Sales Law Legal Outline

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					SALES Model Codes Covered in this Class A. UCC 1. 2. 3. 4. 5. B. Adopted by the American Law Institute as a model statute. Adopted by the fifty states with variation. The ALI approved the most recent draft of Article II, but the National Conference of Lawyers did not. Art. II is more of a general guideline Find Section and then Interpret and Apply ALI (consumer protectionists) and NCCUSL (business protectionists) must adopt for states to adopt. (check this)

UETA-Uniform Electronic Transaction Act 1. 2. Adopted by many states, PA adopted Provides a system that facilitates the enforcement of electronic contracts; the purpose is to REMOVE BARRIERS TO THESE CONTRACTS by VALIDATING electronic contracts.

C.

UCITA- Uniform Computer Information Transaction Act 1. 2. PURPOSE: Computer Software, renting computer software CONTORVERSY: MD and VA adopted but only 2 states to do so. Statute heavily favors business, which is why only two states have adopted it.

I.

SCOPE OF ARTICLE 2 A. Definition of “Goods” 1. § 2-102-SCOPE: this Articles applies to transactions in goods a) TO FALL WITHIN SCOPE OF ARTICLE 2: (1) (2)
MUST INVOLVE GOODS

and

A CONTRACT FOR THE SALE OF GOODS OR SALE OF GOODS

b)

If Article 2 does not apply, general contract law usually applies but sometime tort law. Or maybe governed by 2A – Leases

2.

§ 2-105 DEFINITION OF GOODS: ―Goods‖ means all things (including specially manufactured goods) that are movable at the time of identification to the contact for sale other than the money in which the price is to be paid, investment securities and things in action a) b) c) Tangible Personal Property only (i.e. no rights to the next movie that is intangible intellectual property) First Ask: § 2-107(2): Things attached to realty are goods if they can be severed without material harm (trees, shrubs). Then: § 2-107(1): If severed with material harm (oil, minerals. gas) -- only a good if severed by seller. If severed by buyer -- not a good and issue governed by real estate law. ―Things in action‖ means not intangible things. IDENTIFICATION (1) (2) The goods are identified when the contract is made. § 2-501(1) IDENTIFICATION: (a) (b) (3) Identified at the time contract was made for a specific item. Not ide ntified at the time contract is made, subsequent identification.

d) e)

§ 2-105(2)- distinguishes between existing and identified goods and future goods, but you can have a contract for sale of goods when the goods are future goods. (a) If the goods are NOT EXTANT at the time of the contract for sale, identification occurs when in the course of the manufacture it became clear that i.e. ―this was the house for the Littles.‖ At this point, the house was movable, so the house in this case is a good.

2

f)

MOVABILITY is the key in distinguishing btw goods and something else (personal property/real estate).

(1)

Little v. Grizzly Manufacturing (a) Facts: Couple bought modular home, transported and affixed permanently, has all sorts of problems. Held: The Home was goods. The specific home was not identified at time the contract was made. At time of identification to the contract for sale, the house was moveable.

(b)

3.

IS A PUBLIC UTILITY A GODD? a) Metered and Billed Upon Usage Utilities ARE/ARE NOT goods. (1) Bowen v. Nigara Mohawk Power Corp (holding electricity is NOT a product where surge of electricity was cause of plaintiff‘s house burning down). Some PA authority says that water coming into the house is ―goods‖ within the UCC. BUT: when i.e. a fire hydrant explodes and floods a house – not a UCC question – no contract for the sale of that water.

(2)

b)

Hypo: someone drinks water contaminated with bacteria. Theory to sue under the UCC? (1) (2) (3) § 2-314: IMPLIED WARRANTY OF MERCHANTABILITY Suppose you turned on water from the tap that was contaminated: Argument that water is a good: movable when identified as registering on the person‘s water meter.

B.

CONTRACT FOR THE SALE OF GOODS 1. Although § 2-202 says ―transaction in goods,‖ under § 2-106(1), it must be a sale of goods or a contract for the sale of goods, other 3

sections explicitly say contract for the sale of goods. Intent of drafter was for sale of goods. a) b) a ―sale‖ is the passing of title from the seller to the buyer for a price. ―Contract for sale‖ includes both a present sale and a contract to sell goods at a future time.

2.

Hypo: Free Oysters during happy hour. Something clearly wrong with the oysters. Sale? a) Argument: in an economic sense, there ain‘t not such thing as a free lunch. Incorporates the price of oysters in the price of drinks.

3.

Hypo: Oscar Myer hires a broker to get spices in South America. OM sues broker for breach of warrantablity, U.C.C. doesn‘t apply b.c no sale. Hypo: Adopt a pet from humane society- no sale a) Buying a pet – good, movable, a pet can be unmerchantable.

4.

5.

MA Case: person leaves car for repairs at the dealership, but sees a sports car and test drives it. Man and son seriously injured in an accident because the car is defective. Sues under Article 2 – thrown out. No contract for sale. a) POLICY ARGUMENT the other way: person is entitled to be protected – analogous to a sale: person was using the good, there for an economic reason, dealers frequently loan cars to people whose cars are being repaired.

6.

McQuiston v. K-Mart a) McQuiston goes into a K-Mart and, before buying anything, she injures her wrist severely when a cookie jar lid breaks in her hands. She sues the retailer and the manufacturer. Issue: Was there a contract for the sale of goods or a sale of goods? (1) Some State Courts have held that when a plaintiff has MANIFESTED AN INTENT TO PURCHASE

b)

4

AND ITEM than there is a requisite contract for the sale of goods. (a) Here, she took it off the shelf and put it in her cart. Treated as offer and acceptance. (Courts have not, however, progressed to this point.)

(2)

Although there is a strong policy to allow her to recover, plaintiff loses b/c cannot prove defect from when it left IGC (same thing for strict liability and breach of implied warranty claims.) Appellate court reverses: there clearly was a sale, but it was HARMLESS ERROR, since she had also sued in strict liability in tort, and the jury had found in favor of Indiana Glass. (a) (b) Always present statutory first, then do policy arguments. UCC Theory- Implied Warranty of Merchantability (see outline infra)

(3)

7.

SALE V. SERVICES a) Predominate Thrust Test- whether the predominate factor is the rendition of services with goods incidentally involved or is a transaction of sale with services incidentally involved; MAJORITY POSITION (1) (2) (3) If sale of goods predominate = U.C.C. If services = contract law Factors: (a) (b) b) The cost of the goods compared with services; and Degree of creativity, judgment, and selection of the items.

Foster test (p.11) –apply UCC to goods part and regular contract law to service part; MINORITY POSITION (by and large rejected) Sheehan test (p.13)-Consumer goods retain their character after completion of consumer services (installation of pool), 5

c)

where monetary loss or personal injury results from a defect in the consumer good, Maryland UCC statute applies even if the transaction is predominately one for the rendering of consumer services. d) HYPOS: (1) EXAMPLE: the blood transfusion issue. Defective blood (contaminated) given. Patient wants to sue under the UCC (statute of limitations under UCC can be longer, other advantages). (a) Argument that there is a contract for the sale of goods: blood is movable, and there is a contract for sale – passage of title for a price. The good argument is UCC hook + Policy. Under predominate theory test- the services predominate: transfusing the blood into the patient properly Because of policy reasons, lead courts to hold that it was goods, breach of implied warranty. Counter argument: hospitals are at financial risk if this view is adopted. Therefore, some states have statutes that explicitly state that strict liability and implied warranty theories are not applicable to blood transfusions. (i) Maryland legislatures reacted to courts saying it‘s a good, and wrote legislation saying hospitals are not liable. (2) EXAMPLE: a contract where someone is to design and apply a logo to a series of trucks. The design and affixing is service, but the decals themselves are goods. EXAMPLE: installing a central air conditioning system EXAMPLE: a wedding photographer who becomes inebriated at the wedding.

(b)

(c) (d)

(3) (4) e)

Burton v. Artery Co.

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(1)

Facts: assuming the trees, shrubs, sod are goods, his transaction is part sale and part service – he is selling these goods but is also installing them. Held: Applied the predominate thrust test; the cost of the sod, trees, and shrubs was substantial, and the contract calls for specific types of trees, plants, etc.

(2)

f)

Advent Systems v. Unysis (1) (2) (3) (4) Facts: Computer context, sold software. Held: Part Sale/Part Goods, court applies predominate thrust test. Ct finds it is a sale. Here, argue UCITA-only adopted by two states, which is heavily slanted to industry. For software, CDS, etc- if states have UCITA then apply, if not UCC. But you can argue UCITA should be adopted. (a) If you have a physical item (CD etc.) then it could be goods. But if you buy it online, not goods.

8.

Sale or Lease? a) Article 2 does not, and never did, literally apply to a lease. Leases are covered in 2A of the U.C.C. 2A is premised on Article 2.
EXAMPLES: Transactions

b)

for a car

(1) (2)

Lease with an option to purchase for fair market value; Finance the Car (a) Dealer takes a security interest governed by Art. 9. § 2-709 allows recovery of price under Article. 2. No rights to the case, the only right its to sue for the price. Under § 9-503, the seller has the right to reposes and re-sell the car.

(b)

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(c)

Nominal Lease - Older types of transaction, disguised sale: pay $100 for a car per month over 5 years. You have an option to purchase car for one dollar at the end of 5 years. Functionally, that is a sale. In form, it‘s a lease. Nominally, it would be a lease, regarded as a sale with retention of a security interest. (i) EXAMPLE: Manufacturer has equipment worth $6,000. Buyer doesn‘t have this cash. Seller offers that buyer pays $100 each month for six years, then pay $1 at the end to pass title to Buyer.    Functionally, this is a sale: pay out the price of goods plus interest to obtain title. Advantage: Seller retain title until the whole purchase price is paid. Modern structure of the transaction: sell the item on time and retain a security interest under Article 9.

(ii) KNOW THAT there is a distinction between a true lease and a disguised sale in the form of a lease. Leases are covered by Article 2A, but disguised sales are covered by Article 2. c) Difference btw a Nominal Lease and a True Lease (1) Look at § 2A-103(j) in connection with § 2-201(37): (a) True Lease: (i) § 2A-103(j) -lease means transfer of the right for possession or use over a specified term. (ii) A True Lease would have an option to purchase for a fair market value. True lease is governed by 2A. (b) Nominal Lease or Disguised Sale is governed by Art 2.

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(c)

§ 1-201(37): definition of ―security interest‖ governed by Art. 9. Apply the definition of ―Security interest‖ to determine which type a transaction is. (i) § 1-201(37) – ―Whether a transaction creates a security interest is determined by the facts of each case; however, a transaction creates a security interest if the consideration the lessee is to pay the lessor for the right to possession and use the goods in an obligation for the term of the lease not subject to the termination by the lessee. . .and the lessee has an option to become the owner of the goods for NO ADDITIONAL CONSIDERATION or NOMINAL CONSIDERATION upon compliance with the lease agreement.‖

(2)

Cucchi (a) This was a lease and not a sale. After a number of years, the burglar alarm system fails, and the house is burglarized. The family sues the manufacturer of the alarm system. Statute of limitations question had passed. TODAY: this case is controlled by Article 2A – this is a TRUE LEASE. Article 2A did not exist in PA at the time, so the Court applied Article 2A by analogy – this was ―like a sale.‖

(b)

(c)

C.

Statute of Limitations and Scope 1. 2. § 2A-506 – action must commence 4 years from accrual when breach of warranty is discovered or delivered. § 2-725 – a breach of warranty occurs when tender of delivery is made, except that where a warranty explicitly extends to future performance of the goods and discovery of the breach must await the time of such performance the cause of action accrues when the breach is or should have been discovered. a) Covers IMPLIED too?

9

(1) (2)

Majority position –provision only extends to discovery for express warranties In PA: in the Cucchi case, PA Court said that warranties applying to future performances can be express or implied. [THIS WAS LATER REPUDIATED – Nationwide p.34] Later – only express warranties.

b)

§2-719 – LIMITATION OF REMEDY-- Repair Or Replace & Statute of Limitations (1) (2) Majority- Repair or Replace Warranty does not extend the breach of warranty statute of limitations. Minority- Repair or Replace Warranty does extend the breach of warranty statute of limitations. PA in Nationwide follows the minority rule. Nationwide (a) ―If there is any defect in the first 12,000 miles, it will be fixed free of charge.‖ (i) Does not explicitly extend to the future. [MAJORITY RULE]. Breach of warranty then occurs on TENDER OF DELIVERY – the statute of limitations then has expired in this case. (ii) The COURT HERE adopts a MINORITY RULE: Sellers may not draft documents to escape presenting them to consumers as extended warranties. Since it was presented as an extended warranty, the court treats it like an extended warranty. (iii) FOOTNOTE 7: Suppose there were a SEVEN-YEAR warranty. Buy the car in 1980. If any defect, company will fix it, 7 years. Defect occurs 1.1.86. Company says it will not fix it. Under the majority view, four years expired – no suit. (iv) BUT: the answer here: you are actually suing on a breach of a contractual promise – if anything goes wrong with it in 7 years, the company will fix it. 10

(3)

3. .

§ 2-725(1) [2001 draft]: the action must be within FOUR YEARS after accrual OR ONE YEAR after it should have been discovered, but no more than FIVE YEARS TOTAL after tender of delivery a) b) Ends up being an extra year if you discover the breach LATER. § 2-725(ii)(c) [2001 draft]: breach of a remedial promise – specific statute of limitations. [A repair/replace promise].

4.

Some states: really suing in personal injury arising from defective goods, so ONLY THE TORT STATUTE OF LIMITATIONS applies, even if you have a valid UCC claim within the UCC statute of limitation

II.

GENERAL PRINCIPLES A. Good Faith 1. § 1-203 – OBLIGATION OF GOOD FAITH – Every contract within this Act imposes an obligation of good faith in performance or enforcements. Specialized sections imposing GOOD FAITH: § 2-305(2): a price fixed by the seller or the buyer must be fixed in good faith. General Definition- § 1-201(19): ―Good Faith‖ means HONESTY IN FACT Merchants Definition- § 2-103(i)(b): Good faith in the case of a MERCHANT means HONESTY IN FACT and REASONABLE COMMERCIAL STANDARDS OF FAIR DEALING IN THE TRADE. New Revised definition p.1087: HONESTY IN FACT and the OBSERVANCE OF REASONABLE COMMERCIAL STANDARDS OF BUSINESS PRACTICE. Makes Merchant definition applicable to everyone. Urdang- acceleration provision in contract; based decision on §1-203 definition of good faith and general equitable principles. Left parties as they were.

2. 3.

4.

5.

6.

B.

Unconscionability 1. Unconscionability applies to contract terms; it is not defined. Good faith is defined and applies generally. See Rite Color Chemical p. 43 11

2.

Two Prongs Test: whether the terms of the contract are PROCEDURAL AND SUBSTANTIVE unconscionability. a) PROCEDURAL Unconscionable: how the contract was made: language was archaic, where the buyer is told a term says something that it does not, very important language put in tiny print, where a contract is misleading (warranty that only takes away rights), etc. SUBSTANTIVE Unconscionable: onerous or unduly onesided contract terms. (1) (2) Substantiative alone will not do it, if you have substantive but no procedural -won‘t do it. UNCONSCIONABILITY is not meant to frustrate the allocation of bargaining risks.

b)

3.

§ 2A-108(ii): LEASES: can be declared unconscionable if INDUCED BY UNCONSCIONABLE CONDUCT. If it is unconscionable, the court can award attorney‘s fees to the lessee.

C.

Supplementary Principles of Law 1. § 2-103 – common law principles apply unless inconsistent with the U.C.C. If inconsistent, UCC applies. a) b) c) Promisory Estoppel Estoppel Waiver

III.

d) Mitigation of Damages CONTRACTUAL FORMALITIES A. The Statute of Frauds 1. §2-201(1) STATUTE OF FRAUDS – A contract for the sale of good for $500 or more is not enforceable unless there is some WRITING sufficient to indicate that a contract for sale has been made btw the parties and signed by the party against whom enforcement is sought. . .and the quantity of goods MUST be in such writing. a) b) Rationale: Encourage people to put contracts in writing and prevent fraud. Proposed Revision would make it $5000. 12

c) d)

Formal requirement of writing does not depend on credibility. § 2-102(46) Writing defined as printing, typewriting or any intentional reduction to tangible form. (1) Proposed Revision: using ―record‖ instead of ―writing‖ sweeps in electronic signatures. (a) § 2-201: ―record‖ is ―information stored in a medium that is retrievable in perceivable form.‖ UETA-Uniform Electronic Transaction Act – adopted in PA, § 7 of Act says can‘t deny enforcement b/c in electronic mode. Designed to protect consumers in electronic transactions.

(b)

e)

“Sufficient to indicate a contract has been made”-only terms that must appear in writing is quantity, Comment 1 says beyond that all that is required is that the writing afford a basis for believing that the offered oral evidence rest on a real transaction. The writing must be signed by the party against whom enforcement is sought: (1) ―Signed‖ is a defined term. § 1-201(39): any symbol executed with present intention to authenticate a writing.

f)

g)

“Against whom enforcement is sought” (1) i.e. If Basquiat didn‘t sign, the Rosenfeld would lose. (a) If Basquiat‘s estate is suing her, and only she signed it, then the signature is legitimate.

h)

Baqauit- art dealer plaintiff suing for specific performance, wrote contract on piece of paper with a crayon. (1) (2) Contract for the sale of goods: YES. For the price of $500 or more? YES (total contract price > $500)

13

(3) (4)

Is there a writing here? YES. Crayon on a large piece of paper is a writing Sufficient to indicate that a contract for sale has been made? (the key issue here): COURT: YES. The writing is sufficient. The only term that MUST appear is the QUANTITY of the goods.

i)

HKA (1) (2) A writing that is ambiguous and incomplete. The contract did not contain a price. Court held that the fact that it says ―Purchase Price‖ is not sufficient; the parties could have just been negotiating. The signed memorandum must indicate CONTRACTUAL STATUS; AGREEMENT (a) Does not have to contain price: how then does one determine the contract price? (i) UCC gap filler provisions: § 2-305: the parties can conclude a contract for sale even though the price is not settled. Can have an enforceable contract even though the parties have not discussed the price. (ii) § 2-308, -309, -310: how to determine other terms if there was no agreement.

2.

Merchants’ Exception § 2-201(2) - Between merchants if within a reasonable time a writing in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know its contents, it satisfies the requirements of subsection (1) against such party unless written notice of objection to its contents is given within 10 days after it is received. a) The words ―sufficient against the sender‖ under § 2-202(2) means that it must contain [if sender is being sued] (1) (2) (3) (4) Writing; QUANTITY; Signed by sender; and Indication that contract for sale has been made.

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b)

§ 2-201(2): ―a writing in CONFIRMATION OF THE CONTRACT‖ – does this add anything that must be stated? (1) Seems that § 2-201(2) cases, if the writing is sufficient against the sender, the writing indicates a contract for sale. Does this add more contractual status? Argue that it requires a higher burden than § 2-201(1).

(2) c)

Must be RECEIVED. How to prove this? (1) (2) Send something REGISTERED MAIL, Certified Mail. Circumstantial Evidence: Common law presumption that depositing things in the US mail means that they were received. Defense can still rebut the presumption.

d)

Party receiving HAS REASON TO KNOW ITS CONTENTS (never been used in a reported case)

EXAMPLE: A sends B a letter confirming sale of 300 barrels of soybeans at $10 per barrel. B never responds. If B sues A, there is a writing signed by the party sought to be charged.    NO WRITING if A sues B, since B never signed anything. If the recipient does NOT OBJECT WITHIN 10 DAYS, the writing is sufficient to bind the recipient. § 2-201(2). If B did not object within 10 days, then afterwards, even if there is no signature, B cannot assert a Statute of Frauds defense for no writing. POLICY: a behavioral assumption; a merchant receiving notice confirming a contract he never made would naturally and immediately return a notice denying the contract. Silence would be acquiescence.

e)

EXAMPLE: B receives the writing, does not object, so B cannot assert the Statute of Frauds because they are both merchants. B says that yes, there WAS an oral contract, but the price was different. If A sues B, can B introduce any evidence about the terms of the ORAL contract?

15



YES. Parol Evidence Rule does NOT bar B. § 2-202: terms set forth in a FINAL EXPRESSION OF THE AGREEMENT cannot be contradicted by oral evidence, but here, this writing was not a final expression. A can now sue, B cannot raise the Statute of Frauds, but B is not barred by the Parol Evidence Rule from introducing contradictory ORAL evidence. The letter merely removes the Statute of Frauds as a defense for the recipient if the recipient does not respond within 10 days. Purdue v. Motts (1) Purdue sues, Motts couteralleges on two oral contracts: sent Purdue two purchase orders – oral contracts (no writing) – Purdue never responded with a writing. Motts sent their trucks, and Purdue refused to go through with the contract. Motts sent a writing to Purdue, Purdue did not respond. Is this a situation within § 2-201(2)? COURT: MERCHANTS-then within a reasonable time a writing in confirmation of the contract and sufficient against the sender. ―Sufficient against the sender:‖ the writing would have to meet § 2-201(1) if the sender was being sued.



 f)

(2) (3)

(4) g)

Merchants means a person who deals in goods of the kind or otherwise by is occupation holds himself out a having knowledge . . . (1) ―MERCHANT:‖ (a) (b) A person who deals in goods of the kind Or by his occupation holds himself out as having knowledge or skill peculiar to the goods in the transaction. Or by his occupation is familiar with the practices of the trade

DEFINITION OF MERCHANT § 2-104 –

(c) (2)

is a real estate broker a merchant? Cudahy Foods

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(a)

Facts; Cudhay sends cheese to pizza place, sends invoice to real estate broker. Cudhay sues real estate broker. Plaintiff argues defendant is in the business of buying and selling real estate, she possess that ―knowledge or skill peculiar to the practices involved.‖ The Official Comment responds to this by saying ―for the purposes of [this section] almost every person in business would, therefore, be deemed to be a ‗merchant‘. . .since the practices involved in the transactions are non-specialized business practices such as answering mail.‖ The comment goes on to state, however, that ―even these sections only apply to a merchant in this mercantile capacity.‖

(b)

(c)

3.

§ 2-201(3)(c): the most common EXCEPTION: A contract does not need to satisfy the requirements of subsection (1) if payment for the goods has been made and accepted or which have been received and accepted. a) b) POLICY: the payment is proof that there was a contract. Evidence Sufficient to Show that there has been payment: (1) Kaufman: Plaintiff has an oral contract, plaintiff gives defendant check, seller holds check then gives it back after 30 days. COURT: Delivery of check is not disputed, Statute of Frauds does not bar. In Presti, it was disputed that check was received.

c)

Part Performance (1) Comment 2: Partial performance as a substitute for required memorandum can validate the contract only for the goods which have been accepted or for which payment had been made and accepted. Receipt and acceptance either of goods or price constitutes an unambiguous overt admission by both parties that a contract actually exists. If the court can make just apportionment, therefore, the agreed price of any goods actually delivered can be recovered without writing or, if the price has been paid, the seller can be forced to deliver an apportionable part of goods. 17

(a)

If comment is against you, you can argue not the statute. Usually, comments are viewed with great weight.



EXAMPLE: In Kaufman, what if Buyer gave Seller a check for $10,000, and the whole purchase price is $60,000 of Michigan Loader. Seller refuses to tender the goods.  Seller has no chance trying to defend with the Statute of Frauds: the check is a writing that he signed (when he cashed it), and the check contains quantity (1 machine), contract for sale indicated.



EXAMPLE: If Buyer gave Seller a check saying ―Deposit for payment on contract‖ – then partial performance under (3)(c). But cannot apportion the item here:   The policy of the section would probably be in favor of Buyer: there is evidence of some deal between the Buyer and Seller. All of the indivisibility cases come out the same way: don‘t divide the item; the contract is enforceable.

4.

§2-201(3)(b) Admits in Pleading EXCEPTION: a) Motion to dismiss is not a judicial admission. Triangle Marketing v. Action Industries, Inc. (N.D.IL 1986) (―a motion to dismiss admits the complaint‘s allegations only in a technical sense inadequate to meet.‖). There are a few cases that treat a motion to dismiss as a ―temporary admission‖ to move the case forward. Then the plaintiff would get the chance to ask D in discovery if there was a contract – if D denies it, raise the Statute of Frauds defense. This section only exists only to counter the old English rule that says you can admit and still use Statute of Frauds.

b)

c) 5.

§2-201(3)(a) Special Manufactured Goods EXCEPTION: ―if goods are specially manufactured for the buyer and are not suitable for sale to others in the ordinary course of the seller‘s business. . .‖ a) Impossible Electronics v. Wackenhut Protective Systems (5th Cir. 1982) (1) The Statute of Frauds does NOT apply where the Seller has commenced substantially manufacturing 18

SPECIAL GOODS FOR THE BUYER that cannot be resold to another. (2) The emphasis is on the nature of the defendant‘s GOODS, not on the nature of defendant‘s business.

6.

Estoppel to Assert the Statute of Frauds a) Hoffman v. Hoffman (1) (2) (3) Plaintiff claims § 1-107 – Supplemental Principles applies, thus, promissory estoppel. Most courts let in Promisorry Estoppel and reject below argument. Argument that Statute of Frauds displaces Promissory Estoppel- Statute of Frauds has carefully delineated structure of exception, to allow it would undermine the whole structure. Existing common law is displaced by UCC.

b)

Promissory Estoppel requires: (1) (2) (3) A clear and unambiguous promise; Reasonable reliance --Reasonable and foreseeable reliance on that promise; and Unconscionable injury- ―Unconscionsable injury‖ focuses only on economic loss, not emotional distress, etc.

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STATUTE OF FRAUDS ANALYSIS:

ASK

(1) (2)

Under § 2-201(1), is there a writing? IF NO, EXCEPTIONS? Under § 2-201(2), Merchant? Under § 2-201(3)(c), made and accepted, payment, partial performance? Under § 2-201(3)(b), admits in pleading? Under § 2-201(3)(a), special manufactured goods?

(3)

Promissory Estoppel? (a) a clear and unambiguous promise? Do you have independent verification for promissory estoppel? Some cases raised this issue. Need more than just the plaintiff asserting the oral contract. (b) (c) Reasonable reliance? Unconscionable injury? What does unconscionable mean something more than normal damages?

B.

The Parol Evidence Rule 1. § 2-202 - What type of writing is protected? a) b) Confirmatory memoranda agreed-upon terms, or A writing intended by the parties as a final expression of the parties‘ agreement. (1) NOTE: A writing satisfying the Statute of Frauds may not be sufficient to trigger the Parol Evidence Rule.

EXAMPLE: Merchant A sends to Merchant B a confirmation letter with quantity and price. B does not respond to this letter. A sues B. Can B raise the Statute of Frauds? NO – sufficient against the sender with no objection. Can B introduce oral evidence at trial of a lesser price? YES. Parol evidence rule would not bar this, since ONLY FINAL WRITINGS are protected. One party sent this letter to the other – no indication that this is the Final Writing.

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2.

CONTRADICTION PROHIBITED: Cannot be contradicted by evidence of any PRIOR AGREEMENT or a contemporaneous ORAL AGREEMENT: a) A written contract signed by A and B that says $4 per ton for concrete CANNOT be contradicted by evidence of any prior agreement. B CANNOT introduce evidence of $3 per ton at trial for a prior writing or oral agreement. The parol evidence rule can also keep out prior writings inconsistent with the Final Writing. Subsequent agreements, however, can be considered as a modification by § 2-209.

b) c) 3.

Can be explained or supplemented by: a) § 2-202(a) -―Trade Usage:‖ something that is consistent with the trade standard – a method having regularity in the trade to justify an expectation of this behavior. § 1-205 § 2-202(a) -―Course of Dealings:‖ how the parties have dealt in the past with each other, in previous contracts. § 2-202(a) -―Course of Performance:‖ how the parties dealt with each on THIS CONTRACT. § 2-208 § 2-202(b) –Evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement. (1) Merger Clauses – ―This contract is the sale and exclusive agreement between the parties. The parties hereto have no agreement or understanding other than as set forth herein.‖ PROBLEM 3 --Buyer gets an oral express warranty that car has been rebuilt and is good for at least 10,000 miles. Buyer finds out later was not rebuilt. Does the oral express warranty come in of the buyer signed a written contract? (a) BUYER: consistent additional term; should come in

b) c) d)

(2)

21

(b) (c) (d)

SELLER: merger clause prohibits anything else under § 2-202(b). Merger clauses protect the seller, most often. Some authority holds that in a consumer context, merger clauses don‘t have as powerful an effect – consumer expects warranties to induce the consumer to be part of the deal. A consumer would expect an oral express warranty to be honored.

(e)

4.

Carter Baron Drilling v. Badger Oil Co. a) Facts: Carter will drill a well for Badger Oil, the operator. Badger, the operator, will pay Carter a certain amount. Badger claims a trade usage that the person designated as the operator is actually an agent for the real operator Issue: Should Contradictory Trade Usage be allowed in? (1) CONTRACT: ―operator shall pay,‖ but Badger claims that a trade usage means that the operator does not pay. Trade usage comes in under § 2-202(a). The writing cannot be contradicted; but it can be EXPLAINED BY CONSISTENT TERMS – here, the trade usage contradicts the express terms of the contract. COURT: the admission of evidence of trade usage presents none of the dangers the parol evidence rule was meant to guard against – trade usage cannot be manipulated. Objectively verifiable – can be objectively verified. (a) Trade usage explains the environment – defendant cannot manipulate that environment – it either exists or does not. Verbal agreements, however, are not trade usage. Also verbal agreements do not include trade usage, course of dealings, course of performance, etc.

b)

(2)

(3)

(b)

22

c)

Some cases are willing to find trade usage contradictory, if severe enough, but here, the majority lets it in, since it explains the context.

IV.

CONTRACT FORMATION, MODIFICATION & TERMINATION A. Additional or Different Terms in Acceptance 1. The Mirror Image Rule@ Common Law a) The common law rule about additional terms: the ―MIRROR IMAGE‖ rule: the acceptance had to be a mirror image of the offer. (1) b) An offer goes out to buyer, and buyer adds a term. At common law, no agreement, no contract.

Under common law, if Seller sends the goods out, and Buyer USES THE GOODS, is the term added to the agreement? (1) (2) At common law, there is a contract formed by conduct – good sent, received, and used. Added term IS NOW PART OF THE CONTRACT – use of the goods by the buyer is acceptance.

c) 2.

BECKER: don‘t have to go through the common law analysis on the exam. Apply the UCC.

§ 2-207: ADDITIONAL TERMS IN ACCEPTANCE OR CONFIRMATION a) § 2-207(1): determines whether there is a contract-- A definite and seasonable expression of acceptance sent in a reasonable time is an ACCEPTANCE. § 2-207(2): what the terms of the contract are; BETWEEN MERCHANTS: the terms become part of the contract
UNLESS

b)

(1) (2)

§ 2-207(2) (a): the offer expressly limits acceptance to the terms of the offer; § 2-207(2) (b): Unless the added terms materially alter the contract

23

(a)

Comment 4 lists examples. ―So result in surprise or hardship if incorporated without express awareness by the other party‖ Does an arbitration clause materially alter? (i) Argument that it does: because it limits your options (ii) Argument that it doesn‘t: because it still allows a remedy. (iii) Cases vary and some say it‘s a factual determination.

(b)

(3)

§ 2-207(2) (c): notification of objection to them has already been given or is given within a reasonable time after notice of them is received.

3.

DIFFERENT TERMS § 2-207(2) a) b) § 2-207(1): different terms OR additional terms do not prevent the contract from being formed. § 2-207(2) sets forth how additional terms become part of a contract but does not set forth how different terms become part of a contract. There are two views on how different terms become part of the contract. (1) c) Apply § 2-207(2) to different terms unless it materially alters the contract; or

The Knock Out Rule- terms cancel each other out of the contract, since they ―object to each other.‖ Use UCC gap filler provisions. Diatom, Inc. v. Pennwalt Corp. (10th Cir. 1984)

4.

CONDUCT § 2-207(3): Conduct by both parties is sufficient to recognize a contract for sale although the writings of the parties do not otherwise establish a contract. C. Itoh & Co. v. The Jordan International Co. (7th Cir. 1977) UNLESS EXPRESSLY CONDITIONAL: § 2-207(1) applies unless acceptance is expressly conditional on assent to the additional or different terms. a) MAJORITY RULE: language is expressly conditional if it tracks the language of § 2-207(1). ―EXPRESSLY 24

5.

CONDITIONAL ON THE BUYER‘S ASSENT TO….‖ If it says this, then there is no contract unless conduct. Diatom 6. Parol Evidence rule does not apply is fraud actions. a) Fraud theory requires state of mind –false and knew it was false.

EXAMPLE: Buyer must prove statement was made for express warranty contract action, goods did not comply with the description.  IF MERGER CLAUSE: seller told buyer goods were refurbished; they were not. MERGER CLAUSE would keep out the express warranty in a contract action for breach of express warranty. If Buyer says that SELLER LIED TO HIM, INTENTIONALLY, I relied to detriment – FRAUD ACTION. Must prove of state of mind --proof that seller knew it was false and made the statement to induce reliance from the Buyer. EXPRESS WARRANTY: only prove that the statement was made, good did not comply with stated description. FRAUD: must prove that seller made the statement knowing it was false and to induce reliance of the buyer.



 

EXAMPLE: merger clause in contract, nothing in contract about condition of goods. Merger clause would keep out express warranty – action on the contract. BUT: merger clause not relevant in a FRAUD ACTION. 7. Diatom v. Pennwalt Corp. (10th Cir. 1984) a) Facts: Pennwalt, the Seller, is the OFFEROR – they offered to sell two vacuum dryers. Diatom, the Buyer, is the OFFEREE – they sent a response. Goods shipped but are defective. Diatom wants to sue. Pennwalt: the offer contained a limited statute of limitations, which has expired, so Diatom cannot sue. Pennwalt‘s argument: § 2-207(2) does NOT apply here, since this is a term in the OFFER – 2-207 applies only to terms in the acceptance. Diatom: two arguments

b)

c)

25

(1)

Diatom sent back additional terms and claimed that its acceptance was subject to these additional terms. This language made our acceptance a conditional acceptance under § 2-207(1). [Would then mean that terms agreed upon are determined under § 2-207(3), which would exclude the special statute of limitations clause.] 4 year UCC statute of limitations. COURT: When Diatom said it reserves the rights and remedies at law, that said that because they implicitly reserve the four-year statute of limitations, so the two documents are now DIFFERENT. (a) Court applies the KNOCKOUT RULE here – they knock each other out, but then the court is left with the 4-year statute of limitations as the UCC default. Diatom loses on the ―unless‖ clause, but wins on the DIFFERENT TERMS argument. NOTE: very manipulative of § 2-207.

(2)

8.

Horning v. Falconer Glass (S.D.I.N. 1989) a) Facts: Oral agreement on 8/4. On 8/5, Seller sends a confirmation that confirms the oral agreement and ADDS ADDITIONAL TERMS. Additional terms was a choice of law provision. CHOICE OF LAW CLAUSE in this contract: ―all disputes resolved under the laws of New York.‖ Buyer brought this action in federal district court in Indiana. Seller claims the action must be brought in New York state court. (1) Choice of Law usually governed by § 1-105. NOTE: there isn‘t much variation in Article 2, so although it is wise to put in a choice of law clause, right now that wouldn‘t result in too much difference of interpretation. NOTE: Under § 2-207(1) permits a confirmation to oral agreements with additional terms, but a confirmation after written agreement. If you send a confirmation after a WRITTEN agreement signed by both parties, then § 2-207(1) is probably inapplicable, since the comment talks about confirmation after an oral agreement. As a result, under § 2-207(2), Merchants are allowed to bootstrap additional terms.

(2)

26

b)

COURT: Found that the choice of law agreement materially altered the oral contract. The limitation of remedy: Comment 5 says that clauses that limit remedy in a reasonable matter are not surprise and should be incorporated. However, the additional express warranty and no general warranty limitations materially alter as well because of the factual situation here (1) ARGUE: Limitation of remedy doesn‘t materially alter as a matter of law by Comment 5. Or Becker says you can argue that it materially limits because there are no right to damages and it‘s a factual question.

9.

Herzog v. Otto Torpedo (Pa. Super. 1989) a) COURT: The invoice is a ―confirmation‖ that immediately triggers § 2-207(2). Between merchants, part of the contract unless kept out by (a), (b), or (c). Adding an interest charge is NOT a material alteration. NOTE: ARGUE: an invoice is not a confirmation. A confirmation asserts the contract and triggers a response. This is just something that says ―invoice.‖ Dictionary definition of ―confirmation‖ is ―corroborate, ratify, etc.‖ (1) ―This term has always been in the invoice:‖ some courts let it in because of WAIVER or COURSE OF DEALINGS between the parties.

b)

10.

NOTE: Heated debate surrounding this new draft. Wanted more consumer protection, the DRAFT VERSION OF § 2-207: All of the categories are gone: if the parties have a contract, then: a) b) c) the terms that appear in the records of both parties, terms they agree on, and UCC supplemental terms are in the contract.

27

TRACK ONE: Acceptance additional or different terms.

OVERVIEW § 2-207 has TRACK TWO:

Whether additional terms come is governed by § 2-207(2). Whether different terms come is either governed by: (1) § 2-207(2) or (2) KNOCKOUT RULE + supplemental terms of the UCC

Response has additional terms with express conditional assent to terms (Itho), thus no contract and either party can walk away. However, under § 2-207(3), there can be a contract if there had been conduct and goods are sent anyway.

B.

Missing Terms 1. Under § 2-204, Contracts can be formed if: a) b) The parties intended to make a contract; and There is reasonable certain basis for giving an appropriate remedy. See e.g. Deck House v. Scarborough Sheffield and Gaston, Inc. (Ga. App. 1976)

2.

GAP FILLERS used in Deck House v. Scarborough Sheffield and Gaston, Inc. (Ga. App. 1976): a) b) c) d) e) § 2-305 (missing price term) §2-307-delivery in single lot of several lots § 2-308(a): place for delivery is seller’s place of business § 2-309(1): the time for delivery is a reasonable time § 2-310(a): payment is due at the time and place the buyer receives the goods.

C.

Shrinkwrap Licenses 1. There are three scenarios which courts treat differently: a) HYPO 1: buy a TV. Inside the box, there is a notice that says there is no implied warranty of merchantability.

28

(1)

Conventional Article 2 law/Becker‘s understanding: this is NOT binding on the buyer – the buyer has the TV and has the implied warranty, because the contract was formed at the time of the purchase. This notice attempts to add a term to the contract, which has already formed. § 2-207(1) is totally inapplicable here. Not a confirmation, not an exchange of documents. HYPO 1A: inside the box for the TV, a notice says that ―use of TV is acceptance of disclaimer.‖ Article 2 law: § 2-207(3) is also completely inapplicable here. Not part of the contract because not agreed upon at the time of the purchase.

(2) (3) (4)

b)

HYPO 2: on the side of the TV box, it says, ―Remedy limited to replacement or repair.‖ Does writing on the box bind you? (1) (2) Some cases: NOT bound unless called to the buyer‘s attention. Some cases assume if you bought it, then you are bound. You have an obligation to read the box. (a) (3) If you sign a contract you are bound.

If you get the box after the purchase, seems more like HYPO 1.

2.

HYPO 3: Box says ―subject to restrictions.‖ ProCD v. Zeidenberg & Silken Mountain Web Services (7th Cir. 1996) [shrinkwrap terms on software] a) Facts: ProCD sells the cheaper version of its information on CD-ROM to consumers but do not want consumers to use the information for commercial purposes – so they have a shrinkwrap notice on the packaging of the CD-ROM. Zeidenberg buys the consumer version but uses the database info for commercial use. Zeidenberg doesn‘t know the restrictions until after he opens the package. ISSUE: whether Zeidenberg is bound by the terms on the packaging and in the install screen.

b)

29

c)

COURT: Article 2 transaction here because passage of title to the CD has taken place in exchange for a price. 7th Circuit in ProCD: the purchaser IS BOUND BY THE RESTRICTIONS: BECKER: this holding is convoluted and incorrect. But wouldn‘t mind this holding if it was meant to apply as an explicit exception to computer software. Purchaser should NOT be bound by the restrictions inside the packaging. You don‘t know what those restrictions are by examining the outside of the packaging. COURT: returning the package can prevent formation of the package. (1) BECKER: this is absolutely incorrect; if you found a note inside your package that says, ―you owe us $10,000‖ – tear it up and use the software.

d)

e)

f)

NOTE: Depends on the medium of goods, argument for treating computer software differently: transmitting information, not the medium. Title to the packaging only passes to the buyer. The consumer does not OWN the information. (1) EXAMPLE: buying a U2 CD: the owners of the music are not worried about your ripping them off seriously. EXAMPLE: computer software: owners always very worried about consumers invading the producer‘s rights. CONTROVERSY: no agreement on a specific rule to exempt computer software transactions from Article 2. AGAIN, there is UCITA, which is very probusiness, but only two states have adopted it. EXAMPLE: Gateway‘s binding arbitration notice in the setup program… (a) NOTE: some cases would handle the Gateway example by applying § 2-207 and holding the new terms material. BECKER: not a confirmation, not an exchange of documents. DO NOT USE § 2-207 IN THIS SCENARIO 30

(2)

(3)

(4)

(b)

D.

Warranties § 2-313, -314, and –315. 1. Express Warranties: § 2-313: (1) (a) Any affirmation of fact or promise made by the seller to the buyer relating to the goods or is part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise. (1)(b): Any description of the goods which is made as part of the basis of the bargain… (1)(c): Any sample or model. . . (2): it is not necessary for the seller to use formal words such as ―warrant‖ or ―guarantee.‖ Seller does not have to be a merchant to make an EXPRESS WARRANTY; does have to be a merchant for an IMPLIED WARRANTY. (2): NO INTENT, NO DUE CARE, seller does not have to INTENTION to make a warranty; issue is just whether he made an affirmation or promise. DUE CARE is not a defense the only question is whether the statement of fact or promise made. a) PROBLEM 4 p.119: car salesman says, ―This car is in perfect condition and will take you anywhere you want to go.‖ Car breaks down. Buyer sues seller for the cost of repairs. (1) Statement of fact: there was a discussion in advance about what the Buyer‘s purpose was, and Seller‘s statement was a response that this car would fit her intended purpose. Factors to argue: (a) (b) (c) (d) (3) Specific discussion of need of good, Discussion of purpose (the vaguer the words the hard it is to prove statement of fact); Disparity in knowledge Price can indicate level of quality.

(2)

NO Intent/ NO Due Care Defense 31

(a)

Policy reasons: Goods don‘t conform to a statement who should bare the loss of the goods? Between the two choices, the burden should fall on the seller.

b)

§ 2-313(2) When is something an AFFIRMATION OF FACT? (1) (2) Express warranty can be made by any seller, not just a merchant. AFFIRMATION OF FACT (a) The more vague a statement, the more questionable it may become as to whether it is an affirmation of fact. FACTORS: (i) Was there a statement? (ii) Discussion of purpose before statement was made, so as to view the statement in that context? (iii) What is the relative knowledge of the parties? Is the Buyer trusting the Seller? (c) (d) ―Mechanically sound,‖ ―Good condition,‖ etc. are probably affirmations of fact. If Seller says, ―In my opinion…,‖ –still an affirmation of fact.

(b)

c)

STATEMENTS OF VALUE as an affirmation of fact (1) Statements of value tend not to be affirmations of fact, but it depends on the context. (a) Express warranties are very important in commercial litigation. In print media, advertisements, brochures – express warranties everywhere.

32

(2)

Daughtrey v. Ashe (VA 1992): (a) Woman lists her home with a real estate broker. Broker says it will sell quickly for $180,000. She makes arrangements to buy another home. It doesn‘t sell anywhere close to $180,000. She is stuck later with incurred costs. COURT: affirmation of fact under the circumstances – the buyer had no understanding what houses sold for; broker held himself out as an expert. EXAMPLE: an ad describing a truck roof as ―strong, leak-proof, and rock solid.‖ Collapsed after truck fell 29 feet. No understanding that it was strong enough to survive a 29-foot fall. This is a question of interpretation. The Court said the commercial meant in the normal operation it would so all these things.‖ Weng-p.119 said ―mechanically sound‖

(b)

(c)

(d) d)

§ 2-313(1)(a): need more than simply showing an affirmation of fact or promise relating to the goods – THAT BECOMES PART OF THE BASIS OF THE BARGAIN. (1) Reliance does not need to be shown to prove this element. (a) As Comment 3 states: ―no particular reliance on such statements need to be shown in order to weave them into the fabric of the agreement.‖

(2)

In some cases, the Seller has the right to show that the statement did not become part of the basis of the bargain. The BURDEN of PROOF is on the Seller. (a) EXAMPLE: the invisible water wings – FTC brought an action because the water wings were not ―invisible.‖ Issue: if someone wanted to sue because they were ―visible‖ out of the water, argue that invisible is a statement of fact, but that is so fanciful that it could not

33

have been part of the basis of the bargain. Court agreed with that in this case. (b) EXAMPLE: if the Buyer does not care about the statement: Bryan Keith and Buddy Epson: relied on Epson‘s statement about the yacht being fine, not the Seller‘s statements. (i) The Seller has the right to show that it did not become part of the basis of the bargain. But it is a hard to win, possibly if the buyer brought an expert or take it to your own mechanic etc. (3) Modification Theory: Affirmations made after the purchase becomes a modification. (a) Daughtrey (i) Facts: ―Diamonds are nice.‖ Pays the jeweler – in the box there is an appraisal that says that the jewels are ―v.v.s. quality,‖ when it was clear they were not. Statement made in a document given in a box after the bracelet was paid for. Bracelet does not meet this standard. (ii) COURT quotes Comment 7: the sole question is whether the language is fairly to be regarded as PART OF THE CONTRACT. If the language is used AFTER THE CLOSING, the warranty becomes a modification. (iii) At common law: no consideration for the modification. BUT: § 2-209: an agreement modifying a contract needs no consideration. (iv) Held that affirmation was part of the bargain. (v) PROBLEM: Modification theory may be interpreted to require a writing, have the additional problem of § 2-209(3). (b) EXAMPLE: buy a car, get a manufacturer‘s booklet with specifications. You don‘t look at it until significantly later. Can you have an 34

express warranty based on a statement in the booklet when you don‘t look at until later? Two possible arguments: (i) MODIFICATION: Seller has made the statement to you – looking at it = modification. (ii) Writing that accompanies goods expected to be part of contract from the beginning. Becker prefers this argument. e) NOTE: If a Buyer comes to you while negotiating a deal and express representations have been made, advise the client to get it in writing. You want something definitely enforceable. Defenses (1) (2) (3) g) Fanciful Language Buyer Relied on an Expert Not basis of the Bargain

f)

Duquesne Light Company v. Westinghouse Electric (3d Cir. 1995) (1) Facts: Duquesne owned the Beaver Valley Nuclear Power Station. Westinghouse supplied Duquesne with nuclear steam supply systems in 1972 that were supposed to last for 40 years. Problems in the 1980s. The argument here was express warranty theory. (a) (b) No implied warranty theory here, because the 4-year statute of limitations had run. No strict liability in tort: In a strict liability in tort action, economic loss is NOT RECOVERABLE. Economic loss: the fact that you bought something that wasn‘t worth what you paid for it – and your damage is your replacement cost – economic loss. Not recoverable in tort. Recoverable in contract law. (i) Question of what ―economic loss‖ means.

(2)

35

(a) The fact that things you purchased the way you want them to work is economic loss. These steam suppliers did not work right, so they must be replaced – economic loss. But personal injury – not economic loss. (b) NOTE: In Contract law: can disclaim an implied warranty; cannot disclaim strict liability. (3) Duquesne’s express warranty arguments: the warranty claims that the goods are free from defect and workmanship for one year. When they were delivered, they were NOT free from defect – it just took this long to discover the defect. (a) § 2-725(2): for statute of limitations purposes, the action accrues only when the defect materializes. A limited-time express warranty: must the breach (materializing of the defects) occur in this time period, or can you make the argument that the defect materialized later but was TRACEABLE to the time of delivery, although the Buyer was not aware at the time.

(b)

(4) (5)

COURT: the effects must materialize during the period of the express warranty. MAJORITY: must argue that the effects existed during the period of the express warranty but didn‘t materialize until later. NOTE: a good faith argument: There is a duty under § 1-203 for good faith in performance of a contract. Duquesne claims Westinghouse did not act in good faith when they dealt with us – claimed the goods would last forty years. (a) COURT: courts use the good faith rule as an INTERPRETIVE RULE and do not enforce an independent duty: There is no INDEPENDENT DUTY of good faith. When you talk about how someone has performed or enforced a specific contractual term – there is a duty to use good faith. 36

(6)

There is no generalized duty to act fairly in all cases. (7) NOTE: negligent misrepresentation argument: (a) (b) Common law fraud:. Must prove knowledge of falsity. Negligent misrepresentation: similar to common law fraud, doesn‘t require knowing fraud; just negligence. Must prove duty of care because of negligence. Duty of Care arising from business relationship; because there is a higher duty of care – must also have to be shown to have a duty of care to the person to whom you spoke. Lose on summary judgment: the court predicts that PA courts would apply the economic loss doctrine in this case. No recovery.

(c)

h)

§ 2-313(c) Express Warranty based on a given sample. (1) If they give you a sample, it must conform to that sample. Alimenta v. Anheuser-Busch (11th Cir. 1986) (Express warranty that peanuts would conform the sample given for testing.)

Overview of Express Warranty To become a basis of the bargain, if a statement is made before a contract, it must be an affirmation of fact. If facts permit, seller can try to prove that the buyer would have bought it anyway. Code doesn‘t require reliance. 2. Implied Warranty of Merchantability a) GENERALLY §2-314 –Unless excluded or Modified by 2-316, a warranty that the good shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of the kind. (1)
SELLER MUST BE A MERCHANT

37

(2)

NO PROOF OF RELIANCE, § 2-314 EMBODIES A LEVEL OF QUALITY FOR ALL SALES BY MERCHANTS --Implied warranty of merchantability arises without having to prove reliance – between merchants – expected level of quality.
DUE CARE IS NOT A DEFENSE

(3)

(a)

POLICY REASONS: No due care defense is not unfair to the Seller or Manufacturer. It‘s a policy decision made in favor of the innocent buyer. Problem 9: Electric Blanket Hypo. NOTE ON MANUFACTURERS: Don‘t use Indemnity just means right under some theory, USE UCC THEORY to sue a manufacture.

(b)

b)

Specifically Under § 2-314(2) --Goods to be merchantable must be at least . . .(most common are (a) and (c). (a) pass without objection in the trade under the contract description. (c) are fit for the ordinary purpose for which such goods are used. NOTE: (a) and (c) are almost always used and construed to protect the Buyer. Usually for a breach of implied warranty of merchantability, (c) fits but depends on factual situtation: (1) Dempsey v. Rosenthal (N.Y.S.2d 1983) decided under §2-314(2)(a), but §2-314(2)(c) could apply. (a) Facts: Plaintiff bought a puppy that was not capable of breeding. A dog is ―goods‖ under the UCC because it was movable at the time of identification. She gets an express warranty of health. Express warranty not breached; question is whether an implied warranty WAS breached. COURT: held that a unilateral cyptorchid would NOT pass without objection in the trade under §2-314(2)(a).

(b)

38

(i) Becker also said that the argument under (c): fit for ordinary purpose for which it was intended. If it were intended to be a show dog – defective  or intended to breed then he would also be defective. (2) §2-314(2)(c) -- PROBLEM 6 p.139: Buy a new car and the later find ot it was damaged and repaired. Argue under §2-314(2)(a), that the car would not pass without objection in the trade. §2-314(2)(c)-- PROBLEM 7, p.139: Buy a ladder and place 225 lbs of equipment on one of its steps. Step broke and injured a child. Argue §2-314(2)(c) and say ―Fitness for ordinary purpose‖ is not limited to the purpose for which it was sold: people place weights on a ladder. Not limited to just one accepted purpose. § 2-314(2)(e)- Good to be merchantable must be at least as such as. . .are adequately contained, packaged, and labeled as the agreement may require. . . (a) E.g. PROBLEM 8 p.139- Buy a glass of wine, and the glass shatters in your hand. Decent number of cases that hold that the goods must be adequately contained or packaged.

(3)

(4)

c)

Differences between the UCC and Strict Liability in Tort (1) (2) (3) The § 2-314(c) standard is usually as protective as strict liability in tort. For both MUST prove that a DEFECT has occurred. PROS under the UCC/CONS of Strict Liablity: (a) Damages: every class of damages is recoverable, while economic loss is not recoverable for strict liability in tort. Longer Statute of Limitations

(b) (4)

CONS under the UCC/PROS under Strict Liability

39

(a)

Contract-based defenses that do not exist in tort: (i) Privity see below for discussion (ii) Disclaimer of implied warranty of merchantability (iii) Limitation of remedies under § 2-719

(5)

Majority of States hold that Breach of Implied Warranty and Strict Liability are coextensive and quality is the same. Some courts hold that strict liability is more protective. While others hold that Breach of Implied Warranty has additional protection. But see Denny (a) Denny v. Ford Motor Company – (i) Issue is certified by 2d Cir to Court of Apps of NY. Whether strict liability and breach of implied warranty of merchantability are coextensive under NY law. (ii) Answer: NO, the causes of action are not identical and under certain circumstances, it is possible to be liable under breach of implied warranty where strict liability is not proven. (iii) Manufacturing defect vs. design defect. (a) Design here, since her Ford Bronco II was the same as all others. (b) Sellers fight design defect cases tooth and nail: one verdict for manufacturing – class action if design defect found! (iv) The jury could have found that the design of this off-road vehicle that the utility of the vehicle overbalanced the risk, so no strict liability. BUT the jury could ALSO have found that the off-road vehicle was not FIT FOR ITS ORDINARY PURPOSE. (v) Here, the car was not minimally safe for its expected purpose; Ford marketed this to 40

people for suburban driving. The intended purpose was suburban driving. Marketed as an ordinary vehicle – not fit for the purpose of the ordinary vehicle, because it was susceptible to rolling. d) The PRIVITY Requirement for Breach of Implied Warranty (1) (2) General Rule: A buyer cannot sue an up the line manufacturer because there is no privity of contract. Exception- Most state adopt at the least an CASELAW exception to the privity of contract rule where the defect has personally injured someone.

e)

Arguments/Defenses in Tort/Breach of Implied Warranty (1) Foreign Natural Doctrine: [TORT?] If the defect is a FOREIGN substance in the food, manufacturer is liable. If the defect is a NATURAL substance in the food, manufacturer is NOT liable. (Defendant usually wins under this doctrine). (a) CA, LA Variation: if the defect is foreign, manufacturer is absolutely liable under implied warranty of merchantability, but if natural, then liability attaches only if manufacturer was negligent.

(2)

Reasonable Exceptions Test: [TORT?] Whether a substance in a food product is natural to an ingredient thereof, liability will lie for injuries caused by the substances where the consumer of the product would not reasonably have expected to find the substance in the product. (a) Jackson: Jackson bit into a Nestle candy and broke a tooth on a pecan shell. Court of Appeals supplants the foreign nature doctrine with the reasonable expectations test and Jackson wins. Court refuses to adopt LA variation regarding negligence and says Nestle could have put a warning to protect itself.

41

(b)

EXAMPLE: raw oysters CAN have a naturally occurring bacterium that hurts people with inferior immune systems. (i) Applying reasonable expectations: might need expert testimony. Reasonable expectation that you will get sick if you eat raw food? Usually a jury question. (ii) The oyster bars should put up signs to protect themselves.

(3)

Adequate Warnings: [TORT] Manufacturers can put an adequate warning to the consumer on their product‘s container of the possibility or risk of injury pose thereby. Courts view this as a relatively inexpensive step to making products safer and to avoid liability for injuries. Comment K Defense: [TORT] A manufacturers that make goods that are unavoidable unsafe are not subject to strict liability. Failure to Warn- [BOTH] a strict liability and breach of implied warranty theory. Wolfe; See Below (a) A failure to adequately warn CAN breach the implied warranty of merchantability as well as in strict liability. TEST: ―If directions or warnings as to the use of particular product are reasonably required in order to prevent the use of such product from becoming unreasonably dangerous, the failure to give such warnings or directions, if any renders the product defective.‖ (i) Wolfe v. Ford Motor (MA 1978) (ii) Facts: Jury found that overloading the vehicle and an underinflated tire caused a blowout. Suit in strict liability AND breach of implied warranty of merchantability. (iii) Theory: no adequate warning that you can risk a blowout with under-inflation and overloading. 42

(4)

(5)

(b)

(iv) FORD: there is a recommended gross vehicle weight and a recommended tire pressure, which should have been the warning. (v) COURT: No. Does not alert the user to the possible danger; alludes more to efficiency or good performance. (vi) Court held MUST INFORM THE CONSUMER ABOUT THE SEVERITY OF THE CONSEQUENCES FOR NOT FOLLOWING DIRECTIONS. Directions for use are not a warning. (c) Duty to Warn When Idiosyncratic Reactions: (i) Gordon v. Proctor – Court held no duty to warn where there is an idiosyncratic reaction. (a) If a significant number of people that will have a reaction, then the manufacturers would have a duty to warn. f) Implied Warranty of Merchantability for Used Goods (1) Majority Rule: A Majority of states hold that there is an implied warranty of merchantability for used goods. Content of the Warranty and standard of quality depends of the following factors: (a) (b) (c) The buyer‘s knowledge that the goods as used; Extent of use (how used); Price (whether goods are significantly discounted); (i) Strong discount would mean a weaker quality demanded. (3) NOTE: Strict Liability in tort does NOT apply to used goods. Tort theory in strict liability applies only 43

(2)

to NEW GOODS in most cases; could be another distinguishing factor. (4) Dickerson: good described as a rebuilt tractor; use in a small part of only one season. COURT: is it fit for the ordinary purpose? § 2-314(c) – Purpose: described as a used tractor – court decides that it should have provided more use than it did.

g)

When doesn’t an Implied Warranty of Merchantability arise? (1) Whether INSPECTION or refusal to inspect under §2-316(b)(3) is a defense? i.e Dempsey (a) Seller’s Argument: Seller can argue that under § 2-316(2) and (3)(b): if the buyer has examined the goods as fully as he has desired or has refused to examine the goods, then there is NO IMPLIED WARRANTY for defects the EXAMINATION SHOULD HAVE REVEALED. Can be interpreted to place responsibility on the buyer. Buyer’s Counterargument: (i) COMMENT 8 to §2-316 states ―Examination‖ as used in this ¶ is not synonymous with inspection before acceptance or at any time after the contract has been made. It goes rather to the nature of the responsibility assumed by the Seller at the time of making the contract. (ii) In addition, if the Buyer UNREASONABLY fails to examine the goods – there must in addition a DEMAND BY THE SELLER that the Buyer examine the goods fully. (c) BECKER: RARELY USED TO KEEP OUT IMPLIED WARRANTY OF MERCHANTABILITY --courts should be reluctant to apply the language of the statute unless the Seller actually placed the responsibility on the Buyer.

(b)

44

(2)

§2-316(2) DISCLAIMER --can eliminate the implied warranty of merchantability in a writing that is conspicuous and that mentions merchantability by eliminating it. § 2-317(c): Warranties whether express or implied shall by construed as CONSISTENT WITH EACH OTHER and as CUMULATIVE, but if such construction is unreasonable the intention of the parties shall determine which warranty is dominant. (providing rules of construction). (a) Some times an express warranty will give you more than an implied warranty. (Brake linings do not have to be replaced for 2 years, versus normal wear and tear is 1 ½ years) Dickerson- If you bought a tracker heavily used for $50 dollars, but have an express warranty that says parts won‘t break for a year. (i) Seller‘s Argument: §2-317(c) comes in to construe them as cumulative but if you cannot construe them cumulatively then the express warranties displace the implied warranty of merchantability. Original express warranty trumps implied warranty, and express has expired. (ii) COURT: Rejects the argument. Sellers can always disclaim, thus, as WHITE AND SUMMERS point out, ALWAYS treat an implied warranty as consistent UNLESS its crystal clear that it is not. (iii) BECKER says make the argument, when it is made usually rejected but sometimes accepted. Know the counterargument rejecting its rationale. (iv) NOTE: You can limit the implied warranty of merchantability to THE TERM OF THE EXPRESS WARRANTY (i.e. one year).

(3)

(b)

h)

Proving Defect

45

(1)

If you can prove manufacture defect, then defendants (retailer and manufacturer) all have breached the implied warranty of merchantability. It does not matter that they any of them did not know of the defect. DiEnno v. Libbey Glass Division (D.DE 1987) (a) Facts: Had a jar with peanuts. Had it in her office for 6 days. It shattered and cut her wrist. Cannot sue in strict liability in tort in DE. Assume that she bought the jar, opened it, and it shatters in her hands. She has no shards of glass. She wants to sue the retailer for implied warranty of merchantability. NOTE on Express Warranty Argument: DiEnno argues express warranty: the catalog states that it would open and close properly. (i) COURT: No. There is no evidence that she saw the catalog. (ii) BECKER: you don‘t need reliance for this theory. This rationale is wrong, but the answer is correct because THIS WAS NOT A BASIS OF THE BARGAIN if she never saw the catalog. (c) NOTE on Particular Purpose: Sometimes goods can be perfectly merchantable but not fit for a particular purpose. (i) § 2-315: Particular purpose requires that Seller knows of it and the Buyer relies on Seller‘s recommendation. (ii) EXAMPLE: Buyer needs a sound system that will be audible in this size room. Seller recommends a particular model. The model is perfectly fit for ordinary purposes but not for the large space the Buyer wants. (d) She must prove that the goods were not fit for their ordinary purpose. DO NOT HAVE TO PROVE ―HOW‖ or ―WHY.‖

(b)

46

(i) NOTE: if you had the glass, you could analyze it and prove particular defect (i.e. stress lines, impurities, etc.) (e) She tried to prove design defect by looking at ANOTHER JAR: would hope that the expert concludes that ALL THE JARS ARE DEFECTIVE. The retailer would defend: she did something incorrect that caused it to come apart. She banged it and weakened it, etc. NOTE: because of the time interval here: Buyer establishes that the jar was in her custody the whole time, opened it the way she normally opened jars. SUING THE WHOLESALER AND THE MANUFACTURER: the manufacturer – something intervening happened – and manufacturer is much farther away from DiEnno. (i) Manufacturer will argue that DiEnno has to prove the defect was there when it left manufacturer‘s hands. The retailer could easily have messed it up in the interim period. (i) When you do NOT have clear proof of design defect, then you have circumstantial evidence to determine where the defect came from. The further away the defendant is from the time of possession, the better the case. The more likely a jury may find that the malfunction was caused by intervening event the longer the time or distance along the chain of sale between the victim and the defendant. COURT: too many things could have intervened here; there is no basis for holding the manufacturer and the wholesaler liable.

(f)

(g)

(h)

(j)

(2)

Orlando (a) Facts: Orlando eats shrimp Creole at a restaurant, gets ill, sues the restaurant for breach of implied warranty of merchantability. 47

If the shrimp was spoiled, it IS A BREACH. Food is a sale of goods, and spoiled goods are not fit for consumption. (b) ISSUE: his proof is ―I ate it. I got sick.‖ Orlando DOES NOT HAVE TO PROVE what the defect was; he just has to show that something was wrong with the shrimp. COURT: yes, this is enough to get to the jury. NOTE: this could go either way; some courts would hold this was not enough to go to a jury.

(c)

(3)

COMMENT 13 to §2-314: (a) In an action of breach of warranty, it is of course necessary to show not only the existence of the warranty but the fact that the warranty was broken and that the breach of the warranty was the proximate cause of the loss sustained. In such an action an affirmative showing by the seller that the loss resulted from some action or event following his own delivery of the goods can operate as a defense. Equally, evidence indicating that the seller exercised care in the manufacture, processing or selection of the goods is relevant to the issue of whether the warranty was in fact broken. In Orlando, the restaurant is then permitted to prove that it exercised much care in serving food; allow the food curator to testify to storage procedures. (i) COURT: this is relevant under Comment 13 (ii) NOTE: if a product was defective, it does not matter whether the defendant was negligent or not; but HERE, there is the issue of whether the shrimp was actually defective in the first place. (iii) Not like the GM case where everybody agreed that the brakes were defective. The

(b)

48

defense here was that maybe plaintiff threw up for other reasons. (iv) Objection: makes the case sound like a negligence case when it is not; it is prejudicial to the plaintiff‘s contract case. The evidence of due care is too remote to the issue of whether the brakes failed. i) Implied Warranty of Merchantability and Leased Goods Kimco Leasing v. Lake Hortonia (S.Ct. Vt. 1993) (1) Facts: SunAmerica tells Fitness Center that it will sell to Kimco, and Kimco will lease to Fitness Center with an option to purchase after ten years. Equipment does not work. Kimco sues Fitness Center for the price of the lease; Fitness Center defends that the equipment does not work. FIRST ISSUE: is this a TRUE LEASE governed by Article 2A or is it a disguised sale under Article 2? (a) Why could it be a sale with a reservation of a security interest? Kimco is basically charging the equivalent of the purchase price over the period, and Kimco owns the property over the period, so if Fitness defaults, Kimco still owns the property. Applicable provision: § 1-201(37): definition of lease v. security interest. It is a 10% option to purchase. Issue is whether 10% of the purchase price is nominal or substantial. BECKER: More like a true lease, since 10% is substantial.

(2)

(b) (c)

(3)

If governed by Article 2A: (a) 2A has the same warranty terms as Article 2. 2A-210 has express warranties and Implied Warranties 2A-212, 2A-213 One exception: in 2A-212: ―EXCEPT IN A FINANCE LEASE, there is an implied warranty of merchantability….‖ (i) What is a ―finance lease?‖ 49

(b)

(ii) Assume it is. If so, then no implied warranty of merchantability. Then Fitness Center looks to SunAmerica, the manufacturer. (4) OTHER REMEDIES: 2A-209(1): The Lesee gets all the benefit of supplier‘s promise to the Lessor and of all warranties under a finance lease but is subject to all of the defenses under the original contract between Lessor and Supplier. (a) If when Sun sold to Kimco, Sun had disclaimer of warranties, they would apply down the line to Fitness Center. Because there are no rights against the lessor (Kimco), Fitness Center (lessee) gets the implied warranties the Seller is stuck with. But if Seller disclaims these warranties, Fitness has no claims. It is a way to sue the supplier even without privity of contract.

(b)

(5)

Is this a finance lease? (a) 2A-103(g): if lessor did not select or manufacture the goods (Kimco did not) AND one of the following occurs: (i) The lessee has to be given in one way or another the right to ascertain whether the supplier has disclaimed warranties. (ii) If the lessee doesn‘t get the contract, then the lessee has to have the right to APPROVE the contract (iii) Or if the lessee before signing receives a warranty statements applicable. (iv) Or (d) – if lease is not a consumer lease, lessor has to give certain information.

NOTE: the lessee must be given a fair shot to find out whether there are disclaimers first to be a finance lease. (6) In a finance lease, there is no implied warranty of merchantability, but you do have rights against the 50

ultimate supplier, but you are stuck if they have a disclaimer in their contract. (7) To deprive you of this right against the lessor, one of the four factors must occur. If not, then it is not a finance lease, and you have an implied warranty of merchantability. If there is an option to buy for $1, then it is an Article 2 case – not a true lease: Is there an implied warranty of merchantability? (a) Argue Kimco is a merchant in goods of this kind – it is their business. It is a disguised sale. This court: Kimco are not a merchant under Article 2 because Kimco is not an expert in the goods. BECKER: this distinction is not in the statute; you just have to sell the goods; you don‘t have to be an expert in the goods.

(8) (9)

(b)

(10)

SUMMARY (a) (b) If it is a finance lease, then under 2A, no rights against Kimco the lessor. If Article 2 case and not a true lease, then Kimco should probably be a merchant and should be given the implied warranty of merchantability. If holding Kimco is exempt under Article 2, then the plaintiff has no protection under Article 2A to know in advance if there are disclaimers or not.

(c)

j)

State Implied Warranty Law Versus Federal Law. Duvall v. Bristol-Meyers Squibb Co. (4th Cir. 1996) (1) Facts: Duvall buys a penial prosthesis that is governed by a federal act, and it fails to work. Plaintiffs then sued for breach of warranty, etc. and defendants would claim that the MDAA preempts these actions.

51

(2)

If federal law regulating a particular product explicitly or implicitly preempts state law, then federal law controls. ASK did Congress intend to preempt state law? Here: The Medical Device Amendment Act states that no state may establish different requirements for safety or effectiveness. COURT: implied warranty not preempted; the Act doesn‘t have any particular safety requirements. Then Argued: the express warranty in the brochure: Express warranty claims are not preempted unless the claim is based on mandatory federal language. If the federal government mandates certain language on the exterior of the package, there is no express warranty claim.

(3) (4)

(5) (6)

(7)

3.

Implied Warranty of Fitness for Particular Purpose a) §2-315- Where seller at the time of contracting has reason to know any particular purpose for which the goods are required, and that the buyer is relying on the seller‘s skill or judgment to select or furnish suitable goods, there is unless excluded or modified under the next section an implied warranty that the goods shall be fit for such purpose. (1) The purpose of this section is to supply a warranty that goods will meet a particular purpose needed by the buyer over and above the implied warranty requirements. REQUIREMENTS: (a) (b) (c) (3)
THERE MUST BE A PARTICULAR PURPOSE;

(2)

SELLER MUST KNOW THE PARTICULAR PURPOSE; AND
MUST KNOW THAT BUYER IS RELYING ON THE SELLER‘S SKIILL OR JUDGMENT.

PROBLEM 10, page 182:: Buyer goes into a audio store and asks for a system that will be audible in particular dimensions of a room. Seller recommends 52

a model. Buyer claims it is not audible for the dimensions of the room. If Seller says, ―This stereo should do the job. That‘s a fine model.‖ (a) Seller‘s argument: Buyer did not rely on Seller‘s judgment or skill. Seller knows the particular purpose but does not know that Buyer is relying on his judgment. Goods are perfectly merchantable but not fit for particular purpose. Watch for If Buyer discusses a particular purpose, and Seller states an express warranty.

(b) (c) b)

Rubin v. Marshall Field Co. (IL 1992) (1) Facts: Buyer has a severe dermatological reaction from makeup bought at Marshall Field‘s. Both experts agreed that the injuries she sustained to her eyes were the result of the eye makeup remover she purchased there. They agree also that this reaction is peculiar to her for this product. Sues Seller. Is there a breach of implied warranty of merchantability? (a) NO – an idiosyncratic reaction – unique reaction to her is NOT a breach of the implied warranty of merchantability. NOTE: If 10% of people had this reaction before and the company does not warn, then that IS a breach of the implied warranty of merchantability.

(2)

(b)

(3)

She argues implied warranty of fitness for a particular purpose: (a) She asked the salesperson if the product was safe: salesperson showed her the box that said, ―Recommended for all skin types.‖ Salesperson said, ―If it weren‘t safe for you, it would have said so on this box.‖ (i) She wins on this issue. The particular purpose: safety for her and her skin type in removing makeup. 53

(4)

Is this enough for the Seller to know that the Buyer is relying on her judgment? (a) COURT: YES. The Seller knew Buyer was relying on her judgment. The fact that she had an idiosyncratic reaction is not a defense here: policy of holding the Seller responsible for giving specific advice under the circumstances.

(5)

EXAMPLE: suppose she sues the manufacturer of the eye makeup remover: (a) (b) Breach of implied warranty of merchantability: idiosyncratic reaction – NO Breach of implied warranty of particular purpose: NO – no basis for reliance here – no knowledge of particular purpose. Breach of express warranty: § 2-313: is it an affirmation of fact relating to the goods? (i) She would have to show that ―Recommended for all skin types‖ means ―safe for all skin types‖ (ii) Does it necessarily equate to ―absolutely safe for everybody to use?‖ (a) SELLER: this language does not mean absolutely safe.

(c)

c)

Smith v. Stewart (KA 1983) (1) (2) Facts: Sells a yacht, makes an express warranty, and goods clearly are defective. Buyer cannot sue on express warranty here: § 2607(3)(a): If tender is accepted, Buyer must within a reasonable time notify the Seller that he has discovered a defect or otherwise be barred. If you don‘t give notice, it‘s an absolute barred from any remedy. Notice before lawsuit. But the lawsuit is not notice.

54

(a)

There is NO equivalent under tort theory. Under tort theory, just sue within the statute of limitations period.

(3)

Buyer does not have an implied warranty of merchantability claim: Seller is NOT A MERCHANT. He‘s a dentist. He does not deal in goods of this kind. (a) NOTE: a dentist who collects and trades antique cars might qualify under this section.

(4)

Implied warranty of fitness for a particular purpose: COURT: NO. No particular purpose here; nothing different than fitness for ORDINARY PURPOSES, which is the implied warranty theory that cannot apply here.

d)

PARTICULAR PURPOSE is a specific use peculiar to the nature of the Buyer’s business. COMMENT 2 to §2-315 (1) 10 Cir. EXAMPLE: Buyer buys clothes dryer that explodes and burns down a house, including an $80,000 rare book collection. (a) No implied warranty of merchantability – it was disclaimed under § 2-316. Otherwise would have existed. Buyer sues under the implied warranty of fitness for a particular purpose: COURT: the fact that the dryer did not function ordinarily is not a particular purpose – functioning normally is an ordinary purpose.

(b) (c)

e)

Ingram River Equipment v. Pott Industries, Inc. (8th Cir. 1987) (1) Facts: Ingram orders four barges equipped with steam coil systems to transport heavy petroleum products. It is clear that the steam coil systems do not work. $360,000 in damages. Ingram sues in NEGLIGENCE and gets a recovery. East River goes to the US Supreme Court on the same issue, and the US Supreme Court reverses:

(2)

55

Economic loss is NOT RECOVERABLE in strict liability or negligence. (a) HOWEVER: East River: Supreme Court decided as a matter of federal tort law in admiralty in East River, the Supreme Court set forth this rule– which means states are free to deviate from this result for state tort laws. As a result, it became so influential that states followed this rule in state tort liability. The definition of economic loss varies among states.

(b)

(3)

Plaintiff is left with UCC Theory: (a) Implied warranty of merchantability theory: § 2-317(c): the parties did not intend to create an implied warrant of merchantability that would be inconsistent with specifications— merchantability is not available USES breach of implied warranty of fitness for a particular purpose:

(b) (4)

How do you decide whether goods are used for an ordinary purpose or a particular purpose? HERE: Ingram calls the goods ―specially equipped tank barges.‖ Potts calls them ―heating-coil equipped barges,‖ an ordinary purpose. (a) EXAMPLE: going to a regular shoe store to buy mountain-climbing shoes – particular purpose. Going to a mountain-climbing store to buy these shoes – that is an ordinary purpose. COURT: Court cites Comment 2 and gives above example. Then says that particular purpose depends on the context in which the bargain was made. The trial court made a factual decision that this was a particular purpose; affirmed. Potts: the Buyer did not rely on our expertise, since the buyer had expertise. COURT: Minor modifications in the product and some

(b)

(c)

56

expertise does not preclude recovery if Buyer is still relying on Seller‘s skill or judgment. (5) NOTE ON DAMAGES: you spend $x for the barges. They are not worth what you paid for them. § 2-714(2) controls the measure of damages with respect to the goods themselves. (a) Usually the difference between what you paid and what they are worth in their defective condition. § 2-714(3): can also recover incidental and consequential damages: § 2-715(2)(b): includes injury to person or property, and the general formula in (a). NOTE: there is no class of damages that cannot be recovered under the UCC. Recover them under § 2-714 and § 2-715.

(b) (c) (d)

4.

Warranty of Title a) § 2-312 – Does NOT require seller to be a Merchant (only implied warranty of merchantability requires this). (1) (2) Not a warranty of quality; a warranty that the Seller is passing you good title. Not called an implied warranty of title but nevertheless, it‘s always in there. Arises in every contract unless disclaimed.

b)

Jefferson v. Jones (MD 1979) (1) Widely Accepted Proposition -The warranty of title protects the Buyer against superior claims and against any litigation that is based on a reasonable claim to title even if the Buyer ultimately wins the litigation. Before a third party‘s claim may result in a warranty breach, the claim must be COLORABLE, REASONABLE and NONSPURIOUS claim. (a) IF someone claims God gave them the right to the good, this is spurious and seller is not responsible.) 57

(2)

(3)

If someone sells you a good and a third party has a reasonable claim for title, that is a breach of warranty of title. You are entitled to ―quiet possession.‖ You should be protected from other people claiming reasonable title. (a) Facts: Jefferson buys a motorcycle from Jones. Years later, Jones is asked by proof of ownership by the police. He produces his title of ownership. Police take possession of the vehicle because they suspect it is stolen. Jefferson brings an action in replevin and gets the bike back. Jefferson then sues for attorney‘s fees for the action in replevin. ISSUE: are attorney‘s fees recoverable under § 2-715? (i) At common law, the warranty of title protects only if somebody showed superior title, so the buyer would lose here. (ii) COURT: the purpose of the UCC was give the Buyer greater protection – superior title is one way among many: the Buyer is protected, there is a breach of the warranty when someone shows superior title to the Buyer. (c) The police action was reasonable here, because the title certificate differed from the vehicle itself – the vehicle ID number – so the police raised a reasonable question as to whether Buyer had title. This is then Seller‘s responsibility. The issue of DAMAGES here: Buyer wants attorney‘s fees from the Seller for litigating this action. (i) § 2-714: when the Buyer has accepted goods, he may recover damages for nonconformity – a breach of warranty is a nonconformity. (ii) CONSEQUENTIAL DAMAGES under (3): look to § 2-715(2)(a) and (b). 58

(b)

(d)

(a) Argue attorney‘s fees are consequential damages under 2715(2)(a): The Seller knew the Buyer needed to have good title. The loss resulted from this need. (b) NOTE: The ―American Rule:‖ a litigant typically cannot recover attorney‘s fees from the other party. (i) Different here: the PREVIOUS litigation with the POLICE department – trying to recover what was spent in SOME OTHER LITIGATION as damages in this lawsuit. (c) NOTE: sometimes consumer protection statutes will permit the plaintiff to recover what the plaintiff spent in attorney‘s fees. Encourages people to enforce the right to recover.

V. VI. VII.

c) Extension of Warranty, and the Relationship Between Tort and Warranty E. Modification RISK OF LOSS TRANSPORTATION, DELIVERY AND INSPECTION A. Transportation B. Delivery and Inspection PERFORMANCE AND BREACH A. Right to Assurance and Anticipatory Repudiation B. Rejection and Revocation of Acceptance C. Buyer’s Remedies D. Damages re: Accepted Goods E. Buyer’s Right of Offset F. Buyer’s Right to Goods G. Disclaimer and Limitation of Remedy H. Seller’s Remedies I. Excuse J. Waiver of Breach K. Statute of Limitations 5.

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