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I. Introduction
A. Historical Background and
Philosophy
The law of sales originated in the customs and traditions of merchants and traders. The
Lex Mercatoria (Law Merchant) was a
system of rules, customs, and usages self-imposed by merchants to settle disputes and
enforce obligations among themselves. (See also Maritime
Law and the Courts of Pied Poudre). The rules were established at fairs, at
which merchants met to exchange goods and settle differences through courts established
and operated by merchants. By the end of the seventeenth century, the principles of the
Law Merchant had become widely accepted. Eventually, they became part of the common law,
and judges refined them into the modern law of sales. In the United States, sales law
varied from state to state, and this made multistate sales contracts difficult. In the
late nineteenth century, when multistate contracts became the norm, the difficulties
became especially troublesome, and attempts were made to produce a uniform body of law
relating to commercial transactions. In the 1940s the need to integrate the laws covering
commercial transactions into a single, comprehensive body of statutory law was recognized.
The UCC was developed to serve that purpose.
B. Structure (Articles)
and
Road Map
C. Minnesota Application, MSA Chapter 336
D. Scope and Applicability of Article 2
Article 2 applies to transactions in goods,
including all contracts involving the sale (and under 2A, leases) of goods
Goods = all things movable at the time they are identified to the
contracts (UCC 2-105(1))
Article 2 applies to
transactions in goods, including all contracts involving the sale (and under 2A, leases)
of goods The UCC applies to leases of goods under Article 2A, covering any
transaction that creates a lease and includes subleases [UCC 2A-102, 2A-103(k)]. A lease agreement
is the lessor and lessee's bargain, as found in their language and as implied by other
circumstances, including course of dealing and usage of trade or course of performance [UCC 2A-103(k)]. A lessor is
one who sells the right to possession and use of goods under a lease [UCC 2A-103(p)]. A lessee is
one who acquires the right to possession and use of goods under a lease [UCC 2A-103(o)].
Except that it applies to leases instead of sales, Article 2A is very similar to
Article 2. Differences between their provisions include the following. Article 2A does not
provide for acceptance by shipment of goods or for additional terms in an acceptance or
confirmation [UCC 2A-206].
Under Article 2A, an oral lease is enforceable if the lease payments are less than $1,000
[UCC 2A-201]. Article 2A
does not say whether a lease as modified needs to satisfy the Statute of Frauds. Article
2A replaces Article 2's implied warranty of title with an implied warranty of quiet
possession [UCC 2A-211(1)].
Article 2A extends protection against unconscionability to leases and expands it in cases
concerning consumer leases. (A consumer lease involves a lessor who regularly engages in
the business of leasing or selling, a lessee who leases the goods "primarily for a
personal, family, or household purpose," and total lease payments that are less than
$25,000 [UCC 2A-103(1)(e)].)
If unconscionable conduct induced the consumer to enter the lease or occurred in the
collection of a claim under it, courts can grant relief, even if the lease itself is not
unconscionable [UCC 2A-108(2)].
Article 2 deals with sales of goods, not real property, services, or intangible
property such as stocks and bonds. If the subject of a sale is goods, the UCC will govern.
If it is real estate or services, the common law will apply. Nevertheless, a contract for
the sale of goods (a sales contract) is subject to common law principles applicable to all
contracts-offer, acceptance, consideration, capacity, and legality. When the UCC speaks,
its principles apply; when the UCC is silent, other state statutes and the common law
apply. In some cases, the UCC applies different rules, depending on whether a buyer or
seller is a merchant.
What is a Sale? Article 2 "applies to transactions in goods" [UCC 2-102]. This implies a broad
scope, but for this chapter, Article 2 is treated as applicable only to a sale. A sale is
"the passing of title from the seller to the buyer for a price" [UCC 2-106(1)]. The price may be
payable in money or in other goods, services, or real estate.
What are goods? Goods are tangible and movable. A tangible item has physical existence
(a car, a chair). Intangible property (stocks, bonds, contract rights) has only conceptual
existence. A movable item can be carried from place to place. Real estate cannot.
II. Themes that permeate the UCC
A. Good Faith (UCC 1-203)
Applying to all parties throughout performance and enforcement of every
contract within the UCC are the obligations of good faith and commercial reasonableness [UCC 1-203]. Good faith means
honesty in fact. Merchants are held to a higher standard than non-merchants are. For a
merchant, good faith means honesty in fact and the observance of reasonable commercial
standards of fair dealing in the trade [UCC 2-103(1)(b)]. Good faith can
mean that a party cannot manipulate the terms of a contract to take advantage of another
party. Good faith is a question of fact. If a contract leaves open some particulars of
performance and permits one of the parties to specify them, "[a]ny such specification
must be made in good faith and within limits set by commercial reasonableness" [UCC 2-311(1)]. Thus, if one
party delays specifying particulars of performance for an unreasonable period or otherwise
fails to cooperate, an innocent party who has performed as far as is reasonably possible
under the circumstances can treat the other's failure as a breach of contract.
B. Unconscionability (2-302)
Adhesion Contracts: "Take It or
Leave It" Buyer has no choice. An unconscionable contract is one that is
so unfair and one-sided that enforcing it would be unreasonable. Under the UCC, if a court
finds a contract or any clause in a contract to be unconscionable at the time it was made,
in light of general commercial practice and the commercial needs of the trade involved,
the court can (1) refuse to enforce the contract, or (2) enforce the remainder of the
contract without the unconscionable clause, or (3) limit the application of any
unconscionable clauses to avoid an unconscionable result [UCC 2-302]. Generally, an
unconscionable contract will be found to result from unequal bargaining power and
unscrupulous dealings by one party (uneducated consumers subjected to high-pressure sales
tactics, for example).
Basic Test: Whether, in light of the general commercial background and
needs of the particular parties, the clauses are so one-sided as to be unconscionable
under the circumstances existing at time K was made: Usually one side has substantially
superior bargaining power
C. Merchant Standards (2-104(1))
A number of rules in Article 2 depend on whether the
seller (and sometimes the seller and buyer) is a merchant. The Code define a
"merchant" as one who regularly deals in goods of the kind sold or who otherwise
holds himself out as having special knowledge of the goods sold.
Who Is a Merchant? In certain phases of sales transactions
involving merchants, special business standards are imposed because of the merchants'
degree of commercial expertise. A merchant is a person who acts in a mercantile capacity,
possessing or using an expertise specifically related to the goods being sold. That is, a
merchant is: (1) a person who deals in goods of the kind involved in the contract (a
retailer, a wholesaler, or a manufacturer is a merchant of those goods sold in the
business); (2) a person who, by occupation, holds himself or herself out as having
knowledge and skill peculiar to the practices or goods involved in the transaction (this
can include banks or universities); or (3) a person who employs a merchant as a broker,
agent, or other intermediary (for instance, if a "gentleman farmer" who
ordinarily does not run the farm hires a broker to purchase livestock, the farmer is a
merchant in the livestock transaction) [UCC 2-104]. A merchant for one
type of goods is not necessarily a merchant for another type (for example, a sporting
goods retailer is a merchant when buying tennis equipment but not when buying stereo
equipment). Whether a farmer is a merchant depends on the goods involved, the transaction,
and whether the farmer has special knowledge concerning those goods.
III. Important Differences
A. Firm Offers (2-205)
If a merchant signs a written offer giving assurances
that it will be held open, the offer is irrevocable for the stated period, or for a
reasonable period if none is stated, in no event to exceed 3 months.
In general contract law, when a definite offer is met by an unqualified
acceptance, a binding contract is formed. In a sales transaction, verbal exchanges,
correspondence, and the actions of the parties may not reveal exactly when a binding
contract arises. Under the UCC, an agreement sufficient to constitute a contract exists
even if the moment of its making is undetermined [UCC 2-204(2)].
Under common law contract principles, an offer can be revoked any time
before acceptance. Under the UCC, if a merchant gives assurances in a signed writing that
an offer will remain open, the offer is irrevocable, without consideration for the stated
period of time, or, if no definite period is specified, a reasonable period (neither
period to exceed three months) [UCC
2-205]. These are known as firm offers. The purpose of the rule is to give effect to a
merchant's intent to be bound to a firm offer. When a firm offer is contained in a form
contract prepared by the offeree, a separate assurance must be signed, because otherwise
the offeror might inadvertently sign the contract without realizing the firm offer is
included, thus defeating the purpose of the rule.
Acceptance. Generally, acceptance of an offer to buy or sell goods may be
made in any reasonable manner and by any reasonable means. If the response indicates a
definite acceptance of the offer, a contract is formed, even if the response includes
additional or different terms-so long as acceptance is not made expressly conditional on
the offeror's assent to the new terms. An offeree's additional terms are considered
proposals, and the contract is formed on the offeror's terms, unless the parties are both
merchants.
Relaxed requirements. A writing will be sufficient as long as it indicates
that a contract was intended and (except for contracts between merchants as mentioned
above) as long as it is signed by the party against whom enforcement is sought. Except for
output and requirements contracts, a contract is not enforceable beyond the quantity of
goods shown in the writing. All other terms can be proved by oral testimony. Often, terms
that are not agreed on can be supplied by the open term provisions of Article 2.
B. Battle of the Forms (2-207)
Article 2 abandons the Mirror Image Rule, and any
acceptance or written confirmation sent within a reasonable time that indicates an
intention to enter into a contract will be effective as an acceptance, even if it states
additional or different terms for the K, unless the acceptance is made expressly
conditional on assent to the acceptance terms. Whether the acceptance terms will be
included in the K depends on whether both parties are merchants.
1. Ks Involving a Non-Merchant -- Terms of the Offer
Govern
2. Ks between Merchants -- Acceptance Terms Usually
Govern
Additional terms. Under the common law, the mirror-image rule requires
that acceptance exactly mirror an offer. Any difference in terms constitutes a rejection
and a counteroffer. Under the UCC, if an offeree's response indicates a definite
acceptance, a contract is formed, even if the acceptance includes terms in addition to or
different from the offer [UCC
2-207(1)]. The response does not constitute an acceptance if the modifications are
conditional on the offeror's assent. (For instance, accepting an offer to sell 500 pounds
of chicken breasts by saying, "I accept, and I want that evidenced by a city scale
weight certificate," would make a contract. Responding by saying, "I accept on
condition that the weight is evidenced by a city scale weight certificate" would not,
unless the offeror agreed.) Is performance to be measured by the offeror's terms or the
offeree's terms (which include modifications)? This is the battle of the forms.
When the seller or the buyer is a non-merchant, the additional terms are
construed as mere proposals and do not become part of the contract [UCC 2-207(2)]. (For instance, in
response to an offer to sell a car, a non-merchant offeree's added term-"I want a
spare tire included"-does not prevent the making of a contract, which is formed on
the offeror's terms.)
In a transaction between merchants, the additional terms become part of
the contract unless: (1) they materially alter the contract (generally, if no unreasonable
surprise or hardship for the offeror is involved, no material alteration is involved); (2)
the offer expressly states that no terms other than those in the offer will be accepted;
or (3) the offeror objects to the added terms in a timely fashion [UCC 2-207(2)]. (For instance, in
response to a merchant's offer to sell 1,000 pens, a merchant's offeree's added
term-"shipping costs included"-becomes part of the contract, unless it
materially alters the contract, the offer was restricted to the offer's terms, or the
offeror objects.)
C. Course of Dealing (1-205) (A sequence of previous
conduct between the parties to a particular transaction that may be regarded as
establishing a common basis of their understanding) and Usage of Trade (1-205) (A practice or method of
dealing, regularly observed in a particular business setting so as to justify an
expectation that it will be followed in the transaction in question.)
Under the UCC, a court will assume that the course of dealing
between the parties and the usage of trade were considered when the agreement was phrased
[UCC 2-202, 1-201(3)]. A course of dealing
is a sequence of conduct between the parties that occurred before their agreement and
establishes a common basis for their understanding [UCC 1-205(1)]. Usage of trade is
any practice or method of dealing having regularity of observance in a place, vocation, or
trade so as to justify an expectation that it will be observed with respect to the
transaction in question [UCC
1-205(2)]. The express terms of an agreement, the course of dealing, and the usage of
trade will be construed to be consistent with each other whenever reasonable. When that is
not possible, the terms in the agreement prevail [UCC 1-205(4)]. Parol evidence of
a course of dealing or usage of trade that is not inconsistent with the terms of the
written agreement can be introduced in situations in which both parties knew or should
have known of the existence of the particular custom or usage in that industry in that
locality.
D. Rules of construction -- (2-208)
Express terms, course of performance, course of dealing, and usage of
trade are to be construed together when they do not contradict one another. When that is
not possible, the following order of priority controls: (1) express terms, (2) course of
performance, (3) course of dealing, and (4) usage of trade [UCC 1-205(4), 2-208(2)].
E. Open Terms -- (2-204, 2-305)
Court can supply reasonable terms for those that are
missing. Under contract law, an offer must be definite enough for the
parties to ascertain its essential terms when it is accepted. Under the UCC, a sales
contract will not fail for indefiniteness even if one or more terms are left open, as long
as: (1) the parties intended to make a contract and (2) there is a reasonably certain
basis for the court to grant an appropriate remedy [UCC 2-204(3)]. Nevertheless, a
contract must be definite enough for a court to identify the agreement so as to enforce it
or award appropriate damages on its breach. The more terms left open, the less likely a
court will find that the parties intended to form a contract. If the quantity term is left
open, a court will have no basis for determining a remedy, and the contract will fail
unless it is an output or a requirements contract [UCC 2-306]. The quantity need not be
accurately stated, but a contract will normally not be enforced beyond the amount stated
in the writing.
F. Allocation of Interest and Risk
of Loss (2-319 through 2-327)
Under pre-UCC law, title was a central concept in sales
law controlling risk of loss, the seller's right to the sales price, and the buyer's right
to the goods. Under the UCC, the importance of title has been substantially reduced. It
controls none of the above questions and the drafters of the UCC tried to divorce the
question of title as completely as possible from the question of the rights and remedies
of the parties to a sales contract. Under the UCC scheme, several concepts replace title.
They are (1) identification, (2) insurable interest, and (3) risk of loss
1. Identification: Designation of specific goods -- It
gives the Buyer an insurable interest
2. Insurable Interest: The Buyer has an insurable
interest in identified goods and can buy insurance even before the risk of loss has passed
to her
3. Risk of Loss: Denotes which party will pay for goods
that are lost, stolen, damaged or destroyed. Central question is when does the ROL shift
from S to B
While at common law, tender of non-conforming goods
does not constitute acceptance, under UCC shipment of NCG results as both acceptance of
offer and breach
Before the UCC, title was a central concept in sales law. The party who
had title bore the risk of a loss of goods (and could thus buy insurance against it). It
was often difficult to determine when title passed from seller to buyer, however, and thus
which party had title at the time of a loss. The UCC divorced the question of title from
the question of the rights and obligations of buyers, sellers, and others (subsequent
purchasers, creditors). Title remains relevant under the UCC in some situations, and the
UCC has rules for locating title.
In most situations, however, the UCC replaces the concept of title with
three other concepts-identification, risk of loss, and insurable interest. Generally, the
UCC attempts to place a loss on the party who breaches a contract, the party who has
physical control of the goods, or the party who is most likely to have thought of
obtaining insurance. Of course, the rules do not apply if a different party caused the
loss or if the parties allocated the risk in their contract. The last point is most
important: parties can agree on who will bear the risk of loss.
G. Non-Conforming Goods (2-206(1)(b))
and
Cure (2-508)
The Perfect Tender Rule. At common law and under the UCC, a seller is
obligated to deliver goods in conformity with a contract in every detail [UCC 2-601]. (Delivering
ninety-eight cases of apricots when ninety-nine have been ordered, for example, gives the
buyer the right to reject the entire shipment and hold the seller in breach.) Because of
the harshness of the rule, there are the following exceptions.
1. Agreement of the parties. If parties agree, for instance, that
defective goods will not be rejected if the seller is able to repair or replace them
within a reasonable time, the rule does not apply.
2. Cure. Cure is a seller's right to repair, adjust, or replace
nonconforming goods [UCC 2-508].
When tender is rejected because goods are nonconforming, a seller can notify the buyer
promptly of an intent to cure and can then do so within the contract time for performance
(delivering plaid tablecloths on May 2, under a contract for delivery of red tablecloths
by May 8, for example, gives the seller six days to notify the buyer and cure). If the
time for performance has expired, a seller can exercise the right to cure if he or she
reasonably believed that the buyer would accept the nonconforming tender. (For example,
believing that a buyer will accept R-Y paint in lieu of R-Z paint, as the buyer has always
done before, would be reasonable, and thus the seller has a reasonable time within which
to cure, even if the time extends beyond the contracted time for performance.) When a
seller offers a price allowance with tender of nonconforming goods (tendering more
expensive goods at the same price, for instance), a presumption may be created that the
buyer will accept, and this may extend the time to cure beyond the contracted time for
performance. A seller's right to cure substantially restricts a buyer's right to reject.
If a buyer refuses a tender of goods as nonconforming without disclosing the nature of the
defect to the seller, the buyer cannot later assert the defect as a defense if the defect
is one that the seller could have cured [UCC 2-605].
Where the B has rejected goods because of defects, S
may within the time originally provided for performance "cure" by giving
reasonable notice of intention to do so and making a new tender of conforming goods that
the B must then accept.
IV. Remedies (2-701 through 2-725)
Under the UCC, remedies can be limited, but different rules apply. If a
remedy is intended to be exclusive, the contract must say it (for example, that, if a car
breaks down, "the sole and exclusive remedy is repair or replacement of defective
parts"). If circumstances cause an exclusive remedy to fail in its essential purpose
(if the car breaks down and the dealer is unable to fix or replace defective parts, for
instance), then it will not be exclusive, and all other remedies under the UCC become
available. Under the UCC, a contract may limit or exclude consequential damages, provided
the limitation is not unconscionable. If a buyer is purchasing goods for a household,
family, or personal purpose, a limitation of liability for personal injury is prima facie
unconscionable and will not normally be enforced. If a buyer is purchasing goods for
commercial use, the same limitation is not necessarily unconscionable.
A seller's remedies take several forms, but the substance of each remedy
is the same-a seller is entitled to either the goods or the amount that the buyer promised
to pay. By stopping delivery or repossessing goods, a seller is returned to the position
he or she was in before contracting. In other cases, a seller can bring an action for the
price or resell the goods and recover the difference between the resale and contract
prices. In these cases, a seller is permitted to end up with the same profit that the
seller would have had if the buyer had not breached.
Cover is the term that typifies a buyer's remedies. If a seller fails to
deliver or delivers nonconforming goods, a buyer can cover by buying replacement goods and
then recover the extra expense from the seller. If a buyer accepts nonconforming goods, he
or she can recover from the seller the difference between the value of the goods accepted
and the value the goods would have had if they had been conforming. In either case,
recovery is the cost of cover. Sometimes, a buyer may be able to recover incidental or
consequential damages, and equitable remedies may be available.
A. Acceptance (2-606)
Occurs when (1) after a R opportunity to inspect B
indicates to S that they conform to requirements or that she will keep them even though
they fail to conform; or (2) B fails to reject within the proper time; or (3) B does any
act inconsistent with the seller's ownership
B. Buyer's Rights On Improper
Deliver (2-601)
1. Reject Whole
2. Accept Whole
3. Accept in Part/Reject in Part
C. Buyer's Remedies Before
Acceptance (2-711)
1. Cancel (2-106)
2. Damages (2-712) Basic remedy it the
difference b/t the K price and either goods (Cover)
* "Market" = the difference b/t the
contract price
* "Cover" = the cost of buying replacement
goods
3. Specific Performance or Replevin (2-716)
D. Buyer's Remedies After
Acceptance -- Revocation (2-608)
The time of acceptance is important because it
terminates B's power to reject goods and obligates her to pay the price less any damages
because of S's breach
B may revoke her acceptance if the defect materially
impairs the value to her and (1) she accepted them on a reasonable belief that the defect
would be cured and it has not been; or (2) she accepted them b/c of the difficulty of
discovering defects or b/c of S's assurance that the goods conformed to the K
E. Merchant Buyer's Duties as to
Rightfully Rejected Goods (2-602
-- 2-604)
1. Follow Seller's instructions to reship, store or
deliver
2. If perishable goods, affirmative action to resell
F. Seller's Remedies before Buyer
has Accepted (2-703)
1. Withhold Delivery of Goods (2-702; 2-705)
2. Stop Manufacturing (2-704)
3. Resell and Recover Damages (2-706)
4. Sue for Damages for Non-Acceptance (2-708)
5. Action for the Price (2-709)
6. Cancel (2-703)
G. Seller's Remedies After the
Buyer Has Accepted
1. Action for the Price (2-709)
2. Seller's Right to Reclaim (2-702)
H. Anticipatory Repudiation and
Assurances (2-609)
Under common law, intentional or unintentional actions or situations
that make it unlikely that the other party will be able to carry out the K, may sometimes
be treated as an anticipatory repudiation. Not so under UCC. However UCC gives protection
in that the party who reasonably fears that the other party will not perform may demand
assurances that performance will be forthcoming at the proper time.
-30-
Index on Class
Notes
MBLW 600
AMBA 740
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