\nPajamas, Inc. delivers a stock of the pajamas to The Bon Marche\nBecause the pajamas don\xe2\x80\x99t sell well, The Bon Marche delivers its\nremaining stock of the pajamas to Discount Seller.\nSeptember 24, 1999 Discount Seller sells the pajamas to Martha.\nOctober 11, 2000\nThe injury occurs.\nSeptember 1, 2003 The lawsuit is filed.\nProblem 18-6. What if a third party beneficiary brings the claim? For example, a guest in the\nhouse wears the pajamas and is injured.\n18.5. Indemnity. Assume, in the above example, that the injured daughter sues Discount Seller\non September 1, 2008 (within the four-year statute of limitations), and a judgment is entered\nagainst Discount Seller on January 5, 2010 (after the four-year statute of limitations has expired).\nCan Discount Seller now file a suit seeking indemnity against Pajamas, Inc. more than four years\nafter the cause of action accrued?\n18.5.1. A right to indemnity may arise by contract, or in equity. The equitable principle of\nindemnity \xe2\x80\x9crecognizes the right of one compelled to pay damages caused by another to\nshift the burden of that loss to the responsible party.\xe2\x80\x9d Jones v. Aero-Chem Corp., 680\nF. Supp. 338 (D. Mont. 1987).\n18.5.2. There is a split of authority on when a claim arising under an indemnity must be\nfiled. Some courts have ruled that the claim for indemnity accrues only after the party\nseeking indemnity has been damaged (i.e., a judgment has been entered against them).\nSee, e.g., City of Wood River v. Geer-Melkus Construction Co., 444 N.W.2d 305 (Neb.\n1989). Under this line of cases, the statute of limitations for filing the indemnity claim\n255\n\n\x0carises when the judgment (or other determination of liability, such as a settlement\nagreement) is entered against the party seeking indemnification. Other courts have held\nthat a claim for indemnity must be brought within the statute of limitations governing the\nunderlying claim. Moroni Perry v. Pioneer Wholesale Supply Co., 618 P.2d 214 (Utah\n1984). See Amended \xc2\xa7 725(2)(d).\n18.6. Breach of Warranties for Future Performance. Generally, lack of knowledge or\ndiscovery of a breach is not a fact which will toll the statute of limitations. Section 2-725\nspecifically states a cause of action accrues at the time of breach, \xe2\x80\x9cregardless of the aggrieved\nparty\xe2\x80\x99s lack of knowledge of the breach.\xe2\x80\x9d However, there is one important exception: \xe2\x80\x9cwhere a\nwarranty explicitly extends to future performance of the goods,\xe2\x80\x9d then the cause of action accrues\n\xe2\x80\x9cwhen the breach is or should have been discovered.\xe2\x80\x9d Once again, there is a divergence of\nopinions as to when a warranty is a \xe2\x80\x9cnormal\xe2\x80\x9d warranty, or when it is a warranty that \xe2\x80\x9cexplicitly\nextends to future performance.\xe2\x80\x9d\n18.6.1. Recall Schlenz. Schlenz purchased the hay baler from John Deere in May, 1976.\nThe injury occurred on June 26, 1976. Assuming there is a 3-year statute of limitations in\ntort, when did the statute run on his tort claim? When did the statute run on his breach of\nwarranty claim? The court stated that the complaint was filed on April 24, 1980, \xe2\x80\x9cslightly\nless than four years after the injury and the alleged breach of warranty.\xe2\x80\x9d Is the date of the\ninjury relevant? What if he had filed the complaint on June 1, 1980?\n18.6.2. This issue often arises in the sale of art, as indicated in the following case.\nRosen v. Spanierman\n894 F.2d 28 (2d Cir. 1990)\nMESKILL, Circuit Judge\nThis appeal requires us to examine the New York statute of limitations for breach of\nwarranty concerning a sale twenty years ago of a painting where the purchaser only recently\nlearned that the painting was a fake....\nBACKGROUND\n\xe2\x80\xa6.\nIn 1968, as an anniversary gift for her daughter and son-in-law, Norma and Hobart Rosen,\nFrances Lipman purchased a portrait entitled "The Misses Wertheimer" from Ira Spanierman\nGallery. Ira Spanierman is the sole owner of the gallery. Hobart Rosen negotiated with\nSpanierman for the purchase, and when they had reached an agreement on price the Rosens\ninstructed Lipman to send Spanierman a check for $15,000. Lipman never saw the painting prior\nto the purchase and had no direct dealings with Spanierman.\n256\n\n\x0cSpanierman prepared an invoice that contains the following warranty: "This picture is\nfully guaranteed by the undersigned to be an original work by John Singer Sargent." The invoice\nalso represented that the painting had been "acquired from a member of the Wertheimer family,"\na fact that, if true, would enhance the value of the painting. Plaintiffs assert that Spanierman\nmade similar oral representations to Hobart Rosen prior to the purchase. The invoice was\naddressed to Lipman "c/o" the Rosens, and the painting was shipped directly to the Rosen home.\nSpanierman subsequently provided appraisals of the painting for insurance purposes at\nthe Rosens\' request.... The 1986 appraisal estimated the value of the painting to be $ 130,000.\nIn 1984 the Rosens learned that a "catalogue raisonne" of John Singer Sargent\'s work was\nbeing prepared. Hoping that their painting would be included, the Rosens sent photographs of it\nand other information to Warren Adelson of the Coe Kerr Gallery in New York, which was\ninvolved in the preparation of the catalog. The Rosens did not communicate with Adelson again\nregarding their painting until after they had attempted to sell it as discussed below.\nThe Rosens subsequently decided to sell the painting and asked for appraisals from\nSotheby\'s Parke Bernet and Christie\'s Appraisals (Christie\'s) in New York. The appraisals ranged\nfrom $175,000 to $250,000. Upon placing the painting with Christie\'s for auction in 1987,\nhowever, the Rosens were informed that it was a fake. They then met with Warren Adelson of\nthe Coe Kerr Gallery, who agreed that the painting was not an authentic work of Sargent and\nstated that he had immediately suspected the painting was not genuine when the Rosens first\ncontacted him in 1984.\nThe Rosens commenced this action against Spanierman in 1987 for common law fraud,\nnegligent misrepresentation, breach of warranty and professional negligence. The original\ncomplaint named only Hobart and Norma Rosen as plaintiffs. In his answer, Spanierman raised\nas an affirmative defense the Rosens\' lack of standing to bring the suit. The Rosens amended the\ncomplaint to add Frances Lipman as plaintiff.\nSpanierman denied that the painting was a fake and moved for summary judgment,\nasserting, inter alia, the bar of the statute of limitations and plaintiffs\' failure to state a claim of\nfraud. The district court granted Spanierman\'s summary judgment motion and dismissed the\ncomplaint in its entirety. Lipman and the Rosens appeal only the dismissal of the fraud and\nbreach of warranty claims.\nDISCUSSION\nA. Breach of Warranty\nUnder \xc2\xa7 2-725 of New York\'s Uniform Commercial Code the statute of limitations on an\naction for breach of contract is four years from the time the cause of action accrues. N.Y. U.C.C.\n257\n\n\x0c\xc2\xa7 2-725(1) (McKinney 1964). The plaintiffs purchased the painting from Spanierman in 1968,\nand therefore their action clearly was untimely unless the statute was extended for some reason.\nLipman and the Rosens assert that their action falls within the exception to the four year\nlimitations period contained in subdivision two of \xc2\xa7 2-725, which states:\nA cause of action accrues when the breach occurs, regardless of the aggrieved party\'s lack\nof knowledge of the breach. A breach of warranty occurs when tender of delivery is\nmade, except that where a warranty explicitly extends to future performance of the goods\nand discovery of the breach must await the time of such performance the cause of action\naccrues when the breach is or should have been discovered.\nId. \xc2\xa7 2-725(2) (emphasis added).\nThe district court assumed, and the parties agree, that a painting "performs" for purposes\nof the statute by being what it is purported to be, i.e., an authentic work of the artist. See 711 F.\nSupp. at 753 (citing Lawson v. London Arts Group, 708 F.2d 226, 228 (6th Cir. 1983)). The\ndistrict court then concluded that the statute of limitations on plaintiffs\' breach of warranty claims\nhad run because Spanierman\'s warranty did not explicitly extend to future performance and\nbecause discovery of the alleged defect in the painting did not necessarily await future\nperformance. Id. at 754-55.\nWe note that the Court of Appeals for the First Circuit reached these same conclusions on\nnearly identical facts. See Wilson v. Hammer Holdings, Inc., 850 F.2d 3, 4-7 (1st Cir. 1988)\n(construing Mass. Gen. L. ch. 106, \xc2\xa7 2-725(2)); see also Lawson, 708 F.2d at 228 (discovery of\nnonauthenticity of painting did not necessarily await future performance). We agree with the\nFirst Circuit in its interpretation of \xc2\xa7 2-725 as it applies to the authenticity of works of art.\n1. Explicit Extension of Warranty\nLipman and the Rosens contend that Spanierman\'s warranty explicitly extended to future\nperformance for three reasons: (1) authenticity is a permanent quality, and any warranty of\nauthenticity therefore necessarily extends to the future; (2) under New York law, a warranty\nexplicitly extends to future performance when the nature of the product implies performance over\nan extended period; and (3) Spanierman\'s subsequent appraisals indicate his intent to extend the\nwarranty to the future and acted to revive the warranty.\nThe argument that a warranty of authenticity necessarily extends to future performance is\nunconvincing. Lipman and the Rosens are, in essence, asking us to create an exception to \xc2\xa7 2725\'s explicitness requirement when the warranty concerns an immutable quality. We decline this\ninvitation to invade what is properly the domain of the state legislature. See Wilson, 850 F.2d at\n6. As the district court recognized, subdivision 2 of \xc2\xa7 2-725 is itself an exception to the general\nstatute of limitations on breach of warranty claims. It would be inappropriate to expand this\nexception beyond its plain terms by dispensing with the condition that, to take advantage of the\n258\n\n\x0cexception, the warranty explicitly extend to future performance. See Stumler v. Ferry-Morse Seed\nCo., 644 F.2d 667, 671 (7th Cir. 1981) ("The mere expectation, however reasonable, that due to\nthe type of product involved the statute of limitations on the warranty claims would not begin to\nrun until discovery of the defect rather than upon delivery does not fit such a claim into the\nexception to the general rule.")\nPlaintiffs maintain that a warranty of authenticity explicitly extending to future\nperformance is difficult to imagine: it would make little sense, they assert, to warrant something\nas authentic "for its lifetime." But this does not present a reason for ignoring the plain language\nof \xc2\xa7 2-725(2). The fact that a warranty of authenticity does not fit neatly within the statute as\nwritten does not justify judicial modification of the statute\'s requirements.\nPlaintiffs\' argument that New York law deems a warranty explicitly to extend to the\nfuture when the nature of the product implies performance over an extended period of time also\nis without merit. Plaintiffs rely on Mittasch v. Seal Lock Burial Vault, Inc., 42 A.D.2d 573, 344\nN.Y.S.2d 101 (2d Dep\'t 1973) (burial vault warranted to be satisfactory "at all times"), and\nParzek v. New England Log Homes, Inc., 92 A.D.2d 954, 460 N.Y.S.2d 698 (3d Dep\'t 1983)\n(logs guaranteed to be free from defects). The court in Mittasch, however, found the warranty\'s\nlanguage to be explicit, and merely buttressed its conclusion with the fact that the nature of the\nproduct implied performance over an extended period. See Mittasch, 42 A.D.2d at 574, 344\nN.Y.S.2d at 103. Parzek offers little analysis, and any statements are dicta because the court did\nnot apply \xc2\xa7 2-725 due to the defendant\'s failure to raise the statute of limitations as a defense. See\nParzek, 92 A.D.2d at 955, 460 N.Y.S.2d at 699.\nPlaintiffs\' final argument fares no better. They cite no authority for their proposition that\nSpanierman\'s subsequent appraisals extended his warranty to future performance. The argument\nis unpersuasive because the appraisals themselves contain no warranties and the appraisals were\ncompletely separate transactions from the sale of the painting. The appraisals therefore could not,\nas plaintiffs maintain, revive Spanierman\'s original warranty.\nThus, the district court correctly held that the discovery rule of \xc2\xa7 2-725(2) does not apply\nbecause the warranty did not explicitly extend to future performance.\n2. Discovery "Must Await" Future Performance\nThe district court went on to hold that, even if the warranty had been explicit as to future\nperformance, plaintiffs\' discovery of the alleged lack of authenticity did not, as required by the\nstatute, necessarily await future performance because plaintiffs could have discovered the defect\nimmediately after the sale. 711 F. Supp. at 754. Plaintiffs contend that, to discover the alleged\ndefect in the painting, they would have had to obtain the opinion of a second expert and that this\nwould be an unreasonable burden to place on amateur collectors of art. They also assert that the\ndistrict court was clearly erroneous, in the absence of expert testimony or affidavit, in finding\n259\n\n\x0cthat they could have discovered the alleged defect prior to their attempt to sell the painting. We\nreject both contentions.\nPlaintiffs argue that requiring a purchaser of art to obtain a second expert opinion is\nunreasonable because most buyers do not call upon their paintings to "perform" until they try to\nsell them, and if a collector makes his purchase from a reputable dealer, he normally has no\nreason to suspect the authenticity of what he buys. But \xc2\xa7 2-725(2) makes clear that it only applies\nwhere discovery of a defect necessarily awaits future performance. If the defect is discoverable\nas soon as the good is purchased, \xc2\xa7 2-725(2) simply does not apply. See Wilson, 850 F.2d at 7\n(purchasers of painting easily could have discovered problem). While we would hesitate to deem\nthe alleged defect here readily discoverable if extraordinary measures were required to detect the\nflaw, a painting\'s lack of authenticity is readily apparent to the trained eye of an art expert. A\npurchaser who spends a considerable sum of money for a painting undoubtedly will, as the\nRosens did here, obtain appraisals for insurance purposes. Requiring a purchaser to obtain that\nappraisal from an expert other than the seller is not an onerous burden. See Dawson v. G. Malina,\nInc., 463 F. Supp. 461, 463 (S.D.N.Y. 1978) (plaintiff in breach of warranty action alerted to\npossible lack of authenticity during same year as purchase when he showed photograph of vase to\nan expert)....\nIn sum, the discovery exception to the statute of limitations contained in \xc2\xa7 2-725(2) does\nnot apply, and plaintiffs\' breach of warranty claims accrued at the time tender of delivery was\nmade in 1968. The cause of action therefore is untimely. A contrary holding would provide\npurchasers of art with greater protection than purchasers of other types of goods, and would leave\nart dealers exposed to breach of warranty claims indefinitely, a result that we do not believe was\nintended by the New York legislature. See Wilson, 850 F.2d at 7 . . . .\nCase Notes:\n1. Section 2-725 states that creation of a warranty extending to future performance must\nbe explicit. Courts have interpreted this to mean that such language must be distinctly\nstated, in plain language, clear, not ambiguous, express, unequivocal. Binkley Co. v.\nTeledyne Mid-America Corp., 333 F. Supp. 1183 (E.D. Mo. 1971)). Would it have\nmattered if the seller had said, \xe2\x80\x9cThis painting is by Sargent and will continue being by\nSargent\xe2\x80\x9d?\n2. Most courts have held that warranties referencing indefinite time periods such as \xe2\x80\x9cin\nthe future,\xe2\x80\x9d \xe2\x80\x9cpermanent,\xe2\x80\x9d or even \xe2\x80\x9clifetime\xe2\x80\x9d are not warranties which extend to future\nperformance. For example, in Spring Motors Distributors, Inc. v. Ford Motor Co., 465\nA.2d 530 (N.J. Super. 1983) (rev\xe2\x80\x99d on other grounds at 489 A.2d 660 (N.J. 1985)), the\nwarranty booklet provided by Ford stated that \xe2\x80\x9cyour vehicle has been designed to give\nlong, reliable service with the simplest and least costly maintenance requirements\npossible.\xe2\x80\x9d The court found this language insufficient to create a warranty \xe2\x80\x9cextending to\nfuture performance,\xe2\x80\x9d noting that the key to creating a \xe2\x80\x9cfuture performance\xe2\x80\x9d warranty is to\n260\n\n\x0cstate a specific time period, such as \xe2\x80\x9c90 days\xe2\x80\x9d or \xe2\x80\x9cfive years.\xe2\x80\x9d For example, \xe2\x80\x9c34\nmonths/34,000 miles\xe2\x80\x9d is sufficient language to create a warranty which extends to future\nperformance. Wienberg v. Independence Lincoln-Mercury, Inc., 948 S.W.2d 685 (Mo.\nApp. 1997).\nSee generally the cases collected in David B. Harrison, Annotation, What Constitutes\nWarranty Explicitly Extending to \xe2\x80\x9cfuture performance\xe2\x80\x9d for Purposes of UCC \xc2\xa7 2-725(2),\n93 A.L.R.3d 690 (1979).\n3. The majority of jurisdictions hold that an implied warranty by its nature is not an\nexplicit guarantee of future performance, because as an implied warranty, it is not based\nupon any expression by the manufacturer or seller. Williston Basin Inter. Pipeline v.\nRockwell Int\'l, 1993 Mont. Dist. LEXIS 660. In one suit, homeowners who had purchased\nbrick alleged breach of the implied warranty of merchantability due to the deterioration of\nthe brick. The suit was commenced approximately 9 years after the brick had been\ndelivered for the construction of the residence. The plaintiffs contended that the warranty\nof merchantability explicitly extended to future performance, since (1) the nature of brick\nis such that a buyer can reasonably expect it to last for many years, and (2) the cause of\naction should not accrue until the discovery of a defect. The deterioration of the brick had\nnot begun, and was not discovered, until approximately 3 years prior to the institution of\nthe suit. Rejecting this contention, the court observed that the term "explicit" was not\ndefined to include mere implication, but meant that which was plain in language,\nunequivocal, and clear. Beckmire v Ristokrat Clay Products Co., 343 N.E.2d 530 (Ill.\nApp. 1976).\n18.7. Promises to Repair or Replace. In Chapter 17 we discussed how a seller can limit the\nremedy for breach of warranty; for example, instead of money damages, a seller can limit the\nremedy to a promise to repair or replace the defective goods. For purposes of the statute of\nlimitations, it is essential to \xe2\x80\x9cdistinguish between a warranty as to future performance and a\nlimitation of remedy in the form of a commitment to repair or replace for a stated period of\ntime.\xe2\x80\x9d Ronald Anderson, Anderson on the Uniform Commercial Code, \xc2\xa72-725:129 (3d ed. 1994)\nA warranty to repair or replace does not ensure future performance, \xe2\x80\x9crather, it anticipates\npotential defects and specifies the buyer\'s remedy during the stated period.\xe2\x80\x9d Nebraska Popcorn,\nInc. v. Wing, 602 N.W.2d 18, 24 (Neb. 1999). In Nebraska Popcorn, the manufacturer of a motor\ntruck scale provided a limited remedy that \xe2\x80\x9cit will repair or replace... any part... [that] is defective\nin material or workmanship for a period of one (1) year from date of shipment.\xe2\x80\x9d Id. at 62. The\ncourt held that this was a remedy to be provided within a certain time frame, and not a warranty\nas to future performance because there was no explicit guarantee that the product would be free\nfrom defects for a specified number of years. See Amended \xc2\xa7 2-725(2)(c) for the proposed rule\non breach of a \xe2\x80\x9cremedial promise.\xe2\x80\x9d\n18.8. Tolling -- what events toll it (keep it from running)? Section 2-725(4) states that \xe2\x80\x9cthis\nsection does not alter the law on tolling of the statute of limitations.\xe2\x80\x9d Tolling is an equitable\n261\n\n\x0cconcept, which prevents one party from asserting the statute of limitations as a defense if certain\ncircumstances exist. Courts are divided on whether repair attempts toll the statute of limitations.\n18.8.1. In Holbrook, Inc. v. Link-Belt Const. Equipment Co., 2 P.3d 638 (Wash. App.\n2000), the court stated:\nIn the alternative, Holbrook argues that we should apply the \xe2\x80\x9crepair doctrine\xe2\x80\x9d to\ntoll the four-year statute of limitations based on the repair attempts of HowardCooper, Link-Belt, and Isuzu. If this were the case, the statute of limitations\nwould be tolled only if (1) \xe2\x80\x9cevidence reveals that repairs were attempted\xe2\x80\x9d; (2)\n\xe2\x80\x9crepresentations were made that the repairs would cure the defects\xe2\x80\x9d; and (3) \xe2\x80\x9cthe\nplaintiff relied upon such representations.\xe2\x80\x9d Amodeo v. Ryan Homes, Inc., 595\nA.2d 1232, 1237 (Pa. Super. 1991).\nBut the repair doctrine has been endorsed in few jurisdictions. See 5 Ronald A.\nAnderson, Anderson on the Uniform Commercial Code \xc2\xa7 2-725-131, at 295-96\n(3d ed. 1994); 67A Am. Jur. 2d Sales \xc2\xa7 947, at 350 (1985); Gary D. Spivey,\nAnnotation, Promises or Attempts by Seller to Repair Goods as Tolling Statute of\nLimitations for Breach of Warranty, 68 A.L.R.3d 1277, 1280 (1976). The\napparent reason that the majority of jurisdictions reject the repair doctrine is that\ngranting exceptions to specific statutes of limitation is the prerogative of the\nlegislature. See Binkley Co. v. Teledyne Mid-Am. Corp., 333 F. Supp. 1183, 1187\n(E.D. Mo. 1971), aff\'d, 460 F.2d 276 (8th Cir. 1972). It can be argued that the\nrepair doctrine conflicts with the purpose for applying the four-year limitations\nperiod to breach of warranty claims stated in the Official Comment to the section\n\xe2\x80\x93 to permit commercial sellers to discard their warranty records at the end of the\n\xe2\x80\x9cnormal commercial record keeping period.\xe2\x80\x9d See Ogle v. Caterpillar Tractor Co.,\n716 P.2d 334, 340 (Wyo. 1986).\n18.8.2. In Sierra Diesel Injection Service v. Burroughs Corp., Inc., 648 F. Supp. 1148 (D.\nNev. 1986), a federal court applying Nevada law stated:\nOther courts have accepted the proposition that repair promises and attempts can toll the\nrunning of the statute of limitations. See Daughtry v. Jet Aeration Co., 18 Wash. App.\n155, 566 P.2d 1267, rev\'d on other grounds, 91Wash.2d 704, 592 P.2d 631 (1979).\nAlthough no Nevada case directly discusses the point, this tolling concept is thus widely\naccepted in other jurisdictions and is found in several well reasoned cases. Where the\nstate courts are silent on a matter, it is this Court\'s task to use its \xe2\x80\x9cown best judgment in\npredicting how the state\'s highest court would decide the case.\xe2\x80\x9d Fiorito Bros., Inc. v.\nFruehauf Corp., 747 F.2d 1309, 1314 (9th Cir. 1984) quoting Takahashi v. Loomis\nArmored Car Service, 625 F.2d 314, 316 (9th Cir. 1980). In that the more persuasive\n\n262\n\n\x0copinions from other jurisdictions adopt this method of tolling, the Court finds that the\nNevada Supreme Court would also assume this position if it were presented with this\nquestion.\nChapter 18. Additional Sources\nScott J. Burnham, Glannon Guide to Sales: Learning Sales Through Multiple-Choice Questions\nand Analysis (Wolters Kluwer 2d ed., 2012), Chapter 20\nJames J. White and Robert S. Summers, Uniform Commercial Code (West 6th ed., 2010),\nChapter 12-9\n\n263\n\n\x0cChapter 19. Assignment and Delegation\n19.1. Introduction. To approach assignment and delegation, it is best to break a contract down\ninto the respective rights and duties of the parties, and to think of each of those rights and duties\nas a commodity that can be bought and sold. It is important to get the vocabulary down: rights\nare assigned, and duties are delegated.\nExample. Seller agrees to sell 10 steel beams to Buyer for $10,000 on June 1. Seller has the right\nto receive payment of $10,000 on June 1, and Buyer has the right to receive tender of the steel on\nJune 1. Seller has the duty to tender the steel on June 1, and Buyer has the duty to tender the\n$10,000 on June 1.\nThose rights and duties can be assigned and delegated. Seller might notify Buyer: don\xe2\x80\x99t pay me,\npay my creditor instead. Buyer might notify Seller: don\xe2\x80\x99t tender the steel to me, tender it to ABC\nCo. Those would be assignments of rights. Seller might notify Buyer: you won\xe2\x80\x99t be getting the\nsteel from me -- you will be getting it from Steelco. Buyer might notify Seller: I won\xe2\x80\x99t be paying\nyou \xe2\x80\x93 payment will come from ABC Co. Those would be delegations of duties.\nThe UCC rules determine whether those assignments and delegations are enforceable. Section 2210 contains the rules on assignment and delegation. They are quite similar to the common law\nrules, and the policy strongly favors free assignment and delegation. Let\xe2\x80\x99s look at those rules.\n19.2. Delegation of duty. Read \xc2\xa7 2-210(1). It permits an obligor (one who is obligated to do\nsomething) to delegate a duty except in two situations:\n\xef\x82\xb7\n\nunless otherwise agreed\n\n\xef\x82\xb7\n\nunless the other party has a substantial interest in having his original promisor\nperform.\n\n19.2.1. The second exception. We will discuss the first exception shortly. The second\nexception, prohibiting delegation when there is a \xe2\x80\x9cchoice of person\xe2\x80\x9d sounds like it might\narise frequently. In our example, Buyer might claim that it chose Seller to tender the steel\nbecause Seller is a reliable party with whom it has always dealt. On the other hand, it\ndoesn\xe2\x80\x99t have as much confidence in Steelco and specifically chose not to deal with\nSteelco initially. Therefore, Buyer argues that it does not have to accept Seller\xe2\x80\x99s\ndelegation of the duty to Steelco. Buyer will probably lose that argument. Steel beams are\na commodity with certain specifications, and will be the same whether they come from\nSeller or Steelco.\nThe choice of person exception might kick in if the goods were to be specially\nmanufactured. For example, if you ask a particular tailor to make me a handmade suit,\n264\n\n\x0cand the tailor says, \xe2\x80\x9cI\xe2\x80\x99m kind of busy now, so I will have the suit made by my nephew,\xe2\x80\x9d I\nthink you could say that you have a substantial interest in having the particular tailor\nmake the suit. A handmade suit is not a commodity, and the quality may well be a\nfunction of the person chosen to make it.\n19.2.2. The party delegating remains liable. Moreover, the last sentence of \xc2\xa7 2-210(1)\nstates a very important rule in delegation: No delegation of performance relieves the party\ndelegating of any duty to perform or any liability for breach. In other words, by delegating\nits duty to Steelco, Seller does not step out of the picture. Seller remains liable for\nSteelco\xe2\x80\x99s performance and breach. The same is true for Buyer\xe2\x80\x99s delegation of the duty to\npay. Buyer\xe2\x80\x99s delegation to ABC Co. of the duty to pay Seller does not relieve Buyer of\nthe obligation to pay. In fact, it gives Seller two parties to whom it can look for payment.\n19.2.3. Demand for Assurances. Additional protection is given to the obligee (the party to\nwhom performance is due) by \xc2\xa7 2-210(6). Recall the demand for assurances under \xc2\xa7 2609 discussed in connection with Anticipatory Repudiation in \xc2\xa7 14.3. According to \xc2\xa7 2210(6), if the delegation raises reasonable grounds for insecurity, then the obligee may\ndemand assurances from the delegatee (the party to whom the duty was delegated). In our\nexample, if Buyer was reasonably concerned about Steelco\xe2\x80\x99s performance, it could\ndemand assurances from Steelco; if it did not get reasonable assurances, presumably it\ncould regard the delegation as ineffective.\nProblem 19-1. A law student went into a bar and was approached by a derelict, who asked, \xe2\x80\x9cWill\nyou buy me a drink?\xe2\x80\x9d The law student replied, \xe2\x80\x9cSure, if you agree to pay my student loans.\xe2\x80\x9d The\nderelict said, \xe2\x80\x9cIt\xe2\x80\x99s a deal,\xe2\x80\x9d and the law student bought him a drink. Is the derelict liable to pay the\nloans?\n19.3 Assignment of rights. Read \xc2\xa7 2-210(2). It supports assignment of rights except in two\nsituations:\n\xef\x82\xb7\n\nunless otherwise agreed (and as we will see, that exception is subject to a major\nexception)\n\n\xef\x82\xb7\n\nunless the assignment would materially change the duty of the other party or\nincrease the burden on him or impair materially his chance of obtaining return\nperformance.\n\nNormally it does not matter to an obligor to whom it tenders the goods. Especially in a shipment\ncontract (recall from \xc2\xa7 10.1 that this requires the seller to deliver the goods to a carrier rather than\nto a particular destination); it does not materially change the duty of the seller to ship the goods\nto A rather than to B.\n265\n\n\x0c19.3.1. An example of an assignment that materially changes the duty of a party might\narise in the case of one business buying out another. The acquiring party assumes the\nrights and duties of the acquired party. Assume Smallco had a requirements contract\n(recall from \xc2\xa7 2-306 that this is a provision measuring quantity by the requirements of the\nbuyer) allowing it to buy all the steel it requires from Steelco at a certain price. Smallco is\nthen acquired by Bigco, which claims it has been assigned the right to buy all the steel it\nrequires from Steelco. It would seem that this assignment increases the burden on Steelco,\nso it would not be enforceable.\n19.3.2. Frequently, the right to receive payment is assigned. A seller might, for example,\nassign its right to payment to a creditor. Although it is just as easy for the buyer to pay the\ncreditor as to pay the seller, sometimes that assignment might \xe2\x80\x9cimpair materially his\nchance of obtaining return performance.\xe2\x80\x9d For example, if the seller needed the payment to\nbuy machinery it was going to use to complete the order, then the buyer might be\nconcerned if the seller assigned its right to the money.\n19.3.3. Recall that in a delegation, the delegating party remains liable for the performance\nof the delegate. When a party assigns rights, however, \xe2\x80\x9cthe assignee stands in the shoes of\nthe assignor,\xe2\x80\x9d and the assignor drops out of the picture. For example, Seller informs\nBuyer that it has assigned to Creditor its right to payment for the steel. Buyer nevertheless\npays Seller. Creditor has a claim against Buyer to enforce the obligation, and Buyer\nwould have to recover from Seller in restitution. If the steel was defective, to the extent of\nthe amount due, Buyer would assert that claim against Creditor rather than against Seller.\nProblem 19-2. Sarah sold some lawn furniture to Brenda for $2,000, which was to be paid in one\nmonth. Prior to receiving payment from Brenda, Sarah became short on cash and approached\nFriendly Finance. Friendly agreed to pay her $1,900 in return for an assignment to Friendly of the\nright to payment.\nFriendly claimed payment from Brenda, who discovered that she had a breach of warranty claim\nagainst Sarah because the furniture was not as described. She figured she was damaged in the\namount of $100. Can Brenda include an explanation with her payment and deduct that amount from\nthe amount she pays Friendly?\n19.4. Prohibition of assignment and delegation. Just as the default rules allow parties to freely\nassign and delegate, the freedom of contract rules allow parties to prohibit assignment and\ndelegation. Recall that both subsections (1) and (2) of \xc2\xa7 2-210 provide that an exception to the\nrule of free assignment and delegation is \xe2\x80\x9cunless otherwise agreed.\xe2\x80\x9d There are, however, a\nnumber of limitations on a party\xe2\x80\x99s right to prohibit assignment and delegation.\n19.4.1 There is an explicit exception to the right to prohibit the assignment of rights in\n\xc2\xa7 2-210(2), which limits that right with the language \xe2\x80\x9cexcept as otherwise provided in\n266\n\n\x0cSection 9-406.\xe2\x80\x9d The problem is that accounts receivable financing, which is facilitated by\nArticle 9, depends on the availability of accounts receivables that are unencumbered by\nrestrictions. For example, assume Steelco went to the bank to get financing. \xe2\x80\x9cWhat have\nyou got for collateral?\xe2\x80\x9d the banker will ask. Steelco will respond, \xe2\x80\x9cWe have the right to\nreceive payment from all of our buyers, and we will be happy to assign those rights to you\nin order to secure our loan.\xe2\x80\x9d That sounds good to the bank \xe2\x80\x93 but if there was an effective\nprohibition of assignment in the agreement between Steelco and its buyers, then the bank\nwould not be able to recover from the buyer. So the drafters of Article 9 came up with a\nsimple solution \xe2\x80\x93 restrictions on the assignment of accounts are not effective. Therefore it\ndoesn\xe2\x80\x99t matter what the parties say in their agreement about prohibiting assignment; the\nstatute will trump it in the case of secured financing.\n19.4.2. The parties themselves sometimes get tripped up when they attempt to prohibit\nassignment and delegation. Instead of drafting a provision stating that assignment of\nrights and delegation of duties is prohibited, they state something like \xe2\x80\x9cThis contract may\nnot be assigned.\xe2\x80\x9d Because rights rather than contracts are assigned, this language creates\nan ambiguity as to what the parties meant by the language they used. Surprisingly, this\noccurs frequently enough that the drafters of the Code came up with a provision that\naddresses it! Subsection 2-210(4) provides that \xe2\x80\x9ca prohibition of assignment of \xe2\x80\x98the\ncontract\xe2\x80\x99 is to be construed as barring only the delegation to the assignee or the assignor\xe2\x80\x99s\nperformance.\xe2\x80\x9d So when the prohibition is drafted ambiguously, the resolution is that\nrights may still be assigned, but duties may not be delegated.\n19.4.3. A more subtle limitation on the parties\xe2\x80\x99 right to prohibit assignment and\ndelegation is the remedy awarded by some courts for breach of the prohibition. Many\ncourts hold that delegating a duty in the face of a no-delegation clause does not make the\ndelegation ineffective; it merely entitles the injured party to damages. In our original\nexample, if Buyer and Seller had agreed that \xe2\x80\x9cdelegation of duties is prohibited,\xe2\x80\x9d and\nSeller nevertheless delegated to Steelco its duty to tender the steel, in such a jurisdiction,\nthe delegation to Steelco would be effective -- Buyer would have to accept the steel from\nSteelco and look to Seller for any damages resulting from the breach. In other\njurisdictions, the delegation would not be effective and Buyer would not have to accept\nperformance by Steelco.\nPractice tip: To make clear that an attempted delegation in the face of a provision barring\ndelegation is not effective, the drafter should expressly provide that any attempted\ndelegation is void.\nProblem 19-3. Brenda learned her lesson and did not want to be bothered by her seller\xe2\x80\x99s creditors.\nThe next time she made a contract with Sarah, she insisted that the contract state \xe2\x80\x9cno rights under\nthis contract may be assigned.\xe2\x80\x9d\n\n267\n\n\x0c1. Nevertheless, Sarah assigned the debt to Friendly. If Friendly demanded payment from\nBrenda, is it a good defense that the contract prohibits an assignment of rights?\n2. Alternately, Brenda\xe2\x80\x99s next contract with Sarah stated, \xe2\x80\x9cThis contract may not be assigned.\xe2\x80\x9d\nBrenda then told Sarah that she was transferring the contract to her neighbor, who would\nreceive the goods and make the payment. Is the transfer effective?\nResearch Assignment 19-1. What is the rule in your jurisdiction on the consequence of a party\ndelegating a duty in the face of a clause prohibiting the delegation of duties?\nBel-Ray Co., Inc. v. Chemrite (Pty) Ltd.\n181 F.3d 435 (3d Cir. 1999)\nSTAPLETON, Circuit Judge\nLubritene Ltd. (\xe2\x80\x9cLubritene\xe2\x80\x9d) and four of its directors and officers appeal the District Court\'s order\ncompelling them to arbitrate claims brought against them by Bel-Ray Company, Inc. (\xe2\x80\x9cBelRay\xe2\x80\x9d). Lubritene claims the District Court erroneously concluded that it was bound under its\npredecessor\'s arbitration agreement. The directors and officers contend that the District Court\nerred because it lacked personal jurisdiction over them, and because they are not bound by their\ncorporate principal\'s agreement to arbitrate. We agree that Lubritene is bound to arbitrate this\ndispute and that the District Court had personal jurisdiction over the directors and officers. We\nconclude, however, that the directors and officers are not bound to arbitrate Bel-Ray\'s claims\nagainst them. Accordingly, we will affirm in part and reverse in part.\nI.\nBel-Ray is a New Jersey corporation engaged in the business of manufacturing specialty\nlubricants for the international mining, industrial and consumer markets. Bel-Ray has developed\nspecial formulas and blending technology for its products and maintains them in the highest\nconfidentiality. Between 1983 and 1996, Bel-Ray entered into a series of agreements with\nChemrite (Pty.) Ltd., a South African corporation, for the blending and distribution of Bel-Ray\nproducts in South Africa. Ivor H. Kahn, Cesare Carbonare, Ian Robertson, and Pierre Van Der\nRiet (the \xe2\x80\x9cIndividual Appellants\xe2\x80\x9d) were officers or directors, as well as shareholders, of\nChemrite.\nIn January of 1996, the parties entered into the most recent set of these agreements (the\n\xe2\x80\x9cTrade Agreements\xe2\x80\x9d) by executing a (i) Distributor Sales Agreement, (ii) Blending\nManufacturing License Agreement, and (iii) License Agreement to Trade Name. The Trade\nAgreements allowed Chemrite to market and sell Bel-Ray products, and to produce and market\nproducts under Bel-Ray\'s trade name in South Africa. Each agreement contains two clauses\n268\n\n\x0crelevant to this appeal. First, each agreement required arbitration of \xe2\x80\x9cany and all disputes relating\nto th[e] agreement or its breach\xe2\x80\x9d in Wall Township, New Jersey. Arbitration was to proceed\nunder the American Arbitration Association rules and New Jersey substantive law. Second, the\nagreements specifically require Bel-Ray\'s written consent to any assignment of Chemrite\'s\ninterests under the Trade Agreements.\nOn August 20, 1996, Chemrite sent Bel-Ray a fax indicating that it had changed its name\nto \xe2\x80\x9cLubritene (Pty) Ltd.\xe2\x80\x9d The change became more than nominal on October 10, 1996, when\nChemrite sold its lubricant business, expressly including its rights under the Trade Agreements to\nLubritene, a newly formed business entity, and Chemrite entered liquidation. Lubritene continued\nChemrite\'s lubricant business at the same location with the same employees and management,\nand the Individual Appellants became Lubritene shareholders, directors and officers. Lubritene\nand Bel-Ray continued to conduct business in the same manner under the Trade Agreements. In\nNovember of 1996, Lubritene sent Bel-Ray a package of documents that included the October\n10th sale of assets documents and thereby informed Bel-Ray that Lubritene was a new and\nseparate company.\nIn the Spring of 1997, the parties engaged in a series of negotiations. These negotiations\nwere initially motivated by Bel-Ray\'s interest in acquiring a stake in Lubritene. When it became\nclear that such an acquisition was not in the cards, the negotiations turned to focus upon\nmodifying the Trade Agreements to add additional industrial products and to extend their terms\nto six years. During negotiating sessions in South Africa, Lubritene representatives queried BelRay representative Linda Kiefer as to whether Bel-Ray believed there was a legally binding\nagreement between Lubritene and Bel-Ray. According to Keifer:\n[she] explained to them that, not being an attorney, [she] could not comment on the legal\nenforceability of the [Trade Agreements], but told them that Bel-Ray\'s attorneys had\nadvised [her] that technically and legally we do have an agreement. Moreover, [she]\npointed out that both Bel-Ray and Lubritene had continued to conduct business in the\nsame manner without interruption, since the agreements were signed ... [and] that [she]\nunderstood from Bel-Ray\'s attorneys that as long as we both continued to do business\naccording to the terms of the existing agreements while we discussed a possible new\nrelationship, Bel-Ray had an implied agreement with Lubritene on the same terms as the\nexisting agreements with Chemrite.\nSix Lubritene affiants, however, contend that Keifer stated that \xe2\x80\x9ctechnically and legally there is\nno agreement between Lubritene and Bel-Ray\xe2\x80\x9d because any assignment of the Chemrite\nagreement required Bel-Ray\'s written consent, which had not yet been granted.\nSoon after these negotiations, a former Lubritene director brought internal corporate\ndocuments to Bel-Ray\'s attention. Among these documents were the minutes of a Lubritene\nboard meeting held in anticipation of the Spring 1997 negotiations \xe2\x80\x9cto resolve the legal stance\nLubritene (Pty) Ltd must take in respect of the Bel-Ray Company Inc[.] agreement.\xe2\x80\x9d Lubritene\'s\n269\n\n\x0ccounsel advised the board at the meeting that:\nwhile admittedly the [Trade Agreements were] entered into between Chemrite Southern\nAfrica (Pty) Ltd[.,] and Bel-Ray Company Inc.[,] after the deregistration/liquidation of\nChemrite Southern Africa (Pty) Ltd [.], Bel-Ray still continued to deal commercially with\nLubritene (Pty) Ltd and therefore, Bel-Ray\'s conduct has basically assumed that the\nassigned agreements were in fact assigned to Lubritene (Pty) Ltd.[.] However, the\nagreements state that the transfer of the agreements must be approved in writing by\nBelRay.\nId. The board then resolved to (i) liquidate Chemrite; (ii) \xe2\x80\x9ccontinue to trade with Bel-Ray\nCompany Inc as is and not [to] suggest any changes to the current agreement when Linda Kiefer\nand Bernie Meeks visit South Africa in April\xe2\x80\x9d; (iii) create another new company and transfer all\nof Lubritene\'s business other than Bel-Ray to that company so that Lubritene \xe2\x80\x9cwill have no\nassets\xe2\x80\x9d and \xe2\x80\x9c[i]f Bel-Ray decides to take legal action against Lubritene (Pty) Ltd, there will be\nnothing left in the company and hence Bel-Ray will not recover any damages\xe2\x80\x9d; and (iv) when\nBel-Ray seeks to renew the Trade Agreements to inform them that the Trade Agreements were\nwith Chemrite, \xe2\x80\x9cwhich does not exist anymore and that the agreements are no longer valid.\xe2\x80\x9d Id.\nThe minutes end by instructing that \xe2\x80\x9c[i]t is vital that we do not alert Bel-Ray to our plans and\nhence we must be very cautious and circumspect when we ALL meet with them in April.\xe2\x80\x9d Id.\n(emphasis in original).\nBel-Ray alleges that these minutes and the other documents brought to them by the\nformer Lubritene director reveal that Lubritene, and the Individual Appellants as its officers and\ndirectors, conspired to misappropriate Bel-Ray\'s technology and other proprietary information\nand intentionally defrauded Bel-Ray by leading it to believe that Lubritene would abide by the\nTrade Agreements. Additionally, they allege that Lubritene marketed Bel-Ray products falsely\nunder Lubritene\'s trade name, and conversely marketed inferior Lubritene products under BelRay\'s trade name thereby damaging Bel-Ray\'s business reputation.\nBel-Ray filed this action in the United States District Court for the District of New Jersey\nto compel Lubritene and the Individual Appellants to arbitrate their claims under the Trade\nAgreements\' arbitration clauses. Bel-Ray alleges that Lubritene\'s actions amount to the business\ntorts of (i) unfair competition, (ii) fraud, and (iii) misappropriation. Bel-Ray also claims that\nthese same actions constitute breaches of the Trade Agreements.3\nLubritene and the Individual Appellants, jointly represented, filed an answer asserting\ninter alia lack of personal jurisdiction and counterclaims. The counterclaims alleged that Bel-Ray\nhad commenced related proceedings in South Africa to enjoin Lubritene from continuing to use\n3 Additionally, Bel-Ray alleges that Lubritene owes it $64,532.60 for products received but not paid for. These\nproducts were purchased under bills of lading between Bel-Ray and Lubritene that included arbitration clauses for\ndisputes regarding amounts owed. The parties do not discuss these claims in their briefs to this Court. Nonetheless, it\nwould appear that compelling arbitration of these claims was proper.\n\n270\n\n\x0cits intellectual property and trade name, and requested the District Court to either (i) stay the\nproceedings, or (ii) enjoin Bel-Ray from seeking to compel arbitration because it had waived its\nright to arbitrate by initiating the South African litigation. Two months later, the Individual\nAppellants filed a motion on their counterclaims requesting a stay, or alternatively, summary\njudgment enjoining Bel-Ray from seeking to compel arbitration.\nThe District Court denied the appellants\' motion. Months later, the Court granted Bel-Ray\nsummary judgment and entered an order compelling arbitration on August 10, 1998. Lubritene\nand the Individual Appellants appeal this order.\nII.\nThe District Court had jurisdiction under 9 U.S.C. \xc2\xa7 203 because this action to compel\narbitration between international parties falls under the Convention on the Recognition and\nEnforcement of Foreign Arbitral Awards. See 9 U.S.C. \xc2\xa7\xc2\xa7 201-208. We have jurisdiction\npursuant to 28 U.S.C. \xc2\xa7 1291. We review the District Court\'s summary judgment order\ncompelling arbitration de novo and apply the same test that the District Court should have\napplied.\nIII.\nWe begin with the propriety of the District Court\'s order to the extent it compelled\nLubritene to arbitrate Bel-Ray\'s claims. Under the Federal Arbitration Act (\xe2\x80\x9cFAA\xe2\x80\x9d), a court may\nonly compel a party to arbitrate where that party has entered into a written agreement to arbitrate\nthat covers the dispute. See 9 U.S.C. \xc2\xa7\xc2\xa7 2 & 206. The arbitration clauses in the Trade\nAgreements are the only written agreements to arbitrate offered in this case. It is undisputed that\nthese agreements were entered into by Chemrite and Bel-Ray, and that Chemrite subsequently\nassigned the agreements to Lubritene. If these assignments are effective, then the District Court\'s\norder should be affirmed. Lubritene, however, contends that the assignments are ineffective\nbecause Bel-Ray did not consent to the assignments in writing as the Trade Agreements require.\nThey therefore argue that there is no written agreement to arbitrate and we must reverse the\nDistrict Court\'s order.\nThus, according to Lubritene, this case turns on the effect to be given to the Trade\nAgreements\' requirement that Bel-Ray consent in writing to any assignment of Chemrite\'s\ninterest. As noted, the Trade Agreements are international agreements between United States and\nSouth African parties. To determine the legal effect of this provision, we must first resolve the\nthreshold matter of which jurisdiction\'s contract law we should apply. Ordinarily, this would\nrequire a conflict of laws analysis to determine which state had the weightier interest in having its\nlaw apply in resolving the relevant issue. Because of a failure of proof discussed below, however,\nwe will apply the law of the forum . . . .\n\n271\n\n\x0cLubritene claims that it cannot be bound by Chemrite\'s agreement to arbitrate because, as\na matter of contract law, the written consent provision prevents it from becoming Chemrite\'s\nassignee. Lubritene, however, has not raised the issue of whether South African contract law\napplies to its claim, nor has it provided any evidence to prove the substance of that law.4 We\ntherefore will apply the law of the forum\xe2\x80\xa6.\nThis case was brought in New Jersey. Thus, we now turn to consider that state\'s contract\nlaw. The New Jersey Supreme Court has not yet addressed the effect of contractual provisions\nlimiting or prohibiting assignments. Nevertheless, we are not without guidance because the\nSuperior Court\'s Appellate Division recently addressed this issue in Garden State Buildings L.P.\nv. First Fidelity Bank, N.A., 305 N.J. Super. 510, 702 A.2d 1315 (1997). There, a partnership had\nentered a loan agreement with Midatlantic Bank for the construction of a new hotel. The parties\nsubsequently entered into a modification agreement to extend the loan\'s maturity date, which\nprovided that: \xe2\x80\x9cNo party hereto shall assign this Letter Agreement (or assign any right or delegate\nany obligation contained herein) without the prior written consent of the other party hereto and\nany such assignment shall be void.\xe2\x80\x9d Id. at 1318. Midatlantic subsequently assigned the loan to\nStarwood without obtaining the partnership\'s prior written consent. The partnership\nacknowledged Starwood\'s rights under the loan agreement by making payments to, and\neventually entering a settlement agreement with, Starwood. Nonetheless, the partnership filed\nsuit against Midatlantic for damages arising from its breach of the modification agreement\'s\nassignment clause. It argued that it was not required to void the assignment, but could recognize\nits validity while still preserving its right to sue Midatlantic for breach of its covenant not to\nassign without the partnership\'s written consent.\nTo resolve this claim the Appellate Division looked to \xc2\xa7 322 of the Restatement (Second)\nof Contracts, which provides in relevant part:\n(2) A contract term prohibiting assignment of rights under the contract, unless a different\nintention is manifested....\n(b) gives the obligor a right to damages for breach of the terms forbidding assignment but\ndoes not render the assignment ineffective...\nRestatement (Second) of Contracts \xc2\xa7 322 (1981) (emphasis added). The Court, distinguished\nbetween an assignment provision\'s effect upon a party\'s \xe2\x80\x9cpower\xe2\x80\x9d to assign, as opposed to its\n\xe2\x80\x9cright\xe2\x80\x9d to assign. A party\'s \xe2\x80\x9cpower\xe2\x80\x9d to assign is only limited where the parties clearly manifest a\ndifferent intention. According to the Court:\n\n4 The only information regarding South African law that Lubritene has provided relates to the distinct issue of\nsuccessor liability. This information relates to Lubritene\'s claim that, if the District Court properly considered\nsuccessor liability, it should have used South African, not New Jersey, law on the issue. Lubritene\'s primary\nargument, however, is that the District Court need not consider successor liability principles because this case can be\nresolved as a matter of contract law. In the course of making this argument, Lubritene does not raise the issue of\nwhich country\'s contract law applies.\n\n272\n\n\x0c\xe2\x80\x9c[t]o reveal the intent necessary to preclude the power to assign, or cause an assignment\nviolative of contractual provisions to be wholly void, such clause must contain express\nprovisions that any assignment shall be void or invalid if not made in a certain specified\nway.\xe2\x80\x9d Otherwise, the assignment is effective, and the obligor has the right to damages.\nGarden State, 702 A.2d at 1321 (quoting University Mews Assoc\'s v. Jeanmarie, 122 Misc.2d\n434, 471 N.Y.S.2d 457, 461 (1984)). The Court concluded that the parties had sufficiently\nmanifested their intent to limit Midatlantic\'s power to assign the loan because the anti-assignment\nclause clearly provided that assignments without the other party\'s written consent \xe2\x80\x9cshall be void.\xe2\x80\x9d\nId. at 1322.\nIn adopting \xc2\xa7 322, New Jersey joins numerous other jurisdictions that follow the general\nrule that contractual provisions limiting or prohibiting assignments operate only to limit a parties\'\nright to assign the contract, but not their power to do so, unless the parties\' manifest an intent to\nthe contrary with specificity. [citations omitted.] To meet this standard the assignment provision\nmust generally state that nonconforming assignments (i) shall be \xe2\x80\x9cvoid\xe2\x80\x9d or \xe2\x80\x9cinvalid,\xe2\x80\x9d or (ii) that\nthe assignee shall acquire no rights or the nonassigning party shall not recognize any such\nassignment. See Garden State, 702 A.2d at 1321 (\xe2\x80\x9cclause must contain express provisions that\nany assignment shall be void or invalid if not made in a certain specified way\xe2\x80\x9d); Cedar Point,\n693 F.2d at 754 n. 4 (same); Allhusen, 103 N.E.2d at 893; Sullivan, 465 N.Y.S.2d at 238;\nUniversity Mews, 471 N.Y.S.2d at 461. In the absence of such language, the provision limiting or\nprohibiting assignments will be interpreted merely as a covenant not to assign, or to follow\nspecific procedures-typically obtaining the non-assigning party\'s prior written consent-before\nassigning. Breach of such a covenant may render the assigning party liable in damages to the\nnon-assigning party. The assignment, however, remains valid and enforceable against both the\nassignor and the assignee.\nThe Trade Agreements in this case contain the following assignment provisions: (i) the\nDistributor Sales Agreement \xc2\xa7 7.06 provides that the \xe2\x80\x9cAgreement and the obligations and rights\nunder this Agreement will not be assignable by [Chemrite] without express prior written consent\nof Bel-Ray, which may be withheld at the sole discretion of Bel-Ray\xe2\x80\x9d; (ii) the Blending and\nManufacturing License Agreement \xc2\xa7 7.05 provides that the \xe2\x80\x9cAgreement and the obligations and\nrights hereunder will not be assignable by [Chemrite] without the express prior written consent of\nBEL-RAY\xe2\x80\x9d; and (iii) the License Agreement to Trade Name \xc2\xa7 6.06 provides that the\n\xe2\x80\x9cAgreement, and the obligations and rights under this agreement will not be assignable without\nthe express written consent of all Parties to this Agreement.\xe2\x80\x9d None contain terms specifically\nstating that an assignment without Bel-Ray\'s written consent would be void or invalid. Several\ncourts have considered virtually identical clauses and concluded that they did not contain the\nnecessary express language to limit the assigning party\'s power to assign.\nThe Trade Agreements\' assignment clauses do not contain the requisite clear language to\nlimit Chemrite\'s \xe2\x80\x9cpower\xe2\x80\x9d to assign the Trade Agreements. Chemrite\'s assignment to Lubritene is\ntherefore enforceable, and Lubritene is bound to arbitrate claims \xe2\x80\x9crelating to\xe2\x80\x9d the Trade\n273\n\n\x0cAgreements pursuant to their arbitration clauses. We therefore agree with the District Court that\nBel-Ray was entitled to an order compelling Lubritene to arbitrate\xe2\x80\xa6.\nIV.\nThe order of the District Court compelling arbitration will be reversed and the case will\nbe remanded to it with instructions to enter an order compelling only Lubritene to arbitrate.\nCase Note:\nNot all courts follow the Restatement rule. In Rother-Gallagher v. Montana Power Co., 522 P.2d\n1226 (Mont. 1974), the court stated:\nAppellants further argue that the transfer of rights in the contract between the Rother\ncompanies and the partnership is not in violation of the nonassignment clause relying on\nthe holdings of the California Supreme Court in the cases of Trubowitch v. Riverbank\nCanning Co., 30 Cal.2d 335, 344, 182 P.2d 182, 188; People v. McNamara Corporation\nLimited, 28 Cal.App.3d 641, 104 Cal. Rptr. 822. In these cases the California Supreme\nCourt held that where there is a transfer of an interest, or an assignment of a contract, the\ncourt will look to see how it affects the interests of the parties by the nonassignability\nclause of the contract and will allow it if it can be made without a change of the beneficial\ninterest in and to the contract.\nHowever, as argued by the respondent, this is not the law of Montana. We do not follow\nTrubowitch. Rather it has long been the law of this state established in 1912 by the case\nof Winslow v. Dundom, 46 Mont. 71, 82, 125 P. 136, that provisions for nonassignment in\na contract will be upheld. The key case, Standard Sewing-Machine Co. v. Smith, 51\nMont. 245, 248, 152 P. 38, holds that nonconsent to assignment (where nonassignability\nis set forth in the contract) destroys or precludes the establishment of privity between an\nalleged assignee and the other party.\nProblem 19-3. Review Problem: Assignment and Delegation\nA Law School administration invited White & Summers to deliver a commencement address on\nthe topic of sales law, for which they would be paid a fee of $1,000. No other terms were\ndiscussed. The Law School ordered a case of champagne and various hors d\'oeuvres from ABC\nCatering, Inc. for a reception following the address.\nA month before commencement, White & Summers informed the Law School that they were\nasking Scott Burnham to speak in their place and that they wanted the fee to be donated to the\n274\n\n\x0cUniversity of Michigan. At the same time, ABC Catering informed the Law School that it was\nasking XYZ Catering to handle the reception.\nWhen the law students heard about those events, they sought an injunction to prevent the\ntransfers. They stated in their application that they strongly preferred the views of White &\nSummers to those of Burnham, that they had had bad experiences with XYZ Catering, and that\nthey disliked the Michigan football program.\nYou are the judge. You have called the students and all the parties in for a conference. Explain to\nthem what issues you perceive, and how you view their rights and obligations.\n\nChapter 19. Additional Sources\nScott J. Burnham, Glannon Guide to Sales: Learning Sales Through Multiple-Choice Questions\nand Analysis (Wolters Kluwer 2d ed., 2012), Chapter 19\nJames J. White and Robert S. Summers, Uniform Commercial Code (West 6th ed., 2010),\nChapter 4-13\n\n275\n\n\x0cChapter 20. Article 2A -- Leases of Goods\n20.1. History of Article 2A. In the 1980s, commercial leasing of goods became wide-scale. For\nexample, most airlines began to lease, rather than buy, their fleet of airplanes. Leasing became\npopular for several reasons, including tax and accounting advantages. Although Article 2 in \xc2\xa7 2102 purports to apply to \xe2\x80\x9ctransactions in goods,\xe2\x80\x9d most operative provisions relate only to sales of\ngoods. For example, the definition of \xe2\x80\x9ccontract\xe2\x80\x9d and \xe2\x80\x9cagreement\xe2\x80\x9d under \xc2\xa7 2-106 are limited to\nthose relating to the sale of goods. To govern leases of goods, the Uniform Law Commission\npromulgated Article 2A in 1987, and revised it in 1990. Currently, every state except Louisiana\nhas enacted Article 2A. Amended Article 2A, like Amended Article 2, has been withdrawn from\nconsideration.\n20.1.1. For further reading on Article 2A, see Amelia H. Boss and Stephen T. Whelan,\nThe ABCs of the UCC: Article 2A Leases, Kelly S. Murphy, Survey: Lease Law, 16 U.\nArk. Little Rock L. Rev. 153 (1994), and Michael I. Spak, Pledge Allegiance to the Code:\nDodging the Draft with Liberty and Leases for All, 13 J. L. & Com. 79 (1993).\n20.2. Definition of Lease. It is important to initially distinguish between a lease and a sale with\na reservation of a security interest, because the rights of the parties and the rights of third parties\nvary depending upon the type of transaction involved. The UCC looks at the substance of the\ntransaction, and not the form of the transaction or what the parties may call it. For example, if a\nlaw firm enters into a 24-month \xe2\x80\x9clease\xe2\x80\x9d of a copy machine, with the right to purchase it for $1.00\nat the end of the term, this will be treated as a sale rather than a lease, regardless of the title of the\nagreement.\n20.2.1. Section 2A-103(1)(j) defines a \xe2\x80\x9clease\xe2\x80\x9d as \xe2\x80\x9ca transfer of the right to possession and\nuse of the goods for a term in return for some consideration.\xe2\x80\x9d The crucial factor is that in\na true lease, the lessor enjoys a reversionary interest in the property; that is, it will come\nback to the lessor at the end of the lease.\n20.2.2. The definition adds that \xe2\x80\x9ca sale, including a sale on approval or a sale or return, or\nretention or creation of a security interest is not a lease.\xe2\x80\x9d\n20.2.2.1. A \xe2\x80\x9csale\xe2\x80\x9d is defined at \xc2\xa7 2-106(1) as \xe2\x80\x9cthe passing of title from the seller to\nthe buyer for a price.\xe2\x80\x9d\n20.2.2.2. \xe2\x80\x9cSecurity interest\xe2\x80\x9d is defined in \xc2\xa7 1-201(b)(35) as \xe2\x80\x9can interest in\npersonal property or fixtures which secures payment or performance of an\nobligation.\xe2\x80\x9d Section 1-203, \xe2\x80\x9cLease Distinguished from Security Interest,\xe2\x80\x9d\nelaborates on the distinction.\n\n276\n\n\x0c20.3. Lease or Security Interest? Section 1-201(b)(35) defines a \xe2\x80\x9csecurity interest\xe2\x80\x9d as \xe2\x80\x9can\ninterest in personal property or fixtures which secures payment or performance of an obligation.\xe2\x80\x9d\nThe problem is that like goods subject to a security interest, the goods subject to the lease may be\nrepossessed if the lessee does not pay. But unlike the creditor obtaining a security interest, the\nlessor does not have to file notice of its interest to have priority over other creditors or to recover\nthe goods in bankruptcy. It is usually another creditor with an interest in the goods or the\nbankruptcy trustee who claims that the alleged lease is really a security interest. The real work of\n\xe2\x80\x9csharpening the line between true leases and security interests disguised as a lease,\xe2\x80\x9d in the words\nof Official Comment 2, is done at \xc2\xa7 1-203.\n20.3.1. While there are a number of tests we will look at, these tests are always subject to\nthe principle found in \xc2\xa7 1-203(a) that the issue \xe2\x80\x9cis determined by the facts of each case.\xe2\x80\x9d\nSeveral courts have noted that the key aspect of a true lease is whether the lessor retains a\nmeaningful residual interest. As stated by E. Carolyn Hochstadter Dicker & John P.\nCampo in FF&E and the True Lease Question: Article 2A and Accompanying\nAmendments to UCC Section 1-201(37), 7 Am. Bankr. Inst. L. Rev. 517 (1999), \xe2\x80\x9c[c]ourts\ninterpreting both Old and New UCC 1-201(37) [\xc2\xa7 1-203] have consistently held that the\nprincipal characteristic of a lease, which distinguishes it from a secured transaction, is\nthat it allows the lessee the right to use the leased property with an attendant opportunity\nto return the property to the lessor while it still has \xe2\x80\x98substantial useful economic life.\xe2\x80\x99\xe2\x80\x9d\n20.3.2. Section 1-203 establishes a two-prong objective test to determine whether a\ntransaction is a lease or a sale with a retained security interest in the seller. The first step\nunder \xc2\xa7 1-203(b) is to determine if the obligation of the lessee to make rental payments is\nterminable by the lessee during the term of the lease. If yes, then the transaction is a true\nlease. If no, the purported lease is a sale if any one of four other tests, listed at \xc2\xa7 1203(b)(1) through (4), is satisfied.\nRemember: you only get to these additional tests if the first prong is met, i.e., if the\nlessee\xe2\x80\x99s obligation to make rental payments during the term of the lease is not subject to\ntermination by the lessee.\n\xef\x82\xb7\n\nThe first test is to determine whether the original lease term is equal to or greater\nthan the remaining economic life of the goods.\n\n\xef\x82\xb7\n\nThe second test is to determine whether the lessee is either bound to renew the\nlease at the end of the original term for the remaining economic life of the goods\nor to become the owner of the goods. For example, a clause requiring the lessee to\npurchase the goods at the end of the lease would satisfy this test.\n\n\xef\x82\xb7\n\nThe third test is to determine whether the lessee has an option to renew the lease for\nthe remaining economic life of the goods for no additional consideration.\n277\n\n\x0c\xef\x82\xb7\n\nThe fourth test is to determine whether the lessee has an option to become the\nowner of the goods for no additional consideration or for nominal additional\nconsideration.\n\n20.3.3. Application of the foregoing tests requires an analysis of the \xe2\x80\x9cremaining economic\nlife\xe2\x80\x9d of the leased property and whether the consideration to be paid under a purchase or\nrenewal option is "nominal.\xe2\x80\x9d\n20.3.3.1. Section 1-203(d) provides that additional consideration is nominal if it\nis less than the lessee\xe2\x80\x99s reasonably predictable cost of performing if the option is\nnot exercised. Additional consideration is not nominal if the renewal rental or\noptional purchase price is based upon predicted fair market values at the time the\noption is to be performed.\n20.3.3.2. Section 1-203(e) provides that \xe2\x80\x9cremaining economic life\xe2\x80\x9d and \xe2\x80\x9cfair\nmarket value\xe2\x80\x9d are determined with reference to the facts and circumstances at the\ntime the transaction is entered into.\n20.3.4. Finally, \xc2\xa7 1-203 sets forth certain factors which do not, in and of themselves, turn\na lease into a sale with a retained security interest. For example, if the lessee agrees to\nassume the risk of loss of the goods, or to pay insurance and maintenance costs during the\nterm of the lease (normally an incident of ownership), these facts alone do not make the\npurported lease a disguised sale.\n20.3.5. The \xc2\xa7 1-203 factors are discussed at length in E. Carolyn Hochstadter Dicker &\nJohn P. Campo, FF&E and the True Lease Question: Article 2A and Accompanying\nAmendments to UCC Section 1-201(37), 7 Am. Bankr. Inst. L. Rev. 517 (1999).\nProblem 20-1. As graduation day approaches, you decide to acquire your dream car, a 2008\nVolkswagen 2.0 turbo Passat, which retails for $24,975. Since you don\xe2\x80\x99t have that much cash\nnow, and you don\xe2\x80\x99t want to borrow any more money until you make a dent in your law school\nloans, you consider a lease on the following terms: $399.00/month for 36 months, plus an upfront payment of $2,000. As lessee, you would be responsible for insurance, maintenance and\nrepairs. At the end of the 36-month lease, you will have an option to purchase the vehicle or\nreturn it to the dealer. Considering the following variables, is this a \xe2\x80\x9clease\xe2\x80\x9d governed by Article\n2A, or a \xe2\x80\x9cdisguised security interest sale\xe2\x80\x9d governed by Articles 2 and 9?\n1. You can cancel the lease at any time during the 36 month period, as long as you pay a $1,000\nfee for early termination.\n\n278\n\n\x0c2. You cannot cancel the lease during its term, and must continue to make payments even if the\nvehicle is damaged. At the end of the lease, you have the option to purchase the car for its then\n\xe2\x80\x9cblue book\xe2\x80\x9d retail value.\n3. You cannot cancel the lease during its term, and must continue to make payments even if the\nvehicle is damaged. At the end of the lease, you have the option to purchase the car for $100.\n20.4. Consumer Leases. Once it has been determined that the transaction is a lease, the next step\nis to determine whether it is a \xe2\x80\x9cconsumer lease.\xe2\x80\x9d There are special rules applicable under Article\n2A to consumer leases. For example, \xc2\xa7 2A-106 invalidates a choice of law clause, except where\nthe law chosen is that of the state of the consumer\xe2\x80\x99s residence or where the goods will be kept. A\nforum selection clause is limited to those forums which would (absent the forum selection\nclause) otherwise have jurisdiction over the consumer. As another example, \xc2\xa7 2A-108,\nUnconscionability, provides in subsection (2) that in a consumer lease unconscionable acts\ninclude those in inducing the contract or collecting a claim, and subsection (4) provides for\nrecovery of attorney\xe2\x80\x99s fees.\n20.4.1. Section 2A-103(1)(e) defines a \xe2\x80\x9cconsumer lease\xe2\x80\x9d as \xe2\x80\x9ca lease that a lessor regularly\nengaged in the business of leasing or selling makes to a lessee who is an individual and\nwho takes under the lease primarily for a personal, family, or household purpose [if the\ntotal payments to be made under the lease contract, excluding payments for options to\nrenew or buy, do not exceed ______ ].\xe2\x80\x9d Each state has the option to establish a point at\nwhich the amount of money involved takes the lease out of being a consumer lease. For\nexample, Washington filled in the bracketed language with $25,000. Wash. Rev. Code\n\xc2\xa7 62A.2A-103(1)(e) (2013).\nProblem 20-2. Jim enters a 36-month lease at $150/month for a 4-wheeler. Jim intends to use the\n4-wheeler to get around his apple orchard, and for recreational purposes on weekends and\nwhenever else he can get away. Is this a consumer lease?\nProblem 20-3. Jim, who lives in Spokane, Washington, leases a 4-wheeler for personal purposes\nfrom a business located in Idaho. The lease provides that any lawsuit arising out of the lease will\nbe governed by Idaho law and resolved in an Idaho court. Is either of these provisions\nenforceable?\n20.5. Finance Leases. Article 2A also defines a special type of lease at \xc2\xa7 2A-103(1)(g), the\nfinance lease. As noted in Official Comment (g) to \xc2\xa7 2A-103, a typical finance lease involves\nthree parties: (i) the seller (\xe2\x80\x9csupplier\xe2\x80\x9d) of the equipment, (ii) a third party, whose purpose is to\nfinance the purchase price of the equipment and who serves as lessor; and (iii) the lessee, who\nselects the supplier and the equipment, and who uses the equipment. In effect, the lessee is\nrelying upon the seller/ supplier to provide the goods and to stand behind any warranties relating\nto the goods, and is relying upon the lessor as the source of financing of the goods. Thus, Article\n279\n\n\x0c2A limits the ability of the lessee to bring a breach of warranty or other type of claim against the\nlessor, who is intended to be a financier rather than a supplier of the goods.\nProblem 20-4. Sam manufactures refrigerated units for the storage of medicine, specially\ndesigned to meet the space requirements and storage needs of each particular hospital which buys\nhis products. Sam agrees to manufacture storage equipment for use by Happy Hospital. To stay\nwithin the equipment budget adopted by its Board of Directors, Happy Hospital indicates to Sam\nthat it wants to enter into a lease instead of buying the equipment. Sam needs the money from the\nsale to finance his expanding operations, and isn\xe2\x80\x99t willing to enter a lease, but he has worked in\nthe past with a company which buys hospital equipment for re-lease to hospitals. Accordingly,\nSam enters into an agreement to sell the specially manufactured equipment to Finance Company\nfor cash, who then turns around and leases the equipment to Happy Hospital.\n1. Who is the \xe2\x80\x9csupplier\xe2\x80\x9d (\xc2\xa7 2A-103(1)(x))?\n2. What is the \xe2\x80\x9csupply contract?\xe2\x80\x9d (\xc2\xa7 2A-103(1)(y))?\n3. Who is the \xe2\x80\x9clessor?\xe2\x80\x9d (\xc2\xa7 2A-103(1)(p)?\n4. Who is the \xe2\x80\x9clessee?\xe2\x80\x9d (\xc2\xa7 2A-103(1)(n))?\n5. If the refrigerated units turn out to be defective, can Happy Hospital sue Finance Company for\nbreach of warranties? Sam? See \xc2\xa7 2A-103(1)(g)(iii).\n20.6. Lease-Purchase Agreements. A number of jurisdictions regulate \xe2\x80\x9crent to own\xe2\x80\x9d\ntransactions. In these transactions, the consumer leases the goods for a period of time that is up to\nthe consumer, but if she leases them for a certain period of time, she becomes the owner of the\ngoods. See, e.g., Wash. Rev. Code \xc2\xa7 63.19 (2013). Courts in those jurisdictions have tended to\nread these types of acts as providing \xe2\x80\x9ccumulative\xe2\x80\x9d remedies or requirements to those supplied by\nother statutes, such as the UCC or statutes regulating consumer sales or retail installment\ncontracts. See, e.g., Miller v. Colortyme, 518 N.W.2d 544 (Minn. 1994). If you represent a client\nin this type of business, you should advise the client to abide by all applicable statutes. Thus, an\nagreement falling under both the UCC (as a consumer lease or as a sale with a retained security\ninterest) and this act should be drafted in a manner which complies with both regulatory\nschemes.\nResearch Assignment 20-1. Find out whether your jurisdiction regulates \xe2\x80\x9crent-to-own\xe2\x80\x9d\ntransactions. If so, note the limited scope of the statute, in terms of what is and what is not\nincluded, and note which provisions of the act merely require disclosures and which are\nregulatory. What are the remedies for violation of each type of provision?\nProblem 20-5. A rent to own agreement conspicuously discloses, among other things, that the\ncash price of a television set is $520, that if the lessee makes 52 weekly payments of $20 the\n\n280\n\n\x0clessee acquires ownership, and that until the amount of $1,040 is paid, the lessee has no\nownership interest. Is the lessor in violation for failing to disclose that the effective interest rate is\n250%?\n20.7. Provisions of Article 2A. Most of the provisions of Article 2A are analogous to the\ncomparable provision of Article 2, with changes to accommodate the fact that the article is\ndealing with leases rather than sales, and sometimes to update or clarify a provision. A couple of\nexamples of the latter are that the dollar amount to bring a transaction within the Statute of\nFrauds in \xc2\xa7 2A-201(1) is $1,000, and the Exclusion of Warranties in \xc2\xa7 2A-214 requires that both\nthe disclaimer of the implied warranty of merchantability using the word merchantability and the\ndisclaimer using the term \xe2\x80\x9cas is\xe2\x80\x9d be by a conspicuous writing.\nThis similarity is by design. The Official Comments to Article 2A provisions begin with a\n\xe2\x80\x9cUniform Statutory Source\xe2\x80\x9d that cites the analogous Article 2 provisions. The \xe2\x80\x9cChanges\xe2\x80\x9d and\n\xe2\x80\x9cPurposes\xe2\x80\x9d in the Official Comment typically explain how the sales provision was modified to be\napplicable to a lease transaction, and the reason for the modification. Finally, the \xe2\x80\x9cCross\nReferences\xe2\x80\x9d and \xe2\x80\x9cDefinitional Cross References\xe2\x80\x9d typically cite the appropriate Article 2\nanalogue.\nProblem 20-6. Look at \xc2\xa7 2A-201, the Statute of Frauds. What differences between that provision\nand \xc2\xa7 2-201 do you see? How do the Official Comments help you understand the provision?\n20.8. Remedies. The remedies provisions of Article 2A are analogous to those of Article 2, but\nnotice that the expectancy of the lessor is to have an income stream in the future. Thus, the\nconcept of present value must be used when computing future losses. Section 2A-501(1) states\nthat default is determined by the agreement and by Article 2A. More so than in sales transactions,\nparties to a lease often define events of default by contract. For example, the lease may provide\nthat it is an event of default for the lessee to fail to insure the leased goods or to move them to a\ndifferent location.\nThe significant remedy provisions with their Article 2 analogues are as follows:\n20.8.1. Lessee\xe2\x80\x99s remedies. Section 2A-508 [cf. \xc2\xa7 2-711] is an overview of Lessee\xe2\x80\x99s remedies for\nLessor\xe2\x80\x99s default.\n20.8.1.1. Cover. Section 2A-518 [cf. \xc2\xa7 2-712]. The formula is:\npresent value of rent for the comparable term under the new lease agreement\n- present value of rent for the remaining term of the original lease agreement\n+ incidental and consequential damages\n- expenses saved\n281\n\n\x0cThe replacement lease must be \xe2\x80\x9csubstantially similar.\xe2\x80\x9d Note that damages are calculated\n\xe2\x80\x9cas of the date of the commencement of the term of the new lease agreement.\xe2\x80\x9d\n20.8.1.2. Market. Section 2A-519 [cf. \xc2\xa7 2-713]. The formula is:\npresent value of the market rent for the comparable period\n- present value of rent for the remaining term of the original lease agreement\n+ incidental and consequential damages\n- expenses saved\nNote that damages are calculated by the market rent \xe2\x80\x9cas of the date of the default.\xe2\x80\x9d\n20.8.1.3. Breach of warranty. Section 2A-519(4) [cf. \xc2\xa7 2-714]. The formula is:\npresent value if the goods had been as warranted for the lease term\n- present value of the use of the goods accepted\n+ incidental and consequential damages\n- expenses saved\n20.8.1.4. Lessee\xe2\x80\x99s incidental and consequential damages. Section 2A-520 [cf. \xc2\xa7 2-715].\nProblem 20-7. On January 1, Lessor leases equipment to Lessee for 12 months at $500 per\nmonth. On June 30, Lessor breaches. On August 1, Lessee leases substantially similar equipment\nfor 12 months at $700 per month. What are Lessee\xe2\x80\x99s cover damages?\nProblem 20-8. On January 1, Lessor leases equipment to Lessee for 12 months at $500 per\nmonth. On June 30, Lessor breaches. Lessee decides not to lease substitute goods. If it had, it\nwould have paid $700 per month. What are Lessee\xe2\x80\x99s market damages?\n20.8.2. Lessor\xe2\x80\x99s remedies. Section 2A-523 [cf. \xc2\xa7 2-703] is an overview of Lessor\xe2\x80\x99s\nremedies for Lessee\xe2\x80\x99s breach. Under \xc2\xa7 2A-523(2), \xe2\x80\x9cthe lessor may recover the loss\nresulting in the ordinary course of events from the lessee\xe2\x80\x99s default as determined in any\nreasonable manner.\xe2\x80\x9d This is often the lost rent.\n20.8.2.1. Repossession and Disposition. Sections 2A-525 to 527 [cf. \xc2\xa7 2-706]. The\nformula is:\nunpaid rent\n+ the present value of the total rent for the remaining lease term of the original\nlease\n- the present value of the rent under the new lease for the comparable period\n+ incidental damages\n- expenses saved\n282\n\n\x0cNote that incidental damages under \xc2\xa7 2A-530 includes expenses of the default and\ndisposition. Note also that consequential damages are not recoverable.\n20.8.2.2. Market. Section 2A-528 [cf. \xc2\xa7 2-708]. The formula is:\nunpaid rent\n+ the present value of the total rent for the remaining lease term of the original\nlease\n- the present value of the market rent for the comparable period\n+ incidental damages\n- expenses saved\nSection 2A-528(2) [cf. \xc2\xa7 2-708(2)] provides for \xe2\x80\x9clost profit\xe2\x80\x9d for a volume lessor.\n20.8.2.3. Action for the rent. Section 2A-529 [cf. \xc2\xa7 2-709]. The present value of\nthe promised rental amount is available under subsection (1)(a) where the lessee\nhas possession of the goods, or the goods have been lost or damaged after the risk\nof loss passed to the lessee; and under subsection (1)(b) where the lessor is unable\nto dispose of the goods or the circumstances indicate that effort to do so would be\nunavailing. The lessor may also recover incidental damages but must deduct\nexpenses saved.\n208.2.4. Lessor\xe2\x80\x99s incidental damages. Section 2A-530 [cf. \xc2\xa7 2-710].\nProblem 20-9. On January 1, Lessor leases a computer to Lessee for 24 months at $100 per\nmonth. After one year, the computer has become obsolete, so Lessee cancels the lease and returns\nthe computer. After spending $150 advertising the sale, Lessor holds a sale of the computer but\nno one buys it. What are Lessor\xe2\x80\x99s damages?\nProblem 20-10. On January 1, Lessor leases equipment to Lessee for 12 months at $500 per\nmonth. On June 30, Lessee breaches. Lessor recovers the goods and on August 1 re-leases them\nfor $400 per month. Lessor spent $600 to recover the goods and to dispose of them. What are\nLessor\xe2\x80\x99s damages?\nChapter 20. Additional Sources\nScott J. Burnham, Glannon Guide to Sales: Learning Sales Through Multiple-Choice Questions\nand Analysis (Wolters Kluwer 2d ed., 2012), Chapter 21\nJames J. White and Robert S. Summers, Uniform Commercial Code (West 6th ed., 2010),\nChapter 22-3 (issue of true lease or security interest)\n283\n\n\x0c'