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Sales Outline

Which Provision Applies? Article 1 General Provisions will usually apply but article 3 or 4 will apply if they give more specific information. Article 2 Sale of Goods Article 3 ONLY Negotiable Instruments o If it is not a negotiable instrument then the CL applies. Note: Although Cash technically a note, for the purposes of our class cash is NOT an article 3 issue. What is a Negotiable Instrument? A negotiable instrument travels more freely through commerce than non-negotiable instruments. o In essence, a negotiable instrument means on unconditional promise or order to pay a fixed amount of money, with or without interest. The 2 types of negotiable instruments that our class is going to be focused on are: o Promissory Notes A note is a 2 party instrument: o Maker Person who issues the note and promises to pay. o Payee Person to whom the note is made payable to. o Drafts (Most common is a cheque) A draft is a 3 party instrument: o Drawer/Maker Creates the draft and orders the drawee to pay. o Drawee Person to whom the drawer addresses the order of payment (usually the bank). o Payee Person entitled to payments

7 Requirements of Negotiable Instruments 3 104 o If any of the below elements are missing, it is no longer an article 3 issue but rather common law. 1. Writing o 3 103 (a) o Any intentional reduction to tangible form. A writing does not have to be on paper as long as the instructions are reduced to a tangible form of communication. o E.g. Instructions can be written on a shirt. There are NO ORAL negotiable instruments Signed o 3 401(b) o Anything executed or adopted with the present intent to authenticate. This can include symbols and signatures or by an agent. o E.g. When Prince used a symbol as his name. Any signature or assumed name also constitutes a signing as long as it is used for the PRESENT INTENT to authenticate a writing.

Note: 2.


E.g. Man using his companies stamp to as a signature for his personal cheques.


Unconditional Promise or Order o 3 106 o An UNCONDITIONAL PROMISE or order CANNOT have an express condition or a conditional promise to pay. If a cheque/money order/draft has an express condition or a conditional promise that is subject to getting the money then the instrument is a NON-negotiable instrument. o E.g. I will pay you, if you first wash my car. o On Notes, Promise or Order are magic words.


The courts have ruled that implied promises are unconditional promises and do not destroy negotiability. o Furthermore, referencing other documents or contracts does not destroy negotiability as long as the additional writing does have an additional condition. The court has ruled that acceleration clauses are NOT express conditions or conditional promises to pay. o Furthermore, the courts have ruled that references to collateral or even additional collateral or even security interests do not destroy negotiability. If a cheque says, void after 90 days this condition will destroy negotiability but they person still owes you the money. Fixed Amount of Money o 3 102 o A holder of a negotiable instrument must be able to determine the amount of money they are going to receive from the individual who is promising to pay. The Test to determine if the money is fixed is whether the amount can be readily calculable. The amount has to be MONEY in order it to be a negotiable instrument. o Even if the amount of a commodity is readily calculable such as gold, it will not be ruled as a negotiable instrument because it is NOT money. In essence, as long as the payment is in an official currency, it will be ruled as MONEY. Courier Without Luggage o 3 104 o A negotiable instrument cannot contain additional promises. E.g. I promise to pay you $100 and Ill take you to lunch. o In essence, if there is any other burden stated on the document then it destroys negotiability. o Exceptions to this additional promises element include: 3 104 (a)(3): o Giving additional collateral or referencing collateral; Even if the instrument requires additional collateral in order to receive the money, it will not destroy negotiability. o Authorization or Power to the holder to confess judgment or realize on or dispose collateral; o A waiver of the benefit of any law intended for the advantage or protection of an obligor. Payment is conditional on the obligor waving their protection.







As long as the additional language references and does not give instructions or commands, then the court is more likely to rule that it is a negotiable instrument.

A good test to determine if there is luggage, Is if there another promise besides the promise to pay?


Payable on Demand or at a Definite Time o 3 108 o A negotiable instrument does not have to be dated but it must state when the instrument is payable or becomes due. 3 113 states that if an instrument is undated, its due date is the date of issuance OR if it is an unissued instrument, the due date becomes when the holder has possession of the instrument. o UNLESS, the maker did not intend to leave the instrument undated. A promise or order is payable on demand if: o It states that it is payable on demand or at sight or otherwise indicates that it is payable at the will of the holder; Does not state any anytime of payment. o However, if the marker intended to write a date and didnt then it destroys negotiability. States a period of time after the issuance of the draft or note, when the instrument is payable. o However, if the note or draft does have a date of issuance then it is difficult to determine when the instrument is payable and therefore, is not a negotiable instrument.


In essence, as long as the date is readily ascertainable, it will not destroy negotiability. o E.g. Payable on the date of my next birthday. o Non. Payable 30 days after my grandfather dies. This clause destroys negotiability because the payment date is not readily ascertainable. Acceleration clauses do not destroy negotiability. o E.g. This note is payable 100 years from this date but if my grandfather dies, it will be payable 30 days after the distribution of his estate. If a note says, payable on the date of next birthday, and I die before my next birthday, it will NOT destroy negotiability because the date is still definite. Payable to Bearer or Order o 3 109 (a) A promise is payable to bearer if it: o (1) States that it is payable to bearer or to the order of bearer or otherwise indicates that the person in possession of the promise or order is entitled to payment; o o (2) Does not state a payee; OR (3) States that it is payable to or to the order of case or otherwise indicates that it is not payable to an identified person.





When it is bearer paper, it is payable to anyone who has control of it. o It is like cash. E.g. Paid to Cash E.g. Paid to Bearer E.g. Paid to Merry Christmas (unless your name is merry Christmas) o 3 109

(b) When it is order paper, it limits the negotiability of the instrument by being only payable to the named person. o Order paper must include the words. PAY TO THE ORDER OF Therefore, if it is a promissory note, it must have the order words for it to be a negotiable instrument.


The only time we do not need order paper is when the instrument is a cheque. o If a cheque merely states, PAY TO, it will not destroy negotiability If a promissory note states, PAY to bearer it will be considered as bearer paper. If the instrument says, Pay to the order of John Smith OR bearer it will be treated as bearer paper. o Therefore, if an instrument has both qualities of order paper and bearer paper, it will be treated as bearer paper.

Note: Note:

Why is a negotiable instrument important? Once we have a negotiable instrument, any issue that arises out of that negotiable instrument, Article 3 will govern. Negotiation 3 201(a) o Refers to a transfer process whether voluntary or involuntary, other than by the issuer (the person making the document), to a person who becomes a holder of the instrument. If it is bearer paper, possession alone transfers the instrument. If it is order paper (pay to the order of a named person), indorsement and possession transfers the instrument.

Negotiation v. Negotiable Negotiation is talking about a specific transfer Negotiable means the instrument. Promissory Notes Maker o Person who issues the promissory note and promises to pay. Maker creates a note. Payee o Person to whom the note is made payable to. Payable to bearer this is the payee for order paper. Drafts Drawer o Person who creates the draft and orders the drawee to pay. Drawer creates a draft Drawee o Person to whom the drawer address the order of payment to (usually the bank). Payee o Person entitled to the payment. Transfer and Negotiation There are 3 steps in a life cycle of a negotiable instrument. o Stage 1: Issuance 3 105 Given by the maker or drawer to the payee o Stage 2: Transfer 3 203 Refers to every legally significant movement of the paper between issuance and presentment.

Stage 3: Presentment 3 501 The payee presents the instrument to the bank and the get the money.

How Transfer Occurs Order paper o In order to have a valid transfer of order paper, 2 things need to be present: It must be indorsed by the proper person; AND The instrument must be delivered to the named transferee o When both of this occurs, the subsequent payee becomes a holder. Bearer Paper o In order to have a valid transfer of bearer paper, ONLY one thing needs to be present: The instrument must be delivered to the transferee. o When this occurs, the payee becomes a holder. Bearer paper does NOT need to be indorsed to have a valid transfer.

Indorsement 3 204 o Indorsement means a signature, other than that of a signer as maker, drawer, or acceptor, that alone or accompanied by other words is made on an instrument for the purpose of: (I) negotiating the instrument; (II) restricting payment of the infstrument; OR (III) incurring indorsers liability on the instrument. o A signature on the back of the cheque is presumed to be an indorsement UNLESS the indorser explicitly states it is not an indorsement.

Special and Blank Indorsement 3 205 (b) Blank Indorsement o Occurs when the payee simply signs the back of the instrument. When this occurs, it converts the instrument into bearer paper. o Anyone who finds bearer paper, becomes the holder of the instrument. (c) Special Indorsement o To preserve the order character of the instrument, the original payee may specify a new payee by writing a New Payees Name above the indorsers signature. The new payee becomes a holder as soon as the instrument is delivered. If an instrument is payable to the Order of a named payee, only that payee can become a holder. o Therefore, no one else can qualify as a holder until the payee indorses the instrument. If there is a forgery of the payees indorsement, no later transferees (no matter how innocent) can quality as a holder. o If they cannot be a holder, then they cannot be a holder in due course and achieve super plaintiff status. The significance of a blank indorsement and a special indorsement has to do with who can cash the instrument. o Blank indorsement turns the instrument into bearer paper and anyone who has possession of the instrument can cash it, EVEN IF they steal or find the cheque. However, if there is a special indorsement, then only the named payee can cash the instrument. o If there is a named payee, no one can be a holder until that named payee indorses in the instrument AND transfer possession.



An instrument can alternate between bearer paper and order paper depending on how the payee transfers the instrument to subsequent payees. Holder in Due Course In order to become a holder in due course 2 elements must be met: An individual CANNOT become a holder of a non-negotiable instrument AND an individual cannot become a holder in course if they are not a holder first. In order to become a holder in due course (3 302) an individual must: o BE A HOLDER; 1-201 (21) To be a holder: o There must be a negotiable instrument; o The individual must be a holder through valid negotiation; Issuance: Possession of the cheque when you are the named payee; OR Through Negotiation: Indorsement and Possession.

FOR VALUE; 3-303 (a) an instrument is issued or transferred for value if: o (1) The instrument is issued or transferred for a promise of performance, to the extent the promise has been performed; o (2) The transferee acquires a security interest or other lien in the instrument other than a lien obtained judicial proceeding; o (3) The instrument is issued or transferred as payment of, or as security for, an antecedent is issued or transferred in exchanged for a negotiable instrument; OR o (4) The instrument is issued or transferred in exchange for the incurring of an irrevocable obligation to a third party by the person taking the instrument. 3 303 (b) o Consideration means any consideration sufficient to support a simple contract.


The holder is only protected for the amount they actually performed NOT the amount they promised to perform. o The exception to the value requirement is the shelter rule. o This occurs when an individual is given an negotiable instrument as a gift but acquire holder in due course rights from the individual gifting the instrument. o IN GOOD FAITH; 3 302 (a)(2)(ii) o Good faith means honesty in fact and the observance of reasonable commercial standards of fair dealings. Honestly in Fact (Subjective Standard) o I didnt know about the defect. Reasonable Commercial Standard of Fair Dealings (Objective Standard) o This standard is based on a reasonable prudent business person standard. WITHOUT NOTICE OF ANY DEFECTS. 3 302 (a)(2)(iii)


Defect can be shown through physical signs of forgery, alteration, or anything else will call its authenticity into question. In essence, if there is suspicious activity or circumstances surrounding the instrument, then the individual is deemed to have constructive notice of the defects. o E.g Defect can also be shown by the amount of profit or discount on the instrument. Paying a cheque for $11K when its worth $16k.


Generally a date change will not indicate a defect. o However, a name change is a sign of a defect. A drawees bank can never become a holder. o This is because the only way you can become a holder is either through: Issuance: if you are the named payee; OR Through negotiation. o The drawee bank only receives the instrument through presentment; therefore, they can never be a holder.


Effect of Becoming a Holder in Due Course When an individual becomes a Holder in Due Course, that person takes the instrument free of personal defenses, and contract defenses. Note: Personal defences cannot be raised against a holder in due course.

Transferees: Non-Holders 3 203 3 203 o (b) A transferee acquires all rights of the transferor. If transferor was a holder then the transferee is also a holder.

Shelter Rule 3 203(b) o Occurs when the transferor gives their rights to the transferee. These rights can include holder in due course status. o Therefore, even though the party may not satisfy holder in due course status, they still may acquire the same rights as a holder in due course. Note: A true holder in due course has superior rights than an individual receiving holder in due course rights. o Therefore, an individual who has acquired holder in due course rights, cannot sue the actual holder in due course. Under the shelter rule, subsequent individuals ONLY obtain the rights the previous owner of the instruments had. o Therefore, if they previous owner did not have holder status or holder in due course status, the subsequent holders of the instrument cannot get holder rights or holder in due course rights.


Defenses and Claims against a Holder in Due Course 3 305 (a) Real Defenses 3 305 (b) Effect of the Defenses Infancy (i) o If a minor is the MAKER of a note they can disaffirm the negotiable instrument and avoid payment.

However, if a minor is a named PAYEE, negotiation is effective even by an infant. o E.g. Employee gives minor a cheque and then minor indorses the cheque to another named payee. Therefore, at this point, real defenses to a negotiable instrument will not work but normal CL defenses may work. Mental incapacity (ii) Illegality (ii) o Illegal transactions are void and can be raised to avoid payment on illegally made instruments. E.g. Note on an illegal gambling debt. o However, this defense can ONLY be raised if the underlying transaction is illegal and Legal Duress (ii) o Refers to real duress and not economic duress. E.g. Someone pointing a gun at your head and telling you to make a note. Fraud in the Factum (iii) o Refers to when you dont know and you dont have a reasonable opportunity to determine what the document ACTUALLY says. E.g. Person is sight impaired and the reader lies about what the document says. o Fraud in the Inducement is NOT a viable defense because it is personal. Discharge in Bankruptcy (iv) o If a debt is discharged in bankruptcy it will also discharge obligation of paying a holder in due course. These are the only defenses that can be raised against a holder in due course. o EVERYTHING ELSE is a personal defense and will not work against avoiding payment to a holder in due course. E.g. I already paid the note, will NOT work against a claim by the holder in due course because this is a personal defense. o This is the example of paying the student loan, ANY DEFENSE can be raised against a NON-holder in course. o Therefore, even personal defenses can be raised to avoid payment to a non-holder in due course.



Forgery as a Real Defense Although forgery is not listed as a real defense under 3 305(a), o 3 401 says a person is not liable on an instrument, unless the person signs the instrument. Generally, when a holder in due course obtains a valid instrument, there is a presumption that the maker or drafters signature is legitimate. o Therefore, if the maker or drawer signature is forged, the maker or drawer must rebut that presumption and offer evidence that the signature is not theirs. If this rebuttal is successful, then they will not be liable, even to a holder in due course because there is no liability if you have not signed the instrument.

3 -305(b) Must be your own claim When asserting a defense for a claim, you only only succeed on the merits of your defense and not against someone else.

LIABILITY ON THE INSTRUMENT Based on 3 401, generally, a party is ONLY liable on a negotiable instrument if they sign the instrument. o However, the type of liability someone incurs depends on where they sign the instrument. Eg. Maker liability, Indorser Liability, Surety Liability.

Marker Liability 3 412 o Makers are PRIMARILY LIABLE on a note because they are the one promising to pay money. Makers generally sign at the bottom right hand corner of a note. 3 116 o If there is more than one maker on a note and all receive the benefit of the note, then they are jointly and severely liable. These makers are also referred to as true-co makers. o True-co makers can be more than 2 parties. Note: Even though true-co makers are jointly and severely liable to the payee, they are only liable for the amount they put in to each other.

Indorser Liability 3 415 o Indorsers incur secondary liability on a note because the maker still has primary liability. This liability extends to individuals who are the named payee of the note and subsequent indorsers of the note. o (a) However, an indorser does not experience liability UNTIL there has been a dishonour of that negotiable instrument. In other words, an indorser will ONLY experience liability if: o The drawee bank did not pay the cheque; OR o The maker of the note does not pay the note. (c) Furthermore, if the indorser does not get notice of the dishonour under 3 503, they will NOT experience any liability. In other words, in order for an indorser to experience liability: o The drawee bank or maker dishonour the note; AND o The indorser receives notice of the dishonour. (d) If the draft is accepted by a bank after an indorsement, the liability of the indorser under subsection a is discharged.


Subsequent indorsers can sue prior party, which also includes prior indorsers. o Once a party becomes an indorser they may be liable to subsequent parties. (b) An indorser can discharge their liability under subsection (a) if the indorser indorsing the instrument with the words, without recourse. o When this occurs, the indorser will not have any liability if the chq bounces. However, banks do not like this and will often not accept these chqs because it means they incur liability. (e) An indorser can also discharge their liability by dating when they indorsed the instrument. o This is because if 30 days pass from the time the indorser indorsed the instrument, they are no longer liable. An indorser can also be discharged from liability under the rule found in 3 605.




Surety Liability 3 419 For the purposes of our class, we are only responsible for surety liability under article 3. o Therefore, in order to be in article 3, the surety must sign the negotiable instrument. If the surety signs a contract promising to be a surety, article 3 will not apply, for the purposes of our class.

A surety is similar to a guarantor. o A surety agrees to pay the debt of someone else. In general, the type of liability a surety receives depends on the scope the surety signs as. o Therefore, if a surety signs as an indorser, then they incur indorser liability; marker, then they incur maker liability etc When there is a surety issue, there are 3 relationships: Surety Accommodation Party Receives NO Benefit

Principal (debtor) Accommodated Party Benefited Party

Creditor (holder) Person entitled to enforce the instrument

3 419 (a) an accommodation party is someone who signs only to benefit the accommodated party. o In other words, an accommodation party is someone who signs the back of the instrument and agrees to pay the debt of the principle if they default. 3 419 (b) The liability that the accommodation party incurs depends on the legal liability assigned to a person who signs the NI. o Therefore, they can incur maker, indorser, drawer etc liability de pending on their capacity when signing the negotiable instrument. 3 419 (c) An anomalous indorser is presumed to be an accommodation party. o In other words, an accommodation party is someone who signs the back of the instrument and agrees to pay the debt of the principle if they default. 3 419 (d) states the type of liability a surety is given. o A surety (accommodation party) gives one of two types of guarantees: Payment guarantee o If there is a payment guarantee, the person owed the money does not have to first seek payment from the primary debtor, instead they can go DIRECTLY after the accommodation party for payment. Collection guarantee o If there is a collection guarantee, the person owed the money must first seek payment from the primary debtor BEFORE they can seek payment from the accommodation party.


If we cannot determine if a surety is a payment guarantee or collection guarantee, payment guarantee is presumed. 3 419 (e) states that a surety who pays the debt of the primary debtor can always go after the accommodated party for the amount the surety paid.

Discharge of Indorsers and Accommodation Parties


If there is a discharge under 3 604 cancellation or renunciation, doesnt discharge accommodation party. o Therefore, the only way to discharge an accommodation party is through 3 605. 3 605 o (b) If the tender of payment is refused by the creditor, it will discharge the accommodation party or indorser to an amount equal to the tender of payment. Tender of Payment is under 3 603. o (c) If the indorser or accommodation party suffers a PROVEABLE loss as a result of creditor granting an extension of the due date to the debtor, then the indorser or accommodation party is discharged from liability by an amount that is equal to the loss suffered. The BURDEN to show of loss is on the INDORSER or accommodation party (d) If any party that can enforce the agreement with the debtor makes a material alternation of agreement, other than extension of due date, then the indorser or accommodation party is discharged. UNLESS the creditor can prove the accommodation party or indorser party was not injured. o The BURDEN to show the indorser was NOT injuried is on the creditor.


In subpart (c) the burden is on the indorser or accommodation party to show loss, in subpart (d) the burden is on the creditor to show loss. An increased interest rate on the loan is something that material alters the agreement. o (e) If the obligation to pay the instrument is secured by collateral and the creditor impairs the collateral, then it discharges the indorser or accommodation party liability to the extent of the impairment. E.g. Debtor makers a note and lists 500 shares of MSFT stock worth $50,000 but the creditor turns it down. When this occurs, the indorser or accommodation party is liability free up to $50,000. o This rule even applies if the creditor messes up the collateral paperwork???? However, if the bank never gets control of the collateral then it will not discharge the indorser or accommodation partys liability.



An indorser or accommodation party can pre-waive their right to have collateral. o (i) There is no discharge for the indorser or accommodation party if they consent to the material modification of the instrument OR if the indorser or accommodation party waives their right.

CL Principles for Surety We are not responsible for CL material on Surety.

Exoneration Is an equitable remedy where we can compel the principle debtor to pay. o E.g. If the surety is being sued and we know the principle debtor is collectable, under the CL principle of exoneration, we can bring the principle debtor into the suit. Subrogation Occurs when we step into the shoes of the party that we have paid. o E.g. If a creditor had a lien on a something but party A pays a debt owed by the creditor, Party A now has the rights to the lien. Contribution

Drawees Liability 3 408 o A drawee is not liability on Unaccepted Chqs 3 409 states, a drawee ONLY becomes liable on instrument when they certify them.

Drawer Liability 3 414 o (b) Drawers incur secondary liability because they expect their bank (drawee bank) to make payment on their behalf. Therefore, until the cheque is dishonoured, the payee cannot go after the drawer. Dishonour does not occur until we have proper presentment. o Presentment means a demand for payment by a person entitled to enforce the instrument. 3 501 (a) If note, demand for payment is made to maker. If draft, demand for payment is made to drawee bank. o Dishonour occurs when there is a REFUSAL of payment. 3 502. Therefore, a drawer does NOT incur liability until there is PRESENTMENT and DISONOR.

Note: Note:

Refusal of old cheque does NOT count as dishonour. These requirements are the same for indorser liability. 3 414 (c) o Certification destroys drawer liability. This is because the drawee bank steps into the shoes of the drawer when they certify the cheque. o If a drawee bank certifies a cheque they incur liability under 3 413; Acceptor liability.

Notice of Dishonor 3 503 o Notice of dishonour must be given to an indorser or drawer before they can incur any liability. In other words, whenever someone incurs secondary liability, they must be given notice of dishonour before they can incur any liability. o Notice of dishonour can be given by any person and can be given in any manner that is commercially reasonable, including oral, written, or electronic communication. In essence, valid notice of dishonour occurs when it reasonably identifies the instrument and indicates that the instrument has been dishonoured or not been paid or accepted.


Notice of Dishonour can be excused (3 504) when: o (a) The person entitled to the notice already has knowledge that in the instrument wont be paid ; OR o (b) The person entitled to the notice has waived his or her right to notice.

Drawee Liability 4 401 Properly Payable Rule o The drawee is usually a bank. Banks may charge the accounts of their customers when item is properly payable, even if it creates an overdraft.

A properly payable instrument occurs when; Authorized by the customer; Complies with the agreement between the bank and its customer; If a bank charges a customers account that was not properly payable, the bank will have to eat the loss under 4 401. E.g. Someone forges the drawers signature. o NOT properly payable because customer did not authorize.

Kiss my foot problem 3 409 o (a) Acceptance means the drawees signed agreement to pay a draft as presented. A bank has no liability on an unaccepted cheque. o In other words, if the cheque is NOT certified then the drawee bank has no liability to the payee under article 3 liability. This is because the drawee bank did not sign the cheque.

Agent Liability 3 402 o (a) If an agent is authorized to sign on behalf of the principle, the principle is liable EVEN if they are NOT named/identified on the instrument. This is an exception to the general rule, that an individual is liable only if they sign the negotiable instrument. o (b) If an agent wants to avoid being personally liable for signing an instrument, that agent should, Unambiguously identify the principle; AND Unambiguously identify that they are signing as merely an agent on the face of the instrument.


An agent cannot say they merely signed the instrument as an agent in order to escape liability from a holder in due course. o This is because, saying you are an agent is a personal defense and personal defenses cannot be raised against a holder in due course. An agent can only escape personal liability against a holder in due course if they unambiguously identify the party they are signing AND unambiguously identify they are signing merely as an agent.

Tender of Payment 3 603 o In this section, we do not want the creditor to refuse payment from someone who should be paying and then go after the surety for payment. o o (a) A tender of payment occurs the exact same ways as in contract law. E.g. Someone is standing there with cash or a negotiable instrument requesting to pay. (b) If the tender of payment is refused by the creditor, it will discharge the accommodation party or indorser to an amount equal to the tender of payment. As long as the tender of payment was made by someone who the indorser or accommodation party could seek payment from, such as a maker. (c) If either an accommodation party or an indorser attempt to tender the full amount that is due and then that is refused, it will cut off the creditors right to ask for future payment. ARTICLE 4

Mainly deals with banks and banking o 4-104 sets out definitions that are used in the article 4 provisions. There are a lot of terminology differences between article 3 and article 4. o For instance, drawee and payor bank; depository bank and collection bank. If there are any conflicts between article 3 and article 4, article 4 will prevail.


Chqing Accounts 4 103 o If the bank makes a payment on a cheque, the bank must do it in compliance with the agreement it has with customers and 4 401. Properly Payable Rule 4 401 o (a) A bank may charge against the account of a customer if the item is properly payable. EVEN IF it creates an overdraft. o An item is properly payable if: It is authorized by the customer; AND In accordance with any agreement created between the customer and the bank. Note: A bank does not have to pay the overdraft if it pays a properly payable cheque. o (b) If a bank pays a cheque that is NOT properly payable, then the customer will not be charged and the bank is liable for the amount of the cheque and any charges that result from the payment. E.g. forgeries, someone stole the customers chq book, etc (c) A bank may charge a post-dated cheque before the date of the cheque if the cheque is properly payable. UNLESS the customer gives the bank notice not to pay the cheque until the post-dated date. (d) A bank, in good faith, can charge a customers account against an altered item, improper cheque, or cheque completed by someone else. UNLESS the bank has notice that the completion was improper. o E.g. Bank knows you signed your parents signature. o E.g. Customer writes the wrong date on a cheque and then crosses it out to write the correct date.

Negligence 4 406 o (c) If a bank sends a customer monthly statements of their account, the customer must check within a reasonable time to make sure there are NO unauthorized cheques or alternations. o o (d) If the bank proves that the customer failed to act reasonably under (c), then the customer may be barred from recovery if the bank paid an instrument in good faith. (e) If the bank pays an instrument that was NOT in good faith or acts negligently, then the preclusion in (d) does not apply. In other words, if the also bank acts negligently and pays the instrument in bad faith, then the customer can still recover under 4 401. (f) See comment 5; Over one year problem

Ratification If an individual has knowledge that someone has signed an unauthorized cheque from their account and they do nothing, the law will deem that the individual has ratified the cheque. o E.g. Paying the locksmith with parents cheque. Note: In general, if a bank charges a customers account on an instrument that was not properly payable, the bank must credit the customers account. o However, if the customer was negligent and their negligence caused the bank to suffer the loss then the bank will not have to credit the customers account.

Wrongful Dishonour 4 402 o (a) Occurs when a payor bank does not pay a properly payable cheque with proper presentment. o (b) When this occurs, the payor bank is liable to the customer for proximate damages and consequential damages (which include mental anguish). E.g. bank refusing to pay a chq you wrote for the bar, and then you dont get a job. o In order to receive damages, the customer has the burden to show the loss.


When there is Wrongful Dishonour, the payor bank is ONLY liable to its customer (drawer). o The named payee CANNOT go after the payor bank in a wrongful dishonour cause of action. o If a bank wrongfully dishonors a chq, the customer can receive damages that were proximately cause by the wrongful dishonor. These damages are limited to actual damages proved. o May include damages for an arrest or prosecution and other consequential damages.

Customers Right to Issue Stop Payment Orders 4 403 o (a) In general, a customer can issue a stop payment order as long as the customer provides sufficient information that allows the bank to identify the instrument that they do not want paid. o (b) If the notice of stop payment was made orally, then it will be valid for 14 days. If the notice of stop payment was made by a written instrument, then it will be valid for 6 months. o The validity of oral and written notices can be renewed.


If a cheque is paid contrary to a stop payment order, the customer may receive damages from the payor bank, as long as the customer is NOT unjustly enriched. o E.g. customer issued stop payment but the bank still honoured the cheques and paid her bills. Comment 4 in the UCC 4 403 says that a customer has NO RIGHT to issue a stop order to certified cheques, cashiers cheques, etc o This is because the bank is primarily liable on these instruments under 3 413. If the bank fails to pay a cashiers chq, then they are liable.


Old Cheques 4 404 o A bank is under no obligation to a customer, other than a certified check, if it charges a customers account on a cheque that is presented more than six months after its date, UNLESS the payment was made in good faith. An argument against good faith relates to the date of the cheque. If the cheque is very old and the bank still pays the cheque, it can be a sign of bad faith.

Death or Incompetence of the Customer 4 405 o (a) If a payor bank does NOT know about the death or incompetence of the customer it can continue handling their cheques the same way they always have. o (b) Even with knowledge of death or incompetence, a bank may pay cheques or certify cheques 10 days after receiving notice, UNLESS they are ordered to stop payment by a person claiming an interest in the account.

Banks Right to Setoff (CL RULES) If the banks customer has a debt that is due, the bank can use the customers CHQING account to set-off the amount that is due. o If the debt is not yet due, the bank can still go into the chequing account of the customer to set-off the amount that is due if: The customer has become insolvent; AND As long as it is done in a fair and appropriate way. Note: The bank can ONLY use set-off from a customers GENERAL CHEQUING ACCOUNT. o In other words, if a customer has a chequing account that is only used for paying off tax services, the bank CANNOT go into this account to set-off.

Subrogation Rights 4 407 o In general, if a bank pays an item improperly, they must credit the customers account. However, K for machine by seller to buyer. Delivered on sept 1 and the buyer writes chq on sept 2. Buyer rejects sept 3 claiming defective. Stop order received sept 3. Chq paid over sept 4. Buyer convinces count

Warranty Liability When a cheque is deposited into a bank, everything that occurs BEFORE the cheque is deposited in the bank is governed by article 3 o Everything that occurs AFTER the cheque is deposited in the bank is governed by article 4. Transfer Warranties and Presentment Warranties are governed by both articles 3 and articles 4.

Transfer Warranties 4 207 (a) o Use article 4, if the entity receiving the instrument is a bank. 3 416 (a) o Use article 3, if the entity receiving the instrument is a non-bank. Whoever transfers an instrument for consideration gives the transfer warranty. o Whoever receives it is the transferee and subsequent transferees. Transferor warrants that: o The warrantor is a person entitled to enforce the instrument; o All signatures on the instrument are authentic and authorized; o The instrument has not been altered; o The instrument is not subject to a defense or claim in recoupment of any party which can be asserted against the warrantor; AND

The warrantor has no knowledge of any insolvency proceeding commenced with respect to the maker or acceptor or, in the case of an unaccepted draft, the drawer.

Any transferee who took the instrument in good faith may recover from the warrantor an amount equal to the loss suffered as a result of the breach but not more than the amount of the instrument plus expenses and loss of interest as a result. o These warranties may NOT be disclaimed.

Presentment Warranties 4 208 (a) o Use article 4, if the entity receiving the instrument is a bank. 3 417 (a) o Use article 3, if the entity receiving the instrument is a non-bank. Note: Presentment warranties can ONLY be raised by the drawee bank. Anyone who had possession of the chq warrants: o Warrantor is entitled to enforce the draft; o It has not been altered; o It has not be forged; AND o The warrantor has no knowledge that the signature of the drawer of the draft is unauthorized. The drawee bank gets these warrantys from the depository bank and any other person or entity who had the instrument before them. o In other words, the drawee bank can sue anyone who held the instrument prior to them. Presentment Warranties can ONLY be obtained by a payor/drawee bank. o A payor/drawee bank can never get transfer warranties.


Conversion Liability 3 420 o (a) If something constitutes conversion under the CL, then it satisfies conversion of a negotiable instrument under the codified code. However, in order to bring a suit for conversion, the individual or entity must have either actual or constructive possession of the instrument before it can be converted from you. Note: Constructive Possession can occur if an instrument is received by an agent of the principle. o (b) In an action under subsection (a), the measure of liability is presumed to be the amount payable on the instrument, but recovery may not exceed the amount of the plaintiffs interest.


If an item has been converted and is transferred, everyone who took that instrument is also converting that instrument. o In other words, once converted, always converted If converted, the instrument is no longer a good instrument and no one can become a holder in due course. The only proper plaintiff in a conversion action is the named payee or indorsee who receives actual or constructive possession. o A drawee or drawer cannot be a proper plaintiff in a conversion action because they did not have actual or constructive possession. If a bank cashes a cheque that has a restrictive indorsement (For Deposit Only), they have converted the cheque.



Forgery of the Drawers Signature Based on the rule presented in Price v. Neal, o If the drawers signature is forged, the payor bank is usually the one that incurs liability for payment of the instrument because the bank paid an instrument that was not property payable. This is because we expect the payor bank to know what the drawers signature looks like. o In other words, the payor bank incurs liability because they are in the best position to catch the forgery. o Furthermore, the payor bank is barred from raising Presentment Warrantys against the depository bank because before the party can collect from the depository bank they must have knowledge that the drawers signature is fraudulent


A payor bank cannot sue under presentment warranty for a forged cheque because the depository bank did not know the signature was forged. o The only one who breached the warranty is the bad guy who forged the cheque and they are usually gone.

Forgery of the Payees Indorsement Signature If the payees signature is forged, the depository bank is usually the one that incurs liability for payment of the instrument. o This is because the depository bank is in the best position to discover the forgery. o breached their presentment warranty because the instrument is not valid. If the named payee did not properly indorse the instrument, then the depository bank does NOT take as a holder. o In other words, if a depository bank is not entitled to enforce the instrument, they breached the presentment warranty and they eat the loss.

Unauthorized Signatures 3 403 o (a) An unauthorized signature is ineffective, except as the signature of the unauthorized signer in favour of a person, in good faith, pays the instrument or takes it for value. Validation of the Forgery Imposter Rule (week 7 @ 12:45) 3 404 o (a) If an imposter induces the issuer of an instrument by: Impersonating a payee; OR Convincing the issuer that they are acting on behalf of the payee, o Then the indorsement of that instrument will be valid as long as the indorsement is made in good faith. o (b) does not deal with an imposter. If the person whose intent that the named payee either has no interst or is fictisous, then any person is a holder, and any person indorsing is a valid. o (d) If a depository bank has failed to exercise ordinary care, they may be held liable to an extent on those instruments, but only to the extent of their share of the liability.


We are in subpart (a) if the facts indicate someone is tricking another individual. We are in subpart (b) if the facts indicate someone is listing fictional people in order to rip someone off. We are in subpart (b) if the facts indicate someone is

Identification of Person to Whom the Instrument is Payable 3 110

(a) The person to whom an instrument is initially payable is determined by the intent of the person.

Employers Responsibility for Fraudulent Indorsement by Employee 3 405 o If an employee with responsibility authorizes/signs/makes the employer draft a cheque, and the employee intends to keep it. The employees action gives liability to the employer, because the employer is the person who is in the best position to stop the misconduct.

Material Alteration 3 407 o (a) Alteration means an: (i) unauthorized change in an instrument that actually changes the obligation on the negotiable instrument; OR (ii) unauthorized addition of words or numbers or other change to an incomplete instrument related to the obligation of a party. o E.g. Cheque was originally issued for $100 but then it was fraudulently changed to $1000.

(b) Except as provided in subsection (c), an alternation fraudulently made discharges a party whose obligation is affected by the alteration unless that party assents or is precluded from asserting the alternation. In other words

(c) A payor bank or drawee paying a fraudulently altered instrument or a person taking it for value, in good faith and without notice of the alternation, may enforce rights with respect to the instrument: (i) according to its original terms; OR o Cheque was originally issued for $100 but then it was fraudulently changed to $1000. The obligated party still is liable for $100. (ii) in the case of an incomplete instrument alternated by unauthorized completion, according to its terms as completed.


However, if the alternation was caused by the negligence of the maker or drawer, then the bank may avoid liability. o E.g. You write a chq in pencil.

Negligence Rule Contributing to Forgery 3 406 o When looking at alteration, a partys negligence can actually make them liable. In other words, a bank can avoid liability on an altered instrument when the customer asks negligently. o E.g. Signing a blank cheque. Unless the customer puts the bank on notice that he lost the blank cheque.

Therefore, if the bank still pays the cheque, even after they have notice, they will be liable under the properly payable rule.


The Bank Statement Rule also relates to Negligence o

Non-Personal Cheques These cheques refer to cashiers cheques, teller cheques, and bank drafts. o Customers purchase these cheques from the bank and when this occurs, the bank becomes primarily liable on the instrument. 3-411 o (b) If a customer purchases these types of cheques, the customer cannot stop payment on these cheques because a customer can ONLY stop payment on their personal cheques.

Depositary Bank Holder of Unindorsed Item 4 205 o If a customer delivers an item to a depositary bank for collection: (1) the depositary bank becomes a holder of the time at the time it receives the item for collection if the customer at the time of delivery was a holder of the item, whether or not the customer indorses the item, and, if the bank satisfies the other requirements of Section 3 302, it is a holder in due course, AND (2) the Forgery In general, if there is a forgery, liability is imposed on the individual or party who is in the best position to stop the forger. o In most cases this will be a bank.

Imposter Rule 3 404 (a) o Occurs when someone is impersonating the payee; OR E.g. Someone calls me on the phone and says he is Matt and asks me to send him money. o Convinces the issuer that they are acting on behalf of the payeee E.g. Someone pretends to be Matts friend and says he is in jail. Note: The loss is on the dummy that wrote the chq and NOT the bank???

Fictitious Payee 3 404 (b) o Occurs when a authorized chq drawer (such as a treasurer) makes chqs to fake people and indorses those chqs This rule focuses on the intent of the guilty drawer who makes chqs with no intention that the fake payees will have any interest in them. o Instead the guilty drawer intends to keep these chq for himself. Padded Payroll 3 405 o Occurs when an employee with responsibilities (not janitor) takes corporate chqs and deposits them into fake accounts. E.g. Plant Foreman has 40 employees working under him. However, he tells the corporate treasurer that he has 43 employees. o The foreman signs the name of the fake people.

When this occurs, the bank does not incur liability because the chqs where properly payable. Therefore, the liability falls on the employer because of their negligence.

ARTICLE 2 Scope of Article 2 2 102 o We apply Article 2 instead of the CL when we have a transaction for goods. NOT just a sale for goods. In other words, the UCC applies when we have a TRANSACTION for goods. o A transaction for goods includes: Sale of Goods Being injured by goods (2 litter bottle pops off and hits you in the eye). Note: Note: The UCC applies even if the parties involved are NOT merchants. Article 2 (a) deals with leases and NOT sales. o There are 3 factors to distinguish article 2 and article 2 (a):

What is a Good? 2 105 o (1) A good is all things which are movable at the time of identification to the contract for sale OTHER THAN money, investment securities, and things in action. A thing in action is a personal proprietary right to bring an action to recover a debt, action or suit. o E.g. a lawsuit. o Goods also include the unborn young of animals and growing crops AND other identified things attached to realty as described in the section on goods to severed from realty (section 2 107). A contract for the sale of minerals or the like (including oil, gold)

(2) Goods both be existing and identified before any interest in them can pass. Goods which are not both existing and identified are future goods. A purported sale of future goods or of any interest operates as a contract to sell. o E.g. Are these items goods? Insurance Contract? o Not a good, because it is a thing in action Sale of Real Property? o Is not movable Sale of Standing Timber? o Is a good, because it can severed from the land. Sale of Goods as a part of a Medical Procedure? o Generally UCC does not apply. Sale of Electricity? o Depends on the jurisdiction, some courts have said it is a good while other have said it is a service. Sale of Software? o Depends on the jurisdiction, but the trend seems to be that courts are treating software as a service instead of a good. Predominance Purpose Test (Majority of Courts) When there is a hybrid contract, the courts will look at the contract as a whole to determine what the predominant purpose of the contract was. o If the predominant purpose of the contract was a transaction for goods the Article 2 applies.

If the predominant purpose of the contract was for services then the CL applies.

Under this test, the court will not look at the contract and apply 2 different laws, because they contract must be viewed as a whole. Based on policy reasons, a predominance purpose test should NOT be used when contract has done physical harm to one of the parties. o This is because the courts do not want wrongdoers to escape liability under the UCC.


Gravamen Test (Minority of Courts) Looks at the nature of the harm. o If the nature of the harm comes out of the goods part of the contract, then UCC applies o If the nature of the harm comes out of the services part of the contract, then the CL applies. Note: In General, even though the Graven test is used in a minority of jurisdictions, it is more likely used when someone experiences physical harm. o Therefore, if the individual was severely injured if the CL applies they can get punitive damages which are generally not allowed under the UCC.

Merchants 2 104 o There are 3 ways to classify Merchants: There are three types of Merchants. o A merchant is someone who deals with the kind being sold. o A merchant is someone who holds knowledge or skill particular to the practices involved in the transaction o A merchant is someone who employs someone who holds knowledge or skill particular to the practice involved in the transaction. Note: Note: Even if an individual quits there job and opens a store, once they open their store they become a merchant. The court is split as to whether to classify farmers as merchants. o It depends on the facts and whether they have advance degrees in agriculture. Generally large farmers are merchants.

Contract Formation Contract Formation in General 2 204 o (1) In general, a contract for sale of goods may be made in any manner to show agreement. E.g. Contracts can be formed by the conduct of the parties. o Therefore, if the parties behave like there is a contract, then the UCC will recognize there is a contract. o (2) The contract can be created, even though we do not know exactly when the contract was created. The exact moment when the K does not have to be determined (3) The contract can exist even if there is indefiniteness or there are terms missing. The only thing that MUST be present is quantity. o The court said that as long as the contract requires a quantity in order for the court to determine a remedy if it is breached.


In general the court will conclude a contract existed if the 2 prong test is satisfied. o Parties intended to form a K; AND

Court can fashion an appropriate remedy.

Offer and Acceptance 2 206 o (1) (a) Unless the parties have unambiguously indicated by the language or circumstances, An offer to make a contract, in any manner; Can be accepted in any manner that is reasonable by the circumstances. o (1) (b) An offer or order to buy goods for prompt or current shipment shall be construed as inviting acceptance by either, Prompt promise to ship; OR By actual shipment of confirming or non-conforming goods. o However, a shipment of non-conforming goods does not constitute an acceptance if the seller gives notice that it is for an accommodation ONLY. Otherwise, the seller is accepting and is also in breach because they shipped non-conforming goods.

Firm Offers 2 205 o Occurs when the offer is made BY a merchant. It does NOT have to be between merchants. o The offer must be: Signed; In a writing; Give assurance that the offer will remain open (for no more than 90 days); AND Offer must be to buy or sell goods When these elements are met, these merchant offers are irrevocable, for the time stated or for at least a reasonable time that does not exceed 3 months. EVEN if they lack consideration.


This is an exception to the general rule that an offer may be revoked when the party wants prior to an acceptance.

Statute of Frauds 2 201 o In some circumstances a K does not have to be in writing. However, there must be a writing if: o (1) There is a sale of goods in excess of $500; o (2) Between Merchants o (3) Writing Excused If a K is not in a writing it could still be enforceable if: o (a) The good is specially manufactured for buyer and not suitable for sale to others in ordinary course of business. o (b) Party against whom enforcement is sought admits there is a K. o (c) Part Performance with respect to good for which payment has been made and accepted or which have been received and accepted. Note: Generally, quantity is required in K because the court must to know how to fashion a remedy.

Parole Evidence Rule

Occurs when there is a writing and one of the parties involved argues that the written contract does not contain everything that the parties agreed upon. o The goal of the PER is to determine when a term that is outside of the written contract can become part of the contract even though it is not in writing. If the underlying K is not in writing, PER does NOT apply. 2 202 o If there is a writing that is fully or partially integrated, it cannot be contradicted by a prior agreement, whether in writing or orally, or by an oral contemporaneous agreement. However, it may be supplemented by: o Course of dealings o Course of performance o Usage of trade o And any additionally consistent terms, UNLESS the term or provision is something that would have been included in the writing but was not. o If the writing applies, then oral or written agreements are going to be excluded


Battle of Forms (week 9 @ 10 mins 15 mins). 2 207 o This is always a 2 step process First step is section (1): Courts will not imply consent to additional terms to 2 207 Note: Minor alternations will probably be let in, but major alternations wont. o The test to determine if the alteration is material or not will be: Hardship to the other party; Surprise Completely different K o Warranties There are 2 basic types of warranties under the UCC: o Warranties of Title o Warranties of Quality Express Warranties of Quality Implied Warranties of Quality o Implied Warranty of Merchantability o Implied Warranty of Fitness for a Particular Purpose

Warranties of Title 2 312 o When the seller engages in selling for goods, they have automatically made a warranty to the buyer: (a)The seller is conveying good title to the goods; That the transfer is rightful and valid; AND (b) Goods will be delivered free of any claim or liens of the sellers creditors of which buyer has no knowledge. Note: Void Title occurs when there is no voluntary transfer o Thieves only have void title because the person they got the good from did not voluntarily transfer it to them. However, if If a seller is defrauded, such as when a buyer pays for the item with a forged cheque, good title still transfers because the seller voluntarily gave up title.


If an item is stolen, good title does NOT transfer. o Even if an buyer does not have notice that the item was stolen, the facts of circumstances of the fact pattern will show whether or not the buyer should have known title was not good. E.g. Buying a Rolex for $100 in a bathroom.

Warranties of Title can be Disclaimed by: Specific Language o Must be a very specific disclaim and assent by buyer. Cannot be disclaimed under 2 316; ONLY under 2 312 (2); OR Circumstances o Buyer has reason to know that the seller does not claim title. E.g. Buyer buys watch from seller on street corner in NYC. Warranties of Quality Express Warranties 2 313 o Express warranties are NOT automatic. They only arise when the seller takes affirmative action to create them. o In other words, in order for these warranties to arise, the seller must explicitly state or show or do something that is an actual representation related to the good AND that action acts as the basis of the bargain (in part or in whole) to purchase the good. E.g. Seller tells buyer that the hammer is the most durable on the market and buyer wants a durable hammer. NON. Seller tells buyer that this is a great and reliable care as determined mechanically, but the buyer takes it to his own mechanic. o If the car breaks down, the buyer cannot sue the seller for breach of express warranty because since the buyer took the car to his own mechanic, the sellers statements were not the basis of the bargain. Note: Mint Condition, A1 Condition, Like New, Straight out, and fly right for chickens, were all deemed express warranties. Puffing statements do NOT satisfy the express warranty requirement. o Generally, puffing statements are opinions. o (c) Any sample of model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample of model. When a sample or model is shown, it creates an express warranty that the goods will conform to that sample or model.



These warranties may be written or oral. But they must have been made PRIOR to the K, otherwise it could NOT be the basis of the bargain. Implied Warranties Implied warranties are automatic and will attach to every sale UNLESS they are specifically waived. o Implied warranties arise out of a matter of law.

Implied Warranty of Merchantability 2 314 o A warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of kind.

In other words, In order to receive an implied warranty of merchantability, the merchant MUST be a seller of goods of this type. o E.g. Buyer purchases wine glass from a seller that mainly sells wine. o NON. Buyer purchases a wine glass from a seller that mainly sells hardware tools. The Seller(Merchant) warrants that the goods: Conform to the Contract Description; Are fit for ordinary purpose; Variations within normal limits; Adequately contained, packaged, and labelled; AND The goods conforms to label.

2 314 (2) (c) o To determine if there is a breach of the implied warranty of merchantability, the courts looks to determine if the good is fit for its ordinary purpose. If the good is not fit for its ordinary purpose then there is a breach of the implied warranty of merchantability. o E.g. Non-conforming goods are not fit for its ordinary purpose. o E.g. Clam Chowder from NE has bones in it, the buyer is a NE native who has had clam chowder, so the court said it WAS fit for its ordinary purpose. The fit for its ordinary purpose is a subjective test. o Whether or not a good is fit for its ordinary purposes is based on the expectation of the buyer. Unless the buyer is an extreme case. o E.g. Buyer has an extreme condition which only affects 5% of the population.


Implied Warranty of Fitness for a Particular Purpose 2 315 o The implied warranty of fitness for a particular purpose is breached when: The seller must know or have reason to know of the buyers particular purpose for the goods; The seller must know or has reason to know that the buyer was relying on the sellers knowledge or skill; AND The buyer must actually rely on the sellers knowledge or skill. Note: Applies to all transactions, NOT JUST merchants. Disclaimers of Warranty 2 316 o (1) Express warranties may be disclaimed. However, although the rule states, a seller can disclaim an express warranty, in practice sellers cannot disclaim express warranties because in essence they would be saying, this is not going to work as it is supposed to. o UNLESS, there is a PER ISSUE

Disclaimer of Implied Warranty of Fitness for Particular Purpose MUST be in writing; AND MUST be conspicuous. Note: Unlike the disclaimer for Implied Warranty of Merchantability, no special words are required.

Disclaimer of Implied Warranty of Merchantability

Must contain the work Merchantability; AND If in writing, the disclaimer must use conspicuous words indicating disclaimer of warranties. o Whether a word is Conspicuous (1 201 (10)) is an issue for the court to decide. In general, conspicuous words are words which give the reader notice of the words because they call attention to them. o These words may be in bold, CAPITALIZED, italicized. o (3) Refers to other situation when a warranty can be disclaimed. Unless the circumstances indicate otherwise, all implied warranties are excluded by expressions like as is, with all faults or other language which i n common understanding calls the buyers attention to the exclusion of warranties and makes plain that there is no implied warranty.

Defenses for the Defendant in a Warranty Action If the plaintiff is suing the defendant in a warranty action; the defendant has 2 defenses that they can raise in order to incur no liability. o Not Sufficient Notice of Breach 2 607 (3) (a) o Horizontal Privity 2 318

Defenses to Warranties 2 316 (4) 2 719 o (1) In general, remedies may be limited but these limitations are subject to subpart (2) and (3). o (2) A limitation on a remedy will not be effective if it fails of its ESSENTIAL PURPOSE. A limitation fails its essential purpose if it deprives either party of their substantial benefit of the bargain. o In other words, if the party continuously fails to correct the breach, most courts will rule the contract fails its essential purpose. E.g. A defect was not noticed until AFTER the limitation time period has passed. E.g. A boat has a warranty repair but the seller does not honor the warranty. (3) A limitation of consequential damages will NOT be allowed if the limitation is considered to be UNCONSCIONABLE. Generally, a limitation on a remedy is unconscionable if it limits the remedies for physical injury to a person or consumer contract.


A majority of courts will look at the subsection (2) and (3) independently in order to determine if there is a limitation on a remedy.

Insufficient Notice of breach 2 607 o (3) (a) If there is a breach, the buyer must notify the seller of the breach within a reasonable time after he discovers or should have discovered a defect, if he wants to recover. Even if the breach is obvious, the buyer still has to give notice. Note: What will constitute as a reasonable time will depend on: o Type of Business

o o o

Industry Standards Nature of Goods (E.g. Perishable goods) Valid notice requires the buyer to give notice that: The good/product is troublesome; o However, the buyer does NOT need to indicate with specific detail as to what the troublesome issue is.


Filing a law suit does not count as notice because it does not give the seller a chance to cure. If Buyer resells goods BEFORE giving notice it takes away the sellers ability to inspect and t hus would be unreasonable. o Even if resale would not prejudice the seller, NOTICE is still required. o


A minority of courts will rule that if one fails, the other also fails.

Horizontal Privity 2 318 o There are 3 ways jurisdictions can address Horizontal Privity. Alternative A (Majority View) o Causes of action for breach are NOT limited to the buyer. Anyone who is in the home, as a family member or guest of the buyer and is reasonably expected to be affected by the good may bring a cause of action for breach. o These claims are often brought as tort claims because they do not require privity of contract. Alternative B o Allows, a natural person who experience a personal injury who is reasonably expected to use, or consume, or be affected by the goods to sue for breach. Personal injury to sue for breach. Alternative C o Allows any person who may reasonably be expect use or consume or be affected by the goods. Allows for property damage to sue for breach. o This view is the most liberal.

Gap Fillers Since the UCC purpose is to promote commerce, contracts which would fail under the CL do not fail under the UCC as long as the UCC can provide gap fillers to resolve the issues. o Generally, these gap fillers are found in 2 300s. In general, as long as parties intended to contract AND state the quantity to contract, the contract will not fail under the UCC. o Failure to agree on price usually does not cause a contract to fail because the UCC allows the jury to decide a reasonably price for the contract if one is missing.

Open Price Term 2 305 o Parties can conclude K without actually settling on a K price. When this occurs, price is determined by the reasonable price at time of delivery. o Always use the good faith standard to determine price.

o o

If failure to fix price is one parties fault, other party can treat K as cancelled or use reasonable price. If parties didnt intend to be bound until price was set, then there is no K.

Open Quantity Arrangements UCC will not supply quantity. o Quantity must be set by the parties and if K is subject to SOF then it must be in writing. UNLESS there is an OUTPUT or REQUIREMENTS K o Requirements K Agreement that specifies buyer will purchase from seller all or some % of buyers needs or requirement for given commodity during a given period. o Output Buyer agrees to take all or some % of goods produced by seller from specific production unity during a given period of time. Open Delivery Arrangements 2 307 Delivery in Single Lot of Several Lots o Unless otherwise agreed, parties must make delivery in single lot shipment Sometimes circumstances may give party right to make or demand shipment in lots (K term or evolving situation). 2 308 Absence of Specified Place for Delivery o If no place is specified for delivery then its sellers place of business. If seller does not have a place of business then it is his residence.

Open Time Arrangements 2 309 o If there is no time stated when performance is due, the law implies a reasonable time. Power to terminate these K are conditioned on terminating party giving to other party reasonable advance notice.

Instalment Contracts 2 612 o (1) An instalment contract is one which requires or authorizes the delivery of goods in separate lots to be separately accepted. A party can reject instalment shipments that do not substantially comply, but that party cannot cancel the whole contract, unless there is a substantial impairment of the contract as a whole. o If there is substantial impairment which impairs the value of the whole K, then there is a breach of the whole contract. However, if there is NO substantial impairment of the whole K, o The Buyer must give the seller a right to cure under 2 508; OR o Demand assurances under 2-609.


An Aggrieved party can reinstates instalment K by: Accepting non-conforming instalment without seasonably notifying of cancellation; Bringing action with respect ONLY to past instalments; Demanding performance of future instalments

Right to Demand Adequate Assurances 2 609

o o

Either pay has a right to demand assurances if there are reasonable grounds for insecurity The procedure for demanding assurances is: Writing demanding adequate assurance of due performance; Upon written demand, the other party must provide adequate assurances in 30 days; Until assurance is received aggrieved party is entitled to suspend any performance for which party has not already received the agreed return performance. o If assurances are not received, then you can repudiate the K and sue for breach.


Right to Demand Adequate Assurances are ONLY between merchants and must demand in writing of assurances.

Perfect Tender Rule 2 601 o Perfect Tender Rule only applies when there is a single sale. Perfect Tender Rule does NOT apply in instalment contracts. o Under the Perfect Tender Rule, goods do not have to be perfect. Goods merely have to perfectly conform to the terms of the contracts. o E.g. Contract for irregular socks to sell in a weirdo store. If the goods do not perfectly conform, the buyer can reject any nonconforming goods. o However, in reality, if there are non-conforming goods under the Perfect Tender Rule, you should always think about the sellers right to cure under rule 2 508.


If the goods do not conform under the Perfect Tender Rule, the buyer may: o Accept the whole; o Reject the whole; OR o Accept any commercial unit and reject the rest.

Sellers Right to Cure 2 508 o Gives the seller the right to cure non-conforming goods. Therefore, the buyer cannot immediately consider the contract cancelled when there is non-conforming goods. Note: Courts are strongly in favour of a sellers right to cure because they do not like the termination of contracts. o (1) If the time to tender has not arrived, the seller will always have until the date when the tender was actually due to cure the non-conformity. E.g. Tender is due on Saturday, but the seller ships goods on Thursday which are nonconforming. o If the seller cures the non-conformity by Saturday there will be no breach. (2) If the buyer rejects a non-conforming tender (after delivery), which the seller had reasonable grounds to believe would be accepted OR if the seller did not know the goods did not conform, then the seller will have a further reasonable time to cure the defect. E.g. Seller offers to fix a new t.v. but buyer refuses.

Note: Note:

Reasonable time is defined in 1 204. The more problems and the more broken promises, the less likely the court will allow the right to cure.

Shaken Faith Doctrine

Argues that the seller can never make a perfect tender to the buyer because the buyers faith in the seller is so shaken that they do not want the seller to cure. o E.g. A car that always breaks down. The shaken faith doctrine is a limitation to the Sellers Right to Cure.


Acceptance 2 606 o Acceptance occurs when: (a) After a reasonable opportunity to inspect goods, buyer signifies to seller goods are conforming OR the buyer will take the goods in spite of non-conformity. (b) An acceptance can also occur when the buyer fails to make a rejection under 2 602, after the buyer has had a reasonable opportunity to inspect them. (c) Buyer does any act inconsistent with the sellers ownership. o Note: E.g. NEED EXAMPLES

If there is an acceptance under 2 606, it also triggers 2 607. o Effect of Acceptance

Effect of Acceptance 2 607 o If the buyer has accepted the goods, the buyer must pay the price of the contract. o Acceptance of goods by buyer: Precludes rejection of goods accepted; If made with knowledge of non-conformity cant be revoked UNLESS buyer assumed it would be seasonably cured BUT Acceptance does no impair any other remedy provided by the UCC for non-conformity

Revocation of Acceptance in Whole or in Part 2 608 o Can be used when: Buyer may revoke acceptance of a lot of commercial unit whose non-conformity substantially impairs value to him if he has accepted it; o Test: Was the defect substantial to buyer (subjective based on totality of circumstances) Defect substantially impairs value of good to reasonable person in circumstances of the buyer (objective) o On reasonable assumption non-conformity would be cured and has not seasonably been; Defect difficult to discover prior to acceptance or buyer was deceived by sellers assurances that the goods were free of problems.

Buyer must give notice to seller of revocation within a reasonable time after buyer should have discovered defect and before any substantial change to the goods. Buyer who revokes has same rights and duties with regard to goods involved as if he had rejected them to begin with. o Reasonable time will depend on the facts and circumstances of the case. Therefore, 2 years may be reasonable if the goods are non-perishable.


If the K says remedy is limited to repair and replacement?

If defects have been frequent, even if they have all been cured, buyer could argue revocation because remedy fails of its essential purpose.

Buyers Right to Inspect 2 513 o When goods are tendered or delivered or identified to the contract for sale, the buyer has a right before payment or acceptance to inspect them at any reasonable place and time and in any reasonable manner. However, the parties can always agree otherwise. Rightfully Rejection 2 602 o A rejection of goods must be made after in a reasonable time after delivery or tender. Furthermore, the rejection is also ineffective unless the buyer seasonably notifies the seller. o Notification is defined in 1 202. o If the buyer rejects the goods PRIOR to acceptance or tender, rejection does not always cancel the contract. Because the seller usually has a Right to Cure under 2 508. If the buyer rejects the goods AFTER acceptance, the buyer can sue for breach OR revoke the acceptance. Possession alone or transfer of title alone does not equal acceptance. o Acceptance occurs if it meets the definition in 2 606.


If buyer took physical possession of the goods PRIOR to acceptance, he has a duty after rejection to hold the goods with reasonable care at sellers deposition until seller is able to remove them. If a buyer does not rightfully reject the goods, it may be deemed as an acceptance under 2 606.


Rejection v. Revocation Before Acceptance = Rejection After Acceptance = Revocation Times when you can argue either rejection or revocation: o When goods did not conform to K o Sell had opportunity to cure by the failed to do so. The timing of the rejection or revocation is key. o If BEFORE acceptance: Buyer can reject for any reason. o If AFTER acceptance: Buyer can only revoke if non-conformity substantially impairs. Possession alone does not equal acceptance.



Failure of Notice 2 605 o The buyers failure to state a particular defect after a reasonable inspect ion precludes the buyer from rejecting the shipment. Identification of the Goods Manner of Identification of Goods 2 501

If there is identification of the goods, the risk of loss still remains with the seller, until the seller has completed all their obligations/duties as it remains to the goods.

Identification of Goods 2 501 o (1) The buyer obtains a special property in goods by identification of existing goods. Such Identification can be made at any time and in any manner explicitly agreed to by the parties. o In the absence of explicit agreement identification occurs: (b) If the contract is for the sale of future goods, the future goods are identified based on the terms of the contract. o E.g. You get all the fish when I CATCH THEM. (c), when goods are shipped, marked, or otherwise designated by the seller as goods to which the contract refers.

When Goods have been identified Risk of Loss for Damaged Goods In the risk of loss doctrine, the court is determining when the loss shifts from the seller to the buyer. o Under this doctrine, when the risk of losses shifts to the buyer will mainly depend on whether there is a breach. Generally, loss is most likely to occur when the goods are: o In Transit; OR o In Storage.

Risk of Loss for Damaged Goods (NO Breach) 2 509 o (3) In general, if the seller is a merchant, then the risk of loss passes when the possession is given to the buyer. Therefore, the buyer must bear the risk of loss when there is delivery. If the seller is NOT a merchant, then the risk of passes to the buyer when the seller tenders. Therefore, you have to look at the tender rule to determine if there is tender under 2 503 (1) (a). o Tender requires the seller to REASONABLY hold the good until the buyer can take possession. E.g. Holding a car until the buyer picks it up in a day. Note: If the seller holds the good for an unreasonable amount of time, the loss may shift back to the seller. o (1) ONLY applies when there is a carrier that takes the goods from the seller to the buyer. (a) If there is a SHIPMENT CONTRACT from FOB sellers location, the risk of loss passes to the buyer when the goods are duly delivered (2 504) to the carrier, even though the shipment is under reservation. o In other words, if the shipment contract says FOB sellers location, the sellers risk of loss ends when the seller duly delivers the goods to the carrier that satisfies 2 504.


Duly Delivered means appropriate mode of transportation and notice to the buyer that shipment is on its way. o E.g. If the good is perishable did the seller takes steps to protect the good? o E.g. If the good is under insured, the shipment can be deem an inappropriate mode of transportation

(b) If there is a DESTINATION CONTRACT from FOB buyers location, the risk of loss to the buyer does not occur until the carrier tenders goods as to make the buyer to take delivery.

o o

(2) ONLY applies when someone is paying to have the goods stored. A bailee. (4) The provisions in this contract are subject to agreements of the parties. Furthermore, these provisions do not apply if there is a breach. o If there is a breach go to 2 510.

Risk of Loss for Damaged Goods (Breach) 2 510 o (1) Sellers Breach When a tender or delivery of goods fails to conform to the contract as to give a right of rejection, the risk of loss remains on the seller until they cure the defect OR the buyer accepts the non-conforming good. o E.g. Seller does not put the under coat on a car and before they have an opportunity to cure the non-conformity the car is stolen. Loss remains on the seller. o (2) Sellers Breach If the buyer has accepted but later revokes his acceptance, o The risk of loss is on the buyer, up to the extent of his insurance coverage, at which time the sellers insurance picks up the deficiency). When the buyer rightfully revokes an acceptance, the risk of loss remains on the seller. (3) Buyers Breach Even if the buyer is in breach, the seller can only cover an amount that is equal to the deficiency in the insurance coverage. o In other words,

Impossibility If an unforeseeable event makes the contract commercially impracticable OR a contract performance impossible, the contract will be terminated and the parties duties will be excused. Generally, an increase cost (even if the increase is 4 times more) alone, will not make a contract performance impossible or commercially impracticable, because the parties should have included an escalation clause. Impossibility of Performance


Casualty to Identified Goods 2 613 o If the contract requires for its performance goods identified when the contract is made and the goods suffer casualty without fault of either party before risk of loss passes to buyer, or in a proper case under a no arrival, no sale term (2 324) then: If loss is total then K is avoided AND If goods damaged or have deteriorated but are not totally destroyed at the time of sale, then K is NOT void but buyer has option to void sale. Substituted Performance 2 614 o Delivery

If, without fault of either party, the agreed type of carrier or delivery becomes unavailable or commercially impractical but a commercially reasonable substitute is available, substitute means of performance must be used.

Payment If agreed means or method of payment fail because of domestic or foreign government regulation (devaluation of currency), seller may without or stop delivery unless buyer provides a means of payment that is commercially a substantial equivalent.

Commercial Impracticability 2 615 o Conditions under which both parties assumed K was to be performed failed and it becomes either impossible or impracticable to perform K as contemplated. 3 things have to happen for a seller to claim this: o The contingency occurred o Non-occurrence of the contingency event must have been a basic assumption on which K was made. o Performance must thereby be made impracticable. If change was reasonably foreseeable at the time the K was made then performance is NOT excused. No discharge of K if seller is able to perform in part. o Seller must allocate production and deliver among all customers in any fair and reasonable manner. o Seller must notify buyer (orally or in writing) that there will be a delay or nondelivery (if there is going to be part performance via allocation of production. Procedure on Notice Claiming Excuse 2 616 o Where buyer receives notification on material or indefinite delay or allocation justified under 2615 he may be writing to seller as to any delivery and where deficiency substantially impairs value of whole K under breach of instalment contract (2-612), then also as to the whole. Terminate and discharge any unexecuted portion of K OR Modify K by agreeing to take his available quota in substitution.

Excuse by Failure of Presupposed Conditions 2 615

Possession alone is not valid acceptance. Title alone is not valid acceptance Possession and title do not always constitute as acceptance.

Sellers Remedy (Accepted Goods) 2 703 o Special Remedies Insolvency 2 502 2 702 o If you have a buyer or seller who is insolvent, it might be better to get the good instead of the money. Note: This will not be on the exam.

Liquidated Damages 2 718 o (1) These are damages which the parties have agreed to in the contract. Restitution by a Breaching Buyer 2 718 o (2) The purpose of restitution is to take away the benefit that has been given to a party because it would be unjust for them to keep it. The formula for restitution compares: o 20% of the total contract price v. $500 Then subtract the smaller value of these comparisons to the amount that was actually conferred to the seller. o The difference between these 2 numbers is what we allow the buyer to recover. Note: Restitution based on this calculation acts like a liquidated damaged because the seller does not have to give back everything they got from the buyer. Example o Problem Sellers Remedy The remedies which the seller can use will depend on whether the buyer has accepted the goods OR revoked the acceptance.

Sellers Remedy in General (Accepted Goods) 2 703 o In General, if a buyer: Wrongfully rejects; Revokes acceptance; Fails to make a payment when its due; OR Repudiates with respect to part or the whole contract, (in essence, when the buyer breaches), o The Seller may: Withhold delivery of such goods; Stop delivery by an bailee as provided in 2 705; Proceed under the next section respecting goods still unidentified to the contract; Resell and recover damages as provided in 2 706; Recover damages for non-acceptance as provided in 2 708; Recover damages in a proper case as provided in 2 209; OR o Generally, 2 209 deals with goods that have not been paid.


Cancel the K.

2 703 tells us the that seller can get the purchase price of the contract, but to determine a more specific remedy, look at the other code sections.

Action for the Price 2 709 o (1) If a buyer has failed to pay the price as it becomes due, the seller may recover incidental damages. However, this remedy is only available IF the buyer has: Accepted the goods; OR o 2 606 Accepted Goods o 2 602 Improperly rejecting goods The risk of loss has passed to the buyer at the time of the breach. o 2 509 Risk of Loss for Conforming Goods o (2) If the seller has sued for the contract price, they must hold those goods open to the buyer so they can accept them, UNLESS it becomes clear they can resell those goods to someone else. If they can sell those goods to someone else, the seller must subtract the total value of that sale from contract price with the original buyer. (3) If the seller is NOT entitled to recover the contract price under subpart (1), the seller may still be able to recover damages under 2 708.


If a buyer accepts but then later tries to revoke their acceptance, they must take reasonable care of the goods.

Sellers Resale NOT Accepted Goods 2 706 o If the buyer has accepted the goods and then breached the contract, the seller may resell the goods in good faith and in a commercially reasonable manner, and sue the breaching buyer for the difference between the contract price and the resell price. The seller can also receive incidental damages but must subtract any expenses that were saved as a result of the buyers breach. Note: The seller is NOT required to resell the goods in order to recover. o If the seller does not resale the goods, the seller may still recover under 2 708. A valid private sale requires notification to the buyer. o If the buyer fails to provide a valid private sale, they may be barred to recover under 2 708. A public sale, it means there is a public auction. If remedy under 2 706 does not work because the seller did not resell, AND 2 709 does not work because there is no acceptance or the risk of loss has not passed, then 2 708 may still provide the seller with a remedy.


Note: Note:

Sellers Damages for Non-Acceptance or Repudiation 2 708 o (1) Damages under 2 708 are measured by the difference in market price and the time and place of tender and the unpaid contract price, plus any incidental damages minus any expenses saved as a result of the breach. Unlike in 2 706 to determine the sellers remedy look at the market price at the time and place of tender instead of the resale price.

(2) Lost Volume Seller Subpart (2) is most likely used when a remedy under subpart (1) is inadequate because the market price is the same as the contract price so the seller would get nothing. o Covers situations where the seller would have made 2 sales instead of one. One sale to the breaching buyer and another sale to a new buyer. o When this occurs, the seller can obtain


Since 2 708 determines a sellers remedy based on market price at the time and place of tender, it is possible that the seller may receive a remedy that is greater than the contract price. o When this occurs, the courts are UNLIKELY to let the seller receive a windfall and will limit the sellers recovery to the contract price. 2 704

Buyers Remedy for Accepted Goods 2 714 o ONLY occurs when the buyer has accepted the goods but there is a valid revocation. o o (1) In general, in order for the buyer to get a remedy, they must give general notice to the seller that the goods are in breach and they are troublesome. (3) In a proper case, incidental and consequential damages may be recovered. 2 715 says that incidental damages are those that result from the sellers breach or incident to the delay as a result of the breach. Consequential damages are those but for and foreseeability damages. o (a) Generally these damages are given to the buyer if they can show that the seller was aware or should have been reasonably aware at the time of contract. o (b) Consequential damages can also be recovered without showing foreseeability if the buyer experiences personal injury or property damage proximately resulting from the breach.

Buyers Remedy for UN-Accepted Goods OR Rightfully Revoked their Acceptance 2 711 o When Seller: Fails to deliver goods; Repudiates o Or Buyer: Rightfully reject or justifiable revokes acceptance; o Then Buyer May: Cancel; Cover; Recover damages for non delivery as provided in 2 713; OR Obtain special performance. Incidental Damages Incidental damages are losses reasonable associated with or related to actual damages. o Sellers incidental damages under the UCC include: Any commercially reasonable charges; Expenses or Commission incurred in stopping delivery or transportation; Care and custody of goods after breach or in connection with resale. o Buyers incidental damages under the UCC include:

Costs Directly related to sellers breach o And include expenses reasonably incurred in: Inspection; Receipt; Transportation Care and custody of goods that are rightfully rejected Commercially reasonable charges; Expenses or commissions related to effecting cover. Any other reasonable expenses incident to the delay or other breach.

Consequential Damages These are damages not directly associated with sellers breach but traceable to it because seller had reason to know of buyers general or particular needs at time of contracting. o Includes injury to persons/property proximately resulting from breach of warranty. However, buyer is not entitled to consequential damages when he could reasonably have covered and chose not to.

Remedies Attack Analysis Who is seeking the remedy? Seller Remedy o Did the buyer accept goods? Yes o Sue for K Price under 2 709 Appropriate in 1 of 3 situations: o Buyer made technical acceptance o Risk of Loss was on Buyer and goods destroyed o Buyer wont take specially manufactured goods No o Did Seller try to resell? Yes (2 706) o Recovers difference between resale price and K price minus any expenses saved. Resale must be made in good faith and in commercially reasonable manner. o Many be public or private sale Seller is also allowed incidental damages. No o What type of Seller is it? Seller of One Good o Recovers difference between K price and market price at time and place goods tendered plus incidental damages minus any expenses saved. Lost volume seller (Seller of unlimited amount of goods) o Damages will not put seller in as good as position so can never recover reasonable overhead for this one good he would have sold Expected profit minus expenses.

Buyers Remedy o Did the Buyer accept the goods? Yes o 2 714 Recover for damages for any non-conformity if he has given notice to seller. Recover difference between value of goods if they had conformed and valued of goods accepted. To get consequential damages there must have been reason to know it would occur and could not reasonably be prevented by cover. No o 2 712 buyer may cover by making good faith and without unreasonable delay a reasonable purchase good goods in substitution. Recover is the difference between cost of cover and K price Not required to cover but penalty is may not recover consequential damages. o 2 713 Does not Cover Recovery is difference between K price and market value at time buyer learned of breach.

Buyers Cover 2 712 o Buyer has the right, but not obligation, to cover by making a substitute contract Buyer may cover under 2 712 2 712 o If the buyer chooses not to cover, they will be barred from receiving consequential damages.

Formula for Cover 2 712 o Cost of the Cover Contract Price + Incidental and Consequential Damages Expenses Saved Note: Note: The test to determine if a cover is appropriate is based on a commercially reasonable standard. Cover is not mandatory. o However, if the buyer could have covered but did not reasonably cover, the buyer may be barred from consequential damages based on the comments after the rule. o Furthermore, if a buyer does not reasonably cover under 2 12, they will NOT be barred from recovery under 2 713 if it does not result in a windfall.

Anticipatory Repudiation 2 610 o If you assume that a contract has been breached too quickly, you can become the breaching party. Therefore, if you are unsure whether or not the party is going to perform, you should ask for assurances under 2 609. o Because if the party does not give adequate assurances, they become the breaching party and you may use the Anticipatory Repudiation Rule. o If there is DEFINITE statement that a party will not or cannot perform, then the other party can treat the contract as breach. AND can sue for contract damages immediately.

Withdrawing Anticipatory Repudiation 2 611 o A party may withdraw their anticipatory repudiation and perform under the terms of the K .

UNLESS non-repudiating party has materially altered position in reliance on repudiation. If retraction is proper it may be effected by any method that clearly indicates to aggrieved party that repudiating party now intends to perform as originally promised.