CH-21-22 Introduction to Sales and Leases – Smith and Robersons Business Law : Chapter Notes

This Document Contains Chapters 21 to 22 Part Four: Sales CONTENTS Chapter 21 Introduction to Sales and Leases Chapter 22 Performance Chapter 23 Transfer of Title and Risk of Loss Chapter 24 Products Liability: Warranties and Strict Liability in Tort Chapter 25 Sales Remedies ETHICS QUESTIONS RAISED IN THIS PART 1. The Code establishes two overriding regulatory requirements on all sales transactions–unconscionability and good faith. If you were redrafting the Code, how would you define "unconscionability” and “good faith?" 2. The Code establishes a minimum level of quality when it states in the warranty of merchantability that goods must be "merchantable," or "fit for the ordinary purpose intended and of fair, average quality." Is this a reasonable minimum level of quality and safety? Is it necessary? 3. The UCC does not require that a contract for the sale of goods be "fair." Should the Code require that a contract be fair, or would this unnecessarily derogate the principle of freedom of contract? 4. Under the UCC merchants are held to a higher standard than nonmerchants. Why does the Code do this? Is it fair to require a higher standard of merchants than of nonmerchants? Should additional protections be given to nonmerchants under the Code? 5. The Code modifies general contract law by making it easier to form a contract. It has explicitly adopted the policy of permitting the parties to use "open terms." Does this make sense? Why? 6. Standardized contracts are widely used, especially by businesses that deal with a large number of consumers daily. Do the Code provisions on unconscionability serve any useful purpose in this context? Explain. ACTIVITIES AND RESEARCH PROBLEMS 1. Look up the warranty of merchantability provision in the version of UCC 2-318 adopted in your state. Which version of the privity requirements has your state adopted? Check the case law decided under the provision to determine how your courts have interpreted the privity requirements. 2. UCC 2-302 states that a court can as a matter of law find a contract or any clause unconscionable, but the term "unconscionable" is not defined in the Code. Research how the courts in your state have interpreted the term. What types of contracts or contract terms are considered to be "unconscionable" in your state? 3. Research decisions under 2-314 (warranty or merchantability) and find what types of products have been found to have breached the warranty of merchantability in your region of the country. 4. There have been attempts recently to have a federal statute for products liability. Research some of the proposals that have been made and analyze the impact they would have upon the Code provisions. 5. The United States is a party to an international treaty called the Convention on the International Sale of Goods. This treaty governs transactions in goods in the international sector between private parties who are citizens of ratifying countries. Research the provisions of this treaty and analyze its affect upon transactions of goods in the international sector. Does the CISG supercede the Code? Analyze this in terms of legal principles governing law in the United States. 6. Have a local retail businessperson talk to the class regarding store policies on things such as the return of goods, etc. Then discuss whether the store's policies are in accordance with provisions of the UCC and whether they are wise in light of the legal responsibilities of merchants under the Code. In lieu of having a speaker talk to the class, you might send students out to interview the customer service managers of various retail stores and compare the policies followed by businesses in your area. Chapter 21 INTRODUCTION TO SALES AND LEASES Cases in This Chapter Carter v. Tokai Financial Services, Inc. Pittsley v. Houser DJ Coleman, Inc. v. Nufarm Americas, Inc. Commerce & Industry Insurance Co. v. Bayer Corp. Chapter Outcomes After reading and studying this chapter, the student should be able to: • Distinguish a sale from a lease and describe the governing law for both. • Identify and explain the fundamental principles of Article 2 and Article 2A of the Uniform Commercial Code (UCC). • Compare and contrast the manifestation of mutual assent under both the common law and under Article 2. • Determine how Article 2 deals with (1) the necessity of consideration to modify a contract and (2) irrevocable offers. • Describe the UCC’s approach to requiring that certain contracts be in writing and identify the alternative methods of compliance under the Code. TEACHING NOTES NATURE OF SALES AND LEASES Sales law had its beginning in the United States with the codification of pertinent common law principles in the Uniform Sales Act in 1906. A new uniform act was written in 1951 and is the basis for Article 2 of the Uniform Commercial Code as we know it today. Amendments to Article 2 and 2A were promulgated in 2003 to accommodate electronic commerce and to reflect development of business practices, changes in other law, and interpretive difficulties of practical significance. Because no States had adopted them and prospects for enactment in the near future were bleak, the 2003 amendments to UCC Articles 2 and 2A were withdrawn in 2011. However, at least forty-three States have adopted the 2001 Revisions to Article 1, which applies to all of the articles of the Code. NOTE: See Figure 21-1 *** Chapter Outcome *** Distinguish a sale from a lease and describe the governing law for both. 21-1 DEFINITIONS A sales transaction consists of transferring title of goods for a price by an owner to the buyer. 21-1a Goods "Goods" are defined as movable, tangible, personal property. 21-1b Sale Sales transactions are governed by Article 2 of the Code; general contract law continues to apply where the code has not specifically modified the law. General contract law also continues to govern all contracts outside the scope of the Code, including employment contracts, service contracts, insurance contracts, contracts involving real property, and contracts for the sale of intangibles such as stocks, bonds, patents, and copyrights. Transactions which are not sales, but which affect goods include bailments, leases, gifts and transfer of a security interest. Most courts extend Code principles to cover these transactions. 21-1c Lease A lease is defined as a "transfer of rights to possession and use of goods for a term in return for consideration, but... retention or creation of a security interest is not a lease." UCC 2A, 103(1)(j). In nonlease transactions where title in the goods is transferred but a security interest attaches to the goods (e.g., a financed car purchase), Article 9 applies. Consumer Leases – Article 2A carries over general Code principles, primarily the prohibition against unconscionable provisions, to leases involving consumer goods. Finance Leases – A financed lease is a three-party transaction where the lessor is not the supplier or manufacturer of the leased goods. Because of this, Article 2A treats finance leases differently from ordinary leases. The lessee looks almost exclusively to the supplier or manufacturer of the leased goods for warranties and fulfillment of other promises relating to the goods. CASE 21-1 CARTER v. TOKAI FINANCIAL SERVICES, INC. Court of Appeals of Georgia, 1998 231 Ga.App. 755, 500 S.E.2d 638 http://scholar.google.com/scholar_case?case=1919852511859232954&hl=en&as_sdt=2&as_vis=1&oi=scholarr Blackburn, J. Tokai Financial Services, Inc. brought suit against Randy P. Carter for monies owed under Carter’s guaranty of a telephone equipment lease agreement. The trial court granted summary judgment to Tokai, and Carter appeals. * * * On January 3, 1996, Tokai’s predecessor in interest, Mitel Financial, entered into a “Master Equipment Lease Agreement” (Agreement) with Applied Radiological Control, Inc. (ARC) for the lease of certain telephone equipment valued at $42,000. Carter personally guaranteed ARC’s obligations under the Agreement. ARC made four rental payments and then defaulted on its obligations as of June 1, 1996. Thereafter, Tokai repossessed the telephone equipment and sold it for $5,900. * * * Tokai then brought this suit against Carter, and the trial court awarded Tokai $56,765.74. *** Carter contends the Agreement is a “finance agreement” rather than a true lease. * * * As an initial matter, we note that Paragraph 13 of the Agreement states that each lease contemplated therein is a finance lease as defined by Article 2A of the UCC. “A ‘finance lease’ involves three parties—the lessee/business, the finance lessor, and the equipment supplier. The lessee/business selects the equipment and negotiates particularized modifications with the equipment supplier. Instead of purchasing the equipment from the supplier, the lessee/business has a finance lessor purchase the selected equipment, and then leases the equipment from the finance lessor.” [Citation.] Carter contends, nonetheless, that the true intent of the parties was to enter into a security agreement. “Whether a transaction creates a lease or security interest is determined by the facts of each case; however, a transaction creates a security interest if the consideration the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease not subject to termination by the lessee, and (a) [t]he original term of the lease is equal to or greater than the remaining economic life of the goods, (b) [t]he lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the goods, (c) [t]he lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement, or (d) [t]he lessee has an option to become the owner of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement.” [UCC]–201(37). Here, the Agreement’s initial term was for five years, ARC was not required to renew the lease or purchase the telephone equipment at the end of the term, and ARC did not have the option to renew the lease or purchase the property at the end of the term for nominal consideration. Therefore, the Agreement does not fit within the definition of a secured transaction provided by [UCC]1–201(37). Furthermore, “it is commonly held that the ‘best test’ for determining the intent of an agreement which provides for an option to buy is a comparison of the option price with the market value of the equipment at the time the option is to be exercised. Such a comparison shows whether the lessee is paying actual value acquiring the property at a substantially lower price. * * * If, upon compliance with the terms of the ‘lease,’ the lessee has an option to become the owner of the property for no additional or for a nominal consideration, the lease is deemed to be intended for security. [Citations.] ARC was given the option to purchase the telephone equipment in this case at the end of the lease term for its fair market value. “Additional consideration is not nominal if * * * when the option to become the owner of the goods is granted to the lessee the price is stated to be the fair market value of the goods determined at the time the option is to be performed.” [UCC §1–201(37)(x).] Accordingly, the agreement in this case must be considered a true lease, not a secured transaction. As a result, the procedural safeguards of Article 9 of the UCC are inapplicable to the matter at hand, and Carter’s claims under this enumeration must fail. [Citations.] * * * “In Georgia, all lease contracts for ‘goods,’ including finance leases, first made or first effective on or after July 1, 1993, are governed by Article 2A of the Uniform Commercial Code.” [Citations.] The Agreement was entered into by the parties on January 3, 1996; therefore, it is subject to Article 2A of the UCC. * * * * * * Judgment reversed. 21-1d Governing Law The U.C.C. did not directly apply to lease transactions. To fill this void, the Code drafters approved Article 2A-Leases in 1987 and subsequently, in 1990, amended the Article. South Dakota has enacted the 1987 version of Article 2A while the District of Columbia and all the other states except Louisiana have adopted the 1990 version CISG CISG — The United Nations Convention on Contract for the International Sale of Goods (CISG), which has been ratified by the US and more than forty other countries, governs all contracts for the international sales of goods between parties located in different nations that have ratified the CISG. This treaty supercedes the UCC whenever the provisions are different. The CISG includes provisions dealing with interpretation, trade usage, contract formation, obligations and remedies of sellers and buyers, and risk of loss. Parties to a contract can expressly exclude CISG governance from their contract, and certain types of sales, such as personal goods, ships and aircraft, and electricity, are automatically excluded from the CISG. ***Where appropriate, the CISG provisions are given in the text of this instructor’s manual. CASE 21-2 PITTSLEY v. HOUSER Idaho Court of Appeals, 1994 875 P.2d 232 http://scholar.google.com/scholar_case?case=1225385276065420693&hl=en&as_sdt=2&as_vis=1&i=scholarr Swanstrom, J. [Jane Pittsley contracted with Donald Houser, who was doing business as Hilton Contract Co. (Hilton), to install carpet in her home. The total contract price was $4,402. From this sum, Hilton paid the installers $700 to put the carpet in Pittsley’s home. Following installation, Pittsley complained to Hilton that the installation was defective in several respects. Hilton attempted to fix the installation but was unable to satisfy Pittsley. Eventually, Pittsley refused any further efforts to fix the carpet. She sued for rescission of the contract and return of the $3,500 she had previously paid on the contract plus incidental damages. Hilton counterclaimed for the balance due on the contract. The magistrate determined that the breach was not so material as to justify rescission of the contract and awarded Pittsley $250 in repair costs plus $150 in expenses. The magistrate also awarded Hilton the balance of $902 remaining on the contract. Pittsley appealed to the district court, which reversed and remanded the case to the magistrate for additional findings of fact and to apply the Uniform Commercial Code (UCC) to the transaction. Hilton appeals this ruling, asserting that application of the UCC is inappropriate because the only defects alleged were in the installation of the carpet, not in the carpet itself.] The single question upon which this appeal depends is whether the UCC is applicable to the subject transaction. If the underlying transaction involved the sale of “goods,” then the UCC would apply. If the transaction did not involve goods, but rather was for services, then application of the UCC would be erroneous. Idaho Code §2-105(1) defines “goods” as “all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale. * * *” Although there is little dispute that carpets are “goods,” the transaction in this case also involved installation, a service. Such hybrid transactions, involving both goods and services, raise difficult questions about the applicability of the UCC. Two lines of authority have emerged to deal with such situations. The first line of authority, and the majority position, utilizes the “predominant factor” test. The Ninth Circuit, applying the Idaho Uniform Commercial Code to the subject transaction, restated the predominant factor test as: The test for inclusion or exclusion is not whether they are mixed, but, granting that they are mixed, whether their predominant factor, their thrust, their purpose, reasonably stated, is the rendition of service, with goods incidentally involved (e.g., contract with artist for painting) or is a transaction of sale, with labor incidentally involved (e.g., installation of a water heater in a bathroom). [Citations.] This test essentially involves consideration of the contract in its entirety, applying the UCC to the entire contract or not at all. The second line of authority, which Hilton urges us to adopt, allows the contract to be severed into different parts, applying the UCC to the goods involved in the contract, but not to the nongoods involved, including services as well as other nongoods assets and property. Thus, an action focusing on defects or problems with the goods themselves would be covered by the UCC, while a suit based on the service provided or some other nongoods aspect would not be covered by the UCC. * * * We believe the predominant factor test is the more prudent rule. Severing contracts into various parts, attempting to label each as goods or nongoods and applying different law to each separate part clearly contravenes the UCC’s declared purpose “to simplify, clarify and modernize the law governing commercial transactions.” §1-102(2)(a). As the Supreme Court of Tennessee suggested in [citation], such a rule would, in many contexts, present “difficult and in some instances insurmountable problems of proof in segregating assets and determining their respective values at the time of the original contract and at the time of resale, in order to apply two different measures of damages.” Applying the predominant factor test to the case before us, we conclude that the UCC was applicable to the subject transaction. The record indicates that the contract between the parties called for “165 yds Masterpiece No. 2122—Installed” for a price of $4319.50. There was an additional charge for removing the existing carpet. The record indicates that Hilton paid the installers $700 for the work done in laying Pittsley’s carpet. It appears that Pittsley entered into this contract for the purpose of obtaining carpet of a certain quality and color. It does not appear that the installation, either who would provide it or the nature of the work, was a factor in inducing Pittsley to choose Hilton as the carpet supplier. On these facts, we conclude that the sale of the carpet was the predominant factor in the contract, with the installation being merely incidental to the purchase. Therefore, in failing to consider the UCC, the magistrate did not apply the correct legal principles to the facts as found. We must therefore vacate the judgment and remand for further findings of fact and application of the UCC to the subject transaction. *** Chapter Outcome *** Identify and explain the fundamental principles of Article 2 and Article 2A of the Uniform Commercial Code (UCC). 21-2 FUNDAMENTAL PRINCIPLES OF ARTICLE 2 & ARTICLE 2A Leases of personal property are of great economic significance, yet the law governing these transactions was previously patched together from the common law of personal property, real estate leasing law, and the U.C.C. (Articles 2 and 9). No unified or uniform statutory law governed leases of personal property for most of the twentieth century. To fill this void, the drafters of the Code approved Article 2A—Leases in 1987 and subsequently amended the Article in 1990. Article 2A is an attempt to codify in one statute all the rules governing the leasing of personal property. Most states have adopted one of these two versions of Article 2A. Article 2 and Article 2A are intended to modernize, clarify, simplify and make uniform the law of sales and leases while providing the flexibility to expand as unforeseen and new circumstances demand. They are both based on the following concepts: 21-2a Good Faith All parties to a contract or duty under the Code are required to act honestly in their dealings with others. Commercial standards may also be looked to as a measure of whether conduct has met the good faith requirement in the case of merchants. CISG governs the formation of contracts of sales, but not their validity; it promotes good faith. 21-2b Unconscionability A contract or portion of a contract that is regarded as imposing an unfair burden on one of the parties to the point that the court's conscience is offended thereby precluding enforcement. In such cases the court may refuse to enforce the entire contract or it may enforce the contract after excising the unconscionable provision. Note that exculpatory clauses in lease agreements could be mentioned as an example of the application of the unconscionability concept to non-goods transactions. NOTE: See the following case for a discussion of procedural and substantive unconscionability. CASE 21-3 DJ COLEMAN, INC v. NUFARM AMERICAS, INC United States District Court, North Dakota, 2010 693 F.Supp.2d 1055 http://scholar.google.com/scholar_case?case=17211902140509214621&q=DJ+COLEMAN,+INC+V.+NUFARM+AMERICAS,+INC&hl=en&as_sdt=2,10 Hovland, J. The plaintiff, DJ Coleman, Inc. (“DJ Coleman”), is a farm corporation that is incorporated in the State of North Dakota and conducts farming operations in Burleigh County, North Dakota. DJ Coleman’s principal, Clark Coleman, is responsible for DJ Coleman’s commercial farming operations. Clark Coleman is a licensed pesticide purchaser and applicator. The defendant, Nufarm Americas, Inc. (“Nufarm”), is an Illinois corporation. Between May 10, 2007 and May 24, 2007, Clark Coleman planted different varietals of sunflowers. Clark Coleman used preemergent chemicals, Mad Dog®, a generic glyphosate broad-spectrum herbicide, and Spartan®, a herbicide, prior to planting the sunflowers. Between June 21, 2007 and June 24, 2007, Clark Coleman sprayed his post-emergent sunflower crops with a tank mix of Assert®, Scoil®, and Asana®. Nufarm is the manufacturer of Assert® and the wholesale distributor to United Agri Products, Inc. (“UAP”), the direct North Dakota retail seller to Clark Coleman. Clark Coleman did not contact Nufarm for approval before tank mixing Assert®, Scoil®, and Asana® in 2007. DJ Coleman alleges that Assert® caused severe damage to its 2007 sunflower crop by producing stunted and deformed heads, and seeks economic and non-economic damages. * * * Nufarm contends that the Assert® label effectively limits any damages for breach of warranties to either the purchase price or the replacement of the product. Section 41-02-94 of the North Dakota Century Code permits the recovery of consequential damages for injury to property proximately resulting from any breach of warranty. However, Section 41-02-98 of the North Dakota Century Code, which is modeled after Section 2-719 of the Uniform Commercial Code, allows the parties to an agreement to limit the remedies available upon breach and to exclude consequential damages: * * * Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not. * * * The doctrine of unconscionability permits a court to “‘deny enforcement of a contract because of procedural abuses arising out of the contract’s formation and substantive abuses relating to the terms of the contract.’” [Citation.] The determination of whether a contractual provision is unconscionable is a question of law. [Citation.] “The court is to look at the contract from the perspective of the time it was entered into, without the benefit of hindsight. The determination to be made is whether, under the circumstances presented in the particular commercial setting, the terms of the agreement are so one-sided as to be unconscionable.” [Citation.] North Dakota law provides the Court with several options when a contract, or clause of a contract, is found to be unconscionable: 1. If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result. 2. When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose, and effect to aid the court in making the determination. N.D.C.C. § 41-02-19. There is no North Dakota case that addresses whether a limitation of remedies provision is unconscionable for injury resulting from the application of agricultural chemicals. * * * * * * Courts from other jurisdictions vary on whether a limitation of remedies provision is unconscionable in the chemical agriculture business. * * * In order to find that a provision is unconscionable, there must be a showing of both procedural and substantive unconscionability. “‘The concept of unconscionability must necessarily be applied in a flexible manner, taking into consideration all of the facts and circumstances of a particular case.’”[Citation.] (a) Procedural Unconscionability “Procedural unconscionability focuses upon formation of the contract and fairness of the bargaining process, including factors such as inequality of bargaining power, oppression, and unfair surprise.” [Citation.] Courts are more likely to find unconscionability in consumer transactions than in commercial transactions involving experienced parties [Citation.] “Courts’ general skepticism of unconscionability claims in purely commercial transactions stems from the presumption that businessmen possess a greater degree of commercial understanding and substantially stronger economic bargaining power than the ordinary consumer.” [Citation.] Nevertheless, the North Dakota Supreme Court has stated: [G]eneralizations are always subject to exceptions and categorization is rarely an adequate substitution for analysis. With increasing frequency, courts have begun to recognize that experienced but legally unsophisticated businessmen may be unfairly surprised by unconscionable contract terms … and that even large business entities may have relatively little bargaining power, depending on the identity of the other contracting party and the commercial circumstances surrounding the agreement. * * * It is undisputed that DJ Coleman had no bargaining power to alter the language of the limitation of remedies provision. The limitation of remedies provision contained on the Assert® label was pre-printed and was not negotiated. There is a substantial inequality in bargaining power between DJ Coleman and Nufarm. DJ Coleman is a commercial farming operation located in North Dakota, and Nufarm is part of an enormous, highly diversified, and international conglomerate. * * * the facts of this case do not demonstrate an element of unfair surprise. Clark Coleman testified that he used Assert® for ten years prior to 2007. Nonetheless, the evidence reveals that the parties had unequal bargaining power and there was no room for meaningful negotiation. The purchasers of herbicides, regardless of their experience, are not in a position to bargain for more favorable terms than those listed on the pre-printed label, nor are they in a position to test the effectiveness of a herbicide before purchasing it. The fact that Clark Coleman was experienced farmer that had used Assert® crops for ten years should not control whether he is entitled to consequential damages for a breach of warranty. Accordingly, the Court finds that the limitation of remedies provision was procedurally unconscionable. (b) Substantive Unconscionability Substantive unconscionability focuses on the harshness or one-sidedness of the limitation of remedies provision. [Citation.] The Official Comment to Section 2-719 of the Uniform Commercial Code provides: However, it is of the very essence of a sales contact that at least minimum adequate remedies be available. If the parties intend to conclude a contract for sale within this Article they must accept the legal consequence that there be at least a fair quantum of remedy for breach of the obligations or duties outlined in the contract. Thus any clause purporting to modify or limit the remedial provisions of this Article in an unconscionable manner is subject to deletion and in that event the remedies made available by this Article are applicable as if the stricken clause had never existed. The clause at issue here would limit DJ Coleman’s remedy for a breach of an express warranty to the purchase price of Assert® or the replacement of the product. The Court finds that the limitation of remedies provision is substantively unconscionable. “[T]he farmer is required to expend large sums of money before any defect [ ] is noticeable, and once a defect is found an entire year’s crop might be worthless. Once the crop has failed, the farmer’s only recourse is monetary compensation to cover his lost profit and expenditures; replacement and repair are not viable options.” [Citation.] It is clear that the allocation of risk for defective herbicides is better shouldered by the manufacturer of the herbicide, rather than the consumer. The consumer does not have the ability or resources to test its use, but the manufacturer does. The Court finds that the limitation of remedies provision on the Assert® label is unconscionable, both procedurally and substantively and, therefore, unenforceable. Accordingly, damages for a breach of express warranty of fitness for a particular purpose are not limited to the purchase price or replacement of the product. * * * * * * Summary judgment is granted on the Plaintiff’s products liability, negligence, failure to warn, breach of implied warranties, and statutory violation * * * claims. Summary judgment is denied on the Plaintiff’s breach of express warranties claim. 21-2c Expansion of Commercial Practices The Code's policy is to promote commercial transactions and to achieve this result, the Code gives considerable weight to "course of dealing" and "usage of trade" in establishing the meaning of contract provisions. CISG— Parties are bound by usages they have agreed to and any normal usage of trade. 21-2d Sales by and between Merchants The Code establishes different and more stringent rules for transactions involving 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. NOTE: Figure 21-2 lists the most significant merchant rules. 21-2e Liberal Administration of Remedies Code remedies are to be liberally administered in order to place the agreed party in as good a position as if the defaulting party had fully performed. Remedies are discussed further in Chapter 25. 21-2f Freedom of Contract Within certain parameters the parties to a contract may alter the effect of some Code provisions. Good faith, however, is always required. 21-2g Validation and Preservation of Sales Contracts The Code reduces the formal requisites of a valid agreement to the bare minimum and attempts to preserve agreements whenever the parties manifest an intent to enter into a contract. FORMATION OF SALES & LEASE CONTRACTS The Code will strive to recognize a contract if the intent of the parties is consistent with such a conclusion. *** Chapter Outcome *** Compare and contrast the manifestation of mutual assent under both the common law and under Article 2. 21-3 MANIFESTATION OF MUTUAL ASSENT 21-3a Definiteness of an Offer The Code has rejected the strict approach of the common law which required that the terms of a contract must be definite and complete. The Code provides that even though one or more terms to a contract may have been omitted, the contract need not fail for indefiniteness. The Code provides rules, where the parties do not agree, as to the terms of payment, duration, and the particulars of performance. CISG — offer is definite if it defines the goods and fixes the price or makes provision to do so. Open Price — If no price is stated in the agreement, the price is a reasonable price. Open Delivery – Must be reasonable; is place of seller’s business unless otherwise agreed. Open Quantity: Output and Requirement Contracts — An output contract is the agreement to purchase the entire output of a seller for a stated period, and a requirements contract is an agreement to supply a buyer with all her requirements of certain goods. Enforceable based on good faith of both parties. Other Open Terms – Provided by the Code if the parties do not agree. 21-3b Irrevocable Offers An offeror may generally withdraw (or revoke) her offer at any time before it is accepted. To be effective, the notice revoking the offer must reach the offeree before he has accepted. An option is a contract by which the offeror is bound to hold an offer open for a specified period of time; requires consideration, but can apply to all types of contracts, including sales of goods. Firm offers are irrevocable without requiring consideration. A merchant must keep an offer open for up to three months if the merchant gives assurance in a signed writing that it will be held open. CISG — offer may not be revoked if it indicates that it is irrevocable; it need not be in writing. 21-3c Variant Acceptances The Code does not follow the common law mirror image rule regarding acceptances. Under the common law rule where two businesses exchange pre-printed forms with varying terms no contract exists, even if the parties intend that there be a contract. The Code addresses this battle of the forms problem by focusing on the intent of the parties. As to merchants, additional terms (those proposed by the offeree) become part of the contract if they do not materially alter the agreement and are not objected to by the other party. The courts are divided over how to handle different, conflicting, terms. CISG — “acceptance” with modifications is a counteroffer that rejects the offer; an acceptance that adds terms which do not materially change the offer is valid unless the offeror objects. NOTE: See Figure 21-3, Battle of the Forms. CASE 21-4 COMMERCE & INDUSTRY INSURANCE COMPANY v. BAYER CORPORATION Supreme Judicial Court of Massachusetts, 2001 433 Mass. 388, 742 N.E.2d 567, 44 U.C.C. Rep.Serv.2d 50 http://scholar.google.com/scholar_case?case=8104304470024394019&q=742+N.E.2d+567&hl=en&as_sdt=2,10 Greaney, J. We granted the application for direct appellate review of the defendant, Bayer Corporation (Bayer), to determine the enforceability of an arbitration provision appearing in the plaintiff’s, Malden Mills Industries, Inc. (Malden Mills), orders purchasing materials from Bayer. In a written decision, a judge in the Superior Court concluded that the provision was not enforceable. * * * We affirm the order. The background of the case is as follows. Malden Mills manufactures internationally-known apparel fabrics and other textiles. On December 11, 1995, an explosion and fire destroyed several Malden Mills’s buildings at its manufacturing facility. Subsequently, Malden Mills and its property insurers, the plaintiffs Commerce and Industry Insurance Company and Federal Insurance Company, commenced suit in the Superior Court against numerous defendants, including Bayer. In their complaint, the plaintiffs allege, insofar as relevant here, that the cause of the fire was the ignition, by static electrical discharge, of nylon tow (also known as bulk nylon fiber), which was sold by Bayer (but manufactured by a French business entity) to Malden Mills. * * * Malden Mills initiated purchases of nylon tow from Bayer either by sending its standard form purchase order to Bayer, or by placing a telephone order to Bayer, followed by a standard form purchase order. Each of Malden Mills’s purchase orders contained, on the reverse side, as one of its “terms and conditions,” an arbitration provision stating: Any controversy arising out of or relating to this contract shall be settled by arbitration in the City of New York or Boston as [Malden Mills] shall determine in accordance with the Rules then obtaining of the American Arbitration Association or the General Arbitration Council of the Textile Industry, as [Malden Mills] shall determine. Another “term and condition” appearing in paragraph one on the reverse side of each purchase order provides: This purchase order represents the entire agreement between both parties, not withstanding any Seller’s order form, * * *, and this document cannot be modified except in writing and signed by an authorized representative of the buyer. In response, Bayer transmitted Malden Mills’s purchase orders to the manufacturer with instructions, in most instances, that the nylon tow was to be shipped directly to Malden Mills. Thereafter, Bayer prepared and sent Malden Mills an invoice. Each of the Bayer invoices contained the following language on its face, located at the bottom of the form in capital letters: TERMS AND CONDITIONS: NOTWITHSTANDING ANY CONTRARY OR INCONSISTENT CONDITIONS THAT MAY BE EMBODIED IN YOUR PURCHASE ORDER, YOUR ORDER IS ACCEPTED SUBJECT TO THE PRICES, TERMS AND CONDITIONS OF THE MUTUALLY EXECUTED CONTRACT BETWEEN US, OR, IF NO SUCH CONTRACT EXISTS, YOUR ORDER IS ACCEPTED SUBJECT TO OUR REGULAR SCHEDULED PRICE AND TERMS IN EFFECT AT TIME OF SHIPMENT AND SUBJECT TO THE TERMS AND CONDITIONS PRINTED ON THE REVERSE SIDE HEREOF. The following “condition” appears in paragraph fourteen on the reverse side of each invoice: This document is not an Expression of Acceptance or a Confirmation document as contemplated in Section 2–207 of the Uniform Commercial Code. The acceptance of any order entered by [Malden Mills] is expressly conditioned on [Malden Mills’s] assent to any additional or conflicting terms contained herein. Malden Mills usually remitted payment to Bayer within thirty days of receiving an invoice. Based on the arbitration provision in Malden Mills’s purchase orders, Bayer demanded that Malden Mills arbitrate its claims against Bayer. After Malden Mills refused, Bayer moved to compel arbitration and to stay the litigation against it. The judge denied Bayer’s motion, concluding, under §2–207 of * * * the Massachusetts enactment of the Uniform Commercial Code, that the parties’ conduct, as opposed to their writings, established a contract. As to whether the arbitration provision was an enforceable term of the parties’ contract, the judge concluded that subsection (3) of §2-207 governed, and, pursuant thereto, the arbitration provision was not enforceable because the parties had not agreed in their writings to arbitrate. * * * This case presents a dispute arising from what has been styled a typical “battle of the forms” sale, in which a buyer and a seller each attempt to consummate a commercial transaction through the exchange of self-serving preprinted forms that clash, and contradict each other, on both material and minor terms. [Citation.] Here, Malden Mills’s form, a purchase order, contains an arbitration provision, and Bayer’s form, a seller’s invoice, is silent on how the parties will resolve any disputes. Oddly enough, the buyer, Malden Mills, the party proposing the arbitration provision, and its insurers, now seek to avoid an arbitral forum. Section 2–207 was enacted with the expectation of creating an orderly mechanism to resolve commercial disputes resulting from a “battle of the forms.” The section has been characterized as “an amphibious tank that was originally designed to fight in the swamps, but was sent to fight in the desert.” [Citation.] Section 2–207 sets forth rules and principles concerning contract formation and the procedures for determining the terms of a contract. As to contract formation, under §2–207, there are essentially three ways by which a contract may be formed. [Citation.] “First, if the parties exchange forms with divergent terms, yet the seller’s invoice does not state that its acceptance is made ‘expressly conditional’ on the buyer’s assent to any additional or different terms in the invoice, a contract is formed [under subsection (1) of §2–207].” “Second, if the seller does make its acceptance ‘expressly conditional’ on the buyer’s assent to any additional or divergent terms in the seller’s invoice, the invoice is merely a counteroffer, and a contract is formed [under subsection (1) of §2–207] only when the buyer expresses its affirmative acceptance of the seller’s counteroffer.” Third, “where for any reason the exchange of forms does not result in contract formation (e.g., the buyer ‘expressly limits acceptance to the terms of [its offer]’ under §2–207(2)(a), or the buyer does not accept the seller’s counteroffer under the second clause of §2–207[1]), a contract nonetheless is formed [under subsection (3) of §2–207] if their subsequent conduct—for instance, the seller ships and the buyer accepts the goods—demonstrates that the parties believed that a binding agreement had been formed.” Bayer correctly concedes that its contract with Malden Mills resulted from the parties’ conduct, and, thus, was formed pursuant to subsection (3) of §2–207. A contract never came into being under subsection (1) of §2–207 because (1) paragraph fourteen on the reverse side of Bayer’s invoices expressly conditioned acceptance on Malden Mills’s assent to “additional or different” terms, and (2) Malden Mills never expressed “affirmative acceptance” of any of Bayer’s invoices. In addition, the exchange of forms between Malden Mills and Bayer did not result in a contract because Malden Mills, by means of language in paragraph one of its purchase orders, expressly limited Bayer’s acceptance to the terms of Malden Mills’s offers. [Citation.] * * * * * * Where a contract is formed by the parties’ conduct (as opposed to writings), as is the case here, the terms of the contract are determined exclusively by subsection (3) of §2–207. [Citation.] Under subsection (3) of §2–207, “the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this chapter.” §2–207 (3). In this respect, one commentator has aptly referred to subsection (3) of §2–207 as the “fall-back” rule. [Citation.] Under this rule, the Code accepts “common terms but rejects all the rest.” While this approach “serves to leave many matters uncovered,” terms may be filled by “recourse to usages of trade or course of dealing under [§]1–205 or, perhaps, the gap filling provisions of [§§]2–300s.” [Citation.] * * * Thus, the judge correctly concluded, under subsection (3) of §2–207, that the arbitration provision in Malden Mills’s purchase orders did not become a term of the parties’ contract. The arbitration provision was not common to both Malden Mills’s purchase orders and Bayer’s invoices. Bayer properly does not argue that any of the gap-filling provisions of [the UCC] apply. Because Bayer concedes that it never previously arbitrated a dispute with Malden Mills, we reject Bayer’s claim that the parties’ course of dealing requires us to enforce the arbitration provision. * * * Bayer may be right that the drafters of the Massachusetts version of the Code did not intend that §2–207 should provide “an avenue for a party to strike the terms of its own purchase documents.” Bayer, however, cannot ignore the fact that the use of its own boilerplate invoices contributed to the result that Bayer now finds problematic.* * * The order denying the motion to compel arbitration and to stay litigation is affirmed. 21-3d Manner of Acceptance Unless clearly specified by the offer an acceptance may be by any reasonable means, as opposed to the common law's authorized means of acceptance. For example, an offer to purchase goods may be accepted by shipment. 21-3e Auctions Unless an auction is explicitly advertised as without reserve, the items being sold cannot be withdrawn unless no bid is made. In a with reserve auction, goods may be withdrawn up until the sale is final. CISG does not apply to sales by auctions. *** Chapter Outcome *** Determine how Article 2 deals with (1) the necessity of consideration to modify a contract and (2) irrevocable offers. 21-4 CONSIDERATION The Code does not follow the common law principle requiring that contract modifications be accompanied by separate consideration. CISG — Consideration is not needed to modify a contract. *** Chapter Outcome *** Describe the UCC’s approach to the requirement that certain contracts must be in writing and the alternative methods of compliance under the Code. 21-5 FORM OF THE CONTRACT 21-5a Statute of Frauds The original statute of frauds, which applied to contracts for the sale of goods, has been used as a prototype for the Article 2 statute of frauds provision. Section 2–201 of the Code provides that a contract for the sale of goods costing $500 or more is not enforceable unless there is some writing or record sufficient to evidence the existence of a contract between the parties ($1,000 or more for leases, Section 2A–201). As previously discussed in Chapter 15, forty-seven States have adopted the Uniform Electronic Transactions Act (UETA), which gives full effect to contracts formed by electronic records and signatures. The Act applies to contracts governed by Articles 2 and 2A. In addition, Congress in 2000 enacted the Electronic Signatures in Global and National Commerce (E-Sign). The Act, which uses language very similar to that of UETA, makes electronic records and signatures valid and enforceable across the United States for many types of transactions in or affecting interstate or foreign commerce. CISG — A contract must be in writing unless one of the parties has its business located in a country that requires otherwise. Modification of Contracts — An agreement modifying a contract must be in writing or electronic record if the resulting contract is within the statute of frauds. Writings or Record — The statute of frauds compliance provisions under the Code are more liberal than the rules of general contract law. The Code merely requires a writing or record (1) sufficient to indicate that a contract has been made between the parties; (2) signed by the party against whom enforcement is sought or by her authorized agent or broker; and (3) including a term specifying the quantity. A writing or record may be sufficient even if it omits or incorrectly states a term. Under the Code the term "signature" is liberally interpreted. Between merchants, a written confirmation of an oral agreement is sufficient against the recipient of it unless the recipient gives written notice of objection within ten days after receipt. This means that if these requirements have been met, the recipient of the writing or record is in the same position he would have assumed by signing it; and the confirmation, therefore, is enforceable against him. Exceptions — The Code permits enforcement against a party who in his pleading, testimony, or otherwise in court admits that a contract was made. It permits enforcement of an oral contract for specifically manufactured goods where the goods are not readily marketable and where there has been a substantial beginning on their manufacture or where there have been commitments for procurement made by the manufacturer. Enforcement of an oral contract is also possible where a contract has been performed. Under the Code, delivery and acceptance of part of the goods or payment of part of the price and acceptance of the payment validates the contract only for the goods that have been delivered and accepted or for which payment has been accepted. 21-5b Parol Evidence Contractual terms that are set forth in a writing intended by the parties as a final expression of their agreement may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement, but they may be explained or supplemented by course of performance, course of dealing, usage of trade, or by consistent additional evidence. See UCC 2-202. CISG — permits a court to consider all relevant evidence, including negotiations, course of performance, trade usages and any subsequent conduct. NOTE: See Figure 21-4, Contract Law Compared with Law of Sales. Chapter 22 PERFORMANCE Performance by the Seller [22-1] Time and Manner of Tender [22-1a] Place of Tender [22-1b] Shipment Contracts Destination Contracts Goods Held by Bailee Perfect Tender Rule [22-1c] Agreement Between the Parties Cure by the Seller Installment Contracts Performance by the Buyer [22-2] Rejection [22-2b] Acceptance [22-2c] Revocation of Acceptance [22-2d] Obligation of Payment [22-2e] Obligations of Both Parties [22-3] Casualty to Identified Goods [22-3a] Nonhappening of Presupposed Condition [22-3b] Substituted Performance [22-3c] Right to Adequate Assurance of Performance [22-3d] Right to Cooperation [22-3e] Anticipatory Repudiation [22-3f] Cases in This Chapter Wilson v. Scampoli Furlong v. Alpha Chi Omega Sorority Waddell v, L.V.R.V Inc. Donald R. Hessler v. Crystal Lake Chrysler-Plymouth, Inc Chapter Outcomes After reading and studying this chapter, the student should be able to: • Explain the requirements of tender of delivery with respect to time, manner, and place of delivery. • Explain the perfect tender rule and the three limitations on it. • Explain when the buyer has the right to reject the goods and what obligations the buyer has upon rejection. • Explain what constitutes acceptance by the buyer and the buyer’s right to revoke acceptance. • Identify and describe the excuses for nonperformance and the Uniform Commercial Code’s provisions for protecting the parties’ expectations of performance by the other party. TEACHING NOTES Performance is the carrying out of a contract’s obligations according to its terms. The basic obligation of the seller in a contract for the sale of goods is to transfer and deliver the goods in a way that conforms to the terms of contract. The basic obligation of the buyer is to accept and pay for these goods in accordance with the contract. Tender (offer) of performance by one party obligates the other party to perform. Tender is an offer by one party, who is ready, willing, and able to perform his obligation to the other party, according to the terms of the contract. Specific obligations of the parties are determined by their contractual agreement. 22-1 PERFORMANCE BY THE SELLER Tender of conforming goods by the seller entitles him to acceptance of them by the buyer and to payment of the contractually agreed-upon price. Tender of delivery occurs when the seller obtains and holds conforming goods, makes them available to the buyer and gives buyer reasonable notification and opportunity to take delivery. CISG — seller must deliver the goods, related documents and transfer the interest in the goods. *** Chapter Outcome *** Explain the requirements of tender of delivery with respect to time, manner, and place of delivery. 22-1a Time and Manner of Tender Tender must be made at a reasonable time and be kept open for a reasonable period to enable the buyer to take possession. CISG — fixed date - must deliver on that date; no fixed date - must deliver in a reasonable time 22-1b Place of Tender If the contract does not specify the place for delivery of the goods, the place for delivery is the seller’s place of business, or, if he has no place of business, his residence. If the goods are not located at either the seller’s place of business or his residence, the location of the goods is then the place for delivery. CISG — unless required otherwise, seller must make goods available at the seller’s place of business; if both parties know the goods are somewhere else, they must be made available to the buyer at that other place. Delivery terms can be used to specify whether the contract is a shipment or destination contract and determine the place where the seller must tender delivery of the goods. Shipment Contracts — The delivery terms F.O.B. place of shipment, F.A.S. seller’s port, C.I.F., and C. & F. are all shipment contracts. The seller’s performance tender takes place at the shipment location, because the contract does not obligate her to deliver them at a particular destination. CISG — unless required to deliver goods himself, seller’s obligation is to deliver goods to the first carrier for delivery to the buyer. Destination Contracts — The delivery terms F.O.B. city of buyer, ex-ship, and no arrival, no sale are destination contracts. Since a destination contract requires the seller to tender delivery of conforming goods at a specified destination, the seller must make the goods available to the buyer and give him reasonable notice to take delivery. Goods Held by Bailee — Where goods are held by a bailee and are to be delivered without being moved, delivery occurs with tender of a title document or acknowledgment by bailee that the buyer has a right of possession. NOTE: See Figure 22—1 for a summary of the performance by the seller. 22-1c Perfect Tender Rule The Code’s perfect tender rule obligates the seller to conform her tender of goods exactly to the requirements of the contract. If either the tender of delivery or the goods fail in any respect to conform to the contract, the buyer may (1) reject the whole lot, (2) accept the whole lot anyway, or (3) accept any number of commercial units and reject the rest. CISG — does not follow the perfect tender rule; buyer may avoid contract if seller commits an unforeseeable, fundamental breach, substantially depriving buyer of what he is entitled to. *** Chapter Outcome *** Explain the perfect tender rule and the three limitations on it. There are three basic limitations on the perfect tender rule: 1. Agreement by the Parties —Parties may expressly limit application of the perfect tender rule. 2. Cure by the Seller — The seller may cure or correct a nonconforming tender of goods: a) if the original performance deadline has not elapsed, or b) if the seller reasonably expected that the nonconforming goods would be acceptable. Seller must reasonably notify buyer of intent to cure. CISG — seller may cure deficiency before delivery due date, if it does not inconvenience buyer; buyer may still claim damages. Buyer may extend deadline for seller to cure deficiency, but still may have damages for delay. If seller does not deliver on time, buyer may avoid contract. Seller may cure deficiency even after the due date if it does not cause unreasonable delay for buyer. 3. Installment Contracts — Installment contracts provide that the goods be delivered in lots. Payment may be demanded for each installment if the price can be apportioned accordingly. Separate lots may be rejected if the goods are nonconforming so as to substantially impair the installment’s value and cannot be cured. If the nonconformity or default of one or more the installment substantially impairs the value of the whole contract, the buyer can treat it as a breach of the whole contract. CISG — seller’s failure on any installment causes a breach for that installment. If one installment affects future or past installments, buyer may declare whole contract avoided. CASE 22-1 WILSON v. SCAMPOLI United States Court of Appeals, District of Columbia Circuit, 1967 228 A.2d 848 http://scholar.google.com/scholar_case?q=228+A.2d+848&hl=en&as_sdt=2,34&case=8847954677255207423&scilh=0 Myers, J. This is an appeal from an order of the trial court granting rescission of a sales contract for a color television set and directing the return of the purchase price plus interest and costs. Appellee [Wilson] purchased the set in question on November 4, 1965, paying the total purchase price in cash. The transaction was evidenced by a sales ticket showing the price paid and guaranteeing ninety days’ free service and replacement of any defective tube and parts for a period of one year. Two days after purchase the set was delivered. * * * When the set was turned on, however, it did not function properly, the picture having a reddish tinge. Appellant’s [Scampoli’s] delivery man advised the buyer’s daughter, Mrs. Kolley, that it was not his duty to tune in or adjust the color but that a service representative would shortly call at her house for that purpose. After the departure of the delivery men, Mrs. Kolley unplugged the set and did not use it. On November 8, 1965, a service representative arrived, and after spending an hour in an effort to eliminate the red cast from the picture advised Mrs. Kolley that he would have to remove the chassis from the cabinet and take it to the shop as he could not determine the cause of the difficulty from his examination at the house. He also made a written memorandum of his service call, noting that the television “Needs Shop Work (Red Screen).” Mrs. Kolley refused to allow the chassis to be removed, asserting she did not want a “repaired” set but another “brand new” set. Later she demanded the return of the purchase price, although retaining the set. Appellant refused to refund the purchase price, but renewed his offer to adjust, repair, or if the set could not be made to function properly, to replace it. Ultimately, appellee instituted this suit against appellant seeking a refund of the purchase price. After a trial, the court ruled that “under the facts and circumstances the complaint is justified. Under the equity powers of the Court I will order the parties put back in their original status, let the $675 be returned, and the set returned to the defendant.” Appellant * * * contends the trial judge erred in holding that rescission here was appropriate. He argues that he was always willing to comply with the terms of the sale either by correcting the malfunction by minor repairs or, in the event the set could not be made thereby properly operative, by replacement; that as he was denied the opportunity to try to correct the difficulty, he did not breach the contract of sale or any warranty thereunder, expressed or implied. [UCC §] 2–508 provides: (1) Where any tender or delivery by the seller is rejected because non-conforming and the time for performance has not yet expired, the seller may seasonably notify the buyer of his intention to cure and may then within the contract time make a conforming delivery. (2) Where the buyer rejects a non-conforming tender which the seller had reasonable grounds to believe would be acceptable with or without money allowance the seller may if he seasonably notifies the buyer have a further reasonable time to substitute a conforming tender. A retail dealer would certainly expect and have reasonable grounds to believe that merchandise like color television sets, new and delivered as crated at the factory, would be acceptable as delivered and that, if defective in some way, he would have the right to substitute a conforming tender. The question then resolves itself to whether the dealer may conform his tender by adjustment or minor repair or whether he must conform by substituting brand new merchandise. The problem seems to be one of first impression. * * * * * * While these cases provide no mandate to require the buyer to accept patchwork goods or substantially repaired articles in lieu of flawless merchandise, they do indicate that minor repairs or reasonable adjustments are frequently the means by which an imperfect tender may be cured. In discussing the analogous question of defective title, it has been stated that: The seller, then, should be able to cure [the defect] under subsection 2–508(2) in those cases in which he can do so without subjecting the buyer to any great inconvenience, risk, or loss. [Citations.] Removal of a television chassis for a short period of time in order to determine the cause of color malfunction and ascertain the extent of adjustment or correction needed to effect full operational efficiency presents no great inconvenience to the buyer. In the instant case, [Appellant’s] expert witness testified that this was not infrequently necessary with new televisions. Should the set be defective in workmanship or parts, the loss would be upon the manufacturer who warranted it free from mechanical defect. Here the adamant refusal of Mrs. Kolley * * * to allow inspection essential to the determination of the cause of the excessive red tinge to the picture defeated any effort by the seller to provide timely repair or even replacement of the set if the difficulty could not be corrected. The cause of the defect might have been minor and easily adjusted or it may have been substantial and required replacement by another new set—but the seller was never given an adequate opportunity to make a determination. We do not hold that appellant has no liability to appellee, but as he was denied access and a reasonable opportunity to repair, appellee has not shown a breach of warranty entitling him either to a brand new set or to rescission. We therefore reverse the judgment of the trial court granting rescission and directing the return of the purchase price of the set. Reversed. 22-2 PERFORMANCE BY THE BUYER A buyer is required to accept conforming goods and to pay for them according to the contract terms, but is not required to accept a tender or delivery of nonconforming goods. CISG — buyer must pay the price and take delivery of the goods per the contract. 22-2a Inspection Usually, the buyer has a right to inspect the goods before payment or acceptance, in order to determine whether the goods conform to the contract. The inspection must be within a reasonable time. CISG — buyer is not bound to pay until he has had time to inspect goods (as short a time as is reasonable), unless otherwise agreed. Buyer must promptly give notice of any nonconformity. *** Chapter Outcome *** Explain when the buyer has the right to reject the goods and what obligations the buyer has upon rejection. 22-2b Rejection Rejection is a manifestation by the buyer of unwillingness to accept goods. Rejection of nonconforming goods or tender is rightful under the perfect tender rule; it must be made in a reasonable time after the goods have been tendered or delivered and is not effective unless the buyer reasonably notifies seller. If the defect which causes a buyer to reject goods is curable, the buyer must either tell the seller the nature of the defect or she may not use the defect as an excuse for rejecting the goods. CISG — buyer may require delivery of substitute goods if delivered goods do not conform. CASE 22-2 FURLONG v. ALPHA CHI OMEGA SORORITY Bowling Green County Municipal Court, 1993 73 Ohio Misc.2d 26, 657 N.E.2d 866 http://scholar.google.com/scholar_case?case=13710936984230391946&q=657+N.E.2d+866&hl=en&as_sdt=2,34 Bachman, J. [Alpha Chi Omega (AXO) entered into an oral contract with Furlong to buy 168 “custom designed” sweaters for the Midnight Masquerade III. The purchase price of $3,612 was to be paid as follows: $2,000 down payment when the contract was made and $1,612; upon delivery. During phone conversations with Furlong, Emily, the AXO social chairperson, described the design to be imprinted on the sweater. She also specified the colors to be used in the lettering (hunter green on top of maroon outlined in navy blue) and the color of the mask design (hunter green). Furlong promised to have a third party imprint the sweaters as specified. Furlong later sent to Emily a sweater with maroon letters to show her the color. He then sent her a fax illustrating the sweater design with arrows indicating where each of the three colors was to appear. On the day before delivery was due, Argento, Furlong’s supplier, requested design changes which Furlong approved without the consent of AXO. These changes included: deleting the navy blue outline, reducing the number of colors from three to two, changing the maroon lettering to red, and changing the color of the masks from hunter green to red. Upon delivery, AXO gave a check to Furlong’s agent for the balance of the purchase price. Later that day, Emily inspected the sweaters and screamed her dismay at the design changes. AXO immediately stopped payment on the check. Amy, the president of AXO, phoned Furlong stating that the sweaters were not what AXO had ordered. She gave the specifics as to why the sweaters were not as ordered and offered to return them. Furlong refused but offered to reduce the unit price of the sweaters if AXO agreed to accept them. AXO refused this offer. Furlong then filed suit against AXO for the unpaid portion of the sweaters’ purchase price ($1,612) and AXO counterclaimed for return of the down payment ($2,000).] * * * Furlong and Emily created an express warranty by * * * affirmation of fact (his initial phone calls); by sample (the maroon sweater); by description (the fax). This express warranty became part of the contract. Each of the three methods of showing the express warranty was not in conflict with the other two methods, and thus they are consistent and cumulative [UCC §2–317], and constitute the warranty. The design was a “dickered” aspect of the individual bargain and went clearly to the essence of that bargain [UCC §2–313]. Thus, the express warranty was that the sweaters would be in accordance with the above design (including types of colors for the letters and the mask, and the number of colors for the same). Further, the express warranty became part of the contract. * * * Furlong’s obligation as the seller was to transfer and deliver the goods in accordance with the contract. AXO’s obligation was to accept and pay in accordance with that contract [UCC §2–301]. * * * * * * The sweaters did not conform to the contract (specifically, the express warranty in the contract). Thus (in the words of the statute), the sweaters did “fail in any respect to conform to the contract.” Actually, the sweaters failed in at least five respects [UCC §2–601]. * * * they were a nonconforming tender of goods [UCC §2–601]. * * * AXO, as the buyer, had the right to inspect the boxes of sweaters before payment or acceptance [UCC §2–513]. AXO did so at a reasonable time and place, and in a reasonable manner, on the same day that Furlong had sent the sweaters and AXO had received them [UCC §2–513]. AXO’s purpose of inspection had (in the words of the statute) “to do with the buyer’s check-up on whether the seller’s performance is in accordance with a contract previously made. * * *” (Official Comment 9 to UCC §2–513.) * * * According to the statute, “if the goods * * * fail in any respect to conform to the contract, the buyer may: (A) reject the whole * * * [.]” [UCC §2–601]. As concluded above, the sweaters were nonconforming goods. Therefore, Furlong breached the contract, and AXO had the right to reject the goods (sweaters). * * * One [section of the] statute provides: “Rejection of goods must be within a reasonable time after their delivery. * * * It is ineffective unless the buyer seasonably notifies the seller.” [UCC §2–602(1)]. AXO did what this statute requires. * * * Thus, AXO never had an acceptance of the sweaters (as the term “acceptance” is legally defined) [UCC §2–606]. That is, AXO never did any of the following (per the statute): (1) signified to Furlong that the sweaters were conforming or that AXO would take or retain the sweaters in spite of their non-conformity; (2) failed to make an effective rejection of the sweaters; (3) did any act inconsistent with Furlong’s ownership. [UCC §2–606.] * * * As concluded above, AXO rightfully rejected the sweaters, after having paid part of the purchase price: namely $2,000. AXO is entitled to cancel the contract and to recover the partial payment of the purchase price [UCC §2– 711]. *** Chapter Outcome *** Explain what constitutes acceptance by the buyer and the buyer’s right to revoke acceptance. 22-2c Acceptance Acceptance of goods means a willingness by the buyer to become the owner of the goods tendered or delivered to him by the seller. Acceptance occurs when the buyer, after a reasonable opportunity to inspect the goods (1) signifies to the seller that the goods conform to the contract, (2) signifies to the seller that he will take the goods or retain them in spite of their nonconformity to the contract, or (3) fails to make an effective rejection of the goods. 22-2d Revocation of Acceptance A buyer may revoke acceptance of defective goods if the nonconformity substantially impairs the value of the goods to him and if either the buyer reasonably expected the seller to correct the defect or if the defect was difficult to discover, and therefore was not discovered during inspection. Revocation gives buyer the same rights and duties as if he had rejected the goods, and is effective when notification is given to seller. CASE 22-3 WADDELL v. L.V.R.V. INC. Supreme Court of Nevada, 2006 125 P.3d 1160 http://scholar.google.com/scholar_case?q=125+P.3D+1160+&hl=en&as_sdt=2,34&case=13475809545477317507&scilh=0 Gibbons, J. L.V.R.V. Inc., D/B/A [doing business as] Wheeler’s Las Vegas RV (Wheeler’s) sold a 1996 Coachmen Santara motor home (the RV) to * * * Arthur R. Waddell and Roswitha M. Waddell (the Waddells). * * * * * * * * * Before they took possession of the RV, the Waddells requested that Wheeler’s perform various repairs. The Waddells’ request included a service on the RV’s engine cooling system, new batteries, and alignment of the door frames. Wheeler’s told Arthur Waddell that the repairs had been performed as requested. The Waddells took delivery of the RV on September 1, 1997. The Waddells first noticed a problem with the RV’s engine shortly after they took possession of it. They drove the RV from Las Vegas to Hemet, California. On the return trip, the RV’s engine overheated while ascending a moderate grade to such a degree that Mr. Waddell had to pull over to the side of the road and wait for the engine to cool down. When the Waddells returned from California, they took the RV back to Wheeler’s for repairs. Despite Wheeler’s attempts to repair the RV, the Waddells continually experienced more problems with the RV, including further episodes of engine overheating. Between September 1997 and March 1999, Wheeler’s service department spent a total of seven months during different periods of time attempting to repair the RV. On June 9, 2000, the Waddells filed a complaint in district court seeking both equitable relief and money damages. * * * * * * The district court concluded that the RV’s nonconformities substantially impaired its value to the Waddells. The district court allowed the Waddells to revoke their acceptance of the RV. * * * [U.C.C. §2–608(1)] provides that a buyer may revoke his acceptance if the item suffers from a “nonconformity [that] substantially impairs its value to him” and (a) the buyer accepted the goods on the understanding that the seller would cure the nonconformity or (b) the buyer was unaware of the nonconformity and the nonconformity was concealed by the difficulty of discovery or by the seller’s assurances that the good was conforming. * * * The Supreme Court of Oregon has established a two-part test to determine whether a nonconformity, under the totality of the circumstances, substantially impairs the value of the goods to the buyer. The test has both an objective and a subjective prong: Since [the statute] provides that the buyer may revoke acceptance of goods “whose nonconformity substantially impairs its value to him,’ the value of conforming goods to the plaintiff must first be determined. This is a subjective question in the sense that it calls for a consideration of the needs and circumstances of the plaintiff who seeks to revoke; not the needs and circumstances of an average buyer. The second inquiry is whether the nonconformity in fact substantially impairs the value of the goods to the buyer, having in mind his particular needs. This is an objective question in the sense that it calls for evidence of something more than plaintiff’s assertion that the nonconformity impaired the value to him; it requires evidence from which it can be inferred that plaintiff’s needs were not met because of the nonconformity. [Citation.] * * * [W]e adopt the Supreme Court of Oregon’s two-part test for determining whether a nonconformity substantially affects the good’s value to the buyer under [U.C.C. §2–608(1)]. * * * Mr. Waddell’s testimony demonstrates that the RV’s subjective value to the Waddells was based on their ability to spend two or three years driving the RV around the country. Thus, we must consider whether the RV’s nonconformities substantially impaired the value of the RV based on the Waddells’ particular needs. Mr. Waddell testified that as a result of the RV’s defects, he and his wife were unable to enjoy the RV as they had intended. Mr. Waddell further testified that the RV’s engine would overheat within ten miles of embarking if the travel included any climbing. As a result of the overheating, the Waddells were forced to park on the side of the road and wait for the engine to cool down before continuing. Consequently, the RV spent a total of 213 days, or seven months and one day, at Wheeler’s service department during the eighteen months immediately following the purchase. This testimony is sufficient to demonstrate an objective, substantial impairment of value. * * * Accordingly, we conclude that substantial evidence exists to support revocation of acceptance under [U.C.C. §2–608(1)]. Wheeler’s argues that the Waddells should not have been allowed to revoke their acceptance because they did not attempt to revoke within a reasonable time after purchasing the RV. We disagree. Under [U.C.C. §2–608(2)], “revocation of acceptance must occur within a reasonable time after the buyer discovers or should have discovered the ground for it and before any substantial change in condition of the goods which is not caused by their own defects.” * * * * * * The seller of nonconforming goods must generally receive an opportunity to cure the nonconformity before the buyer may revoke his acceptance. * * * Furthermore, the seller’s attempts to cure do not count against the buyer regarding timely revocation. * * * The Waddells gave Wheeler’s several opportunities to repair the defects before revoking their acceptance. Because Wheeler’s was unable to repair the defects after a total of seven months, the Waddells were entitled to say “that’s all” and revoke their acceptance, notwithstanding Wheeler’s good-faith attempts to repair the RV. * * * 22-2e Obligation of Payment Unless otherwise agreed, payment is due at the time and place the buyer is to receive the goods, even if the place of shipment is the place of delivery. This rule allows the buyer the right to inspect the goods before paying for them. CISG — Unless required otherwise, the buyer must pay for goods when they or their controlling documents are made available; payment place is either at the seller’s business or at the place where the goods or documents are transferred to the buyer. NOTE: For a summary of performance by the buyer, see Figure 22-2 in the text. 22-3 OBLIGATIONS OF BOTH PARTIES *** Chapter Outcome *** Identify and discuss the excuses for nonperformance and the Uniform Commercial Code’s provisions for protecting the parties’ expectations of performance by the other party. Sometimes the performance obligations of one or both parties may be excused, such as if one party defaults or if the goods which are the subject of the contract are somehow destroyed. The Code contains three sections that address the situations which may excuse performance. 22-3a Casualty to Identified Goods If goods are destroyed: • before an offer is accepted, the offer is terminated • after the offer is accepted, the rules for the passage of risk of loss usually apply Only exception: if the contract is for already identified goods, and these goods are totally lost or damaged, without fault of either party and before the risk of loss passes to the buyer, the contract is avoided and each party is excused from his performance obligation under the contract. In the case of a partial destruction or a deterioration of the goods, the buyer has the option to avoid the contract or to accept the goods with due allowance from the contract price. This allowance or deduction should be sufficient to account for the deterioration or deficiency in quantity. 22-3b Nonhappening of Presupposed Condition Although increased costs may not be relied upon to avoid a contract obligation, the non-happening of a condition which was understood and assumed by both parties when the contract was formed will excuse the seller's performance. This is like the common law impossibility of performance but governed under the more liberal Code standard of commercial impracticability. The Code will excuse performance that, though not impossible, is commercially impracticable (more than inconvenient; performance too difficult to require in fairness; or must involve more than mere hardship or increased cost of performance). The impracticability must be a result of an unforeseen event not within the contemplation of the parties at the time of contracting. CISG — A party to a contract is not liable for performance failure caused by factors which were unforeseeable and uncontrollable. 22-3c Substituted Performance If neither party is at fault, but the agreed-upon manner of delivering the goods becomes commercially impracticable, a substituted manner of performance, if commercially reasonable, must be tendered and accepted. 22-3d Right to Adequate Assurance of Performance If reasonable doubts arise regarding either party’s performance, the other party may suspend his own performance until he receives written assurance. CISG — A party may suspend performance if there is doubt about the other party’s performance, but must immediately notify other party of the suspension and must not suspend performance if the other party gives adequate assurance of performance. 22-3e Right to Cooperation Where one party's cooperation is necessary to the agreed performance but is not timely forthcoming, the other party is excused for any resulting delay in her own performance. The nonbreaching party may either proceed to perform in any reasonable manner or, if the time for her performance has occurred, she may treat the failure to cooperate as a breach. In either event, the nonbreaching party has all other remedies provided by the Code. 22-3f Anticipatory Repudiation If, before the time to perform occurs, one party takes an action that makes performance impossible, this action may be considered an anticipatory repudiation. If the repudiation substantially impairs the value of the contract, the aggrieved party may (1) await performance for a commercially reasonable time or (2) resort to any remedy for breach. In either case, she may suspend her own performance. CISG — If prior to the date for performance, it is clear that one party will commit a fundamental breach, the other party may declare the contract avoided. CASE 22-4 DONALD R. HESSLER v. CRYSTAL LAKE CHRYSLER-PLYMOUTH, INC. Appellate Court of Illinois, Second District, 2003 788 N.E.2d 405, 273 Ill.Dec 96, 50 U.C.C. Rep.Serv.2d 330 http://scholar.google.com/scholar_case?q=788+n.e.2d+405&hl=en&as_sdt=2,34&case=8385072036048572860&scilh=0 Callum, J. In February 1997, Chrysler Corporation introduced a new promotional vehicle called the Plymouth Prowler. However, the company did not reveal whether it would manufacture any of the vehicles. Plaintiff became aware of j the vehicle and of its uncertain production, and, on February 4, 1997, contacted several dealerships to inquire about purchasing a Prowler. On February 5, 1997, plaintiff met with Gary Rosenberg, co-owner of defendant-dealership and signed a “Retail Order for a Motor Vehicle” (hereinafter Agreement). The Agreement, which was filled out primarily by Rosenberg, stated that the order was for a 1997, V6, two-door, purple Plymouth Prowler. Moreover, it read: Customer to pay $5,000 00/100 over list price by manufacturer. Money refundable if can not [deliver] by 12/30/97. Dealer to keep car 2 weeks. * * * The order also noted that plaintiff had deposited $5,000 by check. The Agreement contained a box labeled “TO BE DELIVERED ON OR ABOUT.” Inside the box was written “ASAP” in a handwriting and ink different from that in the rest of the document. * * * Rosenberg stated that the term “ASAP” is used in his business “in lieu of a stock number. Just line it up in order. As soon as you can get it done, do it.” * * * Rosenberg testified that plaintiff was the first person to place an order for a Prowler. Further, Rosenberg was “pretty sure” that plaintiff’s order was the first order on which he received a deposit. * * * Plaintiff testified that his next contact with Rosenberg was on May 11, 1997, when he called Rosenberg to discuss the Prowler’s list price. They agreed that the information they had received was that the manufacturer’s list price would be $39,000. On May 23, 1997, Salvatore Palandri entered into a contract with defendant to purchase a 1997 Plymouth Prowler. His contract reflects a purchase price of “50,000 + tax + lic + doc” and a $10,000 deposit. It further states that Palandri would receive the “first one delivered to [the] dealership.” * * * [Plaintiff testified that on August 11, 1997, Rosenberg informed plaintiff that no Prowlers would be delivered to the Midwest and that he would be returning plaintiff’s check. Defendant, according to the plaintiff, nevertheless, stated that should defendant receive a vehicle, it would be plaintiff’s. Defendant denies having stated this.] * * * Plaintiff next testified that he attended a Chrysler customer appreciation event at Great America on September 19 and spoke to a company representative about the Prowler. Two days later, the representative sent him a fax that contained a tentative list of dealers who were to receive Prowlers. Defendant’s name was on the list. Plaintiff testified that he called Rosenberg on September 22 to notify him that his dealership was on a list of dealers due to receive Prowlers. Rosenberg informed plaintiff that he would not sell plaintiff a car because plaintiff had gone behind Rosenberg’s back and that contacting Chrysler would cause Rosenberg problems. Rosenberg also stated that plaintiff was not the first person with whom he contracted to sell a Prowler. Plaintiff protested and Rosenberg informed him that he did not sign the contract and would not sell plaintiff the car. Based on this and previous conversations with Rosenberg, plaintiff did not believe that he would be able to purchase a Prowler from defendant. * * * Beginning on September 23, 1997, plaintiff contacted 38 Chrysler-Plymouth dealerships to inquire about purchasing a 1997 Prowler, but did not obtain one. Plaintiff had “serious doubts” about whether Rosenberg would deliver to him a Prowler. On October 24, 1997, plaintiff attended a Prowler coming-out party at the Hard Rock Cafe and saw a purple Prowler in the parking lot with a sign in its window that had defendant’s name written on it. On October 25, plaintiff went to defendant’s showroom and saw a Prowler parked there. He found Rosenberg and informed him that he was there to pick up his car. Rosenberg stated that he was not going to sell plaintiff the car and that he did not want to do business with him. Later that day, plaintiff purchased a Prowler from another dealer for $77,706. On October 27, 1997, defendant sold the only Prowler it received in that year to Palandri for a total sale price of $54,859, including his $10,000 deposit. * * * On April 23, 1998, plaintiff sued defendant for breach of contract. * * * Following a bench trial, the court entered judgment for plaintiff and awarded him $29,853 in damages. It concluded that defendant breached the Agreement and that plaintiff properly covered by purchasing a replacement vehicle for $29,853 more than the contract price. * * * The trial court also concluded that defendant repudiated its contract in September and October of 1997 when Rosenberg told plaintiff that he would not sell him a car. It found plaintiff “ready, willing, and able to perform the contract.” The court found that the price plaintiff paid for the car at another dealership was the best price he could receive for a Prowler after Rosenberg’s refusal to sell to him a car. * * * Under the UCC, certain actions by a party to a contract may constitute an anticipatory repudiation of the contract if the actions are sufficiently clear manifestations of an intent not to perform under the contract. [UCC §] 2–610; [citation.] * * * Comment 1 to Section 2–610 provides, in relevant part: Anticipatory repudiation centers upon an overt communication of intention or an action which renders performance impossible or demonstrates a clear determination not to continue with performance. * * * When such a repudiation substantially impairs the value of the contract, the aggrieved party may at any time resort to his remedies for breach. * * * [UCC §] 2–610, Comment. Comment 2 to Section 2–610 provides, in relevant part: It is not necessary for repudiation that performance be made literally and utterly impossible. Repudiation can result from action which reasonably indicates a rejection of the continuing obligation. [UCC §] 2–610, Comment. * * * Upon learning that defendant was on a tentative list to receive a Prowler, plaintiff testified that he called Rosenberg to relate the information and that Rosenberg responded that plaintiff was not the first person to contract to purchase a Prowler. Rosenberg also stated that he would not do business with plaintiff. Further, Rosenberg’s testimony about this conversation corroborated plaintiff’s, in that Rosenberg stated that he told plaintiff that the vehicle was already “committed.” The trial court also heard both plaintiff and Rosenberg testify that, when plaintiff went to defendant’s showroom on October 25 and informed Rosenberg that he was there to pick up his car, Rosenberg told plaintiff that he did not want to do business with him. We conclude that the trial court did not err in finding that defendant’s foregoing actions reasonably indicated to plaintiff that defendant would not deliver to him a Prowler under the Agreement. * * * * * * With respect to plaintiff’s actions, section 2–610(b) of the UCC provides that an aggrieved party may “resort to any remedy for breach” of the contract “even though he has notified the repudiating party that he would await the latter’s performance.” [UCC §] 2–610(b). One such remedy is to cover. [UCC §] 2–711(1)(a) (buyer may effect cover, upon seller’s repudiation, whether or not buyer cancels the contract). The statute is clear that a buyer’s willingness to proceed with performance under a contract does not excuse a repudiation. * * * Defendant next asserts that, even if there was a repudiation in September or October of 1997, plaintiff did nothing to indicate that he thought this was the case. He took no self-help measures such as: terminating the contract; seeking to enjoin the sale to Palandri; requesting a retraction; or suspending his performance obligations. Again, we disagree. The UCC does not require a party to request assurances as a condition precedent to recovery. [Citation.] For the foregoing reasons, we conclude that the trial court’s finding of repudiation was not against the manifest weight of the evidence. * * * * * * [T]he judgment of the circuit court of McHenry County is affirmed. Instructor Manual for Smith and Robersons Business Law Richard A. Mann, Barry S. Roberts 9781337094757, 9780357364000, 9780538473637