Sales and Leases Outline (First Edition)

Sales and Leases

Outline

First Edition

Sales and Leases Quimbee Outlines

Table of Contents

Quickline

I. Introduction to UCC Article 2

Scope of Article 2

Key Terms in UCC Article 2

A Brief Introduction to International Sales of Goods Scope of Article 2A on Leases of Goods

II. Contract Formation and Modification under Article 2

The Basics of Offer, Acceptance, and Consideration

The Battle of the Forms

The Statute of Frauds

The Parol-Evidence Rule

Modification, Rescission, and Waiver

Delegation and Assignment

III. Interpreting the Contract

Parties’ General Obligations

Unconscionability

Identifying Goods to the Contract

Gap Fillers

Risk of Loss without a Breach of Contract under § 2-509 Effect of Breach on Risk of Loss under § 2-510 Course of Performance, Course of Dealing, and Usage of Trade

103

107

108

IV. Creditors and Good-Faith Purchasers 112

Passing of Title and Reservation of Security Seller’s Creditors’ Rights as to Sold Goods

Implied Warranty of Fitness for a Particular Purpose 196 Excluding and Modifying Warranties 198 Conflicting Warranties 205

112

115

Special Protections for Good-Faith Purchasers and Power to Transfer 117 Entrusting 121

VIII.Remedies

206

Special Remedies for Particular Contexts

206

V. Performance

125

212

Seller’s Remedies

125

The Perfect-Tender Rule

Buyer’s Remedies for Goods Not Accepted Buyer’s Damages for Breach Regarding Accepted Goods

127

233

Cure

Installment Contracts 130 Buyer’s Right to Inspect the Goods 135 Acceptance and Rejection of Goods 136 Revoking Acceptance 148 Insurable Interest in Goods 153 Seller’s Tender of Delivery and Shipment of Goods 154 Payment by the Buyer 156 VI. Breach, Repudiation, and Excuse 157 Anticipatory Repudiation 157 Retracting an Anticipatory Repudiation 160 Right to Adequate Assurance of Performance 162 Casualty to Identified Goods 167 Substituted Performance by Way of Transport, Delivery, and Payment 169 Impracticability of Performance 170

245

Buyer’s Incidental and Consequential Damages 247 Deducting Damages from the Price 255

Limitation or Modification of Remedies in the Agreement

255

259

Statute of Limitations in Article 2

VII. Warranties in UCC Article 2

177

Express Warranties

Warranty of Title and Warranties against Infringement 183 Implied Warranty of Merchantability 186

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I. Introduction to UCC Article 2

The law addressing contracts for the sale of movable goods appears in Article 2 of the Uniform Commercial Code (UCC), except in Louisiana.

Scope of Article 2

Article 2 applies to transactions in goods.

1. Transaction in Goods Defined

The term transaction in goods normally refers to a present or future sale of goods. A sale is the passing of title in goods from a seller to a buyer for a price.

2. Contract v. Agreement In the UCC, agreement refers to the parties’ bargain, gleaned from the language and context. Contract refers to the parties’ total legal obligation, including the bargain and governing contract law.

3. Goods Defined Goods include all items movable when identified to the contract.

4. Transactions Excluded from Article 2’s Scope

Several transactions are excluded from Article 2’s scope:

 transactions operating only as secured transactions under UCC Article 9;  leases;  real estate transactions;  bailments; and  to the extent of any conflict with Article 2, transactions subject to laws regulating sales to specified classes of buyers, such as consumers or farmers. 5. Contracts for Services, Construction Contracts, and Hybrid Contracts Article 2 does not apply to contracts for services or construction contracts. The common law normally controls these transactions. But so-called hybrid transactions involve both services (or construction) and a sale of goods. Courts apply one of two tests to determine whether Article 2 or the common law controls hybrid transactions.

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a. Predominant-Purpose Test Most courts follow the predominant-purpose test. Here, if the transaction is primarily a sale of goods with labor incidentally involved, Article 2 controls. Conversely, if the transaction is principally for services, with a sale incidentally involved, then the common law controls. How the parties label the transaction is relevant but not conclusive. Factors include:  contractual language;  the nature of the seller’s business, particularly whether the seller mainly provides goods or services;  what a reasonable person would believe to be the buyer’s primary purpose in entering the

transaction, whether to obtain goods or services; and  the amount charged for goods, relative to services.

b. Gravamen Test The gravamen test considers the primary focus of the plaintiff’s complaint. If the plaintiff’s allegations emphasize defective goods, then Article 2 controls—even if the transaction’s predominant purpose involves services. If those allegations center around the quality of services or labor, then the common law applies—even if the transaction’s predominant purpose is the sale of goods.

6. Role of the Common Law in a Transaction Subject to the UCC

Even if the UCC applies, common-law rules also operate, except insofar as the UCC supersedes them.

Key Terms in UCC Article 2

Article 2 features many technical terms.

1. Buyer

A buyer is someone to whom title to goods is transferred or who enters a contract contemplating such a transfer.

2. Seller A seller transfers title to goods or contracts to do so.

3. Good Faith

Concerning a merchant, good faith means subjective honesty and observing reasonable

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commercial fair-dealing standards in the trade. For a nonmerchant, good faith means simply honesty in fact—though some jurisdictions also require a nonmerchant to observe reasonable commercial standards of fair dealing. Good faith requires parties to act consistent with the contract’s spirit, not just its letter, and with the other’s justified expectations.

4. Receipt Receipt means taking physical possession of goods.

5. Merchant A merchant (1) is in the business of selling goods of the kind, or regularly sells those goods, or (2) otherwise, by occupation, holds herself out as possessing knowledge or skills peculiar to the goods or the practices involved in the transaction (or who employs such a person as an agent or broker). This definition contemplates two types of merchants: (1) merchants concerning practices involved in the transaction and (2) merchants with respect to goods of the kind. If both parties are merchants of either type, the transaction is between merchants . a. Merchants Concerning the Practices Involved Almost any professional businessperson acting in a business capacity could be a merchant concerning the practices involved in the transaction. Most sales of goods rest on conventional business practices. b. Merchant with Respect to Goods of the Kind A merchant with respect to goods of the kind has professional experience and expertise (or employs agents with such experience and expertise) in the relevant goods—that is, one who sells the goods as a substantial part of her occupation. This definition contemplates regular, systematic, and continuous dealing in the goods.

6. Future Goods Future goods do not yet exist and are not yet identified to the contract.

7. Goods or Conduct Conforming to the Contract

To conform to the contract, goods or conduct must accord fully with all contractual requirements, however detailed or minute.

II. Contract Formation and Modification under Article 2

In Article 2, contract formation generally demands an offer, acceptance, and consideration. Here, Article 2 diverges from the common law in many respects.

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The Basics of Offer, Acceptance, and Consideration An offer is an offeror’s manifestation of willingness to enter a bargain, justifying the offeree’s acceptance. Assuming adequate consideration, the offeree’s acceptance creates a binding contract. But once the offer terminates, so too does the offeree’s power of acceptance. With few exceptions, the offeror may revoke (terminate) the offer any time before acceptance. Acceptance is the offeree’s manifestation of assent to form a contract on the offer’s terms. Consideration means a bargained-for exchange of promises or performances. 1. A Merchant’s Firm Offer under UCC Article 2 If a merchant offers, in a signed writing, to buy or sell goods, and the writing’s terms give assurance that the offer will be held open, then the offer is irrevocable even without consideration for the lesser of (1) the time stated in the writing or (2) if none, a reasonable time. But in no event is the offer irrevocable for longer than three months after the offeree receives the offer. The offeror must separately sign the term if it appears on a writing that the offeree supplied. Of course, a promise to keep the offer open for consideration is a normal option, irrevocable for as long as the option indicates. The Battle of the Forms Under UCC § 2-207, an acceptance may form a contract although it contains terms additional to or different from the original offer. For instance, in the battle of the forms, the parties exchange preprinted, boilerplate forms to make or acknowledge orders for goods. If one form has terms additional to or inconsistent with the other, yet the parties perform, § 2-207 governs which terms become part of the contract. 1. Significance of a Definite and Seasonable Expression of Acceptance or Written Confirmation Generally, if the offeree sends definite, seasonable expression of acceptance or a written confirmation within a reasonable time, then the acceptance or confirmation is an acceptance forming a contract, even with terms additional to or different from the offer. But no contract forms if acceptance is expressly and clearly conditioned on assent to the additional or different terms, unless the offeror agrees to them. If the offeror agrees, a contract forms based on the terms in the conditional acceptance. If not, then no contract forms based on the parties’ writings. 2. Result if the Parties’ Writings Do Not Form a Contract If the parties’ writings do not form a contract, yet they perform, then their conduct establishes a contract. Here, contradictory terms in the writings cancel each other out, and the UCC itself supplies any relevant, missing terms.

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3. Whether Additional Terms Become Part of the Final Contract if the Parties’ Writings Form a Contract An additional term is one that adds to, but does not contradict, the offer’s terms. A different term varies or contradicts the offer’s terms. If the parties’ writings form a contract, additional terms are treated as proposals for inclusion in the contract. Their treatment depends on whether the transaction is between merchants. Courts differ over the treatment of different terms. a. Rules for Additional Terms in a Contract between Merchants Between merchants , additional terms in the acceptance or confirmation become part of the contract, unless:  the offer expressly limits acceptance to the offer’s terms,  the additional terms materially alter the offer, or  notification of objection to the additional terms either has already been given or is given within a reasonable time after notice of the additional terms is received. Whether Additional Terms Materially Alter the Offer An additional term materially alters the offer if it would cause the offeror unreasonable surprise or hardship (usually economic hardship) were it incorporated into the agreement without the offeror’s express awareness. Examples include:

 a requirement to arbitrate disputes,  indemnification,  a limitation of liability or warranty disclaimer, or  a term reallocating risk of loss.

b. Rule if One Party Is Not a Merchant If the parties’ writings form a contract, and one party is not a merchant, then any additional terms become part of the contract only if the original offeror assents to them. c. Whether Different Terms (as Opposed to Additional Terms) Become Part of the Final Contract Some courts treat different terms the same as additional terms. Others apply the knock- out rule, in which contradictory terms cancel each other out, and the UCC’s gap-filling rules supply any relevant, missing terms. Still other courts treat an acceptance with different terms the same as a counteroffer at common law.

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The Statute of Frauds A contract for the sale of goods with a price of $500 or more is unenforceable without a writing that (1) suffices to indicate that the parties made a contract, (2) is signed by the party against whom enforcement is sought, and (3) states a quantity. The contract is unenforceable beyond the quantity stated in the writing. If the parties modify the contract, and the contract as modified falls within the statute of frauds, then the modified contract must satisfy the statute of frauds. 1. Written Confirmation in a Contract between Merchants Between merchants, special rules apply if one party sends the other a written confirmation of the contract, and the confirmation, for statute-of-frauds purposes, would suffice against the sender . If the confirmation is sent within a reasonable time, and the other party receives it and has reason to know of its contents, then the statute of frauds is satisfied as against the recipient . This rule does not apply, though, if within 10 days after the confirmation is received, written notice of objection to the confirmation’s contents is given.

2. Exception for Specially Manufactured Goods A contract failing the statute of frauds is nonetheless enforceable if:

 the goods are specially manufactured for the buyer;  the goods are not suitable for sale, other than to the buyer, in the ordinary course of the seller’s business; and  the seller substantially begins to manufacture the goods, or makes commitments for their procurement, before receiving notice of repudiation and under circumstances reasonably indicating that the goods are for the buyer. 3. Exception for Judicial Admissions A valid contract subject to the statute of frauds is enforceable even without a writing if the defending party admits in court, for instance, in a pleading or in testimony, the existence of a contract for sale. The contract is enforceable only up to the quantity of goods admitted. 4. Exception for Part Performance A valid contract subject to the statute of frauds is enforceable, even without a writing, concerning goods (1) that have been both received and accepted or (2) that have been paid for, provided payment was accepted.

The Parol-Evidence Rule

UCC’s parol-evidence rule covers integrated terms, which consist of (1) terms on which the

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parties’ writings agree and (2) terms in a writing that the parties intended to be the final expression of their agreement as to any terms in the writing. An agreement is fully integrated if the parties intended the writing to be the final, complete, and exclusive statement of their agreement’s terms. Integrated terms cannot be contradicted by extrinsic evidence of (1) any prior agreement, written or oral, or (2) any contemporaneous oral agreement. Integrated terms may be supplemented or explained, though, by evidence of course of performance; course of dealing; usage of trade; or, unless the agreement is fully integrated, evidence of consistent additional terms. Yet even in a fully integrated agreement, virtually any type of relevant extrinsic evidence is admissible to explain or supplement an ambiguous term. 1. Merger Clause as a Factor in Determining Whether an Agreement Is Fully Integrated A merger clause states that the writing embodies the final, complete, and exclusive expression of the parties’ agreement. A merger clause is not technically controlling. But courts will usually honor a merger clause, especially one separately entered into the agreement and not just part of a preprinted form.

2. Things the Parol-Evidence Rule Does Not Bar The parol-evidence rule does not bar evidence to:

 interpret an ambiguous term;  determine whether the agreement is fully or partially integrated;  determine whether there is a valid, enforceable contract;  show the transaction’s true nature;  show a modification to the agreement;  establish or disprove a defense to enforcement;  prove fraud or mistake;  prove that the contract does not reflect the parties’ intent; or  show evidence of collateral undertakings.

Contract Modification under Article 2 Generally

In Article 2, a good-faith contract modification requires no consideration to be binding.

Delegation and Assignment

Under Article 2, the parties may delegate their contractual duties or assign their contractual rights.

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1. Delegation Generally, a party may delegate her contractual duties to a third party, with or without the other party’s consent. Delegation does not relieve the delegator of her duty to perform. But delegation is prohibited if:

 the parties agreed to limit or bar delegation;  delegation would violate public policy or statute; or

 the counterparty has a substantial interest in having the delegator, as opposed to a third party, render or control performance ( e.g. , contract for personal services where the value lies in the promisor’s identity and credentials). 2. Assignment Unless otherwise agreed (and except as provided in UCC § 9-406), all a seller’s or a buyer’s contractual rights can be assigned with or without the other party’s consent—unless assignment would materially:

 change the other party’s duty,  increase the other party’s burden or risk stemming from the contract, or  impair the other party’s chance to obtain return performance.

a. Validity of Contractual Prohibitions on Assignment Article 2 generally honors contractual prohibitions on assignment. However, despite any contrary agreement, a party may assign (1) a right to damages for breach of the whole contract or (2) a right arising out of the assignor’s proper performance of her whole obligation. Unless the circumstances indicate otherwise, any prohibition on assigning “the contract” merely bars the assignor from delegating her duties of performance to the assignee. b. Effect of Assignment on Assignor A mere assignment does not absolve the assignor of her contractual liability. But if the assignor, assignee, and counterparty agree to substitute the assignee as a contractual party in place of the assignor, there is a novation. A novation absolves the assignor of liability. c. Effect of Assignment on Assignee As to any rights assigned, the assignee becomes entitled to receive the counterparty’s

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performance and may sue, in her own name, to enforce the assigned rights—subject to any defenses the obligor could assert against the assignor.

III. Interpreting the Contract

Article 2 boasts many rules governing contract interpretation.

Parties’ General Obligations The seller’s general duty is to deliver goods (1) of the kind, (2) in the quantity, (3) conforming to the quality, and (4) at the time required in the contract. The buyer’s is to accept and pay for conforming goods according to the contract. The buyer’s obligation to pay persists, even if the buyer is insolvent or unable to pay. Neither party is entitled to receive performance unless she herself has tendered performance. But the mere fact that the other party has not tendered performance does not necessarily relieve a party of her obligations. Unconscionability Unconscionability applies if the court finds that, at contracting, the whole contract or any of its terms were unconscionable. Here, the court may (1) decline to enforce the contract altogether, (2) enforce the contract without the unconscionable provision, or (3) limit the unconscionable clause’s application as justice requires. 1. Basic Test for Unconscionability There are two types of unconscionability: procedural and substantive. Normally, both types must exist, but not necessarily to the same degree. a. Procedural Unconscionability Procedural unconscionability speaks to the fundamental fairness of the bargaining process, as opposed to terms, emphasizing things like fine print, misrepresentations, disparate bargaining power, and so on. Relevant factors include:  the phrasing, clarity, and placement of the assertedly unconscionable terms;  whether the terms were available to the party asserting unconscionability before she entered the contract;  the parties’ relative sophistication;  whether the contract was one of adhesion;  whether one would reasonably expect the challenged terms to appear in the type of transaction;

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 the parties’ relative bargaining power and ability to negotiate; and  whether the party asserting unconscionability had other options.

b. Substantive Unconscionability Substantive unconscionability means that the contractual terms themselves are unfairly or unreasonably one-sided or oppressive. These terms allocate contractual risk so unevenly that one reasonably wonders why any reasonable person would knowingly agree to them under the circumstances. Examples include inequitable termination or arbitration clauses, unreasonable or unfair limits on remedies, and improper warranty disclaimers. Price matters, but price alone will seldom establish unconscionability. Identifying Goods to the Contract Identification occurs when particular goods, whether conforming or not, are associated with a specific contract for their sale. If the goods exist and have been identified at the time of contracting, then the goods are identified to the contract when the contract is made. If the goods are future goods, or if the goods exist but have not been identified at contracting, then identification typically occurs when the seller designates the goods as the contract’s subject matter ( e.g. , by marking or shipping the goods). Risk of Loss without a Breach of Contract under § 2-509 Section 2-509 sets forth the rules (absent contrary agreement) to determine risk of loss, assuming neither party has breached the contract. Normally, risk of loss passes from the seller to the buyer when the seller has performed its contractual obligations. If the goods are in a bailee’s possession for delivery without being moved, risk of loss passes when the bailee acknowledges the buyer’s right to possess the goods (though special rules apply if documents of title are involved). 1. Risk of Loss in a Shipment Contract In a shipment contract, the seller must or may ship the goods by carrier, but need not deliver the goods at a particular destination. Here, risk of loss passes to the buyer when the goods are properly delivered to the carrier. If the goods are identified in transit ( e.g. , the seller buys goods that are aboard a ship and diverts them to the buyer), risk of loss passes upon identification, regardless of when the goods were shipped. 2. Risk of Loss in a Destination Contract In a destination contract, the seller is authorized or required to ship the goods by carrier, and the seller must deliver the goods at a particular destination. Courts normally presume a

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shipment contract, even if the contract specifies a shipment address. But terms such as “F.O.B. destination” or “F.O.B. the place of destination” usually indicate a destination contract. In a destination contract, risk of loss passes to the buyer when the goods are duly tendered to the buyer, so as to enable the buyer to take delivery, at the particular destination while in the carrier’s possession. 3. Rule in Cases Not Involving Shipment Contracts, Destination Contracts, Sale on Approval, or Goods in a Bailee’s Possession In cases that do not involve shipment contracts, destination contracts, sale on approval, or goods in a bailee’s possession, when risk of loss passes depends on whether the seller is a merchant. If the seller is a merchant, risk of loss passes when the buyer receives the goods. If the seller is not a merchant, risk of loss passes when delivery is tendered.

Effect of Breach on Risk of Loss under § 2-510

If either the buyer or the seller has breached the contract, the rules on risk of loss change substantially.

1. Risk of Loss if Seller’s Tender or Delivery Does Not Conform to the Contract If the seller breaches by tendering or delivering nonconforming goods, thus giving the buyer a right to reject the goods, risk of loss stays with the seller until either the seller cures the nonconformity in the goods themselves ( e.g. , by repairing the goods) or the buyer accepts the goods. If the seller furnishes replacement goods, risk never shifts as to the goods replaced, but it shifts under the normal rules as to the replacement goods. If the buyer rightly revokes acceptance, she may proceed as though the seller always bore the risk of loss, to the extent of a deficiency in the buyer’s insurance coverage. 2. Risk of Loss if Buyer Breaches the Contract Special rules apply if the buyer breaches the contract, as to conforming goods, before risk of loss has passed to the buyer. Here, the seller may proceed as though the buyer bore the risk of loss for a commercially reasonable time ( e.g. , long enough for the seller to dispose of the goods).

Course of Performance, Course of Dealing, and Usage of Trade

Apart from express language, perhaps the most important factors in interpreting any contract for the sale of goods are course of performance, course of dealing, and usage of trade.

1. Course of Performance and Course of Dealing

Course of performance references the parties’ sequence of conduct concerning one specific

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transaction. A course of performance exists only if (1) the parties’ agreement concerning the transaction contemplates repeated occasions for performance by at least one party, and (2) the other party knows of the performance’s nature and has a chance to object to it, but that other party accepts the performance or acquiesces to it without objection. A course of dealing is a sequence of conduct involving transactions between the parties that arose prior to the agreement being interpreted. The prior sequence of conduct must be fairly regarded as establishing a common basis for understanding to interpret the parties’ expressions and other acts. a. Relevance of Course of Performance and Course of Dealing in Interpreting a Contract A course of performance or course of dealing between the parties (1) is relevant to ascertain the meaning of their agreement, (2) may lend meaning to discrete terms in the agreement, and (3) may qualify or supplement the agreement’s terms. Course of performance is also relevant to show waiver or modification of a term inconsistent with the course of performance. 2. Usage of Trade A usage of trade is a practice or a method of dealing so regularly observed in a place, trade, or vocation that one could justifiably expect the parties to observe it in the transaction being interpreted. To factor into contract interpretation, the usage must be reasonable. Courts normally presume reasonableness if the usage is regularly observed, but even here, courts may apply the rules on unconscionability to disregard unscrupulous, dishonest, or illegal practices. a. Relevance of Usage of Trade in Interpreting a Contract Usage of trade is relevant to contract interpretation in the same way as course of performance and course of dealing. But to be considered at all, a usage of trade must be (1) one the parties know about or should know about, or (2) in some vocation or trade that the parties are engaged in. 3. Hierarchy of Interpretation: Express Terms, Course of Performance, Course of Dealing, and Usage of Trade As a general rule, the agreement’s express terms and any applicable course of performance, course of dealing, and usage of trade must be construed consistently with each other. But if this sort of construction is unreasonable:

 express terms control course of performance, course of dealing, and usage of trade;  course of performance controls course of dealing and usage of trade; and

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 course of dealing controls usage of trade.

IV. Performance

Part 5 of Article 2 sets forth detailed provisions regarding the parties’ performance. Other provisions governing performance are scattered throughout Article 2.

The Perfect-Tender Rule Under the perfect-tender rule, both the goods and their tender of delivery must conform to the contract in every respect (including timeliness), no matter how detailed or minute. That is, in most contracts, the seller must perform perfectly, or else be in breach. If the seller fails the perfect-tender rule, the buyer may reject the whole delivery, accept the whole delivery (whether the goods conform or not), or accept any commercial units within the delivery and reject the rest. Different rules apply to installment contracts. But proper cure correspondingly limits the buyer’s remedies for imperfect tender. Cure Generally, the seller’s right to cure under § 2-508 applies if (1) the buyer rejects any tender of delivery due to nonconformity and (2) the seller’s time to perform has not yet elapsed. Here, the seller may, within the contractual time for performance, make a conforming delivery ( e.g. , by repairing or replacing defective goods). The seller must seasonably notify the buyer of any intention to cure. The seller has no right to cure as to accepted goods. 1. Giving the Seller a Further Reasonable Time beyond the Time for Performance to Effectuate a Cure Sometimes, the buyer will reject a nonconforming tender, even though the seller had reasonable grounds for believing that the goods would be acceptable to the buyer—with or without a money allowance ( e.g. , the buyer has previously accepted slightly nonconforming tender). Here, if the seller seasonably notifies the buyer, then the seller has a further reasonable time, beyond the time for performance, to give a substitute, conforming tender. Buyer’s Right to Inspect the Goods Unless otherwise agreed, the buyer has a right to inspect goods that are tendered, delivered, or identified to a sales contract before paying for them or accepting them. The buyer may inspect the goods at any reasonable time or place and in any reasonable manner.

Acceptance and Rejection of Goods

Whether and when the buyer accepts or rejects goods affects many of Article 2’s rules.

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1. How the Buyer Accepts the Goods Normally, the buyer accepts the goods by:

 signifying to the seller, by words or conduct and after a reasonable opportunity for inspection, that either the goods conform to the contract or the buyer will take or retain the goods despite any nonconformity;  after a reasonable opportunity for inspection, failing to effectively reject the goods; or  undertaking any action inconsistent with the seller’s ownership (excluding acts consistent with the buyer’s remedies; reasonable inspection, use, or troubleshooting; or acts that Article 2 requires or authorizes), provided that if the act is wrongful against the seller, the seller must ratify the act. 2. Effects of Acceptance Article 2 lists several effects of the buyer’s acceptance. For one, the buyer must pay the contract rate for any goods accepted, even nonconforming goods (though the buyer may receive an offset for the breach). Also, the buyer cannot reject accepted goods, though she may be able to revoke acceptance. Finally, if the buyer accepts a tender of goods, she must notify the seller of the breach within a reasonable time after she discovers or should have discovered it, or else lose any remedy. But if the buyer takes adequate steps to notify the seller, the buyer may retain her remedies even if the seller never actually receives notice. The notice should particularize the relevant nonconformities. 3. Manner of Rejection To be effective, any rejection must occur within a reasonable time (including a reasonable time for inspection) after the goods are tendered or delivered. In addition, the buyer must seasonably notify the seller of the rejection. A rejection need not be rightful to be effective. However, a wrongful rejection, although effective, is a breach of contract by the buyer. Once the buyer rightfully rejects the goods, it is wrongful against the seller for the buyer to exercise ownership as to any commercial unit of the rejected goods. This wrongful exercise of ownership entitles the seller to treat the act as acceptance or to recover damages. It is not an exercise of ownership, however, for the buyer to deal with the goods in a manner consistent with her entitlements, remedies, and duties under Article 2. A buyer may have special obligations to the seller as to rightfully rejected goods in her possession. Revoking Acceptance Even if a buyer accepts goods, Article 2 sometimes permits the buyer to revoke acceptance. If the buyer properly revokes acceptance, her rights and obligations are the same as if she had rejected them.

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1. Basic Requirements for Buyer to Revoke Acceptance The buyer may revoke acceptance of a lot or commercial unit that does not conform to the contract. However, the nonconformity must substantially impair the goods’ value to the buyer (considering the buyer’s subjective needs and whether the goods objectively satisfied them). Thus, the buyer cannot revoke acceptance for nominal or trivial nonconformities. Also, the buyer must have accepted the goods either (1) reasonably assuming that the nonconformity would be cured, provided the nonconformity was not seasonably cured, or (2) without discovering the nonconformity, assuming the buyer was reasonably induced to accept the goods by either the difficulty of discovering the nonconformity before acceptance or by the seller’s assurances (whether given in good faith or bad faith). 2. Time to Revoke Acceptance The buyer must revoke acceptance (1) within a reasonable time after the buyer discovered or should have discovered the basis for revocation and (2) before any substantial change in the goods’ condition not attributable to the goods’ own defects. Revocation is effective only when the buyer notifies the seller. Seller’s Tender of Delivery and Shipment of Goods From the seller’s perspective, tender means to place and keep conforming goods at the buyer’s disposal, providing any reasonably necessary notification so that the buyer can take delivery. Absent contrary agreement, the buyer’s tender of payment is normally a condition to any duty on the seller’s part to complete or tender delivery. Conversely, the seller’s tender of delivery is generally a condition to the buyer’s duty of acceptance and (unless otherwise agreed) the buyer’s duty to pay for the goods. 1. Seller’s Tender Obligations in a Shipment Contract In a shipment contract, the seller must (unless otherwise agreed) (1) put the goods in a reasonable carrier’s possession and (2) make a reasonable contract for the goods’ transportation. The seller must also promptly notify the buyer of the shipment. 2. Tender of Delivery in a Destination Contract In a destination contract, tender occurs once the carrier tenders the goods to the buyer at the destination. The goods must conform to the contract and be made available at a reasonable place and time, and the seller must give the buyer notice sufficient for the buyer to take delivery. Of course, the seller must also tender any document of title necessary for the buyer to take delivery from the carrier.

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V. Breach, Repudiation, and Excuse

Part 6 of Article 2 sets forth many rules to help determine whether either party has breached the contract and, if so, whether that breach will impose liability or will be excused.

Anticipatory Repudiation

A breach by anticipatory repudiation occurs if:

 either party repudiates the contract,  the repudiation concerns a performance not yet due, and  the loss of that performance will substantially impair the contract’s value to the nonrepudiating party. 1. Repudiation Defined A repudiation is an overt, clear communication that a party will not or cannot perform or an action that makes performance impossible. For instance, a party may refuse to perform without concessions going beyond the contract. By contrast, statements that merely raise doubts or concerns about one party’s ability or willingness to perform are no repudiation. 2. Whether Lack of Repudiated Performance Will Substantially Impair the Contract’s Value to the Nonrepudiating Party Substantial impairment means that the nonrepudiating party will suffer material injustice or inconvenience if she must wait to receive performance, minus the part repudiated. 3. Nonrepudiating Party’s Remedies for Anticipatory Repudiation Upon an anticipatory repudiation, the nonrepudiating party may:  await the repudiating party’s performance for a commercially reasonable time;  invoke any remedy for breach; or  in either case, suspend performance, proceed under § 2-704 (dealing with the seller’s right to identify goods to the contract despite a breach or to salvage unfinished goods), or cancel the contract.

Retracting an Anticipatory Repudiation

A repudiating party may cut off the nonrepudiating party’s remedies, and reinstate the repudiating party’s contractual rights, by effectively retracting the repudiation. Retraction means that the repudiating party clearly and unequivocally indicates to the nonrepudiating party, by

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words or conduct, that the repudiating party intends to perform the contract. To be effective, retraction must occur before the repudiating party’s next performance is due and before the nonrepudiating party has:  cancelled the contract,  materially changed position in reliance on the repudiation ( e.g. , entering a substitute contract), or  otherwise indicated that she considers the repudiation final. Right to Adequate Assurance of Performance Special rules apply if reasonable grounds for insecurity arise concerning one party’s performance that is not yet due. Here, the insecure party (if not in breach herself) may, in writing, demand adequate assurance of due performance. If commercially reasonable, the insecure party may suspend performance (for which she has not received the agreed return) until she gets that assurance. The other party’s failure to provide that assurance within a reasonable time not exceeding 30 days is a repudiation. 1. Reasonable Grounds for Insecurity Reasonable grounds for insecurity as to one party’s performance arise if (1) there is not an outright repudiation of the contract, but (2) there is objective reason to doubt the party’s willingness or ability to perform ( e.g. , seller’s loss of a supply source or one party’s insolvency). Relevant factors include:

 the nature of the contract,  the parties’ relationship,  information gleaned from apparently trustworthy sources, and  the counterparty’s performance on the current contract and other contracts.

2. Demand for Assurances without Reasonable Grounds for Insecurity If a party demands adequate assurance of due performance without reasonable grounds for insecurity, then the demand may be a repudiation. Impracticability of Performance The impracticability doctrine may excuse the seller’s delay or failure to deliver the goods if (1) a contingency has occurred, (2) the contingency’s nonoccurrence was a basic assumption on which the parties made the contract (usually, the contingency was not reasonably foreseeable to the parties at contracting), (3) the contingency has made the seller’s performance impracticable, (4) the seller is not at fault for the contingency and did not cause it, and (5) the seller did not

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contractually assume the risk of the contingency. Examples include war, embargo, natural disasters, and unforeseen loss of major supply sources, but not garden-variety cost increases. This delay or failure may also be excused if good-faith compliance with a foreign or domestic government regulation renders performance impracticable. The seller must seasonably notify the buyer of the delay or nondelivery. 1. Impracticability Only Partially Affecting Seller’s Ability to Perform Special rules apply if the impracticability only partially affects the seller’s ability to perform. Here, the seller must allocate both delivery and production among her customers. At the seller’s option, she may include (1) regular customers, even those not under contract at the time, and (2) the seller’s own future-manufacture requirements. The seller may implement the allocation in any fair and reasonable manner but must do so in good faith and must seasonably notify the buyer of the estimated quantity to be made available to the buyer.

VI. Warranties in UCC Article 2

Article 2 both acknowledges express warranties and imposes implied warranties.

Express Warranties Article 2 articulates three distinct ways for the seller to create an express warranty, though no intent to create a warranty or formal words of guarantee are required:

 an affirmation of fact or promise,  a description of the goods, or  a sample or model.

1. Express Warranty by Affirmation of Fact or Promise An affirmation of fact or promise from the seller to the buyer creates an express warranty if (1) it relates to the goods ( i.e. , relates to the goods’ type, description, or quality) and (2) becomes part of the basis for the bargain. That warranty, in turn, is that the goods will conform to the affirmation or promise. 2. Express Warranty by Description of the Goods A description of the goods creates an express warranty, provided the description is part of the basis of the bargain. The warranty, in turn, is that the goods will conform to the description. Examples include technical specifications, blueprints, representations about the strength of materials, statements on product labels, and so on.

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3. Express Warranty by Sample or Model If a sample or model becomes part of the basis of the bargain, then there arises an express warranty that the goods will conform to the sample or model. 4. Affirmation of the Goods’ Value or the Seller’s Opinion or Commendation of the Goods Two types of statements cannot create an express warranty, even if they relate to the goods: (1) a mere affirmation of the goods’ value and (2) a statement claiming to be the seller’s mere opinion or commendation of the goods. These statements, often called puffery, tend to involve exaggerations or embellishments that most reasonable buyers disregard and that cannot objectively be proven true or false ( e.g. , the goods are of the “best quality”). 5. Whether an Affirmation, Promise, Description, Model, or Sample Becomes Part of the Basis of the Bargain In deciding whether a representation becomes part of the basis of the bargain, courts are divided over whether the buyer must actually rely on the representation in entering the contract.

Implied Warranty of Merchantability

Absent valid disclaimer, a seller who is a merchant with respect to goods of the kind warrants that the goods will be merchantable.

1. Requirements for Merchantability Generally, merchantable means of at least average quality for goods of the kind. More particularly, to be merchantable, the goods must:  under the contract description, pass without objection in the trade;  if the goods are fungible, be of average, fair quality within the description;  be fit for the ordinary purposes for which goods of the kind are used;  run of even kind, quantity, and quality among all units involved and within each unit, with any variations that the agreement permits;  be adequately labeled, packaged, and contained as the agreement requires; and  conform to any promises or affirmations of fact on the label or container. 2. Fitness for the Ordinary Purpose for Which the Goods Are Used The most important and litigated requirement for merchantability is probably that of fitness for the goods’ ordinary purpose (not necessarily the buyer’s particular purpose). To satisfy this

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requirement, the goods must meet the ordinary, intended user’s objectively reasonable expectations (but not any subjective or idiosyncratic expectations). Relevant factors include whether the goods:  are as safe as the ordinary user would reasonably expect, when used for their ordinary purposes;  conform to industry or government standards;  are marketable or usable; and  are of average quality. 3. Time of Breach of Implied Warranty of Merchantability The implied warranty of merchantability is breached, if at all, at the time of sale—that is, the time of tender of delivery. 4. Plaintiff’s Conduct as a Limitation on Recovery The plaintiff’s conduct can lead to a finding that whatever made the goods unmerchantable was not the actual or proximate cause of the harm, which defeats recovery for breach of the implied warranty of merchantability. Examples include the plaintiff’s:  misuse of the goods, at least if unforeseeable;  failure to follow suitably conspicuous and clear instructions;  substantially altering the goods; or  continuing to use the goods, even after the buyer knows that the goods are harmful. Implied Warranty of Fitness for a Particular Purpose The implied warranty of fitness for a particular purpose applies if, at the time of contracting, the seller has reason to know (1) any particular purpose for which the buyer requires the goods and (2) that the buyer relies on the seller’s judgment or skill to provide or select suitable goods. Unless the warranty is excluded or modified under § 2-316, there is an implied warranty that the goods will be fit for the particular purpose. For instance, the warranty might apply if a mountain climber informs an employee at a shoe store that the climber wants boots suitable for scaling snow-covered mountainsides. This warranty applies regardless of whether the seller is a merchant.

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Excluding and Modifying Warranties

Within limits, Article 2 permits parties to exclude or modify warranties, including the implied warranties of merchantability and fitness for a particular purpose.

1. Excluding or Modifying Express Warranties To the extent reasonable, any words or conduct tending to create an express warranty must be construed consistently with any words or conduct tending to negate or limit a warranty ( e.g. , the goods are sold “as is”). But to the extent consistent construction is unreasonable, words or conduct tending to create an express warranty prevail over words or conduct that would negate or limit the warranty. This rule is subject, however, to the parol-evidence rule, which may exclude evidence of words or conduct tending to create an express warranty. 2. Excluding or Modifying the Implied Warranty of Merchantability There are two general ways to exclude or modify the implied warranty of merchantability. The first is conspicuous language, written or oral, that mentions merchantability. The second is by language like “as is,” “with all faults,” or a similar expression that brings home to the buyer, in common understanding, that warranties are excluded and makes clear that implied warranties are absent. This sort of language need not mention merchantability. However, it will not exclude any warranties if the circumstances indicate that it should not ( e.g. , the seller’s fraudulent representation), and many courts require this language to be conspicuous. 3. Excluding or Modifying the Implied Warranty of Fitness for a Particular Purpose There are two general ways to exclude or modify the implied warranty of fitness for a particular purpose. The first is by written, conspicuous warranty disclaimer, which need not mention fitness. The second is by language like “as is,” “with all faults,” or a similar expression that brings home to the buyer, in common understanding, that warranties are excluded and makes clear that implied warranties are absent. Here again, this language will exclude the warranties unless the circumstances indicate otherwise, and the language should generally be written and conspicuous. 4. Conspicuous Defined Conspicuous means that a term is written, presented, formatted, or displayed so that a reasonable person who is subject to the term should have noticed it. That is, the term should be contrasted so as to call the reader’s attention to it ( e.g. , written in all capital letters or highlighted).

Conflicting Warranties

Article 2 sets forth rules to reconcile cumulative or conflicting warranties in one contract.

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Generally, unless unreasonable in a given case, warranties must be construed consistently with each other and as cumulative. If that construction is unreasonable, then the parties’ intent determines which warranty prevails. 1. Rules to Determine the Parties’ Intent Concerning Conflicting Warranties If the parties’ intent determines which warranty prevails, then unless unreasonable or inconsistent in the circumstances, the following rules normally apply:  exact or technical specifications prevail over both inconsistent samples or models and inconsistent general descriptive language;  a sample taken from a bulk in existence prevails over inconsistent general descriptive language;  an express warranty displaces the implied warranty of merchantability, to the extent of a conflict; and  the implied warranty of fitness for a particular purpose prevails over an express warranty, to the extent of a conflict.

VII. Remedies

Part 7 of Article 2 sets forth most of the seller’s and buyer’s remedies, though some remedial provisions appear elsewhere in Article 2.

Seller’s Remedies on the Buyer’s Insolvency If the seller discovers that the buyer is insolvent, the seller may normally (1) refuse delivery unless the buyer pays in cash, including payment for any goods previously delivered under the same contract and (2) stop delivery under § 2-705. If the seller learns that the buyer has received goods on credit while insolvent, the seller may reclaim the goods (if identified and in the buyer’s possession) within 10 days after the buyer receives them (or longer if the buyer made a written misrepresentation of solvency to the seller within three months before delivery). In either case, the seller must discover the buyer’s insolvency after contracting. Different rules apply if the buyer is in bankruptcy. A seller who reclaims the goods loses all other remedies concerning those goods. Liquidated Damages Generally, a liquidated-damages provision sets the remedy for a party’s breach at a fixed amount of money. In Article 2, a liquidated-damages clause is void as a penalty unless reasonable considering (1) the anticipated or actual harm that the breach caused, (2) the difficulty of proving loss, and (3) how inconvenient or infeasible it is to procure another adequate remedy. That is, the

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