Professional Documents
Culture Documents
Scope of Article 2: Sales and Leases Outline & Problems
Scope of Article 2: Sales and Leases Outline & Problems
Scope of Article 2
Article 2 covers the sales of goods.
o Would not cover other dealings in goods, such as gifts, bailment, and gratuitous bailment.
o True lease of goods is covered by Article 2A
o Computer software licenses, not specifically covered by Article 2, process of drafting Article 2B to deal with this
issue. (covered in class notes)
o If the transaction is to operate only as a security transaction, Article 2 will not apply.
o Article 2 covers any sale, no matter how small or large, as long as the subject is goods.
o Real property is NOT movable and can’t be considered “goods”; not governed by Article 2.
o “Chose in action” or “things in action” “an incorporeal right, a right not reduced to possession but recoverable by
bringing and maintaining an action” such as copyrights, etc. Although copyrights can be bought and sold, Article
2 does not handle those transactions.
o Investment securities are expressly excluded from the scope of Article 2.
o
Goods:
All things that are movable at the time of identification (other than the money in which the price is paid)
Unborn young of animals and growing crops
All those whose value is determined by its physical attributes; those whose value is determined by the things “in” them.
Must be both existing and identified before any interest in them can pass.
Future goods goods that are not both existing and identified
Transactions:
There is no definition for this word.
What is the scope of Article if this term is not defined?
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in the contract, the buyer specifies that the goods are specific and particular may indicate that he is more interested in the sale
of goods rather than the services portion of the hybrid.
Is a breach of contract dependent on proof of negligence? No, contracts are strict obligations.
Contractual liability may or may not require proof of negligence. Typically, contractual obligations are strict.
Article 2 does not cover most custom designed goods; the materials, etc. involved in the making of the goods are incidental to
the services.
Are loans or gifts considered transactions? Article 2 is consistently interpreted to be limited to sales (supported by 2-101 and
by the fact that in all the comments and articles, the body of the transactions identified mention seller and buyer). Until
recently, there was a tendency to apply the article to lease transactions, mostly because there was not a specific body of law
covering lease transactions (Article 2A now covers this area).
Predominant Purpose test characterization of the transaction as a whole as either a sales transaction or a service
transaction. This characterization is applied to all parts of the transaction.
Gravaman test what gave rise to the cause of action/dispute? Not always easy to apply because it requires to answer some
difficult causation questions. This does, however, do away with the problem of having to characterize each transaction as one
of two types holistically.
2-314 service of food in a restaurant (contains both service and sales elements) = provides that this type of hybrid
transaction is always to be considered a sales transaction (all Article 2 warranties apply). This article recognizes that this type
of transaction may be considered a service transaction. (Does not apply to other types of hybrid transactions; these are
covered by the predominant factors test or the Gravaman test).
Anthony Pools v. Sheehan (product liability case: questions about implied warranty)
Facts: (2-314)
1. P (Sheehan) and wife sue D (Anthony Pools).
2. P sustained injuries when he fell from the side of the diving board (Anthony designed and manufactured the pool and diving
board).
3. P’s theories of liability:
a. Skid resistant material didn’t extend to the edges of the board breached an implied warranty of merchantability.
b. D used “defective” diving board that was inherently dangerous.
4. Trial court found for D = stipulation in contract provided that the express warranties were in lieu of any others.
5. Appeals court reversed pool = consumer goods; can’t limit the implied warranty of merchantability.
6. The contract = hybrid transaction in part a contract for the rendering of services and in part a contract for the sale of
goods.
7. The test = whether “the predominant factor …, the thrust, the purpose, reasonably stated, is a transaction of sale with labor
incidentally involved.” If follows that, if “the service aspect predominated, no warranties of quality were imposed in the
transaction.”
8. Used the majority test to determine what the predominant factor was: the P’s hired D to install a pool, the sale of the board
was incidental to the construction of the pool. Although the diving board is “goods” it was not purchased in a separate
agreement and therefore not protected by implied warranty.
Holding:
Where, as part of a commercial transaction, consumer goods are sold which retain their character as consumer goods after the
completion of the performance promised to the consumer, and where monetary loss or personal injury is claimed to have resulted from
a defect in the consumer goods, the provisions of the Maryland UCC dealing w/implied warranties apply to the consumer goods, even
if the transaction is predominantly one for the rendering of consumer services. [Used the gravamen test]
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The Merchant Class
§2-104:
1. “Merchant” means a person who deals in goods of the kind or otherwise by his occupation holds himself out as having
knowledge or skill peculiar to the practices or goods involved in the transaction or to whom such knowledge or skill may be
attributed by his employment of an agent or broker or other intermediary who by his occupation holds himself out as having
such knowledge or skill.”
2. Because of the word “or” used repeated in trying to spell out the classification, there is no single test to determine if someone
is a “merchant.”
3. Comment #2 the term “merchant” as defined here roots in the “law merchant” concept of a professional in business. The
professional status under the definition may be based upon specialized knowledge as to the goods, the business practices, or
as to both and which kind of specialized knowledge may be sufficient to establish the merchant status is indicated by the
nature of the provisions.
4. The definition of “merchant” is supposed to distinguish between the “professional” on the one hand and the “casual or
inexperienced buyer or seller”.
5. A person making an isolated sale of goods is not considered a merchant; warranty of merchantability will not apply.
6. Sometimes determining the status of merchant is a toss up; general rule to follow: the more professional the party appears to
be, the more likely he will fall within the classification of merchant; the more casual or inexperienced the less likely.
7. The court usually distinguishes between casual sellers of food (luncheons, etc.) and the “commercial restaurateur”. Of course,
if the organizer of the luncheons did it on a regular or continuing basis, it may then change its status of merchant.
8. One is considered a “merchant” as soon as he “holds himself out” as having the kind of knowledge and skill that others in the
field have; it matters not that the individual is a newcomer; the code protects the buyer, not the merchant when it comes to the
warranty of merchantability.
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6. §2-105 “Firm Offers” modifies the rule stating that consideration is no longer a requirement; offers are firm if they are
characterized as such and in signed writings.
a. An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be
held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable
time, but in no event may such period of irrevocability exceed three months; but any such term of assurance on a
form supplied by the offeree must be separately signed by the offeror.
b. ** This is an OPTION CONTRACT
7. The common law of “offer and acceptance” was altered significantly by the UCC. Much of the evolution of the common law
has been brought about by Article 2 of the UCC, in particular.
8. It is now clear that a contract for sale may be created by the parties’ having exchanged forms which contain different terms as
long as the differences are not of the type which in the commercial environment usually make or break a deal.
9. Generally, the terms of the offer are the terms of the contract.
10. Under §2-207, there are 2 ways that an additional term in the acceptance can become part of the contract:
a. Implicit in the statement that such additional terms are to be “construed as proposals for additions to the contract.”
An “additional term” can become part of the contract by is express acceptance by the original offeror.
People in business tend to rely on form documents detailing all manner of terms and conditions.
When merchants/businesspeople exchange forms, the information specific to the deal = “dickered terms”.
Under common law, the exchange of forms would probably not result in a binding contract “mirror image rule”; any
additional terms/conditions were considered counteroffers.
“only to an acceptance which clearly reveals that the offeree is unwilling to proceed with the transaction unless he is assured
of the offeror’s assent to the additional terms therein” does the proviso (1) apply; it should be reasonably worded and
presented in such a manner as is calculated to bring a reasonable recipient to the understanding that no deal has yet been
concluded and none will be concluded unless and until either it responds favorably to the new terms being presented or even
more negotiation brings on a compromise. (Dorton test)
The common law of “offer and acceptance” was altered significantly by the UCC. Much of the evolution of the common law
has been brought about by Article 2 of the UCC, in particular.
It is now clear that a contract for sale may be created by the parties’ having exchanged forms which contain different terms as
long as the differences are not of the type which in the commercial environment usually make or break a deal.
Generally, the terms of the offer are the terms of the contract.
Under §2-207, there are 2 ways that an additional term in the acceptance can become part of the contract:
Implicit in the statement that such additional terms are to be “construed as proposals for additions to the contract.” An
“additional term” can become part of the contract by is express acceptance by the original offeror.
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Diamond Fruit Growers, Inc. v. Krack Corp. (1986)
Facts:
1. Krack (K) manufacturer of cooling units containing tubing supplied by Metal Matic (MM).
2. At beginning of each yr. K sent blanket purchase order to MM stating how much tubing it would need for the year. Then K
would send release orders and MM would respond w/acknowledgment form and shipping of tubing.
3. MM’s acknowledgement form disclaimed all liability for consequential damages and limited MM’s liability for defects in
tubing to refund of the purchase price or replacement or repair of the tubing. (these terms were not found in K’s purchase
order). ‘acceptance made conditional on additional terms’ [see reverse side for terms and conditions = printed on signature
side of acknowledgement form]
4. K objected to the terms, but they were never changed, and K continued to buy.
5. K then sold one its cooling units to Diamond Fruit Growers (P).
6. Unit began leaking ammonia. Found a pin-hole leak in cooling coil. P sued for lost produce. K brought MM in as a third
party complaint.
7. Jury found for P; MM was liable for 30%.
8. Issue is whether the disclaimer was ever a part of the contract with K.
9. K argues 2-207 applies (it does apply to commercial transactions in which parties exchange printed forms). In this case, they
exchanged forms w/ different terms.
10. 2-207 changes the common law mirror image rule: “converts a common law counteroffer into an acceptance even though it
states additional or different terms” The only requirement is that the responding form contain a definite and seasonable
expression of acceptance; if the offeror assents, the parties have a contract w/additional terms; if offeror doesn’t assent, but
performs, then there is a contract w/additional terms.
11. MM argues that K agreed based on conversations and then continued buying.
12. But, 2-207 does away with common law’s “last shot rule” which gives advantage to the party who sent the last form. Instead,
all the terms on which the parties’ forms do not agree drop out, and the UCC supplies the missing terms. 2-207(3)
13. Accepting MM’s argument would in effect reinstate the last shot rule.
Holding: Because K’s conduct did not indicate unequivocally that it intended to assent to MM’s terms, that conduct did not amount to
assent. [if the seller truly doesn’t want to be bound unless the buyer assents to its terms, it can protect itself by not shipping until it
obtains that assent].
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9. Glass industry presents a dichotomy in the course of dealing analysis: suppliers make exceptions where it is in their best
interest. Boilerplate clauses are not reliable; parties must expressly negotiate terms of limited liability if they don’t want to be
found liable.
10. Note: the code did not completely abolish the concept of mutual assent.
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1. Whether the disputed documents qualified as confirmatory writings within the “merchant’s exception” to the Statute of
Frauds.
2. Are explicit words of confirmation necessary?
Rule of law:
1. A confirmatory writing does not satisfy the requirements of 2-201(2) unless it is “sufficient against the sender.” the
sending merchant itself runs the risk of being held to a contract.
2. Explicit words of confirmation are not necessary, but the writing must satisfy the test that it be “sufficient to indicate that a
contract for sale had been made.”.
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Course of Performance
Section 2-208
1. Where the contract for sale involves repeated occasions for performance by either party with knowledge of the nature of the
performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without
objection shall be relevant to determine the meaning of the agreement.
2. The express terms of the agreement and any such course of performance, as well as any course of dealing and usage of trade,
shall be construed whenever reasonable as consistent with each other; but when such construction is unreasonable, express
terms shall control course of performance and course of performance shall control both course of dealing and usage of trade.
3. Subject to the provisions of the next section on modification and waiver, such course of performance shall be relevant to
show a waiver or modification of any term inconsistent with such course of performance.
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Unless otherwise agreed all goods called for by a contract for sale must be tendered in a single delivery and payment is due only on
such tender but where the circumstances give either party the right to make or demand delivery in lots the price if it can be
apportioned may be demanded for each lot.
2-310 Open Time for Payment or Running of Credit; Authority to Ship Under Reservation
Unless otherwise agreed
a) Payment is due at the time and place at which the buyer is to receive the goods even though the place of shipment is
the place of delivery; and
b) If the seller is authorized to send the goods he may ship them under reservation, and may tender the documents of
title, but the buyer may inspect the goods after their arrival before payment is due unless such inspection is
inconsistent with the terms of the contract; and
c) If delivery is authorized and made by way of documents of title otherwise than by subsection (b) then payment is
due at the time and place at which the buyer is to receive the documents regardless of where the goods are to be
received; and
d) Where the seller is required or authorized to ship the goods on credit the credit period runs from the time of
shipment but postdating the invoice or delaying its dispatch will correspondingly delay the starting of the credit
period.
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5. Estoppel was not established: estoppel arises when a representation or act by one party causes the other to do an act
which would operate to his detriment if the first party is allowed to complain, or where a party recognizes the validity of
a transaction and accepts benefits from it and then attempts to repudiate it.
6. Court reversed and ordered a new trial.
Unconscionability
2-302 Unconscionable Contract of Clause
(1) If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time
it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the
unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any
unconscionable result.
(2) When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties
shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid
the court in making the determination.
In the name of freedom of contract, caveat emptor, and the duty to read, courts have permitted some rapacious merchants to insulate
themselves in legally formidable contracts that have bordered on fraud and were filled with “I win—you lose” provisions adhesion
contracts (because the lesser party had to adhere to the will of the stronger).
Professor Leff divided “unconscionability” into:
a) Procedural unconscionability: unfair conduct in the formation of a contract.
b) Substantive unconscionability: unfairness in the terms of the resulting bargain.
He said that both should be required before a court can make a finding of 2-302 unconscionability.
Warranties
Title Warranty (77-79)
2-312 Warranty of Title and Against Infringement; Buyer’s Obligation Against Infringement
1) Subject to subsection (2) there is in a contract for sale a warranty by the seller that
a) The title conveyed shall be good, and it’s transfer rightful; and
b) The goods shall be delivered free from any security interest or other lien or encumbrance of which the
buyer at the item of contracting has no knowledge.
2) A warranty under subsection (1) will be excluded or modified only by specific language or by circumstances
which give the buyer reason to know that the person selling does not claim title in himself or that he is
purporting to sell only such right or title as he or a third person may have.
3) Unless otherwise agreed a seller who is a merchant regularly dealing in goods of the kind warrants that the
goods shall be delivered free of the rightful claim of any third person by way of infringement or the like but a
buyer who furnishes specifications to the seller must hold the seller harmless against any such claim which
arises out of compliance with the specifications.
Note Warranty of title includes:
1. a warranty that there are no security interests (or other liens) on the goods other than those of which the buyer knows
2-312(1)B, and
2. a warranty given by merchant sellers against claims based on patent infringement or the like 2-312(3).
o If the buyer furnishes specifications to the seller (which happens whether the goods are to be specifically
manufactured to buyer’s order) the buyer automatically makes a warranty to the seller that protects the
latter from infringement claims. This is the only situation in the UCC where the buyer is the warrantor.
Warranty of Quality. (79-83)
o Express Warranties
Arises when the seller does something affirmative to create buyer expectations about the characteristics or
performance of the goods. (i.e. seller will make oral or written representation about the product in
advertisements, the verbal sales pitch, or the written contract).
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Rest on “dickered” aspects of the bargain.
The representations “must have some substance” = “they must relate to the goods” and become part of the
“basis of the bargain”.
Most courts have adopted a test that a statement goes to the basis of the bargain if its natural tendency is to
induce the buyer to purchase (even though it is not the sole reason) if the statement has any substance to it so
that it might have played a part in buyer’s decision to buy, the burden in on the seller to prove that the buyer
did not rely .
Problem 22: Joe College bought a new car from Flash Motors, relying on the seller’s extravagant
claims about the car’s superior qualities. He signed a purchase order on Aug. 1, and the car was
delivered 2 wks later. In the glove compartment he found the warranty booklet and on reading it was
dismayed to learn that the actual written warranty was very limited in coverage. Is he bound by the
written warranty’s terms? What argument can he make? Comment 7 to 2-313, 2-209.
o For a post sale modification, no consideration is needed, but there must be agreement.
Additional post sale statements working themselves in rarely apply to disclaimers. These
kinds of cases where a written warranty is contained, courts have rejected the applicability of
the written warranty. One aspect that has changed is the warranty in computer sales (where
sales were made online/telephone and at time of sale negotiation, nothing was said about
warranty.
o In this case, the post sale limited warranty is ineffective. In regard to computer sales, if he
didn’t do anything, (reject the modification) then it would be considered an agreement w/the
limited/additional terms.
o Implied Warranties
Automatically part of the contract unless the seller (or the circumstances) does something affirmative to get of
them.
Implied as a matter of law; sometimes referred to as “children of the law”
The seller’s intention to create any implied warranty is completely irrelevant.
Implied warranty of merchantability the idea must be saleable and conform to the normal expectations of the
parties.
Does not relate to the use of the goods; just means that it is sellable. The warranty expanded in the
common law and began to cover users as well as sellers.
o 2-314
Implied warranty of fitness for purpose specific description of the content of the warranty of implied
merchantability.
o 2-315 Implied Warranty: Fitness for Particular Purpose
In what case does a post sale warranty alter the agreement? Look at 2-209. Comment 7.
Unilateral statements that don’t seem to matter to the buyer are unable to equal a post sale warranty. Courts have been reluctant 2-313
and have
2-314
Problem 24:
o A. Are cigarettes that cause lung cancer if used over a period of years merchantable? If the seller’s advertisements stated
that the cigarettes were “mild,” would that create an express warranty?
The aspects of what it does to your health do not imply that it the product is not fit for its ordinary purpose.
They’re not un-merchantable because all cigarettes cause lung cancer; they are no worse the average product
(OBJECTIVE there is no departure from the norm; SUBJECTIVE still conform to the reasonable
expectation of the buyers). So long as they’re as good/bad as the products in the market, the fitness for purpose
is satisfied.
The tobacco cases involved “concealment” additional ingredients added to the product to make them more
potent w/o adequately disclosing; the cases succeed on fraud grounds, not on breach of warranty grounds.
Some things which pose a greater risk than normal, may be held unmerchantable w/o proper notice.
“Mild” does not create an express warranty unless they are not mild: the expectations of the buyers would be
different and therefore may be a breach of warranty. If the buyer has been led to expect that he is getting a
milder
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o B. Officer Krupke, a NY policeman by profession, sold his family car to his next-door neighbor, Maria, telling her it was
a “good car.” In fact, it was falling apart and blew up the first time she drove it. Has Krupke breached the implied
warranty of merchantability. Should 2-314 be extended so that the warranty is made by all sellers?
No, b/c if you don’t deal in goods of the kind, you’re not as knowledgeable about the product’s fitness of
ordinary purpose.
The policeman is not a merchant, but he did have a duty to tell her of all and any latent defects (comment 3).
There is not an implied warranty, is there an express warranty? (Comment 4). If he had guaranteed the car, for
example, then the warranty arises. Disclaiming an express warranty is next to impossible; if seller is saying that
the goods are fit for its ordinary purposes, then that warranty is almost impossible to detach.
Problem 25: Natty Bumpo was driving through upstate NY when a deer ran in front of his car. He swerved to avoid it and ran into
a tree. His major injuries came from his sudden contact w/the inside of the driver’s door, where he smashed up against sharp
points on the door handle, the window lever, and an ashtray. Natty sued the car manufacturer for breach of warranty or
merchantability. His theory was that the design should have been safer. The manufacture’s defense was the car was fit for its
ordinary purpose and that Netty misused it. How should this come out?
o By swerving the car in such a way, he brought the injury upon himself; if there were no fault on his side, the question
would arise to whether the design defect made the car un-merchantable because of the liability to produce injury because
of the features. Defense: all cars are like this; none of them have padded doors, etc.
o How does a court determine that the car in un-merchantable? Ct held that the design ought to be different; buyers had a
right to expect that they would be protected against injuries of this kind. So: even though the car was no worse than all
the cars in the market place, it failed to satisfy the expectations of the buyer. (Dual test: dynamic element into product
design brings about changes in product design, much like strict liability in tort brings about incentive to exercise
higher standard of care)
Problem 26: When Christopher Wren finished building a recreation room in his basement, he wanted a heater for it. He saw an ad
for the A-1 Hotblast heater, which seemed to be what he needed. A good friend of Wren’s named Jones ran a nearby appliance
store. Wren went there and told Jones that he wanted the A-1 Hotblast for the new room. Jones knew the room well; he had
helped build it. When the heater arrived, it worked perfectly, but it didn’t have the capacity to heat the room. May Wren sue Jones
for breach of 2-314 or 2-315?
o For fitness of purpose to apply, Seller must have reason to know of purpose; reason to know that the buyer was relying
on the seller; buyer was relying on the seller. This warranty probably doesn’t apply because the buyer didn’t ask for the
seller’s advice (the seller, did however, know of the room for which he buying and he knew the buyer and the degree of
non-expertness and the relationship which suggests that the seller knew that the buyer’s use of the brand name wasn’t a
result of the buyer’s expert knowledge of the heater and its suitability for that particular room); but the buyer also wanted
that particular brand. So, the fitness warranty MAY arise; if it arises, it’s been breached. The merchantability warranty
does arise, but hasn’t been breached.
Note comment 8: patent or trade name exception. Irrefutable presumption that if a buyer comes in and orders
something of a brand name is enough to determine that the buyer is relying on his own judgment; however, this
factor is just one among many.
o Under old law, if the buyer insisted on a particular brand it eliminated the possibility of reliance; comment 5 says that
this is no longer an absolute rule.
Problem 27: Harold Thumbs went to the Easy Paint Store and bought a can of green paint, which the store mixed on the premises
from various pigments. Harold used the paint on his dining room walls, but due to a miscalculation on his part, he ran out when he
was half finished. He took the empty paint can back to the store. He told the clerk that he was only half done with the job and
needed another can, which the clerk promptly mixed and sold him. Harold finished the painting and then notice two things: (1) the
dried paint gave off an offensive odor, and (2) the paint from the second can did not match the first.
o The merchantability warranty has been breached; the first paint can was not fit for ordinary purposes.
o The fitness warranty? The seller knew of the buyer’s particular purpose, that he is relying on him to match the paint, and
he knew what the paint was for. There is no breach of warranty of merchantability, but the fitness warranty is breached
(the painted purpose had a different purpose; the buyer had a specific purpose in mind (a non ordinary purpose) and the
paint sold did not fit that purpose; the 3 requirements were met).
Problem 28: Donald Souse ordered a martini at the Tired Executives Club. When he bit into the olive, he cracked his new $2000
dentures on a pit. Is there a cause of action under either 2-314 or 2-315? Courts faced with this last problem (harmful substances
in food) have split into 2 camps: those that deny liability if the object is a natural substance, as opposed to a foreign object, and
those that permit recovery even when the consumer is injured by a nautral substance as long as the biter’s “reasonable
expectation” is that it would have been removed.
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o Does the merchantability warranty arise? Value of food or drink is also applied to the merchantability warranty arises.
Has it been breached? Was the martini not fit for ordinary purpose? The reasonable expectation is that the olive in
martini doesn’t have a pit in it. However, there is a question as to what the expectation is; the evidence is probably
inconclusive as to whether martini’s are typically sold w pitted olives.
o What about the fitness purpose? No cause of action unless he can show that the buyer specifically had the seller know
that he was expecting a pitted olive in his martini. In the absence of an individual communication of that kind, would the
fitness warranty arise? If the customer was a frequent one who relied on the pitted-ness of the olives, then the fitness
warranty may arise. Unless it was a settled practice that the club sold pitted olive martini’s, the only cause of action the
buyer may be able to establish is the fitness warranty.
o The content of the merchantability warranty depends on the typical customer of the establishment; if the customers are
typically tourists, their expectations may be different from those of the frequent ones. It may be that the tourist/consumer
may have a claim of breach of merchantability; if not, then the only claim would be breach of fitness warranty which
would depend on the individual conversation.
Problem 29: Carry Nation, on the advice of her hairdresser, bought a hair dye and proceeded to use it in accordance w/the
instructions on the box. Unfortunately, the product contained alcohol, to which Nation was allergic, and she suffered considerable
burn damage to her scalp and ears. When she sued the manufacturer, the basic defense was that only 5% of the population had
that reaction. Is this a good defense?
o Only 5% of the people had this reaction. So, the merchantability warranty probably would not apply. The fact that there
are allergic reactions to scalp preparations: but it must be fit for the typical customer. Assuming that is not the case,
assuming it is a regular establishment, probably, the analogy affecting such a small proportion of the population, it
probably won’t be considered unmerchantable. The jury, however, must decide what standard the manufacture must be
held to.
o The fitness warranty may be able to apply if the buyer had made it known that she had a particularly sensitive scalp.
Also, unless the seller worked with the manufacturer, then she wouldn’t really know of the particular purpose, etc. If the
suit was on the dresser, then the hair dresser would know of the buyer’s particular purpose (a hair dye that doesn’t burn
the scalp). Additionally, there is not a privity issue; the manufacturer did not directly sell the hair dye. In this case, it
may have been the duty of the buyer to look at the ingredients.
o A warranty suit can only be brought against the buyer and the seller; not the buyer and someone who advised the buyer;
it must rest on the privity of contract. One of the evolving changes is the gradual erosion of the privity requirement as
applied to warranty.
Burden of Proof
In a warranty suit the P has the burden of proving:
(1) The creation of a warranty;
(2) Its breach;
(3) Its causal connection to P’s injury (proximate cause); and
(4) The fact and extent of the injury.
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Warranty Disclaimers and Limitations
Warranty disclaimer is a disclaimer of obligation; it is an attempt to reduce or eliminate the scope of obligation it assumes.
Without more, the merchant/seller assumes that the goods are fit for purposes ABCD. However, he may only wish to accept the
obligation for ABC, and therefore wants to reduce the scope of the warranty of merchantability (that risk is then transferred to the
buyer). If the seller is willing to assume goods are fit for ABCD, but unwilling to pay the full damages if the goods are unfit, then
what the seller needs is a Limitation. 2-316
Remedy LIMITATION for consequential damages; here the obligation is unaffected, the only thing changed is the amount of
damages he must pay in the event there is a breach.
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governmental implication of protective terms into private contracts is commonplace and rests on the faulty premise that
contractual disclaimers are generally freely bargained for elements of a contract. Marketplace reality suggests that freedom of
contract in the sale of goods is actually nonexistent; a buyer can either take the contract w/the disclaimer attached or leave it
and go w/o the good. this reality would seem to demand that the legislature prohibit implied warranty disclaimers by
repealing 2-316 (w/o this action, courts have to rely on the unconscionability or conspicuous requirements to reach a fair
result.
7. Purpose of implied warranty they create incentives to produce and market higher quality products; they discourage shoddy
workmanship and unethical trade practices; they place responsibility on those who profit from the sale of goods, have the
greatest control over the products, and are better able to bear the risk of loss.
Problem 31
a. A statement buried in the fine print of a used car purchase agreement states that “There are no express or implied
warranties that are part of this sale.”
i. Are the implied warranties effectively disclaimed?
1. NO. The disclaimer was not conspicuous. Also, as a side note, the disclaimer may have failed the
unconscionability test as well.
ii. If the car dealership asks you to redraft this clause so as to comply with the Code, what changes would you
make in the language?
1. You would include “as is” or “with all the defects”, etc.
iii. What changes would you make in the physical appearance of the clause in the contract? Is it all right to put
the disclaimer in the clause labeled WARRANTY?
1. You cannot put the disclaimer in the section labeled warranty because it would not call attention to
itself. Changes made the physical appearance of the contract would include a change in font or
type face, color, or separation from the rest of the warranty provisions.
iv. Can the car dealer win the legal dispute by arguing that the usage of trade permits the burial of warranty
disclaimers in the fine print?
1. He may win, however, the usage of trade and course of dealing argument can be used the other
way as well: it is a usage of trade and course of dealing presumption that buyers don’t read the
fine print, especially in boilerplate forms.
b. The words AS IS are written with soap in large letters across the front windshield of the used car. Is this effective to
disclaim implied warranties? Express warranties? Must the “as is” language be conspicuous?
i. The writing is specific and conspicuous; should meet the test of enforceability.
c. The car salesman asks the buyer, “Would you like to examine the car?” and the buyer, who is in a hurry, says,
“NO.” Effective disclaimer?
i. If buyer refused to examine the goods then the resulting injuries likely resulted from buyer’s own action
rather than from breach of warranty. An examination could have revealed defects; the buyer had a
responsibility to inspect the goods he was purchasing.
d. Remember Ted Traveler (problem 19) who walked into the men’s room of the bus depot and bought an expensive
watch? We decided that there was no warranty of title in that transaction; however, a warranty of quality is a
separate question. Are there implied warranties in this sale?
i. Yes. There is an implied warranty of fitness and merchantability; an implied warranty that the car will
work, etc.
15
Remedy Limitations
2-719 Contractual Modification or Limitation of Remedy
1. Subject to the provisions of subsection (2) and (3) of this section and of the preceding section on liquidation and limitation of
damages,
a. The agreement may provide for remedies in addition to or in substitution for those provided in this Article and may
limit or alter the measure of damages recoverable under this Article, as by limiting the buyer’s remedies to return of
the goods and repayment of the price or to repair and replacement of non-conforming goods or parts; and
b. Resort to a remedy as provided is optional unless the remedy is expressly agreed to be exclusive, in which case it is
the sole remedy.
2. Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in
this Act.
3. Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of
consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of
damages where the loss is commercial is not.
Problem 32: On Nov. 1, Jack bought a car from King. J used the car to get to work during the week in the winter and for fun on
the weekends. The contract he signed stated that the seller warranted the vehicle was merchantable, but that, in the event of
breach, “the buyer’s remedy was limited solely to repair or replacement of defective parts.” Moreover, the contract conspicuously
stated that the seller was not responsible for “any consequential damages.” One week after J received the car, he noticed a rumble
in the engine; he took it back and the machine was allegedly repaired; the same thing happened several times. 4 weeks later, J was
seriously injured; he lost the use of his arm, incurred hospital expenses, lost pay, and lost the cost of vehicle. K defended on the
grounds that his liability was limited to the cost of repair or replacement. J argued the remedy limitation was unconscionable.
How should the suit result?
o The personal injury losses: hospital expenses, lost pay, lost use of left arm. Could he recover from those losses? The
contract limited liability for “consequential damages”. Does this argument work? NO, any attempt to limit the liability
for injury is an unconscionable attempt and they are excluded leads to the deletion of the objectionable clause 2-719
and 2-302. There must be some argument that the seller can use to offer an exemption from liability? What is it that
makes a provision unconscionable? :Concealment, etc. 2-719 1b seems to say that this is a limited warranty; attempt to
recover damages for personal injury is precluded by 2-719 1b and 1a. If you were advising the buyer facing these
damages, what call would you make? It is still unconscionable and this argument still trumps the seller’s argument. The
distinction between failure of essential purpose and unconscionability is big. The agreement to a limited remedy
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represents a bargain. This bargain should be made to function perfectly; when it doesn’t, the limited remedy has failed in
its essential purpose.
o If the buyer cannot prove that the damages were caused as a proximate result, then he cannot recover. This is a matter of
foreseeability, etc. which may prevent recovery despite contract limitations, etc. The remedy limitations: 1. no
consequential damages, 2. the only remedy is for replacement. As far as consequential damages, the limitation is
unconscionable; on the damages for non-consequential damages or damages that are injury, but not consequential, the
problem is that w/ so many repeated failures, the buyer is going to be able to argue that the limitation failed in its
essential purpose and therefore should be excluded from the contract.
Warranty limitations and buyer disclaimers try to limit the liability of the seller trip back the scope of the warranty (there is no
warranty for certain losses); these are difficult drafting decision that are faced because you have to account for the probability that any
disclaimer, etc. will even stand up to the unconscionability test. (disclaimers are subject to stricter regulations than warranty
limitations).
NOTE: in a commercial setting where the buyer is not a consumer, courts tend to hold that disclaimer limiting consequential damages
is enforceable despite the failure of the limited warranty.
Notice
In all warranty actions a buyer loses all UCC rights if he fails to give the seller notice of the breach w/in a reasonable time after the
breach should have been discovered.
2-607 Effect of Acceptance; Notice of Breach; Burden of Establishing Breach After Acceptance; Notice of Claim or Litigation
to Person Answerable Over.
1. The buyer must pay at the contract rate for any goods accepted.
2. Acceptance of goods by the buyer precludes rejection of the goods accepted and if made with knowledge of a non-conformity
cannot be revoked because of it unless the acceptance was on the reasonable assumption that the non-conformity would be
seasonably cured but acceptance does not of itself impair any other remedy provided by this Article for non-conformity.
3. Where a tender has been accepted
a. The buyer must within a reasonable time after he discovers or should have discovered any breach notify the seller of
breach or be barred from any remedy (time begins to run when buyer becomes aware or should have been aware;
there is a general obligation to inspect the goods); and
b. If the claim is one for infringement or the like and the buyer is sued as a result of such a breach he must so notify the
seller w/in a reasonable time after he receives the notice of the litigation or be barred from any remedy over for
liability established by the litigation.
4. The burden is on the buyer to establish any breach w/respect to the goods accepted.
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5. Where the buyer is sued for breach of a warranty or other obligation for which his seller is answerable over
a. He may give his seller written notice of the litigation. If the notice states that the seller may come in and defend and
that if the seller does not do so he will be bound in any action against him by his buyer by any determination of fact
common to the 2 litigations, then unless the seller after seasonable receipt of the notice does come in and defend he
is so bound.
b. If the claim is one for infringement or the like the original seller may demand in writing that his buyer turn over to
him control of the litigation including settlement or else be barred from any remedy over and if he also agrees to
bear all expenses and to satisfy any adverse judgment, then unless the buyer after seasonable receipt of the demand
does turn over control the buyer is so barred.
6. The provisions of 3, 4, and 5 apply to any obligation of a buyer to hold the seller harmless against infringement or the like.
Problem 34
o Here, the seller knew: the shipment was five months late. Was notice necessary? Here there is an installment contract; so
notification of a breach in the first installment would give the seller the opportunity to make up for it in the second
installment. Without notice, the delay is not deemed to be important. Even if the seller was aware of the importance of
timely delivery, if he had been notified then the seller would reasonably be able to do something to avoid delay.
o If 2-607 is not satisfied, then you’re left with no remedy.
o When the second delay occurs, the buyer sends a notice; seller argues that it is insufficient notice to satisfy 2-607.
Comment 4 says that all is necessary to be included in the notice is that the transaction is troublesome. However, the
weak letter doesn’t tell the seller that something needs to be done. “notification need only be such as informs the seller
that the transaction is claimed to involve a breach, and thus opens the way for normal settlement through negotiation.”
Especially if you’ve attained legal advice on the matter, you should include the word breach and make it clear that the
breach has not been waived.
o Would filing of a suit be sufficient? The purpose of notice is to give the seller time to cure the breach or offer a
settlement. If the buyer files suit right away, then those rights are taken away. Even if one wasn’t looking for a cure,
there are other means of settlement. In a sense, one could argue that those settlements are all short circuited by skipping
the notice portion. Seller could argue that 2-607 says that if there is no notice, you are barred from any remedy. Some
courts have held that no serious negotiation occurs before filing of suit. However, to be safe, if you were giving advice,
you would not want to skip that step (unless, of course, you were facing imminent bankruptcy of the seller, etc.).
2-318 Third Party Beneficiaries of Warranties Express or Implied (states select one alternative)
Alternative A
A seller’s warranty whether express or implied extends to any natural person who is in the family or household of his buyer
or who is a guest in his home if it is reasonable to expect that such a person may use, consume or be affected by the goods and who is
injured in person by breach of the warranty. A seller may not exclude or limit the operation of this section. (This is the most restrictive
alternative)
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Alternative B
A seller’s warranty whether express or implied extends to any natural person who may reasonably be expected to use,
consume or be affected by the goods and who is injured in person by breach of the warranty. A seller may not exclude or limit the
operation of this section. (This is broader than the first alternative; does not limit it to family members or guests of a household)
Alternative C
A seller’s warranty whether express or implied extends to any person, who may reasonably be expected to use, consume or
be affected by the goods and who is injured by breach of the warranty. A seller may not exclude or limit the operation of this section
with respect to injury to the person or an individual to whom the warranty extends. (This is the broadest of the alternatives; it includes
corporations as well as injuries that are not personal, such as financial)
Problem 35
o 2-318 extends to third party beneficiaries the warranty of merchantability. (Alternative A is the most restrictive; but the
alternative which applies varies by jurisdiction).
o Does Sancho have to give notice in order to maintain an action? NO. 2-607 speaks only of buyers, Sancho is not a buyer.
Would it make sense to require an non-buyer to give notice? The comment suggests that even though 3rd party
beneficiaries are not required to give notice of breach, they may required to give notice of injury. Is there a real
difference? Plus, how would Sancho give notice? Sancho doesn’t know anything about Carrasco. Notice of breach
sections make a lot of sense when you’re talking about buyers and sellers (all the information is available); however,
when you include 3rd parties, it’s more difficult to hold them to a notice requirement because they lack the information
necessary. The comment doesn’t make clear what a notice of injury is. Most courts hold that individuals claiming under
alternative A or B have held that they don’t need to give notice (a court can ignore the comment).
o What about Alonzo himself (the buyer) is held to a notice requirement? What if he wanted to sue La Mancha, not
Carrasco? Alonzo is claiming breach of merchantability w/contract to Carrasco. He could claim under alternative B
because he in the foreseeable range of use of the product. Would he have to give notice to La Mancha? Courts have
tended to ignore the notice injury requirement for 3rd party. However, he does fall w/in the term buyer (he bought from
Carrasco). Courts still hold that he is a 3rd party and tend to hold that he is not required to give notice.
o Are there any other warranty claims? If you were representing Alonzo, you’d want a stronger claim? How would you
argue that there is a direct warranty to Alonzo? Can you find a contract b/w the manufacturer and Alonzo? This is a
heavily advertised product. With respect to mass circulation, highly advertised products, the representation made to
buyers acts as a direct contractual relationship between the buyer and the manufacture. Alonzo could argue that he was
persuaded by La Mancha’s advertisements, etc. and by acting upon that advertisement he directly engaged in a contract
(consideration included, the representations then become express warranties). If he’s suing on express warranty, then he
would have to satisfy the notice requirements under 2-607.
Privity
Suits on warranties are contract actions. Buyer must establish that there was in fact and in law a contract b/w the parties = privity. The
problem of how far back up the distribution chain the buyer can go is said to be an issue of vertical privity. Horizontal privity
deals with identifying to whom the retail seller is liable other than the immediate purchaser.
Problem 36
o Mr. Gauss could use alternative C (the jurisdiction would have to have adopted this provision) to sue. If the jurisdiction
did not adopt C, could he establish a direct warranty/contract b/w himself and the manufacturer? Consideration has to be
something that is reasonably/conceivably conclusive on part of the seller. It would be difficult to construct a contract out
of that. He would have to depend on Alternative C (as far as the dog is concerned); or Alt B for injuries to himself.
o Cayley could establish a direct contract w/manufacture (not the paint company though) and therefore was protected by
the express warranty.
o Can Mr. Gauss bring a tort action based on strict product liability? a defect in the product maintained by strict
liability. All he would have to prove is a defect that is unreasonably dangerous.
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1. One who sells any product in a defective condition unreasonably dangerous to the user or consumer or to his property is
subject to liability for physical harm thereby caused to the ultimate user or consumer, or to his property, if
a. The seller is engaged in the business of selling such a product, and
b. It is expected to and does reach the user or consumer w/o substantial change in the condition in which it is sold.
2. The rule stated in subsection 1 applies although
a. The seller has exercised all possible care in the preparation and sale of his product, and
b. The user or consumer has not bought the product from or entered into any contractual relation with the seller.
Differences b/w strict liability action and breach of implied warranty of merchantability:
1. 402A does not require notice
2. 402A damages are limited to physical injury
3. 402A has the statute of limitations imposed by state law for tort actions; UCC is governed by 2-725; time
periods may vary significantly.
4. 402A is not affected by disclaimers or remedy limitations
5. 402A does not consider privity
6. 402A requires that the product contain a defect; UCC warranty may be breached even if the product is
not defective.
Problem 37 The axle on Monty’s car snapped while driving; Monty skidded across median and ran into Bystander. What is the
best cause of action: negligence, 402A, or 2-314? Whom should you sue?
o 402A is probably the best COA; you don’t have to establish negligence or privity. Although Bystander was not a
consumer; part 2b states that it applies even if the user or consumer did not buy the product himself. All you have to
prove is that manufacturer distributed into commerce a product that contained a dangerous defect. Also, the damages are
limited to personal injury, so you wouldn’t be suing for merchantability of the product, but rather for personal injury
damages.
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1) The buyer obtains a special property and an insurable interest in goods by identification of existing goods as goods to which
the contract refers even though the goods so identified are non-conforming and he has an option to return or reject them. Such
identification can be made at any time and in any manner explicitly agreed to by the parties. In the absence of explicit
agreement identification occurs
a. When the contract is made if it is for the sale of goods already existing and identified;
b. If the contract is for the sale of future goods other than those described in paragraph C, when goods are shipped,
marked or otherwise designated by the seller as goods to which the contract refers;
c. When the crops are planted or otherwise become growing crops or the young are conceived if the contract is for the
sale of unborn young to be born within twelve months after contracting or for the sale of crops to be harvested
within twelve months or the next normal harvest season after contracting whichever is longer.
2) The seller retains an insurable interest in goods so long as title to or any security interest in the goods remains in him and
where the identification is by the seller alone he may until default or insolvency or notification to the buyer that the
identification is final substitute other goods for those identified.
3) Nothing in this section impairs any insurable interest recognized under any other statute or rule of law.
Comment 2 if identification in tentative or contingent, it is the general policy to resolve all doubts in
favor of identification.
Problem 44
o Seller, a fisherman, contracts to sell his entire catch for the coming season. Does the identification occur on the making
of the contract, on the catching of the fish, or on their packaging with a label indicating they belong to this particular
buyer?
1) 2-501 1B when the contract is for future goods (not growing crops or unborn young) identification is when
goods are shipped, marked or otherwise designated by the seller. So, in this case, identification occurred when
he packaged the fish w/ a label indicating they belonged to that particular buyer.
o Circus contracted to sell the unborn calf of Nancy the elephant as soon as it was born; the contract was made when
Nancy was 2 months pregnant. Does the identification occur on the date of contracting, on the calf’s birth, or when the
calf is marked for shipping?
1) The identification was made on the date of contracting because the calf had already be conceived by then.
Identification takes place on the conception of the unborn young (which in this case was also the date of the
contracting). 2-501 1C
o Carl agreed to sell ½ of the grain he stored in a place where it was mixed w/other grain. Does the identification occur on
contracting or on segregation of the grain?
1) Identification occurs at the time of contracting; the portion of the grain is part of an undivided share of
identifiable bulk with presumably equal units.
o W contracted to sell 5000 widgets to a buyer. Its warehouse contained 2 million, all alike. Does identification occur on
contracting or when the goods are picked out and marked as pertaining to this contract?
1) 1-201 [17] “Fungible” with respect to goods or securities means goods or securities of which any unit is, by
nature or usage of trade, the equivalent of any other like unit. Goods which are not fungible shall be deemed
fungible for the purposes of this Act to the extent that under a particular agreement or document unlike units are
treated as equivalents.
2) If the contract left it up to W (implicitly or explicitly) then identification would occur when W makes the
selection (picks it out and marks it as pertaining to the contract). If the contract stated that B would go by the
warehouse and pick out the items, then identification would occur when B made his selections. Note: the
comments state that the code favors the earliest possible identification of the goods.
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1) Where the contract requires or authorizes the seller to ship the goods by carrier
a. If it does not require him to deliver them at a particular destination, the risk of loss passes to the buyer when the
goods are duly delivered to the carrier even though the shipment is under reservation (this is shipment contract; he is
NOT actually responsible for them getting where they are going) (section 2-505); but
b. If it does require him to deliver them at a particular destination and the goods are there duly tendered while in the
possession of the carrier, the risk of loss passes t the buyer when the goods are there duly so tendered as to enable
the buyer to take delivery. (this is a destination contract; seller has an added layer of obligation and takes ultimate
responsibility that the goods will get if not literally into Buyer’s hands as least to the ‘particular destination’)
2) Where the goods are held by a bailee (a person engaged in the business of storing goods for hire) to be delivered without
being moved, the risk of loss passes to the buyer(In many contracts, the seller must arrange for the warehouse company
(bailee) to change its records to show the buyer as the new owner; this section sets out the rules as to when the risk of loss
passes to the buyer in this situation)
a. On his receipt of a negotiable document of title covering the goods; or
b. On acknowledgment by the bailee of the buyer’s right to possession of the goods; or
c. After his receipt of a non-negotiable document of title or other written direction to deliver, as provided in subsection
4b of section 2-503.
3) In any case not within subsection 1 or 2, the risk of loss passes to the buyer on his receipt (means taking physical possession
of them, 2-103) of the goods if the seller is a merchant; otherwise the risk passes to the buyer on tender of delivery. (applies
only when paragraph 1 and 2 do not)
4) The provisions of this section are subject to contrary agreement of the parties and to the provisions of this Article on sale on
approval (section 2-327) and on effect of breach on risk of loss (section 2-510)
The general rule on the transfer of the risk of loss is that, absent contrary agreement,
o Where the seller is a merchant, the risk of loss passes to the buyer on the buyer’s actual receipt of the goods; and
o Where the seller is not a merchant, risk of loss passes to the buyer when the seller tenders delivery.
Problem 45 W bought car from J. He paid price in full and J promised delivery on the next Mon. On Mon. the car was ready
and J called W to come “take it away”. W said he was busy and that he would pick it up the next day; J agreed. That night the car
was stolen from the lot due to no fault of J who had taken reasonable precautions against such a thing. Who had the risk of loss?
o J has risk of loss; W had to take actual receipt of the car; J who was to make actual delivery at his own place continues
meanwhile to control the goods and can be expected to insure his interest in them. The buyer, on the other hand, has no
control of the goods and it is extremely unlikely that he will carry insurance on goods not yet in his possession.
Problem 46 J decided to have a garage sale to clean up her home. In the course of the sale, B offered J $200 for the piano. J
said, “take it”. B said she’d be back the next day. That night J’s home burned to the ground, and the piano was destroyed. Did the
risk of loss pass from J to B? (2-503) If B never picked up the piano and if it was destroyed in a fire 6 months after the sale, what
result? (2-709 1a)
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had a reasonable time to present the document or direction, and a refusal by the bailee to honor the document or to
obey the direction defeats the tender.
5) Where the contract requires the seller to deliver documents
a. He must tender all such documents in correct form, except as provided in Article with respect to bills of lading in a
set; and
b. Tender through customary banking channels is sufficient and dishonor of a draft accompanying the documents
constitutes non-acceptance or rejection.
Delivery Terms
Shipment Contract: in sales contracts the parties often agree that the seller need only get the goods to the carrier and then the
buyer will take the risk of loss. (Comment 5 of 2-503 says that this is the normal type of contract)
Destination Contract: the parties agree that the goods must be delivered by the carrier before the risk of loss passes from
seller to buyer. (this is the variant type)
F.O.B. = “free on board”; can indicate a shipment or destination contract; the risk of loss transfers at the named place.
F.A.S. = “free along-side”
C.I.F. = “cost, insurance, freight”; always indicates a shipment contract; also, means the stated price includes the cost of the
item, the insurance premium, and the freight charge; here buyer agrees to pay insurance
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C. & F. = “cost and freight”; always indicates a shipment contract; same as C.I.F. except buyer doesn’t agree to pay for
insurance because usually a blanket insurance policy already covers goods the buyer owns.
Ex-ship = “off the ship”
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4) Under the term CIF or C&F unless otherwise agreed the buyer must make payment against tender of the required documents
and the seller may not tender nor the buyer demand delivery of the goods in substitution for the documents.
2-321 CIF or C&F: “Net Landed Weights”; “Payment on Arrival”; Warranty of Condition on Arrival
Under a contract containing a term CIF or C&F.
1) Where the price is based on or is to be adjusted according to “net landed weights”, “delivered weights”, “out turn” quanitity
or quality or the like, unless otherwise agreed the seller must reasonably estimate the price. The payment due on tender of the
documents called for by the contract is the amount so estimated, but after final adjustment of the price a settlement must be
made with commercial promptness.
2) An agreement described in subsection 1 or any warranty of quality or condition of the goods on arrival places upon the seller
the risk of ordinary deterioration, shrinkage and the like in transportation but has no effect on the place or time of
identification to the contract for sale or delivery or on the passing of the risk of loss.
3) Unless otherwise agreed where the contract provides for payment on or after arrival of the goods the seller must before
payment allow such preliminary inspection as is feasible; but if the goods are lost delivery of the documents and payment are
due when the goods should have arrived.
2-322 Delivery “Ex-ship”
1) Unless otherwise agreed a term for delivery of goods ex-ship (from the carrying vessel) or in equivalent language is not
restricted to a particular ship and requires delivery from a ship which has reached a place at the named port of destination
where goods of the kind are usually discharged.
2) Under such a term unless otherwise agreed
a. The seller must discharge all liens arising out of the carriage and furnish the buyer with a direction which puts the
carrier under a duty to deliver the goods; and
b. The risk of loss does not pass to the buyer until the goods leave the ship’s tackle or are otherwise properly unloaded.
2-323 Form of Bill of Lading Required in Overseas Shipment; “overseas”
1) Where the contract contemplates overseas shipment and contains a term CIF or C&F or FOB vessel, the seller unless
otherwise agreed must obtain a negotiable bill of lading stating that the goods have been loaded in board or, in the case of a
term CIF or C&F, received for shipment.
2) Where in a case w/in subsection 1 a bill of lading has been issued in a set of parts, unless otherwise agreed if the documents
are not to be sent from abroad the buyer may demand tender of the full set; otherwise only one part of the bill of lading need
be tendered. Even if the agreement expressly requires a full set
a. Due tender of a single part is acceptable w/in the provisions of the Article on cure of improper delivery (2-508
subsection 1); and
b. Even though the full set is demanded, if the documents are sent from abroad the person tendering an incomplete set
may nevertheless require payment upon furnishing an indemnity which the buyer in good faith deems adequate.
3) A shipment by water or by air or a contract contemplating such shipment is “overseas” insofar as by usage of trade or
agreement it is subject to the commercial, financing or shipping practices characteristic of international deep water
commerce.
2-324 No Arrival, No Sale Term
Under a term “no arrival, no sale” or terms of like meaning, unless otherwise agreed,
(a) the seller must properly ship conforming goods and if they arrive by any means he must tender them on arrival but he
assumes no obligation that the goods will arrive unless he has caused the non-arrival; and
(b) where without fault of the seller the goods are in part lost or have so deteriorated as no longer to conform to the contract or
arrive after the contract time, the buyer may proceed as if there had been casualty to identified goods (2-613)
Problem 47 Seller in NY contracted to sell 80 boxes to B in Ga. Delivery term was “$1800 FAS SS Seaworthy, NYC”. S
delivered the goods to the dock alongside the ship and received a bill of lading from the ship as a receipt. Before the boxes could
be loaded, the dock collapsed, and everything thereon disappeared into the water. Must B pay anyway? What if the delivery term
had been “ex-ship SS Seaworthy, Savannah” and the boxes had been properly unloaded just before the dock collapsed. Would 2-
322 make B pay?
Part one; this is a shipping contract. Once the seller put the goods in the hands of the carrier, the risk shifted to the
buyer.
Part two: the buyer still assumes the risk of loss because the ex-ship section specifies that the risk transfers when the
goods are properly unloaded. (destination contract)
Problem 48 S in MI contracted to sell and ship 50 T’s to B in AL. Assume lightning strikes, destroying all vehicles after the
carrier has received them, but before they are loaded on board the railroad car that was to take them to AL. Who had the risk of
loss if (a) the contract said FOB Detroit; (B) the contract said FOB railroad cars Detroit; (C) the contract said CIF Birmingham?
Buyer ; this is a shipment contract; goods were delivered to the carrier; risk passed.
25
Seller; this is a shipment contract however the goods never reached the RR cars in Detroit so the risk never passed.
Buyer; if seller met all the requirement of 2-320 then the risk shifted to the buyer; this is a shipment contract.
Problem 49 Dispatcher of PP, Inc. just finished loading 5 boxcars of product on board the cars of an independent RR carrier
when he received notice from PPI’s sales department that it agreed to sell one of them to GKFS “FOB seller’s processing plant”.
The dispatcher agreed to divert one of the cars to GK, but before he could do so, a hurricane destroyed all five cars and their
contents. Who bears risk of loss?
This is a destination contract; the goods were never tendered to the destination and therefore risk of loss was never
passed to buyer.
26
(b) accept the whole; or
(c) accept any commercial unit or units and reject the rest.
(Look back at Identification for the next step in contract performance; then to tender and the delivery terms).
Problem 53 S signed contract to buy 5 cars. Cars were delivered; S test drove all and rejected 2 because the cigarette
lighters didn’t work. The dealer offered to repair the defects but S refused. Who wins?
o The dealer would probably win because even though the 2 cars were non-conforming the seller still retains the
option to cure the defect.
o Yes, the cure section is useful to the dealer. It is a way of getting around the perfect tender rule.
o Yes, usage of trade is built into the contract regardless of whether it is explicit. It is also another way of getting
around the perfect tender rule.
Cure
2-508 Cure by Seller of Improper Tender or Delivery; Replacement
1. Where any tender or delivery by the seller is rejected because non-conforming and the time for performance has not yet
expired, the seller may seasonably notify the buyer of his intention to cure and may then within the contract time make a
conforming delivery.
2. Where the buyer rejects a non-conforming tender which the seller had reasonable grounds to believe would be acceptable
with or without money allowance the seller may if he seasonably notifies the buyer have a further reasonable time to
substitute a conforming tender.
Problem 54 F ordered a new car from PM for $22,000. It had special accessories ordered and would be delivered; the car was
ready early so buyer picked it up. 3 miles from the dealer the engine blew up w/o warning. F wanted his money back. PM said:
a) PM offered to take the engine out of another car and replace it. (the rest of the car was not damaged)
b) PM refused to refund the money; instead, it claimed a right to give F a new car to be delivered fresh from the factory a
week later.
a. According to 2-508, the seller has the right to cure; however, using 2-607, if the value is substantially
impaired to the buyer, he may reject the product and in effect cancel the contract. The Shaken Faith Doctrine
may be applied to the purchase of vehicles.
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Shaken Faith Doctrine: For a majority of people the purchase of a new car is a major investment, rationalized by peace of mind
that flows from its dependability and safety. Once their faith is shaken, the vehicle loses not only its real value in their eyes, but
becomes an instrument whose integrity is substantially impaired and whose operation is fraught with apprehension. The attempted
cure in the present case was ineffective.
2-607 Effect of Acceptance; Notice of Breach; Burden of Establishing Breach After Acceptance; Notice of Claim or Litigation
to Person Answerable Over.
1. The buyer must pay at the contract rate for any goods accepted.
2. Acceptance of goods by the buyer precludes rejection of the goods accepted and if made with knowledge of a non-
conformity cannot be revoked because of it unless the acceptance was on the reasonable assumption that the non-conformity
would be seasonably cured but acceptance does not of itself impair any other remedy provided by this Article for non-
conformity.
3. Where a tender has been accepted
a. The buyer must within a reasonable time after he discovers or should have discovered any breach notify the seller of
breach or be barred [FOREVER!!] from any remedy (time begins to run when buyer becomes aware or should have
been aware; there is a general obligation to inspect the goods); and
b. If the claim is one for infringement or the like and the buyer is sued as a result of such a breach he must so notify the
seller w/in a reasonable time after he receives the notice of the litigation or be barred from any remedy over for
liability established by the litigation.
4. The burden is on the buyer to establish any breach w/respect to the goods accepted.
5. Where the buyer is sued for breach of a warranty or other obligation for which his seller is answerable over
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c. He may give his seller written notice of the litigation. If the notice states that the seller may come in and defend and
that if the seller does not do so he will be bound in any action against him by his buyer by any determination of fact
common to the 2 litigations, then unless the seller after seasonable receipt of the notice does come in and defend he
is so bound.
d. If the claim is one for infringement or the like the original seller may demand in writing that his buyer turn over to
him control of the litigation including settlement or else be barred from any remedy over and if he also agrees to
bear all expenses and to satisfy any adverse judgment, then unless the buyer after seasonable receipt of the demand
does turn over control the buyer is so barred.
The provisions of 3, 4, and 5 apply to any obligation of a buyer to hold the seller harmless against infringement or the like.
The buyer has to react to a tender whether or not it is conforming tender. If she doesn’t make a rejection, then the law
will make an acceptance for her by default. Rejection isn’t automatic if the goods are non-conforming.
Consequence of Rejection If a buyer rightfully rejects the seller will usually be responsible for getting back the goods;
the seller may be able to try again under the notion of cure; the buyer will have some minimal responsibility for protecting
the goods after rightful rejection.
Consequences of Acceptance The buyer must pay for the goods. Under subsection 2 of 2-607, the buyer has forever lost
the opportunity to reject. (right of revocation are a little tricky). There is a notification requirement for breach; if you don’t
give notice, you’re barred forever from ANY remedy. Lesson when a buyer experiences any problem with accepted
goods, the seller should be notified as soon as possible and with as much specificity as possible about the problem; the notice
should make clear that the buyer considers the problem to be a breach of the sales agreement and furthermore that he may
have to pursue some remedy in light of what is now known about the goods.
Problem 55 MS ordered lobsters from ME “FOB Portland”. ME loaded the goods on an airplane in Portland but failed to
notify MS of the date of flight until 2 days later when MS called to inquire. He then made inquiries as to the current location
and found that they were sitting in Iowa for a day. MS signed a receipt and picked them up. 20 of them were clearly dying;
the other 30 were fine. MS decided that it wanted none of the lobsters.
o Is the seller’s failure to notify MS of the shipment ground for rejection?
If the seller fails in his obligations to the buyer after shipping the goods, then the buyer may rightfully
reject if it causes material delay or loss. Here the seller failed to promptly notify of the shipment causing
buyer to have to hunt for the goods and then discover that the lobsters were dying (loss) and delay. So, yes,
the failure to notify is grounds for rejection.
o May MS reject due to the 20 dying lobsters?
According to the perfect tender rule, the buyer may be able to rightfully reject the whole if the goods fail to
conform to the terms of the contract. This section does not apply to installment contracts. Also, 2-509 (1)
provides that the goods must be duly tendered; this includes fulfilling the seller’s obligations under 2-504
which he did not do because he did not notify the buyer and therefore the risk of loss did not rightfully pass
from the seller to the buyer.
o How quickly must MS act if it wants to reject?
2-602 states that notice of rejection must be given in a reasonable time; especially when dealing with live
animals for sale the notice would have to be almost immediately after delivery and inspection. This is to
give the seller the opportunity to take back the goods and resell, etc.
o Must MS reship the goods if the latter offers to pay freight?
2-603 Merchant Buyer’s Duties as to Rightfully Rejected Goods
1. Subject to any security interest in the buyer (subsection 3 of 2-711), when the seller has no
agent or place of business at the market of rejection a merchant buyer is under a duty after
rejection of goods in his possession or control to follow any reasonable instructions received
from the seller with respect to the goods and in absence of such instructions to make
reasonable efforts to sell them for the seller’s account if they are perishable or threaten to
decline in value speedily. Instructions are not reasonable if on demand indemnity for expenses
not forthcoming.
2. When the buyer sells goods under subsection 1, he is entitled to reimbursement from the seller
or out of the proceeds for reasonable expenses of caring for and selling them, and if the
expenses include no selling commission then to such commission as is usual in the trade or if
there is none to a reasonable sum not exceeding ten per cent on the gross proceeds.
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3. In complying with this section the buyer is held only to good faith and good faith conduct
hereunder is neither acceptance nor conversion nor the basis of an action for damages.
Here, the buyer would have to follow the seller’s instructions to send back the goods, especially because
they are perishable.
o If MS decides to keep 30, is this allowed?
Any acceptance of a commercial unit is acceptance of the entire unit. (2-606 2). Here you have to see what
constitutes a commercial unit. Each lobster is probably its own unit, so acceptance of 30 and rejection of
the rest is probably okay as long as the notice of rejection is timely, etc. Under 2-601 the perfect tender
rule, the buyer could accept some commercial units and reject the rest.
o If MS rejects the goods, must it give its reasons in the notice of rejection? What penalty for not doing so?
If there is rejection, there must be a notice of the rejection. If there is no notice, then the buyer is forever
barred from any remedy.
2-605 Waiver of Buyer’s Objections by Failure to Particularize
1. The buyer’s failure to state in connection with rejection a particular defect which is
ascertainable by reasonable inspection precludes him from relying on the unstated defect to
justify rejection or to establish breach
a. Where the seller could have cured it if stated seasonably; or
b. Between merchants when the seller has after rejection made a request in writing for a
full and final written statement of all defects on which the buyer proposes to rely.
2. Payment against documents made without reservation of rights precludes recovery of the
payment for defects apparent on the face of the documents.
A failure to state the reasons for rejection may constitute a waiver of objection if the rejection is based
on a defect that the seller could have cured. Here, the buyer rejected 20 of the lobsters because they
were dyeing. This is probably not something the seller could have cured, unless it had some sort of
miracle life drug or something So, the buyer may be able to rely on the fact the seller could not have
cured the dyeing lobsters.
o If MS gives a valid notice of rejection w/in a reasonable period of time after the lobsters are delivered, what should
it then do with the lobsters?
According 2-603, the buyer has little obligation in regard to the goods, unless they are perishable and the
buyer is a merchant. In that case, the buyer should try to sell the goods at the seller’s account (this would
not constitute acceptance or waiver of rejection) or follow any necessary instructions given by the seller as
to the reasonable storage/keeping of the goods until the seller can pick them up; or follow any instructions
as to the re-shipping of the goods.
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b. In a proper case obtain specific performance or replevy the goods as provided in this Article (2-716)
3. On rightful rejection or justifiable revocation of acceptance a buyer has a security interest in the goods in his possession or
control for any payments made on their price and any expenses reasonably incurred in their inspection, receipt,
transportation, care and custody and may hold such goods and resell them in like manner as an aggrieved seller. (2-706)
Problem 56 S ran a ranch in CO. He wanted a statue of a horse; it was to be especially manufactured by E and arrived in 6
boxes for assembly. When the horse was put together, S didn’t like the tail; he removed it and substituted it w/one of his own. He
returned the original tail w/letter of rejection. In the meantime, S painted the horse black and used it for advertising the ranch.
After 3 months of display, S took the horse down and returned it back to E w/letter of rejection stating that the tail made the horse
unusable. E sues. Did S make a rightful rejection? If the tail didn’t conform, was that grounds for objection?
a. According to 2-606, he made an inadvertent acceptance by doing something that is inconsistent with the seller’s ownership
(he painted the horse); he also attempted to accept only part of a commercial unit (which he cannot do) violation of 2-
606 2.
b. The effect of acceptance (2-607) means that he is barred forever from any warranty; as soon as goods are accepted he is
liable to pay the contract price. (these were the conditions of the Plateq case). (Subsection 1 of 2-607). Is this true also if
the goods are non-conforming? Yes. If no effective revocation takes place, then the buyer has to pay the contract price.
(Revocation can take place if the buyer accepts the goods under the assumption that the defect would be cured). If he
accepts and does not revoke, does the buyer have any recourse against the buyer for the violation of the express remedy?
He may be able to sue for damages for non-conforming goods (subsection 2 of 2-607 provides that acceptance doesn’t
preclude any other remedy for non-conformity (2-714, 2-715).
c. The steps that the buyer should take to protect his legal rights to damages for breach of warranty (non-conformity); he
must notify the seller of the breach (content of notification must include some notification that a breach had occurred; the
comments seem to suggest that if you say that the transaction was troublesome it would be enough, however, the airplane
case ruled that that sort of statement wasn’t strong enough).
Effective acceptance occurs when there is a failure to make an effective rejection. If buyer had a right to reject but failed to reject
effectively; because the acceptance is effective, he is liable for the contract price, but it does not eliminate buyer rights (but he
must preserve those rights by notifying).
An acceptance can occur if a buyer can fail to particularize (but even if they hadn’t found this, the buyer had made some
affirmative action which resulted in acceptance).
There is some case law that allows the buyer to use the rejected goods for a reasonable time (if there are no substitute goods
available or alternative methods) w/o effecting an acceptance. [If the right of post-revocation use is to exist, it should be limited]
Comment 1 of 2-608 seems to indicate that the revocation attempts to put both the buyer and seller at the same position they were
in before the contract was made; this indicates that the buyer may responsible for compensation to the seller for the benefits he
received during the post-revocation use.
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Revocation of Acceptance
2-608 Revocation of Acceptance in Whole or in Part
1. The buyer may revoke his acceptance of a lot or commercial unit whose non-conformity substantially impairs its value to him
if he has accepted it
a. On the reasonable assumption that its non-conformity would be cured and it has not been seasonably cured; or
b. Without discovery of such non-conformity if his acceptance was reasonably induced either by the difficulty of
discovery before acceptance or by the seller’s assurances.
2. Revocation of acceptance must occur within a reasonable time after the buyer discovers or should have discovered the ground
for it and before any substantial change in the condition of the goods which is not caused by their own defects. It is not
effective until the buyer notifies the seller of it.
3. A buyer who so revokes has the same rights and duties with regard to the goods involved as if he had rejected them.
The difference between revocation and rejection When parties choose to “rescind” the contract they both renounce any and all
rights under that agreement; there is no longer any contract to enforce. When a buyer revokes, he has not waived and may still
enforce any claim for damages to which he or she is entitled under the terms of the contract and the provisions of the article.
The drafters wanted revocation to be possible when the defects that never get cured (subpart a) or later turn up (subpart b) are
serious and materially affect the value of the goods to the purchaser (subjective test).
The “reasonable time” period to revoke may be extended “where the delay is prompted either by the seller’s attempts to cure the
defect, or where the delay was in reliance on the seller’s continued assurances that the defect would be successfully repaired.”
Notification of revocation “while the notice need not be in any particular form and may be implied by conduct, it must inform
the seller that the buyer does not want to keep the goods.”
On postrevocation use: a court will annul a revocation and conclude that a reacceptance has occurred only where the buyer’s
actions with respect to the goods are deemed “unreasonable”.
Problem 57
o How must time do you have to reject the goods? What is the criterion for a reasonable time? With a car, the time is
different: more time because there are complicated mechanisms that an ordinary person wouldn’t be able to
determine/inspect the goods. 2-513 gives the buyer a right of inspection of the goods; the period necessary to exercise
that right is different from each good; if the period lapses w/o you taking any affirmative action to inspect, then it really
constitutes acceptance.
o If the car is so flimsy that it is not a curable defect, then she probably has a right of revocation. 2-608 sanctions the use of a
subjective use (a history of impairment, so that accumulation of defects may lead to allowance of revocation). The
section speaks of “substantial impairment to him”. Enough is enough and notwithstanding the seller’s good faith efforts,
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the buyer should be allowed to say that “that’s all” and revoke. 2-609 might be advisable in situations where problems
have been fixed. Look at comment 4.
Problem 58 Limitations of remedies cannot be unconscionable and they should not preclude a buyer from revocation if the
value of the goods has been substantially impaired. Here, the buyer could still revoke by showing that the value is substantially
impaired; enough is enough and the buyer shouldn’t be subjected to a perpetual postponement of revocation by the seller’s
assurances to repair continuing defects.
Problem 61 This seems as though the material breach is a subjective issue. He did accept the computer; however after
discovery of one of the features, the value of the goods was substantially impaired. Comment 2 suggests that it doesn’t matter
what the seller’s actual knowledge as to the buyer’s needs or circumstances, if the non-conformity impairs the value, then a right
of revocation exists.
Problem 62 ? I would think that he would be able to get his purchase price back at least on the basis that the goods were not
merchantable.
Installment Sales
2-612 “Installment Contract”; Breach
1. An installment contract is one which requires or authorizes the delivery of goods in separate lots (a parcel or single article
which is the subject matter of a separate sale or delivery, whether or not it is sufficient to perform the contract, 2-105
5) to be separately accepted, even though the contract contains a clause “each delivery is a separate contract” or its
equivalent.
2. The buyer may reject any installment which is non-conforming if the non-conformity substantially impairs the value of that
installment and cannot be cured or if the non-conformity is a defect in the required documents; but if the non-conformity does
not fall within subsection 3 and the seller gives adequate assurance of its cure the buyer must accept that installment.
3. Whenever non-conformity or default with respect to one or more installments substantially impairs the value of the whole
contract there is a breach of the whole. But the aggrieved party reinstates the contract if he accepts a non-conforming
installment w/o seasonably notifying of cancellation or if he brings an action with respect only to past installments or
demands performance as to future installments.
Substantial performance is the law. The seller is entitled to payment even where the tender of goods fails to conform exactly to
the contract as long as it “substantially” conforms.
The right of rejection in installment contracts hinges on “substantial” nonconformity, which must mean something different than
the failure to conform “in any respect” which is the hallmark language of 2-601.
Problem 52
Problem 63
o Did Empusa waive its rights to sue for repudiation? To be safe, after having receiving notice of cancellation, you
would advise Empusa to declare a reservation of rights (1-207). Courts are reluctant to find modifications under 2-
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209 where those modifications would justify a breach by one of the parties; there were have to be evidence of a
renegotiation of the contract.
o Under non conformity, the risk doesn’t transfer until the goods are accepted or cured. How can you be sure about a
right of rejection?
o Was the seller entitled to make the judgment that the good would not survive the ship travel? 2-614: they must find
an alternative. In this case, the delivery obligations and the risk of loss pass at the same moment as the agreed upon
delivery method. So, risk of loss passed w/delivery to the plane.
o When the gargoyle was accepted, 510 1 says that risk passes on acceptance; 510 2 says that the risk may not pass if
the buyer revokes acceptance.
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