CH-23-25 Transfer of Title and Risk of Loss – Smith and Robersons Business Law : Book Guide

This Document Contains Chapters 23 to 25 Chapter 23 TRANSFER OF TITLE AND RISK OF LOSS ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. Stein, a mechanic, and Beal, a life insurance agent, entered into a written contract for the sale of Stein’s tractor to Beal for $6,800 cash. It was agreed that Stein would tune the motor on the tractor. Stein fulfilled this obligation and on the night of July 1 telephoned Beal that the tractor was ready to be picked up on Beal’s making payment. Beal responded, “I’ll be there in the morning with the money.” On the next morning, however, Beal was approached by an insurance prospect and decided to get the tractor at a later date. On the night of July 2, the tractor was destroyed by fire of unknown origin. Neither Stein nor Beal had any fire insurance. Who must bear the loss? Answer: Risk of Loss. Beal must bear the loss. Since Stein was not a "merchant" within the meaning of Section 2-104, U.C.C., the risk of loss passes upon tender of delivery. Section 2-509(3). Therefore since Stein has held "conforming goods at the buyer's disposition" and has given Stein "notification reasonably necessary to enable him to take delivery" (Section 2-503(1)), Stein has made a proper tender and the loss falls on Beal. 2. Regan received a letter from Chase, the material portion of which stated, “Chase hereby places an order with you for fifty cases of Red Top Tomatoes. Ship them C.O.D.” As soon as he received the letter, Regan shipped the tomatoes to Chase. While en route, the railroad car carrying the tomatoes was wrecked. When Chase refused to pay for the tomatoes, Regan started an action to recover the purchase price. Chase defended on the ground that because the shipment was C.O.D., neither title to the tomatoes nor risk of loss passed until their delivery to Chase. Who has title? Who has the risk of loss? Explain. Answer: Risk of Loss: Shipment Contracts. Chase has title to the tomatoes, and must bear the loss. Where goods are shipped by common carrier C.O.D., title and risk of loss pass to the buyer, unless otherwise agreed, at the time and place of delivery to the carrier. The Code regards a C.O.D. contract as a "shipment" contract. 3. On May 10, the Adair Company, acting through one Brown, entered into a contract with Clark for the installation of a milking machine at Clark's farm. Following the enumeration of the articles to be furnished, together with the price of each article, the written contract provided: “This outfit is subject to thirty days' free trial and is to be installed about June 1.” Within thirty days after installation the entire outfit, excepting a double utility unit, was destroyed by fire through no fault of Clark. The Adair Company sued Clark to recover the value of the articles destroyed. Explain who bears the risk of loss. Answer: Sale on Approval/Sale or Return. This problem presents a question whether the transaction is a "sale on approval", or a "sale or return." Section 2-316 (1) of the U.C.C. provides: "Unless otherwise agreed, if delivered goods may be returned by the buyer even though they conform to the contract, the transaction is (a) a `sale on approval' if the goods are delivered primarily for use." As the milking machine was primarily for the use of the buyer, Clark, the transaction is therefore a sale on approval. Neither title nor risk of loss passed to Clark upon delivery and installation of the machine. The seller, Adair Company, bears the risk of loss until the buyer manifests his approval of the goods. The machine, excepting the double utility unit, was destroyed though no fault of Clark and before Clark had signified his approval or acceptance to the Adair Company. If the goods had been delivered to the buyer primarily for the purpose of resale, under Section 2-316(b) of the U.C.C., the transaction would be a "sale or return." In such case, title and risk of loss would be transferred to Clark with the privilege of divesting himself thereof within the stated period of 30 days free trial. Decision in favor of Clark. 4. Brown, located in Knoxville, contracted to buy sixty cases of Lovely Brand canned corn from Clark in Toledo at a contract price of $1,250. Pursuant to the contract, Clark selected and set aside sixty cases of Lovely Brand canned corn and tagged them “For Brown.” The contract required Clark to ship the corn to Brown via T Railroad, F.O.B. Toledo. Before Clark delivered the corn to the railroad, the sixty cases were stolen from Clark’s warehouse. a. Who is liable for the loss of the sixty cases of corn, Brown or Clark? b. Suppose Clark had delivered the corn to the railroad in Toledo. After the corn was loaded on a freight car but before the train left the yard, the car was broken open and its contents, including the corn, were stolen. As between Brown and Clark, who is liable for the loss? c. Would your answer in question (b) be the same if this was an F.O.B. Knoxville contract, all other facts remaining the same? Answer: Risk of Loss: Shipment Contracts. (a) Clark, the seller, has the risk of loss. Although the goods have become identified to the contract as existing goods as to which the contract refers and Brown has a special property in them under Section 2-501 of the U.C.C., this does not cause title or risk of loss to pass to the buyer. Where the contract requires the seller to ship the goods by carrier, and not to deliver them at a particular destination, risk of loss passes to the buyer when the goods are duly delivered to the carrier. U.C.C. Section 2-509 (a). (b) Brown, the buyer, bears the risk of loss. The contract was F.O.B. Toledo, where the goods were duly delivered to the carrier. U.C.C. Section 2-509 (1)(a). (c) No, under the F.O.B. Brown's Warehouse term, Clark would bear the risk of loss until the goods were duly delivered to their destination. 5. Gardner owned a quantity of corn, which was contained in a corncrib located on Gardner’s farm. On March 12, Gardner wrote a letter to Bassett stating that he would sell to Bassett all of the corn in this crib, which he estimated at between nine hundred and one thousand bushels, for $3.90 per bushel. Bassett received this letter on March 13 and immediately wrote and mailed on the same day a letter to Gardner stating that he would buy the corn. The corncrib and its contents were accidentally destroyed by fire that broke out about 3 A.M. on March 14. (a) What are the rights of the parties? (b) What difference, if any, in result if Gardner were a merchant? Answer: Risk of Loss. (a) The risk of loss falls on Gardner. Bassett is not liable for the price of the corn. Bassett does not have any rights against Gardner for breach of the contract as Gardner’s duty of performance was excused by the accidental destruction of the subject matter. (b) In this case, the result is the same whether or not Gardner is a merchant, because there was neither tender nor delivery of the corn to Bassett. If Gardner were a merchant, risk of loss would pass to Bassett upon delivery and actual receipt of the corn by Bassett. If Gardner were not a merchant, risk of loss would pass to Bassett upon tender of the corn by Gardner to Bassett. U.C.C. Section 2-509 (3). 6. Franco, a New York dealer, purchased twenty-five barrels of specially graded and packed apples from a producer at Hood River, Oregon, under a contract that specified an agreed price on delivery at Franco’s place of business in New York. The apples were shipped to Franco from Oregon but, through no fault of Franco, were totally destroyed before reaching New York. Does any liability rest on Franco? Answer: Risk of Loss: Destination Contracts. No. The contract between Franco and the seller required the seller to deliver the good at a particular destination—destination contract. Section 2-509 (1)(b) provides that risk of loss would not pass to the buyer until the goods were duly tendered to the buyer at destination (New York) while in possession of the carrier. 7. Smith was approached by a man who introduced himself as Brown of Brown & Co. Smith, who did not know Brown, asked Dun & Bradstreet for a credit report on Brown. He thereupon sold Brown some expensive gems and billed Brown & Co. “Brown” turned out to be a clever jewel thief, who later sold the gems to Brown & Co. for valuable consideration. Brown & Co. was unaware of “Brown’s” transaction with Smith. Can Smith successfully sue Brown & Co. for either the return of the gems or the price as billed to Brown & Co.? Answer: Void and Voidable Title to Goods. No, because Brown & Co. was a good faith purchaser for value.”Smith intended to pass title to the gems to the man physically before him, the jewel thief and impostor impersonating Brown. The transaction between Smith and the impostor resulted in the latter acquiring voidable title to the gems. Section 2-403 (1)(a) provides: "a person with voidable title has power to transfer a good title to a good faith purchaser for value. When goods have been delivered under a transaction of purchase the purchaser has such power even though (a) the transferor was deceived as to the identity of the purchaser." Under these facts, Brown & Co. is a good faith purchaser for value. 8. Charlotte, the owner of a new Cadillac automobile, agreed to loan the car to Ellen for the month of February while she (Charlotte) went to Florida for a winter vacation. It was understood that Ellen, who was a small-town Cadillac dealer, would merely place Charlotte’s car in her showroom for exhibition and sales promotion purposes. While Charlotte was away, Ellen sold the car to Bob. When Charlotte returned from Florida, she sued to recover the car from Bob. Who has title to the automobile? Explain. Answer: Risk of Loss: Goods in the Possession of a Bailee. Decision in favor of Bob. Charlotte, the owner of the Cadillac, voluntarily placed the automobile in a dangerous bailment situation when she entrusted it to Ellen, a Cadillac dealer, for display in Ellen's showroom. The buyer in the ordinary course of business (Robert) is therefore protected. Section 2-403 (2) of the U.C.C. provides: "Any entrusting of possession of goods to a merchant who deals in goods of that kind gives him power to transfer all rights of the entruster to a buyer in ordinary course of business. 9. Brilles offered to sell his used automobile to Nevarro for $12,600 cash. Nevarro agreed to buy the car, gave Brilles a check for $12,600, and drove away in the car. The next day Nevarro sold the car for $13,000 to Hough, a bona fide purchaser. The $12,600 check was returned to Brilles by the bank in which he had deposited it because of insufficient funds in Nevarro’s account. Brilles brings an action against Hough to recover the automobile. What judgment? Answer: Void and Voidable Title to Goods. Judgment for Hough. Nevarro acquired voidable title to the automobile when he purchased it with a check drawn on an account with insufficient funds. This empowered him to transfer good title to Hough since Hough was a good faith (bona fide) purchaser for value. Section 2-403 (1)(b) and (c) of the U.C.C. provides: "A person with voidable title has power to transfer a good title to a good faith purchaser for value. When goods have been delivered under a transaction of purchase the purchaser had such power even to Hough. 10. Yount told Lewis he wished to buy Lewis's automobile. He drove the car for about ten minutes, returned to Lewis, stated he wanted to take the automobile to show it to his wife, and then left with the automobile and never returned. Yount sold the automobile in another state to Turner and gave him a bill of sale. Can Lewis recover the automobile from Turner? Explain. Answer: Void and Voidable Title to Goods. Judgment for Turner, he has title to the automobile. Yount acquired voidable title which empowered him to transfer good title to Turner, a good faith purchaser for value. Section 2-403 (1)(d) provides that a person has such power even though that person procured delivery "through fraud punishable as larcenous under the criminal law." 11. On February 7, Pillsbury purchased eight thousand bushels of wheat from Landis. The wheat was being stored at the Greensville Grain Company. Pillsbury also intended to store the wheat with Greensville. On February 10, the wheat was destroyed. Landis demands payment for the wheat from Pillsbury. Who prevails? Who has title? Who has the risk of loss? Explain. Answer: Passage of Title/Risk of Loss. Pillsbury prevails. When goods are held by a bailee the risk of loss occurs: a) if a negotiable document of title is involved, upon the buyer's receipt of the document, b) if a non-negotiable document of title is used by the bailee as a receipt for storage of the seller's goods, when the document is tendered to the buyer, unless the buyer seasonably objects, or c) if no documents of title are employed, upon either (1) the seller's tender to the buyer of written directions to the bailee to deliver the goods to the buyer, unless the buyer reasonably objects or (2) the bailee's acknowledgment of the buyer's right to possession of the goods. U.C.C. Section 2-509 (2). The facts do not indicate that any of these conditions occurred, therefore, risk of loss falls on Landis. Title would be with Pillsbury. In this case delivery was made without moving the goods and title will pass 1) on delivery of a document of title where the contract calls for delivery of such document, or 2) at the time and place of contracting where the goods at that time have been identified and no documents are to be delivered. U.C.C. Section 2-401 (3). Where the goods are not identified at the time of contracting, title passes when the goods are identified. The grain was identified in this situation even though it could not be actually separated from that grain belonging to other farmers. No specific mention was made as to any documentation that needs to be delivered, so the title passes at the time and place of contracting. 12. Johnson, who owns a hardware store, was indebted to Hutchinson, one of his suppliers. Johnson sold his business to Lockhart, one of Johnson’s previous competitors. Lockhart combined the inventory from Johnson’s store with his own and moved the combined inventory to a new, larger store. Hutchinson claims that Lockhart must pay Johnson’s debt because the sale of the business had been made without complying with the requirements of the bulk sales law. Discuss whether Lockhart is obligated to pay Johnson’s debt to Hutchison? Answer: Sales of Goods in Bulk. Judgment for Hutchinson—Lockhart must pay the debt. This is a bulk transfer covered by Article 6 of the U.C.C. since it could be described as "any transfer in bulk and not in the ordinary course of the transferor's business of a major part of the materials, supplies, merchandise, or other inventory." U.C.C. Section 6-102. Such transfers must be preceded by certain requirements which include: preparation of list of existing creditors by the transferor, a complete listing of property to be transferred, preservation of the creditor list by the transferee for six months, and notice given by the transferee to the creditors at least ten days before the transferee takes possession of the goods or makes payment for them. See U.C.C. Sections 6-104 (1), 6-105. 13. Seller had manufactured forty thousand pounds of plastic resin pellets especially for a buyer, who agreed to accept them at the rate of one thousand pounds per day upon his issuance of shipping instructions. Despite numerous requests by the seller, the buyer issued no such instructions. On August 18, the seller, after warehousing the goods for forty days, demanded by letter that the buyer issue instructions. The buyer agreed to issue them beginning August 20, but never did. On September 22, a fire destroyed the seller’s plant containing the goods, which were not covered by insurance. Who bears the risk of loss? Why? Answer: Risk of Loss: Breach by the Buyer. Judgment for Seller—the buyer bears the risk of loss. Where conforming goods have been identified to a contract which the buyer breaches before risk of loss has passed to him, the seller may treat the risk of loss as resting on the buyer "for a commercially reasonable time" to the extent of any deficiency in the seller's effective insurance coverage. 14. McCoy, an Oklahoma cattle dealer, orally agreed with Chandler, a Texas cattle broker, to ship cattle to a New Mexico feedlot for delivery to Chandler. The agreement was for six lots of cattle valued at $119,000. After McCoy delivered the cattle, he presented invoices to Chandler that described the cattle and set forth the sales price. McCoy then demanded payment, which Chandler refused. Unknown to McCoy, Chandler had obtained a loan from First National Bank and had pledged the subject cattle as collateral. The bank had no knowledge of any interest that McCoy may have had in the cattle. McCoy sued to recover the cattle. The bank counterclaimed that it had a perfected security interest in the cattle that was superior to any interest of McCoy’s. Who has title to the cattle? Explain. Answer: Transfer of Title. Judgment for the bank—the bank has a superior interest in the cattle. Title to goods passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods, unless otherwise explicitly agreed. Here, once McCoy delivered the cattle to Chandler, Chandler had the power to create a security interest in a third party such as the bank. This interest attached even though Chandler was found to have committed a fraud against McCoy and thus had only a voidable title to the cattle. The UCC provides that “a person with voidable title has the power to transfer a good title to a good faith purchaser for value. When goods have been delivered under a transaction of purchase, the purchaser has such power even though...(d) the delivery was procured through fraud punishable as larcenous under the criminal law.” One of the basic policies of the UCC is to protect good faith purchasers for value, in this case the bank, from “hidden” interest in goods. Any unperfected security interest that McCoy might have had in the cattle would have been hidden from the bank. McCoy could, and should, have protected himself by perfecting his own security interest in the cattle. 15. Home Indemnity, an insurance company, paid one of its insureds after the theft of his car. The car reappeared in another state and was sold to Michael Schrier for $4,300 by a used car dealer. The dealer promised to give Mr. Schrier a certificate of title. One month later, the car was seized by the police on behalf of Home Indemnity. Explain who is entitled to possession of the car. Answer: Good Faith Purchaser. Judgment for Home Indemnity; home Indemnity is entitled to possession . The possessor of stolen goods, regardless of her knowledge of their origins, cannot convey good title. The subsequent sale of the goods, even to a bona fide purchaser for value, does not divest the original owner of title. Even a good faith purchaser cannot receive better title than the seller has. Schrier v. Home Indemnity, Co., 273 A.2d 248 (D.C. App. 1971). 16. Fred Lane, who sells boats, motors, and trailers, sold a boat, motor, and trailer to John Willis in exchange for a check for $6,285.00. The check was not honored when Lane attempted to use the funds. Willis subsequently left the boat, motor, and trailer with John Garrett, who sold the items to Jimmy Honeycutt for $2,500.00. Considering the boat’s quality, Honeycutt was surprised at how inexpensive it was. He did not know where Garrett had obtained the boat, but he had dealt with Garrett before and described him as a “sly businessman.” Garrett did not sell boats; normally, he sold fishing tackle and provisions. Honeycutt also received a forged certificate for the boat, on which he had observed Garrett forge the purported owner’s signature. Can Lane compel Honeycutt to return the boat, motor, and trailer? Explain. Answer: Power to Transfer/Good Faith Purchaser. Yes, Lane can regain possession --judgment for Lane. The court found that Honeycutt was not a good faith purchaser under Section 2-403 of the UCC, which provides: A person with voidable title has power to transfer a good title to a good faith purchaser for value. When goods have been delivered in a transaction of purchase the purchaser has such power even though (a) the transferor was deceived as to the identify of the purchaser, or (b) the delivery was in exchange for a check which was later dishonored, or (c) it was agreed that the transaction was to be a "cash sale", or (d) the delivery was procured through fraud punishable as larcenous under the criminal law. Good title can only be transferred to a "good faith purchaser for value", however. The court found that given the circumstances associated with the sale, Honeycutt did not purchase the boat, motor, and trailer in good faith. Lane v. Honeycutt, 14 N.C. App. 436, 188 S.E.2d 604 (1972). 17. Mike Moses purchased a mobile home, including installation, from Gary Newman. Newman delivered the home to Moses’s lot. Upon inspection of the home, Moses’s fiancée found a broken window and water pipe. Moses also had not received keys to the front door. Before Newman corrected these problems, a windstorm destroyed the home. Who bears the risk for the loss of the home? Why? Answer: Risk of Loss. Judgment for Moses; Newman bears the loss. "Where a tender or delivery of goods so fails to conform to the contract as to give a right of rejection the risk of the loss remains on the seller until cure or acceptance." U.C.C. 2-510(1). The right of rejection exists if the goods "fail in any respect to conform to the contract." U.C.C. 2-601. Because the loss occurred before the installation was complete and the goods did not conform to the contract, Newman (the seller) could not shift the risk of loss to Moses (the buyer). Moses v. Newman, 658 S.W.2d 119 18. United Road Machinery Company, a dealer in heavy road equipment (including truck scales supplied by Thurman Scale Company), received a telephone call on July 21 from James Durham, an officer of Consolidated Coal Company, seeking to acquire truck scales for his coal mining operation. United and Consolidated entered into a twenty-four-month lease-purchase arrangement. United then notified Thurman that Consolidated would take possession of the scales directly. United paid for the scales and Consolidated took possession of them, but the latter never signed or returned the contract papers forwarded to it by United. Consolidated also never made any of the rental payments ($608/month) due under the lease. On September 20, Consolidated, through its officer Durham, sold the scales to Kentucky Mobile Homes for $8,500. Kentucky's president, Ethard Jasper, checked the county records prior to the purchase and found no lien or encumbrance on the title; likewise, he denied knowledge of the dispute between Consolidated and United. On September 22, Kentucky sold the scales to Clyde Jasper, individually, for $8,500. His search also failed to disclose any lien on the title to the scales, and he denied knowledge of the dispute between Consolidated and United. United brought suit to recover the scales from Jasper. Can United recover the scales from Jasper? Explain. Answer: Voidable Title/Good Faith Purchaser. The right of rescission in the original owner of the goods is cut-off, and the possessor takes good title if such purchaser is a good faith purchaser. This is due to the fact that Section 2-403 of the U.C.C. enables a person with voidable title to transfer good title to a good faith purchaser for value. Because Jasper acted honestly in fact, gave value, and took the goods without notice or knowledge of any defect in title, Jasper was a good faith purchaser. Since Jasper further obtained the goods from Consolidated, which had voidable title at the time of acquisition, Jasper obtained good and non-defeasible title in the goods under the U.C.C. United Road Machinery Co. v. Jasper, 568 S.W. 2d 242 (Ct.App. Kent. 1978). 19. James Norwood bought 190 heifers in Valentine, Nebraska, and then delivered them to Kevin Asbury in Missouri to care for them. Norwood and Asbury were merchants with regard to cattle. While in Asbury's care, 150 of the heifers were delivered to Max Hargrove. Hargrove in turn sold the heifers to B & W, Inc. Then B & W sold 115 of the heifers to Steve Maulsby, who in turn sold the heifers to Kenneth Nordhues. Explain what Nordhues would have to prove to establish good title to the heifers. Answer: Entrusting of Goods to a Merchant. To establish good title in the cattle, Nordhues would have to prove that Hargrove was a buyer in the ordinary course of business. This case problem is based on Nordhues v. Maulsby, 19 Neb.App. 620, 815 N.W.2d 175 (2012). It is undisputed that Norwood and Asbury were merchants with regard to cattle. Under Missouri law, by entrusting the heifers to Asbury, Norwood gave Asbury the power to transfer all of Norwood's rights in the heifers to a buyer in the ordinary course of business. See Mo. Ann. Stat. § 400.2-403(2) (any entrusting of possession of goods to merchant who deals in goods of that kind gives him power to transfer all rights of entruster to buyer in ordinary course of business). Therefore, we now turn to whether Hargrove was a buyer in the ordinary course of business. Missouri defines a "buyer in the ordinary course of business" as a person that buys goods in good faith and without knowledge that the sale violates the rights of another person in the goods, and in the ordinary course from a person, other than a pawnbroker, in the business of selling goods of that kind. A person buys goods in the ordinary course if the sale to the person comports with the usual or customary practices in the kind of business in which the seller is engaged or with the seller's own usual or customary practices. Mo. Ann. Stat. § 400.1-201(9) (West Cum. Supp.2012). Incidentally, we note that Nebraska law is in accord. See Neb. U.C.C. § 1-201(9) (Cum.Supp.2010). "Good faith" in the case of a merchant means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade. Mo. Ann. Stat. § 400.2-103(1)(b) (West Cum.Supp.2012). Accord Neb. U.C.C. § 2-103(1)(b) (Cum. Supp.2010). "[A] bona fide purchaser [is] one who pays a valuable consideration, has no notice of outstanding rights of others and who acts in good faith." J.C. Equipment, Inc. v. Sky Aviation, Inc., 498 S.W.2d 73, 76 (Mo.App.1973). "The necessary notice referred to may be imparted to a prospective purchaser by actual or constructive notice of facts which would place a reasonably prudent person upon inquiry as to the title he is about to purchase." Id. See, also, Mo. Ann. Stat. § 400.1-201(25) (person has "notice" of fact when person has actual knowledge of it or from all facts and circumstances known to him or her at time in question he or she has reason to know that it exists). We find no error in the district court's conclusion that Hargrove was a buyer in the ordinary course of business and a good faith purchaser. Thus, the Asbury/Hargrove transaction resulted in Hargrove's receiving Norwood's rights—the rights of an owner—to the heifers. And as owner, Hargrove would have good title to the heifers. See Mo. Ann. Stat. § 400.2-403(2). *** all parties agree that if Hargrove had good title, then all subsequent purchasers, including Nordhues, also had good title. ANSWERS TO “TAKING SIDES” PROBLEMS Harrison, a men’s clothing retailer located in Westport, Connecticut, ordered merchandise from Ninth Street East, Ltd., a Los Angeles–based clothing manufacturer. Ninth Street delivered the merchandise to Denver-Chicago Trucking Company (Denver) in Los Angeles and then sent four invoices to Harrison that bore the notation “F.O.B. Los Angeles.” Denver subsequently transferred the merchandise to a connecting carrier, Old Colony Transportation Company, for final delivery to Harrison’s Westport store. When Old Colony tried to deliver the merchandise, Harrison’s wife asked the truck driver to deliver the boxes inside the store, but the driver refused. The dispute remained unresolved, and the truck departed with Old Colony still in possession of the goods. By letter, Harrison then notified Ninth Street of the nondelivery, but Ninth Street was unable to locate the shipment. Ninth Street then sought to recover the contract purchase price from Harrison. Harrison refused, contending that risk of loss remained with Ninth Street because of its refusal to deliver the merchandise to Harrison’s place of business. (a) What are the arguments that the risk of loss remained with Ninth Street? (b) What are the arguments that the risk of loss passed to Harrison? (c) What is the appropriate outcome? Answer: (a.) Harrison made a reasonable request to the carrier—Old Colony Transportation—to deliver the merchandise into the store. Old Colony departed with the goods, and they were lost or destroyed at no fault of Harrison. (b) Uunder an F.O.B. place of shipment contract, the risk of loss passes to buyer at the point that the goods are transferred to the carrier—Old Colony Transportation. Colony properly and reasonable made tender to Harrison who wanted Colony to deliver the goods into the store which they were not obligated to do. (c.) Judgment for Ninth Street. The agreement provided for F.O.B. shipment, and thus risk of loss passed to Harrison after Ninth Street placed the goods in possession of the carrier Denver, made a reasonable contract for their transportation, and notified Harrison of the shipment. Harrison, therefore, is liable for the entire purchase price of the merchandise. Ninth Street Ease, Limited v. Harrison, 5 Conn.Cir. 597, 259 A.2d 772 (1968). Chapter 24 PRODUCTS LIABILITY: WARRANTIES AND STRICT LIABILITY IN TORT ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. At the start of the social season, Aunt Lavinia purchased a hula skirt in Sadie’s dress shop. The salesperson told her, “This superior garment will do things for a person.” Aunt Lavinia’s houseguest, her niece, Florabelle, asked and obtained her aunt’s permission to wear the skirt to a masquerade ball. In the midst of the festivity, where there was much dancing, drinking, and smoking, the long skirt brushed against a glimmering cigarette butt. Unknown to Aunt Lavinia and Florabelle, its wearer, the garment was made of a fine unwoven fiber that is highly flammable. It burst into flames, and Florabelle suffered severe burns. Aunt Lavinia notified Sadie of the accident and of Florabelle’s intention to recover from Sadie. Can Florabelle recover damages from Sadie, the proprietor of the dress shop, and Exotic Clothes, Inc., the manufacturer from which Sadie purchased the skirt? Explain. Answer: Horizontal Privity. Florabelle can recover from Sadie and from Exotic Clothes. Lack of horizontal privity is no defense as to Sadie because Florabelle is a statutory third-party beneficiary under Section 2-318 of the U.C.C. Moreover, vertical privity is no defense for the manufacturer because by the great weight of authority this type of defense is no longer recognized. Moreover, lack of privity is not a defense to a cause of action based upon strict liability in tort. More specifically: Express warranties of seller: The statement of a sales person that a product is wonderful or that it will enhance a person's appearance is seller's talk and mere "puffing" without legal significance. However, in this case it is questionable whether the saleslady's statement that the garment is "superior" is merely sales talk or constituted an express warranty. Most likely, a court would hold this statement not to be an express warranty under Section 2-313 of the Code. Implied warranty of merchantability: A merchant seller impliedly warrants that the goods he sells are reasonably fit for their ordinary purpose. U.C.C. Section 2-314. Here, a dress which bursts into flames upon contact with a lighted cigarette is not of merchantable quality. Strict liability in tort: An item of clothing which is highly flammable is a defective product which is unreasonably dangerous to the user or consumer. Accordingly, Florabelle will prevail under an implied warranty of merchantability theory and a strict liability in tort theory. 2. The Talent Company, manufacturer of a widely advertised and expensive perfume, sold a quantity of this product to Young, a retail druggist. Dentley and Bird visited Young’s store and Dentley, desiring to make a gift to Bird, purchased from Young a bottle of this perfume, asking for it by its trade name. Young wrapped up the bottle and handed it directly to Bird. The perfume contained a foreign chemical that, upon the first use of the perfume by Bird, severely burned her face and caused a permanent facial disfigurement. What are the rights of Bird, if any, against Dentley, Young, and the Talent Company, respectively? Answer: Implied Warranty of Merchantability/Strict Liability in Tort. Bird has no right of action against Dently because the perfume was a gift from Dently to Bird. However, Bird has a right of action against both Young and Talent Co. under both strict liability in tort and implied warranty of merchantability. Bird is the direct third party beneficiary of the implied warranty of merchantability. Privity is not an obstacle to the strict liability action and should not be a problem to the warranty action since most states have abrogated this doctrine; nevertheless, the instructor may wish to discuss both horizontal and vertical privity and the application of Section 2-318. 3. John Doe purchased a bottle of “Bleach-All,” a well-known brand, from Roe’s combination service station and grocery store. When John used the “Bleach-All,” his clothes severely deteriorated due to an error in mixing the chemicals during the detergent’s manufacture. John brings an action against Roe to recover damages. Explain whether John will be successful in his lawsuit. Answer: Strict Liability in Tort. Judgment for John Doe. Roe is a "merchant" within the meaning of the U.C.C. since he is a "person who deals in goods of the kind." Section 2-104. Unless excluded or modified, which it is not in this case, a merchant seller impliedly warrants that the goods which he sells are merchantable. Section 2-314. John Doe would also prevail under a strict liability in tort cause of action since Roe is a merchant who sold a defective product that was unreasonably dangerous. It might further be noted that Roe would have a cause of action based upon both warranty and strict liability theory against the manufacturer of the bleach as well as any seller in his chain of title. 4. A route salesperson for Ideal Milk Company delivered a half-gallon glass jug of milk to Allen’s home. The next day, when Allen grasped the milk container by its neck to take it out of his refrigerator, it shattered in his hand and caused serious injury. Allen paid Ideal on a monthly basis for the regular delivery of milk. Ideal’s milk bottles each contained the legend “Property of Ideal—to be returned,” and the route salesman would pick up the empty bottles when he delivered milk. Can Allen recover damages from Ideal Milk Company? Why? Answer: Implied Warranty of Merchantability/Strict Liability in Tort. Yes, Allen may recover damages. When Allen purchased the half-gallon of milk from defendant Ideal Milk Co., the glass jug container was inherently necessary both in the delivery of the milk and the possession of it prior to use by the buyer. With respect to the container, the transaction is a bailment essentially tied into the sale of the milk. The buyer had the right to use the container along with its original contents although under a duty to return the container when empty. The implied warranty of merchantability and strict tort liability therefore attached both to the container and its contents. Ideal may have an action based on design defect against the manufacturer of the bottle, if it is shown that squeezing caused the bottle to explode. 5. While Butler and his wife, Wanda, were browsing through Sloan’s used car lot, Butler told Sloan that he was looking for a safe but cheap family car. Sloan said, “That old Cadillac hearse ain’t hurt at all, and I’ll sell it to you for $5,950.” Butler said, “I’ll have to take your word for it because I don’t know a thing about cars.” Butler asked Sloan whether he would guarantee the car, and Sloan replied, “I don’t guarantee used cars.” Then Sloan added, “But I have checked that Caddy over, and it will run another 10,000 miles without needing any repairs.” Butler replied, “It has to because I won’t have an extra dime for any repairs.” Butler made a down payment of $800 and signed a printed form contract, furnished by Sloan, that contained a provision: “Seller does not warrant the condition or performance of any used automobile.” As Butler drove the car out of Sloan’s lot, the left rear wheel fell off and Butler lost control of the vehicle. It veered over an embankment, causing serious injuries to Wanda. What is Sloan’s liability to Butler and Wanda? Answer: Butler may recover under a breach of the implied warranty of merchantability and under a strict liability in tort cause of action and possibly for a breach of an express warranty. Warranties An express warranty need not be in writing. An affirmation or promise is sufficient. In this particular case it is debatable whether Sloan's statement concerning the condition of the car–"it will run another 10,000 miles without needing any repairs"–constitutes an express warranty. An implied warranty of merchantability arises where the seller is a merchant, unless it is disclaimed or modified. There is an implied warranty that the goods are fit for ordinary purposes, here to drive the automobile. The fact that the car is used does not destroy the implied warranty of "merchantability" but merely mandates that consideration be taken of the price, age and condition of the good. Warranties, as limited by the Magnuson-Moss Act (which is not applicable to this case since no written warranty was provided) may generally be excluded or modified. A disclaimer of merchantability must mention the word "merchantability" and must be conspicuous if in writing. A disclaimer of an express warranty must be clear, specific and definite. In the case at hand the warranty of "merchantability" was not effectively disclaimed since the disclaimer did not mention "merchantability." Moreover, the disclaimer would probably not negate the express warranty, if indeed one was given, since it did not specifically disclaim such warranty. Wanda will also be able to collect from Sloan under a breach of the implied warranty of merchantability since privity of contract will not be a valid defense. Strict Liability in Tort Strict liability in tort applies to this transaction since a merchant seller sold a defective product unreasonably dangerous to user or consumer. Strict liability in tort applies to new and used goods and is generally not subject to disclaimer, exclusion or modification. Moreover, privity is not a limitation upon the cause of action. 6. John purchased for cash a Revenge automobile manufactured by Japanese Motors, Ltd., from an authorized franchised dealer in the United States. The dealer told John that the car had a “twenty-four month 24,000-mile warranty.” Two days after John accepted delivery of the car, he received an eighty-page manual in fine print that stated, among other things, on page 72: The warranties herein are expressly in lieu of any other express or implied warranty, including any implied warranty of merchantability or fitness, and of any other obligation on the part of the company or the selling dealer. Japanese Motors, Ltd., and the selling dealer warrant to the owner each part of this vehicle to be free under use and service from defects in material and workmanship for a period of twenty-four months from the date of original retail delivery of first use, or until it has been driven for 24,000 miles, whichever first occurs. Within nine months after the purchase, John was forced to return the car for repairs to the dealer on thirty different occasions; and the car has been in the dealer’s custody for more than seventy days during these nine months. The dealer has been forced to make major repairs to the engine, transmission, and steering assembly. The car is now in the custody of the dealer for further major repairs, and John has demanded that it keep the car and refund his entire purchase price. The dealer has refused on the ground that it has not breached its contract and is willing to continue repairing the car during the remainder of the “twenty-four/twenty-four” period. What are the rights and liabilities of the dealer and John? Answer: Warranties/Strict Liability. The dealer did not properly disclaim the implied warranty of merchantability, and he has breached this warranty. The dealer's continued willingness to "cure" the numerous defects in the Revenge automobile have not been accomplished within a reasonable time thereby giving John the right to revoke his acceptance of the car and entitling him to recover his purchase price. Section 2-316(2), U.C.C., provides that in order to exclude or modify the implied warranty of merchantability the language of the disclaimer must mention the word "merchantability" and if in writing the writing must be conspicuous. The manufacturer and dealer used appropriate language to disclaim the warranty of merchantability: however, the exclusionary language was of the same size type as the other language in the document and it was contained in an 80-page fine-print manual. The disclaimer language therefore did not comply with the mandate of the Code that it be conspicuous and would not be effective against John. More importantly, the Magnuson-Moss Federal Warranty act provides that a seller granting a written warranty on consumer goods cannot disclaim any implied warranty; therefore, this disclaimer contained in a document providing express written warranties is ineffective against all implied warranties. NOTE: Most jurisdictions would hold that strict liability does not apply for two possible reasons: (1) the damage suffered, i.e., economic loss, is not within the coverage of 402A and/or (2) the product is not unreasonably dangerous. 7. Fred Lyon of New York, while on vacation in California, rented a new model Home Run automobile from Hart’s Drive-A-Car. The car was manufactured by the Ange Motor Company and was purchased by Hart’s from Jammer, Inc., an automobile importer. Lyon was driving the car on a street in San Jose when, due to a defect in the steering mechanism, it suddenly became impossible to steer. The speed of the car at the time was thirty miles per hour, but before Lyon could bring it to a stop, the car jumped a low curb and struck Peter Wolf, who was standing on the sidewalk, breaking both of his legs and causing other injuries. What rights does Wolf have against (a) Hart’s Drive-A-Car, (b) Ange Motor Company, (c) Jammer, and (d) Lyon? Answer: Strict Liability: Privity. Wolf would be able to prevail under a strict liability cause of action against Harts, Ange Motor Company, and Jammer, Inc., but not against Lyon. Ange Motor Co., the manufacturer, however, should bear the ultimate responsibility due to the defective parts. The fact that Wolf was an innocent by-stander is not significant in that strict liability in tort does not recognize the lack of privity as a defense. In addition, Section 402A has been applied to sellers and non-sellers, such as bailors and lessors, of personal property. A cause of action premised upon a breach of the implied warranty of merchantability would present the problems of privity and non-seller of goods. Comment 2 to Section 2-313 invites utilization of warranty theory to bailments for hire and most courts have so ruled. 8. The plaintiff brings this cause of action against a manufacturer for the loss of his leg below the hip. The leg was lost when caught in the gears of a screw auger machine sold and installed by the defendant. Shortly before the accident, the plaintiff’s co-employees had removed a covering panel from the machine by use of sledgehammers and crowbars in order to do repair work. When finished with their repairs, they replaced the panel with a single piece of cardboard instead of restoring the equipment to its original condition. The plaintiff stepped on the cardboard in the course of his work and fell, catching his leg in the moving parts. Explain what causes of action the plaintiff may have against the defendant and what defenses the defendant could raise. Answer: Design Defect. In this case the court held that the machine was so well built that it contained a design defect because it was extremely difficult to disassemble and it should have been equipped with an automatic safety interlock device to prevent its operation when it was disassembled. What of possible defenses? (1) Subsequent alteration: this was held to be inapplicable in that the disassembly was foreseeable and the manufacturer should have acted to eliminate the problem. (2) Misuse/Abuse of the product: this was done by fellow workers and not the plaintiff. Moreover, such misuse was reasonably foreseeable. (3) Voluntary assumption of the risk: this is only applicable if the plaintiff knew of the risk. (4) Contributory negligence: this is not a valid defense under Section 402A. But comparative negligence may be raised. ***If the instructor wishes he can discuss a significant public policy question underlying this case: the effect of worker's compensation laws on the number of Section 402A suits. In most instances, workers who are injured on the job are prohibited from suing their employer and thus frequently look for other potential defendants. In this case one would look to (a) the co-workers, who are probably judgment proof and (b) the manufacturer with the deeper pocket. 9. The plaintiff, while driving a pickup manufactured by the defendant, was struck in the rear by another motor vehicle. Upon impact, the plaintiff’s head was jarred backward against the rear window of the cab, causing the plaintiff serious injury. The pickup was not equipped with a headrest, and none was required at the time. Should the plaintiff prevail on a cause of action based upon strict liability in tort? Why? Why not? Answer: Design Defect. The facts as presented are premised upon those found in Buccery v. General Motors Corp., 60 Cal. App. 3d 533, 132 Cal. Rptr. 605 (1976). The court held that the vehicle was defectively designed in that a headrest should have been installed for safety purposes, even though they were not required by state or federal regulations at the time the truck was manufactured. Headrests were required for new automobiles at the time of the purchase. In most states compliance with government or industry-wide standards does not provide a safe-harbor, but is merely a factor to be considered. ***If the instructor wishes, she can add the fact that the plaintiff recognized the danger caused by the lack of a headrest and sought, without success, to purchase one. Should this prevent the plaintiff from recovering due to voluntary assumption of risk? The court held no: the plaintiff knew of the danger but was not cognizant of the magnitude of that harm. To assume a risk one must know of its potential harm as well as the magnitude of harm. 10. The plaintiff, while dining at the defendant’s restaurant, ordered a chicken pot pie. While she was eating, she swallowed a sliver of chicken bone, which became lodged in her throat, causing her serious injury. The plaintiff brings a cause of action. Should she prevail? Why? Answer: Strict Liability: Unreasonably Dangerous. There are two different tests which jurisdictions apply to this type of fact situation, i.e., is the product unreasonably dangerous. The majority rule is the reasonable expectations test, which asks, “Would the ordinary consumer expect they might find chicken bones in a chicken pot pie?” Under this test, the defendant may or may not prevail, depending on the perspective of the court. The minority and old rule is the natural versus foreign test: if an element is natural to an ingredient in the final product, it is natural to the final product. Hence, since chicken bones are natural to chicken which is natural to chicken pot pie, chicken bones are natural to chicken pot pie. Under this latter test, the defendant would prevail. 11. Salem Supply Co. sells new and used gardening equipment. Ben Buyer purchased a slightly used riding lawn mower for $1,500. The price was considerably less than that of comparable used mowers. The sale was clearly indicated to be “as is.” Two weeks after Ben purchased the mower, the police arrived at his house with Owen Owner, the true owner of the lawn mower, which was stolen from his yard, and reclaimed the mower. What recourse, if any, does Ben have? Answer: Warranty of Title. Ben can sue Salem Supply Co. for breach of warranty of title. Under the UCC Warranty of Title found in 2-312, the seller is obligated to convey the right to ownership without any lien. Because the goods were stolen, Salem Supply Co. had a void title and could convey no interest to Ben even though Ben is a good faith buyer in the ordinary course of business from a merchant. This is not an entrustment to a merchant, because the true owner did not authorize an entrustment of the mower to Salem. The fact that the sale is "as is" means that the warranty of merchantability may have been waived, but it does not negate the warranty of title, because there is nothing in the circumstances of the sale to suggest to Ben that Salem's title is a colorable one. Ben is entitled to the return of the $1500 he paid for the mower. 12. Seigel, a seventy-three-year-old man, was injured at one of Giant Food’s retail food stores when a bottle of Coca-Cola exploded as he was placing a six-pack of Coke into his shopping cart. The explosion caused him to lose his balance and fall, with injuries resulting. Has Giant breached its implied warranty of merchantability to Seigel? Why? Answer: Warranty of Merchantability/Moment of Sale. Yes, decision for Seigel. The few reported decisions are in conflict as to whether a sale or contract is made before closing at the check-out counter. The Maryland case of Sheeskin v. Giant Foods, Inc., 20 Md. App. 611, 318 A.2d 874 (1974), cites three pre-Code cases which hold that in such cases no sale or contract is made. Most cases, including Sheeskin, decided under the Code reach the opposite conclusion. In Sheeskin the court unequivocally holds that the moment the customer picks up the goods with the intent to buy them, an executory bilateral contract of sale by offer and acceptance is entered into between the retailer and the customer, and from that moment forward the implied warranties of the Code apply. Remember, Giant may in turn bring suit for strict liability in tort against Coca-Cola. 13. Guarino and two others (plaintiffs) died of gas asphyxiation and five others were injured when they entered a sewer tunnel without masks to answer the cries for help of their crew leader, Rooney. Rooney had left the sewer shaft and entered the tunnel to fix a water leakage problem. Having corrected the problem, Rooney was returning to the shaft when he apparently was overcome by gas because of a defect in his oxygen mask, which was manufactured by Mine Safety Appliance Company (defendant). The plaintiffs’ estates brought this action against the defendant for breach of warranty, and the defendant raised the defense of the plaintiffs’ voluntary assumption of the risk. Explain who will prevail. Answer: Defenses to Breach of Warranty of Merchantability. Decision the plaintiffs. If a seller of goods through its negligence or breach of warranty places another person in a position of imminent peril, that seller may be held liable for any damages sustained by a rescuer in his attempt to aid the imperiled victim under the "danger invites rescue" doctrine. Here, Mine Safety Appliance Company, through its breach of warranty on the oxygen mask, placed Rooney in a position of imminent peril in the tunnel. The company, then, is liable for damages suffered by Rooney's attempted rescuers and cannot successfully plead the defense of voluntary assumption of risk. 14. Green Seed Company packaged, labeled, and marketed a quality tomato seed known as “Green’s Pink Shipper” for commercial sale. Brown Seed Store, a retailer, purchased the seed from Green Seed and then sold it to Guy Jones, an individual engaged in the business of growing tomato seedlings for sale to commercial tomato growers. Williams purchased the seedlings from Jones and then transplanted and raised them in accordance with accepted farming methods. The plants, however, produced not the promised “Pink Shipper” tomatoes but an inferior variety that spoiled in the field. Williams then brought an action against Green Seed for $90,000, claiming that his crop damage had been caused by Green Seed’s breach of an express warranty. Green Seed argued in defense that its warranty did not extend to remote purchasers and that the company did not receive notice of the claimed breach of warranty. Who will prevail? Why? Answer: Privity of Contract. Decision for Williams. The Code and the restatement broaden the traditional common law concept of vertical privity with respect to breach of warranty actions. A seller of tomato seed might reasonably expect a commercial grower of tomatoes to use or be affected by the seeds distributed and sold on the market by the seller. The Green Seed Company is an integral part of the distributive chain for production purposes. When a seller of tomato seed warrants it to be of particular fitness and variety, the warranty extends in the distributive chain to a purchaser of tomato plants which are grown from the seed for commercial purposes. L.A. Green Seed Co. of Arkansas v. Williams, 438 S.W. 2d 717 (Ark. 1969). 15. Shell Oil Company leased to Flying Tiger Line a gasoline tank truck with a movable ladder for refueling certain types of aircraft. Under the terms of the lease, Flying Tiger was to maintain the equipment in safe operating order, but Shell was obligated to make most of the repairs at Flying Tiger's request. Four years after the lease was entered, Shell, at Flying Tiger's request, replaced the original ladder with a new one built by an undisclosed manufacturer. Both Flying Tiger and Shell inspected the new ladder. Two years later, however, Price, an aircraft mechanic employed by Flying Tiger, was seriously injured when the ladder's legs split while he was climbing onto an airplane wing. What are Price’s rights against Shell and Flying Tiger? Answer: Strict Liability in Tort/402A Products Liability. Decision for Flying Tiger. The court in the case said that the doctrine of strict liability in tort is applicable to bailors and lessors of personal property as well as to sellers, because both the sellers and the lessor place an article on the market, knowing that it will be used without inspection for defects. In light of the market realities and the widespread use of leases of goods in today's business world it makes good sense to impose on lessors the same liability for physical harm which has been imposed on the manufacturers and retailers. The former, like the latter, are able to bear the cost of compensating for injuries resulting from defects by spreading the loss through an adjustment in the rental. This type of situation would best be covered by the new Article 2A, of the UCC, which deals with leases of goods. Price v. Shell Oil Co., 85 Cal. Rptr. 178, 466 P.2d 722 (1970). 16. A gasoline-powered lawn mower, which had been used earlier to cut grass, was left unattended next to a water heater which had been manufactured by Sears. Expert testimony was presented to demonstrate that vapors from the mower’s gas tank accumulated under the water heater and resulted in an explosion. Three-year-old Shawn Toups was injured as a result. Evidence was also presented negating any claim that Shawn had been handling the gasoline can located nearby or the lawn mower. He was not burned on the soles of his feet or the palms of his hands. Is Sears liable to the Toups in strict product liability? Explain. Answer: Strict Liability: Failure to Warn. Sears is liable. Judgment for Shawn Toups. In a strict liability case the plaintiff must prove that the harm resulted from the condition of the product, in that the condition made the product unreasonably dangerous to normal use, and the condition existed at the time the product left the manufacturer's control. It is not necessary to prove negligence. Sears did not include in its users' manuals a warning as to this explosion danger and this evidence should have been made known at trial. Toups v. Sears, Roebuck and Co., 507 So.2d 809 (La. 1987). 17. Mrs. Embs went into Stamper’s Cash Market to buy soft drinks for her children. She had removed five bottles from an upright soft drink cooler, placed them in a carton, and turned to move away from the display when a bottle of Seven-Up in a carton at her feet exploded, cutting her leg. Apparently, several other bottles had exploded that same week. Stamper’s Cash Market received its entire stock of Seven-Up from Arnold Lee Vice, the area distributor. Vice in turn received his entire stock of Seven-Up from Pepsi-Cola Bottling Co. Can Mrs. Embs recover damages from (a) Stamper, (b) Vice, or (c) Pepsi-Cola Bottling? Why? Answer: Strict Liability/Vertical Privity. Yes, on all three. The doctrine of strict liability in tort extends not only to actual purchasers and users but also to bystanders whose injury from a defective product is reasonably foreseeable. Moreover, as a matter of public policy, the retailer and the distributor as well as the bottler are liable for injuries resulting from defective products. These members of the marketing chain are best able to bear the loss and can distribute the risk among themselves by means of insurance and reimbursement agreements. In the present case, the explosion of the bottle in the course of normal handling permitted the inference of a defect, particularly where there was evidence of similar explosions earlier in the week. Thus, Embs can recover under strict liability in tort in that the defendants sold a defective product that is unreasonable dangerous to the user or consumer. Embs v. Pepsi-Cola Bottling Co. of Lexington, Kentucky, Inc., 528 S.W.2d 703 (1975). 18. Catania wished to paint the exterior of his house. He went to Brown, a local paint store owner, and asked him to recommend a paint for the job. Catania told Brown that the exterior walls were stucco and in a chalky, powdery condition. Brown suggested Pierce’s shingle and shake paint. Brown then instructed Catania how to mix the paint and how to use a wire brush to prepare the surface. Five months later, the paint began to peel, flake, and blister. Catania brings an action against Brown. Decision? Answer: Implied Warranties, Fitness for a Particular Purpose. Judgment for Catania. There is an implied warranty of fitness covering the sale of the paint. Here, 1) the seller had reason to know the buyer's particular needs and purpose, and 2) knew that the buyer was relying on the seller's superior skill and judgment to select suitable goods. Catania v. Brown, 4 Conn.Cir. 344, 231 A.2d 668 (1967). 19. Robinson, a truck driver for a moving company, decided to buy a used truck from the company. Branch, the owner, told Robinson that the truck was being repaired and that Robinson should wait and inspect the truck before signing the contract. Robinson, who had driven the truck before, felt that inspection was unnecessary. Again, Branch suggested Robinson wait to inspect the truck, and again Robinson declined. Branch then told Robinson he was buying the truck “as is.” Robinson then signed the contract. After the truck broke down four times, Robinson sued. Will Robinson be successful? What defenses can Branch raise? Answer: Obstacles to Warranty Actions, Buyer's Examination or Refusal to Examine. No, Robinson will not prevail. Branch can use the defense of waiver of implied warranties. Exclusion of implied warranties in this case was effectuated both orally ("as is" statement) and by course of performance. The Uniform Commercial Code allows the exclusion or modification of implied warranties by course of performance, as well as course of dealing and trade usage. There is no question in this case that the seller disclaimed, and the buyer waived, any implied warranties. Robinson v. Branch Moving & Storage Company, Inc., 28 N.C.App. 244, 221 S.E.2d 81 (1976). 20. Perfect Products manufactures balloons, which are then bought and resold by wholesale novelty distributors. Mego Corp. manufactures a doll called “Bubble Yum Baby.” A balloon is inserted in the doll’s mouth with a mouthpiece, and the doll’s arm is pumped to inflate the balloon, simulating the blowing of a bubble. Mego Corp. used Perfect Products balloons in the dolls, bought through independent distributors. The plaintiff’s infant daughter died after swallowing a balloon removed from the doll. Is Perfect Products liable to plaintiff under a theory of strict liability? Explain. Answer: Nature or Strict Liability in Tort, Defective Condition, Unreasonably Dangerous. No. Judgment for Perfect Products. A cause of action in strict products liability arises when a manufacturer places on the market a product which has a defect that causes injury. Inadequate and dangerous products, regardless of warnings, will be held to be defective. Balloons, however, are not inherently dangerous, and Perfect Products has no duty to warn since the intended or foreseeable use of their products is not hazardous. Ingesting a balloon is not an intended use, and to the extent it is a foreseeable one, it is a misuse of the product from which the child's guardian must protect. Note that Perfect Products had no knowledge of the subsequent use of their product by Mego Corp. Any unforeseen modification of the product after it leaves the manufacturer's hands is not its responsibility. Landrine v. Mego Corporation, 94 A.D.2d 759, 464 N.Y.S.2d 516 (A.D. 1 Dept. 1983). 21. Patient was injured when the footrest of an adjustable X-ray table collapsed, causing Patient to fall to the floor. G.E. manufactured the X-ray table and the footrest. At trial, evidence was introduced that G.E. had manufactured for several years another footrest model complete with safety latches. However, there was no evidence that the footrest involved was manufactured defectively. The action is based on a theory of strict liability. Who wins? Why? Answer: Defective Condition. Judgment for Patient. The failure of the manufacturer G.E. to equip the footrest with a safety device may constitute a design defect. The safety latches were already within the state of the art, since G.E. had been including them on footrests for several years. A jury could reasonably find the absence of the safety latches to be a design defect which in turn was the proximate cause of Patient's injury. Ontai v. Straub Clinic and Hospital, Inc., 659 P.2d 734 (Hawaii 1983). 22. Heckman, an employee of Clark Equipment Company, severely injured his left hand when he caught it in a power press that he was operating at work. The press was manufactured by Federal Press Company and sold to Clark eight years earlier. It could be operated either by hand controls that required the use of both hands away from the point of operation or by an optional foot pedal. When the foot pedal was used without a guard, nothing remained to keep the operator’s hands from the point of operation. Federal Press did not provide safety appliances unless the customer requested them, but when it delivered the press to Clark with the optional pedal, it suggested that Clark install a guard. The press had a similar warning embossed on it. Clark did, in fact, purchase a guard for $100, but it was not mounted on the machine at the time of the injury; nor was it believed to be an effective safety device. Heckman argued that a different type of guard, if installed, would have made the press safe in 95 percent of its customary uses. Federal, in turn, argued that the furnishing of guards was not customary in the industry; that the machine’s many uses made it impracticable to design and install any one guard as standard equipment; that Clark’s failure to obey Federal’s warning was a superseding cause of the injury; and that state regulations placed responsibility for the safe operation of presses on employers and employees. The jury awarded Heckman $750,000, and Federal appealed. Decision? Answer: Design Defect. Judgment for Heckman. A failure to provide proper safety devices constituted a design defect that subjected Federal to liability. The question whether Federal’s guardless press created an unreasonable risk of harm to the user was a question for the jury to decide after considering such factors as: (1) the feasibility of incorporating safety features during manufacture; (2) the likelihood that users would not secure adequate protective devices; (3) whether the machine was of standard make or custom built; (4) the relative expertise of the manufacturer and the customer with regard to the product; (5) the extent of risk to the user; and (6) the seriousness of the injury that could be anticipated. The jury concluded that the press, considering these factors, was defective and unreasonably dangerous. Heckman v. Federal Press Co. 587 F.2d 612 (1978). 23. Raymond and Sandra Duford purchased a woodburning stove from Sears. The stove was manufactured by Preway, Inc. At trial, it was shown that Raymond had inadvertently installed the section of the chimney pipe that went through the roof upside down; and all parties agreed that such improper installation caused a fire that had destroyed the Dufords' house. At trial, the Dufords alleged, and Preway admitted, that there were no markings on the pipe indicating "which end was up." An expert for the Dufords then testified that the simple precaution of an embossed marking would have been satisfactory. Later, to the amazement of all the parties, a witness for Preway pointed out that the actual pipe in question had been marked with embossed letters. The pipe in fact had tiny letters spelling "UP" with two arrows pointed in the proper direction. Since no one on either side had noticed the letters except the one witness, the Dufords hastily changed their claim to that of inadequacy of the marking. The trial court however issued a directed verdict for Preway and Sears, and the Dufords appealed. Who will prevail? Why? Answer: Merchantability/Strict Liability. Opinion vacated and case remanded for a new trial. Products liability actions can be brought if goods are defectively manufactured or defectively designed. In a defective design case, the plaintiff must show that the design itself rendered the product "unreasonably dangerous" to consumers. An absent or inadequate warning also constitutes a design defect. To determine what is unreasonably dangerous, a court must examine the social utility of a product. Courts should also consider whether the risk of danger could be reduced or eliminated without significant impact on product effectiveness or manufacturing cost. Failure to take such feasible steps supports a finding that a product design is defective. Since a jury could have found that the chimney pipe in question was defective, the trial court's order for a directed verdict was improper. For the same reason, a jury could have found that the pipe was not fit for the ordinary purposes for which such goods are used, and thus found Sears in breach of the implied warranty of merchantability. 24. Vlases, a coal miner who had always raised small flocks of chickens, spent two years building a new two-story chicken coop large enough to house 4,000 chickens. After its completion, he purchased 2,200 one-day-old chicks from Montgomery Ward for the purpose of producing eggs for sale. He had selected them from Ward’s catalog, which stated that these chicks, hybrid Leghorns, were noted for their excellent egg production. Vlases had equipped the coop with brand-new machinery and had taken further hygiene precautions for the chicks’ health. Almost one month later, Vlases noticed that their feathers were beginning to fall off. A veterinarian’s examination revealed signs of drug intoxication and hemorrhagic disease in a few of the chicks. Eight months later, it was determined that the chicks were suffering from visceral and avian leukosis, or bird cancer, which reduced their egg-bearing capacity to zero. Avian leukosis may be transmitted either genetically or by unsanitary conditions. Subsequently, the disease infected the entire flock. Vlases then brought suit against Montgomery Ward for its breach of the implied warranties of merchantability and of fitness for a particular purpose. Ward claimed that there was no way to detect the disease in the one-day-old chicks, nor was there medication available to prevent this disease from occurring. Is Montgomery Ward liable under a warranty and/or strict liability cause of action? Explain. Answer: Implied Warranty Of Merchantability. Yes, Montgomery Ward is liable. The implied warranty of merchantability and the implied warranty of fitness for a particular purpose are designed to protect the buyer from bearing the loss when the goods do not conform to normal commercial standards or meet the buyer's particular purpose. The seller is therefore liable for the breach of these warranties even if he is unable to discover the defect in the goods or cure the damage if it could be ascertained. Under both warranties, however, the goods must be defective at the time of delivery to hold the seller liable. Here, the avian leukosis definitely rendered the chicks commercially inferior and unmerchantable. They also were unfit for the purpose of laying eggs, for which Vlases had purchased them, relying on Ward's catalogue advertisement. Vlases had taken the necessary hygienic precautions in the handling, care, and housing of the chicks. There is a strong inference, then, that the chicks had contracted the disease genetically rather than because of unsanitary conditions. Therefore, they were of inferior quality at the time of the delivery, although the disease was not discovered until eight months later. Despite its inability to detect or prevent the leukosis in the one-day-old chicks, Ward is liable for the breach of both warranties. 25. For more than forty years, Rose Cipollone smoked between one and two packs of cigarettes a day. Upon her death from lung cancer, Rose’s husband, Antonio Cipollone, filed suit against Liggett Group, Inc., Lorillard, Inc., and Philip Morris, Inc., three of the leading firms in the tobacco industry, for the wrongful death of his wife. Many theories of liability and defenses were asserted in this decidedly complex and protracted litigation. One theory of liability claimed by Mr. Cipollone was breach of express warranty. It is uncontested that all three manufacturers ran multimedia ad campaigns that contained affirmations, promises, or innuendos that smoking cigarettes was safe. For example, ads for Chesterfield cigarettes boasted that a medical specialist could find no adverse health effects in subjects after six months of smoking. Chesterfields were also advertised as being manufactured with “electronic miracle” technology that made them “better and safer for you.” Another ad stated that Chesterfield ingredients were tested and approved by scientists from leading universities. Another brand, L&M, publicly touted the “miracle tip” filter, claiming it was “just what the doctor ordered." At trial, the defendant tobacco companies were not permitted to try to prove that Mrs. Cipollone disbelieved or placed no reliance on the advertisements and their safety assurances. Did the defendants breach an express warranty to the plaintiff? Explain. Answer: Express Warranty. Remand for a new trial on the issue of whether Mrs. Cipollone had read or heard the advertisements and, if so, whether she believed them. The court also ruled that the Federal Cigarette Labeling Act preempted claims arising from smoking after January 1, 1966, based upon the adequacy of warnings. The central concern in a breach of express warranty case is the nature of the reliance interest required by U.C.C. According to this section, any affirmation or promise, any description, or any sample or model must be made part of the basis of the bargain in order to create an express warranty. On one hand, the tobacco companies contend that Mr. Cipollone must prove that Mrs. Cipollone actually relied on the advertisements, and was induced to buy the cigarettes because of the advertisements. On the other extreme, the trial court seemed to feel that any affirmations made in any advertisements become a basis of the bargain between Mrs. Cipollone and the tobacco companies, regardless of whether Mrs. Cipollone actually knew of the ad. The court noted that the district court’s interpretation of this requirement would be met even if Mrs. Cipollone had not read or heard the ads. Rather, the court noted that a plaintiff satisfies the “basis of the bargain” requirement, establishing breach of express warranty by proving that he or she read, heard, saw, or knew of ads containing affirmation of fact or promise. Once the buyer has become aware of such affirmations or promises, those statements are presumed to be part of the basis of the bargain unless the seller, by clear affirmative proof, shows that the buyer knew that the affirmation or promise was untrue. [ Author’s note: This case was appealed on the issue of federal preemption of common law claims arising after January 1, 1966 and was reversed in part and affirmed in part by the U.S. Supreme Court, Docket No. 112 S-Ct. 2608 (1992).] 26. Trans-Aire International, Inc. (TAI), converts ordinary automotive vans into recreational vehicles. TAI had been installing carpet and ceiling fabrics in the converted vans with an adhesive made by the 3M Company. Unfortunately, during the hot summer months, the 3M adhesive would often fail to hold the carpet and fabrics in place. TAI contacted Northern Adhesive Company (Northern), seeking a “suitable” product to replace the 3M adhesive. Northern sent samples of several adhesives, commenting that hopefully one or more “might be applicable.” Northern also informed TAI that one of the samples, Adhesive 7448, was a “match” for the 3M adhesive. After testing all the samples under cool plant conditions, TAI’s chief engineer determined that Adhesive 7448 was better than the 3M adhesive. When TAI’s president asked if the new adhesive should be tested under summerlike conditions, TAI’s chief engineer responded that it was unnecessary to do so. The president then asked if Adhesive 7448 came with any warranties. A Northern representative stated that there were no warranties, except that the orders shipped would be identical to the sample. After converting more than 500 vans using Adhesive 7448, TAI became aware that high summer temperatures were causing the new adhesive to fail. Explain whether TAI should prevail against Northern in a suit claiming (a) breach of an implied warranty of fitness for a particular purpose, (b) breach of an implied warranty of merchantability, and (c) breach of express warranty. Answer: Disclaimed Warranty. Judgment for Northern. The U.C.C. provides that “when the buyer before entering into a contract has examined the goods or the sample or model as fully as he desired or has refused to examine the goods there is no implied warranty with regard to defects which an examination ought in the circumstances to have revealed to him.” The facts clearly show that TAI refused to do any further testing of Adhesive 7448 to determine the effect of summerlike heat upon the adhesive. Had they done so, TAI would have discovered that Adhesive 7448 fared no better than the 3M adhesive they had been using. Moreover, Northern did not breach an implied warranty of fitness for a particular purpose, since TAI did not rely on Northern’s skill or judgment in selecting Adhesive 7448. Northern, furthermore, did not breach any express warranties, for Northern made no affirmations or promises when it supplied TAI with samples. At most, Northern claimed that Adhesive 7448 was a “match” for the 3M adhesive, which in fact turned out to be true. 27. The plaintiff’s children purchased an Aero Cycle exercise bike for their mother to use in a weight loss program. The Aero Cycle bike was manufactured by DP and purchased from Wal-Mart. The first time the plaintiff, Judy Dunne, used the bike she used it only for a few seconds. But the second time she used it, she pedaled for three or four rotations when the rear support strut failed and the bike collapsed under her. At the time of the accident, the plaintiff weighed between 450 and 500 pounds. She fell off the bike backwards, struck her head on a nearby metal file cabinet, and was knocked unconscious. When the plaintiff regained consciousness, her mouth was bleeding and her neck, left shoulder, arm, leg, knee, and ankle were injured. The plaintiff was diagnosed as having a cervical strain and multiple contusions. She filed suit against Wal-Mart and DP. Explain whether the plaintiff should prevail. Answer: Defective Conditions/Failure to Warn. A manufacturer is not responsible for accounting for every conceivable foreseeable use of a product, but is liable for damage caused by a use or handling of a product that the product's manufacturer should reasonably expect of an ordinary person in the same or similar circumstances. The trial court concluded that "the use of this exercise bike by a woman of 500 pounds was not reasonably anticipated. DP manufactured the Aero Cycle to withstand use by adults weighing up to 250 pounds, as this encompasses greater than 98.5 percent of the United States adult population. Further, DP adheres to the American Society for Testing and Materials (ASTM) standards. However, DP is not automatically absolved of liability because it complied with the ASTM standards. The ASTM standards are not determinative of liability. More importantly, the trial court committed legal error in their reasons for judgment. Instead of considering whether plaintiff was engaged in a "reasonably anticipated use," the trial court considered whether plaintiff was a "reasonably anticipated user." There was no misuse of the product by plaintiff in this case. In fact, the record demonstrates that plaintiff used the product in a manner wholly consistent with its intended use. The Aero Cycle exercise bike was designed and marketed by DP primarily for use by overweight individuals. Plaintiff, an overweight person, was the type of consumer targeted by DP. Additionally, plaintiff had no reason to know that the Aero Cycle would not sustain her weight as she previously had used a similar exercise bike for several years without incident. The mere fact that plaintiff was considerably overweight does not place her in a category of persons for whom DP has no responsibility. The next issue is whether DP was required to place a maximum weight limit warning on the Aero Cycle. The cover of the owner's manual contains other safety information and warnings and it was entirely feasible to have included a statement or warning that the product should not be used by persons weighing over 250 pounds. In light of DP's admission that the Aero Cycle was only intended to have a limited use, we find that plaintiff proved that DP failed to exercise reasonable care by failing to place a limited use warning on the Aero Cycle. Wal-Mart is also liable as a merchant seller of the defective product. 28. For sixteen years, the late Mrs. Dorothy Mae Palmer had been married to an insulator who worked with asbestos products. Mrs. Palmer was not exposed to asbestos dust in a factory setting; rather, she was exposed when her husband brought his work clothes home to be washed. Mrs. Palmer died of mesothelioma. This product liability suit was brought by Mrs. Palmer’s daughters to recover for the alleged wrongful death of their mother. The daughters claim that Mrs. Palmer’s mesothelioma was the result of exposure to asbestos-containing products manufactured by Owens-Corning. The daughters claim that the asbestos products were defective and unreasonably dangerous and that Owens-Corning was negligent in failing to warn of the dangers associated with its products. Explain whether the plaintiffs should prevail. Answer: Duty to Warn. Under Oklahoma law, a manufacturer may have a duty to warn consumers of potential hazards which occur from the use of its products. A failure to warn may result in a product being defective and unreasonably dangerous. This duty to warn, however, extends only to the ordinary consumer and user of the product (defined as “one who would be foreseeably expected to purchase the product.”) According to these facts, Owens-Corning did not have the obligation to warn Mrs. Palmer because she was not the ordinary consumer of the asbestos-containing products. Additionally, at the time the asbestos products in question were sold, Owens-Corning had no knowledge of its dangers. In fact, the prevailing scientific opinion of the time was that the type of asbestos involved in this case did NOT cause mesothelioma. The Oklahoma Supreme Court had earlier ruled that “the manufacturer of a product has a duty to warn the consumer of potential dangers which may occur from the use of the product when it is known or should be known that the hazards exist.” Rohrbaugh v. Owens-Corning Fiberglass Corp., 965 F.2d 844. ANSWERS TO “TAKING SIDES” PROBLEMS Brian Felley purchased a used Ford Taurus from Thomas and Cheryl Singleton for $8,800. The car had 126,000 miles on it. After test driving the car, Felley discussed the condition of the car with Thomas Singleton, who informed Felley that the only thing known to be wrong with the car was that it had a noise in the right rear and that a grommet (a connector having to do with a strut) was bad or missing. Thomas told Felley that otherwise the car was in good condition. Nevertheless, Felley soon began experiencing problems with the car. On the second day that he owned the car, Felley noticed a problem with the clutch. Over the next few days, the clutch problem worsened and Felley was unable to shift the gears. Felley presented an invoice to Thomas showing that he paid $942.76 for the removal and repair of the car’s clutch. In addition, the car developed serious brake problems within the first month that Felley owned it. Felley now contends that the Singletons breached their express warranty. (a) What arguments would support Felley’s contention? (b) What arguments would support the claim by the Singletons that they had not given an express warranty? (c) What is the appropriate outcome? Explain. Answer: (a) A substantial amount of money was paid for the car, and this is one of the factor[s] which would cause the buyer to reasonably rely on affirmations that the automobile was in good mechanical shape. It makes little sense to pay thousands of dollars, and then expect to immediately sink substantial money into repair. In this case immediate problems were experienced with the brakes and clutch. These were not minor problems, but affected the very drivability of the car, and were directly related to the mechanical condition. Section 2–313 of the Uniform Commercial Code (Code) governs the formation of express warranties by affirmation in the context of a sale of goods such as a used car. Section 2–313 provides, in relevant part: “(1) Express warranties by the seller are created as follows: i. Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise. (2) It is not necessary to the creation of an express warranty that the seller use formal words such as ‘warrant’ or ‘guarantee’ or that he have a specific intention to make a warranty, but an affirmation merely of the value of the goods or a statement purporting to be merely the seller’s opinion or commendation of the goods does not create a warranty.” In the context of a used car sale, representations by the seller such as the car is “in good mechanical condition” are presumed to be affirmations of fact that become part of the basis of the bargain. In this case, it is undisputed that plaintiff asked defendants about the car’s mechanical condition and that defendants responded that the car was in good mechanical condition. The defendants’ representations are presumed to be affirmations of fact that became a part of the basis of the bargain. Because they are presumed to be part of the basis of the bargain, such representations constitute express warranties. (b) The Singletons are not experts in car maintenance. There is no evidence that Mr. Singleton’s statement was not true. Just because he does not know of a defect does not mean he was misrepresenting the truth. Defects in cars are sometimes difficult to discover if you are not trained. Felley had ample opportunity to inspect the car and presumably could have had an expert to inspect it as well. (c) The Singletons are liable. The statements made by the Singletons are considered an express warranty. Chapter 25 SALES REMEDIES ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. Mae contracted to sell one thousand bushels of wheat to Lloyd at $5.00 per bushel. Just before Mae was to deliver the wheat, Lloyd notified her that he would not receive or accept the wheat. Mae sold the wheat for $4.60 per bushel, the market price, and later sued Lloyd for the difference of $400. Lloyd claims he was not notified by Mae of the resale and, hence, is not liable. Is Lloyd correct? Why? Answer: Seller Remedy: Damages for Non-Acceptance or Repudiation. No, Lloyd is not correct. Decision for Mae. Under Section 2-708 of the U.C.C., upon the buyer's repudiation of the contract, the seller is entitled to recover the difference between the market price of the goods at the time and place for tender and the contract price of the goods. This section does not require notice to the buyer. Mae would have to prove that $4.60 was the market price. If she provides satisfactory proof of this, Lloyd would owe her $400 plus any incidental damages she reasonably sustained. 2. On December 15, Judy wrote a letter to David stating that she would sell to David all of the mine-run coal that David might wish to buy during the next calendar year for use at David’s factory, delivered at the factory at a price of $30 per ton. David immediately replied by letter to Judy, stating that he accepted the offer, that he would purchase all of his mine-run coal from Judy, and that he would need two hundred tons of coal during the first week in January. During the months of January, February, and March, Judy delivered to David a total of seven hundred tons of coal, for all of which David made payment to Judy at the rate of $30 per ton. On April 10, David ordered two hundred tons of mine-run coal from Judy, who replied to David on April 11 that she could not supply David with any more coal except at a price of $38 per ton delivered. David thereafter purchased elsewhere at the market price, namely $38 per ton, all of his factory’s requirements of mine-run coal for the remainder of the year, amounting to a total of two thousand tons of coal. Can David now recover damages from Judy at the rate of $8 per ton for the coal thus purchased, amounting to $16,000? Answer: Buyer Remedy: Cover. Yes. Decision for David. Judy has breached her valid requirements contract with David and David is entitled to protect himself by obtaining cover, i.e., the buyer may in good faith and without unreasonable delay purchase goods in substitution for those due from the seller. David can recover from Judy the difference between the cost of cover and the contract price, plus any incidental and consequential damages less expenses saved. U.C.C., Section 2-712. 3. On January 10, Betty, of Emanon, Missouri, visited the showrooms of the Forte Piano Company in St. Louis and selected a piano. A sales memorandum of the transaction signed both by Betty and by the salesman of the Forte Piano Company read as follows: “Sold to Betty one new Andover piano, factory number 46832, price $3,300, to be shipped to the buyer at Emanon, Missouri, freight prepaid, before February 1. Prior to shipment, seller will stain the case a darker color in accordance with buyer’s directions and will make the tone more brilliant.” On January 15, Betty repudiated the contract by letter to the Forte Piano Company. The company subsequently stained the case, made the tone more brilliant, and offered to ship the piano to Betty on January 26. Betty persisted in her refusal to accept the piano. The Forte Piano Company sued Betty to recover the contract price. To what remedy, if any, is Forte entitled? Answer: Seller Remedy: Damages for Non-Acceptance or Repudiation. In Forte’s attempt to recover the contract price, judgment would be in favor of Betty, the buyer. This is a contract to sell specific goods whereby the seller is obligated to stain the piano and make the tone more brilliant in order to put the goods in a deliverable condition. Betty gave notice of cancellation before any work had been done on the piano. Under Section 2-401 and Section 2-509 of the U.C.C., neither title nor risk of loss passed to the buyer, and the seller is not entitled to recover the contract price but only damages for breach of contract as provided in Section 2-708 of the U.C.C. Under this section, upon the buyer's repudiation of the contract, the seller is entitled to recover the difference between the market price of the goods at the time and place for tender and the contract price of the goods. This section does not require notice to the buyer. 4. Sims contracted in writing to sell Blake one hundred electric motors at a price of $100 each, freight prepaid to Blake’s warehouse. By the contract of sale, Sims expressly warranted that each motor would develop twenty-five brake horsepower. The contract provided that the motors would be delivered in lots of twenty-five per week beginning January 2 and that Blake should pay for each lot of twenty-five motors as delivered, but that Blake was to have right of inspection on delivery. Immediately on delivery of the first lot of twenty-five motors on January 2, Blake forwarded Sims a check for $2,500, but on testing each of the twenty-five motors, Blake determined that none of them would develop more than fifteen brake horsepower. State all of the remedies under the U.C.C. available to Blake. Answer: Buyer Remedies. The remedies available to Blake, the buyer, under the UCC are: (1) To accept and keep the twenty-five motors for which he has paid and to recover damages from the seller as provided in Section 2-714. (2) To reject the goods as provided in Section 2-602 and thereafter hold them for the seller's instructions or resell them for the seller's account under Section 2-603. (3) To recover from the seller the price paid for the twenty-five motors rejected and to have a security interest in the rejected goods as provided in Section 2-711. (4) To refuse to accept any further shipment of motors under the contract and to recover damages for non-delivery or repudiation under Section 2-713. (5) To effect "cover" by making in good faith and without reasonable delay a contract to purchase goods in substitution for those due from seller. (6) To recover incidental and consequential damages from the seller as provided in Section 2-715. (7) To obtain adequate assurance of performance by the seller under Section 2-609. (8) To revoke this acceptance of the twenty-five motors and retain his rights against the seller under Section 2-608. (9) To treat the seller's breach of warranty as an anticipatory repudiation and have the rights as provided in Section 2-610. (10) To suspend any further performance of the contract on his part under Section 6-610(c). (11) To rescind the contract by reason of the seller's breach and retain all claims for damages against the seller under Section 2-720. (12) To treat the seller's breach of an installment contract by delivery of twenty-five defective motors of the first installment as a breach of the entire contract as provided in Section 2-612. 5. Henry and Mary entered into a written contract whereby Henry agreed to sell and Mary agreed to buy a certain automobile for $8,500. Henry drove the car to Mary’s residence and properly parked it on the street in front of Mary’s house, where he tendered it to Mary and requested payment of the price. Mary refused to take the car or pay the price. Henry informed Mary that he would hold her to the contract; but before Henry had time to enter the car and drive it away, a fire truck, answering a fire alarm and traveling at a high speed, crashed into the car and demolished it. Henry brings an action against Mary to recover the price of the car. Who is entitled to judgment? Would there be any difference in result if Henry were a dealer in automobiles? Answer: Seller Remedy: Recover the Price. If Henry were a dealer in automobiles, judgment for Mary. If Henry was not a dealer in automobiles, and not otherwise a merchant in goods of that kind, judgment for Henry. Since this is an action by the seller to recover the price, it is governed by section 2-709(1)(a) of the U.C.C. which provides: (1) When the buyer fails to pay the price as it becomes due, the seller may recover together with any incidental damage under the next section the price (a) of goods accepted or of conforming goods lost or damages within a commercially reasonable time after risk of their loss has passed to the buyer. Section 2-509(3) provides in this type of case: "the risk of loss passes to the buyer on his receipt of the goods if the seller is a merchant; otherwise the risk passes to the buyer on tender of delivery." Thus, if the seller were a merchant, the buyer must have actually received the goods for risk of loss to pass to him. If the seller is not a merchant, a tender of delivery, as in this case, would be sufficient to transfer the risk of loss to Mary. 6. James sells and delivers to Gerald on June 1 certain goods and receives from Gerald at the time of delivery Gerald’s check in the amount of $9,000 for the goods. The following day, Gerald is petitioned into bankruptcy, and the check is dishonored by Gerald’s bank. On June 5, James serves notice upon Gerald and the trustee in bankruptcy that he reclaims the goods. The trustee is in possession of the goods and refuses to deliver them to James. What are the rights of the parties? Answer: Seller Remedy: Reclaim Goods upon Buyer's Insolvency. James’ right to reclaim the goods as against the trustee in bankruptcy is governed by Section 2-702(2) of the U.C.C. and Section 546(c) of the Bankruptcy Act. Under the Code, a seller who discovers that the buyer has received goods on credit while insolvent may reclaim the goods upon demand made within ten days after receipt by the buyer of the goods. The Bankruptcy Act recognizes this right if the sale is in the ordinary course of the seller’s business and if the reclamation demand is in writing. 7. The ABC Company, located in Chicago, contracted to sell a carload of television sets to Dodd in St. Louis, Missouri, on sixty days’ credit. ABC Company shipped the carload to Dodd. On arrival of the car at St. Louis, Dodd paid the freight charges and reshipped the car to Hines of Little Rock, Arkansas, to whom he had previously contracted to sell the television sets. While the car was in transit to Little Rock, Dodd went bankrupt. ABC Company was informed of this at once and immediately telephoned XYZ Railroad Company to withhold delivery of the television sets. What should the XYZ Railroad Company do? Answer: Seller Remedy: Recover the Price. The XYZ Railroad Co. should not redeliver the television sets to ABC Co. whose right of stoppage in transit is terminated upon buyer Dodd's reconsignment of the car at St. Louis. Title to the goods would depend upon the terms of the contract between Dodd and Hines. If it were a destination contract, title would remain in Dodd while the goods were moving between St. Louis and Little Rock, and the Railroad Co. would be obliged to deliver them to Dodd's trustee in bankruptcy. If it were a shipment contract, title would pass to Hines upon reconsignment at St. Louis, and the Railroad would be obligated to deliver the goods to the consignee Hines. 8. Robert in Chicago entered into a contract to sell certain machines to Terry in New York. The machines were to be manufactured by Robert and shipped F.O.B. Chicago not later than March 25. On March 24, when Robert was about to ship the machines, he received a letter from Terry wrongfully repudiating the contract. The machines cannot readily be resold for a reasonable price because they are a special kind used only in Terry’s manufacturing processes. Robert sues Terry to recover the agreed price of the machines. What are the rights of the parties? Answer: Seller Remedy: Recover the Price. Robert is entitled to recover the price of the merchandise from Terry. Section 2-709 U.C.C. provides: "(1) When the buyer fails to pay the price as it becomes due, the seller may recover, together with any incidental damages * * * the price * * *; (b) of goods identified to the contract if the seller is unable after reasonable effort to resell them at a reasonable price or the circumstances reasonably indicate that such effort will be unavailing." 9. Calvin purchased a log home construction kit, manufactured by Boone Homes, Inc., from an authorized Boone dealer. The sales contract stated that Boone would repair or replace defective materials and that this was the exclusive remedy available against Boone. The dealer assembled the house, which was defective in a number of respects. The knotholes in the logs caused the walls and ceiling to leak. A support beam was too small and therefore cracked, causing the floor to crack also. These defects could not be completely cured by repair. Should Calvin prevail in a lawsuit against Boone for breach of warranty to recover damages for the loss in value? Answer: Modification or Limitation of Remedy by Agreement. Yes, Calvin should prevail. The repair or replacement clause as a limitation of remedy was a failure in this case. Many of the house's deficiencies simply could not be repaired. As a result the remedy clause failed as to its essential purpose, and Calvin is entitled to any of the buyer remedies provided by the Code, i.e., consequential damages. Hartzell v. Justice Co., Inc., 693 F.2d 770 (8th Cir. 1982). 10. Margaret contracted to buy a particular model Rolls-Royce from Paragon Motors, Inc. Only one hundred of these models are built each year. She paid a $3,000 deposit on the car but Paragon sold the car to Gluck. What remedy, if any, does Margaret have against Paragon? Answer: Buyer Remedy: Cancel the Contract/Cover/Recover Damages for Non-Delivery. Margaret’s remedy depends upon the availability in the market of a comparable car. Under 2-716 of the Code, "Specific performance may be decreed where the goods are unique or in other proper circumstances." Because there were one hundred of this model of car manufactured, the goods are not strictly speaking "unique." Margaret may be able to demonstrate that this is a proper circumstance if she can show that cover is not readily available. On the other hand, if cover is readily available, a court would only allow her money damages, which would be calculated based upon the difference between the cost of cover and the contract price, plus incidental and consequential damages, less expenses saved. If Margaret does not cover, she could seek damages measured by the difference between the market price at the time when the buyer learned of the breach and the contract price, plus incidentaland consequential damages, but less expenses saved. This remedy is an alternative to cover and the buyer could not recover any consequential damages that could have been avoided by cover. 11. Technical Textile agreed by written contract to manufacture and sell 20,000 pounds of yarn to Jagger Brothers at a price of $2.15 per pound. After Technical had manufactured, delivered, and been paid for 3,723 pounds of yarn, Jagger Brothers by letter informed Technical that it was repudiating the contract and that it would refuse any further yarn deliveries. The remaining 16,277 pounds were never manufactured. On August 12, the date of the letter, the market price of yarn was $1.90 per pound. Technical sued Jagger Brothers for breach of contract. To what damages, if any, is Technical entitled? Explain. Answer: Seller's Remedies/Damages. Technical is entitled to $4,069.25 in damages, an amount equal to 16,277 times $0.25, which is the difference between the contract price ($2.15) and the market price ($1.90) of the yarn on the repudiation date. Is this the appropriate method to calculate damages in this case? In general, the measure of damages for repudiation of the contract by the buyer is the difference between the market price at the time and place of tender and the unpaid contract price. The intent of this remedy is to put the seller in as good a position as he would have been had the buyer performed. If the anticipatory repudiation comes to trial before the time for performance, however, the relevant market price for computing damages is that prevailing at the time that the buyer learned of the repudiation. Therefore, Technical's award of damages is based on the difference between the contract price and the market price on the date of repudiation. Jagger Brothers, Inc. v. Technical Textile Co., 202 Pa. Super. 639, 198 A.2d 888 (1964). 12. Sherman Burrus, a job printer, purchased a printing press from the Itek Corporation for a price of $7,006.08. Before making the purchase, Burrus was assured by an Itek salesperson, Mr. Nessel, that the press was appropriate for the type of printing Burrus was doing. Burrus encountered problems in operating the press almost continuously from the time he received it. Burrus, his employees, and Itek representatives spent many hours in an unsuccessful attempt to get the press to operate properly. Burrus requested that the press be replaced, but Itek refused. Burrus then brought an action against Itek for (a) damages for breach of the implied warranty of merchantability and (b) consequential damages for losses resulting from the press’s defective operation. Burrus was able to prove that the actual value of the press was $1,167 and, because of the defective press, that his output decreased and he sustained a great loss of paper. Itek contends that consequential damages are not recoverable in this case since Burrus elected to keep the press and continued to use it. How much should Burrus recover in damages for breach of warranty? Is he entitled to consequential damages? Answer: Buyer Remedy: Breach of Warranty. Judgment for Burrus affirmed. The measure of damages for breach of warranty is "the difference between the value of the goods accepted and the value they would have had if they had been as warranted." The press's warranted value was $7,006.08, the cost of the press to Burrus. The actual value of the press, according to testimony, was one-sixth of this amount or $1,167, resulting in a measure of damages of $5,839.08. Itek argues that Burrus cannot recover consequential damages because he decided to keep the press and continued to use it; however, Burrus was forced to continue to use the press in an effort to maintain his business, since Itek refused to provide a replacement machine. Therefore, Burrus may also recover consequential damages resulting from Itek's breach. He successfully established that the problems with the press reduced his volume of output and resulted in lost profits. Burrus personally spent one thousand hours trying to get the machine to work properly. Although the press should have generated at least $15 per hour, a third of the one thousand hours spent operating the press was wasted and unproductive. Therefore, the figure for consequential damages at which the trial court arrived is well supported by the evidence. Burrus v. Itek Corp., 46 Ill.App.3d 350, 360 N.E.2d 1168 (1977). 13. A farmer made a contract in April to sell to a grain dealer 40,000 bushels of corn to be delivered in October. On June 3, the farmer unequivocably informed the grain dealer that he was not going to plant any corn, that he would not fulfill the contract, and that if the buyer had commitments to resell the corn he should make other arrangements. The grain dealer waited in vain until October for performance of the repudiated contract. Then he bought corn at a greatly increased price on the market in order to fulfill commitments to his purchasers. To what damages, if any, is the grain dealer entitled? Explain. Answer: Buyer Remedy: Right to Cover. This was an anticipatory repudiation of the contract. Under Section 2-610(a) the aggrieved party may await performance for a commercially reasonable time, or under 2-610(b) resort to any remedy for breach. The court held that a commercially reasonable time expired on June 3, as the buyer had no reasonable expectation of performance by the seller, and "cover" was available. The buyer was therefore denied under Section 2-715(2) the consequential damages that he could have prevented by cover, and was allowed to recover from the seller only the difference between the contract price and the June 3 futures market price for corn to be delivered for October. This was substantially less than the actual loss sustained by the grain dealer who in vain had awaited performance of the repudiated contract until October and then had to buy corn at a greatly increased price on the market in order to fulfill commitments to his purchasers. Oloffson v. Coomer, 11 Ill.App.3d 918, 296 N.E.2d 871 (1973). 14. Through information provided by S-2 Yachts, Inc., the plaintiff, Barr, located a yacht to his liking at the Crow’s Nest marina and yacht sales company. When Barr asked the price, he was told that, although the yacht normally sold for $102,000, Crow’s Nest was willing to sell this particular one for only $80,000 in order to make room for a new model from the manufacturer, S-2 Yachts, Inc. Barr was assured that the yacht in question came with full manufacturer’s warranties. Barr asked if the yacht was new and if anything was wrong with it. Crow’s Nest told him that nothing was wrong with the yacht and that there were only twenty hours of use on the engines. Once the yacht had been delivered and Barr had taken it for a test run, he noticed several problems associated with saltwater damage, such as rusted screws, a rusted stove, and faulty electrical wiring. Barr was assured that Crow’s Nest would pay for these repairs. However, as was later discovered, the yacht was in such a damaged condition that Barr experienced great personal hazard the two times that he used the boat. Examination by a marine expert revealed clearly that the boat had been sunk in salt water prior to Barr’s purchase. The engines were severely damaged, and there was significant structural and equipment damage as well. According to the expert, not only was the yacht not new, it was worth at most only a half of the new value of $102,000. What should Barr be able to recover from S-2 Yachts and Crow’s Nest? Answer: Buyer’s Damages for Breach in Regard to Accepted Goods. Judgment for Barr. When a merchant sells goods sold in the ordinary course of the merchant's business, the goods carry an implied warranty of merchantability that they are fit for the ordinary purposes for which they are used. Moreover, if a buyer orders and purchases an item by specific sample or serial number, there is an implied warranty that it is new. Furthermore, the fact that Barr observed some minor defects in the yacht during a trial run (rust on the screws) did not waive the implied warranty. The Code provides that "the measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted," unless special circumstances establish a different amount. Thus, Barr was entitled to recover from the defendants an amount representing the difference between the value of the yacht if it had been as warranted and its actual value at the time of sale, plus the amount spent on repairs. Barr v. S-2 Yachts, Inc., 7 U.C.C.Rep.Serv.2d 1431 (1988). 15. Lee Oldsmobile sells Rolls-Royce automobiles. Mrs. Kaiden sent Lee a $25,000 deposit on a used Rolls-Royce with a purchase price of $155,500. Although Lee informed Mrs. Kaiden that the car would be delivered in November, the order form did not indicate the delivery date and contained a disclaimer for delay or failure to deliver due to circumstances beyond the dealer’s control. On November 21, Mrs. Kaiden purchased another car from another dealer and canceled her car from Lee. When Lee attempted to deliver a Rolls-Royce to Mrs. Kaiden on November 29, Mrs. Kaiden refused to accept delivery. Lee later sold the car for $150,495.00. Mrs. Kaiden sued Lee for her $25,000 deposit plus interest. Lee counterclaims, based on the terms of the contract, for liquidated damages of $25,000 (the amount of the deposit) as a result of Mrs. Kaiden’s breach of contract. What are the rights of the parties? Answer: Liquidated Damages. Judgment for Lee but only for actual damages. The U.C.C. 2-718(1) provides that in the event of a breach of contract, [damages] for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of other-wise obtaining adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty. Lee was limited to the actual loss which resulted from resale of the car at less than the contract price with Mrs. Kaiden. Lee Oldsmobile, Inc. v. Kaiden, 32 Md. App. 556, 363 A.2d 270 (1976). 16. Servebest contracted to sell Emessee two hundred thousand pounds of 50 percent lean beef trimmings for $105,000. Upon a substantial fall in the market price, Emessee refused to pay the contract price and informed Servebest that the contract was canceled. Servebest sues Emessee for breach of contract including (a) damages for the difference between the contract price and the resale price of the trimmings and (b) incidental damages. Discuss. Answer: Measure of Damages. Judgment for Servebest for the difference between the contract price and the resale price of the trimmings, incidental damages and the interest on those amounts. Upon breach of a contract by the buyer, the seller is entitled to cancel the contract and seek damages equal to the difference between the resale of the goods and the market price, or the contract price of the goods together with any incidental damages. U.C.C. 2-706(1). As long as the resale of the goods is commercially reasonable in terms of the method, manner, time, place, and conditions of sale, the seller may seek the difference between the resale value and the contract price. U.C.C. 2-706(2). The seller also may recover incidental damages which result from the buyer's breach. U.C.C. 2-706. Servebest Foods, Inc. v. Emessee Industries, Inc., 82 Ill. App.3d 662, 403 N.E.2d 1 (1980). 17. Mrs. French was the highest bidder on eight antique guns at an auction held by Sotheby & Company. Mrs. French made a down payment on the guns but subsequently refused to accept the guns and refused to pay the remaining balance of $24,886.27 owed on them. Is Sotheby’s entitled to collect the price of the guns from Mrs. French? Answer: Availability of Price as a Remedy. Judgment for Mrs. French. When French wrongfully rejected the guns, Sotheby & Co. had the option of recovering damages for nonacceptance or, in a proper case, maintaining an action for the price. Sotheby & Co. elected to pursue the latter alternative. An action for the price, however, is available only when the goods were accepted, were lost after risk of loss passed to the buyer, or the seller was unable to resell them at a reasonable price. Here, however, Sotheby & Co. failed to show any of these alternatives and thus could not maintain an action for the price. Rather, its available remedy was limited to recovering damages for nonacceptance. French v. Sotheby & Co., 470 P.2d 318 (Okla. 1970). 18. Teledyne Industries, Inc., entered into a contract with Teradyne, Inc., to purchase a T-347A transistor test system for the list and fair market price of $98,400 less a discount of $984. After the system was packed for shipment, Teledyne canceled the order, offering to purchase a Field Effects Transistor System for $65,000. Teradyne refused the offer and sold the T-347A to another purchaser pursuant to an order that was on hand prior to the cancellation. Can Teradyne recover from Teledyne for lost profits resulting from the breach of contract? Explain. Answer: Seller’s Damages for Nonacceptance or Repudiation. Judgment for Teradyne permitting recovery of lost profits. The Code permits an aggrieved seller to recover the difference between the unpaid contract price and the market price. Under this rule, Teradyne would recover nothing because the market price exceeded the contract price. But, the Code also states that this rule does not apply if it is inadequate to put the seller in as good a position as performance would have done. In such an instance, the measure of damages is the expected profit on the broken contract. Here, Teradyne would have made the sale to the resale purchaser even if Teledyne had not breached its contract. Teradyne is a "lost volume seller" and thus entitled to recover from Teledyne its expected profit (including reasonable overhead) on the broken contract despite the resale. The formula for determining lost profit is the contract price minus the direct costs of producing and selling the goods, provided that all variable expenses are identified. Here, Teradyne paid wages (including fringe benefits equal to 12 percent of wages) to its testers, shippers, installers, and other employees who directly handled the T-347A. These costs are not considered part of Teradyne's overhead. Rather, they are "direct costs" and, therefore, should be deducted from the contract price to determine Teradyne's recovery of lost profit. Teradyne, Inc. v. Teledyne Industries, Inc. US Court of Appeals, First Circuit, 1982, 676 F.2d 865. 19. Wilson Trading Corp. agreed to sell David Ferguson a specified quantity of yarn for use in making sweaters. The written contract provided that notice of defects, to be effective, had to be received by Wilson before knitting or within ten days of receipt of the yarn. When the knitted sweaters were washed, the color of the yarn “shaded” (i.e., variations in color from piece to piece appeared). David Ferguson immediately notified Wilson of the problem and refused to pay for the yarn, claiming that the defect made the sweaters unmarketable. Wilson brought suit against Ferguson for the contract price. What result? Answer: Limitations on Remedies. Judgment for Ferguson. Ordinarily, a buyer who accepts goods has a reasonable time after he discovers or should have discovered a breach to notify the seller of the breach. At the same time, however, parties can within limits modify or exclude warranties and fashion their own remedies for the breach of those warranties. Nevertheless, if the remedies available are limited in an unconscionable manner, the limiting terms are subject to replacement by the general remedial provisions of the U.C.C. Since the notice provision in effect precluded buyers from giving notice of latent defects, the provision failed in its essential purpose and left David Ferguson without a remedy. To that extent, the contract provision was displaced by the rule that Ferguson had a reasonable time to notify Wilson of the defect. Wilson Trading Corp. v. David Ferguson, Ltd. 20. Bishop Logging Company is a large, family-owned logging contractor formed in the Low country of South Carolina. Bishop Logging has traditionally harvested pine timber. However, Bishop Logging began investigating the feasibility of a fully mechanized hardwood swamp logging operation when its main customer, Stone Container Corporation, decided to expand hardwood production. In anticipating an increased demand for hardwood in conjunction with the operation of a new paper machine, Stone Container requested that Bishop Logging harvest and supply hardwood for processing at its mill. In South Carolina, most suitable hardwood is located deep in the swamplands. Because of the high accident risk in the swamp, Bishop Logging did not want to harvest hardwood by the conventional method of manual felling of trees. Because Bishop Logging had already been successful in its totally mechanized pine logging operation, it began a search for improved methods of hardwood swamp logging centered on mechanizing the process in order to reduce labor, minimize personal injury and insurance costs, and improve efficiency and productivity. Bishop Logging ultimately purchased several pieces of John Deere equipment to make up the system. The gross sales price of the machinery was $608,899. All the equipment came with a written John Deere “New Equipment Warranty,” whereby John Deere agreed only to repair or replace the equipment during the warranty period and did not warrant the suitability of the equipment. In the “New Equipment Warranty,” John Deere expressly provided the following: (a) John Deere would repair or replace parts that were defective in material or workmanship; (b) a disclaimer of any express warranties or implied warranties of merchantability or fitness for a particular purpose; (c) an exclusion of all incidental or consequential damages; and (d) no authority for the dealer to make any representations, promises, modifications, or limitations of John Deere’s written warranty. Hoping to sell more equipment if the Bishop Logging system was successful, however, John Deere agreed to assume part of the risk of the new enterprise by extending its standard equipment warranties notwithstanding the unusual use and modifications to the equipment. Soon after being placed in operation in the swamp, the machinery began to experience numerous mechanical problems. John Deere made more than $110,000 in warranty repairs on the equipment. However, Bishop Logging contended the swamp logging system failed to operate as represented by John Deere and, as a result, it suffered a substantial financial loss. What, if any, remedies is Bishop entitled to receive? Explain. Answer: Limitation of Remedy by Agreement. The evidence was clearly sufficient for the jury to determine that John Deere did not effectively perform its obligation to repair the equipment since the attempted repairs never cured the defects in the equipment, and as a result, Bishop Logging was deprived of the substantial value of the equipment it contracted for. John Deere's agent knew the equipment would be used in the swamp application and knew that regular, certain repair was promised and expected in order that all of the equipment could be used for its purpose. In negotiating the sale, John Deere's agent assured Bishop Logging that "those units would function properly in [the swamp] environment," and that he would have "at [his] beck and call ... factory support to make sure that the equipment functioned properly." The parties obviously agreed to exclude consequential damages in the event that John Deere performed its obligation to repair or replace defects. However, Bishop Logging could reasonably have expected to recover consequential damages when, as here, the defects were never adequately corrected and the limited remedy proved ineffectual. Profits lost as a result of the breach are recoverable under this section as consequential damages. According to Bishop Logging's expert witness, the total financial loss to Bishop Logging was either $540,921 or $723,323 for the three year estimated life of the equipment. The difference depended upon the price Bishop Logging received per cord of wood logged by it. The one million dollar actual damage award recovered by Bishop Logging, however, apparently included impermissible, noneconomic damages. To that extent, the actual damage award is reduced to the maximum total of economic damages claimed by Bishop Logging, $723,323. Bishop Logging Company v. John Deere Industrial Equipment Co.,317 S.C. 520, 455 S.E.2d 183 (1995). 21. The plaintiff contracted with the defendant to deliver liquid nitrogen to the defendant’s oil refinery production facility located in Belle Chase, Louisiana. The defendant uses liquid nitrogen to ensure the safe operation of its plant. The contract was a “requirement” contract—deliveries were based on how much liquid nitrogen the defendant had in its tanks. As a result, the plaintiff typically made deliveries seven days a week, and sometimes several times a day. The defendant claims that the plaintiff repeatedly failed to deliver the liquid nitrogen on time, thereby dropping the liquid nitrogen to dangerously low levels and compromising the safety of the plant and its personnel. The contract provided that if the plaintiff failed to deliver the liquid nitrogen as required the defendant’s sole remedy would be to purchase the product from another supplier and charge the plaintiff for the additional expenses incurred. The defendant did not exercise this right because it claims it was unable to purchase nitrogen from other suppliers. However, on the only occasion the defendant actually tried to purchase nitrogen from another supplier, it was successful. The plaintiff sued the defendant for breach of contract, and the defendant counterclaimed. What are the rights and remedies of the parties? Explain. Answer: Limitation of Remedy by Agreement. The defendant is entitled to recover damages under the terms of the exclusive remedy specified in the contract. This problem is based on Boc Group, Inc. v. Chevron Chemical Company, LLC, Superior Court of New Jersey, Appellate Division (2003), 359 N.J.Super. 135, 819 A.2d 431, http://lawlibrary.rutgers.edu/courts/appellate/a0338-01.opn.html. The trial judge relied on the exclusive remedy language of the contract, limiting defendant’s rights in the event of plaintiff’s breach. The court found that defendant’s sole remedy was to purchase nitrogen from another supplier and charge plaintiff for any additional expense. The court concluded that defendant did not have the right to terminate the contract and granted plaintiff’s motion for partial summary judgment on the issue of liability. After trial before a jury on the issue of damages, plaintiff was awarded a judgment in the amount of $1.2 million. Defendant appealed. Under the Uniform Commercial Code (UCC), parties to a contract may establish an exclusive remedy, which is the sole remedy available to them under the terms of the contract. Yet, despite this exclusive remedy provision, “where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in [the UCC].” The exclusive remedy provision is “not concerned with arrangements which were oppressive at their inception, but rather with the application of an agreement to novel circumstances not contemplated by the parties.” Although an arm’s-length contract between sophisticated commercial parties, such as in this case, should not be readily upset by a court, where a party is deprived of the substantial value of its bargain by reason of the exclusive remedy, the contract remedy will give way to the general remedy provisions of the UCC. When deciding whether an exclusive remedy has failed in its essential purpose, a court must examine “the facts and circumstances surrounding the contract, the nature of the basic obligations of the party, the nature of the goods involved, the uniqueness or experimental nature of the items, the general availability of the items, and the good faith and reasonableness of the provision.” Whether an exclusive remedy fails in its essential purpose is a question of fact. Here, the defendant’s exclusive remedy for the unexcused failure on the part of plaintiff to deliver product to defendant was defendant’s right to recover from plaintiff the difference between defendant’s cost to purchase nitrogen from another supplier and the price defendant would have paid plaintiff for the nitrogen under the terms of the contract. Defendant did not exercise this right because it claims it was unable to purchase nitrogen from other suppliers; therefore, defendant argues, the remedy failed in its essential purpose and may not be enforced. The evidence does not, however, support defendant’s argument. Earle testified that at the time he decided to terminate the contract with plaintiff he was not even aware of the exclusive remedy provision of the contract. Moreover, on the only occasion defendant actually tried to purchase nitrogen from another supplier, it was successful. The defendant did not give the exclusive remedy an opportunity to work before terminating the contract. It made no attempt to purchase liquid nitrogen from other suppliers when plaintiff was delinquent in its deliveries. Instead, Earle canceled the contract despite the contract’s exclusive remedy, which did not include termination. Both plaintiff and defendant are sophisticated business entities, freely entering into a contract which limited defendant’s remedies. There is no reason why the parties should not be held to the terms of their bargain. 22. Appalachian is a coal hauling company in southern West Virginia. Appalachian purchased four new Mack trucks for off-road coal hauling purposes. Appalachian purchased three of the trucks for $165,000 each and the fourth for $175,000. The trucks were sold to Appalachian by Worldwide, a franchised retail dealer for Mack. The express warranty made with regard to Appalachian's purchase of the four trucks validly disclaimed implied warranties and limited the express warranty to repairing or replacing defective parts. According to Appalachian, each of the four trucks failed to properly function due to a multitude of problems beginning immediately after the purchase. The trucks continually broke down, resulting in repeated instances of driving or towing the trucks back for repairs. The problems included not running, hard starting, transmission problems, overheating, leaking water pump, hoods falling off, and cabs falling apart. Although Worldwide never declined to try to repair the trucks, the repairs were never successful and replacement vehicles were never provided. Appalachian brought an action for revocation of acceptance of the four trucks, a refund of the purchase price, incidental damages, and consequential damages. Decision? Answer: Limitation of Remedy by Agreement. Although the implied warranties were validly disclaimed, there are genuine issues of material fact concerning whether the sellers satisfied their obligations under the trucks' express warranty and whether the express warranty failed of its essential purpose. Appalachian is entitled, on remand, to pursue the various remedies and damages provided in Article 2 of the Uniform The Official Comment to W.Va. Code, 46-2-313 [1963], on the creation of express warranties, confirms the fundamental views that "the whole purpose of the law of warranty is to determine what it is that the seller has in essence agreed to sell" and that "the probability is small that a real price is intended to be exchanged for a pseudo-obligation." Here, Appalachian did not purchase the four trucks knowing them to be defective and hoping that the trucks would be repaired at a later time. The trucks purchased were new, 2008 Mack trucks, Model GU-713, customized for off-road coal hauling purposes. If the trucks were inherently defective and unusable because of a manufacturing defect and incapable of being repaired, then Appalachian was deprived of the basis of its bargain. ANSWERS TO “TAKING SIDES” PROBLEMS Daniel Martin and John Duke contracted with J & S Distributors, Inc., to purchase a KIS Magnum Speed printer for $17,000. The parties agreed that Martin and Duke would send one-half of the money as a deposit and would pay the balance upon delivery. They also agreed to the following provision: In the event of non-payment of the balance of the purchase price reflected herein on due date and in the manner recorded or on such extended date which may be caused by late delivery on the part of [the seller], the Customer shall be liable for: (1) immediate payment of the full balance recorded herein; and (2) payment of interest at the rate of 12 percent per annum calculated on the balance due, when due, together with any attorney’s fees, collection charges and other necessary expenses incurred by [the seller]. When the machine arrived five days late, Martin and Duke refused to accept it, stating that the company had purchased a substitute machine elsewhere. Martin and Duke requested the return of its deposit but J & S refused. Martin and Duke sued J & S for the return of its deposit. J & S counterclaimed for full performance of the contract seeking an order that Martin and Duke accept delivery of the KIS machine and pay the entire balance of the contract. (a) What arguments would support the claim by Martin and Duke for the return of the deposit? (b) What arguments would support the claim by J & S for full performance of the contract? (c) Who should prevail? Explain. Answer: (a) Martin and Duke could argue that even if their rejection of the machine was wrongful they were only obligated to pay damages under Uniform Commercial Code (UCC) §2-708, which are limited to lost profits. Martin and Duke could also argue that the contract provision is an unconscionable liquidated damages clause. (b) J & S could argue that their remedy for breach by the buyer is governed by the contractual provision instead of what the UCC provides. J & S could argue that the provision is conscionable since it is only enforcing the promise the buyers made in their contract. (c) Answer: J & S will prevail. Martin v. Sheffer, 102 N.C.App. 802, 403 S.E.2d 555 (1991), http://scholar.google.com/scholar_case?case=3707898217986887729&q=403+S.E.2d+555+&hl=en&as_sdt=2,34. Martin and Duke argue that seller’s damages are controlled by UCC §2-708 and are limited to lost profits. However, §1-102 clearly allows parties to vary the provisions of the Code by agreement, except that the obligations of good faith, diligence, reasonableness and care prescribed by the Code may not be disclaimed. Also, §2-719(1)(a) provides that a contract for the sale of goods “may provide for remedies in addition to or in substitution for those provided in this article and may limit or alter the measure of damages recoverable under this article.” A contractual provision expanding seller’s damages upon breach of the buyer will therefore be upheld where the contractual provision is reasonable and in good faith. Martin and Duke do not argue that they were fraudulently induced into signing the contract, that the clause authorizing specific enforcement is ambiguous or a mistake, or that the seller breached the contract by failing to deliver at the time promised. Martin and Duke argue that the contract provision is an “unconscionable and oppressive” liquidated damages clause. However, a contract clause authorizing specific performance is different from a liquidated damages provision. Even if this were not the case, enforcement of the price the plaintiff freely agreed to pay for the machine cannot be considered unreasonable or a penalty. Furthermore, to find unconscionability, there must be an absence of meaningful choice on the part of one of the parties together with contract terms, which are unreasonably favorable to the other. As a merchant, Martin and Duke are presumed to be familiar with the terms and practices of contracts for the purchase of the tools of their trade. It is rare that a limitation of remedy will be held unconscionable in a commercial setting, since the relationship between parties is usually not so one-sided as to force an unconscionable limitation on a party. The contractual clause authorizing specific performance does not undermine the essential purpose of the contract. Therefore, the clause is enforceable. Solution Manual for Smith and Robersons Business Law Richard A. Mann, Barry S. Roberts 9781337094757, 9780357364000, 9780538473637