CH-20-22 Relationship with Third Parties – Smith and Robersons Business Law : Book Guide

This Document Contains Chapters 20 to 22 Chapter 20 RELATIONSHIP WITH THIRD PARTIES ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. Alice was Peter’s traveling salesperson and was authorized to collect accounts. Before the agreed termination of the agency, Peter wrongfully discharged Alice. Peter did not notify anyone of Alice’s termination. Alice then called on Tom, an old customer, and collected an account from Tom. She also called on Laura, a new prospect, as Peter’s agent, secured a large order, collected the price of the order, sent the order to Peter, and disappeared with the collections. Peter delivered the goods to Laura per the order. (a) What result if Peter sues Tom for his account? (b) What result if Peter sues Laura for the agreed price of the goods? Answer: Effect of Termination of Agency upon Authority. (a) Decision for Tom. Under the Second Restatement, Peter wrongfully terminated the agency. In such cases, the principal, in order to protect himself against possible future liability for the acts of his former agent, must give notice to third persons of the termination of the agency. Where, as here, a third person (Tom) has previously dealt on credit with Peter through his agent, Alice, Peter must give him actual notice. Since Tom did not receive notice from Peter, either oral or written, he had no reason to suspect that the agency relationship between Peter and Alice had been terminated and was justified in paying his account to Alice. Same result would be obtained under the Third Restatement. The general rule of the Third Restatement is that it is reasonable for third parties to assume that an agent’s actual authority continues, unless and until a third party has notice of circumstances that make it unreasonable to continue that assumption. These circumstances include, for example, notice that the principal has revoked the agent’s actual authority, that the agent has renounced it, or that circumstances otherwise have changed such that it is no longer reasonable to believe that the principal consents to the agent’s act on the principal’s behalf. Restatement, Section 3.11, comment c. A person has notice of a fact if the person knows the fact, has reason to know the fact, has received an effective notification of the fact, or should know the fact to fulfill a duty owed to another person. Restatement, Section 1.04(4). Here there was no notice. (b) Decision in favor of Laura. Under the Second Restatement, although the authority of Alice to collect had been terminated before Alice dealt with Laura, and Laura had not been a customer of Peter prior to such termination, if Laura knew of the agency while it was in force, Alice had continuing apparent authority until Laura received constructive notice of the termination of the agency relationship. Since Peter did not publish such notice in a newspaper of general circulation in the place where the agency is conducted, Peter is bound by Alice's acts. Same result would obtain under the Third Restatement. Here there was no notice. If Laura had not known of the agency, then Alice was without apparent authority, but Peter's acceptance of the order and shipment of goods was a ratification of Alice's unauthorized act. 2. Paula instructed Alvin, her agent, to purchase a quantity of hides. Alvin ordered the hides from Ted in his own (Alvin’s) name and delivered the hides to Paula. Ted, learning later that Paula was the principal, sends the bill to Paula, who refuses to pay Ted. Ted sues Paula and Alvin. What are Ted’s rights against Paula and Alvin? Answer: Undisclosed Principal. Second Restatement: Ted is entitled to recover the price either from Alvin or Paula, but not both of them. Upon learning of the undisclosed principal, Ted may treat Alvin as the agent and hold the principal (Paula) liable or he may disregard Paula and hold Alvin with whom he contracted liable as a principal. Ted may bring suit against Alvin and Paula, but before conclusion of the trial must make an election as to which one he wishes to take judgment against. Third Restatement: Ted is entitled to recover the price from Alvin and/or Paula. The Third Restatement and a number of states have recently rejected the election rule, holding that a third party’s rights against the principal are additional and not alternative to the third party’s rights against the agent. Section 6.09 provides, “When an agent has made a contract with a third party on behalf of a principal, unless the contract provides otherwise, the liability, if any, of the principal or the agent to the third party is not discharged if the third party obtains a judgment against the other.” However, the liability, if any, of the principal or the agent to the third party is discharged to the extent a judgment against the other is satisfied. 3. Stan sold goods to Bill in good faith, believing him to be a principal. Bill in fact was acting as agent for Nancy and within the scope of his authority. The goods were charged to Bill, and, on his refusal to pay, Stan sued Bill for the purchase price. While this action was pending, Stan learned of Bill’s relationship with Nancy. Nevertheless, thirty days after learning of that relationship, Stan obtained judgment against Bill and had an execution issued that was never satisfied. Three months after the judgment was made, Stan sued Nancy for the purchase price of the goods. Is Nancy liable? Explain. Answer: Undisclosed Principal. Second Restatement: No, Nancy is not liable to Stan, but is liable to Bill for reimbursement if Bill pays any or all of the judgment. If Stan had obtained his judgment against Bill before he learned that Nancy was an undisclosed principal, clearly he could proceed against Nancy upon learning of the relationship. Although his action against Bill was instituted before he learned of Nancy, he did not take judgment against Bill until thirty days after he learned of Nancy's relationship with Bill. Under the circumstances, Stan is not entitled to collect from Nancy. Restatement, Agency, Second, Section 210 states: An undisclosed principal is discharged from liability upon a contract if, with knowledge of the identity of the principal, the other party recovers judgment against the agent who made the contract, for breach of the contract. Third Restatement: Nancy is liable Stan. Nancy is liable to Bill for reimbursement if Bill pays any or all of the judgment. The Third Restatement and a number of states have recently rejected the election rule, holding that a third party’s rights against the principal are additional and not alternative to the third party’s rights against the agent. Section 6.09 provides, “When an agent has made a contract with a third party on behalf of a principal, unless the contract provides otherwise, the liability, if any, of the principal or the agent to the third party is not discharged if the third party obtains a judgment against the other.” However, the liability, if any, of the principal or the agent to the third party is discharged to the extent a judgment against the other is satisfied. 4. Green Grocery Company employed Jones as its manager. Jones was given authority by Green to purchase supplies and goods for resale and had conducted business for several years with Brown Distributing Company. Although her purchases previously had been limited to groceries, Jones contacted Brown and had it deliver a color television set to her house, informing Brown the set was to be used in promotional advertising to increase Green’s business. The advertising did not develop, and Jones disappeared from the area, taking the television set with her. Brown now seeks to recover the purchase price of the set from Green . Will Brown prevail? Explain. Answer: Actual Implied Authority. No, Green will prevail. Generally, an agent has implied authority to make reasonable and necessary purchases for his principal, who is bound by the act of the agent within the scope of apparent authority. Payment of bills for merchandise sold to an agent by his principal is sufficient to establish apparent authority, especially where this practice is continued over a period of time, and the principal is estopped to deny the agent's authority. It is a generally recognized rule of law that an agent has implied or apparent authority to purchase those items required in the prosecution of the business he represents. The burden is upon the plaintiff, Brown Company, to prove the authority of the agent, Jones, and that she had authority to make the specific purchase in question. The authority to buy one type of goods is insufficient to establish authorization to buy an entirely different type. While a general agent has authority to bind the principal as to matters within the proper scope of the business, the authority is limited to acts customary and usual in the business involved. Here the purchase was different from prior dealings. The set was delivered to the home of the agent and Brown Company is charged with the duty of determining actual authority. The question of acceptance of benefits or ratification is not involved here. 5. Stone was the agent authorized to sell stock of the Turner Company at $10 per share and was authorized in case of sale to fill in the blanks in the certificates with the name of the purchaser, the number of shares, and the date of sale. He sold 100 shares to Barrie, and without the knowledge or consent of the company and without reporting to the company, he indorsed the back of the certificate as follows: “It is hereby agreed that Turner Company shall, at the end of three years after the date, repurchase the stock at $13 per share on thirty days' notice. Turner Company, by Stone.” After three years, demand was made on Turner Company to repurchase. The company refused the demand and repudiated the agreement on the ground that the agent had no authority to make the agreement for repurchase. Is Turner Company liable to Barrie? Explain. Answer: Types of Authority. No, Turner Company is not liable. The agent was employed to sell shares of stock. He had no express authority to repurchase stock. There is no implied authority since an agreement by a corporation to repurchase its stock is not usual or customary and is contrary to the purpose for which the stock is sold, namely, to raise capital. There is no basis whatever for any apparent authority. The act of Stone was completely unauthorized. 6. Helper, a delivery boy for Gunn, delivered two heavy packages of groceries to Reed’s porch. As instructed by Gunn, Helper rang the bell to let Reed know the groceries had arrived. Mrs. Reed came to the door and asked Helper if he would deliver the groceries into the kitchen because the bags were heavy. Helper did so, and on leaving he observed Mrs. Reed having difficulty in moving a cabinet in the dining room. He undertook to assist her, but being more interested in watching Mrs. Reed than in noting the course of the cabinet, he failed to observe a small, valuable antique table, which he smashed into with the cabinet and totally destroyed. Does Reed have a cause of action against Gunn for the value of the destroyed antique? Answer: Tort Liability of the Principal. No. Gunn is liable for the negligent acts of his employee committed within the scope or course of his employment, but is not liable for acts of an employee or agent that are unrelated to performance of the duties he was employed to perform. The duties of the delivery boy included only delivering groceries to the front porch and ringing the bell and not only did not entail carrying the goods inside but certainly did not entail his aiding the customer in a chore such as this. His act was voluntary and merely an act of courtesy, and having so volunteered, the act became a joint enterprise of Mrs. Reed and Helper for the accomplishment of special business of Mrs. Reed which was not the business of Gunn. 7. Driver picked up Friend to accompany him on an out-of-town delivery for his employer, Speedy Service. A “No Riders” sign was prominently displayed on the windshield of the truck, and Driver violated specific instructions of his employer by permitting an unauthorized person to ride in the vehicle. While discussing a planned fishing trip with Friend, Driver ran a red light and collided with an automobile driven by Motorist. Both Friend and Motorist were injured. Is Speedy Service liable to either Friend or Motorist for the injuries they sustained? Answer: Tort Liability of the Principal. Speedy Service is liable to Motorist, but is not liable to Friend. Driver was making a delivery within the course of his employment and his negligent act of running the red light will make his employer responsible for the injuries sustained by Motorist. The mere fact that the driver had an unauthorized passenger does not of itself render the servant outside the scope of his employment insofar as Motorist is concerned. Driver violated the employer's rule as to unauthorized passengers, but he had not abandoned the business of Speedy Service as he was making a delivery for his employer. If Driver had abandoned the business of his employer and embarked upon an adventure for himself, such as taking a trip to the lake where Friend and Driver planned to fish, then such conduct would be outside the scope of his employment and in that event Speedy Service would not be liable to Motorist. Such is not the case here as Driver was on his employer's business at the time of the collision. Speedy Service is not liable to Driver's unauthorized invitee who was injured by the negligence of Driver. Driver's invitation of Friend was outside the scope or course of his employment. Driver had no apparent authority to invite Friend to take a ride as he was specifically instructed not to do so and the "No Riders" sign demonstrated his lack of authority. Friend was accompanying Driver for personal reasons unrelated to the employment of Driver by Speedy Service. 8. Cook’s Department Store advertises that it maintains a barber shop in its store and that the shop is managed by Hunter, a Cook’s employee. Actually, Hunter is not an employee of the store but merely rents space in the store. While shaving Jordan in the barber shop, Hunter negligently puts a deep gash, requiring ten stitches, into one of Jordan’s ears. Should Jordan be entitled to collect damages from Cook’s Department Store? Answer: Apparent Authority. Yes. By advertising that it maintained a barber shop in its store in charge of Hunter, Cook's Department Store has caused third persons reasonably to believe that Hunter is its employee. The store is therefore estopped from asserting the fact that Hunter is not its employee because to allow it to do so would be unfair and unjust to persons who, in good faith and in reliance upon the advertisements, engaged Hunter's services in the mistaken belief that he was an employee of the store. This problem presents a case of agency by estoppel or apparent authority. 9. The following contract was executed on August 22: Ray agrees to sell and Shaw, the representative of Todd and acting on his behalf, agrees to buy 10,000 pounds of 0.32  15/8 stainless steel strip type 410. (signed) Ray (signed) Shaw On August 26, Ray informs Shaw and Todd that the contract was in reality signed by him as agent for Upson. What are the rights of Ray, Shaw, Todd, and Upson in the event of a breach of the contract? Answer: Undisclosed Principal. Ray, Todd and Upson are bound by the contract but Shaw is not. (a) Ray, although an agent for Upson, is bound because of his failure to reveal the agency. The agent is personally liable upon a contract she enters into with a third person on behalf of an undisclosed principal. Restatement, Section 6.03(2). Since he appears in the written contract as a principal, he cannot show that he intended to sign the contract merely as an agent. (b) Since Shaw signed the contract only as the agent for Todd, Shaw is not bound by the contract but Todd is bound. . When an agent acting with actual or apparent authority makes a contract with a third party on behalf of a disclosed principal, the agent is not a party to the contract unless she and the third party agree otherwise. Restatement, Section 6.01(2). (c) Upson is bound by the contract as an undisclosed principal. An undisclosed principal and the third party are parties to the contract if the agent acts within her actual authority in making the contract on the principal’s behalf unless (a) the terms of the contract exclude the principal or (b) his existence is fraudulently concealed. Restatement, Sections 6.03 and 6.11(4). 10. Harris, owner of certain land known as Red Bank, mailed a letter to Byron, a real estate broker in City X, stating, “I have been thinking of selling Red Bank. I have never met you, but a friend has advised me that you are an industrious and honest real estate broker. I therefore employ you to find a purchaser for Red Bank at a price of $350,000.” Ten days after receiving the letter, Byron mailed the following reply to Harris: “Acting pursuant to your recent letter requesting me to find a purchaser for Red Bank, this is to advise that I have sold the property to Sims for $350,000. I enclose your copy of the contract of sale signed by Sims. Your name was signed to the contract by me as your agent.” Is Harris obligated to convey Red Bank to Sims? Answer: Types of Authority. No. There is no actual authority. Byron was not authorized by the letter to Harris to effect a sale of Red Bank. He was merely authorized to find a buyer. The problem is silent regarding the existence of a custom in the real estate business that the broker has the authority to effect a sale. The duty rested upon Sims to ascertain precisely Byron's authority unless there is a custom in the real estate brokerage business in the community where the transaction occurred that the real estate broker had the authority to make a sale. 11. While crossing a public highway in the city, Joel was struck by a horse-drawn cart driven by Morison’s agent. The agent was traveling between Burton Crescent Mews and Finchley on his employer’s business and was not supposed to go into the city at all. Apparently, the agent was on a detour to visit a friend when the accident occurred. Joel brought this action against Morison for the injuries he sustained as a result of the agent’s negligence. Morison argues that he is not liable for his agent’s negligence because the agent had strayed from his assigned path. Who is correct? Answer: Respondeat Superior. Joel is correct. Under the doctrine of respondeat superior, the principal is liable for his agent's negligence only if the agent was acting in the course of his employment at the time of the accident. On the other hand, the principal is not liable if the accident occurred while the agent was out on a frolic of his own and not on his master's business. In this case, however, the agent was driving on Morison's business but had gone out of his way against his master's implied command in order to visit a friend. Joel v. Morison, 6 Carrington & Payne Reports, 501 Court of Exchequer, 1833) (England). 12. Serges is the owner of a retail meat marketing business. Without authority his managing agent borrowed $3,500 from David, on Serges’s behalf, for use in Serges’s business. Serges paid $200 on the alleged loan and on several other occasions told David that the full balance owed would eventually be paid. He then disclaimed liability on the debt, asserting that he had not authorized his agent to enter into the loan agreement. Should David succeed in an action to collect on the loan? Answer: Ratification. Yes, judgment for David. Serge's partial payment and his promise to pay off the loan constituted a ratification of his agent's action. Ratification is the principal's affirmance of a prior act by the agent that would not otherwise have been binding on the principal. Its effect is to bind the principal as if the agent's act had been authorized. David v. Serges, 373 Mich. 442, 129 N.W.2d 882 (1964). 13. Sherwood negligently ran into the rear of Austen’s car, which was stopped at a stoplight. As a result, Austen received bodily injuries and her car was damaged. Sherwood, arts editor for the Mississippi Press Register, was en route from a concert he had covered for the newspaper. When the accident occurred, he was on his way to spend the night at a friend’s house. Austen sued Sherwood and—under the doctrine of respondeat superior—Sherwood’s employer, the Mississippi Press Register. Who is liable? Explain. Answer: Respondeat Superior. Sherwood is liable, but the Mississippi Press Register is not. Under the doctrine of respondeat superior, the negligent acts of an employee on his way to and from work are not generally imputed to his employer. The determination of liability depends upon whether the employee's conduct is more closely related to his employment duties or to purely personal considerations separate from the employer's interests. Here, Sherwood was on his way from work to visit a friend. This excursion in no way benefited his employer nor was it related to his employment duties. It did not occur within the course and scope of Sherwood's employment. Therefore, his employer, the Mississippi Press Register, is not liable. Austen v. Sherwood, 425 So.2d 818 (Louis. 1983). 14. Aretta J. Parkinson owned a two-hundred-acre farm in a state that requires written authority for an agent to sell land. Prior to her death on December 23, Parkinson deeded a one-eighth undivided interest in the farm to each of her eight children as tenants in common. On January 15 of the following year, one of the daughters, Roma Funk, approached Barbara Bradshaw about selling the Parkinson farm to the Bradshaws. They orally agreed to a selling price of $800,000. After this meeting, Funk contacted Bryant Hansen, a real estate broker, to assist her in completing the transaction. Hansen prepared an earnest money agreement that was signed by the Bradshaws but by none of the Parkinson children. Hansen also prepared warranty deeds, which were signed by three of the children. Several of the children subsequently refused to convey their interests in the farm to the Bradshaws. Explain whether the Bradshaws can get specific performance of the oral contract of sale, based on the defendants’ ratification of the oral contract by their knowledge of and failure to repudiate it. Answer: Ratification No, implied ratification is not allowed in this case. Ratification of an agent's unauthorized conduct may be express or implied. It is imperative, though, that the principal have full knowledge of all material facts since the ratification cannot subsequently be revoked. If formalities are required for the authorization of an act, the same formalities apply to a ratification of that act. Restatement, Section 4.01, comment e. Since the law requires that Funk's authority must have been given in writing, the ratification must also have been in writing. Therefore, implied ratification is not allowed in this case. Bradshaw v. McBride, 649 P.2d 74 (Utah 1982). 15. Raymond Zukaitis was a physician practicing medicine in Douglas County, Nebraska. Aetna issued a policy of professional liability insurance to Zukaitis through its agent, the Ed Larsen Insurance Agency. The policy covered the period from August 31, 2015, through August of the following year. On August 7, 2017, Dr. Zukaitis received a written notification of a claim for malpractice that occurred on September 27, 2015. Dr. Zukaitis notified the Ed Larsen Insurance Agency immediately and forwarded the written claim to them. The claim was then mistakenly referred to St. Paul Fire and Marine Insurance Company, the company that currently insured Dr. Zukaitis. Apparently without notice to Dr. Zukaitis, the agency contract between Larsen and Aetna had been canceled on August 1, 2016, and St. Paul had replaced Aetna as the insurance carrier. However, when St. Paul discovered it was not the carrier on the date of the alleged wrongdoing, it notified Aetna and withdrew from Dr. Zukaitis’s defense. Aetna also refused to represent Dr. Zukaitis, contending that it was relieved of its obligation to Dr. Zukaitis because he had not notified Aetna immediately of the claim. Dr. Zukaitis then secured his own attorney to defend against the malpractice claim and brought this action against Aetna to recover attorney’s fees and other expenses incurred in the defense. Should Dr. Zukaitis succeed? Explain. Answer: Effect of Termination of Agency upon Authority. Yes, judgment for Dr. Zukaitis. Aetna is responsible for the defense of Dr. Zukaitis. The notice given by Dr. Zukaitis to Larsen, the agent of Aetna, constitutes notice to Aetna and obligates it to carry out the terms of its insurance contract with Dr. Zukaitis. A revocation of the agent's authority does not become effective between the principal and third persons until they receive notice of the termination. More specifically, when an insurer terminates the agency contract, it is its duty to notify third persons, such as the insureds with whom the agent dealt, and inform them of such termination. If it does not do so and such third persons or insureds deal with the agent without notice or knowledge of the termination and in reliance on the apparently continuing authority of the agent, the insurer is bound by the acts of the former agent. Therefore, the notice given by Zukaitis to Larsen, the agent of Aetna, obligates Aetna to carry out the terms of its insurance contract with Dr. Zukaitis and to provide for his defense against the malpractice claim. Zukaitis v. Aetna Casualty and Surety Co., 236 N.W.2d 819 (1975). 16. Chris Zulliger was a chef at the Plaza Restaurant in the Snowbird Ski Resort in Utah. The restaurant is located at the base of a mountain. As a chef for the Plaza, Zulliger was instructed by his supervisor and the restaurant manager to make periodic trips to inspect the Mid-Gad Restaurant, which was located halfway up the mountain. Because skiing helped its employees to get to work, Snowbird preferred that its employees know how to ski and gave them ski passes as part of their compensation. One day prior to beginning work at the Plaza,, Zulliger went skiing. The restaurant manager asked Zulliger to stop at the Mid-Gad before beginning work that day, and Zulliger stopped at the Mid-Gad during his first run and inspected the kitchen. He then skied four runs before heading down the mountain to begin work. On the last run, Zulliger decided to take a route often taken by Snowbird employees. About midway down, Zulliger decided to jump off a crest on the side of an intermediate run. Because of the drop, a skier above the crest cannot see whether there are skiers below, and Zulliger ran into Margaret Clover, who was below the crest. The jump was well known to Snowbird; the resort’s ski patrol often instructed people not to jump, and there was a sign instructing skiers to take it slow at that point. Clover sued Zulliger and, under the doctrine of respondeat superior, Snowbird, claiming that Zulliger had been acting within the scope of his employment. Who is liable? Explain. Answer: Tort Liability of the Principal. Zulliger is liable. In addition, Snowbird may be held liable if Zulliger was acting within the course of employment. . Under the circumstances of the instant case, it is entirely possible for a jury to reasonably believe that at the time of the accident, Zulliger had resumed his employment and that Zulliger's deviation was not substantial enough to constitute a total abandonment of employment. First, a jury could reasonably believe that by beginning his return to the base of the mountain to begin his duties as a chef and to report to Mandler concerning his observations at the Mid-Gad, Zulliger had resumed his employment. If the employee has resumed the duties of employment, the employee is then "about the employer's business" and the employee's actions will be "motivated, at least in part, by the purpose of serving the employer's interest." The fact that due to Zulliger's deviation, the accident occurred at a spot above the Mid-Gad does not disturb this analysis. In situations where accidents have occurred substantially within the normal spatial boundaries of employment, we have held that employees may be within the scope of employment if, after a personal detour, they return to their duties and an accident occurs. Clover v. Snowbird Ski Resort, 808 P.2d 1037 (1991). 17. Rubin was driving on one of the city’s streets when he inadvertently obstructed the path of a taxicab, causing the cab to come into contact with his vehicle. Angered by the Rubin’s sudden blocking of his traffic lane, the taxi driver exited his cab, approached Rubin, and struck him about the head and shoulders with a metal pipe. Rubin filed suit against the cab driver to recover for bodily injuries resulting from the altercation. He also sued the Yellow Cab Company, asserting that the company was vicariously liable under the doctrine of respondeat superior. Is the Yellow Cab Company liable? Explain. Answer: Tort Liability of the Principal. Judgment for Yellow Cab affirmed. It is well established that an employer may be held vicariously liable under the doctrine of respondeat superior for the negligent, willful, malicious, or criminal acts of its employees where such acts are committed in the course of employment and in furtherance of the business of the employer. However, when the acts complained of are committed solely for the benefit of the employee, the employer will not be held liable to an injured third party. The plaintiff contends that the driver's acts were committed within the course and scope of his employment, and were designed to further the business purposes of Yellow Cab. Plaintiff asserts that the driver's act (1) fulfilled his obligation to investigate and report accidents damaging company property, (2) were performed pursuant to his obligation to protect property owned by Yellow Cab, and (3) were meant to prevent plaintiff and others from delaying his progress to obtain fares. The court flatly rejected the plaintiff's argument. The driver's act of hitting the plaintiff has no relation whatsoever to the business of driving a cab. The nature of some jobs, such as a bouncer or bartender, makes the use of force during the course of employment highly probable. The assault on plaintiff in this case, however, amounted to a deviation from the conduct generally associated with the enterprise of cab driving. The driver was not acting to further the business purposes of Yellow Cab. Accordingly, Yellow Cab is not vicariously liable for the battery of the plaintiff by the driver. 18. Van D. Costas, Inc. (Costas) entered into a contract to remodel the entrance of the Magic Moment Restaurant owned by Seascape Restaurants, Inc. Rosenberg, part owner and president of Seascape, signed the contract on a line under which was typed “Jeff Rosenberg, The Magic Moment.” When a dispute arose over the performance and payment of the contract, Costas brought suit against Rosenberg for breach of contract. Rosenberg contended that he had no personal liability for the contract and that only Seascape, the owner of the restaurant, was liable. Costas claimed that Rosenberg signed for an undisclosed principal and, therefore, was individually liable. Explain whether Rosenberg is liable on the contract. Answer: Unidentified (Partially Disclosed) Principal Yes, Rosenberg is individually liable. To avoid personal liability, an agent must disclose both that he is acting as an agent and the identity of his principal. If the contracting party knows the identity of the principal for whom the agent is acting, the principal is considered disclosed. It is not the contracting party's duty to seek out the identity of the principal. Here, nothing indicates that Costas had ever heard of Seascape at the time the contract was signed. Moreover, use of a trade name (here, Magic Moment) is not sufficient disclosure of the identity of the principal. Rosenberg knew that Seascape was the owner, and he could have avoided personal liability by properly disclosing the identity of his principal. Since he did not, Rosenberg is personally liable. Van D. Costas, Inc. v. Rosenberg, 432 So.2d 656 (1983). 19. Virginia and her husband Ronnie Hulbert were involved in an accident in Mobile County when their automobile collided with another automobile driven by Dr. Murray’s nanny. The nanny’s regular duties of employment included housekeeping, supervising the children, and taking the children places that they needed to go. At the time of the collision, the nanny was driving her own car and was following Dr. Murray and her family to Florida from Louisiana to accompany Dr. Murray’s family on their vacation. One of Dr. Murray’s daughters was in the automobile driven by the nanny. Virginia Hulbert sued Dr. Murray under the doctrine of respondeat superior, alleging that the nanny was acting within the scope of her employment when the automobile accident occurred. Should she be able to recover from Dr. Murray? Explain. Answer: Respondeat Superior. Yes. To recover from a tortfeasor’s employer on the theory of respondeat superior, the plaintiff must show by substantial evidence that the employee’s act was within the scope or course of the employee’s employment. An act is within an employee’s scope of employment if the act is done as part of the duties the employee was hired to perform or if the act confers a benefit on his employer. Dr. Murray and the nanny assert that the nanny was on vacation at the time of the accident and that while on vacation she was not to perform any of the duties she had been hired to perform. Hulbert responded with four pieces of evidence. First, Hulbert proffered an affidavit from her husband in which he stated that shortly after the accident both Dr. Murray and the nanny had stated that the nanny was going to the beach with the Murray family to help Dr. Murray take care of the children a duty the nanny was hired to perform. Second, it is undisputed that one of Dr. Murray’s daughters was a passenger in the car with the nanny at the time of the accident. Third, it is undisputed that the nanny was to receive her regular salary for the week spent at the beach. Fourth, although the nanny was driving her own car, Dr. Murray was to pay for the lodgings, which the nanny was to share at the beach. While Dr. Murray asserts that her daughter rode with the nanny for personal reasons and that the pay received by the nanny was vacation pay, these contentions merely underscore that there is a genuine issue of material fact as to whether at the time of the accident the nanny was acting for personal motives or for employment motives. Hulbert v. State Farm Mutual Automobile Insurance Company, 723 So.2d 22 (1998). 20. Tommy Blair, Sr., was the sole owner and president of Tommy Blair, Inc., d/b/a Courtesy Autoplex. His son, Thomas Blair, Jr., was a management employee who supervised employees within the service department. On September 28, Tommie Lee Patterson entered into an agreement with Courtesy to trade his Camaro for a new GMC Jimmy. At the time of the trade, Patterson owed $12,402.82 on the Camaro. Despite this, he incorrectly informed Courtesy that he owed only $9,500.00 on the car. The transaction occurred at a time when Courtesy could not verify the payoff amount on the loan. Courtesy allowed Patterson to take possession of the Jimmy, but did not transfer title. An agreement was also executed providing that (a) Courtesy would credit Patterson if he had overstated his outstanding indebtedness on the Camaro and (b) Patterson would pay the difference if his figure understated that amount. The next day Courtesy discovered the amount Patterson actually owed on the Camaro. When notified of this discrepancy, Patterson refused to pay the additional sum and refused to return the Jimmy. Courtesy subsequently tried unsuccessfully to repossess the truck on at least two occasions. On October 4, Thomas Blair, Jr., and another Courtesy employee encountered Patterson, who was driving the Jimmy, on a public road. At a stoplight, Thomas Blair, Jr., exited his car and knocked on the Jimmy's driver-side window, demanding that Patterson get out of the vehicle. When Patterson refused, Thomas Blair, Jr., drew a pistol he was carrying and fired two shots in the front tire and two shots in the rear tire of the Jimmy. Ultimately, the disabled truck was impounded and returned to Courtesy by the police. Thomas Blair, Jr., was convicted of wanton endangerment in the first degree, a felony. Patterson sued Thomas Blair, Jr., and Courtesy, claiming that Courtesy was vicariously liable for the tortious acts of its employee, Thomas Blair, Jr. Explain whether Courtesy is vicariously liable. Answer: Respondeat Superior. Thomas Blair, Jr. (“Blair, Jr.”) acted within the scope of employment, thereby imposing vicarious liability on Courtesy. Patterson v. Blair, 172 S.W.3d 361, Kentucky Supreme Court (2005). Stated generally, the doctrine of respondeat superior, also called vicarious liability, provides the legal rationale for holding a master responsible for a tort committed by his servant. *** vicarious liability is a long-standing principle of Kentucky's tort law. *** an employer's liability is limited only to those employee actions committed in the scope of employment. The central difficulty in applying the rule of respondeat superior focuses on this concept, especially when the tort in question was intentional (as opposed to merely the result of negligence). Thus, the question inevitably arises: What does "scope of employment" mean? *** Kentucky's approach is precisely the standard advanced by Prosser and Keeton when they explained that "in general, … the master is held liable for any intentional tort committed by the servant where its purpose, however misguided, is wholly or in part to further the master's business." Prosser and Keeton at 505. Thus, if the servant "acts from purely personal motives . . . which [are] in no way connected with the employer's interests, he is considered in the ordinary case to have departed from his employment, and the master is not liable." Clearly, in confronting Patterson and shooting out the truck's tires, Blair, Jr. was acting to further the business interests of Courtesy. At the very least, his conduct was at least incidental to the conduct that was authorized by Courtesy. Here, just as in Frederick, Blair, Jr. was acting to protect his employer's property. In fact, Blair, Jr.'s testimony explicitly confirmed this motive. And perhaps most importantly, there is no evidence that he sought to serve any personal purpose by his actions. Quite simply, he engaged in the act to further his employer's business interests. And finally, although the act was criminal, it was not so outrageous to indicate that the motive was a personal one. Therefore, the jury's finding that Blair, Jr. acted within the scope of employment, thereby imposing vicarious liability on Courtesy, is supported by the evidence. 21. Frederick “Rick” Worrell conducted business as WRL Advertising. However, WRL Advertising was not a legal entity in its own right but rather a trade name for Wingfield, Bennett & Baer, LLC, which is owned and operated by Worrell. Martha J. Musil, an employee of WRL Advertising, placed advertising orders with the Plain Dealer Publishing Company at the direction of her employer. Musil communicated to the Plain Dealer that she was working on behalf of WRL Advertising. WRL did not pay for all of the advertising, and the Plain Dealer sued Worrell and Musil. Shortly after the case was brought, Worrell filed for bankruptcy. Explain whether Musil is personally liable on the contracts. Answer: Nonexistent Principal. Musil is not personally liable because she disclosed the name and identity of her principal and thus was not acting on behalf of a nonexistent or fictitious principal. Plain Dealer Publishing Co. v. Worrell, 178 Ohio App.3d 485, 898 N.E.2d 1009, Court of Appeals of Ohio, Ninth District, Summit County (2008). The parties do not contest the fact that Musil communicated to the Plain Dealer that she was working on behalf of a principal. In Ohio, an agent is liable to a third party when she contracts in the name of a nonexistent or fictitious principal or assumes to act as an agent for a principal who has no legal status or existence. But Musil was not acting on behalf of a fictitious entity or an entity that does not exist in Ohio, but rather she acted for WRL Advertising, which was a fictitious name for Wingfield, Bennett, & Baer, L.L.C. ANSWERS TO “TAKING SIDES” PROBLEMS Sonenberg Company managed Westchester Manor Apartments through its on-site property manager, Judith. Manor Associates Limited Partnership, whose general partner is Westchester Manor, Ltd., owned the complex. The entry sign to the property did not reveal the owner’s name but did disclose that Sonenberg managed the property. Judith contacted Redi-Floors and requested a proposal for installing carpet in several of the units. In preparing the proposal, Redi-Floors confirmed that Sonenberg was the managing company and that Judith was its on-site property manager. Sonenberg did not inform Redi-Floors of the owner’s identity. Judith and her assistant orally ordered the carpet, and Redi-Floors installed the carpet. Redi-Floors sent invoices to the complex and received checks from “Westchester Manor Apartments.” Believing that Sonenberg owned the complex, Redi-Floors did not learn of the true owner’s identity until after the work had been completed when a dispute arose concerning the payment of some of its invoices. (a) What arguments would support Redi-Floors in recovering on the outstanding invoices from both Sonenberg and Manor Associates? (b) What arguments would limit Redi-Floors to recovering on the outstanding invoices from either Sonenberg or Manor Associates? (c) Explain what the outcome would be under (i) the Second Restatement and (ii) the Third Restatement. Answer: (a) Redi-Floors could argue that that Sonenberg never disclosed the name of Manor Associates Limited Partnership to Redi-Floors. Accordingly, Sonenberg acted for an undisclosed principal and upon discovery the identity of the principal Redi-Floors is entitled to a judgment against both the agent and the principal. The principal and agent each consented to create his own obligation. The two causes of action are not inconsistent, since the agent is liable because she made the contract, while the principal is liable because he caused it to be made. The undisclosed principal is made liable originally upon the transaction, because he initiated it; because he profits by it; and because it is his business, conducted under his control. Thus he should be liable and should be discharged only if the debt is paid. (b) Sonenberg and Manor Associates could argue that even if Manor Associates were an undisclosed principal, Redi-Floors may recover from either Sonenberg or Manor Associates, but not from both. (c) An agent who makes a contract without identifying his principal becomes personally liable on the contract. If the agent wishes to avoid personal liability, “the duty is on him to disclose his agency, and not on the party with whom he deals to discover it.” The agent’s disclosure of a trade name and the plaintiff’s awareness of that name are not necessarily sufficient so as to protect the agent from liability. Under the Second Restatement and the rule in Georgia (where this case took place), Redi-Floors may recover from either Sonenberg or Manor Associates, but not both. With respect to an undisclosed principal, if the buyer is in fact merely an agent and acts with the authority of an undisclosed principal, either he or such principal may be held liable at the election of the opposite party; but the contractual liability of such agent and principal is not joint, and, after an election to proceed against one, the other cannot be held regardless of whether the judgment is ever satisfied. So, Redi-Floors must make an election as to which defendant it will proceed against, as they can obtain a judgment against only one of the defendants. Redi-Floors, Inc. v. Sonenberg Co., Court of Appeals of Georgia, 2002, 254 Ga.App. 615, 563 S.E.2d 505; certiorari denied. The Third Restatement and a number of states have recently rejected the election rule described above in favor of a “satisfaction rule” holding that a third party’s rights against the principal are additional and not alternative to the third party’s rights against the agent. Under this approach Redi-Floors could recover on the outstanding invoices from both Sonenberg and Manor Associates. The Third Restatement provides, “When an agent has made a contract with a third party on behalf of a principal, unless the contract provides otherwise, the liability, if any, of the principal or the agent to the third party is not discharged if the third party obtains a judgment against the other.” However, the liability, if any, of the principal or the agent to the third party is discharged to the extent a judgment against the other is satisfied. Thus, a creditor who contracts with an agent for an undisclosed principal may proceed to judgment against both agent and undisclosed principal but is limited to one satisfaction. Chapter 21 INTRODUCTION TO SALES AND LEASES ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. Adams orders one thousand widgets at $5 per widget from International Widget to be delivered within sixty days. After the contract is consummated and signed, Adams requests that International deliver the widgets within thirty days rather than sixty days. International agrees. Is the contractual modification binding? Answer: Contractual Modifications/Statute of Frauds. No. This problem brings out two significant problems: (1) can the contract be modified without consideration and (2) what is the effect, if any, of the statute of frauds upon the modification. Concerning the first point, the U.C.C., Section 2-209(1) provides that "an agreement modifying a contract within this article needs no consideration to be binding." However, the U.C.C. statute of frauds provision, Section 2-201, renders this oral modification unenforceable. A contract for the sale of goods costing $500 or more must be in writing or otherwise comply with the requirements of the statute of frauds. The key question concerning a modification of a prior contract is whether the modification brings or retains the contract within the statute of frauds, i.e., whether the contract as modified is for $500 or more. In this case, the contract is for $5,000 and the modification does not change that, so the contract is within the statute of frauds. 2. In Question 1, what effect, if any, would the following letter have? International Widget: In accordance with our agreement of this date you will deliver the 1,000 previously ordered widgets within thirty days. Thank you for your cooperation in this matter. (signed) Adams Answer: Sales By and Between Merchants. Ten days after receiving the telegram International Widget would be bound by the written memorandum as if they signed it. U.C.C. Section 2-201(2) provides that, between merchants, a written confirmation which is sufficient against the sender is also sufficient against the recipient unless the recipient gives written notice of his objection within 10 days of receipt of the confirmation. 3. Browne & Assoc., a San Francisco company, orders from U.S. Electronics, a New York company, ten thousand electronic units. Browne & Assoc.’s order form provides that any dispute would be resolved by an arbitration panel located in San Francisco. U.S. Electronics executes and delivers to Browne & Assoc. its acknowledgment form, which accepts the order and contains the following provision: “All disputes will be resolved by the State courts of New York.” A dispute arises concerning the workmanship of the parts, and Browne & Assoc. wishes the case to be arbitrated in San Francisco. What result? Answer: Variant Acceptances. The matter should be arbitrated in San Francisco. The common law "mirror image" rule, by which the acceptance can not vary or deviate from the terms of the offer, is modified by the code. Section 2-207 provides: (1) A definite and reasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms. (2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless: (a) the offer expressly limits acceptance of the terms of the offer; (b) they materially alter it; or (c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received. Thus, the U.C.C. alleviates this "Battle of the Forms" problem by focusing upon the intent of the parties. If the seller definitely and reasonably expresses his acceptance of the offer and does not expressly make his acceptance conditional upon the buyer's assent to the additional or different terms a contract is formed. Section 2-207(1). The issue then becomes whether seller's additional terms become part of the contract. If the contract is between merchants, the terms will be part of the contract provided they do not materially alter the agreement and are not objected to either in the offer itself or within a reasonable period of time. Section 2-207(2). Different terms, as here presented (arbitration in San Francisco versus litigation in New York), do not become part of the contract unless specifically accepted by the original offeror. 4. Explain how the result in Question 3 might change if the U.S. Electronics form contained the following provisions: (a) “The seller’s acceptance of the purchase order to which this acknowledgment responds is expressly made conditional on the buyer’s assent to any or different terms contained in this acknowledgment.” (b) “The seller’s acceptance of the purchase order is subject to the terms and conditions on the face and reverse side hereof, which the buyer accepts by accepting the goods described herein.” (c) “The seller’s terms govern this agreement—this acknowledgment merely constitutes a counteroffer.” Answer: Manifestation of Mutual Assent. (a) The clause provides that the seller's acceptance is expressly conditional on its terms and hence no contract is formed. Section 2-207(1). (b) The offeree cannot make himself the offeror by this trick of hand. In actuality, the seller is merely accepting the buyer's offer to buy and is attempting to make the buyer's silence (acceptance of the goods) an acceptance of the seller's terms. (c) If the seller is not accepting the offer as stated, there is no contract. If the seller ships the goods without an acceptance from the buyer, then the seller should be considered as accepting the buyer's offer. Here, however, the seller is attempting to indicate that he rejects the buyer’s offer and is making the offer. The key question is whether the seller is accepting or rejecting the buyer's offer. Most courts would consider the seller accepting the buyer’s offer if the seller ships the goods without the buyer accepting the counteroffer. NOTE: In parts (a) and (c) the seller is risking the loss of a sale for a provision(s) which in the great majority of cases will never be utilized (arbitration in San Francisco versus litigation in New York). Parties to a potential contract must carefully weigh the provisions in question versus the risk of losing a contract. 5. Reinfort executed a written contract with Bylinski to purchase an assorted collection of shoes for $3,000. A week before the agreed shipment date, Bylinski called Reinfort and said, “We cannot deliver at $3,000; unless you agree to pay $4,000, we will cancel the order.” After considerable discussion, Reinfort agreed to pay $4,000 if Bylinski would ship as agreed in the contract. After the shoes had been delivered and accepted by Reinfort, Reinfort refused to pay $4,000 and insisted on paying only $3,000. Is the contractual modification binding? Explain. Answer: Contractual Modifications/Statute of Frauds. This problem raises three separate but interrelated issues: (1) Modification of a prior contract. As indicated in the answer to problem 1 the Code, Section 2-209(1), does not require consideration to be given in order to validly modify an existing contract, all that is necessary is a good faith intent to alter the contract. (2) Oral modification of a contract for the sale of goods costing $500 or more. Under the Code, Section 2-201, this oral modification (to a cost of $4,000) would keep the transaction within the statute of frauds and therefore to be valid must comply with its requirements. (3) Compliance with the statute of frauds by delivery and acceptance of the goods-U.C.C. Section 2-201(3)(c) provides that an oral agreement is valid, even though it is for a sale of goods costing $500 or more, if the goods have been received and accepted as in this case. Consequently, Reinfort must pay Bylinski $4,000, unless Reinfort can prove lack of intent to enter into the contract (for example, economic duress). 6. On November 23, Acorn, a dress manufacturer, mailed to Bowman a written and signed offer to sell one thousand sundresses at $50 per dress. The offer stated that it would “remain open for ten days” and that it could “not be withdrawn prior to that date.” Two days later, Acorn, noting a sudden increase in the price of sundresses, changed his mind. Acorn therefore sent Bowman a letter revoking the offer. The letter was sent on November 25 and received by Bowman on November 28. Bowman chose to disregard the letter of November 25; instead, she happily continued to watch the price of sundresses rise. On December 1, Bowman sent a letter accepting the original offer. The letter, however, was not received by Acorn until December 9, due to a delay in the mails. Bowman has demanded delivery of the goods according to the terms of the offer of November 23, but Acorn has refused. Does a contract exist between Acorn and Bowman? Explain. Answer: Irrevocable Offers. Yes. Acorn’s offer of November 23 constituted a firm offer and could not be revoked for the specified period of time (10 days). Hence Acorn’s attempted revocation of his firm offer on November 25 is ineffective. A firm offer is a written offer signed by a merchant which by its terms gives assurance that is will be held open for a period of time, which cannot exceed three months. U.C.C., Section 2-205. Bowman validly accepted Acorn’s offer on December 1, while the offer was still open, by dispatching, by a reasonable means of acceptance, her acceptance. It is irrelevant on what date the acceptance was received by Acorn. 7. Henry and Wilma, an elderly immigrant couple, agreed to purchase from Brown a refrigerator with a fair market value of $450 for twenty-five monthly installments of $60 per month. Henry and Wilma now wish to void the contract, asserting that they did not realize the exorbitant price they were paying. Result? Answer: Unconscionability. The contract price of $1500 for a $450 refrigerator should be held unconscionable and void as against public policy, especially in light of the plaintiffs' ages and immigrant backgrounds. The challenged contract is clearly unreasonable and should not be enforced by a court of law. 8. Courts Distributors needed two hundred compact refrigerators on a rush basis. It contacted Eastinghouse Corporation, a manufacturer of refrigerators. Eastinghouse said it would take some time to quote a price on an order of that size. Courts replied, “Send the refrigerators immediately and bill us later.” The refrigerators were delivered three days later, and the invoice arrived ten days after that. The invoice price was $140,000. Courts believe that the wholesale market price of the refrigerators is only $120,000. Do the parties have a contract? If so, what is the price? Explain. Answer: Open Price. Parties to a contract for the sale of goods do not necessarily have to reach an agreement on price. The Code provides that the price will be a reasonable one based on the time and place of delivery. Three requirements must be met in order for this provision to apply: a) the agreement must say nothing as to price, b) the agreement must provide that the parties shall agree later on price and they subsequently fail to agree, and c) the agreement fixes the price in terms of some agreed upon market or other standard which has not been set. Judgment could be for Courts depending on how the contract deals with factor (c). UCC 2-305(1). However, if Eastinghouse had additional costs because of the "rush basis" of the contract, the invoice price could be found reasonable. 9. While adjusting a television antenna beside his mobile home and underneath a high-voltage electric transmission wire, Prince received an electric shock resulting in personal injury. He claims the high-voltage electric current jumped from the transmission wire to the antenna. The wire, which carried some 7,200 volts of electricity, did not serve his mobile home but ran directly above it. Prince sued the Navarro County Electric Co-Op, the owner and operator of the wire, for breach of implied warranty of merchantability under the Uniform Commercial Code. He contends that the Code’s implied warranty of merchantability extends to the container of a product—in this instance, the wiring—and that the escape of the current shows that the wiring was unfit for its purpose of transporting electricity. The electric company argues that the electricity passing through the transmission wire was not being sold to Prince and that, therefore, there was no sale of goods to Prince. Is the contract covered by the Code? Answer: Scope of Article 2/Definition of "Goods." Yes, it is covered by the Code. UCC 2-105. Judgment for Navarro County Electric Co-Op. To be within the U.C.C.'s definition of a good, electricity must be (1) a thing, (2) existing, and (3) movable, with #2 and #3 occurring simultaneously. Electricity can be measured in order to establish a purchase price by the amount of current which passes through the meter, thus fulfilling the existing and movable requirements. Also, it is legally considered personal property, subject to ownership, and may be bartered, sold, and, in fact, stolen. Therefore, the sale of electricity is a sale of goods subject to Article 2's statute of limitations. Helvey v. Wabash County REMC, Court of Appeals of Indiana, First District, 1972. 151 Ind. App. 176, 278 N.E. 2d 608. 10. HMT, already in the business of marketing agricultural products, decided to try its hand at marketing potatoes for processing. Nine months before the potato harvest, HMT contracted to supply Bell Brand with one hundred thousand sacks of potatoes. At harvest time, Bell Brand would accept only sixty thousand sacks. HMT sues for breach of contract. Bell Brand argues that custom and usage in marketing potatoes for processing allows buyers to give estimates in contracts, not fixed quantities, as the contracts are established so far in advance. HMT responds that the quantity term in the contract was definite and unambiguous. Can custom and trade usage be used to interpret an unambiguous contract? Discuss. Answer: Expansion of Commercial Practices. Custom and trade usage are used to interpret this contract. Unless carefully negated, trade usage and custom become an element of the meaning of the words used in the contract. Since contracts are executed so far in advance, the custom in the potato processing industry is to treat the quantity solely as a reasonable estimate. The fact that HMT was a newcomer to the trade was no defense. Persons carrying on a particular trade are deemed to be aware of prominent trade customs applicable to their industry. The knowledge may be actual or constructive, and it is constructive if the custom is of such general and universal application that the party must be presumed to know of it. Heggblade-Marguleas-Tenneco, Inc. v. Sunshine Biscuit, Inc., 59 Cal.App.3d 948, 131 Cal.Rptr. 183 (1976). 11. Schreiner, a cotton farmer, agreed over the telephone to sell 150 bales of cotton to Loeb & Co. Schreiner had sold cotton to Loeb & Co. for the past five years. Written confirmation of the date, parties, price, and conditions was mailed to Schreiner, who did not respond to the confirmation in any way. Four months later, when the price of cotton had doubled, Loeb & Co. sought to enforce the contract. Shreiner argues that he is not a merchant. Is the contract enforceable? Answer: Sales By and Between Merchants, Form of the Contract. Judgment for Schreiner. The critical determination is whether a farmer is a "merchant" within the meaning of the Uniform Commercial Code. A merchant must: 1) be a dealer in the goods; 2) who by his occupation holds himself out as having knowledge or skill peculiar to the goods or practices involved; or 3) who employs an agent or broker whom he holds as having such knowledge or skill. A farmer does not solely by his occupation hold himself out as being a professional merchant. Therefore, if Schreiner is not a merchant, the statute of frauds requires a writing signed by Schreiner in order to enforce the contract against him. Loeb and Company, Inc. v. Schreiner, 321 So.2d 199 (Ala. 1975). 12. American Sand & Gravel, Inc., agreed to sell sand to Clark at a special discount if 20,000–25,000 tons were ordered. The discount price was $0.45 per ton, compared with the normal price of $0.55 per ton. Two years later, Clark orders, and receives, 1,600 tons of sand from American Sand & Gravel. Clark refuses to pay more than $0.45 per ton. American Sand & Gravel sues for the remaining $0.10 per ton. Decision? Answer: Manner of Acceptance. American Sand & Gravel win. The special discount price on sand was conditioned on the purchase of 20,000 to 25,000 tons. Performance of this condition (purchase of this amount) had to take place before the special price became operative. Additionally, two years time was an unreasonable length of time to make the seller wait for the buyer to decide to take advantage of the offer. Even if Clark had purchased the required amount, the special price offer has lapsed. American Sand and Gravel, Inc. v. Clark and Fray Construction Company, Conn.Cir. 284, 196 A.2d 68 (1963). 13. In September, Auburn Plastics submitted price quotations to CBS for the manufacture of eight cavity molds to be used in making parts for CBS’s toys. Each quotation specified that the offer would not be binding unless accepted within fifteen days. Furthermore, CBS would be subject to an additional 30 percent charge for engineering services upon delivery of the molds. In December and January of the following year, CBS sent detailed purchase orders to Auburn Plastics for cavity molds. The purchase order forms stated that CBS reserved the right to remove the molds from Auburn Plastics without an additional or “withdrawal” charge. Auburn Plastics acknowledged the purchase order and stated that the sale would be subject to all conditions contained in the price quotation. CBS paid Auburn for the molds, and Auburn began to fabricate toy parts from the molds for CBS. Later, Auburn announced a price increase, and CBS demanded delivery of the molds. Auburn refused to deliver the molds unless CBS paid the additional charge for engineering services. CBS claimed that the contract did not provide for a withdrawal charge. Who will prevail? Why? Answer: Variant acceptances. CBS will prevail. "The earliest communications between the parties shown in this record are defendant's price quotations. While it appears that the quotations were sufficiently detailed and specific so as to constitute offers, plaintiff did not respond to them until months after 15 days had passed. Thus the purchase orders submitted by plaintiff did not create enforceable contracts since they had no binding effect upon defendant. In our view then, plaintiff's purchase orders constituted offers to buy the molds, and defendant's acknowledgments of those orders represented its acceptance of the offers. While the acknowledgments incorporate the conditions contained in the price quotations and therefore conflict with the terms of the offers with respect to the mold acquisition charge, the acknowledgments are nonetheless operable as acceptances since they are not expressly made conditional on plaintiff's assent to the different terms. Whether the condition in defendant's acknowledgments calling for an additional 30% charge became a part of the contracts requires the application of subdivision 2 of section 2-207. The parties are clearly merchants and, therefore, since the purchase orders expressly limited acceptance to their terms and also because notification of objection to a withdrawal charge was implicitly given by plaintiff the provision for such a charge did not become a part of the contract." CBS v. Auburn Plastics, 413 N.Y.S.2d 50 (1979). 14. Frank's Maintenance and Engineering, Inc., orally ordered steel tubing from C.A. Roberts Co. for use in the manufacture of motorcycle front fork tubes. Since these front fork tubes bear the bulk of the weight of a motorcycle, the steel used must be of high quality. Roberts Co. sent an acknowledgment with conditions of sale including one that limited consequential damages and restricted remedies available upon breach by requiring claims for defective equipment to be promptly made upon receipt. The conditions were located on the back of the acknowledgment. The legend “conditions of sale on reverse side” was stamped over so that on first appearance it read “No conditions of sale on reverse side.” Roberts delivered the order in January. The steel had no visible defects; however, when Frank's Maintenance began using the steel in its manufacture in the summer, it discovered that the steel was pitted and cracked beyond repair. Frank's Maintenance informed Roberts Co. of the defects, revoked its acceptance of the steel, and sued for breach of warranty of merchantability. Is the limitation of rights enforceable? Answer: Unconscionability. Judgment for Frank's Maintenance. The U.C.C. provides that consequential damages may be limited or excluded unless it is unconscionable. Unconscionability can be procedural or substantive. It is procedural if it consists of some impropriety during the process of forming the contract, depriving a party of a meaningful choice. Provisions limiting liability must have been bargained for, brought to the other party's attention, or be conspicuous. Substantive unconscionability concerns the question whether the terms themselves are commercially reasonable. Parties may not limit remedies in an unreasonable or unconscionable way; there must be a fair quantum of remedy left for breach. Here, the limiting clause was on the reverse side of the acknowledgment which was made to seem irrelevant by the stamp on the front. It was not conspicuous and was not known to Frank's Maintenance at the time the contract was made. Furthermore, the defects in the steel allegedly were latent and could not have been discovered promptly after acceptance. Thus, it would have been impossible to make a claim at that time as required by the limiting clause. Therefore, the clause is unconscionable. Frank's Maintenance and Engineering, Inc. v. C.A. Roberts Co., 408 N.E.2d 403 (Ill. 1980). 15. Dorton, as a representative for The Carpet Mart, purchased carpets from Collins & Aikman that were supposedly manufactured of 100 percent Kodel polyester fiber but were, in fact, made of cheaper and inferior fibers. Dorton then brought suit for compensatory and punitive damages against Collins & Aikman for its fraud, deceit, and misrepresentation in the sale of the carpets. Collins & Aikman moved for a stay pending arbitration, claiming that Dorton was bound to an arbitration agreement printed on the reverse side of Collins & Aikman's printed sales acknowledgment form. A provision printed on the face of the acknowledgment form stated that its acceptance was “subject to all of the terms and conditions on the face and reverse side thereof, including arbitration, all of which are accepted by buyer.” Is the arbitration clause enforceable? Answer: Deviant Acceptances. Judgment for Collins & Aikman; case remanded to district court for further findings of fact. The Uniform Commercial Code recognizes some contracts in which an acceptance or confirmation contains additional or different terms from the offer. To do so, however, the offeree's intent to accept must be definitely expressed and the acceptance must not be made expressly conditional on the offeror's assent to the additional or different terms. If these two stipulations are met, then a contract is formed and the additional or different terms are treated as "proposals" to the contract. If the transaction is between merchants, then the additional terms become part of the contract unless they materially alter it or the offeror objects to the additions. Here, the provision on the face of the Collins & Aikman acknowledgment form did not make acceptance conditional upon the additional or different terms. Since it was not made expressly conditional upon Dorton's assent, the acknowledgment form constituted an acceptance and created a binding contract. In addition, Dorton did not object to the arbitration agreement. Therefore, unless it materially alters the terms of Dorton's original oral offer, the arbitration clause is part of the binding contract. The case is remanded to the trial court to determine whether the arbitration clause materially altered the contract. Dorton v. Collins & Aikman Corp., 453 F.2d 1161 (6th Cir. 1972). 16. The defendant, Gray Communications, desired to have a television tower built. After a number of negotiation sessions conducted by telephone between the defendant and the plaintiff, Kline Iron, the parties allegedly reached an oral agreement under which the plaintiff would build a tower for the defendant for a total price of $1,485,368. A few days later, the plaintiff sent a written document, referred to as a proposal, for execution by the defendant. The proposal indicated that it had been prepared for immediate acceptance by the defendant and that prior to formal acceptance by the defendant it could be modified or withdrawn without notice. A few days later, without having executed the proposal, the defendant advised the plaintiff that a competitor had provided a lower bid for construction of the tower. The defendant requested that the plaintiff explain its higher bid price, which the plaintiff failed to do. The defendant then advised the plaintiff by letter that it would not be retained to construct the tower. The plaintiff then commenced suit, alleging breach of an oral contract, and asserting that the oral agreement was enforceable because the common law of contracts, not the UCC, governed the transaction and that under the common law a writing is not necessary to cover this type of transaction. Even if the transaction was subject to the UCC, the plaintiff alternatively argued, the contract was within the UCC “merchant’s exception.” Is the contract enforceable? Answer: Statute of Frauds. No, it is not enforceable, but for different reasons than asserted by the plaintiff. The contract for construction of the tower was one for the sale of goods, rather than for services, and thus was subject to the writing requirement of the UCC statute of frauds. Even though services were performed, they were merely incidental to the sale of the tower. The appropriate inquiry is which facet of the transaction, goods or services, is the predominant factor. Thus, under the UCC, the proposal and letter sent by Kline to defendant did not constitute confirmation of an oral contract so as to bring the transaction within the “merchant’s exception” since the writings, by their terms, required further action by defendant to become operative. The writings expressly required the defendant to sign and return the proposal to indicate acceptance of its terms, which the defendant did not do. Kline Iron & Steel v. Gray Communications, 715 F. Supp. 135. 17. Due to high gasoline prices, American Bakeries Company (ABC) considered converting its fleet of over 3,000 vehicles to a much less expensive propane fuel system. After negotiations with Empire Gas Corporation (Empire), ABC signed a contract for approximately three thousand converter units, "more or less depending upon requirements of Buyer," as well as agreeing to buy all propane to be used for four years from Empire. Without giving any reasons, however, ABC never ordered any converter units or propane from Empire, having apparently decided not to convert its vehicles. Empire brought suit against ABC for $3,254,963, representing lost profits on 2,242 converter units and the propane that would have been consumed during the contract period. Is ABC liable? Explain. Answer: Good Faith/Requirements Contract. Judgment for Empire affirmed. The U.C.C., which governs requirements contracts, provides that "a term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate . . . may be tendered or demanded." The Court held that the "unreasonably disproportionate" proviso should not be read literally when a buyer is demanding less, rather than more, of a stated estimate. The Court, however, held that a requirements contract was not, from a buyer's standpoint, in essence an option to purchase up to or slightly beyond a stated estimate on terms specified in the contract. For purposes of a requirements contract, the buyer's "requirements" must be more than purely subjective needs. The good faith requirement, moreover, would preclude the buyer from merely having second thoughts about the contract and desiring to get out of it. The Court concluded that American Bakeries had acted in bad faith in deciding for undisclosed reasons not to convert its fleet to propane, thereby reducing its requirements to zero. 18. Emery Industries (Emery) contracted with Mechanicals, Inc. (Mechanicals), to install a pipe system to carry chemicals and fatty acids under high pressure and temperature. The system required stainless steel “stub ends” (used to connect pipe segments), which Mechanicals ordered from McJunkin Corporation (McJunkin). McJunkin in turn ordered the stub ends from the Alaskan Copper Companies, Inc. (Alaskan). McJunkin’s purchase order required the seller to certify the goods and to relieve the buyer of liabilities that might arise from defective goods. After shipment of the goods to McJunkin, Alaskan sent written acknowledgment of the order, containing terms and conditions of sale different from those in McJunkin’s purchase order. The acknowledgment provided a disclaimer of warranty and a requirement for inspection of the goods within ten days of receipt. The acknowledgment also contained a requirement that the buyer accept all of the seller’s terms. The stub ends were delivered to Mechanicals in several shipments over a five-month period. Each shipment included a document reciting terms the same as those on Alaskan’s initial acknowledgment. Apparently, McJunkin never objected to any of the terms contained in any of Alaskan’s documents. After the stub ends were installed, they were found to be defective. Mechanicals had to remove and replace them, causing Emery to close its plant for several days. McJunkin filed a complaint alleging that Mechanicals had failed to pay $26,141.88 owed on account for the stub ends McJunkin supplied. Mechanicals filed an answer and counterclaim against McJunkin, alleging $93,586.13 in damages resulting from the replacement and repair of the defective stub ends. McJunkin filed a third-party complaint against Alaskan, alleging that Alaskan was liable for any damages Mechanicals incurred as a result of the defective stub ends. What result? Explain. Answer: Battle of the Forms. Judgment for McJunkin Corp. McJunkin’s form will control and Alaskan’s attempt to disclaim its warranty liability will be of no avail. The problem underlying any "battle of the forms" is that parties engaged in commerce have failed to incorporate into one formal, signed contract the explicit terms of their contractual relationship. Instead, each has been content to rely upon standard terms which each has included in its purchase orders or acknowledgments, terms which often conflict with those in the other party's documents. Usually, these standard terms mean little, for a contract looks to its fulfillment and rarely anticipates its breach. Hope springs eternal in the commercial world and expectations are usually, but not always, realized. It is only when the good faith expectations of the parties are frustrated that the legal obligations and rights of the parties must be precisely determined. This case presents a situation typical in any battle of the forms: it is not that the parties' forms have said too little, but rather that they have said too much yet have expressly agreed upon too little. McJunkin Corp. v. Mechanicals, Inc. United States Court of Appeals, Sixth Circuit, 1989 888 F.2d 481 19. Click2Boost, Inc. (C2B) entered into an Internet marketing agreement with the New York Times Company (NYT). Under the agreement, C2B was to solicit subscribers for home delivery of The New York Times newspaper by means of "pop up ads" at Internet Web sites with which C2B maintained "[m]arketing [a]lliances." According to C2B's description of the Internet marketing system it used in connection with the agreement, a person who clicked on the pop-up ad was invited to submit his or her ZIP code; if the ZIP code was suitable for home delivery of The New York Times, the person was prompted to provide additional information needed for a subscription; upon submission of this information, the C2B system displayed a confirmation of the subscription. The agreement required NYT to pay C2B a fee or commission for each home delivery subscription C2B submitted to NYT. Explain whether this contract is covered by the UCC. Answer: Scope of Article 2/Definition of Goods. No, this transaction is not covered by the UCC because it does not involve goods but rather is a contract for services. Wall Street Network, Ltd. v. New York Times Co., 164 Cal. App. 4th 1171 (Court of Appeal, 2nd Appellate Dist., 4th Div., 2008). Under the California Uniform Commercial Code, the terms "goods" encompasses "all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities ... and things in action." (Cal. U. Com. Code, § 2105, subd. (1).) In determining whether the agreement was for the sale of goods or the provision of services, "‘we must look to the "essence" of the agreement. When service predominates, the incidental sale of items of personal property[] does not alter the basic transaction.'" Under the agreement, C2B was obliged to place popup ads at the Web sites of its marketing partners, and then relay information from customers who responded to the ads to NYT. Although no California court has confronted the issue presented here, other state courts have concluded that contracts for the placement of advertising do not involve the sale of goods under the UCC. We reach the same conclusion here. In our view, C2B agreed to provide a service for NYT. That NYT paid a fee for each submission does not establish that the submissions constituted "goods." (See Brown v. Lee (1967) 242 Ark. 122 [412 S.W.2d 273, 274] [agreement that obliged a housebuilder to pay a commission for each building contract a broker obtained for the housebuilder was not for sale of goods].) ANSWERS TO “TAKING SIDES” PROBLEMS Terminal Grain Corporation brought an action against Glen Freeman, a farmer, to recover damages for breach of an oral contract to deliver grain. According to Terminal Grain, Freeman orally agreed to two sales of wheat to Terminal Grain of four thousand bushels each at $6.21 a bushel and $6.41 a bushel, respectively. Dwayne Maher, merchandising manager of Terminal Grain, sent two written confirmations of the agreements to Freeman. Freeman never made any written objections to the confirmations. After the first transaction had occurred, the price of wheat rose to between $6.75 and $6.80 per bushel, and Freeman refused to deliver the remaining four thousand bushels at the agreed-upon price. Freeman denies entering into any agreement to sell the second four thousand bushels of wheat to Terminal Grain but admits that he received the two written confirmations sent by Maher. (a) What arguments support considering Freeman be a merchant who is bound by the written confirmations? (b) What arguments support considering Freeman not to be a merchant seller and thus not bound by the written confirmations? (c) What is the appropriate decision? Answer: (a) Sellers don’t have to be on equal levels of expertise to be considered merchants. A merchant may 1) be a dealer in the goods, or 2) by his occupation hold himself out as having knowledge or skill peculiar to the goods or practices involved, or 3) employs an agent or broker whom he holds out as having such knowledge or skill. Freeman is certainly not a small-time seller; he has knowledge peculiar to the selling of grain. (b) The average farmer has no particular skill or knowledge in the buying or selling of wheat with dealers such as Terminal Grain. Whatever knowledge a farmer may have regarding the production of grain this does not make him an expert in the marketplace on a level with a grain company. (c) Judgment for Freeman. Freeman is not a merchant. Terminal Grain Corp. v. Freeman, 270 N.W. 2d 806 (S.D. 1978). Chapter 22 PERFORMANCE ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. Tammie contracted with Kristine to manufacture, sell, and deliver to Kristine and put in running order a certain machine. After Tammie set up the machine and put it in running order, Kristine found it unsatisfactory and notified Tammie that she rejected the machine. She continued to use it for three months but continually complained of its defective condition. At the end of the three months, she notified Tammie to come and get it. Has Kristine lost her right (a) to reject the machine? (b) to revoke acceptance of the machine? Answer: (a) Rejection. After the buyer has rejected the goods, the Code allows her to exercise no ownership of them. As a result, Kristine has lost her right to reject the machine, although she has a cause of action for damages against the seller if there is a breach of warranty. Upon learning that the machine was defective and that it did not conform to the contract of sale, Kristine could have rejected it by promptly notifying the seller and returning it to the seller or tendering it to him. However, Kristine's continued use of the machine for three months after knowledge of the defect was an acceptance of the goods which precludes rejection. U.C.C. §2-607. (b) Revocation of Acceptance. Kristine would have the right to revoke if (1) she accepted the machine on the reasonable assumption that its non-conformity would be cured, (2) it has not been seasonably cured and (3) the non-conformity substantially impairs the value of the machine. If these conditions are met Kristine, as seems likely on the facts, may revoke her acceptance if she does so within a reasonable time after the seller fails to seasonably cure. U.C.C. §2-608(2). 2. Smith, having contracted to sell to Beyer thirty tons of described fertilizer, shipped to Beyer by carrier thirty tons of fertilizer that he stated conformed to the contract. Nothing was stated in the contract as to time of payment, but Smith demanded payment as a condition of handing over the fertilizer to Beyer. Beyer refused to pay unless he was given the opportunity to inspect the fertilizer. Who is correct? Explain. Answer: Inspection. Judgment for Beyer who has the right of inspection under Section 2-513 of the U.C.C. The contract did not by its terms provide for payment of the price upon presentation of documents of title, nor did Beyer in any other way waive his right of inspection. The refusal of Smith to permit Beyer to inspect the goods, where Beyer has not agreed or contracted to give up his right of inspection, is justification for Beyer's refusal to pay for the goods. 3. Benny and Sheree entered into a contract for the sale of one hundred barrels of flour. No mention was made of any place of delivery. Thereafter, Sheree demanded that Benny deliver the flour at her place of business, and Benny demanded that Sheree come and take the flour from his place of business. Neither party acceded to the demand of the other. Has either one a right of action against the other? Answer: Place of Tender. Benny would have a cause of action against Sheree. Section 2-308(a) of the U.C.C. provides that unless otherwise agreed, the place for delivery of the goods is Benny's place of business. The conforming goods were in a deliverable state at the place where Sheree was under a duty to accept them. The demand of Sheree that Benny deliver the flour to Sheree's place of business indicates an unwillingness to accept delivery at the place where the flour was located and would excuse any further tender by Benny. Sheree would not have a cause of action against Benny because of Sheree's failure to accept on demand the specific goods at the place where they were deliverable, and also by reason of her failure to make a tender of payment of the price as required by §2-511 of the Code. 4. Johnson, a manufacturer of air-conditioning units, made a written contract with Maxwell to sell to Maxwell forty units at a price of $200 each and to deliver them at a certain apartment building owned by Maxwell for installation by Maxwell. On the arrival of Johnson’s truck for delivery at the apartment building, Maxwell examined the units on the truck, counted only thirty units, and asked the driver if that was the total delivery. The driver replied that it was as far as he knew. Maxwell told the driver that she would not accept delivery of the units. The next day, Johnson telephoned Maxwell and inquired why delivery was refused. Maxwell stated that the units on the truck were not what she ordered, that she ordered forty units, that only thirty were tendered, and that she was going to buy air-conditioning units elsewhere. In an action by Johnson against Maxwell for breach of contract, Maxwell defends on the ground that the tender of thirty units was improper, because the contract called for delivery of forty units. Is this a valid defense? Answer: Perfect Tender Rule. Yes, it is a valid defense since the contract was for 40 units; Maxwell does not have to accept delivery of 30 units. The perfect tender rule provides that if the goods or tender of delivery fail in any respect to conform to the contract Maxwell may reject the whole. 5. Edwin sells a sofa to Jack for $800. Edwin and Jack both know that the sofa is in Edwin’s warehouse, located approximately ten miles from Jack’s home. The contract does not specify the place of delivery, and Jack insists that the place of delivery is either his house or Edwin’s store. Is Jack correct? Answer: Place of Tender. No. U.C.C. Section 2-308 provides that in the absence of a specified place for delivery of "identified goods which to the knowledge of the parties at the time of contracting are in some other place [than the seller's business], that place is the place of their delivery." 6. On November 4, Kim contracted to sell to Lynn 500 sacks of flour at $4 each to be delivered to Lynn by December 12. On November 27, Kim shipped the flour. By December 5, when the car arrived, containing only 450 sacks, the market price of flour had fallen. Lynn refused to accept delivery or to pay. Kim shipped 50 more sacks of flour, which arrived December 10. Lynn refused delivery. Kim resold the 500 sacks of flour for $3 per sack. What are Kim’s rights against Lynn? Answer: Cure by the Seller. Kim should prevail. Tender entitles the seller to acceptance of goods and payment of the purchase price. U.C.C. Section 2-507. Where any tender is rejected because non-conforming and the time for performance has not expired, the seller may seasonably notify the buyer of his intention to cure and may then, within the contract time, make a conforming delivery. U.C.C. §2-508. The contract was for delivery by December 12 time c. Since the second shipment cured the deficiency in quantity before the time of performance had expired, Kim has performed her obligations under the contract. Lynn breached by wrongfully rejecting the goods. Kim is entitled to damages for breach of contract. 7. Farley and Trudy entered into a written contract whereby Farley agreed to sell and Trudy agreed to buy 6,000 bushels of wheat at $10.33 per bushel, deliverable at the rate of 1,000 bushels a month commencing June 1, the price for each installment being payable ten days after delivery thereof. Though Farley delivered and received payment for the June installment, he defaulted by failing to deliver the July and August installments. By August 15, the market price of wheat had increased to $12.00 per bushel. Trudy thereupon entered into a contract with Albert to purchase 5,000 bushels of wheat at $12 per bushel deliverable over the ensuing four months. In late September, the market price of wheat started to decline and by December 1 was $9.25 per bushel. Explain whether Trudy would succeed in a legal action against Farley for breach of contract. Answer: Installment Contracts: Cover. Yes, Trudy would prevail. Farley's failure to deliver the July and August installments substantially impaired the value of the whole contract and therefore was a breach of the whole contract. Section 2-612(3) U.C.C. It was a breach which excused Trudy of any further duty under the contract. Trudy's contract with Albert to purchase 5,000 bushels of wheat in substitution for the quantity which Farley had contracted to deliver to Trudy was a "cover" made by the buyer in good faith and without unreasonable delay. Section 2-712 of the U.C.C. provides that the buyer may "cover" in this type of situation and may recover from the seller as damages the difference between the cost of cover and the contract price. Trudy may recover $8,350 from the seller as damages, which is the difference between the cost of cover ($60,000) and the contract price ($51,650). 8. Bain ordered from Marcum a carload of lumber, which he intended to use in the construction of small boats for the U.S. Navy, pursuant to contract. The order specified that the lumber was to be free from knots, wormholes, and defects. The lumber was shipped, and immediately on receipt Bain looked into the door of the fully loaded car, ascertained that there was a full carload of lumber, and acknowledged to Marcum that the carload had been received. On the same day, Bain moved the car to his private siding and sent to Marcum full payment in accordance with the terms of the order. A day later, the car was moved to the work area and unloaded in the presence of the Navy inspector, who refused to allow three-fourths of it to be used because of excessive knots and wormholes in the lumber. Bain then informed Marcum that he was rejecting the order and requested refund of the payment and directions on disposition of the lumber. Marcum replied that because Bain had accepted the order and unloaded it, he was not entitled to return of the purchase price. Who is correct? Explain. Answer: Inspection. Bain is entitled to return a of the purchase price. Unless otherwise agreed the buyer has a right to inspect the goods before acceptance and is allowed a reasonable time to do so. Bain inspected the goods on the next day after delivery by the carrier, which is within a reasonable time. Upon inspection of the goods and finding them to be non-conforming to the contract, he had the right to reject them within a reasonable time after discovery of the non-conformity. Bain gave the seller prompt notice of rejection as required by Section 2-602(1). 9. The plaintiff, a seller of milk, had for ten years bid on contracts to supply milk to the defendant school district, and had supplied milk to other school districts in the area. On June 15, the plaintiff contracted to supply the defendant’s requirements of milk for the next school year, at a price of $0.0759 per half-pint. The price of raw milk delivered from the farm had for years been controlled by the U.S. Department of Agriculture. On June 15, the department’s administrator for the New York/ New Jersey area had mandated a price for raw milk of $8.03 per hundredweight. By December, the mandated price had been raised to $9.31 per hundredweight, an increase of nearly 20 percent. If required to complete deliveries at the contract price, the plaintiff would lose $7,350.55 on its contract with the defendant and would face similar losses on contracts with two other school districts. Is the plaintiff correct in its assertion (a) that its performance had become impracticable through unforeseen events and (b) that it is entitled to relief from performance? Answer: Excuses for Nonperformance: Nonhappening of Presupposed Condition. The UCC recognizes that performance may be excused in instances where it would be commercially impracticable. This is not to say that mere inconvenience or financial hardship would be sufficient. Commercial impracticability requires more than mere hardship or increased cost of performance. For a party to be discharged, performance must be rendered impracticable as a result of an unforeseen supervening event not within the contemplation of the parties at the time of contracting. Moreover, the nonoccurrence of the event must have been a “basic assumption” that both parties made when entering into the contract. Increased production cost alone does not excuse performance by the seller. The impediment to performance must be something that was unforeseen and not within contemplation of the parties at the time the contract was formed. 10. In April F. W. Lang Company (Lang) purchased an ice cream freezer and refrigeration compressor unit from Fleet for $2,160. Although the parties agreed to a written installment contract providing for an $850 down payment and eighteen installment payments, Lang made only one $200 payment upon receipt of the goods. One year later, Lang moved to a new location and took the equipment along without notifying Fleet. Then, in May or June of the following year, Lang disconnected the compressor from the freezer and used it to operate an air conditioner. Lang continued to use the compressor for that purpose until the sheriff seized the equipment and returned it to Fleet pursuant to a court order. Fleet then sold the equipment for $500 in what both parties conceded was a fair sale. Lang then brought an action charging that the equipment was defective and unusable for its intended purpose and sought to recover the down payment and expenses incurred in repairing the equipment. Fleet counterclaimed for the balance due under the installment contract less the proceeds from the sale. Who will prevail? Why? Answer: Rejection of the Goods. Judgment for Fleet. To effectively reject goods the buyer must reject the goods within a reasonable time after their delivery or tender and then seasonably notify the seller of the rejection. The alleged rejection was not effective in that Lang failed to notify Fleet of the rejection, kept the equipment for his own use, moved it to a new location without notifying Fleet, and then used it to operate an air conditioner. These acts were inconsistent with Fleet's ownership of the goods and therefore constituted an acceptance. F.W. Lang Co. v. Fleet, 193 Pa. Super.365, 165 A.2d 258 (1960). 11. Deborah McCullough bought a new car from Bill Swad Chrysler, Inc. The car was protected by both a limited warranty and an extended warranty. McCullough immediately encountered problems with the automobile’s brakes, transmission, and air-conditioning and discovered a number of cosmetic defects as well. She returned the car to Swad for repairs, but Swad did not fix the brakes properly or perform any of the cosmetic work. Moreover, new problems appeared with respect to the car’s steering mechanism. McCullough returned the car twice more for repairs, but on each occasion, old problems persisted and new ones emerged. After the engine abruptly shut off on a short trip away from home and the brakes again failed on a more extensive excursion, McCullough presented Swad with a list of thirty-two of the car’s defects and demanded their correction. When Swad failed to remedy more than a few of the problems, McCullough wrote a letter to Swad calling for rescission of the purchase agreement and a refund of the purchase price and offering to return the car upon receiving from Swad instructions regarding where to return it. Swad did not respond to the letter, and McCullough brought an action against Swad. She continued to operate the vehicle until the time of trial, some seventeen and one-half months (and 23,000 miles) later. Can McCullough rescind the agreement? Answer: Revocation of Acceptance. Yes. The UCC. provides that buyer may revoke acceptance within a reasonable time after discovering a nonconformity that substantially impairs the value of the product to the buyer. Swad contends that McCullough gave up her right to revoke acceptance of the car by using it after notifying Swad of her revocation. Continued use, however, does not invalidate a revocation if the use is reasonable. This use of the car was reasonable for two reasons: (1) Swad did not inform McCullough of how to return the car; and (2) McCullough was in no financial position to return the car and get a second one. Swad further claims that McCullough's continued use of the vehicle proves that the car's nonconformities did not substantially impair its value to McCullough. But conditions beyond McCullough's control mandated her continued operation of the car in spite of its nonconformities. Finally, Swad incorrectly maintains that the car's defects were trivial. The steering, transmission, and brake problems were quite significant, and even cosmetic defects can have an important impact on the value of the good in the buyer's eyes. McCullough therefore satisfies the requirements for an effective revocation and may rescind the agreement and regain the purchase price. McCullough v. Bill Swad Chrysler-Plymouth, Inc. 5 Ohio St. 3d 181, 449 N.E.2d 1289 (1983). 12. On March 17, Peckham bought a new car from Larsen Chevrolet for $16,400. During the first one and one-half months after the purchase, Peckham discovered that the car’s hood was dented, its gas tank contained no baffles, its emergency brake was inoperable, the car did not have a jack or a spare tire, and neither the clock nor the speedometer worked. Larsen claimed that Peckham knew of the defects at the time of the purchase. Peckham, on the other hand, claimed that he did not know the extent of the defects and that despite his repeated efforts, the defects were not repaired until June 11. Then, on July 15, the car’s dashboard caught fire, leaving the car’s interior damaged and the car itself inoperable. Peckham then returned to Larsen Chevrolet and told Larsen that Larsen had to repair the car at its own expense or that he, Peckham, would either rescind the contract or demand a new automobile. Peckham also claimed that at the end of their conversation, he notified Larsen Chevrolet that he was electing to rescind the contract and demanded the return of the purchase price. Larsen denied having received that oral notification. On October 12, Peckham sent a written notice of revocation of acceptance to Larsen. What are the rights of the parties? Answer: Revocation of Acceptance. Judgment for Peckham. Although Peckham sought the common law remedy of rescission, the relief sought was equivalent to the Code concept of revocation of acceptance. For Peckham to revoke his acceptance, he had to show 1) that the car was nonconforming, 2) that the nonconformity substantially impaired the value of the car, 3) that if Peckham knew of the defects when he accepted delivery of the car, then he acted under a reasonable assumption that they would be repaired and they were not, 4) that if he did not know of the defects when he accepted delivery of the car, then he must show that his acceptance was reasonably induced either by the difficulty of discovering the defects before acceptance or by Larsen's assurances, (5) that his revocation of acceptance occurred within a reasonable time after he discovered or should have discovered the defect and before any substantial change in the condition of the car not caused by its own defects, and (6) that he notified Larsen Chevrolet of the revocation at which time the revocation became effective. Peckham v. Larsen Chevrolet, 99 Idaho 675, 587 P.2d 816 (1978). 13. Joc Oil bought a cargo of fuel oil for resale. The certificate from the foreign refinery stated the sulfur content of the oil was 0.5 percent. Joc Oil entered into a written contract with Con Ed for the sale of this oil. The contract specified a sulfur content of 0.5 percent. Joc Oil knew, however, that Con Ed was authorized to buy and burn oil of up to 1 percent sulfur content and that Con Ed often bought and mixed oils of varying contents to stay within this limit. The oil under contract was delivered to Con Ed, but independent testing revealed a sulfur content of 0.92 percent. Con Ed promptly rejected the nonconforming shipment. Joc Oil immediately offered to substitute a conforming shipment of oil, although the time for performance had expired after the first shipment of oil. Con Ed refused to accept the substituted shipment. Joc Oil sues Con Ed for breach of contract. Judgment? Answer: Cure by the Seller. Judgment for Joc Oil. The Uniform Commercial Code provides the seller opportunity to cure, even if the time for performance is past, if 1) the seller had reasonable grounds to believe that the nonconforming tender would be acceptable to the buyer, and 2) if the seller seasonably notifies the buyer of the intention to cure. The first shipment of .92% oil was still within the limits usable by Con Ed. Joc Oil therefore had reasonable grounds to believe this shipment would be acceptable. Upon rejection, Joc Oil acted seasonably to notify Con Ed of its intention to cure, offering "immediately" to substitute a conforming shipment. 14. The plaintiff, a German wine producer and exporter, contracted to ship 620 cases of wine to the defendant, a distributor in North Carolina. The contract was silent as to the shipment destination. During the next several months, the defendant called repeatedly to find out the status of the shipment. Later, without notifying the defendant, the plaintiff delivered the wine to a shipping line in Rotterdam, destined for Wilmington, North Carolina. The ship and the wine were lost at sea en route to Wilmington. When the defendant refused to pay on the contract, the plaintiff sued. Decision? Answer: Shipment Contracts. Here the risk of loss is still borne by the West German wine producer. Failure to give the buyer (here defendant) notice of the shipment of the wine prevented the buyer from making arrangements for insurance or other protective measures. When there is no specified destination in the contract, the risk of loss passes from the seller to the buyer once the goods have been duly delivered to the carrier. However, "duly delivered" requires prompt notification of shipment. But, lack of notification is a ground for rejection by the buyer only if material delay or loss ensues. Rheinberg-Kellerei GMBH v. Vineyard Wine Company, Inc., N.C.App., 281 S.E.2d 425 (1981). 15. Can-Key Industries, Inc., manufactured a turkey-hatching unit, which it sold to Industrial Leasing Corporation (ILC), which leased it to Rose-A-Linda Turkey Farms. ILC conditioned its obligation to pay on Rose-A-Linda’s acceptance of the equipment. Rose-A-Linda twice notified Can-Key that the equipment was unacceptable and asked that it be removed. Over a period of fifteen months Can-Key made several unsuccessful attempts to solve the problems with the equipment. During this time, Can-Key did not instruct Rose-A-Linda to refrain from using the equipment. Rose-A-Linda indicated its dissatisfaction with the equipment, and ILC refused to perform its obligations under the contract. Can-Key then brought suit against ILC for breach of contract. It argued that Rose-A-Linda accepted the equipment, because it used it for fifteen months. ILC countered that the equipment was unacceptable and asked that it be removed. It claimed that Can-Key refused and failed to instruct Rose-A-Linda to refrain from using the equipment. Therefore, ILC argued, Rose-A-Linda effectively rejected the turkey-hatching unit, relieving ILC of its contractual obligations. Who is correct? Explain. Answer: Acceptance. Judgment for ILC. Since ILC's acceptance was conditioned upon the acceptance by its lessee, Rose-A-Linda, it was only obligated to pay for the unit if Rose-A-Linda accepted it. Under the Code, Rose-A-Linda accepted the unit only if it either: (1) failed to make an effective rejection after a reasonable opportunity to inspect it, or (2) performed any act inconsistent with Can-Key's ownership of it. Rose-A-Linda twice notified Can-Key that the equipment was unacceptable and asked that it be removed, which constituted an effective rejection. Furthermore, the fifteen months' use related to Rose-A-Linda's initial inspection of the equipment and Can-Key's subsequent efforts to remedy the "bugs." During this time, Can-Key did not instruct Rose-A-Linda to refrain from using the equipment nor did it argue that Rose-A-Linda's own tests and modifications damaged the equipment in any way. Therefore, Rose-A-Linda did not perform any act inconsistent with Can-Key's ownership. Since Rose-A-Linda did not accept the turkey-hatching unit, ILC is under no duty to pay. Can-Key Industries, Inc. v. Industrial Leasing Corp., 593 P.2d 1125 (Or. 1979). 16. Frederick Manufacturing Corporation ordered 500 dozen units of Import Traders’ rubber pads for $2,580. The order indicated that the pads should be “as soft as possible.” Import Traders delivered the rubber pads to Frederick Manufacturing on November 19. Frederick failed to inspect the goods upon delivery, even though the parties recognized that there might be a problem with the softness. Frederick finally complained about the nonconformity of the pads in April of the following year, when Import Traders requested the contract price for the goods. Can Import Traders recover the contract price from Frederick? Answer: Acceptance. Yes. Under the Code, the contract price may be recovered by a seller when a buyer accepts the goods. Here, acceptance occurred when Frederick failed to make an effective rejection after having had a reasonable opportunity to inspect the pads. Its five-month silence after receiving the goods, which at the time of ordering were of questionable quality, constituted acceptance. Therefore, Import Traders is entitled to recover the $2,580 contract price for the rubber pads. Import Traders, Inc. v. Fredrick Manufacturing Corp., Civil Court of the City of New York, Kings County, 1983, 117 Misc.2d 305, 457 N.Y.S.2d 742. 17. Moulton Cavity & Mold Inc. agreed to manufacture twenty-six innersole molds to be purchased by Lyn-Flex. Moulton delivered the twenty-six molds to Lyn-Flex after Lyn-Flex allegedly approved the sample molds. However, Lyn-Flex rejected the molds, claiming that the molds did not satisfy the specifications exactly, and denied that it had ever approved the sample molds. Moulton then sued, contending that Lyn-Flex wrongfully rejected the molds. Lyn-Flex, argued that the Code's perfect tender rule permitted its rejection of the imperfect molds, regardless of Moulton's substantial performance. Decision? Answer: Perfect Tender Rule. Judgment for Lyn-Flex. Under the Code’s perfect tender provision, “if the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may reject the whole.” Therefore, Moulton’s substantial performance does not obligate Lyn-Flex to accept the molds. If they failed to meet the contract’s specifications in any respect, Lyn-Flex could reject them without liability. 18. Neptune Research & Development, Inc. (the buyer), manufacturer of solar-operated valves used in scientific instruments, saw advertised in a trade journal a hole-drilling machine with a very high degree of accuracy, manufactured and sold by Teknics Industrial Systems, Inc. (the seller). Because the machine’s specifications met the buyer’s needs, the buyer contacted the seller in late March and ordered one of the machines to be delivered in mid-June. There was no “time-is-of-the-essence” clause in the contract. Although the buyer made several calls to the seller throughout the month of June, the seller never delivered the machine and never gave the buyer any reasons for the nondelivery. By late August, the buyer desperately needed the machine. The buyer went to the seller’s place of business to examine the machine and discovered that the still-unbuilt machine had been redesigned, omitting a particular feature that the buyer had wanted. Nonetheless, the buyer agreed to take the machine, and the seller promised that it would be ready on September 5. The seller also agreed to call the buyer on September 3 to give the buyer two days to arrange for transportation of the machine. The seller failed to telephone the buyer on September 3 as agreed. On September 4 the buyer called the seller to find out the status of the machine and was told by the seller that “under no circumstances” could the seller have the machine ready by September 5. At this point, the buyer notified the seller that the order was canceled. One hour later, still on September 4, the seller called the buyer, retracted its earlier statement, and indicated that the machine would be ready by the agreed September 5 date. The buyer sued for the return of its $3,000 deposit. Should the buyer prevail? Explain. Answer: Anticipatory Repudiation. Yes. The seller repudiated the contract when it stated on September 4 that “under no circumstances” could the second agreed-upon delivery date (September 5) be met. This repudiation impaired the value of the contract to the buyer. A contract need not expressly state that time is of the essence in order for timely delivery to be deemed essential. Here the seller delayed delivery for an inordinate amount of time. Nonetheless, under some circumstances a party may retract a repudiation. The Code states that “until the repudiating party’s next performance is due he can retract his repudiation unless the aggrieved party has since the repudiation canceled or materially changed his position or otherwise indicated that he considers the repudiation final.” Here, the buyer communicated its cancellation of the contract to the seller before the attempted retraction. Therefore, the cancellation by the buyer is effective. 19. ALPAC and Eagon are corporations that import and export raw logs. In April, Setsuo Kimura, ALPAC’s president, and C.K. Ahn, Eagon’s vice president, entered into a contract for ALPAC to ship about 15,000 cubic meters of logs between the end of July and the end of August. Eagon agreed to purchase them. Subsequently, the market for logs began to soften, making the contract less attractive to Eagon. ALPAC became concerned that Eagon would try to cancel the contract. Kimura and Ahn began a series of meetings and letters, apparently to assure ALPAC that Eagon would purchase the logs. Eagon was troubled by the drop in timber prices and initially withheld approval of the shipment. Ahn sent numerous internal memoranda to the home office indicating that it might not wish to complete the deal, but that accepting the logs was “inevitable” under the contract. On August 23, Eagon received a fax from ALPAC suggesting a reduction in price and volume of the contract, but Eagon did not respond. Soon after, Kimura asked Ahn whether he intended to accept the logs; Ahn admitted that he was having trouble getting approval. On August 30, Ahn informed the home office that he would attempt to avoid accepting the logs but that it would be difficult and suggested holding ALPAC responsible for shipment delay. Kimura thereafter believed that Eagon would not accept the shipment and eventually canceled the vessel reserved to ship the logs, believing that Eagon was canceling the contract. The logs were not loaded or shipped by August 31, but Ahn and Kimura continued to discuss the contract. On September 7, Ahn told Kimura that he would try to convince the firm to accept the delivery and indicated that he did not want Kimura to sell the logs to another buyer. The same day, Ahn informed Eagon that it should consider accepting the shipment in September or October. By September 27, ALPAC had not shipped the logs and sent a final letter to Eagon stating that because it failed to take delivery of the logs, it had breached the contract. Eagon responded to the letter, stating that there was “no contract” because ALPAC’s breach (not shipping by the deadline) excused Eagon’s performance. Explain whether either party breached the agreement. Answer: Anticipatory Repudiation: Common law supports the position that, when the parties have not indicated that time is of the essence, late delivery is not a material breach. However, as a contract for the sale of goods, this contract is governed by the UCC, Article II which replaced the common law doctrine of material breach with the "perfect tender" rule. Under this rule, "if the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may ... reject the whole." U.C.C. § 2 601(a). Thus, ALPAC breached its duty under the contract and released Eagon from its duty to accept the logs. ALPAC next contends that, even if failure to timely deliver is a breach, the parties modified the delivery date or Eagon waived timely delivery. The UCC changed the common law of contracts to eliminate the need for consideration in contract modifications but did not otherwise alter the common law. U.C.C. § 2 209(1). Mutual assent is still required and one party may not unilaterally modify a contract. If both parties to a contract allow the reasonable time for delivery to pass without complaint, a court may infer that the parties have extended the time for performance. Ahn and Kimura continued to negotiate until September 7, at least a week after the shipment date. Thus, Eagon may initially have waived the original shipment date as negotiations continued. However, by the end of September, when they exchanged their final correspondence, ALPAC still had not shipped the logs. Thus, even if the parties did waive the original date, ALPAC still had a duty to deliver the logs within a reasonable time. Its failure to ship the logs for an additional 20 days, while the price of logs continued to drop, was a breach. ALPAC's third contention is that a material factual issue exists about whether it requested assurances from Eagon and Eagon failed to respond. The UCC provides that: A contract for sale imposes an obligation on each party that the other's expectation of receiving due performance will not be impaired. When reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance and until he receives such assurance may if commercially reasonable suspend any performance for which he has not already received the agreed return. The written demand for assurances under U.C.C. § 2 609 must generally be clear and unequivocal. While the parties here both knew that the contract was no longer favorable to Eagon, there is no showing that Eagon would not perform, or that ALPAC expressed its belief that Eagon would not perform. The letter Kimura sent to Ahn stated only that ALPAC was willing to negotiate new terms for the contract, not that it believed Eagon would not perform. Therefore, neither the parties' interactions nor their correspondence rose to the level of a demand for assurances. ALPAC's final contention is that Eagon repudiated the contract prior to the delivery date. An anticipatory breach must be a clear and positive statement or action that expresses an intention not to perform the contract. Therefore, as a matter of law, neither Eagon's expressed unhappiness about the drop in the price of timber nor its problems completing the contract rise to the level of repudiation. 20. In August, Bunge Corporation, a grain dealer, and Recker, a farmer, entered into a written contract under which Recker agreed to sell to Bunge Corporation ten thousand bushels of No. 2 yellow soybeans to be grown in the United States at $3.35 per bushel. Delivery of the grain was to be made at Bunge Corporation’s place of business, Price's Landing, Missouri, during January of the following year. Nothing in the contract required Recker to grow the beans on his own land, to grow the beans himself, or to operate a farm. The contract also provided that Bunge Corporation could extend the time of delivery. Severe winter weather struck the southeastern Missouri area in the early part of January, making it impossible for Recker to harvest approximately 865 acres of his beans. Agents of Bunge Corporation visited Recker’s farm in mid-January and observed that the beans were unharvestable. Shortly thereafter, Bunge Corporation directed a letter to Recker, calling attention to the fact that the 10,000 bushels of beans due under the contract had not been delivered. By the same communication, Bunge Corporation extended the time for delivery to March 31. From January 31 to March 31, the market price of beans increased by 10 percent. When delivery was not made by March 31, Bunge Corporation commenced an action to recover damages for breach of contract. Recker answered by admitting the failure to deliver but argued that he was excused from performance by the destruction of part of his crop. Explain which party should prevail. Answer: Casualty to Goods. Bunge Corporation (appellant) should prevail as Recker (appellee) was not excused from performance. Bunge Corporation v. Recker, Bunge Corporation v. Recker, 519 F. 2d 449 - Court of Appeals, 8th Circuit 1975 519 F.2d 449 (United States Court of Appeals, Eighth Circuit, 1975). The record is clear that Recker did not perform the contract according to its terms by failing to deliver 10,000 bushels of beans. Appellee's only defense in his pleadings and during the course of trial was that an act of God prevented his performance. 2-613 Casualty to identified goods Where the contract requires for its performance goods identified when the contract is made, and the goods suffer casualty without fault of either party before the risk of loss passes to the buyer, or in a proper case under a ‘no arrival, no sale’ term (section 400.2-324) then (a) if the loss is total the contract is avoided; and (b) if the loss is partial or the goods have so deteriorated as no longer to conform to the contract the buyer may nevertheless demand inspection and at his option either treat the contract as avoided or accept the goods with due allowance from the contract price for the deterioration or the deficiency in quantity but without further right against the seller. (Emphasis supplied.)Since the beans were not identified other than by kind and amount, we agree with the trial judge that the destruction by weather did not constitute an act of God which would excuse performance under either the provisions of the Missouri Uniform Commercial Code or the decisional law of that state. Obviously, appellee could have fulfilled its contractual obligation by acquiring the beans from any place or source as long as they were grown within the United States. Consequently, we are in total agreement with the district judge in his finding and conclusion that appellee was liable in damages for breach of the contract. 21. Seller manufactures furnace-grade carbon black, a filler used in tires and other rubber and plastic products. Buyer was a longtime customer of Seller, purchasing three grades of carbon black for use in numerous rubber products it supplies to customers. Buyer and Seller entered into a supply agreement as of January 1, in which Seller agreed to supply all of Buyer’s requirements for carbon black. When the demand for carbon black subsequently increased and its market price began to rise, Seller notified Buyer on April 14 of the following year that Seller was implementing a two-cents-per-pound base price increase to Buyer effective June 1. Buyer rejected Seller's request for a price increase and insisted that Seller provide adequate assurance that Seller would fill Buyer’s orders under the contract. On April 26, Buyer sent Seller a purchase order for carbon black and requested that Seller confirm the order. When Seller failed to do so, Buyer sent several additional requests for confirmation, but Seller still did not confirm the order. Explain whether either party has breached the contract. Answer: Right to Adequate Assurance of Performance. Seller has repudiated the contract by failing to provide timely adequate assurance of performance. This problem is based on BRC Rubber & Plastics v. Continental Carbon Co., 949 F.Supp.2d 862, United States District Court, N.D. Indiana, Fort Wayne Division (2013). "A contract for sale imposes an obligation on each party that the other's expectation of receiving due performance will not be impaired." IND.CODE § 26-1-2-609(1). "When reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance...." IND.CODE § 26-1-2-609(1). Here, [Seller] failed to provide [Buyer] with adequate assurance of performance and, in doing so, repudiated the Agreement. *** Under the UCC, a failure to timely provide adequate assurance of performance under the circumstances of the particular case is a repudiation of the contract. ANSWERS TO “TAKING SIDES” PROBLEMS On February 26, 2017, William Stem purchased a used BMW from Gary Braden for $26,600. Stem’s primary purpose for buying the car was to use it to drive his child to school and various activities. Braden indicated to Stem that the car had not been wrecked and that it was in good condition. Stem thought the car had been driven only seventy thousand miles. Less than a week after the purchase, Stem discovered a disconnected plug that, when plugged in, caused the oil warning light to turn on. When Stem then took his car to a mechanic, the mechanic discovered that the front end was that of a 2007 BMW and the rear end was that of a 2003 BMW. Further investigation revealed that the front half had been driven one hundred and seventy thousand miles. On March 10, 2017, Stem sent a letter informing Braden that he refused the automobile and that he intended to rescind the sale. Braden refused. Stem then drove the automobile for seven months and nearly nine thousand miles before filing an action against Braden, seeking to revoke his acceptance and to obtain the return of the purchase price. (a) What arguments would support Stem’s revocation of his acceptance and the return of the purchase price? (b) What arguments would support Braden’s denial of Stem’s claim? (c) Who should prevail? Explain. Answer: (a) Stem could argue that he had revoked his acceptance of a product within a reasonable time after discovering a nonconformity that substantially impaired the value of the goods to him. In addition, he needed to drive the car while it was still in his possession because he had no other mode of transporting his child. (b) Braden could argue that Stem’s use of the automobile for seven months and nearly nine thousand miles before bringing suit were clearly inconsistent with the seller’s ownership of the automobile and therefore constituted an “acceptance” under the Uniform Commercial Code (UCC). Consequently, Stem forfeited his right to rescind and to obtain the return of the purchase price. Moreover, by continuing to drive the car, Stem demonstrated that the car was appropriate for its intended use and was not substantially impaired. (c) Stem will prevail. In re Stem, Alabama Supreme Court, 1990 571 So. 2d 1112 http://scholar.google.com/scholar_case?case=231020927669747631&q=571+So.2d+1112&hl=en&as_sdt=2,34 The UCC provides that a buyer may revoke acceptance of a product within a reasonable time after discovering a nonconformity that substantially impairs the value of the product to the buyer. Although the trial court permissibly could have considered Stem’s use of the car as evidence that its value was not substantially impaired, Dickson v. U-J Chevrolet Co., 454 So.2d 964, 967 (Ala.1984), it was not compelled to do so. Accordingly, the trial court could have determined that the automobile’s nonconformities substantially impaired its value to Stem. There is no substantial dispute either that Stem’s revocation occurred within a reasonable time or that Stem properly notified Braden, and the trial court could have found that Stem revoked his acceptance within a reasonable time and that he met the notice requirements of Section 7-2-608. A buyer who asserts a right to revoke acceptance has the same duties and obligations as a buyer who asserts a right to reject the goods before acceptance. After rejection of goods, any exercise of dominion and ownership rights is considered wrongful as against the seller. Many cases involve extensive use of automobiles and motor homes after revocation; the cases emphasize the practical consideration that an individual who buys an automobile or a motor home may very well be unable, without extraordinary financial difficulty, to tender the automobile or motor home and do without it until the litigation concerning it is completed. Additionally, we note that if Stem had exercised any of his options available under Alabama’s commercial code concerning storing or returning the vehicle, he would have been put in the position of doing without a vehicle for transporting his child, which was one of the primary purposes for which he bought the vehicle, until trial of this case or else he would have been required to purchase or lease an additional suitable vehicle. Under these circumstances Stem’s continued use of the automobile was not an act of continued use that constituted an acceptance of ownership after revocation. With uniformity, the courts have held that the “wrongful” use entitles the seller to prove the reasonable value of the buyer’s use and to recover that amount as a setoff, and many courts have awarded setoffs in circumstances similar to those of the present case. Solution Manual for Smith and Robersons Business Law Richard A. Mann, Barry S. Roberts 9781337094757, 9780357364000, 9780538473637