Commercial Transaction Outline

8/3/2019 Commercial Transaction Outline

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COMMERCIAL TRANSACTIONS

SALES: Article 2

I. FORMATION

A. Role and Scope of Codes in Sales System

1. Scope: Article 2 applies to transactions in goods. 2-102.a. Goods, 2-105: Goods means all things which are moveable at the time of

identification to the K for sale other than the money in which the price is to paid,investment securities (stocks) and things in action.

b. Mixed Ks: Mixed Ks are those Ks involving a combination of goods andservices, or combination of goods and something other than services. Twoapproaches to mixed Ks:

i. Predominant Purpose Test: Under the PPT, the court decides whetherthe predominant purpose of the transaction is to sell goods or to sellservices.

1. If it is goods, then Article 2 applies to the whole transaction, even

the services portion of it.2. If it is services, then Article 2 does not apply to any part of the

transaction, not even the goods portion.ii. Gravamen of the Action Test (minority of courts): The court

determines whether the gravamen of the action (the source of thecomplaint) is with the goods or the services portion of the transaction.

1. If the problem lies with the goods, then article 2 applies even if thepredominant purpose of the transaction is services rather thangoods

2. If the problem lies with services, then Article 2 does not apply tothe dispute even if the predominant purpose of the transaction is

goods rather than services.2. Priority for Resolving Disputes, 2-208(2)

a. express terms of the K,

b. course of performance (COP), 2-208: Where the K for sale involves repeatedoccasions for performance by either party with knowledge of the nature of theperformance and opportunity for objection to it by the other, any course ofperformance accepted or acquiesced in without objection shall be relevant todetermine the meaning of the agreement.

c. course of dealing (COD), 1-205(1): A course of dealing is a sequence ofprevious conduct btwn the parties which is to be regarded as establishing acommon basis of understanding for interpreting their expressions and other

conduct.d. usage of trade (UOT), 1-205(2): A usage of trade is any practice or method of

dealing having such regularity of observance in a place or trade as to justify anexpectation that it will be observed with respect to the transaction in question.

e. U.C.C. Gap Fillers: UCC gap-fillers should only be used when there is in fact agap to be filled. A UCC gap-filler may be superseded if express terms of K,course of performance, course of dealings, or trade usage establish the termsbetween the parties.

3. Central Questions to Formation:

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a. Is there a K?i. Is there an agreement? is there a bargain in fact, is there mutual assent.

ii. Offer?1. Article 2 doesnt define offer and the common law remains the

proper and sole source of meaning.2. Restatement 24: An offer is the manifestation of willingness to

enter into a bargain, so made as to justify another person in

understanding that his assent to that bargain is invited and willconclude it.

iii. Acceptance?b. If so, on what terms?

B. FormationGenerally1. Definitions:

a. Contract, 1-201(11): the total legal obligation which results from the partiesagreement as affected by this Act and any other applicable rules of law.

b. Agreement, 1-201(3): the bargain of the parties in fact as founding theirlanguage or by implication from other circumstances including COD (1-205), UT

(1-205), or COP (2-208)2. Formation Principles, 2-204:

a. a K may be made in any manner sufficient to show agreement, including conductby both parties which recognizes the existence of a K, 2-204(1);

b. an agreement sufficient to constitute a K for sale may be found even though themoment of its making is undetermined, 2-204(2); AND

c. a K does not fail for indefiniteness if 1)the parties have intended to make a K and2)there is a reasonably certain basis for giving an appropriate remedy, 2-204(3).

i. All you really need:

1. Quantity term ANDa. A quantity term need not be expressed if it can be derived

from the price term.b. Example: Some hay. Does some have meaning that

can be derived from course of dealing, course ofperformance, or usage of trade?

2. Description of good.ii. Dont Need: Price, delivery, payment, warranty, risk of loss or choice of

law. Once quantity and description of goods are established, all otherterms can be fairly worked out through the hierarchy express terms,conduct, gap-fillers, etc.

3. Firm Offers, 2-205: A firm offeris one in which the offeror promises to keep his offeropen for a period of time.

a. Elements: Firm offers are binding even in the absence of consideration ifi. the offeror is a merchant under Merchant Group 1 AND

1. Merchant, 2-104(1): A merchant is either 1) a person who dealsin goods of the kind or 2) a person who holds himself out as havingknowledge or skill peculiar to the practices or goods involved inthe transaction. 2-104(1). Under merchant group 1, almost everyperson in business is deemed to be a merchant and thereforesubject to the special rules of those sections.

ii. the offer is contained in a signed writing; AND

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1. Must be a signed writing. Cannot be merely oral. Must give theterms and assurances that it will be held open.

iii. the writing by its terms give assurances that it will be held open.

b. Length of time: In the absence of a stated time, a firm offer is only open for areasonable time, and in no event would such a gratuitous firm offer remainirrevocable longer than 3 months.

i. Greater than 3 months: If the firm offer is explicitly open for more than

3 months, 2-205 will hold it open for only 3months. Comment 3. If theofferee wants to have the firm offer extend beyond the 3-month limitation,she needs to provide additional consideration for the additional time tomake the offer binding on the offeror.

4. Acceptance, 2-206: 2-206 is relevant to determine whether an agreement has beenreached. In cases of conflict, the more specific rules of 2-206 govern over 2-204.

a. Valid acceptance, 2-206: An offer may be accepted:i. by any reasonable manner and by any reasonable medium under the

circumstances, 2-206(1)(a); ANDii. when a buyer offers to purchase goods for immediate shipment, the seller

may accept such an offer either by shipping the goods or by promising to

ship them, 2-206(1)(b);1. Shipment of Non-Conforming Goods, 2-206(1)(b): A shipment

of non-conforming goods will count as an acceptance unless theseller specifically indicates that the non-conforming shipment isoffered only as a mere accommodation to the buyer, in which casethe shipment would constitute a counter-offer.

b. Not Valid Acceptance, 2-207(1): Two ways in which a purported acceptancemight not operate as a valid acceptance under 2-207(1), if the acceptance is:

i. not a definite and seasonable expression of acceptance ORii. expressly made conditional on assent to the additional or different

terms.

C. Battle of the Forms: Additional or Different Terms in Acceptance or Confirmation

1. 2-207: A communication which is either 1)a definite and seasonable expression ofacceptance or 2)a written confirmation which is sent within a reasonable time operates asacceptance even though that communication states terms additional to or different fromthose offered or agreed upon unless acceptance is expressly made conditional on assent tothe additional or different.

2. Is there a K?

a. K by Writings?

i. True acceptance (no pre-existing oral K), 2-207(1): Where there is nopre-existing oral K, the offerees form will act as true acceptance even

though it states terms additional to or different from those that wereoffered and there will be a K by the writings, unless the response is:

1. not a definite and seasonable expression of acceptance ORa. Definite: the response must indicate a willingness to go

forward with the deal. This is not a bright line.b. Seasonable: find out what the industry standard is.

2. expressly conditioned upon acceptance of additional or differentterms.

a. Expressly conditioned: In order to be expresslyconditional, the qualifying language needs to be stated

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clearly in such a place, manner, and language that theofferor will understand in the commercial setting of thetransaction that no acceptance has occurred.

b. If the response is expressly conditioned, then it is really arejection and counteroffer. If the offeror/buyer expresslyassents then there is K and those terms are included. But ifthe offeror/buyer does not expressly assent then there is no

acceptance of the offerees terms and no K.ii. Confirmation (pre-existing oral K): Where there is a pre-existing oral K,

the offerees form acts as written confirmation of the K unless theresponse:

1. is not sent within a reasonable time OR2. expressly conditioned upon acceptance of additional or different

terms.b. K by Conduct?

i. Is there a K by conduct? 2-207(3): To create a K by the parties conduct,there must be conduct by both parties which recognizes the existence ofsuch a K. This is a fact and circumstances inquiry. See 2-204(1) (A K

for sale of goods may be made in any manner sufficient to showagreement, including conduct by both parties which recognizes theexistence of such a K.)

1. When applied, 2-207(3): You only resort to 2-207(3) if thewritings of the parties do not otherwise establish a K. The partieswritings do not establish a K when 1)the purported acceptance wasnot a definite and seasonable expression of acceptance or 2) theacceptance was expressly made conditional on assent to theadditional or different term. (2-207(1)). If you dont fit into thesetwo exceptions, then there is a K by the writings and you mustdetermine its terms by using 2-207(2) rather than 2-207(3).

2. Example: Buyers PO said seller must accept all terms of offer orno K. Sellers acknowledgment form, besides including additionaland different terms, also included a conspicuous statement that thisacceptance is expressly made conditional on buyers assent to theadditional or different terms contained herein. Despite these terms,the seller shipped the machines and the buyer accepted them.Within a few months, buyer has trouble with machines and wantsto sue seller on a breach of implied warranty theory. This is where2-207(3) comes in. 2-207(3) would conclude that there is a K herealthough the writings of the parties do not otherwise establish a K

3. What are the terms of the K?

a. K by Writings:i. What are the original K terms?

1. True acceptance (no pre-existing oral K): In a situation of trueacceptance with varying terms, the terms of the offerors form arethe K terms. This is true even if the offerees acceptance hasadditional or different terms.

2. Confirmation (pre-existing oral K): In a situation of pre-existingoral K and single confirmation with varying terms, the terms of theoral K are the K terms.

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ii. Are Additional Terms part of the K?: The same analysis applies toboth true acceptance and confirmation. Whether additional terms becomepart of the K depends in part on whether the transaction is betweenmerchants.

1. Is the transaction between merchants? A transaction isbetween merchants where both parties are merchants. Amerchant is either 1) a person who deals in goods of the kind or

2) a person who holds himself out as having knowledge or skillpeculiar to the practices or goods involved in the transaction. 2-104(1). This section falls under Merchant Group 1, and in thisgroup almost every person in business is deemed to be a merchant.2-104(1) cmt. 2.

a. Non-merchant transaction, 2-207(2): For non-merchanttransactions (where at least one party is not a merchant),the additional terms found in the offerees form are mereproposals to modify the K. They are counter-offers.

i. Offeror must expressly accept: If the offerorexpressly accepts these proposals, they become part

of the K. If he rejects them or does nothing, theyfall out. The offerors assent must be express,conduct (performance) will not act as assent.

b. Merchant transaction, 2-207(2): If the transaction isbetween merchants, acceptance of additional terms isautomatic unless:

i. the offer limits acceptance to the terms of the offer;OR

ii. the additional terms materially alter the K; OR1. Exam: If the additional terms are material

alteration, the terms are not included in the

K unless expressly agreed by the other party.Example: Is a 10% fee increase a materialalteration? Probably not.

iii. notification by the original offeror of objection tothe additional terms has already been given by theoriginal offeror, or is given within a reasonable timeafter notice of then is received by the originalofferor.

iii. Are Different Terms part of the K?: Different Terms arethose termsthat contradict terms in the offer or the pre-existing oral K. The sameanalysis applies to both merchants and non-merchants.

1. True acceptance (no pre-existing oral K):a. Judicially-created Knock-Out Rule: The new, different

term and conflicting term of the offer knock each other outand the court then fills the gaps with UCC provisions.

2. Confirmation (pre-existing oral K):

a. 2-207(2):

i. Single confirmation knockout rule: Wherethere is a different term in a single confirmation, thedifferent term is treated as a mere proposal that will

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become part of the K only if expressly agreed upon.The knockout rule is not applied.

ii. Two conflicting confirmations = knockout rule:Where there are two or more conflictingconfirmations, the knockout rule is applied for thediffering terms contained in the confirmations. Noterm of the existing oral K is knocked out since

after the knockout, the K will consist of the termsoriginally agreed to orally, terms on whichconfirmations agree, and gap-fillers.

b. Terms of K by Conduct, 2-207(3):

i. Original K terms: The terms of a K by conduct consist of:1. those terms on which the writings of the parties agree , AND2. any supplementary terms incorporated under any provisions

of the UCC. (i.e., implied warranty of merchantability, etc.)ii. Additional/ different terms = Knockout Rule: Where the terms of the

forms are in disagreement, they knockout each other, and neither becomespart of the K by conduct. The UCC gap-fillers (the supplementary

terms) fill missing terms. Thus, the additional terms and different termsare knocked out under 2-207(3). You knockout both additional terms anddifferent terms.

D. Statute of Frauds, 2-201:

1. General: In deciding what the parties to a K of sale actually committed themselves to(whats their K), the agreement is the starting point. But then there are constraintsimposed by 2-201(SOF) and 2-202 (Parol Evidence rule).

2. Text of 2-201(1): Generally, a K for the sale of goods for the price of $500 or more isnot enforceable by way of action or defense unless there is some writing sufficient toindicate that a K for sale has been made btwn the parties and signed by the party against

whom the enforcement is sought.A writing is not insufficient b/c it omits or incorrectlystates a term agreed upon but the K is not enforceable beyond the quantity of goodsshown in such writing.

a. Significance: Statute of frauds is a defense to K enforcement. Example: Donorally agrees to buy Karens car for $600. Later, Karen doesnt want to gothrough with it. Karen can assert SOF b/c no signed writing. If there was asigned writing, must still prove that there was a K.

3. Elements of Statute of Frauds:

a. First, does SOF apply?

i. A K for the sale of goods?ii. For a price of $500 or more?

b. Second, is SOF satisfied? If any of these elements are not met the K is notenforceable under SOF.

i. Writing sufficient to indicate that the K has been made?1. The writing must show more than mere negotiations or tentative

agreement.2. Writing: Writing includes printing, typewriting or any other

intentional reduction to tangible form. 1-201(46).ii. Signed by the party who is trying to avoid the K?

iii. Does the K contain a written quantity term?

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1. No quantity term = fails: if there is no quantity term, then the Kfails the statute of frauds and is unenforceable. Quantity need notbe expressed in units, it is sufficient to express it in terms of outputor requirements.

4. Exceptions: If an exception applies, it only means that the statute of frauds is satisfied,not that a K exists. Must still prove that a K exists.

a. Merchant Confirmation Exception, 2-201(2): The Merchant Exception, 2-

201(2), applies, and the requirements of 2-201 satisfied, if:i. between merchants

1. Between merchants = both parties merchants. If one party isnot a merchant, the merchant exception does not apply.

a. Merchant, 2-104(1): a merchant is either 1) a personwho deals in goods of the kind or 2) a person who holdshimself out as having knowledge or skill peculiar to thepractices or goods involved in the transaction.

b. Merchant Group 1 of 2-104(1), Comment 2: Forpurposes of this group, almost every person who operatesin his mercantile capacity is considered a merchant.

ii. a writing in confirmation of the K and sufficient against the sender;1. Sufficient against sender: most courts hold that written

confirmation to be sufficient against the sender must have aquantity term.

iii. is sent within a reasonable time,1. Reasonable time, 1-204(2): What is a reasonable time for

taking any action depends on the nature, purpose andcircumstances such action.

iv. AND is received by the other party who has reason to know ofconfirmations contents,

v. UNLESS the recipient of the confirmation sent a written notice of

objection within 10 days of receipt.b. Specialty Goods Exception, 2-201(3)(a): The Specialty Goods Exception, 2-

201(3)(a), applies, and the requirements of 2-201 met if:i. the goods are to be specially manufactured for the buyer; AND

ii. the goods are not suitable for sale in the ordinary course of the sellersbusiness; AND

iii. the seller before notice of repudiation is received and under circumstanceswhich reasonably indicate that the goods are for the buyer,

iv. has made either a substantial beginning of their manufacture orcommitments for their procurement.

1. Example: Buyer asks for 3 specialty machines. She almost

finishes one of them. So she can probably recover the one shenearly finished, but maybe not the two she never started.

v. Remedies = just apportionment, 2-201, comment 2: If the court canmake a just apportionment the agreed price of any goods actuallydelivered can be recovered without writing or, if the price has been paid,the seller can be forced to deliver an apportionable part of the goods.

c. Admissions Exception, 2-201(3)(b): The Admission Exception, 2-201(3)(b),applies, and the requirements of 2-201 met, if despite the lack of writing the partyseeking to avoid the K admits in his pleading, testimony, or otherwise in court

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that a K for sale was made. In court admissions include interrogatories,requests for admission, depositions, and other forms of out of court discover.

d. Part Performance Exception, 2-201(3)(c): Under the Part PerformanceException, 2-201(3)(c), to the extent that either the seller receives and acceptspayment for the goods or the buyer receives and accepts the goods, neither partycan deny the existence of the oral K.

i. Unilateral action not enough: unilateral action by one party is not

enough. So the buyer cannot get the benefit of the provision just b/c hemakes a payment, nor can the seller get the benefit simply by shipping thegoods. Rather, there must be either payment by the buyer and acceptanceof that payment by the seller, or delivery by the seller and acceptance ofthat delivery by the buyer.

ii. Damages: Damages are equal to the amount accepted. Example: Danagrees to buy 50 cattle of Mike for $100 a head. Dan sends $200 to Mikeand Mike keeps the money. Part performance exception applies. Whatare Dans damages? Only 2 heads of cattle b/c that is all Mike hadaccepted in terms of money.

5. Note: Once a party produces sufficient evidence that some K was in fact made either

within 2-201(1) or the exceptions of 2-201(2) or 2-201(3), then proof of other terms notincluded in the writing may be permitted.

a. Need Written Quantity Term: The exception is the quantity term. If thequantity term does not appear in the key writing or is not evidenced in theexceptions, the admitted K is not enforceable.

b. Parol evidence can resolve ambiguity in written quantity term: Parol evidencemay be admitted to resolve an ambiguity in a quantity term as long as there issome quantity term.

E. Parol Evidence Rule, 2-202:

1. 2-202 Breakdown:

a. A writingi. Writing: Writing includes printing, typewriting or any other intentional

reduction to tangible form. 1-201(46).b. intended by both parties as a final expression of agreement terms

i. Final: A writing which reasonably appears to be a complete agreementis final as to the terms therein unless it is established by other evidencethat the writing did not constitute a final expression. The parole evidencerule wont bar the parties from introducing extrinsic evidence to explain orsupplement non-final or missing terms.

ii. Absence of Merger Clause: Absence of a merger clause may suggest thatthe writing was not intended to be final expression.

1. Example of Merger Clause: This Agreement contains all of theterms and conditions of the Agreement and shall constitute thecomplete and exclusive Agreement btwn the parties.

c. may not be contradicted by evidence of any prior agreement or contemporaneousoral agreements

i. Post-oral agreements: Parties may introduce extrinsic evidence (even ifcontradictory) of oral or written agreements that occurred after the finalwriting to prove, for example, that the agreement had been modified (butmodification must be agreed by both parties.)

d. BUT this writing may be explained or supplemented by:

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i. (a) course of dealing, trade usage, or course of performance; ANDii. (b) evidence of consistent additional terms UNLESS the court finds the

writing to have been intended as a complete and exclusive statement of theterms of agreement.

1. Consistent = reasonable harmony: Under the majority ofcourts, to be consistent the additional term must be in reasonableharmony with the language of the writing and respective

obligations of the parties.2. Complete and exclusive: However, even if the additional terms

are consistent, the extrinsic evidence will not be allowed if thewriting was intended to be a complete and exclusive statement ofthe terms.

a. *Factors for determining if writing was complete andexclusive, perBetaco:

i. the inclusion of merger clauses in the document,ii. the disclaimer of warranties,

iii. whether the extrinsic term is one that the partieswould certainly have included in the document had

it been part of their agreement,iv. the sophistication of the parties,v. the nature of scope of both prior negotiations

between the parties and any purported extrinsicterms.

b. Result = no extrinsic evidence: If it is complete andexclusive agreement, then no extrinsic comes in, even if itis meant to explain or supplement.

2. Judge-Made Exceptions to Parole Evidence Rule

a. Fraud: a party may not invoke 2-202 to shield his own fraud.b. Mistake: 2-202 will not bar evidence of mutual mistake or unilateral mistake.

c. True Ambiguous Terms: 2-202 will not bar evidence bearing on a genuine issueof interpretation arising b/c of ambiguity or uncertainty in the writings terms.

F. Unconscionability

1. Unconscionability as Excuse for Nonperformance, 2-302: If a K or a term of the Kwas unconscionable at the time of contracting, a judge may 1) refuse to enforce the K atall, 2)enforce the remainder of the K without the unconscionable clause, or 3)limit theapplication of any unconscionable clause in order to avoid an unconscionable result.

a. Two Types of Unconsionability: For some courts need to prove both types,others only one.

i. Procedural Unconscionability: an absence of meaningful choice

ii. Substantive Unconscionability: unreasonably favorable terms.

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II. TERMS

Generally

1. Analytical Framework: In order to recover under a breach of warranty theory you mustshow:

a. Warranty was madeb. Warranty was breachedc. Breach of warranty caused harm complained of

d. Extent of damagese. Negation of affirmative defenses

i. Effective Disclaimers, 2-316ii. Lack of notice 2-607(3)

iii. Lack of privity 2-607(5)(a)/ 2-318(A)iv. Assumption of riskv. Statute of limitations

A. Warranties with Sales of Goods

1. Express Warranties by Affirmation, Description, Sample, and Model, 2-313: thereare 3 ways that express warranties can be created.

a. Express Warranty By Affirmation of Fact Or Promise, 2-313(1)(a):Affirmations of fact or affirmations of promises relating to the goods createexpress warranties that the goods shall conform to the affirmation or promise ifthey become part of the basis of the bargain.

i. Two elements:

1. affirmation of fact or promise, AND: Whether a statement is anaffirmation of fact or mere puffery is a question of whether it wasreasonable for the buyer to rely on the sellers statement.

a. Factors to Consider:

i. specific language,1. Example: this car gets 22 miles to the

gallon v. this is a wonderful car.ii. written v. oral,

iii. context,iv. sophistication of parties,v. whether statement can be empirically tested, AND

vi. when the statement was made (during preliminarynegotiations or final negotiations?

2. the statement is a basis for the bargain: A statement becomes abasis for the bargain if the buyer reasonably relied on the statementin entering the K. 2-313, cmt. 3. The seller has the burden ofproving that the buyer did not reasonably rely on statements.

ii. Post-Sale Representations Can Become Part of the Bargain: Iflanguage is used after the closing of the deal, the warranty becomes amodification, and need not be supported by consideration if it is otherwisereasonable and in order. 2-313, Comment 7.

1. Courts have taken three different approaches to this:

a. Modification must be in writingb. Modification must be in writing if over $500c. Modification must be in writing if it otherwise affects

under 2-201(really means if quantity term)

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iii. Ads, Labels Product Packaging: many cases accept the idea that anexpress warranty can be created by representations contained incatalogues, ads, labels, or product packaging, whether those writing wereseen before, during or shortly after the sale took place.

b. Express Warranty by Description, 2313(1)(b): Any description of the goodswhich is made part of the basis of the bargain creates an express warranty that thegoods shall conform to the description.

i. Basis of the bargain: The description becomes a basis for the bargain ifthe buyer reasonably relied on the description in entering the K.

ii. Source of description irrelevant: Unlike express warranties createdthrough promises or statements of fact, a description does not have to bemade by the seller to the buyer. As long as the description becomes partof the basis of the bargain, its source is irrelevant.

c. Express Warranty by Sample or Model, 2-313(1)(c): Any sample or modelwhich is made part of the basis of the bargain creates an express warranty that thewhole of the goods shall conform to the sample or model.

i. Basis of the Bargain Element: The sample or model becomes a basis forthe bargain if the buyer reasonably relied on the sample/ model in entering

the K.2. The Implied Warranty of Merchantability, 2-314

a. Is there warranty of merchantability?: Two ways a warranty of merchantabilitycan be created:

i. Merchant with respect to goods of that kind? 2-314(1): A warrantythat the goods shall be merchantable is implied in a K for their sale if theseller is a merchant with respect to goods of that kind. 2-314(1).

1. Merchant, 2-104(1): a merchant is either 1) a person who dealsin goods of the kind or 2) a person who holds himself out as havingknowledge or skill peculiar to the practices or goods involved inthe transaction.

a. Merchant Group 2, 2-104(1), Comment 2: Morerestricted category: Implied warranty of merchantability isonly implied if seller is a merchant with respect to goodsof that kind. Must have a professional status as to theparticular kind of good.

ii. All People Must Act in Good Faith: All sellers are required to obey asubjective standard of good faith (i.e., disclose hidden material defects).1-209(19). In addition, merchants must obey an objective standard ofgood faith: whether the merchants conduct would be viewed as fair by theaverage member of his trade. 2-103(1)(b). So, must first ask if the personis a merchant under 2-103(1)(b).

1. Merchant Group 3, 2-104, cmt 2: Generally, any person inbusiness will be subject to the requirements of this group.

b. Standards of mechantability, 2-314(2): (2)Goods to be merchantable must beat least such as

i. (a)pass without objection in the trade under the K description;ii. (b)in the case of fungible goods, are of fair average quality within the

description;iii. (c) are fit for the ordinary purpose for which goods of that description are

used;1. This is the most important one.

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iv. (d) run, within the variations permitted by the agreement, of even kind,quality, and quantity within each unit and among all units involved;

v. (e)are adequately contained, packaged, and labeled as the agreement mayrequire;

vi. (f)conform to the promise or affirmations of fact made on the container orlabel if any.

c. Compared to Express Warranty: In contrast to an express warranty, which can

be breached with a perfect product if the seller has overpromised its capabilities,the implied warranty of merchantability cannot be breached unless the product isdefective.

d. Used Goods: Used goods are warranted to perform as used goods, not as if theyare new goods. 2-314, Comment 3.

3. The Implied Warranty of Fitness for a Particular Purpose, 2-315:

a. Text of 2-315: Where the seller at the time of contracting has reason to know ofany particular purpose for which the goods are required and that the buyer isrelying on the sellers skill or judgment to select or furnish suitable goods, thereisan implied warranty that the goods shall be fit for such purpose.

b. Three Elements: Under 2-315, the implied warranty of fitness for a particular

purpose applies, if, at the time of contracting:i. seller has reason to know of buyers particular use;

1. Particular use:

a. Ordinary Good Sold for Specific Purpose = Warrantyof Fitness: an implied warranty of fitness arises whengoods with an ordinary purpose are sold for use by thebuyer for special or limited purpose.

i. Example: shoes generally used for the purpose ofwaling upon ordinary grounds, but a seller knowsthat a particular pair was selected to be used forclimbing mountains.

b. Ordinary Goods Sold for Ordinary Purpose Warrantyof Fitness although warranty of merchantability may apply.

c. Special Goods Sold for Special Purpose Warranty ofFitness: the reasoning is that although the special goods arebeing used for a particular purpose, that purpose is theordinary use of the special goods. Implied warranty ofmerchantability may apply.

d. Special Goods Sold for Ordinary Purpose Warrantyof Fitness: reasoning is that this is the exact opposite ofwhat 2-315 contemplates.

ii. seller has reason to know that buyer is relying on the sellers

expertise; ANDiii. the buyer in fact relied on the sellers expertise.

1. Turns on Relative Skill of Parties: the issue of reliance turns onthe relative skills of the parties. Where the buyer is highlyknowledgeable in his own right, there is little chance that heactually relied on the sellers expertise and that the seller made afitness warranty.

B. Reducing or Eliminating Warranty Liability

1. To Recover for Breach of Warranty Plaintiff (buyer) Must Show

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a. Warranty,b. warranty was breached,c. the breach of warranty caused the harm complained of,d. the extent of the plaintiffs damages, ANDe. the plaintiffs ability to fend certain affirmative defenses, including:

i. privity,ii. lack of notice,

iii. disclaimers,iv. statute of limitations, andv. assumption of the risk

2. Privity:

a. Vertical privity: Vertical privity refers to the possibility that goods may bebought and sold more than once before they come into the hands of the ultimatebuyer. Parties are said to be in vertical privity with the buyer if they are part ofthe chain of distribution that ends with the sale to the buyer.

i. Warrantor is liable only to party to which it had a K.ii. However, retailer can sue the manufacturer for indemnity. 2-607(5)(a)

b. Horizontal privity: Issues of horizontal privity revolve around who other than

the ultimate buyer may sue for injuries resulting from some fault with the product.i. When non-buyer sues manufacturer

ii. Allowed under Alternative A 2-318iii. Also allowed under the Magnuson-Moss Act

1. Federal statute2. Has minimum standards that relate to remedies and duration of

implied warranties.3. Notice, 2-607(3)(a): When buyer discovers defect, buyer must notify the seller in a

reasonable time or else the buyer loses the right to remedy for breach.a. Reasonable time: What is a reasonable time depends on the nature, purpose, and

circumstances of each action. 1-204(2).

4. Warranty Disclaimer, 2-316a. Disclaiming Express Warranties, 2-316(1): A partial or total disclaimer of

express warranties is inoperative unless the seller can find a way to make thedisclaimer consistent with the express warranties, subject to the parol evidencerule. As caselaw has shown, the general rule is that once express warranties aremade, they cannot be disclaimed.

b. Disclaiming the Implied Warranties, 2-316(2)i. Must be conspicuous, 2-316(2): To exclude or modify the implied

warranty of merchantability, the word merchantability must be usedconspicuously either orally or in writing. To exclude or modify theimplied warranty of fitness, the exclusion must be by a writing and

conspicuous.1. Conspicuous, 1-201(10): A term or clause is conspicuous

when it is so written that a reasonable person in the partyssituation ought to have noticed it.

a. Ambiguity construed against draftsmen (i.e., seller):Any ambiguity in the language of a warranty disclaimer islikely to be construed against he seller that drafted it.

ii. Unless, 2-316(3): However, the implied warranty may still beexcluded or modified if:

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1. under the circumstances, language commonly understood as adisclaimer, like as is, or with all faults, calls the buyersattention the exclusion of warranties, 2-316(3)(a); OR

a. Factors:

i. Relative bargaining power and sophistication ofparties;

ii. the price paid;

iii. usage of trade, course of performance, course ofdealing

iv. what the words of the K actually said2. the buyer 1)examines the goods as fully as he desired or 2)has

refused to examine the goods and the defect is one which anexamination ought to have revealed, 2-316(3)(b); OR

a. Refusal means the seller actually demanded aninspection and the buyer refused, not merely that the sellergave the buyer an opportunity for an inspection and buyerdidnt take or asked the buyer to look at it. Must be ademand.

b. The inspection must occur prior to contracting. If thecontract has already formed, an inspection that occurs upondelivery will not operate to exclude warranty liability.

3. the implied warranty is excluded or modified by course of dealing,course of performance, or trade usage, 2-316(3)(c).

iii. Post-contracting disclaimer valid: sellers sometimes deliverdisclaimers to buyer after the K has been consummated (i.e., on aninvoice). Courts invalidate such disclaimers on the ground that theyrepresent unilateral attempts to modify existing Ks.

5. Modification or Limitation of Rights and Remedies, 2-719a. Substituted Remedy Clauses, 2-719: 2-719(1) permits the parties agreement to

provide for remedies that are in addition to or in substitution for those that wouldotherwise be available, and to limit or alter the ordinary measure of damages.However, resort to a remedy as provided is optional unless the remedy isexpressly agreed to be exclusive, in which case it is the sole remedy. 2-719(1)(b).

i. For a buyer to be limited by the substituted remedy

1. there must be express agreement that the remedy be exclusive;2. the remedy must not fail its essential purpose; and

a. Example: The remedy is that seller agrees to repair theproduct up to one year after the sale. If seller is unable torepair the product, then the remedy fails its essential

purpose and the substituted remedy clause is invalid.3. the remedy must not be unconscionable (see 2-302 for

unconscionable.)b. Consequential Damages, 2-719(3): Consequential damages may be limited or

excluded unless the limitation or exclusion is unconscionable. Limitation ofconsequential damages for injury to the person in the case of consumer goods isprima facie unconscionable but limitation of damages where the loss iscommercial is not.

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c. Limiting buyers right to reject goods, 2-719: The seller can contractually limitthe buyers remedies, including the right to reject, thereby obligating the buyer toaccept the sellers efforts to repair or replace the defective parts.

III. PERFORMANCE

A. The Post-Agreement Pre-Shipment Stage

1. Anticipatory Repudiation, 2-609, 610, 611:

a. Adequate Assurance, 2-609: (1) When reasonable grounds for insecurity arisewith respect to the performance of either party the other may in writing demandadequate assurance of due performance and until he receives such assurance mayif commercially reasonable suspend any performance for which he has not alreadyreceived the agreed return. (2)Between merchants the reasonableness of groundsfor insecurity and the adequacy of any assurance offered shall be determinedaccording to commercial standards. (3)Acceptance of any improper delivery orpayment does not prejudice the aggrieved partys right to demand adequateassurance of future performance. (4)After receipt of a justified demand failure toprovide within a reasonable time not to exceed thirty days such assurance of dueperformance as is adequate under the circumstances of the particular case is a

repudiation of the K.b. Anticipatory Repudiation, 2-610: When either party repudiates the K with

respect to a performance not yet due the loss of which will substantially impairthe value of the K to the other, the aggrieved party may (a) for a commerciallyreasonable time await performance by the repudiating party; or (b) resort to anyremedy for breach; and (c) in either case suspend his own performance or proceedin accordance with the provisions of this Article on the sellers right to identifygoods to the K notwithstanding breach or to salvage unfinished goods.

c. Retraction of Anticipatory Repudiation, 2-611: (1) Until the repudiatingpartys next performance is due he can retract his repudiation unless the aggrievedparty has since the repudiation cancelled or materially altered his position or

otherwise indicated that he considers the repudiation final. (2) Retraction may beby any method which clearly indicates to the aggrieved party that the repudiatingparty intends to perform, but must include any assurance justifiably demandedunder 2-609. (3)Retraction reinstates the repudiating partys rights under the Kwith due excuse and allowance to the aggrieved party for any delay occasioned bythe repudiation.

2. Excuse from or Adjustment of the K for Changed Circumstances

a. Casualty to Identified Goods, 2-613

i. Elements:

1. the K requires delivery of goods identified by the K when it ismade, AND: this means that the parties must acknowledge from

the outset of the K that certain specified goods are the only onesthat can be properly tendered, so that their destruction makesperformance literally impossible. The K involves non-fungiblegoods.

a. Example: K for sale of pink Caddy owned by Elvis. If theday before sale the car is destroyed by earthquake w/o faultof either party, the seller is excused from performance. Incontrast, suppose the K calls for the sale of 10 cars locatedon sellers floor and seller has 100 cars on floor and the ten10 are not specifically identified by the K. If the 10 cars

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are destroyed by the earthquake, there is no impossibility ofperformance under 2-613 b/c performance was notpredicated on the continued existence of those particular 10cars. (Sellers only hope for excuse is under 2-615.)

2. the loss or damage to the goods was not the fault of either

party, AND

3. the risk of loss did not yet pass to the buyer.: The time when the

risk of loss passes to the buyer can be set in the parties K, bycourse of dealing, trade usage, or gap filling provisions. See 2-509(3): The risk of loss passes to the buyer on his receipt of thegoods if the seller is a merchant; otherwise the risk passes to thebuyer on tender of delivery.

ii. If Elements Met:1. If the loss is total, the K is avoided completely2. If the loss is partial, the buyer is given a choice of avoiding the

K or taking the remaining goods with a price adjustment.b. Commercial Impracticability of Performance, 2-615

i. Elements: To invoke the excuse of nonperformance for impracticability,

the seller (or buyer, perLawrence) must show:1. a delay in the delivery or non-delivery of the goods by the

seller,

2. either

a. the occurrence of a contingency the non-occurrence ofwhich was a basic assumption on which the K was made

AND the occurrence was not objectively foreseeable

OR,

i. Not sellers fault: the occurrence of a contingencycannot be the sellers fault.

ii. Source of supply: When the event upon which

excuse is premised causes an exclusive source ofsupply to fail, the event that causes failure must bebeyond the control of the seller, in addition to beingunforeseeable. Examples of seller fault: sellersfailure to seek alternative source of supply, sellersoverestimate of supply of goods, etc.

b. unforeseeable government regulation that precludesperformance

3. AND the seller must show resulting commercialimpracticability: Generally, this means showing increasedfinancial hardship that continued performance would impose.

However, the seller must show that it can operate only at a loss andthat loss would be so severe and unreasonable that failure toexcuse performance would result in a grave injustice. The casesindicate that when prices only double, relief is generallyunavailable.

4. (AND the seller must seasonably notify the buyer of the delay

in delivery or that delivery will not occur at all.)

ii. If Elements Met:

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1. Delay or non-delivery of entire performance, 2-615(c): If delayor non-delivery of the entire performance is excused under 2-615(a), the seller must:

a. give the buyer seasonable notification.b. The buyer then has the options set forth in 2-616(1),

including the right to terminate and thereby discharge anyunexpected portion of the K.

2. Delay or non-delivery of part performance, 2-615(b): Inexcused cases of delivery or non-delivery in part, the sellermust:

a. allocate production and deliveries among the sellerscustomers under a fair and reasonable plan, AND

b. give the buyer seasonable notification of partial delay ornondelivery, and send an estimate quota.

i. Upon receiving notification, a buyer has the optionto terminate the executory portion of the K oracquiesce and modify the K by agreeing to take hisavailable quota in substitution. 2-616(1).

3. A seller who fails to allocate deliveries in a fair and reasonablemanner cannot assert the defense of commercial impracticabilityunder 2-615. A buyer who fails to exercise the statutory optionwithin a reasonable time loses the opportunity to preserve anadjusted K for future performance. 2-616(2).

c. Difference between 2-613 and 2-615: For 2-613 to apply, the nature of the Kmust be such that the K requires for its performance certain goods that areidentified when the K is made: Ill that painting; Ill sell you my 1998 ToyotaCamry. If a seller earmarks certain fungible goods for the buyer and they end upbeing destroyed, the sellers only hope for excuse must come from 2-615 ratherthan 2-613.

d. Force Majeure Clauses: Force majeure clauses provide for adjustment to the Kor total relief from the K upon the occurrence of certain described events such asearthquakes, labor strikes, fires, etc. and can be included in the K to limit one orboth parties liability.

B. Closing the Sale

1. Are goods conforming?

a. Nonconforming goods:

i. Nonconforming:Nonconforming goods are the tender of anything lessthan exact performance.

ii. **Buyers options, 2-601: Buyer has three option when goods are

nonconforming:1. reject all of the goods;2. accept all of the goods; OR3. accept any commercial units and reject the rest.

a. Commercial unit, 2-105(6): Commercial unit meanssuch a unit of goods as by commercial usage is a singlewhole for purposes of sale and division.

b. Conforming goods: A buyer has a duty to accept conforming goods, 2-301. Arejection by the buyer of conforming goods constitutes a buyers breach, and alsoessentially precludes acceptance by returning the goods back to the seller.

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2. Acceptance of Goods, 2-606(1):

a. Three Ways to accept, 2-606(1): Acceptance of goods occurs if the buyer:i. affirmatively signifies that buyer has accepted after a reasonable

opportunity to inspect them, 2-606(1)(a), OR:1. Reasonable opportunity to inspect goods, 2-513: The

inspection right may be specified in the parties K; otherwise it isat a reasonable time, place, and manner as determined by trade

usage, course of dealing, and other circumstances of the case.ii. fails to reject the goods after a reasonable opportunity to inspect them, 2-

606(1)(b), OR:1. In other words, acceptance is automatic if the buyer does not act.

iii. does an act that is inconsistent with the sellers ownership, 2-606(1)(c).1. This depends on the situation. In some cases, it will mean using

the goods before rejection. However, in some instances the buyermay need to use the goods to inspect them.

b. Use of Goods After Rejection, 2-606(2)(a): After rejection, any exercise ofownership by the buyer with respect to any commercial unit is wrongful asagainst the seller. The buyers post-rejection use of the goods may amount to

acceptance if it is ratified by the seller.c. Rights and Duties after Acceptance:

i. Buyer must pay for goods, 2-607(1): A buyer who accepts goods mustpay for them at the contract rate.

ii. Cant reject accepted goods, 2-607(2): Acceptance precludes rejection ofthe accepted goods. 2-607(2). Even if the buyer had the right to rejectnonconforming goods, the failure to make effective rejectionautomatically results in acceptance and terminates the right to reject.

iii. Revocation of acceptance, 2-608: After acceptance, the only opportunityto return the goods is through revocation of acceptance under 2-608.

iv. Breach:

1. Burden of proving breach, 2-607(4): Upon acceptance, the buyerhas the burden of proving any breach by the seller with respect tothe accepted goods.

2. Notification of breach, 2-607(3)(a): The buyer must notify theseller within a reasonable time after the buyer discovers or shouldhave discovered any breach. Failure to do so bars the buyer fromany remedy. 2-607(3)(a).

3. Rejection of Goods, 2-601

a. Rightful Rejection Requirements, 2-602: In order to the reject the goods, buyermust show:

i. the goods were nonconforming/ not perfect tender;

ii. goods rejected within a reasonable time after their delivery or tender;iii. buyer seasonably notified seller of the rejection; ANDiv. must give specific grounds for rejection (per 2-605):

1. where the seller could have cured the defect if seasonably stated;OR

2. btwn merchants when the seller has after rejection requested inwriting for a full and final written statement of all defects on whichthe buyer proposes to rely.

b. Sellers Right to Cure, 2-508:

i. Right to cure?

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1. Time for performance not yet expired, 2-508(1): Where thebuyer rejects nonconforming goods and the time for performancehas not yet expired (i.e., the seller tendered goods earlier thancalled for by the K), the seller has an automatic right to cure thedefect if

a. the seller provides the buyer with seasonable notification ofthe intent to cure.

2. No Additional Time for Seller Performance, 2-508(2): Wherethe buyer rejects nonconforming goods and the time forperformance has expired, the seller may have a further reasonabletime to substitute a conforming tender if:

a. seller provided the buyer with seasonable notification of theintent to cure AND;

b. buyer rejected a nonconforming tender that the seller hadreasonable grounds to believe would be acceptable to thebuyer with or without a money tender.

ii. Result of cure?

1. If the seller provides conforming/ perfect tender, the original

nonconformity will be cured and the buyers right to reject isterminated.

2. If the seller does not cure within the time allowed the buyersrejection will become effective.

3. If the seller provides another nonconforming tender, the buyermust respond with a new rejection.

c. Rights and Duties After Rightful Rejection/ Revocation:

i. Cure: see below.ii. Merchant? Merchant, 2-104(1):a merchant is either 1) a person who

deals in goods of the kind or 2) a person who holds himself out as havingknowledge or skill peculiar to the practices or goods involved in the

transaction. Merchant group 3, 2-104(1), cmt. 2:Generally, any person inbusiness will be subject to the requirements of this group of specialmerchant requirements.

1. Non-Merchant, 2-602(2)(b): Where a non-merchant buyer haseffectively rejected the goods of which he has taken physicalpossession, he must hold them with reasonable care at the sellersdisposition for a time sufficient to permit the seller to removethem.

2. Merchant, 2-603(1): Where a merchant buyer has effectivelyrejected the goods of which he has taken physical possession andthe seller has no agent at the place of rejection, the merchant buyer

must follow any reasonable instructions of the seller as to resale,storage, or the like. If the goods are perishable or will lose theirvalue quickly, the buyer must sell them on the sellers behalf.

iii. Reselling rejected goods, 2-711(3): On rightful rejection a buyer has asecurity interest in the goods in his possession for any payments made ontheir price and any expenses reasonably incurred in their inspection,receipt, etc. and may hold such goods and resell them in like manner as anaggrieved seller (2-706).

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iv. Use after rejection/ revocation, 2-602(2)(a): A buyers use of the goodsafter rejection results in acceptance if it is ratified by the seller. 2-602(2)(a).

4. Revocation of Accepted Nonconforming Goods, 2-608

a. Does the right to revoke exist?

i. Discovery of defect before acceptance, 2-608(1)(a): When a buyerdiscovers a defect prior to accepting and then accepts the goods anyway,

revocation of acceptance is possible only if1. the buyer accepted on the reasonable assumption that the defect

would be cured AND2. it is not seasonably cured.

ii. Discovery of defect after acceptance, 2-608(1)(b): When a buyer acceptswithout having discovered nonconformities in the goods, revocation isavailable only if the acceptance was reasonably induced either:

1. by the buyers difficulty in discovering the defect, OR2. by assurances from the seller.

b. Further requirements:

i. nonconformity substantially impairs value of goods to the buyer;

1. Whether the value of the product has been impaired is determinedsubjectively, from the buyers perspective. Whether suchimpairment is substantial, however, is determined based on theobjective evidence. NAL v. Hopkins

ii. revocation must be within a reasonable time, 2-608(2);iii. seasonable notification of revocation by buyer, 2-608(2), AND;iv. no substantial change in the goods, 2-608(3).

c. Duties/ Rights, 2-608(3): A buyer who revokes has the same rights and dutieswith regard to the goods involved as if he had rejected them.

C. Risk of Loss & Delivery Terms

1. Risk of Loss Generally:a. Negligent Party Bears Risk: If the destruction or damage to the goods occurs

through either the buyers or sellers fault, the negligent party bears the risk ofloss and the risk of loss rules of Article 2 do not come into play.

b. Result:

i. If Buyer has risk: Where the risk of loss has passed to the buyer, thebuyer has a duty to pay for the goods (2-301), which the seller can enforceby a cause of action for the price in the risk of loss context under 2-709(1)(a).

ii. If Seller has risk: If the risk of loss has not yet passed to the buyer whenthe goods are lost or destroyed, the seller must make a substitute,

conforming tender in order to avoid liability for nondelivery arising out ofits duty to transfer and deliver goods under 2-301. Buyer can enforce thisobligation with its remedies for seller nondelivery indexed under 2-711.

c. FOB: FOB means free on board which means that at the named place (thesellers or the buyers place), the seller must pay all charges necessary for thegoods to arrive, on board, at the designated location, free of charge to the buyer.

2. Express Allocations of Risk: There are two ways to expressly allocate risk in a K.a. Express Terms, 2-509(4): The seller and buyer can agree in their K on when the

risk of loss should pass to the buyer, but the K terms must be clear, especiallywhen the risk of loss is to pass to buyer before delivery.

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i. Example: K that reads, All shipments travel at the risk and cost of theseller will allocate the risk of loss to seller.

b. Express FOB Delivery Terms in the K: This only applies if an FOB term wasexpressly used in the K. If it just says, UPS will ship it, this is not express FOBterm.

i. Shipment K, 2-319(1)(a): same as 2-509(1)(a). FOB place of shipment1. Example: Seller is from Boston, Buyer from NYC. K says FOB

Boston. This is a shipment K.ii. Destination K, 2-319(1)(b): same as 2-509(1)(b). FOB place of

destination.1. Example: Seller is form Boston, Buyer is from NYC. K says

FOB NYC. This is a destination K.3. No Express Allocation of Risk: First look at COP, COD, and UOT. If these dont help,

then go to UCC gapfillers.a. COP, COD, and Trade Usage: First, go to these. Then, if these dont help, go to

the UCC gapfiller of 2-509. (Look at hierarchy.)b. Absence of Breach, 2-509: The loss itself is not the breach. Must prove there is

some other nonconformity or breach.

i. Goods Shipped by Third-Party Carrier:1. Shipment K, 2-509(1)(a): With a shipment K, under 2-509(1)(a),

risk of loss shifts to the buyer when the goods are duly deliveredto the carrier and the buyer is responsible for paying the cost offreight.

a. **Presumption: Under Article 2, unless the sellerotherwise clearly agrees, a shipment K is presumed.

b. Duly Delivered, 2-504: Under 2-504 to affect such duedelivery, the seller must:

i. put the goods into the carriers possession;ii. make a reasonable K for their transport;

1. reasonable K: If goods needrefrigeration, need to rent a refrigeratedtruck. To breach a duty of reasonable K, theseller must act recklessly or egregiously.Cook Specialty.

iii. deliver any document necessary to enable the buyerto take delivery; and

iv. promptly notify the seller that the goods have beensent.

c. If Seller Does not Perform Duties: if the seller does notperform the duties listed above, he is liable to the buyer for

any loss caused thereby.2. Destination K, 2-509(1)(b): With a destination K, under 2-509(1)

(b), the risk of loss does not shift to the buyer until the goods areduly tendered to the buyer at the stated destination and the selleris responsible for paying the cost of freight.

a. Duly Tendered, 2-503: To affect such due tender of thegoods, 2-503 requires that the seller:

i. put and hold conforming goods at the buyersdisposition for the period necessary for the buyer totake possession;

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ii. give the buyer notice of tender; andiii. give the buyer any documents that are needed for

the buyer to take delivery.ii. Goods Held by a Bailee, 2-509(2): Where the goods are held by a bailee

to be delivered without being moved, risk of loss passes to the buyer:1. on buyer's receipt of a negotiable document of title covering the

goods, 2-509(2)(a); OR

a. Negotiable Document of Title, 7-104(1)(a): Anegotiable document of title entitles the buyer to possessionof the goods.

2. on acknowledgment by the bailee of buyers right to possession ofthe goods, 2-509(2)(b); OR

3. after buyers receipt of a non-negotiable document of title or otherwritten direction to deliver and buyer has had a reasonableopportunity to present this document to the bailee, 2-509(2)(c).

iii. All Other Cases, 2-509(3)

1. Is seller a merchant? Merchant, 2-104(1):a merchant is either1) a person who deals in goods of the kind or 2) a person who

holds himself out as having knowledge or skill peculiar to thepractices or goods involved in the transaction. Merchant group 3,2-104, comment 2: Generally, any person in business will besubject to the requirements of this group of special merchantrequirements.

a. Seller is a Merchant, 2-509(3): Risk of loss passes to thebuyer on his receipt of the goods if the seller is a merchant.

i. Receipt, 2-103(1)(c): Receipt under 2-103(1)(c) means taking actual physical possession of thegoods. The risk of loss thus remains on themerchant seller who delivers goods at his or her

place of business until the buyer takes physicalpossession of them.

b. Seller is Not a Merchant, 2-509(3): Risk of loss passes tothe buyer on tender of delivery if the seller is not amerchant.

i. Tender of Delivery, 2-503: There are threerequirements for tender of delivery:

1. seller must put and hold conforming goodsat the buyers disposition for the periodnecessary for the buyer to take possession;AND

2. the seller must provide any necessarynotification of tender to the buyer; AND

3. the seller must give the buyer anydocuments needed to take delivery.

c. Event of Breach, 2-510: The breach is not the loss of the goods. The breach isthat the goods are nonconforming.

i. Breach by Seller:1. If buyer has right to reject, 2-510(1): Where a tender or delivery

of goods so fails to conform to the K as to give a right of rejection,the risk of their loss remains on the seller until cure or acceptance.

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(Buyer must just have the right to reject, doesnt have to actuallyreject.)

a. Effect of cure, 2-510, cmt. 2: New tender has no effect onthe risk of loss of the goods originally tendered.

2. If buyer accepts nonconforming goods: If buyer acceptsnonconforming goods, the risk of loss transfers from the breachingseller to the buyer.

3. If buyer has rightfully revoked, 2-510(2): Where the buyerrightfully revokes (actually gone through the process of revocationunder 2-608) acceptance, he may to the extent of any deficiency inhis insurance coverage treat the risk of loss as having rested on theseller from the beginning.

a. Deficiency in insurance coverage:

i. If the loss is fully covered by the buyers insurance,the risk of loss remains on the buyer.

ii. If the buyer has no insurance coverage, the entireloss can be passed on to the breaching seller.

iii. Partial insurance coverage results in the buyers

retaining the risk of loss for the insured portion ofthe loss, with the loss of the remainder being passedback to the seller.

b. Example: Suppose the buyer of X-Boy robots (whose badplastic defect was difficult to discover) first accepts thegoods, and then realizes that they are nonconforming.Before he can revoke his acceptance, a lightening firedestroys the X-Boy robots. Buyer suffers the risk of loss.

c. Example: If before the fire that destroyed the X-Boy robots,the buyer had in fact revoked his acceptance, the risk ofloss would have shifted back to the seller to the extent that

the buyers insurance didnt cover the loss.ii. Breach by Buyer, 2-510(3): Where the buyer as to conforming goods

already identified is in breach and before risk of their loss has passed tohim, the seller may to the extent of any deficiency in his insurancecoverage treat the risk of loss as resting on the buyer for a commerciallyreasonable time.

1. Risk of loss will pass to a breaching buyer only if 3 conditions

met:

a. the goods must conform to the K;b. the goods must have been identified to the K before the

buyer breaches;

c. AND the seller must have a deficiency in its insurancecoverage.

i. Operates the same as 2-510(2): if loss is fullycovered by sellers insurance, the risk of lossremains on the seller; if seller has no insurancecoverage, the entire loss can be passed on to thebreaching buyer; if partial insurance coverage, theseller retains the risk of loss for the insured portionof loss, with the loss of the remainder being passedback to the buyer.

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2. Commercially reasonable time: When these 3 conditions are met,the aggrieved seller is entitled to pass the risk of loss to the buyerto the extent of the sellers insurance coverage, but only for acommercially reasonable time.

4. Risk of Loss and Doctrine of Impossibility of Performance: In addition to sufferingeconomic loss for lost goods, is the seller liable in damages to the buyer for nondelivery?

a. Impossibility, 2-613:

i. If the doctrine of impossibility is applicable, the seller is excused from hisobligation to make delivery; he has an excuse for nonperformance.

ii. If the doctrine of impossibility is not applicable, the seller is liable fordamages on account of nondelivery, unless he tenders replacement goodsfor those damaged or destroyed.

b. Risk of Loss

i. If the buyer has the risk of loss (and excuse from performance under 2-613is thus not available to the seller), the seller does not need to perform bysending a conforming good and the buyer must pay the seller for thedestroyed goods.

IV. REMEDIESA. General

1. Policy, 1-106: The goal of all remedy provisions in the Code is that the aggrieved partymay be put in as good a position as if the other party had fully performed. Thus, thegoal is not to provide a windfall to the nonbreaching party.

B. Sellers Remedies

1. Four Ways Buyer Might Breach, 2-703

a. wrongfully reject goods;b. wrongfully revoke acceptance;c. fail to make a payment when due; OR

d. anticipatorily repudiate the K2. Seven Possible Remedies an Aggrieved Seller Might Pursue, 2-703

a. withhold delivery, 2-703;b. stop delivery by any bailee, 2-703;c. identify goods to the K in the case of an anticipatory repudiation, 2-703;d. resell and recover damages under 2-706;

i. Elements of 2-706: The seller is eligible for resale damages whenever:1. the buyer breaches,2. the seller reasonably identifies the goods being resold as referring

to the broken K,3. the seller gives the buyer notice of resale, AND

4. the seller resells the goods within a commercially reasonablemanner/ time, which is determined by looking at thecircumstances, including the type of market.

ii. Formula for 2-706: Resale Damages = K Price Resale Price +Incidental Damages Expenses Saved As a Consequence of BuyersBreach.

e. recover K-market difference (without resale) under 2-708(1);i. Formula: K-market difference damages = K Price Market Price +

Incidental Damages Expenses Saved as Consequence of Buyers Breach.

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1. Market Price: The market price under 2-708(1) is measured asof the time and place for tender, both of which are defined by theK. The time for tender will be the stated performance date in theK, and the place for tender will be a function of the delivery term.

2. Incidental Damages for Seller, 2-710: Incidental damages to anaggrieved seller include any commercially reasonable charges,expenses or commissions incurred in stopping delivery, in the

transportation, care and custody of goods after the buyers breach,in connection with return or resale of the goods otherwise resultingfrom the breach.

f. recover lost profits under 2-708(2), if the K-market difference is inadequate;i. 2-708(2): If the K-market difference is inadequate to put the seller in as

good a position as performance would have done, then the measure ofdamages is the profit which the seller would have made from fullperformance by the buyer, together with any incidental damages, dueallowance for costs reasonably incurred and due credit for payments orproceeds of resale.

g. sue buyer for the price of the K under 2-709; AND/OR

i. Three circumstances, 2-709(1): Seller is eligible to sue for the price ofthe K only if one of the following circumstances exist:

1. where the buyer has accepted the goods; OR2. where conforming goods, whether or not accepted, have been lost

or damaged within a commercially reasonable time after risk oftheir loss has passed to the buyer; OR

3. where the seller has identified goods to the K and there is noreasonable prospect of reselling them to a third party for areasonable price.

ii. Possible Results, 2-709(2):

1. Buyer pays judgment: If the buyer ultimately pays the judgment

for the price, the buyer is entitled to the goods.2. Seller resells goods: If while the seller is holding the goods for the

buyer resell becomes possible, then the seller may resell and mustdeduct from its action for the price any proceeds of resale.

iii. Incidental damages: The seller who sues for the price is also eligible torecover incidental damages.

1. Incidental damages, 2-710: Incidental damages to anaggrieved seller include any commercially reasonable charges,expenses or commissions incurred in stopping delivery, in thetransportation, care and custody of goods after the buyers breach,in connection with return or resale of the goods otherwise resulting

from the breach. 2-710h. cancel the K.

2. No Consequential Damages, 1-106: Consequential damages are not allowed for theseller unless there is a specific provision made for them in the Code

C. Buyers Remedies: Two Remedies Sections

1. Buyer has Not Accepted Goods or May Revoke, 2-711:a. Three Triggers: Three triggers, one of which must occur to allow a buyer to the

remedies under 2-711. Where:i. the seller fails to make delivery;

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ii. the seller repudiates; ORiii. the buyer rightfully rejects or justifiably revokes acceptance.

b. Available Remedies: Where the seller has 1)failed to make delivery or2)repudiated, or 3)the buyer has rightfully rejected or justifiably revokedacceptance, the buyer may:

i. cancel the K ANDii. recover as much of the price as has been paid, AND in addition:

1. either:a. cover, 2-711(1)(a) OR

i. Cover:The buyer covers by buying comparablegoods from another seller and using any increase ofthese comparable goods to calculate damages.

ii. Cover Elements, 2-712(1): To have a remedy ofcover, the aggrieved buyer must:

1. cover in good faith;2. act without reasonable delay; AND3. make a reasonable substitute purchase.

iii. Cover Formula, 2-712(2): Cover Damages =

Return of any Purchase Price + Cost of Cover Contract Price + Incidental Damages +Consequential Damages Expenses Saved

1. Incidental damages, 2-715(1): Incidentaldamages to an aggrieved buyer includeexpenses reasonably incurred in inspection,receipt, transportation and care and custodyof goods rightfully rejected, anycommercially reasonable charges, expensesor commissions in connection with effectingcover and any other reasonable expense

incident to the delay or other breach.2. Consequential damages, 2-715(2):

Consequential damages available to anaggrieved buyer include injury to person orproperty (not economic loss) proximatelycaused by sellers breach and any loss(including economic loss) so long as:

a. the seller either knew or had reasonto know of the special damages thatcould flow from a breach; AND

b. the buyer has mitigated damages;

ANDc. the breach was the but-for cause of

the loss; ANDd. the buyer can prove consequential

damages with reasonable certainty(i.e., lost profits);

b. recover K-market price differential, 2-713.i. Formula: Damages = Return of any Purchase Price

+ Market Price Contract Price + Incidental

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Damages + Consequential Damages ExpensesSaved

1. Market Price:

a. Place, 2-713(2): Location forpurposes of calculating market priceis the place for tender except in casesof rejection after arrival of

acceptance, it is the place of arrival(i.e., the buyers local market).

b. Time, 2-713(1): Market price is tobe determined at the time when thebuyer learned of the breach.

2. Further, under 2-711(b), where 2)the seller has repudiated or 3)thebuyer has rightfully rejected or justifiably revoked acceptance, thebuyer may obtain

a. specific performance ANDi. Specific performance, 2-716: Specific

performance is available only where monetary

damages are insufficient b/c the goods are unique orother circumstances exist.

b. Replevini. Replevin, 2-716(3): The buyer has the right to

replevin for goods identified to the K if:1. after a reasonable effort he is unable to

effect cover for such goods; OR2. the circumstances reasonably indicate that

such effort to effect cover will beunavailing; OR

3. if the goods have been shipped under

reservation and satisfaction of the securityinterest in them has been made or tendered.

2. Buyer has Accepted Goods, 2-714:a. Obligation to Pay, 2-607(1): If the buyer accepts the sellers goods, even though

they are defective, the buyer is obligated to pay the purchase price for the goods.Consistent with this obligation, the aggrieved buyer is not entitled to the return ofany of the purchase price that has been paid for accepted goods.

b. Notification of breach, 2-607(3)(a): After the buyer has accepted the goods, hemust notify the seller within a reasonable time after the buyer discovers or shouldhave discovered any breach. Failure to do so bars the buyer from any and everyremedy. 2-607(3)(a).

i. Burden of proving breach, 2-607(4): Upon acceptance, the buyer has theburden of proving any breach by the seller with respect to the acceptedgoods.

c. Available Remedies:

i. Recovery of ordinary loss, 2-714(1): Where the buyer has acceptedgoods and given notification (2-607(3)) he may recover as damages,including incidental (2-714(3)) and consequential damages (2-715), forany nonconformity of tender the loss resulting in the ordinary course ofevents from the sellers breach as determined in any manner which isreasonable.

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ii. Breach of warranty, 2-714(2): First, make out the elements of breach ofwarranty: 1)warranty, 2)warranty breached, 3)breach caused the harmcomplained of, 4)the extent of Ps damages, and 5) the Ps ability to fendof certain affirmative defenses.

1. Formula: Damages for breach of warranty = Value of theConforming Goods Value of Nonconforming Goods + IncidentalDamages + Consequential Damages

a. Value of goods: The value of the conforming/nonconforming goods is determined at the time and placeof acceptance.

i. Objective: the value of the goods according tosome objective standard (i.e., K price, market value)

ii. Subjective: the value of the goods to the buyer.b. Special Circumstances, 2-714(2): The standard formula

makes the difference between VCG and VNCG subject tothe proviso unless special circumstances show proximatedamages of a different amount.

iii. Incidental and Consequential Damages, 2-715: see above. A typical

result of a warranty breach may be that the buyer is deprived of the use ofthe goods during the time they are being repaired or replaced.

Payment Systems: Articles 3 & 4

GLOSSARY for Articles 3 & 4

1. Types of checks:

a. Check: Check means (i) a draft payable on demand and drawn on a bank or (ii)a cashiers check or tellers check. 3-104(f). An instrument may be a check eventhough it is described on its face by another term, such as money order.

b. Cashiers check: Cashiers check means a draft with respect to which the

drawer and drawee are the same bank or branches of the same bank. 3-104(g).c. Tellers check: Tellers check means a draft drawn by a bank (i) on another bank

or (ii) payable at or through a bank. 3-104(h).d. Travelers check: see 3-104(i)e. Certificate of deposit: see 3-104(j)

2. Overdue, 3-304:

a. 3-304(a): An instrument payable on demand becomes overdue at the earliest ofthe following times:

i. (1)on they day after the day demand for payment is duly made;ii. (2)if the instrument is a check, 90 days after its date; OR

iii. (3)if the instrument

b. 3-304(b):i. (1)If the principal is payable in installments and a due date has not been

accelerated, the instrument becomes overdue upon default under theinstrument for non-payment of an installment, and the instrument remainsoverdue until the default is cured.

ii. (2) If the principal is not payable in installments and the due date has notbeen accelerated, the instrument becomes overdue on the day after the duedate.

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iii. (3) if a due date with respect o principal has been accelerated, theinstrument becomes overdue on the day after the accelerated due date.

c. 3-304(c): Unless the due date of principal has been accelerated, an instrumentdoes not become overdue if there is default in payment of interest but no defaultin payment of principal.

i. If a due date is accelerated, then it is due now.

I. PAYMENT SYSTEMSPeople involved

1. Issue: Issue means the first delivery of an instrument by the maker or drawer, whetherto a holder or nonholder, for the purpose of giving rights on the instrument to any person.3-105(a).

a. Nonissuance is a defense:Nonissuance is a defense. 3-105(b).2. Issuer: Issuer means a maker or drawer of an instrument. 3-105(c). Two types of

issuers:a. Drawer: Drawermeans a person who signs or is I dentified in a draft as a

person ordering payment. 3-103(a)(5). (i.e., a check)b. Maker: Maker means a person who signs or is identified in a note as a person

undertaking to pay. 3-103(a)(7).3. Payee: the person to whom the check is issued is the payee. 3-105(a).4. Drawee: Draweemeans a person ordered in a draft to make payment. 3-103(a)(4). (A

bank can be the drawee and the payor bank.)a. Acceptor: Acceptormeans a drawee who has accepted a draft. 3-103(a)(1).

5. Indorser: An indorser is anyone that signs an instrument in any capacity other than as adrawer, acceptor or maker. A person may indorse an instrument to negotiate it to a thirdperson. 3-204.

6. Person entitled to enforce, 3-301: Person entitled to enforce an instrument means:a. (i) the holder of the instrument;b. (ii) a nonholder in possession of the instrument who has the rights of a holder

(i.e., transferee); ORc. (iii) a person not in possession of the instrument who is entitled to enforce the

instrument pursuant to 3-309 or 3-418(d).

A. The Banks Right to Pay

1. When is it Proper to Pay?

a. Properly Payable Rule, 4-401(a): It is proper for the bank to charge a customersaccount for any check that is properly payable. A check is properly payable ifthe customer has authorized the payment 4-401, cmt 1.

i. Not authorized payment:

1. forgery:

a. Stolen from customer and forgedb. Stolen from payee and indorsement forged

2. alteration

3. stale check, 4-404: Where a check is more than six months old, abank may or may not pay the check, but must do so in good faith.Thus, undergo a good faith inquiry (i.e., bank could call thecustomer, etc.)

4. valid stop payment order, 4-403: A stop payment order is valid,and t/f a check ceases to be properly payable if:

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a. the customer notifies the bank at a time and in a mannerthat affords the bank a reasonable opportunity to act on itbefore any final action by the bank with respect to theitem;

b. the customer allows the bank to identify the check withreasonable certainty (i.e., bank needs the account # andcheck #); AND

c. the stop order is valid for only six months (must renewevery six months to remain unpayable).

5. check is post-dated and bank has been notified of post-date.a. The customer must follow the rules for stopping payment

(reasonable opportunity for bank to act, six-month duration,reasonable certainty.)

b. Overdrafts, 4-401(a), 4-402(a): A payor bank may honor or dishonor a checkthat is overdrafted, unless the bank has agreed to pay the overdraft (look at Kbetween the parties overdraft protection). No good faith requirement.

i. Joint Account, 4-401(b): A person in a joint account is not liable to thepayor bank for another account holders overdraft if the person did not sign

the check and did not enjoy any benefits of the check.2. Remedies for Improper Payment

a. Recredit Customers account, 4-401: The basic remedy for an impropertransaction is that the bank must recredit the customers account with the fundsimproperly paid out.

b. Proximate Damages, 4-402(b): A payor bank is liable to its customer fordamages proximately caused by the wrongful dishonor of an item. Whether anyconsequential damages are proximately caused by the wrongful dishonor is aquestion of fact.

i. Damages can include consequential and incidental damages such as lostincome, lost value of a business, and/or emotional distress. Maryott.

c. Stop Order = Subrogation Rights of Bank, 4-407: If a payor bank has paid anitem over a valid stop order, the bank becomes subrogated to the other parties toprevent unjust enrichment.

i. For example, if the drawer had kept the goods, the payor bank can assertthe payees rights on the underlying transaction if the drawer tries to makethe bank recredit his account. Or, if the payor bank had recredited thedrawers account and the goods are crappy or werent delivered, it can goafter the payee on the underlying transaction.

B. The Banks Obligation to Pay Checks

1. Overall rule: 4-402(a): If the customer has funds available to cover an item, the bank

has an affirmative obligation to pay the check.a. Damages, Wrongful Dishonor, 4-402(b): A payor bank is liable to its customer

for damages proximately caused by the wrongful dishonor of an item. Whetherany consequential damages are proximately caused by the wrongful dishonor is aquestion of fact.

2. Are Funds Available for Payment?

a. Time of Evaluation, 4-402(c): The bank is free to determine whether the accounthas sufficient funds at any time between the time the item is received by thepayor bank and the time that the payor bank returns the item.

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i. Example: Cliff writes check to Archie on September 28, knowing that hissalary will be deposited automatically into his account on September 30.If Archie presents the check to Rocky Mountain on Sept. 29, the bank isfree to evaluate the account at that time and decide to dishonor it if theaccount does not contain sufficient funds. Then, if the amount of availablefunds increases on Sept. 30, the bank could still dishonor the check, eventhough the account at the time of dishonor contained funds sufficient to

cover the check.b. Availability of Funds: Regulation CC governs this.

i. Counting Days, Regulation CC:

1. Banking days, 229.2(f): Banking day means that part of anybusiness day on which an office of a bank is open to the public forcarrying on substantially all of its banking functions. Reg. CC,229.2(f).

2. Business days, 229.2(g): Business days are all calendar days otherthan Saturdays, Sundays, and federal holidays. Reg. CC,229.2(g).

a. Non-business days: Saturdays, Sundays, January 1, the

third Monday in January, the third Monday in February, thelast Monday in May, July 4, the first Monday in September,the second Monday in October, November 11, the fourthThursday in November, or December 25. If January 1, July4, November 11, or December fall on a Sunday the nextMonday is not a business day. Reg CC 229.2(g).

ii. Rules of Withdrawal, Regulation CC:

1. Local checks:

a. Noncash withdrawals from local checks: The bank mustmake $100 available on the first business day after thebanking day on which the funds are deposited. Regulation

CC, 229.10(c)(1)(vii). The rest of the funds must beavailable for withdrawal no later than the second businessday after the banking day on which the funds are deposited.Regulation CC, 229.12(b)

b. Cash withdrawals from local checks: The bank mustmake $100 available on the first business day following thebanking day on which the funds are deposited and mustmake an additional $400 available on the second day (for atotal of $500) following the banking day on which thefunds are deposited. The bank may defer the availability ofany remaining amount until the third business day

following the banking day on which the funds aredeposited. Reg. CC, 229.12(b) & (d).

2. Nonlocal checks:

a. Noncash withdrawals from nonlocal checks: The bankmust make $100 available on the first business day after thebanking day on which the funds are deposited. The rest ofthe funds must be available for withdrawal no later than thefifth business day after the banking day on which the fundsare deposited. Reg. CC, 229.12(c)(1)

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b. Cash withdrawals from nonlocal clerks: The bank mustmake $100 available on the first business day following thebanking day on which the funds are deposited and anadditional $400 available on the fifth business day (for atotal of $500) following the banking day on which thefunds are deposited. The bank may defer the availability ofany remaining amount until the sixth business day

following the banking day on which the funds aredeposited. Reg. CC 229.10(c)(1)(vii).

iii. Availability Rules for Low-Risk Items, Regulation CC

1. See the table on page 322.3. Damages for Wrongful Dishonor

a. Rule, 4-402(b): A payor bank is liable to its customer for damages proximatelycaused by the wrongful dishonor of an item.

i. The damages caused by wrongful dishonor often exceed the amount of thedishonored check. This can include lost income, lost value of a business,and/or emotional distress. Maryott.

C. Collection of Checks1. Definitions:

a. Bank: Bank means a person engaged in the business of banking, including asavings bank, savings and loan association, credit union, or trust company. 4-105(1).

b. Payor bank, 4-105(3): a payor bank is a bank that is the drawee of draft. (i.e.,the bank in which the drawers account is.)

c. Depositary bank, 4-105(2): a depository bank is the first bank to take an itemeven if it is also the payor bank unless the item is presented for immediatepayment over the counter.

i. Collecting bank: The depositary bank becomes the collecting bank when

it tries to collect the money for the check from the payor bank.d. Presenting bank: Presenting bank means a bank presenting an item except a

payor bank. 4-105(6).i. Presentment: Presentment means a demand made by a person entitled

to enforce an instrument to (i) to pay the instrument or (ii) to accept a draftmade to the drawee. 3-501(a).

ii. (The presenting bank is the bank immediately preceeding the payor bank.Only the payor bank can sue under presentment warranties?)

e. Collecting bank, 4-105(5): The term collecting bank is used to refer to anybank in the collection process other than the payor bank, which t/f includes thedepositary bank as well as any intermediary banks involved.

f. Intermediary bank: Intermediary bank means a bank to which an item istransferred in course of collection except the depositary or payor bank. 4-105(4).

g. Korybut said that its possible that one bank can have three hats: the depositarybank, the presenting bank, and the collecting bank.

h. Drawer: the person who issues/ writes the check.i. Payee : the person to whom the check is issued.

2. Final payment:

a. Final Payment by Payor Bank, 4-215(a): Three ways Payor bank finally paysan item:

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i. payment in cash; (An item is paid in cash by the payor bank when uponpresentment over the counter to a teller, the teller pays cash for the check).

ii. settles for an item without reserving the right to revoke; ORiii. fails to revoke its provisional settlement in the time and manner permitted

by statute (i.e., midnight deadline), clearing-house rule or agreement.b. Results of Final Payment

i. Firm up / irrevocable, 4-214(c): As of the moment of final payment by

the payor bank, all provisional credits generated in the forward collectionprocess between banks are said to firm up and become final. Finalpayment is irrevocable.

ii. Discharge of obligation, 4-302: Once the payor bank pays the item bytransferring funds to the collecting bank,

Commercial Transaction Outline

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