1 Commercial Law Fall 1999 Judge Smalkin I. UCC Generally A. Called Articles in UCC, called Titles in Maryland Commercial Law Code B. Every state commercial code will vary from the UCC, Most of Maryland’s variations are in Article 9, but some are in Article 2. C. The areas of warranties and third party beneficiaries (when consumers are involved) are the most subject to local variation for public policy reasons. D. Maryland -choice of law -the place where the contract was formed. E. Remedies and contract formation provisions are almost identical to the UCC. II. Article I General Provisions, Subtitle I A. Gives uniform foundational principles that apply to all other sections (Leases, Commercial Paper, etc.) § 1-102 Purposes; Rules of Construction (1) Rule of liberal construction, Art. 1-10 should be liberally construed -to promote policies of the UCC that are listed in (2) -liberal construction to accommodate trade, usage, custom -giving effect to parties’ agreement -put it in context of how people really act (2)Underlying purposes of UCC (A) codification of the common law as it existed in 1940s (B) codification of common commercial practice (custom, usage, and agreement of the parties -how things work in the real world) -this will change and adapt as commercial norms change (C)to make the law uniform among jurisdictions -this is not quite true, uniform on such things as offer and acceptance, not uniform on warranties because public policy reasoning creates differences among jurisdictions (ie. Can’t limit consequential damages in contracts for consumer goods in MD) (3) The provisions of the code may be varied by agreement, except as otherwise provided in the code, except that the obligations of GOOD FAITH, DILIGENCE, REASONABLENESS, and CARE may not be disclaimed by agreement but the parties may by agreement determine the standards by which performance of such obligations is to be measured if such standards are not manifestly unreasonable. A. These are questions of fact, what is a reasonable standard and these decisions are made by the jury 2 B. NOW -juries are randomly selected, in England the jury used to be made up of people who knew the trade usage C. There has been a shift to ADR because today’s juries are so unpredictable. § 1-103 Supplementary general principles of law applicable A. Principles of law and equity -paramount even over UCC 1. UCC is not exclusive source of commercial law, it is not even the basic source it’s law and equity 2. Hierarchy --Common law and equity over UCC -unless UCC specifically displaces or gives the rule of decision, only then will UCC govern (see chart in notes) -so Law and Equity governs things not explicitly covered in the UCC, only displaced if codified -some things are so well settled there is no need to codify 3. FACTFINDER A. LAW -damages -JURY B. EQUITY -specific performance -JUDGE B. Principles of Law and Equity Include: 1. Law Relative to Capacity to Contract A. Contracts made by minors are voidable at the option of the minor -age of majority is 18 B. Defacto corporations when charter is forfeited -will depend on local law whether they have the capacity to contract. 2. Law of Principal and Agent A. Agent is someone bound to be charged by a principal. B. 3 Kinds of Agency 1. Express agency -expressly authorizes agent to do something on principal’s behalf -only includes authority to do exactly what was told 2. Implied authority -authority to do everything in connection with the business -not just express tasks -but the agency has not been specifically authorized. 3. Apparent authority -turns on what a 3rd party has been led to believe by the principal about the scope of the agent’s authority A. Like agency by estoppel B. Ex. Insurance agent -held out as an agent -principal has held him out as an agent 3. Estoppel A. Promissory estoppel -will support a contract that is otherwise without consideration if it has been relied upon B. Common element of all estoppels -conduct by one party on which another party justifiably relies to her detriment 3 C. Fair play -something that is relied upon must be upheld. 4. Fraud -Tort (contract damages are often low -no punitive, tort can be high) A. Called Deceit in Maryland -false representation of a material fact 1. Opinions are not actionable 2. Promises/Statements of Intention are actionable if it can be proved that at the time the promise was made, actor had no intention to carry it out. 3. Must be made w/intent to deceive (scienter) on which another party justifiably relies to his detriment. 4. Standard of Proof -Clear and Convincing Evidence 1. Higher than the normal Preponderance of the Evidence tort standard, but not as high as Proof Beyond a Reasonable Doubt 5. Misrepresentation A. Same elements as fraud but do not have to prove it was done with an intent to deceive (can be mere negligence) B. Standard is preponderance of the evidence C. Requires some “special relationship” between the parties -can’t just be someone who walked up to tell you something 6. Duress/Coercion A. Must go beyond economic pressure in order to be defense to a contract -must be almost physical coercion 7. Mistake A. Mutual mistake -as to a material fact will prevent the formation of a contract -no meeting of the minds -will relieve parties from the contract. B. Unilateral mistake -does not relieve one from a contract 8. Bankruptcy A. Governed by federal law -b/c the Constitution mandates it B. Exclusive federal jurisdiction C. Normally a court judgment isn’t worth much unless other side is rich -this is when insurance and bankruptcy law can become very important. 9. Other Validating or Invalidating Cause A. Like illegality -this will invalidate the contract B. What is a contract contract? 1. A promise or set of promises that the law will enforce 2. Private contract will become public when it seeks to be enforced, but content is still private 4 3. Law does not compel parties to put particular clauses in the contract -its up to the parties 4. The code is largely full of GAP FILLERS A. If contract doesn’t cover delivery terms, etc. then UCC will give the contract an infrastructure and foundation on which you overlay your private agreement. C. What is the common law law? 1. The law of England, law that “is”, the law that we inherited 2. The way people behaved on July 4, 1776 3. Judges ascertain what the common law is 4. A distillation of behavior. D. Article 2 Sales -Generally 1. Its a distillation of behavior 2. It makes sure not to unduly cramp private behavior -allows people to have special provisions, change delivery terms, etc. § 1-106 Remedies to be Liberally Administered (1) Benefit of the Bargain Rule -expectation damages -restorative provision -to put the aggrieved party “in as good a position as if the other party had fully performed” -compensatory damages A. No consequential damages, special damages, or penal (punitive) damages unless specified in the UCC III. Article I, Subtitle 2 -General Definitions and Principles of Interpretation A. § 1-201 General Definitions § 2-105 Also contains a definitional section 1. Set of definitions that apply to all UCC 2. Always look at definitional cross references B. Definition of Good Faith -Two definitions depending on whether or not party is a merchant – this is a subjective standard that is decided by the jury – will depend on state of mind, intent, etc. DEFINITIONS 1. Non-merchant -§ 1-201(19) Good faith defined as honesty in fact in the conduct or transaction concerned 2. Merchant -§ 2-103(1)(b) Good faith defined as honesty in fact (subjective) and the observance of reasonable commercial standards of fair dealing in the trade. (Objective) -this is a much higher standard. A. Merchant -§ 2-104 -a person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge . . .whether one is a merchant is a question of fact for the jury (ie. Deals in baseball cards or wrote an entire book on baseball cards) (see MORE on Merchants below) 5 3. Also defined at Sec. 3-103(a)(4) same definition as Sec. 2-103(1)(b) 4. Examples – having an ulterior purpose in conducting transaction, lying, cheating, stealing, dishonesty MAY NOT BE DISCLAIMED Sec. 1 1-203 Obligation of Good Faith 1. Sec. 1-102(3) – good faith may not be disclaimed by agreement but parties may by agreement determine the standards by which performance of such obligations is to be measured. – Duty of Good faith is incorporated into every contract C. Other § 1-201 Definitions (1) Action -a lawsuit (2) Aggrieved Party means a party entitled to resort to a remedy (3) Agreement -means the bargain of the parties in fact as found in their language or by implication from other circumstances including course of dealing, etc. A. What did the parties decide -usually informal (fax or phone) 1. Bargain in fact 2. Sale of apples, no price or delivery terms B. Agreement is necessary (sine qua non) to a contract but a contract is not necessary to an agreement. 1. You can have an agreement that’s not a contract. 2. You can’t have a contract without an agreement. 3. Not every bargain as legal consequences -if it does, its a contract (11) Contract A. Agreement becomes a contract when we add the legal obligation B. Parties will only care if its called an agreement or a contract when they want to enforce it (must be a contract) C.Contract is a promise or set of promises that the law will enforce -the total legal obligation which results from the agreement or bargain as affected by the UCC and the common law D. Once its a contract, UCC Matrix is placed on top of the bargain -Each level is a matrix -always start with the terms of bargain and work from there 1. Terms of the Bargain itself 2. UCC default rules (delivery terms, price) 3. Course of performance, course of dealing, etc. (10) Conspicuous A. that a reasonable person against whom it is to operate ought to have noticed it. B. Larger or other contrasting type or color text. C. This is a question of law for the court, not fact (17) Fungible A. Goods which have a separate identity but when put together they lose their identity and can be exchanged freely. B. Grain in a grain elevator. (25) Notice – Internal set of notice rules – A person has notice when : 6 (a) he has actual knowledge of it; or – subjective (b) he has received a notice or notification of it; or See (26(a)(b)) © from all the facts and circumstances known to him at the time in question he has reason to know that it exists. 1. this is an objective, reasonableness standard that jury decides 2. Notice is proved by A. Direct evidence – admission of knowledge B. Circumstantial evidence – the letter was sitting on the desk – need an inference to connect it – this evidence is not as concrete. A person “knows or has knowledge” when he has actual knowledge of it. -Notice is a lesser state of mind that knowledge, you can have notice without knowledge. -More is required to have knowledge – must prove actual knowledge to the trier of fact. -NOTE: some provisions require knowledge, but most only require notice. -“Discover” and “learn” = “knowledge” (26) A person “notifies” or “gives” a notice to another by taking such steps as may be reasonably required to inform the other in ordinary course whether or not such other actually comes to know of it. (most UCC provisions require this) (1) this only requires that it be delivered or sent in the proper manner, doesn’t even have to actually be received – did you do the right thing to send it out? (2) This is judged by ordinary business practice – was it logged out as sent, is there a record of what was sent, was it put in the mail cart? – court will rely on testimony as to what would normally constitute notice under these circumstances. (3) Sent is what is important, not receipt, except in some provisions A person “receives” a notice or notification when (most UCC provisions don’t require this) (a) it comes to his attention (actual knowledge); or (b) it is duly delivered at the place of business through which the contract was made (this is used more often) -ie using certified mail to prove, may still need to prove what’s inside the envelope. (27) Notice to an Organization (1) Receipt of notice must be proven to constitute notice (2) effective when it is brought to the attention of the individual conducting that transaction, and in any event from the time that it would have been brought to his attention if the organization had exercised due diligence. a. Due Diligence – routine that is followed to ensure that notices 7 are getting to the right people internally. b. Question of Fact – when it would have gotten to the right person had due diligence been exercised. (3) These requirements can be superseded by parties own agreement, but these provisions are generally satisfactory. (37) Security Interest -defining what a security interest is as opposed to a lease (38) Send (1) Read in connection with 25-27 above (2) Means to deposit in the mail or deliver for transmission by any other usual means of communication. D. Time; Reasonable; Seasonable Time – Sec. 1-204 1. any time which is not manifestly unreasonable may be fixed by agreement. 2. Reasonable – depends on the nature, purpose and circumstances of such action – depends on general business practices, may depend on type of goods shipped (perishable) 3. Seasonable – when it is taken at or within the time agreed (as stated in the contract) or if no time is agreed at or within a reasonable time. (seasonable if reasonable) E. Course of Dealing and Usage of the Trade – Sec. 1-205 (1) Course of dealing – sequence of previous conduct between the parties to a transaction, establishing a common basis of understanding of each others conduct A. What is the “usual order” – the broad course of conduct btw the parties – not necessarily with respect to one transaction – an interpretive tool, decoding the internal communications the contracting parties have with one another. B. Question of Fact for the Jury -Proven by testimony, records, invoices C. Even if buyer and seller change positions, course of dealing still applies – common basis of understanding (2) Usage of the Trade – any practice of method of dealing having such regularity of observance in a place place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question. A. Includes lingo and practices of the trade – Ex. certain return allowance for bruised fruit or things you can’t sell B. Usually applies locally but this may change with e-mail C. Also a question of fact – proven by testimony of experts in the industry. If, however, the trade practice is in a written industry code, the interpretation is for the court as a question of law. D. Unlike course of dealing which is between parties, you are bound by usage of the trade the moment you enter that line of business and create a reasonable expectation that the usage of the trade will be followed. 8 (4) Hierarchy (A-C – A controls over others) A. Express Terms B. Course of Dealing C. Usage of the Trade D. HYPO – Party to the contract did not read the express terms of the contract but it happens to be totally different from normal trade usage – do express terms still govern? 1. UCC If inconsistent, written terms control, BUT by case law, judges are sympathetic and the use of course of dealing and usage of the trade has become a way to relieve people from fundamental unfairness. 2. To get around the hierarchy, can argue that interpretation was unfair or that usage of the trade provided the baseline expectation of conduct. 3. Columbia Nitrogen v. Royster Guano a. Fertilizer business – buyer becomes seller, seller becomes buyer b. Phosphate became extremely cheap, Columbia did not want to pay contract price (breaches are always market driven – you can get it cheaper somewhere else). Contract was for a firm fixed price. c. Issue – Should usage of the trade evidence be admissible? d. DC – excluded the testimony, express terms were clear e. 4th Circuit reversed – said it could be admitted (Smalkin disagrees) 1. Parol evidence issue – usage of trade evidence can be admitted to supplement terms – this is consistent with 1-205. 2. Intersection of public and private law. 3. Whether the evidence of usage of the trade is consistent with the terms of the agreement. 4. Contract does not say that usage of the trade evidence cannot be used. 5. Contract doesn’t say you can’t raise or lower the price. f. Letting this evidence in allows sympathetic jury to think its unfair to enforce the contract. 4. What’s fair – to enforce the terms of the agreement OR to let the buyer out because the market has fluctuated so much. a. Appellate judges are not held accountable, they often act as policy making bodies – decisions may not accord with the law but they advance “substantial justice” principles. b. These types of decisions would not be justified under 1-9 205 Course of Dealing and Usage of the Trade and 2-202(a) Parol evidence (6) Evidentiary rule – if you use usage of the trade evidence, you must notify the other party as to prevent unfair surprise. If not, the evidence will be barred. You will be bound by trade usage whether you knew about it at the time of dealing or not. IV. Article 2 – SALES, Subtitle 1 -Construction and General Subject Matter A. Sec. 2-102 – Scope 1. This title applies to “transactions in goods” 2. Does not apply to security transactions – other provisions of UCC apply to security transactions. 3. “Transaction” – sale, lease covered by Article 2A, gratuitous bailment – letting someone borrow something -may or may not be covered. 4. “Goods” – Sec. 2-105 – “All things (including specially manufactured goods) which are movable at the time of identification (2-501 – identification occurs when the goods are existing and identified) to the contract for sale” 2-501 Identification occurs: A. Identified (in the UCC sense) when they are existing and identified (as identified between the parties – looking at art – I’ll take that one) B. if contract is for the sale of future goods or fungible goods picked up from a stockroom full of goods of the same kind that are not specifically identified in advance, they are identified when they are shipped, marked, or otherwise designated by the seller 1. Depends on action of the seller 2. Doesn’t need to be physical action 3. When the forklift operator gets it off of the rack C. Generally identified at time specified in contract or at time it is assembled and not just parts, ie. When the jeans are physically segregated from the other jeans in the warehouse 5. “Movable” – A. A question of fact for the jury B. Must have some kind of tangibility C. Cape Hatteras lighthouse? 6. Not covered by Article 2: A. Services 1. Hypo -hiring someone to build a swimming pool A. Digging the hole -service B. Pouring the concrete -service even though provider is using tangible items C. Building a sauna -two problems 1. Temperature gauge wrong -product defect 2. Door attached wrong -service defect 10 3. Very hard to tell the difference B. Ideas – probably not C. Real estate or non-movable improvements to real estate. But Article 2 does impinge slightly on real estate. 1. § 2-107 -Goods to be severed from the realty (1) contract for the sale of minerals, oil, gas or a structure or its materials to be removed from realty is a contract for the sale of goods within the meaning of this title if they are to be severed by the seller. Before severance, only a contract for sale of the land -real estate (HYPO -want to sell farmhouse that has been severed from the land -will come under UCC only if its severed by the seller, otherwise its real estate, if it remains attached, its real estate) (2)Timber and crops can be severed by buyer or seller even if it forms part of the realty at the time of the contract. -because these things can easily grow back. (HYPO -six bushels of apples to be picked from trees on land -yes, governed by the UCC if they are severed by the buyer or seller) 7. 2-105(2) Future Goods – Goods must be both existing and identified before any interest in them can pass. Goods which are not both existing and identified are “future goods” – present sale of future goods is still a sale of goods under Article 2. A. Example – hire someone to make & deliver a cookie machine in the future – this is probably a sale, although begins to sound like a service. 8. Tests to Determine whether GOOD or SERVICE in Hybrid Sales/Goods Transactions A. Predominant Purpose -Is the predominant purpose of the transaction to sell goods or services? -building of pool would be a service -using this test, even if diving board malfunctioned would still be a service -improvement to real estate -UCC would not apply B. Gravaman of the Action -is the source of the complaint the goods or services part of the transaction? 1. Maryland has adopted this test with respect to consumer goods 2. If diving board malfunctions -this is a good, so UCC would apply 3. Anthony Pools -the diving board has a separate identity that is movable and identifiable as a consumer good notwithstanding its attachment to something else, thus the UCC will apply C. HYPOS -Bottom line -most of these are services not goods, but the Courts have a hard time refusing to provide consumers with UCC protection. 1. Doctor gives you a shot and you get a reaction from the shot A. Service to go to the doctor, but what about the needle itself? B. What if the doctor gives you a sample? 11 C. If the product defect is the gravaman of the action, the UCC may apply. D. But gifts are not usually covered by the UCC. 2. Electricity A. The flow of electrons is in between a particulate and wave form -many courts have said it is a good governed by the UCC. B. Maryland case -nondelivery of electricity -the wiring was never finished -this was found to be a service to which the UCC warranty provisions did not apply. 3. Cable Television -Kaplan A. Court distinguishes cable TV which is a service from electricity, gas, and water that might be goods b/c they are generated by the company and they are measurable. -Courts have said these are goods for UCC purposes in order to protect consumers. B. But physically, there is no distinction btw cable (fiber optics, light pulses) and electricity C. Court still says that Article 2 of UCC does not apply. D. Even if a transaction is determined not to be a transaction in goods, it may still be governed by the UCC by analogy. B. Sec. 2-103 Definitions and Index of Definitions (cross references) (also see 1-201) 1. Good faith defined -SEE ABOVE C. § 2-104 Definition of Merchant 1. See definition above under Good faith 2. Whether one is a merchant is a question of fact for the jury 3. Official Comment 2 -3 kinds of provisions apply to merchants A. Contract formation (2-201,2-205, 2-207, 2-209) -statute of frauds, etc. -for purposes of these sections, a broad definition of merchantability is adopted -includes almost every person in business, even banks and universities B. Warranty of Merchantability (2-314) -only applies to a seller who is a merchant with respect to goods of that kind. This restricts who is a merchant to a much smaller group -a dealer in goods of that kind. C. Good faith (2-103) -reasonable commercial standards of fair dealing in the trade -different definition of good faith for merchants -applies to practice and goods definition of merchant, doesn’t apply to consumers -ie. Bill Gates going to the grocery store is not held to the mercantile standard of good faith. D. Function of the UCC in the Sales System 12 1. HYPO -Sale of Blue Jeans A. Clearly a sale of goods B. Contract was formed when you faxed the purchase order (offer), the acceptance may be the shipment itself (2-206(1)) -acceptance in any manner reasonable -can be a minimal paper trail, can even be negotiated over the phone C. When are the goods identified? As soon as the jeans are physically segregated from other things in the warehouse (2-501) D. Jeans are shipped and the zippers are defective -common sense -the shipper will send replacements, if this doesn’t work, the UCC will come in to fill the gaps (2-608 -revocation of acceptance) -this doesn’t have to be invoked, its just there if you need it. E. Businesses have a legal and economic incentive to behave rationally -keeping the customer is more important than the money you’ll lose replacing the jeans. 2. Ways to Opt Out of the UCC A. Some industries completely shun Article 2 and have adopted their own rules -diamond and grain industries. B. May vary by agreement but may not disclaim good faith, etc. 1-102(3) C. May opt out through 1-205 -Course of dealing and usage of the trade -if the industry does things differently than the UCC D. Arbitration and Dispute Resolution can take you out of this whole system -basic fairness, work it out between parties rather than resorting to a legal remedy. E. Generally, though, people don’t opt out and the UCC provisions come in handy as gap fillers to deal with provisions not agreed upon. E. Leases Article 2A 1. Article 2A is read in pari materia with Article 2 -they are of similar substance and are to be construed similarly. 2. Same warranties and remedies. 3. They are separate b/c the courts were split as to whether a lease was a sale of goods so they put it in a separate article. 4. What Article governs will depend on whether the transaction is a lease (2A) or a secured transaction (Article 9). A. Secured transaction is a transaction in which financing is provided by the financier and the financier takes a security interest. Secured transactions are often disguised as leases because leases receive more favorable tax treatment. Today , there are less incentives to lease as a tax dodge. B. Lease -better tax treatment and it is much easier to get your money back with a lease. Two types of leases governed by Article 2A: 1. Consumer Lease -a lease between a lessor that is in the business of leasing and an individual lessee who leases goods for personal, 13 family, or household use -two parties -like leasing a car directly from the dealer 2. Finance Lease -Involves three parties rather than two, and the lessor merely provides financing to the lessee. C. In re Paz -lease or security interest? 1. Creditors gain advantages by characterizing agreements as leases. Lease -a lessee just takes their interest back, secured transactions become much more complex, lease receives better treatment in bankruptcy. 2. Court determined that it was a lease and not a security interest D. § 1-207(37) -security interest -“an interest in personal property or fixtures which secures payment or performance for an obligation.” This section helps to define lease -its sets our 4 different scenarios in which the transaction considered must be a disguised sale. MOST IMPORTANT PROVISIONS (a) whether a transaction is a lease or a disguised sale is determined by the facts of each case. -Question of fact for the jury. A transaction creates a security interest if the consideration the lessee is to pay the lessor for the right of possession and use of the goods is an obligation for the term of the lease not subject to termination by the lessee and: (seller sells goods on credit and retains a special right to foreclose on the goods if the buyer fails to pay.) (i) the original term of the lease is equal to or greater than the remaining economic life of the goods -expectation is that they are shot when they are returned -this is much closer to sale than lease (iv) the lessee has the option to become the owner of the goods for no additional consideration or nominal consideration upon compliance with the lease agreement. -thus the lessee owns at the end of the term without paying anything else. (b) HOWEVER, a transaction does not become a security interest merely because it provides that: (v) the lessee has the option to become the owner of the goods for a fixed price that is equal to or greater than the reasonably predictable fair market value of the goods at the time the option was performed. -thus, it can still be a lease, not a disguised sale E. Economic realities test -more likely you are to get the goods back, more likely it is a lease. F. CISG -Convention on Contracts for the International Sales of Goods (CISG) 1. International treaty -governed by Supremacy clause so it trumps all inconsistent state law. 2. Commercial only, does not apply to consumer goods, unless the seller neither knew nor should have known that the goods were being purchased for a consumer 14 purpose. 3. Does not apply to the liability of the seller for death or personal injury caused by the goods sold. 4. Deals mainly with choice of law (what applies) and both parties must have known that there would be an international transaction. 5. HYPO -You buy a toaster oven in Circuit City and it was made in Taiwan -you didn’t know this so CISG would not apply. G. Problems 1.2a. Place of delivery is not specified in the contract. First 3 deliveries, seller delivers to buyer’s place of business, then the seller decides that the buyer must pick up at the seller’s place of business for the last two deliveries because this is the default provision in the UCC -§ 2-308(a). Can the seller insist on this? Probably not. -COURSE OF PERFORMANCE A. §1-201(3) Agreement can be formed by implication from course of dealing (1-205), course of performance (2-208), or usage of the trade. (1-205) B. §2-208 -Course of performance -Narrower focus than course of dealing -focuses on the behavior surrounding this particular contract. 1. 3 out of 5 deliveries made one way and no objection was made -why would buyer object, he like this? 2. This will be relevant to determining the meaning of the agreement. 3. 2-208(2) Hierarchy -adds an element to the 1-205 Hierarchy A. Express terms B. Course of performance C. Course of dealing D. Usage of the Trade 4. 2-208(3) -where there has been no enforcement of a contract provision because it has been ignored -ex. 5 day payment provision has been in contract for 4 years and for that entire time the buyer has been allowed to pay in 15 days, course of performance will be relevant to showing a waiver of a tem inconsistent with that performance -a variant of estoppel -behavior that lets another party know that you are not going to enforce something. C. §1-103 -Supplementary general principles -Equitable doctrine of Estoppel may apply here 1. One party gives expectation to another that contract will be performed in a certain way. 2. Buyer justifiably relied to his detriment because this will make the contract more expensive for the buyer. 15 D. § 2-103 -Good faith -A. This could also be a violation of good faith on the part of the seller, he is probably a merchant so he would be held to the higher standard. Yes, they are merchants under §2-104. 1.2b. No deliveries have yet been made. However, in prior deals btw these parties, the seller has delivered the goods to the buyer. COURSE OF DEALING A. Note -no estoppel argument here b/c there has been no performance in this particular transaction. 1.2c. No deliveries, no prior dealing, but the custom in the lumber industry is for the seller to deliver to the buyer. -TRADE USAGE 1.3 Hybrid goods/services contract-optometrists who make and fit contact lenses for the problem wearer. Wants to disclaim all warranties Can they do so? A. In Maryland, can’t have a form contract that disclaims all warranties in a consumer transaction. Also warranty of merchantability may apply by analogy even if this is found to be a service contract. B. § 2-102 Scope, §2-105 Goods -Factual inquiry in each case C. Doctor supplies you with contact lenses -the lenses are goods D. Predominant purpose test -medical services -but most states would consider this a sale -it is not merely incidental to treatment -the contacts are the purpose of the visit. E. Gravaman of the Action Test -In Maryland for consumer goods 1. UCC would apply to the actual goods -contacts because they have a separate identity (Anthony Pools case) if the injury comes from the contact lenses themselves. 1.4 Oral contract btw law school classmates at a reunion -she does collect Rolls Royces A. UCC governs all sales of goods -even selling your friend a doughnut B. Is she a merchant? If yes, additional good faith duties (2-103) C. Statute of frauds -she failed to object to a certified letter stating the terms of the offer (2-201 (2)) -reverse memorandum -see below -both must be merchants -P signs the memorandum and sends it to D 1. D -she is a collector -question of fact -would probably be a merchant 2. P -buyer -he is not a merchant 3. Thus, 2-201(2) reverse memorandum would not apply -thus it does not satisfy the writing requirement and the contract cannot be enforced D. Its over $500 and no writing and reverse memo does not apply so this contract is unenforceable against the D. E. HYPO -Same contract, delivery and payment have been made, and then it breaks down -Contract has been executed, so statute of frauds no longer applies and the contract is enforceable against the seller (D) 16 V. Article 2, SALES, Subtitle 2, Formation and Structure of the Contract A. § 2-201 Statute of Frauds 1. At common law, must put contracts in writing 2. UCC 2-201(1)-If a contract is for $500 or more, it is not enforceable unless there is a writing -doesn’t apply to things of minimal value -total aggregate value is above $500, then statute of frauds applies 3. Statute of Frauds is meant to be a gatekeeper -it keeps certain evidence from going to the jury and gets some contracts to the jury -but this does not mean that the contract will be upheld. 4. 2-201(1) -Written Memorandum A. Sufficient to indicate that a contract for sale has been made btw the parties B. Must be signed by the party against whom enforcement is sought (defendant) -without this signature, the issue of whether or not there was a contract will not go to the jury -any authentication which identifies the party to be charged C. It is not insufficient because it omits or incorrectly states a term D. Contract is not enforceable beyond the quantity of good shown in the writing. Thus, it must specify a quantity to be sufficient sufficient. E. You do not need to be a merchant for the statute of frauds to apply. 5. Statute of Frauds only works when contract is executory A. If contract has already been executed (performance -sale and delivery) then the statute of limitations does not bar an action on the contract -ie. Warranties, etc. B. Thus, it only applies when terms are changed before performance begins. 6. There has been a big push to repeal the statute of frauds -Smalkin thinks it should be -unintended consequences -real contracts don’t get to the trier of fact 7. 2-201(2) Reverse Memorandum (see 1.4 above) -Merchant’s Exception A. Plaintiff signed the writing (need to know who is suing whom) -plaintiff is confirming the contract as if he was the defendant B. Requirements 1. Must be between merchants -2 contracting parties must both be merchants -dealer or one with special skill and knowledge (use broad definition of merchant) 2. Within a reasonable time a writing is 3. Received (1-201(26)) -when it comes to his attention or it is duly delivered at his place of business 4. It has not been objected to in writing within 10 days C. If the reverse memorandum meets these requirements, it will count as a writing and the contract will be enforceable against the D. Ex. GPL case --17 D did not object to the sign and return clause so D cannot not use statute of frauds as a defense to the contract and the contract will be enforceable. 8. 2-201(3) -Substitutes for a Memorandum -Contract which does not satisfy the statute of frauds (by being in writing) is valid and enforceable if: (exceptions to necessity of satisfying the statute of frauds) A. The goods are to be specially manufactured for the buyer and are not suitable for sale to others (provides circumstantial evidence of formation of K that substitutes for a writing) -seller must have at least begun to work on them or received a commitment B. If party against whom enforcement is sought (defendant) admits that the contract was made -admission 1. Ex. Defendant sends letter that states that UCC does not apply (he’s admitting that its a contract) 2. Must specify a quantity term in order to be good as an admission C. Partial performance will remove contract from the statute of frauds -(2-301) -ie. Payment has been made and accepted or goods have been received and accepted (does not require that buyer pay) 9. Waiver of the Statute of Frauds A. Master agreements -parties will usually waive their ability to assert the statute of frauds as a bar to enforceability. B. Generally, the statute of frauds can be waived by the parties -there are no strong policy reasons against allowing this. 1. Written waiver is enough 2. Oral waiver may or may not be enough 10. Statute of Frauds must be specifically plead as a defense -cannot be used as a general answer or denial A. Eliminates the necessity of a series of written confirmations 11. Whether something constitutes a writing in today’s electronic age -EDI electronic messages, digital signature laws. 12. Kline v. Lorillard (4th Cir. 1989) -Smalkin’s Statute of Frauds Case A. Partially executed B. Long term requirements contract -letter said “we will be a full line dealer for you” -full line dealer signifies a requirements contract -this is clearly the trade usage but 4th Circuit wouldn’t let this evidence in. C. 4th Circuit said this was not a sufficient memorandum to meet the writing requirement because it did not contain a quantity term, thus the contract was unenforceable because it did not satisfy the statute of frauds. 1. There was clearly bad faith on the part of the D that should have made the contract enforceable. 2. 4th Circuit reversed jury’s award of damages. 13. When statute of frauds does come up, it can be very important and can change the outcome of the case. 14. Leases -Statute of Frauds 18 A. Applies to contracts over $1,000 B. Must describe goods in addition to quantity, and describe terms of the lease. 15. Real estate -contract for interest in land exceeding one year must be in writing, any fee conveyance must be in writing -strict writing requirement in real estate B. § 2-301 -General Obligations of the Parties -the duties of a buyer and seller in a contract for sale -this will give you an idea of when the contract has been executed for purposes of the statute of frauds A. SELLER -to transfer and deliver B. BUYER -to accept and pay C. Contract Formation Generally 1. Spectrum of conduct can form a contract A. from informal to formally negotiated contract B. UCC is a blunt instrument when it comes to risk allocation -doesn’t really cover who bears the risk when things go wrong 2. Common law contracts A. Offer and Acceptance -need meeting of the minds to form a contract 3. How contracts are typically made A. Open Account -order once a week for supplies 1. Purchase Order -offer by buyer A. Will often contain boiler plate language that places warranty obligations on the seller and leaves all remedies open 2. Sales Order -confirmation/acceptance by seller A. Will be slanted in the opposite direction, will try to get rid of the basic warranties and will provide exclusive remedies 3. Must reconcile the boilerplate (2-207) B. Will often be a minimal amount of writing which confirms it -often not signed, but if a master purchase agreement is involved this would satisfy the statute of frauds but there are usually no enforcement problems at the executory stage anyway (execution takes it out of the statute of frauds) D. § 2-204 -Formation in General (1) Contract may be made in any manner sufficient to show agreement, including conduct by the parties which recognizes the existence of a contract. A. Don’t need words, but may still have a statute of frauds problem. B. Often, paperwork is not used. (2) An agreement sufficient to constitute a contract may be found even though the moment of its making is undetermined. 19 A. Meeting of the minds theory -this provision does not repeal that theory’s relevance to the offer and acceptance inquiry but under UCC don’t need to know exactly when the contract was formed. (3) Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties TEST OF DEFINITENESS 1. intended to make a contract -this is a question of fact for the jury 2. and there is a reasonably certain basis for giving an appropriate remedy. -question of law for the judge -if it meets these requirements, it is sufficient 3. Under common law, contract could fail for indefiniteness if specific terms weren’t specified (description of goods, quantity, price). Now, under UCC, still generally need description and quantity but not much beyond that is required (don’t need to specify price, delivery terms, warranties, etc) A. If these express provisions are not included, can look to course of performance (2-208), course of dealing, and usage of the trade (1-205) as gap filling remedies from the UCC B. If no course of dealing, performance, trade usage, can use good faith (2-103), open price term (2-305), place of delivery (2-308) -the 2-300s fill in most of these provisions E. § 2-206 Offer and Acceptance in Formation of a Contract 1. What if they don’t match? UCC is designed to get rid of the mirror image rule and the technicalities of acceptance. (1)(a) -an offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances. -telephone, writing, fax is reasonable -a bilateral contract -offer and acceptance by both parties are promises (1)(b) -Unilateral -acceptance is an act and not a promise -this is acceptable under the UCC -Offer for prompt or current shipment may be construed as inviting acceptance either by a prompt promise to ship (bilateral) or by the prompt or current shipment of the goods (unilateral) -the shipment = acceptance 2. Offer and Acceptance occur on two different levels -A. Level 1 -Offer (see product on shelf), Acceptance (consumer takes possession in the store) -a contract may arise in this situation even though payment has not yet been made (Giant Food case) (obviously contract is revoked if customer places it back on the shelf.) B. Level 2 -Execution of the Contract -Delivery and Acceptance and Payment F. § 2-207 Battle of the Forms -Additional Terms in acceptance or confirmation 1. If there is no language at all in the contract (oral) then UCC default gap fillers will control (trade usage, course of performance, etc.) 2. 2-207 applies if the language btw the purchase order and the sales order is 20 different -all of these provisions help to determine the terms of the contract. 2-207(1) -Gets rid of the mirror image rule A. A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance. Additional or different terms can still act as an acceptance unless: 1. Acceptance is expressly made conditional (by the offeree -he wants to make sure he approves of additional terms) on assent to the additional or different terms. If acceptance is made conditional, then there will be no contract until party assents orally or in writing to the new terms. 2. 2-207 (1) & (3) are linked. If K does in fact say acceptance is expressly made conditional on assent to different terms, but the parties continue to perform under the contract without that assent, then 2-207(3) applies applies. A. You still have a contract even though the writings do not establish a contract -A common sense solution -“Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract although the writings themselves may not establish a contract.” B. If this is the case, the contract terms will be: 1. Those terms on which the parties agree in writing 2. Any supplementary terms from UCC (course of dealing, trade usage, Part 2-300s -price, delivery terms, etc. 2-207(2) -Applies to a different situation , where acceptance states additional or different terms but there is no expressly made conditional language A. You have a contract, but must decide what to do with the additional terms B. If not between merchants merchants, then additional terms must be treated as new proposals to the contract and will not be treated as part of the contract. -Additional or different terms will go away. C. If between merchants merchants, the additional terms become a part of the contract unless unless: (a) the offer expressly limits acceptance to the terms of the offer (most boilerplates do this) -additional terms will go away and will not become a part of the contract. (This is like the offeror making acceptance conditional) (b) the additional terms materially alter the contract 1. A change in warranty coverage or a change or limitation to a remedy or an arbitration clause will materially alter and will not be considered part of the contract. Clause fixing reasonable time for complaints, etc. would not materially 21 alter and thus would become a part of the contract. See comment 4 p. 79 for examples. Arbitration clause may not materially alter if it is the industry norm. (c)Offeror gets acceptance and objects or initially states that additional terms will not be accepted -“notification in advance or given after notice of new terms has been received” -these terms will not become a part of the contract. D. NOTE regarding 2-207(2) -the language of the provision addresses additional terms but does not address what to do with different terms. MD law does not suggest a solution but: 2 Approaches have been adopted 1. Knock out rule -if different, don’t include them at all. 2. 2-207(2) really applies to additional and different terms -it was just a drafting mistake -this is the proper approach -this will ensure the right result -if it is truly different, it will materially alter and will be knocked out by 2-207(2). 3. Leases -Article 2A does not have a battle of the forms provision. Do not have the same offer and acceptance situation -lessor generally writes the contract. 4. EDI -paperless system -parties negotiate terms -may eliminate some battle of the forms problems. 5. CISG -International -reverts to the common law mirror image rule -Filanto -acceptance with additional terms is not an acceptance, its a counteroffer b/c it contains material alterations. 6. Real Estate -Contracts will have contingencies -like conditions in a contract A. Precedent contingencies -fulfilled before contractual duty arises B. Concurrent contingencies -must be fulfilled at the time the duty arises C. Subsequent -must be fulfilled after the contract has been performed. D. Failure to satisfy conditions will excuse the other party from performing. G. § 2-205 Firm Offers (not on test but may be on bar) 1. At common law, you could revoke an offer before acceptance if there is no consideration. But if an offer had consideration, it would be irrevocable and enforceable -an option to sell -promise or set of promises doesn’t always have to be a two-way street -but it can remain open beyond 3 months in any event. 2. UCC -Firm offer is irrevocable (binding) even without consideration if: A. Offer is made by a merchant B. It must be in writing -signed by the offeror C. Period it remains open cannot exceed 3 months D. If the offer is made through a form supplied by the other party (offeree), in order that the offeror will not be talked into a binding offer he did not mean to be binding, the clause must be separately signed and authenticated. -need express consent from the offeror either way E. If these requirements are not met, it will not be enforceable as an 22 option. 3. UCC -if there is consideration, it will be irrevocable and enforceable indefinitely. H. Problems, Assignment 2 1. 2.1 -Buyer’s PO -seller will be liable for all remedies. Seller’s Acknowledgment -Disclaimed all consequential damages (personal injury). Seller shipped the goods before sending the acknowledgment. A. Formation of the Contract -2-206 1. Offer to Buy was the PO 2. Acceptance was the shipment of the goods (2-206(1)(b)) B. Terms of the Contract -2-207 1. Acceptance was the shipment, not the acknowledgment form. Thus, the form is inconsequential because it was sent after acceptance. -Thus, it is not part of the contract. 2. If the acknowledgment had been sent before the shipment, and thus acted as an acceptance, would the additional/different terms be a part of the contract? A. 2-207(1) -no “expressly made conditional” language -this is a contract B. 2-207(2) -They are both merchants, additional term will be included unless: (a)(c) do not apply (no express limitations or objections -but buyer could have objected if he wanted to and this would have kept the terms out. (b) Materially alter? YES -they are completely contradictory to each other -the terms would be excluded from the contract. 2. 2.2b. Noticing new term you don’t like and saying “I don’t like it” , or saying “take it or leave it” --2-207(2)(a) offer expressly limits acceptance and 2-207(2)(c) notification of objection must be made unequivocally -it will be very hard to prove oral conduct -jury must rely on testimony. 3. 2.2c. “Expressly made conditional language” was added after an oral contract with offer and acceptance was made over the telephone. -not a 2-207 problem, the language is meaningless. A. Assuming the language in the confirmation does act as an acceptance, in order for its different terms to be included: 1. was it made within a reasonable time? (2-207)(look at course of dealing, etc. to determine reasonableness) if no, new clause will not become a part of the contract. If too late, it would have to count as a modification rather than an addition to the contract. Modification requires bilateral assent. 23 2. 2-207(2) -terms will not come in if they materially alter -delivery term -if its an addition it will probably not materially alter, but if it changes an existing delivery term, will have to look at course of dealing, etc. to determine if it would materially alter the contract. 4. 2.3 Party wants to entirely waive consequential damages on every contract she enters into. A. Impossible to waive consequential damages for consumer goods in Maryland, but for non-consumer, may be able to waive consequential damages -how to do it? Can only do it to the extent it is not prohibited by public policy. 1. Don’t rely on standard forms. Have a separate acknowledgment that must be separately signed by other party -demonstrating that the party read and assented to a waive of consequential damages. 2. Have a sit down negotiated contract between the parties -this will be done for expensive contracts. B. Once you have offer and acceptance, these problems go away and then you can look to the actual terms of the contract. 5. 2.4 -Firm Offer Problem (2-205 or 2A-205) A. Same exact language for lease and sale -exception to common law rule that consideration is needed to make an offer binding. B. Deborah sells Rolls Royces, makes offer in writing saying she will keep it open for 5 months. a. He paid consideration of $100 so the offer is irrevocable and the contract is enforceable based on the general principles of contract law b. If no consideration was paid, 2-205 1. She is a merchant and its in writing 2. BUT it can only be held open for 3 months, not 5 c. If buyer did wait 4 months and the seller said the offer was no longer open? Another theory since 2-205 won’t work beyond 3 months? ESTOPPEL -1-103 supplanter general principles 1. Ignore the UCC and do what’s just and fair -equitable theory -last ditch effort 2. Language of the UCC says “in no event” may the offer remain open for more than 3 months -courts will be hesitant to use estoppel in this situation. 6. 2.6 Real estate contract has a contingency clause -requiring buyer’s approval of inspection. The seller cannot force the seller to buy if the buyer does not accept the results of the inspection. A. Buyer’s “personal satisfaction” is required B. When condition fails, both parties can walk away. 24 C. If seller really wants to sell the house, will have to reduce the price to get buyer’s acceptance. 1. She is a merchant 2. Its in writing I. § 2-202 Parol Evidence Rule -An evidentiary question for the judge 1. Don’t even use this rule unless you have one final writing -a unitary written agreement -if you don’t have this, this rule is immaterial and all evidence can come in. A. 2 papers in agreement (offer and acceptance w/identical terms) = one final written agreement. 2. PURPOSE -to protect the sanctity of the final written agreement, but does allow some additional terms. Its a gatekeeper rule that keeps some evidence from the trier of fact. 3. UCC broadens common law parol evidence rule. 4. 2-202 governs what to do with other agreements on terms that come along (not just terms themselves as in 2-207) Ex. We agreed to ship by Fed Ex even though the contract says we will ship by mRequirementsRequirments -2-202 A. A written agreement B. Intended by the parties as a final expression of their agreement -can be confirmatory memoranda C. Evidence that cannot come in (terms cannot be contradicted by): 1. Any prior agreement (written or oral) A. Ex. Offer and acceptance said delivery by fed ex and final written contract says delivery by camel train. Delivery by fed ex was a prior written agreement that contradicted the final agreement so the parol evidence rule bars it. 2. Contemporaneous oral agreement A. Ex. At time of signing of final agreement, orally threw in extra 3 years of warranty -oral can’t come in B. Also, it contradicts b/c the written K says no consequential damages so it is barred by the parol evidence rule. 3. Any evidence that contradi contradicts will be barred cts -but must clearly be opposite of what the final written agreement says -courts don’t want to bar evidence D. Evidence can come in to explain or supplement: 2 2-202 (a) by course of dealing, usage of the trade (1-205), or course of performance (2-208) (b) by evidence of consistent additional terms (if not contradictory, can explain or supplement) unless the court finds the writing to have been intended as a complete and exclusive statement of the terms of the agreement. (Merger clause) 1. Merger or Integration clauses are found in most contracts -act 25 as a door slammer that keeps out even consistent additional terms. -“This written agreement constitutes the whole agreement” A. Even in absence of a merger clause, courts will still accept other evidence that it was meant to be an exclusive final agreement. -The “would certainly”test -if additional terms are such that, if agreed upon, they would certainly have been included in the document in the view of the court, then evidence of their alleged making must be kept from the trier of fact. B. Merger clause will not keep out evidence of course of dealing, trade usage, or course of performance -it only keeps out consistent additional terms. 2. Ex. Extra 3 years of warranty would probably explain or supplement if the written K had the usual warranties and did not disclaim consequential damages. 3. “Contradicts” and “supplements” are often construed very closely -courts use a liberal construction of explain or supplement in order to save the contract and not bar the evidence. 4. Need only convince the judge that it explains or supplements to get it through the door. 6. Subsequent agreements and conduct (after the final written agreement) are not even covered by the parol evidence rule -the rule only operates up until the time the contract was signed. Subsequent agreements will be modifications or waivers under 2-209 and will not be barred by the parol evidence rule. J. Assignment 3 Problems 1. 3.1 -Statute of Frauds (2-201) A. oral contract, no reverse memorandum, goods were $8,000 each, no partial performance because not yet delivered B. But goods were specially manufactured for the buyer (2-201(3)(a)) -his will serve as circumstantial evidence that there was a contract such that an exception to the statute of frauds is made 2. 3.3a. -Parol Evidence Rule (2-202) A. No merger clause B. Agreement was a final written agreement C. Low price guarantee was made orally before contract was signed -does it contradict or explain or supplement? Its a contingency that explains or supplements D. But must also consider if absent a merger clause it was meant to be a final, exclusive agreement (if agreed upon, would have been included) E. This evidence will probably come in. 3. 3.3b. Price guarantee was made after the final written agreement was signed. A. Yes, the evidence may come in. Its out of the parol evidence rule and 26 becomes a modification -2-209 B. 2-209 (1) Modification by words -needs no consideration to be binding (did at c.l.) (2) Parties can agree that modifications can only be made in writing and not orally (3)statute of frauds applies if modification raises the contract price above $500 (4) Modification may act as a waiver C. 2-208 -is a modification by conduct through course of performance. 4. 3.3c. Merger clause, but parties have dealt with each other a number of times in the past. A. Evidence of course of dealing may come in regardless of whether there is a merger clause. B. Course of dealing, usage of the trade, course of performance can always come in to explain or supplement. VI. Article 2, Subtitle 3 -Warranties -Types and How Created A. Generally -things get fixed because of customer good will, its extra-judicial and not because of some warranty applied by law, but b/c they want to keep business. UCC provides back up to form the foundational expectations with respect to warranties. 1. Its a matter of commercial practice to stand behind what you say. B. Warranties do not apply to service contracts, must be a sale of goods within the UCC. C. Types of Warranties Express Warranties by the Seller (§ 2 2-313) -can be made by merchants and nonmerchants -any seller 1. § 2-313(1)(a) Express warranties are an affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain and creates an express warranty that the goods shall conform to the affirmation of fact or promise. -REQUIRES AFFIRMATIVE CONDUCT A. “I promise you will really like it” -this may be puffing and would not create an express warranty or it may be an affirmation of the value or a mere commendation (2-313(2) that would not create an express warranty. B. A false affirmation of fact or promise -can be a warranty of express warranty 1. Requires that the affirmation of fact or promise is made and it doesn’t pan out -need not show deceit (as for misrepresentation under 1-103) need not show known or should have known -not fault based. C. Promise or fact must relate to the goods 27 D. Becomes part of the basis of the bargain 1. This is a question of fact for the jury 2. No specific intention to make a warranty is necessary 3. It is woven into the fabric of the agreement 4. If buyer heard it or saw it, its part of the basis of the bargain -no reliance on statements need be shown. 5. Must in some way have come to the attention of the buyer -may not count if it was communicated to a third party -but this is a question of fact for the jury. 6. Expansive idea -general all affirmations of facts or promise will be considered express warranties. E. Creates an express warranty that the goods will conform to the affirmation of fact or promise 1. Conform -2-106(2) -goods or conduct are conforming when they are in accordance with the obligations under the contract. F. Breach of express warranty -no materiality requirement 1. Doesn’t matter how minor the damages are (difference btw value of goods accepted and value of goods as warranted 2-714) 2. 2-313(1)(b) -A description of the goods that is made part of the basis of the bargain may create an express warranty that the goods shall conform to the description. A. Sign that says black olives when they are green olives or answering that they are black when they are green would be a breach of an express warranty B. Description need not be in words, deliveries may set the description of quality. C. Must be read against applicable trade usages. 3. 2-313(1)(c) -Any sample or model that is made part of the basis of the bargain can create an express warranty. A. That whole of the goods shall conform to the sample or model. B. Model in store display and the one you buy doesn’t look like that when you get home and open the package -this can be a breach of an express warranty. Model is offered for inspection when the subject matter is not at hand. C. Sample would be one drawn from the bulk of goods. 4. 2-313(2) -Commenting on value or commending the goods does not create an express warranty, but it is not necessary for the express warranty to contain formal words such as “warrant” or “guarantee.” Also need not have a specific intention to make a warranty. 5. Timing of the Affirmation A. The precise time when an affirmation was made is not material. B. If the affirmation is made after the closing of the deal then it will become a modification and need not have consideration (2-209) rather than 28 part of the contract. 6. Vertical privity -Express warranties usually only involve two parties -the buyer and seller -because the affirmation is made directly to a person and others would not be able to sue on the express warranty. Requires a communication btw the buyer and the seller. 7. Express warranty can apply to used goods. Implied Warranties by the Seller (§ 2 2-314/2 2-315) 1. Generally, implied warranties do not involve affirmative conduct on the part of the seller as express warranties require. Implied Warranty of Merchantability (§ 2 2-314) 1. Applies only to merchants and not to nonmerchants -Merchant (2-104) -deals in goods of the kind. (Definition of merchantability is much narrower for this provision than it is for statute of frauds) -must be a merchant seller -does not include someone who merely has special skill or knowledge, must actually be engaged in the selling of these goods. Ex. Tiger Woods would not be held to an implied warranty of merchantability if he was selling golf balls while he was playing golf. -This is a question of fact fact. 2. 2-314(2) Goods must be merchantable -Question of fact -Is the crabcake merchantable? 2-314(2)(a) do they pass without objection in the trade under the contract description? A. Ex. When there is agreement in the trade about what Grade A cantaloupes or eggs are B. Description will imply a certain quality 2-314(2)(b) fungible goods -goods that are completely interchangeable like grain in a grain elevator -are they of fair average quality within the description? (1-201(17)) A. Are the bolt and nuts to a specific hardness or were some slipped in that were different? 2-314(2)(c) are they fit for their ordinary purpose? -this is key provision of the implied warranty A. crab cake with tin in it was not fit for its ordinary purpose -eating -foreign object rule B. Crab cake with shell would probably be ok b/c you can still eat a crab with shell in it. “Natural objects” -not used much anymore C. It is not necessary to go through negligence standards and deal with res ipsa loquitur -all you have to do is say that it had tin in it and it was not fit for its ordinary purpose. 1. What are the reasonable expectations of the average consumer? 2. Courts have allowed juries to consider locality -Ex. Consumer is from a foreign country and would not expect to find shell in his crabcake. 29 D. Must be for its ordinary purpose -can’t use crab cake to mop the floor and say a warranty has been breached. Using a chair to change a lightbulb? -this is a question of fact for the jury 1. Misuse is not necessarily a defense to breach of warranty, rather, plaintiff has the burden of proving that the product was being used for its ordinary purpose. 2. If D wanted to attack the breach of warranty claim by alleging misuse, he would have to attack Ps prima facie case 2-314(2)(d) are the goods of even kind, quality and quantity within each unit and among all units involved? -trade expectations -this applies mainly to commercial/mercantile transactions and not to consumer transactions. Covers a broader range than (b) because it includes non-fungible goods. 2-314(2)(e) -are adequately contained and packaged and labeled (as the agreement may require) -most courts have ignored this language A. Broad provision -goes beyond the packaging itself (packing peanuts) and has been expanded to include a blanket duty to warn. 1. “Hazards that manufacturer should reasonably anticipate” 2. Some manufacturers overwarn to prevent liability -but there is not duty to warn of obvious dangers. Ex. This will burn if you hold it near a flame. B. HYPO -restaurant food processor, mislabeled, UPS handler slices hand on the blade as it pokes through the package -brought suit under this provision arguing that the package was improperly labeled 1. He has horizontal privity under 2-318 because he is a foreseeable plaintiff. -it is foreseeable that he would be handling the box. 2-314(2)(f) Conform to the promises or affirmations of fact made on the container or label if any (this sounds like an express warranty but it may not have become a basis of the bargain.) A. Ex. Can says product of Greece when it is really a product of Morocco. 3. 2-314(3) -Other implied warranties may arise from course of dealing or usage of the trade. 4. 2-314(4) -Special Maryland provision -implied warranties will specifically apply to leased goods that “pass through the physical possession of and are maintained by the lessor” -Ex. Renting skis or golf carts -warranty will apply 5. Only requirement on part of seller for 2-314 to apply is that there is a sale of goods. 6. Implied warranty of merchantability also applies to used goods. 30 A. Comment 3 “A contract for the sale of second hand goods, however, involves only such obligation as is appropriate to such goods for that is their contract description.” -limited to what is appropriate for used goods. 7. Arises in every sale of goods between merchants unless disclaimed or modified. 8. Vertical privity is abolished -see below -manufacturer, distributor, retailer, may all maintain a cause of action -runs up and down the chain. Implied Warranty of Fitness for a Particular Purpose (§2 2-315) 1. More like an express warranty because it requires affirmative conduct on the part of the seller. 2. This warranty does not apply when the goods are merely being used for their ordinary purpose -they must be used for a particular purpose in order for this warranty to apply. A. Ex. Chair is marketed by the seller to be used for circus tricks -this would fit under 2-315 and not 2-314 because its ordinary purpose would be for sitting. B. This warranty applies to a situation where the goods may work great, but not for the particular purpose. C. Fact pattern will involve some use beyond ordinary use, then you must look to the communication btw the buyer and the seller. 3. Elements 2-315(1) A. Where the seller at the time of contracting had reason to know any particular purpose for which the goods are required -look to 1-201(25)(c) -from the facts and circumstances known to him at the time in question he has reason to know that it exists. 1. This is a question of fact 2. Seller will usually know because the buyer will make an express statement -“I want to buy this chair for use in the circus” B. And the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods 1. Thus, if you merely ask for the good and the seller merely says “yes, I have it” this would not be enough for 2-315 to apply. 4. 2-315(2) -Like 2-314, particular Maryland provision applies the implied warranty of fitness to a lease situation. Ex. Bulldozer you rented will work for the particular purpose required. Warranty of Title § 2 2-312 1. When you buy something, you expect that the person who sells it to you actually owns the goods. 2. 2-312 states that there is a warranty of title in every contract for sale. 3. The warranty provides that: (a) the title conveyed shall be good and its transfer rightful (b) goods shall be delivered free from any security interest, lien, or encumbrance of which the buyer has no knowledge 31 4. Modification/Exclusion -2-312(2) -It may be modified or excluded only by specific language or by circumstances which give the buyer a reason to know that the person selling does not claim title or that he is purporting to sell only such right that he has (like a quitclaim deed). A. This is a strict modification requirement -difficult to get rid of it. B. Will drive the price of the good down if you must admit that you don’t own it. D. Contract (UCC warranty) v. Tort (products liability) v. Tort Negligence -all three are bases for liability with different defenses and different statutes of limitations -HYPO -tin found in crabcake 1. Tort negligence -MD requires duty of reasonable care (scope of the duty is a question of fact), breach, proximate causation-substantial factor in causing the injury, damage/harm -standard is preponderance of the evidence A. Tin in your crab cake -negligence, yes, this is a breach of duty 2. Tort -Products Liability like Strict Liability -liability without fault, but its not completely without fault. A. Its not absolute liability -like the old cases for escaping lion or escaping water from mines B. Restatement § 402a -Md did not adopt this until 30 years ago C. Remedy outside of negligence law for injuries from products 1. Don’t need to prove duty/breach of duty 2. Inquiry hinges on the nature of the product -products that are unreasonably dangerous if in a defective condition 3. Tin in your crab cake -yes, this is a defective condition 4. Requires defective condition which caused injury and damages. 3. UCC based remedies A. 2-313 -Express Warranty examples -Where tin in crabcake would be a breach 1. Best crab cake in Baltimore -no 2. Crabcake made of 100% handpicked crab meat -closer 3. Show a sample with no tin in it -closer B. 2-314 -Implied Warranty of Merchantability 1. Only applies to goods not services (2-314(1)) -serving of food or drink is a sale for purposes of this section. 2. Merchant with respect to goods of that kind? A. Phillips -yes B. Prof. Reynolds at a party -no C. Prof. Reynolds buying from Eddie’s -privity problems? 2-314(1)(a) -seller includes manufacturer, distributor, dealer, wholesaler, middleman 32 2-314(1)(b) -privity requirement as btw the buyer and the seller is abolished. THUS, VERTICAL PRIVITY (manufacturer-seller-buyer ) is abolished and a buyer could sue the manufacturer even though he did not contract directly with him. (Vertical privity is only abolished with respect to implied warranties and not express b/c you can only sue person who directly made the affirmation to you.) (See diagram 9/27) 3. 2-318 Horizontal privity -a non-buyer can sue a seller for breach of warranty if he is affected by a product -Third party beneficiaries may sue. (See diagram 9/27) A. Applies to both express or implied warranties B. Maryland has adopted the broadest approach available. C. Like the “foreseeable plaintiff” in Palzgraf D. Extends to any natural person who is in the family or household, who is a guest, or any other ultimate consumer of the goods E. Must be a personal injury -does not extend to economic loss only but does extend to economic consequences of personal injury. Still need privity to recover purely economic loss -loss of business F. Whether a plaintiff is foreseeable for purposes of being a third-party beneficiary is a question of fact for the jury. G. A seller may not exclude or limit the operation of this section. C. Elements of UCC Warranty for Breach 1. Was warranty made (2-313, 2-314, 2-315, 2-318) 2. Was it breached? 3. Breach of warranty was proximate cause of the loss sustained 4. Injury/damages D. The advantage of a warranty theory over a tort theory of recovery is that the plaintiff does not need to show a lack of due care as in negligence. The plaintiff must show that there is a defect/nonconformity but he need not show how or why. (Somewhat like res ipsa loquitor -“the thing speaks for itself” -circumstantial proof of negligence requires 1. Legal conclusion that actions like this don’t happen unless someone is negligent. 2. The instrumentality is within the defendant’s exclusive control [this is the difficult element to prove]) E. Disadvantage -no punitive damages. F. UCC Warranties also have a Notice Requirement that would not be involved in a tort suit. § 2-607(3)(a) -“Where a tender has been accepted, the buyer must within a reasonable time after he discovers or should have 33 discovered any breach notify the seller of breach or be barred from any recovery” 1. This is a condition that must be fulfilled and pleaded in any action brought by the buyer for breach of warranty 2. Acts like a statute of limitations. 3. Time of notification is determined by commercial standards 4. Notification need only be such that notifies seller that there is a breach. But must give this notice before bringing a law suit. This provision is trying to encourage negotiation and settlement. 5. Notice requirement does not extend to a third party beneficiary who wishes to sue for breach of warranty (2-318) -but beneficiary may want to notify the seller that an injury has occurred 4. Statute of Limitations for Tort v. UCC actions -Two main questions -what is the length of the SOL and when did the cause of action accrue A. Maryland Tort and products liability 1. 3 years from the time the cause of action accrued 2. When did the cause of action accrue? A. When the accident or injury happened or when the negligence took place. B. When the plaintiff knew or in the exercise of due diligence should have known that the defendant’s actions were the cause of her injury. MARYLAND HAS ADOPTED THIS RULE 1. The “discovery rule” -includes products liability -its a form of delayed accrual -when you “discovered” you had asbestos in your house 2. This rule opened up the courts to asbestos, lead paint cases -plaintiffs could bring lawsuits many years after exposure. 3. Arose out of the pro-plaintiff movement of the 1960s and 1970s. C. Workers injured by product -can’t sue employer b/c of workman’s comp but can sue manufacturer even if the product was built 30 years ago. B. UCC Statute of Limitations (§ 2-725) (excontractio) 1. 2-725(1) An action for breach of contract for sale must be commenced within 4 years after the cause of action has accrued. By the original agreement the parties may reduce the period of limitations to not less than one year but may not extend it. (Thus it can be shortened to as little as one year (seller will want to do this) but it cannot be extended beyond 4 years. 2. 2-725(2) When does the cause of action accrue? 34 A. When the breach occurs, regardless of the aggrieved party’s lack of knowledge = TENDER OF DELIVERY -when the goods are delivered (this applies to implied warranties of merchantability (2-314) and fitness for a particular purpose (2-315)) 3. GENERAL RULE = 4 YEARS FROM THE TIME OF DELIVERY 4. 2-725(2) -There is a limited DISCOVERY RULE -“where the 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. Only applies to express warranties B. Allows for postponed accrual like the tort discovery rule 5. HYPO -Machines bought but sat for 3 years. Installed three years after delivery and after one year of working improperly, the buyer tries to bring suit. This suit will be barred under UCC because the cause of action accrued from the time of delivery. 6. HYPO -4 years, 6 months after delivery it has been working and has a major explosion and a Taiwanese visitor is hurt. A. Third party beneficiaries -Statute of limitations applies to them and thus the suit would be barred because it is past 4 years. (Unlike notice which does not apply to third party beneficiaries) (2-318) 5. Defenses -Tort v. UCC Actions A. Tort negligence action 1. Contributory negligence -complete bar to recovery -plaintiff’s failure to use due care for her own safety -objective standard of a hypothetical, reasonable plaintiff 2. Assumption of Risk -subjective standard -plaintiff had an appreciation of a known risk and voluntarily encountered it. -will depend on the sophistication of the plaintiff -works well for stupid people. B. Strict Products Liability 1. Assumption of risk -if you continue to use an unreasonably dangerous product, knowing it is dangerous 2. Misuse of product which then makes the product unreasonably dangerous because of the misuse 3. Alteration of the product -failure to prove that the product was unreasonably dangerous when it was introduced into the stream of commerce. C. UCC Defenses -They are not really defenses but things that can work against plaintiff’s prima facie case 35 1. Notification (2-607(3)(a)) -the buyer must be plead and prove that notice was given to the seller. 2. Limitations on Implied Warranty of Merchantability (2-314) -Misuse of Product A. This is not so much a defense as it is a showing that the product was not used for its ordinary purpose such that the warranty would not apply. Plaintiff must make the showing that the product was used for its ordinary purpose. B. If P fails to prove this element, judgment as a matter of law -directed verdict 3. Limitations on Express warranties (affirmative conduct, etc.) 4. Contributory Negligence A. Ergman v. Johnson -MD case -product caused a house to burn down and the plaintiffs brought a breach of warranty claim 1. Defense of contributory negligence alleged -Maryland court’s accepted this as a defense to a breach of warranty. 2. Rather than “contributory negligence” its called “abandonment of reliance on the warranty” -when the plaintiff continued to use the product knowing it to have a defect. B. Burden of proving this defense by a preponderance of the evidence is on the defendant. 5. Bulk supplier doctrine -not responsible for what a customer does with the product -like mixing it. ?? 6. Statute of Limitations 7. Learned Intermediary Rule -for products that are not intended for public disbursement. Medications that did not come from a pharmacist that were meant to -this is a defense -pharmacist would have warned the patient about dangers from the drug -drug company can’t be held liable 8. Sealed products defense -A. 2-314(1)(b) -vertical privity has been abolished B. Where there is recourse against the manufacturer (manufacturer must be solvent or have insurance) the retailer or middleman can drop out of the suit if they had no knowledge of danger and did not do anything to change the product before it got to the consumer. C. Gets the liability back to the manufacturer. D. If there is no case against the manufacturer, you can bring the retailer or middleman back in. E. Magnuson Moss Act 36 1. Federal law designed to protect consumers -applies only to consumer products 2. Does not require a warranty to be offered, but if written express warranty is offered, it must be labeled as a limited or full warranty and must comport with all Magnuson-Moss requirements. -Will almost always see “limited warranties” 3. Mag/Moss gives enforcement power if the warranty is breached A. Original jurisdiction will be in the state courts unless amount in controversy of $75,000 is satisfied. B. Mag/Moss is usually tacked on to a UCC products lawsuit. 4. Unlike tort and UCC contract cases, the successful plaintiff may recover attorney’s fees -as an incentive for bringing these suits when small claims are being litigated. F. Lease Warranties 1. Finance leases -banks generally do not give warranties 2. Non-finance leases -warranties are identical to those in Article 2. G. Real Estate 1. Caveat emptor -commercial -no implied warranties, but express written warranties are recognized. 2. Residential sales -implied warranty of habitability for new homes, also a duty not to misrepresent or conceal known defects. H. Warranty Problem Set 4.1a. Student sells a computer to a lawschool classmate -is there an implied warranty of merchantability? NO -the student is not a merchant with respect to goods of that kind. 4.1b. Same facts except that you knew about the fading problem but did not mention it prior to the sale? 1. Still no implied warranty of merchantability -not a merchant 2. 1-203 -Good faith? -will be honesty in fact 1-201(19) -the nonmercchan standard -can’t conceal if asked, but don’t have to tell -you would not be being dishonest 3. If you are asked whether it fades -your answer may create an express warranty 4. Undisclosed defects -no duty to disclose in commercial transactionscavvea emptor still in place in the absence of express or implied warranties -unless its something extremely egregious and there would be some duty 5. 1-103 -May be able to sue for misrepresentation 4.1c. You knew about the fading problem, you did not mention it to her and you said the computer was super 1. No implied warranty -non-merchant 2. Express? Maybe, or it may merely be puffing b/c its a commendation. 3. 1-103 Misrepresentation or Fraud A. Negligent misrepresentation -need to show there was a confidential relationship (don’t usually have this in a sales relationship so it may be hard to prove.), need not prove deceit 37 B. Fraud -justifiable reliance, no confidential relationship need be shown, must show intent to deceive 4.1d. Computer was purchased from the law school which has an annual sale of used computers 1. Law school -merchants? 2-314 extends to a much smaller group of merchants -this is a question of fact -if they regularly sell computers and make revenue, they may be considered a merchant, if its an isolated sale, probably not a merchant. 2. But with an isolated sale, there may be a duty to disclose known material defects -this is also a question of fact which will depend on who its being sold to -public v. Neighbor -this may play into good faith 3. Caveat emptor still generally applies -no clear duty to disclose but its a question of fact depending on the circumstances. 4.2a. Buyer asks about a used car and the seller says “She’s a real humdinger, all right.” 1. Express warranty? Probably not, probably just puffing -sounds like a commendation 4.2b. Buyer asks about gas mileage and seller says “its like a camel” 1. Express warranty? This is closer. 4.2c. Same as b and your mother also tells you it gets good gas mileage 1. Express warranty? Depends if it has become a part of the basis of the bargain. There is a bias in favor of making express warranties actionable as part of the basis of the bargain. 2. No reliance by the buyer on the seller’s statement need be shown, so even if he only relied on his mom, seller can still be bound by making the express warranty. 4.2d. Buyer comes right into the dealer and says he wants a car with good mileage. Seller says he has just the car. 1. Express warranty? This is much closer to making an express warranty. Doesn’t require seller to say “I warrant” -pointing you to the car answers your question. 2. Implied warranty of fitness for a particular purpose (2-315) A. You want a car with good gas mileage and you communicate this to the seller 1. Seller has reason to know 2. Buyer relies on seller B. No merchant requirement although seller is a merchant here. C. Gas mileage is enough of a particular purpose -merely saying you want a nice car probably would not be enough for this warranty. D. This meets the elements of 2-315 4.2e. What if the gas mileage discussion occurs after payment has been made but before you leave the lot? Seller promises what gas mileage will be. 38 1. Express warranty -affirmation of fact or promise -timing is immaterial 2. If its part of the basis of the bargain, it will still be a warranty but will be considered a modification. (2-209) -modifications do not need consideration. 4.2f. If express warranty is written, the same analysis applies. 4.3 Implied warranty of merchantability by a manufacturer -because beer caused a liver condition 1. Is beer that causes liver disease fit for its ordinary use? Unreasonably dangerous products can still be fit for their ordinary purpose. 2. In order for their to be a breach of warranty, must still prove that a warranty existed, that there was a breach and that the breach was the proximate cause of the loss. And are there any defenses? A. Causation package is the same as it is for tort law. B. MD has the substantial factor rule C. Defenses -MD has adopted the Ergman rule -and recognizes a defense of contributory negligence on a contract warranty claim -abandonment of reliance on the warranty -continuing to use a product with a known defect. (Continuing to drink beer in large quantities) D. Could also affirmatively try to show that there is no defect. E. Generally, warranty actions don’t work well for guns, tobacco, firearms -better theories are fraud and misrepresentation. 3. Evidence that the manufacturer exercised due care is relevant to the issue of whether a warranty has been broken. Comment 13 to 2-314 -if manufacturer can show that they make the product just like everyone else in the industry will be strong evidence of the exercise of due care. (Due care is irrelevant under strict products liability) 4.5 Finance lease -1. § 2A-103(1)(g) -finance lease means a lease with respect to which: A. The lessor does not select, manufacture or supply the goods and B. The lessor acquires the goods or the right to possession and use of the goods in conjunction with the lease. C. These are protections to ensure it is a finance lease and not a sale. 2. § 2A-212 no implied warranty of merchantability in a finance lease on part of the lessor -the bank would not be the defendant in the action, it would be the manufacturer 3. § 2A-213 -same with implied warranty of fitness -doesn’t apply to the finance lease. VII. Warranties -Modification and Exclusion A. Exclusion or Modification of Warranties § 2-316 -NONCONSUMER 1. 2-316(1) -Express warranties -consumer/nonconsumer 39 A. Once an express warranty is made, it is impossible to get rid of. Thus if an express warranty has been created, language that says All warranties, express or implied, are excluded can be ignored. -Denies effect to such language when it is inconsistent with an express warranty. The only way the express warranty can be negated is if the limiting words are inconsistent with the warranty itself. ??? B. “As is” language won’t work to get rid of an express warranty, only applies to implied warranties. 2-316(3)(a) 2. 2-316(2)(3) Implied Warranties -NONCONSUMER -excluding the warranty itself A. Implied warranties can be modified or excluded with respect to nonconsumer goods if you jump through the right hoops. 2-316(2) Excludes warranties with specific language B. To exclude warranty of Merchantability (2-314) 1. Language must mention merchantability 2. If its in writing, it must be conspicuous NOTE: If excluded, will also be excluded with respect to third-party beneficiaries. B1. To exclude Warranty of Fitness for a Particular Purpose (2-315) 1. Must be in writing 2. Must be conspicuous -BOLD or LARGER type 3. Doesn’t have to mention fitness for a particular purpose -“There are no warranties which extend beyond the description on the face here of” 2-316(3) -These are all ways to exclude warranties without specific language C. 2-316(3)(a) Implied warranties (2-314, 2-315) can be excluded by the language “as is” “with all faults” and other expressions of common understanding that calls the buyer’s attention to the exclusion of warranties 1. Common understanding determined by trade usage, etc. 2. Case law has required these statements to be conspicuous (1-201(10)) 3. This applies to warranties of merchantability and fitness D. 2-316(3)(b) When the buyer before entering into the contract has examined the goods or sample or model as fully as he desired or has refused to examine the goods there is no implied warranty with regard to defects which an examination ought to have revealed. E. 2-316(3)(c) Implied warranty can also be excluded by course of dealing, course of performance, or usage of the trade 1. Defective product, but trade says it is an acceptable tender -no warranty to complain about. 2. Usage of the trade also allows warranties to be created (2-40 314(3)) 3. 2-316(4) Deals with modifying the remedies under the warranty, not the warranty itself. (1-3 dealt with modifying the warranty itself) A. Remedies can be limited with respect to nonconsumer warranties, consistent with §§ 2-718, 2-719 1. Ex. Limit the remedies to replacement and repair B. Remedies cannot be modified or excluded with respect to consumer goods (2-316.1(2)(3)) B. § 2-316.1 Limitation of exclusion or modification of warranties to CONSUMERS -Maryland -specific provision -not all states have this. 1. 2-316.1(1) 2-316 does not apply to consumer goods, services or both thus -YOU CANNOT DISCLAIM IMPLIED WARRANTIES FOR CONSUMER GOODS A. Does this language mean that 2-316.1 applies to services? 1. Hybrid purpose -goods/services -Anthony Pools, gravaman of the action test 2. This has never been litigated but this language causes structural problems under the code. B. Another language problem -2-316 does not apply to consumer goods and there is no language in 2-316.1 regarding express warranties -it is assumed that 2-316(1) applies to express warranties for consumer goods and they cannot be disclaimed. 2. 9-109 -Definition of consumer goods -goods used or bought for use primarily for personal, family, or household purposes A. Some are obvious -deodorant is obviously a consumer good B. Some could easily be construed as consumer or nonconsumer -microwave or TV could be bought for home or office -thus how you use a good will determine whether implied warranties can be disclaimed or modified. C. Subjective intent test -look at the intent of the buyer at the time of purchase 1. Did the buyer intend to use it for personal, family, or household purposes? 2. Question of fact D. Must be “Primary” use -if your office is upstairs from your home, do you use the microwave mostly for personal use? E. If use changes after you buy it, this is irrelevant -must be use at the time of purchase. 3. 2-316.1(2) -Any language used by a seller of consumer goods (this also applies to manufacturers b/c there is no vertical privity) which attempts to exclude or modify any implied warranties of merchantability or fitness for a particular purpose or any remedies for breach of those warranties is unenforceable. 41 A. But a seller may recover damages from the manufacturer resulting from the breach. 4. 2-316(3) -Modification of remedies for breach of express warranties A. Doesn’t deal with limiting the warranty itself (no language on this so follows 2-316) but rather with changing the remedies. B. Generally, can’t modify the remedies, unless, the manufacturer provides reasonable and expeditious means of performing the warranty obligations. 1. Ex. If remedy on an express warranty is limited to repair or replacement, then the seller must provide an easy way for the buyer to return the product for replacement, etc. 5. 2-316(4) -Used Motor Vehicle Exception -this section does not apply to cars over 6 years old that has been driven more than 60,000 miles, must give notice of the inapplicability of this section. VIII. Damages for Breach of Warranty A. § 2-714 & 2-715 give damages to buyer when a warranty is breached 1. These remedies have to do with already accepted goods -other remedies discussed below involve goods not yet delivered or accepted. 2. § 2-714(2) -Measure of damages = value of goods as warranted -value of goods as accepted = benefit of the bargain A. At time and place of acceptance B. This may be the entire contract price if value of the goods accepted is 0 -no value Ex. Car, steering breaks, car is totaled C. Must also less salvage value from the amount of recovery if applicable. 3. § 2-714(3) -Incidental and consequential damages may also be recovered. 4. § 2-715 Incidental and Consequential Damages A. 2-715(1) -Incidental -costs connected to the goods -storage, transportation, usually pretty low. Can get these damages unless they have been written out of the contract pursuant to 2-316(4) B. 2-715(2) -Consequential damages (a) Any loss resulting from general or particular requirements and needs which the seller at the time of contracting had reason to know and which could not reasonably have been prevented by cover or otherwise. ECONOMIC CONSEQUENTIAL DAMAGES 1. Not actual knowledge, just reason to know 2. Must be reasonably foreseeable consequences A. Hadley v. Baxendale standard (delivery man didn’t know that they needed the shaft to continue business b/c no one told him -so this was not foreseeable) B. LOST PROFIT -can be recovered if seller knows of special use or time requirements at the time of contracting -must be at time of contracting b/c this is the time at which 42 the seller could decide to raise the price to cover potential damages, limit remedies, or warranties C. If seller doesn’t know of special requirements, can’t recover consequential damages. 3. Which could not be prevented by cover (substitute purchase) or otherwise A. Incorporates a duty to mitigate if you want to recover consequential damages. If not, damages would become excessive over and above what it would have cost just to go out and buy a new oven. (b) Can recover consequential damages for injury to person or property proximately resulting from any breach of warranty 1. Big ticket exposure and recovery 2. HYPO -Toaster burns the house down A. 2-714 -cost of good toaster ($15) -cost of toasted accepted ($0) = the cost of the toaster B. 2-715(2)(b) -cost of house and lives, but seller can try to limit consequential damages, remedy can be limited to the cost of the toaster only if its a nonconsumer good. 3. Non-consumer -limiting consequential damages A. Ex. Toaster sold to restaurant rather than a homeowner B. Can limit and exclude the warranties themselves to prohibit recovery C. § 2-719 -Contractual modification or limitation of remedy for non-consumer goods (a) remedies may be added or substituted and buyer’s remedies may be limited to repair or replacement or return of the goods and repayment of the price -this gives the parties freedom to contract and get out of the code’s remedial remedy structure -2-719(1) (b) If remedy is expressly agreed to be exclusive, it is the only remedy available. (3) Consequential damages (economic and personal injury) may be limited or excluded unless the limitation or exclusion is unconscionable. -2-719(3) © Unconscionability -§ 2-302 -“the principle is one of the prevention of oppression and unfair surprise and not of the disturbance of allocation of risks because of superior bargaining power.” Comment 1 (1) Its a question of law for the judge A. Its an equitable remedy -the reformation of contract, in exercise of the court’s conscience, they can refuse to enforce the contract or they can rewrite it. B. Pretty high threshold in order for it to be triggered. 43 (2) Must be unconscionable at the time contract was made A. Not everything that is unfair in retrospect is unconscionable. Its not how it turned out but rather how it was when contract was made. (3) Parties shall be given time to present evidence to a jury to resolve factual issues. (4) Court has the power of reformation -3 options § 2-302 A. Refuse to enforce the contract. B. May enforce the remainder of the contract without the unconscionable clause. C. May rewrite it to limit the application of the unconscionable clause. (5) Definition -see above (6) The more bargaining there is between the parties the less likely it is that the court would find the contract to be unconscionable. (7) It is rarely successful -judges are hesitant to rewrite contracts. (8) 2 types of Unconscionability A. Substantive -gross unfairness, oppression, price completely unfair for an unsophisticated buyer of modest means. $6500 water heater + finance charge = $14,000 B. Procedural -putting unfair clause in fine print. Ex. Must notify us in 24 hours of the defect. C. Some courts have said you only need substantive in order to find the contract unconscionable. 4. § 2-316.1(2) CONSUMER GOODS -Cannot limit remedies for implied warranties. Also 2-719(3) -Limits on consequential damages for personal injury from consumer goods is per se unconscionable. 5. 2-719(2) -Another escape clause from exclusive or limited remedies other than being unconscionable. A. Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, a remedy may still be provided by the UCC. B. 2 ways to determine if something has failed of its essential purpose: 1. Damage much greater than you thought 2. Where seller or manufacturer is unable to live up to its responsibilities under the remedy provided. Ex. Repair or replacement doesn’t work, you can then sue for other damages beyond replacement. -The is the Maryland Rule 3. Maryland Lemon laws for new cars -gives the dealer /manufacturer a certain # of times to fix before they must pay. Laws make it easier for a consumer to get rid of a non-performing new vehicle. 44 IX. Problems -Warranty Exclusion and Modification 5.1 -Warranty protection for a used car bought for consumer purpose -Fine print language -“There are no warranties, express or implied” A. 2-316.1 applies and she has complete protection. B. Warranties can still apply to used goods -it is only warranty for what they are. C. If its not a consumer good (this will depend on her intent at the time of purchase) 1. Express -can’t exclude 2. Merchantability -can’t exclude b/c it did not mention merchantability and it was not conspicuous (it was in small print) 3. Fitness -can’t exclude because not conspicuous 4. Merchant could have excluded implied warranties with “as is” language 5.2 -Purchased used car, discovered after purchase that it had an engine problem, she had refused to check the jeep when the merchant had asked her to at the time of purchase. She “tinkers” with used cars as a hobby. A. 2-316(3)(b) -Comment 8 -Buyer refused to examine or has examined, there is no implied warranty with regard to defects an examination ought to have revealed to him. B. How patent/obvious was the problem? Smoke coming out v. less visible defect. C. Mere fact that you didn’t examine is not enough to exclude the implied warranty. Examination requires more than inspection. D. Seller must demand that you examine the goods and you must say no. -He did ask her to check it out before she bought it and she didn’t so this may exclude. E. It doesn’t exclude the warranties if you just check to see if its ok without being asked -there is no duty to examine. F. If the examination is accompanied by the seller’s express words of merchantability -an express warranty is created that cannot be disclaimed. G. Her status -that she tinkers -with used cars will go to what “ought to have been revealed” to her. H. All questions of fact. 5.3 -Cannot disclaim express warranties. The way to get rid of them is not to make them in the first place. 5.4 -Personal injury from used car, Lou will repair the brakes but does not want to pay the hospital bills. A. Non-consumer -“AS IS” language could exclude implied warranties. Remedies may be limited -2-719(3) unless unconscionable -it is unconscionable to limit to repair and replacement? B. Consumer -Can’t disclaim warranties or consequential damages -prima facie unconscionable. 2-719(3), 2-316.1(2) 5.6 Personal injury from swing set -consumer goods A. 2-316.1 -in Maryland -cannot limit consequential damages and can’t get rid of implied warranty of merchantability. 45 B. Third party injured on swing set -2-318 same result, cannot limit consequential or implied warranty of merchantability 5.7 a. Notice must be given within 4 months of sale or the buyer has no remedy. 5 months after the sale the computer breaks. He told him as soon as he realized the defect. A. 2-607(3)(a) Buyer in all cases, including personal injury must give notice within a reasonable time after he discovers or should have discovered the breach or he will be barred from any remedy. B. Reasonable Time -1-204 -any time which is not manifestly unreasonable, also may be fixed by agreement -allows parties to define it themselves. 1. Is 4 months manifestly unreasonable? -Question of fact for the jury A. Evidence of trade usage in the computer industry (1-205) 2. Does this limit the remedy or get rid of the warranty? Is it so unreasonable that it limits a remedy under the contract? 3. If its part of the agreement, its what you bargained for. Thus, the buyer arguably took the risk that if something went wrong after 4 months, he could not get it fixed. If he wanted more time, he could have negotiated differently. 4. If its consumer goods, unconscionable? 5. This is a novel way to cut down on the seller’s exposure. C. Remember, notice provisions only apply to buyer’s and not to third parties. 5.7 b. Seller got a good deal on this computer -would normally sell for more without the contract provision limiting the notice to 4 months. A. This is evidence that would be brought in -it may indicate that a discount was given for a shorter notice period -this was a part of the bargain. B. Remember that products liability may give remedies that are better than the UCC remedies. X. What to KNOW: 1. Different types of warranties 2. Elements of breach (must show product defect) 3. What the defenses are (Misuse -not really a defense, more used as evidence that it was not used for ordinary purpose, contributory negligence (abandonment of reliance on the warranty, sealed container)). 4. Privity -vertical/horizontal 5. Exclusion/Modification 6. Statute of Limitations Commercial Impracticability I. In General A. There are certain contingencies that will excuse a buyer or seller from performing. B. Impossible to perform -Coronation cases -renting the space to watch the king and the king got sick and was not coronated that day. -Was the lease for the purpose of watching 46 the king or was it a general lease? II. § 2-613 Casualty to Identified Goods (APPLIES TO GOODS THAT HAVE ALREADY BEEN MADE and SPECIFICALLY IDENTIFIED) A. This is the true case of impossibility B. Requires goods to be identified -goods must already exist prior to time of delivery. “Where the contract requires for its performance goods identified when the contract is made” 1. Ex. Buyer goes into the art gallery and says, “I’ll take that one” C. “And the goods suffer casualty without fault of either party before the risk of loss passes to the buyer” 1. If the painting is destroyed prior to time of delivery before the risk of loss passes to the buyer 2. Without fault (negligence, etc.) D. Seller will not be penalized for this loss. 1. If loss is total, the contract is avoided. (2-613(a)) -no continuing obligation to pay or deliver -can get deposits back, etc. 2. If loss is partial, buyer has the option to: (2-613(b)) A. Treat the contract as voided OR B. Accept the goods w/due allowance for deterioration taken off of the contract price. AND Buyer has no further rights against the seller and takes “as is” with no implied warranties. III. § 2-615 Excuse by Failure of Presupposed Conditions (APPLIES TO THOSE GOODS DESIGNATED FOR FUTURE DELIVERY, NOT YET IDENTIFIED) (a) NOT A BREACH OF SELLER’S DUTY IF: PERFORMANCE HAS BEEN MADE IMPRACTICABLE BY THE OCCURRENCE OF A CONTINGENCY THE NONOCCURRENCE OF WHICH WAS A BASIC ASSUMPTION ON WHICH THE CONTRACT WAS MADE OR A. Different from 2-613 because here the goods have not yet been manufactured or identified. Ex. Contracted to purchase paintings but they were not manufactured because the seller ran out of paint. Delivery will be late. B. Thus, it is not impossible to perform as in 2-613 (identified goods are destroyed), but rather performance has been made impracticable. Its not impossible because the goods can still be made, its just going to cost a lot of money. C. This provision is a default mechanism -would not apply if goods were guaranteed. (Seller assumed a greater obligation) D. This provision is invoked when the network of tacit assumptions fails, this a failure of presupposed conditions. 1. That store would still exist when time to deliver arrives 2. That gasoline will still be available in one month and there will not be a fuel shortage crisis. E. What if price goes up -is this failure of presupposed conditions? 1. Ex. Fixed price contract. Seller’s cost of production goes up, source of supply is threatened by disease (cocoa beans for coffee) 47 2. Isn’t unfair to the seller that he will lose money, but it negates the allocation of risk that parties bargained for in the contract to allow him to get out of the contract. 3. GENERAL RULE: Price increases to seller that are not positively ruinous/unjust (will put the seller out of business) are not grounds for getting out of the contract on grounds of commercial impracticability. A. Its a question of fact B. Bring in usage of the trade evidence (1-205) how are risks usually allocated in this particular trade when prices decrease/increase -EX. Certain industry maybe the seller is always let out of the deal. C. If there’s been an embargo, war, etc., this may be enough to allow seller to get out of the contract. D. Huge price fluctuation may be considered commercially impracticable. F. Arguing that you no longer know how to make the product will not work -impracticability does not work when the seller has assumed the risk. BY COMPLIANCE IN GOOD FAITH WITH ANY APPLICABLE FOREIGN OR DOMESTIC GOVERNMENTAL REGULATION A. And it can be proved that the country that has imposed the embargo or boycott was the sole source of supply. Failure of sole source of supply (b) If the causes in section (a) only cause an affect on a part of the seller’s capacity to perform, he must allocate deliveries among his customers but may at his option include regular customers not then under contract as well as his own requirements.He may so allocate in any manner which is fair and reasonable. 1. Pro rata share distribution for your customers -can set some aside for regular customers and yourself as long as “fair and reasonable.” 2. This is a factual inquiry for the jury, use usage of the trade evidence (1-205) -what happens in the industry when there is a shortage. © The seller must NOTIFY the buyer seasonably that there will be a delay or nondelivery. A. Many contracts will insert a “force majeure” clause instead of 2-615. 2-615 is only the default mechanism. 1. This type of clause can deal with certain circumstances that may not be considered in the default provision. Ex. What to do in the event of a strike. 2. Can expressly exclude the ability of a party to get out of the deal because of price fluctuations. 3. Can extend to “any event” not within the control of the party -foreseeability is not required. Foreseeability is required under 2-615 -the tacit assumptions of the underlying contract. 4. Work well for fixed price contract where you can’t hedge. 48 B. 2-615 -Alamance v. Bobby Murray Chevrolet -NO EXCUSE 1. School board contracted to buy buses from Bobby Murray. Two problems kept Bobby Murray from being able to deliver on time and to make it unlikely that they would be able to deliver at all. A. New federal regulations changed standards for diesel engines -so Bobby Murray could not used the motors they had planned to or they would be out of compliance. B. Couldn’t get transmissions from its suppliers. 2. School board sought damages = benefit of the bargain = price of substitute purchase -contract price -COVER 2-712 3. Bobby Murray that they did not breach because performance had been made commercially impracticable. 1. Failure of GM to supply 2. Government regs were an intervening factor. 4. Who assumes the risk? 5. 2-615 is reserved for rare, extraordinary circumstances. This case demonstrates how hard it is to get out of these deals. 6. COURT: No EXCUSE HERE -2-615 does not apply. A. No exclusive specification of GM chassis in the contract -no exclusive source of supply -exclusive source must have been contemplated or assumed by the parties. B. No clause in the contract conditioned performance on the ability to get chassis (why would this be in the contract? If they did have this clause it would have made the buyer worried that the seller wanted to get out of the contract.) C. Government regulation -School board had put a clause in the contract that stated that Bobby Murray needed to give notice to the school board if a government regulation would keep them from performing. Because the seller assumed the risk here, the waived there ability to assert it under 2-615. C. Smalkin’s Advice -if you want to be able to get out of a contract on Commercial Impracticability Grounds 1. Use a force majeure clause -its broader than 2-615 2. Put an extraordinary price increase clause in the contract -this would protect both buyer and seller. Ownership -Possession and Title I. § 2-401 Passing of Title -Identification is more important than title A. Provisions of the UCC apply irrespective of title to goods. B. Pre -UCC, sellers and buyers would base risk of loss on title C. UCC -concept of identification has been substituted for title as the operative term for 49 the rights of the buyer and seller in acceptance, delivery, and revocation. (2-501) II. Title Becomes Important when some Third Party is claiming ownership A. Only time title is important under today’s UCC but when it comes up its very important. III. When does title pass -§2-401(1) A. Title to goods cannot pass under a contract for sale prior to their identification to the contract. Thus, the earliest time title can pass is when the goods are identified to the contract. (2-501). Can be after identification if its in the contract. B. 2-401(2) Unless otherwise agreed, title passes to the buyer at the time and place at which the seller completes his performance = physical delivery 1. This is only the default rule and can be altered by agreement. IV. § 2-403 Power to Transfer (1) General Rule of Title -Derivative Theory of Title A. Title derives from the person who precedes you in the chain. B. Purchaser acquires all title which his transferor had. C. Can trace title back to someone whose title is clear and thus anyone else in the chain has the same title. (2) Void Title -He who has no title has no power to confer it on anyone else A. When stolen goods are purchased -Void goods -NO TITLE B. No claim of ownership can be made under any circumstances. Ex. If Smalkin in trying to sell Hornstein’s car and he doesn’t own it -thief is selling Hornstein’s car 1. Acquired by larceny -physical dispossession and taking away of goods -void title -cannot be transferred. Person to whom you transfer will have no title. A. Must have asportation B. Carrying away with intent to permanently deprive another of the goods. C. Would not be fair to penalize the true owner because he involuntary parted with the goods because they were stolen from him. -NO TITLE IN buyer. (This is different from voidable title below where the seller voluntary parted with the goods, thus buyer would have good title.) (3) Voidable Title -this can be transferred A. If its purchased through fraud, misrepresentation, or trick B. Voidable title does not preclude one from transferring title to the good faith purchaser for value. C. If person is tricked or loses item, and that person sells to a good faith purchaser -Can sue the bad guy for conversion. Still can’t sue the good faith purchaser. Its unfair to the party tricked but its even more unfair to the good faith purchaser. (Party tricked is blameless, but purchaser is even more blameless.) 50 D. To be a good faith purchaser for value, must be 1. Should not be buying Rolex from a guy in the men’s room at the train station -must be in good faith A. 2-103 -Good faith, subjective honesty in fact, if commercial buyer/merchant, would also be reasonable standards of fair dealing in the trade. But GFP doesn’t have to be a merchant. 2. This is different than a buyer in ordinary course -A buyer in ordinary course must be a customer and buy from a merchant. Bad guy here need not be a merchant. So good faith purchaser is a broader category, buyer in ordinary course is narrower. E. Voidable Title -2-403(1) (a) Transferor deceived as to the identity of the purchaser. (b) Delivery was in exchange for a bad check. (C)Transaction was a cash sale (d) Delivery procured through fraud (Embezzlement, larceny after trust) F. Hodges Wholesale Cars v. Auto Dealers -Voidable title can be transferred to good faith purchaser for value. A. Case is a good exam model B. Once title is in hands of good faith purchaser for value it is good, title was confirmed in Express, Rose bought from Express -GOOD TITLE 1. True owner conveyed voidable title to the initial buyer (it was a voluntary transfer and he was defrauded by a bounced check but it was not outright stealing which would make the title void) A. Btw good faith purchaser and seller who is tricked, must be in favor of good faith purchaser. 2. Check had been dishonored but dealer had already sold title 3. Changed hands 4. Intermediate dealers were not liable -had no reason to know it has voidable title -they had power to transfer the goods 5. Cannot take the car from a good faith purchaser for value. G. Rudiger Ranches v. Van de Graaf Ranches -Good Faith Purchaser A. Smalkin is not happy with the result in this case -court may have been wrong in ignoring custom and industry standard in favor of a statute. B. Issue: If the buyer did not follow industry statute, does this keep him from being a good faith purchaser who may receive voidable title? YES -he is not a good faith purchaser. C. Statute for unbranded cattle. Van de Graaf bought stolen cattle without proper paperwork. D. Court said you can’t own unbranded cattle unless you own brand or you have the proper paperwork. E. But, custom of the trade gives purchasers some time to complete the paperwork. Court ignores this in favor of the statute. 51 (4) Entrustment -2-403(2)(3) A. Differs from void and voidable title -“any entrustment of possession of goods to a merchant who deals in goods of that kind gives him power to transfer rights of the entruster to a buyer in ordinary course of business.” B. Entrusting means delivery of goods to a merchant who deals with those goods of that kind (for repair/consignment) and merchant sells that property to a buyer in ordinary course. (More than good faith purchaser because must buy from a merchant) Buyer will have superior title. 1. Pawnbroker cannot be a buyer in ordinary course b/c the person from whom he buys goods is typically an ordinary user and not a person engaged in selling goods of that kind, but you can buy from a pawnbroker and still be a buyer in ordinary course b/c a pawnbroker is a merchant with respect to goods of that kind. C. Owner has no recourse against the buyer -only against the merchant in the form of conversion. D. Balancing of rights of good faith purchaser v. Those entrusting goods. E. Ex. Bank is getting rid of lots of office furniture . Furniture is delivered to a consignment house and advertised for sale at a public sale. Salvage dealer bought it. File cabinets happened to have contained sensitive financial information on trust accounts. Via entrustment doctrine, salvage guy bought the items and the contents from a merchant in ordinary course of business who deals with goods of that kind. Bank paid the salvage dealer. No criminal aspect to this at all. V. Warranty of Title and Against Infringement § 2-312 A. Every thief makes a warranty of title, only time a breach of the warranty of title will occur is if a larcenous thief breaks the chain of title. 1. Ex. Thief sells boat to a boat dealer. You buy the boat from the boat dealer. Boat dealer is on the hook and liable for a breach of the warranty of title. Does not depend on fault. 2. Its like void title -thief -->dealer --> buyer -buyer can go after dealer. B. 2-312(3) Infringement -seller warrants that goods will be delivered free of claims of third parties by way of infringement. 1. Applies to computer software claims 2. Even an innocent user can be sued for patent and trademark infringement C. Warranty of title is a broad warranty, attaches to all sales D. Can only disclaim by specific language Closing the Sale -Rejection, Revocatio Revocation, etc. n, Preliminary Provisions I. Performance -the Fundamental Duties of the Parties (§ 2-301) 52 A. § 2-301 General Obligations of the Parties 1. Seller = to transfer and deliver 2. Buyer = to accept and pay B. This is the epicenter of the UCC -everything depends on this. II. Seller’s Tender of Delivery A. § 2-507 -Effect of seller’s tender; delivery on condition. 1. “Tender of delivery is a condition to the buyer’s duty to accept and pay for the goods” A. Conditions on which future performance is contingent B. Tender satisfies the condition and triggers the buyer’s duty to accept and pay 2. Expands 2-301 from general idea of duties and obligations to more of a mechanical explanation of how it works. B. § 2-503(1) Manner of Seller’s Tender of Delivery 1. How and when goods are delivered is very important in commercial practice 2. Tender does not require delivery or shipment, it merely requires the seller to put and hold the goods and notify the buyer so that the buyer can take delivery. III. Seller’s Shipment of Goods A. Presumptive Model is that the buyer picks them up, but most commercial practice contemplates shipment. B. § 2-504 -Shipment by Seller -2 kinds of contracts under which goods are delivered in the commercial context 1. If there is a duty to deliver, see 2-319 for the two types below 2. If contract contains no terms about delivery, then seller’s only duty is to put and hold the goods as required by 2-503, 2-504 does not require him to deliver the goods to a particular destination. C. § 2-319(1) -F.O.B.”free on board” indicates that it is a contract in which the seller has the duty to deliver the goods -two different types of F.O.B. contracts (a) shipment contract -FOB the seller’s place of business 1. Contract does not require goods to be sent to a particular destination. 2. Use a common carrier -a major transport company, not the seller’s own fleet of trucks. A. Common carriers use a bill of lading as a document of title when goods are shipped. 3. SELLER’s DUTY -to hand goods over to the carrier A. Once this happens, tender of delivery has been made and seller has executed its duty B. If anything happens after this tender (goods are destroyed) the buyer is responsible for the loss, and must get insurance or seek remedy from the carrier C. Seller bears burden only until the goods get into the possession 53 of the carrier. (b) destination contract -FOB the buyer’s place of business 1. Contract requires goods to be shipped to the buyer’s place of business 2. SELLER’s DUTY -to transport the goods to the place of the buyer A. Seller has the duty to contract the common carrier and the seller remains on the hook until the carrier makes the tender of goods to the buyer (either put and hold or deliver depending on terms of the carrier’s contract) B. Seller’s duty does not shift to the buyer until the goods are tendered to the buyer. C. Seller bears the burden of the expense and risk of transporting the goods to the place of business of the buyer. The Real Provisions I. § 2-601 Perfect Tender Rule 1. “If the goods OR tender of delivery fail in any respect to conform to the contract, the buyer may reject or accept the goods A. thus buyer has right to perfect goods (conforming goods) and perfect tender of delivery (conforming mechanical tender) 1. Just in time delivery systems has made perfection of “tender of delivery” extremely important (lack of storage space, cutting down on inventory) B. “conforming” – Sec. 2-106(2) – conforming = in accordance with the obligations under the contract. C. Failure to make a conforming tender empowers revocation and also also causes a breach. The buyer may: (a) Reject the whole; or – even if one of 20,000 pencils is broken? maybe not, but if pencils are green instead of blue – this is more of a rationalization for rejecting the whole (b) Accept the whole; or © Accept any commercial unit or units and reject the rest. – reject the damaged units and accept the rest. How a commercial unit is defined will depend on trade usage – one pencil may not be a commercial unit, a package of pencils may be a commercial unit. 2. Caveats to the Perfect Tender Rule A. § 1-205 -Usage of the Trade 1. Ex. Allowing a certain amount of slippage, a slight nonconformity if it follows industry custom or practice. B. § 2-103(b) -Good Faith -merchant -includes both 1. Subjective good faith -honesty in fact 2. Objective good faith -the observance of reasonable commercial 54 standards of fair dealing. C. Installment Contracts 1. 2-601 applies subject to the provisions of 2-612 for the breach of installment contracts. 2. 2-612 -goods delivered in separate, repeated installments 3. 2-612(2) The buyer may reject any nonconforming installment if the nonconformity A. Substantially impairs the value of that installment, and B. Cannot be cured (2-508, 2-608) 1. If you tell the seller you need more lobsters because the delivery was short and they say no, you can reject -this is a perishable item that must be sold fresh = substantial impairment that cannot be cured 2. But if the seller is late on sending you carrots and he can get them to you the next day, this rejection would not be proper. 3. If seller gives adequate assurance that it will cure, the buyer generally must accept. A. Adequate assurance will be defined by the usage of the trade. 4. 2-612(3) When the nonconformity impairs the value of the whole contract, there is a breach of the whole. A. Continual bad shipments, chronic delivery problems B. These are questions of fact 5. Special case of course of performance D. Cure by the Seller § 2-508 -Gives the seller a second chance to reverse the buyer’s rejection NOTE -although not explicit in the code, there is an implied rule in Maryland that a seller will also have a right to cure before revocation (1) Unconditional right to cure -no conditions need be satisfied -“When any tender of delivery by the seller is rejected because nonconforming and the time for performance has not yet expired expired, the seller may seasonably notify the buyer of his intention to cure and may then within a reasonable time make a conforming delivery. A. Performance is not yet due so the seller has the absolute right to cure until the time of performance is due. (2) Nonconforming at the time performance is due (question of fact) and the buyer rejects and A. The seller had reasonable grounds to believe it would be acceptable (Ex. Goods come in packages that seller could not have been expected to open and check each item) B. The seller may cure if he seasonably notifies the buyer C. Seller then has further reasonable time to cure, substitute a conforming tender. 55 D. Very fact specific inquiries 1. Adequacy of Cure -Tunick v. Kornfeld A. Picasso painting was a forgery, seller offered to cure by providing an authentic replacement print B. 2-508(2) right to cure at the