Business Law Rights and remedies and other Questions

Topics include:

The Formation of Sales and Lease ContractsThe Uniform Commercial CodeUCC Article 2 – SalesUCC Article 2A – LeasesContracts for the International Sale of GoodsPerformance and Breach of Sales and Lease ContractsPerformance ObligationsObligations of the Seller or LessorObligations of Buyer or LesseeAnticipatory RepudiationRemediesLimitations of RemediesStatute of LimitationsWarranties and Product LiabilityWarrantiesLemon LawsProduct LiabilityStrict Product LiabilityDefenses to Product LiabilityNegotiable InstrumentsUCC Article 3Types of InstrumentsRequirements for NegotiabilityTransferHolder in Due CourseSignature LiabilityWarranty LiabilityDefenses to LiabilitySecured TransactionsTerminologyCreating and Perfecting a Security InterestThe Scope of a Security InterestPrioritiesRights and Duties of Creditors and DebtorsDefaultCreditors’ Rights and BankruptcyLaws Assisting CreditorsLaws Assisting DebtorsBankruptcy ProceedingsChapter 7 – LiquidationChapter 11 – ReorganizationChapter 13 –Repayment Plans Lecture Notes for Session 2
This session considers the general requirement of good faith and the basic
performance obligations of a buyer and seller under a sales contract. To
understand the performance that is required of a seller and a buyer under a
sales contract, you need to know the contractual duties and obligations each
assumes. Contractual duties and obligations include those specified by the
agreement, customer and the UCC.
Also discussed in this session are a seller’s rights on a buyer’s breach of a
contract and a buyer’s rights on a seller’s breach. A seller’s remedies take
several forms, but the substance of each remedy is the same – a seller is
entitled to either the goods or the amount that the buyer promised to pay.
Cover is the term that typifies a buyer’s remedies. If a seller fails to deliver or
delivers nonconforming goods, a buyer can cover by buying replacement goods
and recover the extra expense from the seller. If a buyer accepts
nonconforming goods, he or she can recover from the seller the difference
between the value of the goods accepted and the value the goods would have
had if they had been conforming. In either case, recovery is the cost of the
cover. Sometimes, a buyer may be able to recover incidental or consequential
damages, and equitable remedies may be available.
You may find the material in this session a bit overwhelming because of the
mass of rules. Nevertheless, the concepts are important and warrant the time
required to learn them. To make this process a bit easier for you, you may
want to adhere to the following organizational structure:
I.
Obligations of the Seller or Lessor
II.
Obligations of the Buyer or Lessee
III.
Remedies of the Seller or Lessor
a. When the Goods are in the Possession of the Seller or Lessor
b. When the Goods are in Transit
c. When the Goods are in the Possession of the Buyer or Lessee
IV.
Remedies of the Buyer or Lessee
a. When the Seller or Lessor Refuses to Deliver the Goods
b. When the Seller or Lessor Delivers Non-conforming Goods
To review the remedies available under the contract for the sale of goods, it
may help to divide the remedies into those that are available if a breach of the
contract occurs before the buyer accepts the goods and those that are
available if a breach occurs after the buyer’s acceptance. For example,
remedies that are available to the seller if the buyer breaches before
acceptance are (1) withholding deliver, (2) stopping delivery, (3) reselling
goods, (4) recovering damages, (5) canceling the contract, and (6) making use
of the seller’s lien. Remedies that are available to the seller if the breach
occurs after acceptance are (1) reclaiming the goods and (2) recovering the
purchase price.
A couple of points that need clarification:
1. With regard to the seller’s duties – it is not delivery that is necessary. It
is tender of delivery that is required. Also, with regard to the seller’s
right to cure – the seller is only entitled to cure. The seller is not
required to do so.
2. A seller who fails to tender delivery of conforming goods is in breach of
contract. Tender is also necessary to pass the risk of loss.
3. With regard to the buyer’s right of inspection – it is a right, not a duty,
and a buyer’s failure to inspect operates as a waiver. Similarly, a poor
inspection has the same effect as a thorough inspection – in either case,
the buyer has exercised the right.
4. It is important to sort out which parties are merchants because different
rules may apply when one party is a merchant, when both parties are
merchants, and when no party is a merchant.
Koch Materials Co. v. Shore Slurry Seal, Inc. (7th Ed.)
The policy behind the right of assurance: As the court in the Koch case noted,
“A good relationship is built on good communication. . . . [T]hat aphorism is
no less true of long-term business dealings than it is of marriages. . . . The
law of contract . . . is designed to increase certainty in our dealings with one
another. Otherwise, few reasonable businesses would be willing to invest in
long-term cooperative agreements which, by virtue of the deal-specific
investment, expose each party to significant risks of hold-up by the other.
Thus, when one’s contractual partner has reasonable grounds to fear that the
contract will not be performed, one must answer those fears at the risk of
giving the counterparty license to terminate the contract.”
Recent additional cases relating to assurance and cooperation include the
following:
• Kyocera Corp. v. Prudential-Bache Trade Services, Inc., 299 F.3d 769 (9th Cir.
2002) (a seller waived its right to assurance of payment for manufactured disk
drives when it did not demand assurance and subsequently entered into a new
agreement with the buyer, knowing the buyer’s financial condition).
• In re Pacific Gas and Electric Co., 271 Bankr. 626 (N.D.Cal. 2002) (a seller’s
statement that it “has fully complied and will continue to fully comply with the
terms of the Agreement” with the buyer constituted adequate assurance of
performance).
• Shields Pork Plus, Inc. v. Swiss Valley Ag Service, 329 Ill.App.3d 305, 767
N.E.2d 945, 263 Ill.Dec. 219 (4 Dist. 2002) (a seller’s failure to request
adequate assurance from a buyer indicated that the seller did not believe the
buyer had repudiated their contract, in an action by the seller to recover
damages on the basis of repudiation).
• Atwood-Kellogg, Inc. v. Nickeson Farms, 602 N.W.2d 749 (S.D. 1999) (sellers’
demands for adequate assurances, under contracts to sell corn and soybeans to
an insolvent commodities buyer, may be either written or oral).
China National Metal Products Import/Export Co. v. Apex Digital, Inc. (6th Ed.)
To obtain a writ of attachment before a judgment (or in this case, an award in
the arbitration proceeding), a party must show that its claim has a probable
validity of success. Here, there was evidence that Apex was having problems
with its finances: it was not paying its outstanding debts, and some of its
customers were threatening it with claims for indemnification for costs arising
from the defective DVD players. The court concluded that any arbitration
award in favor of China National could thus be rendered “ineffectual,” which
met the requirement for a writ of attachment.
With regard to Apex’s claim that it revoked its acceptance of the DVD players,
the court concluded that “Apex’s conduct in this case fails to meet a number of
[the] requirements” for revocation. “The fact that Apex resold these defective
DVD players to retail distributors seriously places in doubt any argument that
the goods have not undergone a substantial change in condition. . . . Apex
never gave a proper notice of revocation to China National. . . . Finally, . . .
nowhere has Apex . . . argued that it continued to order shipment of the DVD
players upon the assumption that China National would be able to cure the
defect.”
Yates v. Pitman Manufacturing Inc. (6th Ed.)
Imagine that a seller performs as agreed, but the buyer does not pay on time.
The seller does not insist on immediate payment, but carries the buyer on the
seller’s accounts for a time, perhaps not to lose a potential future customer.
Finally, when the seller decides to collect, a less-than-ethical buyer might
argue falsely that the seller’s goods had defects. UCC 2–607(3) requires that
this notice must have been given within a reasonable time, which means the
buyer, in the circumstances in this example, could not use its false argument as
a defense to payment.
Utica Alloys, Inc. v. Alcoa, Inc. (7th Ed.)
Utica argued that the price review clause was ambiguous, which meant that it
could be interpreted according to extrinsic evidence. This evidence indicated
that the clause might have granted either party a right to terminate the
contract if they could not agree on a price. “Because of the desire not to
penalize the party requesting a price review, the purchase agreement price
was suspended during negotiations, and, when such negotiations failed, the
termination of the agreement was effective as of date the price review was
initially undertaken at the end of January of 2002.” Could the price review
clause fairly be considered ambiguous? No. The court stated that the words of
the clause “can be interpreted only to mean just what they say—that ‘[the
price and other details] will be reviewed approximately every six (6) months
beginning in January 2002.’ Nothing in this language indicates, implicitly much
less explicitly, that a lack of consensus on such a review results in the
agreement ceasing to exist. Such an interpretation, which would permit a party
to welch on its obligations if it simply did not get its way, so to speak, in the
negotiations process, would be unreasonable, and could perhaps render the
remainder of the terms of the contract superfluous.”
Jauregui v. Bobb’s Piano Sales & Service, Inc. (8th Ed.)
Why wasn’t specific performance an option in this case? The court does not
discuss this question. It may be that this option was entirely the buyer’s
choice, and the buyer chose not to pursue it. It may also be that the piano,
which was identified by serial number, was unique and not interchangeable
with other pianos.
If the defendant had delivered the piano in new condition and the plaintiff had
refused to pay for it only out of “buyer’s remorse,” what might the court have
ruled in this case? In these circumstances, the buyer would have breached the
parties’ contract. If the piano had not been returned and was still in the
buyer’s possession, the seller could sue for the purchase price or reclaim the
goods. In either case, the seller might also sue for damages, which would
ordinarily be the difference between the contract price and the market price
at the time and place of tender, plus incidental damages.
Wilson Sporting Goods Co. v. U.S. Golf & Tennis Centers, Inc. (10th Ed.)
When a seller tenders conforming goods, the buyer is obligated to accept and
pay for the goods. But when a seller tenders nonconforming goods, the buyer
has other options. The buyer can insist that the goods be replaced with
conforming goods, or if that is not possible, the parties may agree to a price
reduction or other change in terms. Even if the goods are conforming,
however, there are circumstances in a seller might agree to a price reduction.
In this case, for example, Wilson might have agreed to the lower price to avoid
litigation and its bad publicity or to retain U.S. Golf as a customer.
Fitl v. Strek (8th 9th 10th Ed.)
Who has the burden to show a breach, or its absence, in cases involving
attempts to recover damages for accepted goods? Under the UCC, the burden is
on the buyer to show a breach with respect to the goods accepted. Was that
burden met in this case? Here, as the state supreme court noted, “Fitl
presented evidence that the baseball card was not authentic, as he had been
led to believe by Strek’s representations. Strek did not refute Fitl’s evidence.”
Suppose that Fitl and Strek had included in their deal a clause requiring Fitl to
give notice of any defect in the card within “7 days to 1 month” of its receipt.
Would the result have been different? Why or why not? Possibly. The parties to
a sale of lease contract can insert such a provision, which can be enforceable.
Of course, in that situation, Fitl might have acted quicker, and the defect
might then have been discovered sooner.
Recent cases turning on notice of defects as a prerequisite to a buyer’s
recovery on a seller’s breach of warranty include the following.
• Dryvit Systems, Inc. v. Stein, __ S.E.2d __ (Ga.App. 2002) (a seller of
allegedly defective synthetic stucco cladding was not liable for breach of
warranty when the buyer failed to notify the seller in writing within thirty days
of the alleged defects, as required in the parties’ contract).
• Hays v. General Electric Co., 151 F.Supp.2d 1001 (N.D.Ill. 2001) (a seller was
not deemed to have knowledge of a problem with overheating of a motor
installed in a buyer’s treadmills, so as to excuse the buyer’s failure to comply
with a notice requirement to recover on the ground of breach of warranty).
• Hobbs v. General Motors Corp., 134 F.Supp.2d 1277 (M.D.Ala. 2001) (the
buyers’ failure to comply with the notice requirement precluded their claims to
recover on the ground of breach of warranty, for an automobile manufacturer’s
failure to provide a full-size spare tire).
• Christian v. Sony Corp. of America, 152 F.Supp.2d 1184 (D.Minn. 2001) (the
buyers’ failure to comply with the notice requirement precluded their claims to
recover on the ground of breach of warranty, for allegedly defective floppy
diskette controllers in personal computers, regardless of whether the
manufacturer was aware of the alleged defect).
What remedies are available to a seller or lessor when the buyer or lessee
breaches the contract? What remedies are available to a buyer or lessee if the
seller or lessor breaches the contract? Depending on the circumstances at the
time of a buyer’s breach, a seller may have the right to cancel the contract,
withhold delivery, resell or dispose of the goods subject to the contract,
recover the purchase price (or lease payments), recover damages, stop delivery
in transit, or reclaim the goods. Similarly, on a seller’s breach, a buyer may
have the right to cancel the contract, recover the goods, obtain specific
performance, obtain cover, replevy the goods, recover damages, reject the
goods, withhold delivery, resell or dispose of the goods, stop delivery, or
revoke acceptance.
Commercial Impracticability
Maple Farms Inc. v. City School District of Elmire (6th-10th Ed.)
Does the outcome in this case mean that Maple Farms has to fulfill all of its
contracts with other school districts? Apparently, Maple Farms would be
required to honor its contracts. Had the court decided in Maple Farm’ favor,
perhaps the company could have renegotiated the terms of its contracts with
the other parties.
In this case, due to severe inflation that was caused by factors beyond the
plaintiff’s control, the plaintiff was unable to meet its contractual obligations
without losing a great deal of money. Why were these facts insufficient to
persuade the court that the plaintiff’s performance was commercially
impracticable? The key factor here was that inflation in the market price for
milk was foreseeable at the time the contract was entered into, given the
knowledge that was available to the parties.
If the severe inflation would have caused Maple Farms to go bankrupt, would
that have been enough to release it from its obligations under the contract?
Why or why not? Maybe. This set of circumstances would most likely be seen as
unforeseeable, because Maple Farms would probably not enter into a contract
if there was a foreseeable risk of total financial ruin. If bankruptcy were
imminent, the court may have considered the continuation of the contract a
commercial impracticability.
Suppose that the court had ruled in the plaintiff’s favor. How might that ruling
have affected the plaintiff’s contracts with other parties? The actual outcome
of the case meant that Maple Farms had to fulfill all of its contracts with other
school districts. Had the court decided in Maple Farm’ favor, however, the
company might have been able to successfully renegotiate the terms of its
contracts with the other parties.
Recent cases focusing on commercial impracticability include the following.
• Leanin’ Tree, Inc. v. Thiele Technologies, Inc., 43 Fed.Appx. 318 (10th Cir.
2002) (a seller’s performance of a contract for the design and manufacture of
an automated carton-packing machine was not excusable by reason of
impracticability when the manufacturing problems were foreseeable).
• Specialty Tires of America, Inc. v. CIT Group/Equipment Financing, Inc., 82
F.Supp.2d 434 (W.D.Pa. 2000) (a seller’s performance of a contract for the
delivery of tire presses could be excused by reason of impracticability when the
goods, which were owned by the seller, were in the possession of a third party
that refused to permit the seller to take the presses).
• Clark v. Wallace County Co-operative Equity Exchange, 986 P.2d 391
(Kan.App. 1999) (a seller’s performance of a contract for the delivery of corn
was not excusable by reason of impracticability, despite bad weather, when
the contract did not specify that the corn had to be grown on certain land and
a shortage could have been covered by buying corn from another source).
Romero v. Scoggin-Dickey Chevrolet Buick, Inc. (9th Ed.)
If the trade-in vehicles had conformed to the parties’ expectations but the new
Silverado had been defective, could Romero have exercised a right of
rejection? Yes, assuming Romero had not possessed and driven the new vehicle
for too long. In a sales contract, if a buyer performs any act inconsistent with
the seller’s ownership the buyer will be deemed to have accepted the goods.
But there is an exception for the limited purpose of testing or inspecting the
goods. If Romero would have been held to accept the truck, he might still have
been able to revoke his acceptance. Or he might have been able to obtain
relief under applicable lemon laws.
According to the court, “Romero and Scoggin-Dickey were both buyers and
sellers.” What did the court mean by this statement? The court commented
that when the purchase price in a sale of goods is payable in whole or in part in
goods, each party is a seller of the goods that the party is to transfer. In this
case, Romero was a seller because he was selling his two trade-in vehicles to
Scoggin-Dickey (the buyer). Scoggin-Dickey was also a seller because it was
selling the 2006 Silverado pickup to Romero (the buyer).
Why didn’t the “contract order” signed by the parties constitute a binding
contract for the sale of goods? No binding contract was formed because the
sale could not be completed until Scoggin-Dickey received two trade-in
vehicles that conformed to their description in the contract order. When
Scoggin-Dickey rejected the trade-in vehicles as nonconforming goods,
Romero’s offer (to purchase the 2006 Silverado pickup with a combination of
assigned rebates, two trade-in vehicles, and cash) was thus never fully
accepted by the dealership. The court concluded that the order was not a
binding sales contract but a contract for sale (to sell goods at a future time) or
a conditional sale.
Les Entreprises Jacques Defour & Fils, Inc. v. Dinsick Equipment Corp. (9th Ed.)
If Dinsick had delivered a tank that failed to conform to the contract, what
remedies might Les Enterprises have pursued? If goods fail to conform to a sales
contract, the buyer can reject them and obtain cover or cancel the contract,
and seek damages, just as if the seller had refused to deliver the goods. There
are limits to the time within which the buyer can reject the goods and notify
the seller. And the buyer may have a good faith obligation to follow the seller’s
instructions with respect to the goods. If the goods have been accepted, the
acceptance can be revoked, subject to different requirements than rejection
but the same notice limits. The buyer might also recover damages for accepted
goods. In the situation described in the question, Les Enterprises might have
availed itself of any of these remedies in the appropriate circumstances.
On what basis could the court exercise jurisdiction in this case? The plaintiff—
Les Enterprises—is a Canadian corporation with its principal place of business in
Canada. The defendant—Dinsick—is a U.S. Corporation with its base of
operations in Illinois. The amount of damages, plus costs, at issue was nearly
$80,000. Under these circumstances, the court could exercise diversity
jurisdiction. The parties are citizens of a U.S. state and a foreign country, and
the amount in controversy exceeded $75,000. These facts meet the
requirements (you learned these jurisdictional requirements of Federal courts
in Business Law I).
What did the act of wiring the full payment directly to the seller’s bank
account demonstrate in this case? Are there other methods of payment that
could have accomplished the same purpose? In the court’s interpretation, the
buyer’s act of depositing the full payment of the contract price directly into
the seller’s bank account before receiving the tank demonstrated substantial
performance on the part of the buyer. Payment on a sales contract can be
made by any means agreed on between the parties. This includes cash and any
other method generally acceptable in the commercial world. It is likely that
any of these means would have been interpreted by the court in the same
circumstances to show substantial performance by the buyer. If a different
method had been used, however, there could have been a different calculation
of damages, depending on, for example, how long it might have taken a check
to arrive and to be deposited or cashed.
Every Day Counts
The term reasonable appears throughout the UCC. With respect to the right of
rejection, the UCC provides that the buyer or lessee must reject goods within a
“reasonable” time. The UCC makes it clear, however, that parties who desire
more certainty can include a provision in their contract specifying the time
period for rejection. UCC 1–204(1) states that “whenever this act requires any
action to be taken within a reasonable time, any time which is not manifestly
unreasonable may be fixed by agreement.” Suppose, though, that a contract
states that the buyer’s right to reject the goods is limited to ten days. Even
though “ten days” is more specific than “a reasonable time,” there is still no
guarantee that a dispute will not arise over the letter of the law in this
instance.
In one case, for example, the question arose as to whether a ten-day period
included holidays and weekends. If so, then the buyer’s notification of
rejection was just one day late. The court gave the buyer the benefit of the
doubt on the inclusion of holidays and weekends, but did not agree with the
buyer that just one day late was acceptable. The letter of the law, as
expressed in the parties’ contract, had stated ten days, not eleven. Therefore,
concluded the court, the buyer’s failure to reject the goods within the ten-day
period constituted an acceptance of the goods.
This case underscores the importance of making sure that both parties (1)
understand precisely what a certain contract term means and (2) take each
contract term seriously.
What can you do when a contract is breached?
A contract for the sale of goods has been breached. Can the dispute be settled
without a trip to court? The answer depends on the willingness of the parties
to agree on an appropriate remedy.
Contractual Clauses on Applicable Remedies
Often, the parties to sales and lease contracts agree in advance, in their
contracts, on what remedies will be applicable in the event of a breach. This
may take the form of a contract provision restricting or expanding remedies
available under the Uniform Commercial Code [UCC 2–719]. Such clauses help
to reduce uncertainty and the necessity for costly litigation.
When the Contract Is Silent on Applicable Remedies
If your agreement does not cover a breach of contract and you are the
nonbreaching party, the UCC gives you a variety of alternatives. What you
need to do is analyze the remedies that are available if you choose to go to
court, put these remedies in order of priority, and then predict how successful
you might be in pursuing each remedy. Next, look at the position of the
breaching party to determine the basis for negotiating a settlement.
For example, when defective goods are delivered and accepted, usually it is
preferable for the buyer and seller to reach an agreement on a reduced
purchase price. Practically speaking, the buyer may be unable to obtain a
partial refund from the seller. UCC 2–717 allows the buyer in such
circumstances to give notice of the intention to deduct the damages from any
part of the purchase price not yet paid. If you are a buyer who has accepted
defective goods and has not yet paid in full, it may be appropriate for you to
exercise your rights under UCC 2–717 and not pay in full when you make your
final payment. Remember that most breaches of contract do not end up in
court—they are settled beforehand.
Checklist to a nonbreaching party to a contract
1. Ascertain if a remedy is explicitly written into your contract. Use that
remedy, if possible, to avoid litigation.
2. If no specific remedy is available, look to the UCC.
3. Assess how successful you might be in pursuing a remedy if you go to
court.
4. Analyze the position of the breaching party.
5. Determine whether a negotiated settlement is preferable to a lawsuit,
which is best done by consulting your attorney.
Lecture Notes for Session 3
At one time, caveat emptor (“let the buyer beware”) was the philosophy in
sales contract law. This was a realistic approach when buyers and sellers were
equally capable of judging the quality of the goods that were the subjects of
their bargains. Today, however, it is likely that a buyer does not comprehend
what is behind the goods he or she buys, including the risks and their
assumption. Thus, caveat emptor was replaced with a consumer-oriented
approach. A warranty now covers most goods. The term warranty is
synonymous with the term promise. Breaching a warranty has the same
consequences as breaching any contractual promise.
The UCC rules concerning warranties and disclaimers provide a good illustration of the point that the UCC is comparable to the rules of a game—the
rules are the rules, unless the players agree to make their own. For instance,
when goods are sold, a seller extends an implied warranty of merchantability
unless the warranty is specifically disclaimed (by stating, for example, in the
contract, that “the implied warranty of merchantability is expressly
excluded”). If the warranty is not disclaimed, the UCC applies. In other
words, the UCC rules apply, unless the parties agree otherwise.
In this session we also discuss product liability, according to which
manufacturers and other sellers can be held liable to consumers, users, and
bystanders for physical harm or property damage that is caused by the goods.
Product liability encompasses the contract theory of warranty and tort
theories of negligence, misrepresentation, and strict liability. Under a
warranty theory (contract law/UCC), an injured party can recover from a seller
on a showing that an injury was a result of goods not being fit for ordinary purposes. The main difference between the theories of strict liability and
negligence is the lesser burden of proof under the former. Under a theory of
negligence (tort law), an injured party must show that a manufacturer, for
example, did not exercise ordinary care. Under a theory of strict liability, that
showing is not necessary (although injury and causation must still be proved).
This different burden of proof makes it easier for injured plaintiffs to recover
and makes manufacturers and other sellers virtual insurers of their products.
UCC 2-318 and Privity of Contract in Warranties and Strict Liability
At common law, privity of contract would sometimes operate to prevent
manufacturers and sellers of defective products that caused injury or damage
from being held liable on a breach of warranty theory. The UCC attempts to
address this problem in Section 2–318. The following is the text of some of
UCC 2–318, Comments—the Official Comments accompanying Uniform
Commercial Code Section 2–318.
2. The purpose of this section is to give certain beneficiaries the benefit of
the same warranty, which the buyer received in the contract of sale,
thereby freeing any such beneficiaries from any technical rules as to
“privity.” It seeks to accomplish this purpose without any derogation
of any right or remedy resting on negligence. It rests primarily upon
the merchant-seller’s warranty under this Article that the goods sold
are merchantable and fit for the ordinary purposes for which such
goods are used rather than the warranty of fitness for a particular
purpose. Implicit in the section is that any beneficiary of a warranty
may bring a direct action for breach of warranty against the seller
whose warranty extends to him * * *.
The imposition of strict liability, in contrast, does not depend on privity of
contract – the injured party does not have to be a buyer or a third party
beneficiary (as required under contract warranty theory), and a plaintiff does
not have to prove that there was a failure to exercise due care (as in a
negligence action). Strict liability is imposed as a matter of public policy.
Puffery
The term puffing refers to a salesperson’s exaggerated claims as to the quality
of goods offered for sale. Puffing is considered a statement of opinion and not
a statement of fact, and therefore it does not constitute an express warranty.
The law assumes that most buyers or lessees know, or should know, that sellers
and lessors traditionally have engaged in “huffing and puffing” their wares, and
that reasonable buyers and lessees will not be “taken in” by this puffery. Some
customers do not recognize the difference between puffery and statements of
fact, however. This problem is exacerbated when customers do not have a
complete command of the English language and are taken in by fast-talking
salespersons.
Should sales representatives be held accountable for the promises they make to
their customers? Some legal scholars have suggested that they should be.
Others, though, point out that changing the law relating to puffery could lead
to further problems.
Almost any innocent remark made by a sales
representative could conceivably become the basis for litigation. For this
reason, at least to date, the National Conference of Commissioners on Uniform
State Laws has not opted to change the UCC provisions relating to puffery.
In the meantime, the courts have to distinguish between statements that
amount to mere puffery and statements that constitute express warranties or
misrepresentations of material facts.
The line between statements that amount to puffery and statements that
constitute express warranties is not always clear. For example, in one case a
tobacco farmer had read an ad stating that Chlor-O-Pic was a chemical
fumigant that would suppress black shank disease, a fungal disease that
destroys tobacco crops. The ad specifically indicated how much of the product
should be applied per acre and stated that, if applied as directed, Chlor-O-Pic
would give “season-long control with application in fall, winter, or spring.”
The farmer bought eight thousand pounds of Chlor-O-Pic and applied it as
directed to 143 acres of his tobacco crop. Nonetheless, the crop developed
black shank disease, resulting in an estimated loss of three thousand pounds of
tobacco per acre.
Were the representations made in the ad mere puffery? Did the manufacturer
have a duty to disclose in the ad that several applications of Chlor-O-Pic may
be required to prevent black shank disease? When the farmer sued the
manufacturer of Chlor-O-Pic, he argued that he had purchased the product in
reliance on what he assumed to be a “strong promise” of “season-long
control.” In this case, the jury agreed with the farmer. The manufacturer
had indeed made a strong promise—one that created an express warranty.
The line between puffery and fraudulent misrepresentation is also not always
readily discernible. For example, in one case, a sales representative for a
Mazda dealer was trying to sell a used Mazda to Kevin Garrett. The salesperson
said that although the car had nearly 15,000 miles on it, the salesperson
himself had used the car as a demonstrator and for his personal use and had
“babied it to death.” In fact, the car had been stolen from the dealer and
driven 10,000 miles, and prior to the theft, the dealer had had to replace the
engine after the car had been driven only approximately 3,000 miles.
Had the sales representative committed fraud? Did he have a duty to disclose
that the car had been stolen? When Garrett later experienced numerous
problems with the car and eventually sued the dealer, the court held that the
theft of the car was a material fact and that the salesperson had a duty to
disclose this information. According to the court, the statements made by the
salesperson crossed the line between puffing, or “seller’s talk,” and
misrepresentation.
In the cases just discussed, the courts held those who made claims about their
products liable either for breach of warranty or for misrepresentation. In
numerous other cases, though, the courts, despite a buyer’s reliance on a
seller’s promise, have held that the alleged factual representation or express
warranty was, in fact, mere puffery. Should the law be changed to hold sellers
legally accountable for the often exaggerated opinions and promises that they
make to customers? Or would such a change in the law create even greater
problems?
International Turbine Services, Inc. v. VASP Brazilian Airlines (7th Ed.)
An HPT blade is an “on-condition” part. VASP asserted that under the terms of
the lease, ITS was responsible for any damage caused by the failure of an on-
condition part. What was the court’s response to this assertion? The court
reasoned, “The Lease provision clearly sets forth a general rule that VASP will
bear the risk of loss or damage and will service and maintain the Engine at its
expense. The Lease then establishes a narrow exception to this general rule for
scheduled maintenance of time-controlled and on-condition parts. Damage to
engine parts other than time-controlled or on-condition parts does not fall
within this narrow exception. Accordingly, under the plain language of the
contract, VASP is responsible for repairing damage to the engine.” Also, “[t]he
argument that ITS is responsible for any damage caused by failure of an oncondition part is contrary to, and renders meaningless, the provision that
expressly assigns to VASP the risk of loss and damage from ‘any and every cause
whatsoever.’ This interpretation also cannot be reconciled with provisions that
expressly assign to VASP responsibility for the repair and maintenance of the
engine, and require VASP to return the engine to ITS in operable condition upon
termination of the Lease. When read as a whole, the Lease terms are clear and
definite and cannot reasonably be reconciled with the alternative interpretations VASP advances.”
Suppose that the lease in this case had not contained a disclaimer and that the
HPT blade had been defective on the engine’s receipt. The defect would have
been discovered on a reasonable inspection, but VASP declined to examine the
engine. In this situation, would the outcome have been different? Probably
not. Of course, in the absence of a disclaimer, a lessee might have a claim
against a lessor for defects in leased goods. A lessee’s failure to exercise his or
her right to examine goods before entering into a contract for those goods,
however, has the same effect as if an inspection were made. Thus, in the
circumstances described in this question, there would have been no implied
warranty with respect to the defect. That would have left only express warranties to apply, and there does not appear to have been any express warranty.
Restatement (Second) of Torts, Section 395
A manufacturer who fails to use reasonable care in manufacturing its product
may be liable for harm caused by the product to those whom the manufacturer
should expect to be endangered by use of the product. This rule is stated in
the Restatement (Second) of Torts, Section 395. The following is the text of
Restatement (Second) of Torts, Section 395, Comments—selected comments
accompanying the section.
a. History. The original common law rule was contrary to that stated in
this Section. The case of Winterbottom v. Wright, 10 M. & W. 109, 152
Eng. Rep. 402 (1842), in which a seller who contracted with the buyer
to keep a stagecoach in repair after the sale was held not to be liable to
a passenger injured when he failed to do so, was for a long time
misconstrued to mean that the original seller of a chattel could not be
liable, in tort or in contract, to one other than his immediate buyer. To
this rule various exceptions developed, the first of which involved the
rule stated in §§ 388, 390, and 394, that a manufacturer who knew that
the chattel was dangerous for its expected use and failed to disclose
the danger became liable to a third person injured by the defect.
The most important of these exceptions, however, made the seller liable
to a third person for negligence in the manufacture or sale of an article
classified as “inherently” or “imminently” dangerous to human safety.
By degrees this category was redefined to include articles “intended to
preserve, destroy, or affect human life or health.” For more than half a
century, however, the category remained vague and imperfectly
defined. It was held to include food, drugs, firearms, and explosives,
there was much rather pointless dispute in the decisions as to other
articles, and as to whether, for example, such a product as chewing
tobacco was to be classified as a food.
In 1916 the leading modern case of MacPherson v. Buick Motor Co., 217 N.Y.
382, 111 N.E. 1050, L.R.A. 1916F, 696, Cas. 1916C, 440, 13 N.C.C.A. 1029
(1916), discarded the general rule of non-liability, by holding that “inherently
dangerous” articles included any article which would be dangerous to human
safety if negligently made. After the passage of more than forty years, this
decision is now all but universally accepted by the American courts. Although
some decisions continue to speak the language of “inherent danger,” it has
very largely been superseded by a recognition that what is involved is merely
the ordinary duty of reasonable care imposed upon the manufacturer as to any
product which he can reasonably expect to be dangerous if he is negligent in its
manufacture or sale.
b. This Section states the rule thus generally adopted. The justification
for it rests upon the responsibility assumed by the manufacturer toward the
consuming public, which arises, not out of contract, but out of the relation
resulting from the purchase of the product by the consumer; upon the foreseeability of harm if proper care is not used; upon the representation of safety
implied in the act of putting the product on the market; and upon the
economic benefit derived by the manufacturer from the sale and subsequent
use of the chattel.
MacPherson v. Buick Motor Company (1916)
In the landmark case of MacPherson v. Buick Motor Co., the New York
Court of Appeals—New York’s highest court—dealt with the liability of a
manufacturer that failed to exercise reasonable care in manufacturing a
finished product.
The case was brought by Donald MacPherson, who suffered injuries while riding
in a Buick automobile that suddenly collapsed because one of the wheels was
made of defective wood. The spokes crumbled into fragments, throwing
MacPherson out of the vehicle and injuring him.
MacPherson had purchased the car from a Buick dealer, but he brought
suit against the manufacturer, Buick Motor Company. The wheel itself had not
been made by Buick; it had been bought from another manufacturer. There
was evidence, though, that the defects could have been discovered by
reasonable inspection by Buick and that no such inspection had taken place.
MacPherson charged Buick with negligence for putting a human life in imminent
danger.
The major issue before the court was whether Buick owed a duty of care
to anyone except the immediate purchaser of the car (that is, the Buick
dealer). In deciding the issue, Justice Benjamin Cardozo stated that “[i]f the
nature of a thing is such that it is reasonably certain to place life and limb in
peril when negligently made, it is then a thing of danger. . . . If to the
element of danger there is added knowledge that the thing will be used by
persons other than the purchaser, and used without new tests, then,
irrespective of contract, the manufacturer of this thing of danger is under a
duty to make it carefully.”
The court concluded that “[b]eyond all question, the nature of an
automobile gives warning of probable danger if its construction is defective.
This automobile was designed to go 50 miles an hour. Unless its wheels were
sound and strong, injury was almost certain.” Although Buick had not manufactured the wheel itself, the court held that Buick had a duty to inspect the
wheels and that Buick “was responsible for the finished product.” Therefore,
Buick was liable to MacPherson for the injuries he sustained when he was
thrown from the car.
Application to Today’s World
This landmark decision was a significant step toward the world we live in
today—in which it is common for an automobile manufacturer to be held liable
when its negligence causes a product user to be injured. As is often the
situation, technological developments necessitated changes in the law. Had
the courts continued to require privity of contract in product liability cases,
today’s legal landscape would be quite different indeed. Certainly, fewer
cases would be pending before the courts; and just as certainly, many
purchasers of products, including automobiles, would have little recourse for
obtaining legal redress for injuries caused by those products.
Webster v. Blue Ship Team Room (6th-10th Ed.)
This is a landmark case in Massachusetts where fish and clam chowder are
common. Whether the same result would prevail in a state in which chowder is
not so common is open for conjecture, but the case is a logical application of
the UCC, and most of you will find it interesting.
Was Webster’s cause based on negligence? No (it was based on implied
warranty). Would negligence have been a better theory? No, because it does
not seem unreasonable for fish bones to be in fish chowder. Would the result
have been different if Webster had asked whether the chowder was bone-free?
Possibly, but not definitely—Webster might have been held to notice the ob-
vious (that is, that fish chowder may have bones). What if Webster had told
Blue Ship Tea Room that the chowder was for a child? There might have been a
different result, because Blue Ship Tea Room would then have been aware of a
particular purpose.
If Webster had made the chowder herself from a recipe that she had found on
the Internet, could she have successfully brought an action against its author
for a breach of the implied warranty of merchantability? No, An implied
warranty of merchantability arises only in a sale or lease of goods by a
merchant. This action would fail, among other reasons, because there would
have been no sale and possibly neither goods nor a merchant. The question
does not indicate that there would have been an exchange for a price, a
communication over the Internet could arguably be construed intangible, the
source of the recipe might easily have been a non-merchant. More importantly,
perhaps, would be the fact that Webster would have made the “product.”
If Webster had made the chowder herself from a recipe that she had found on
the Internet, could she have successfully brought an action against its author
for a breach of the implied warranty of merchantability? No, An implied
warranty of merchantability arises only in a sale or lease of goods by a
merchant. This action would fail, among other reasons, because there would
have been no sale and possibly neither goods nor a merchant. The question
does not indicate that there would have been an exchange for a price, a
communication over the Internet could arguably be construed intangible, the
source of the recipe might easily have been a non-merchant. More importantly,
perhaps, would be the fact that Webster would have made the “product.”
Recent additional cases centering on food that allegedly breaches the implied
warranty of merchantability include the following.
• McCroy ex rel. McCroy v. Coastal Mart, Inc., 207 F.Supp.2d 1265 (D.Kan.
2002) (a buyer burned by a hot drink from a vending machine failed to show
that the beverage was defective, or that its temperature rendered it unfit for
human consumption at the time that it was sold, as required for a claim for a
breach of the implied warranty of merchantability).
• L.T. Overseas Ltd. v. Hartej Corp., __ A.2d __ (Conn.Super. 2002) (an
importer did not breach the implied warranty of merchantability when it sold
rice to a distributor, in part because there had been only two complaints in the
previous four years and the distributor continued to do business with the
importer despite the complaints).
Recent additional cases concerning other implied warranty of merchantability
questions include the following.
• Evans v. Chrysler Financial Corp., __ N.E.2d __, 44 UCC Rep.Serv.2d 1003
(Mass.Super. 2001) (a buyer who paid a fee to shop for cars on a lot failed to
show that this was a sale of goods, as required for a claim for a breach of the
implied warranty of merchantability).
Bruesewitz v. Wyeth, LLC (9th and 10th Ed.)
How does the result in this case affect the Bruesewitzes? Under the National
Childhood Vaccine Injury Act of 1986 (NCVIA), once a claimant receives a
decision from the U.S. Court of Federal Claims, he or she has two options—the
decision may be accepted, or it may be rejected and tort recovery may be
sought. In this case, the Bruesewitzes’ claim for relief for their daughter’s
injury due to the DTP vaccine’s side effects was denied. They rejected this
unfavorable judgment and filed a suit under state tort law. But the court
granted a judgment in favor of the vaccine’s maker. This judgment was upheld
on appeal and affirmed by the United States Supreme Court.
Because the NCVIA expressly eliminates liability on the maker’s part for a
vaccine’s unavoidable, adverse side effects, the Bruesewitzes are not likely to
recover from the DTP vaccine’s maker for the injury to their daughter. But the
NCVIA’s immunity does not apply if a plaintiff establishes by clear and
convincing evidence that a manufacturer was negligent, or was guilty of fraud,
intentional and wrongful withholding of information, or other unlawful activity.
Thus, if the Bruesewitzes could show that there was improper manufacture or
warning, they may have grounds for relief. If the vaccine’s maker failed to
comply in a material way with the required steps of the regulatory process,
there may be a basis for recovery. There may also be support for a successful
claim if the injury to their daughter was caused by an unlisted side effect.
It might be noted that the decision of the U.S. Court of Federal Claims included
a not-inconsiderable award of attorney’s fees to the Bruesewitzes despite its
denial of their claim.
What is the public policy expressed by the provisions of the NCVIA? In the
Supreme Court’s interpretation, the NCVIA’s program balances payment of
compensation to victims harmed by vaccines and protection of the vaccine
industry from the potentially devastating costs of tort liability. In effect, the
Court adds a fourth assumption to the list in the text of the grounds for the
public policy underlying the imposition of product liability—the liability
imposed on the manufacturers of beneficial products should not be so onerous
as to drive them out of business.
Shoop v. DaimlerChrysler Corp. (8th Ed.)
In 2002, Darrell Shoop bought a 2002 Dodge Dakota truck for $28,000
from Dempsey Dodge in Chicago, Illinois, made by DaimlerChrysler Corp.
Defects required repairs twelve times within the first eighteen months. In
2005, Shoop accepted $16,500 for the trade-in value of the truck as part of a
purchase of a new vehicle. Shoop filed a suit in an Illinois state court against
DaimlerChrysler, alleging a breach of the implied warranty of merchantability.
DaimlerChrysler countered that Shoop’s sale of the Dakota was evidence of its
merchantability. The court issued a summary judgment in DaimlerChrysler’s
favor. Shoop appealed.
A state intermediate appellate court reversed the lower court’s
summary judgment and remanded the case for trial. “[A] product breaches the
implied warranty of merchantability if it is not fit for the ordinary purposes for
which such goods are used. With regard to automobiles, fitness for the ordinary
purpose of driving implies that the vehicle should be in a safe condition and
substantially free from defects. Breach of an implied warranty of
merchantability may also occur where the warrantor has unsuccessfully
attempted to repair or replace defective parts.”
How important are expert witnesses to a plaintiff such as Shoop? On this
point, the court stated, “[B]ecause the value of the Dakota at the time of
acceptance is important to a damages analysis under section [UCC] 2–714(2),
so, too, are expert opinions attesting to that value. Even lay witnesses are
permitted to testify as to the value of property if they have sufficient
knowledge of the property and its value. . . .
“Here, based on a visual inspection, a road test, and reviews of the
Dakota’s service history and technical service bulletins related to the Dakota,
[Shoop’s witness] Thomas Walters opined that the truck’s value was diminished
by 35% at the time of purchase. Walters used the valuation guide of the Kelly
Blue Book and his professional experience in estimating the Dakota’s diminished
value. Walters believed that the Dakota had these manufacturing defects at
the time of sale. Plaintiff’s second witness, Joseph Pennacchio, opined based
on a review of the repair records that the value of the truck at the time of
purchase was $22,300. Both of these witnesses were experienced in the
inspection or appraisal of vehicles. Accordingly, the testimony of plaintiff’s
opinion witnesses created a genuine issue of material fact that the value of the
Dakota was diminished at the time of the sale.”
Should Shoop’s trade-in of the Dakota preclude his recovery in this case?
Why or why not? DaimlerChrysler made this argument in Shoop’s case. The
court disagreed, however, and explained, “The buyer’s damages for breach of
warranty are not lessened because the buyer has resold the goods at an
enhanced price. Had the goods been as warranted, they might have been
resold at a still higher price.” Furthermore, it should not matter whether “the
goods were actually worth the price for which they were resold. Whether the
price received on a resale is evidence of the value of the goods at the time of
the breach is another question.”
Bullock v. Philip Morris USA, Inc. (8th Ed.)
Jodie Bullock smoked Philip Morris-branded cigarettes for forty-five
years from 1956 until she was diagnosed with lung cancer in 2001. Despite
proof as early as the 1950s that smoking caused cancer, Philip Morris contended
in its ads, and its executives asserted in interviews, that there was no proof.
Jodie Bullock sued Philip Morris on a product liability theory. At trial, the jury
found that a defect in cigarettes’ design, attributable to negligence, and
awarded Bullock $850,000 in compensatory damages and $28 billion in punitive
damages. Philip Morris appealed.
The California Court of Appeal for the Second District affirmed. Philip
Morris failed to show any error with respect to its liability for products liability
based on a design defect. “A product is defective in design for purposes of tort
liability if the benefits of the design do not outweigh the risk of danger
inherent in the design, or if the product, used in an intended or reasonably
foreseeable manner, has failed to perform as safely as an ordinary consumer
would expect.”
It seems clear that the “benefits” of the design of cigarettes do not
outweigh the risk of the danger in their use. That risk is the potential—if not
inevitable or predictable—effect on a smoker’s health. But what are cigarettes’
“benefits”? It might be said that there is some physical pleasure in smoking,
and that that is the benefit, but this benefit is arguably short-lived. There may
be some emotional satisfaction in the pose of smoking—“it’s cool”—or there
may some allaying of “nerves” in the activity of it. What sort of safety does the
ordinary consumer expect in the use of cigarettes? It might be that a
consumers’ sense of safety with respect to cigarettes, or any other product,
arises from a general feeling of security in reliance on the good faith of
corporations and other businesses to market products that are relatively safe,
despite their apparent harm.
Under what circumstances, if any, could Philip Morris have justified its
continuing campaign to discredit the scientific arguments that linked smoking
with lung cancer? If the science purporting to support a link between smoking
and cancer were less solid, or if the accompanying statistics were less valid,
Philip Morris might have been able to justify its claims to that effect. Also,
profiting from the sale of tobacco products was most likely the company’s
motivation for denying the asserted link between smoking and bad health (and
any connection between smoking and other adverse consequences, such as
addiction). That profit would very likely have been reduced if customers and
potential customers came to believe that smoking and ill effects were
inextricably linked. In support of this motive, the company might have argued
that it gave jobs to many people in diverse occupations, from farming to
factory work, advertising and distribution to wholesale and retail sales.
Riley v. Ford Motor Co. (10th Ed.)
In this case, the plaintiff’s evidence of a reasonable alternative design met the
risk-utility test. To satisfy this test, a plaintiff must show a feasible,
alternative design. A weighing of the costs and benefits, particularly those of
the alternative design, is the essence of that test.
In a product liability design defect action, the plaintiff must present evidence
of a reasonable alternative design to satisfy the risk-utility test. The plaintiff is
required to point to a design flaw in the product and show how an alternative
design would have prevented the product from being unreasonably dangerous.
This must include a review of the costs, safety, and functionality associated
with the alternative design. In this case, the plaintiff presented evidence that
included two studies conducted by the defendant that covered its own review
of the costs and benefits of an alternative design. If the plaintiff had not had
this evidence, other methods that might have been used to establish a
reasonable alternative design include the testimony of the defendant’s
knowledgeable employees—design engineers, for example—and other experts.”
School Shootings and Strict Liability
Over the past decade, school shootings have led to lawsuits that pose a
novel question for the courts: Can the producers and distributors of violenceladen media, such as video games and Internet transmissions, be held liable for
the shootings? In one case, for example, the plaintiffs were the parents of
several students who were killed by their classmate, Michael Carneal, in a 1997
high school shooting in Kentucky. The plaintiffs sued Meow Media, Inc., and
other companies (the defendants), alleging that the defendants should be held
liable for the shootings. The plaintiffs contended that the defendants’
products—including videos, video games, and Internet transmissions—
“desensitized” Carneal to violence. Carneal’s indifference to violence, in turn,
“caused” the shootings.
The Negligent Claim
One of the plaintiffs’ claims was that the defendants had breached a duty of
care by distributing such violent products and were thus negligent. The court,
however, did not agree with the plaintiffs that the defendants owed a duty of
care to the victims. Recall from Chapter 4 that a defendant’s duty of care
extends only to those who are injured as a result of a foreseeable risk. In the
court’s eyes, a school shooting was not a foreseeable risk for the defendants.
Thus, the court dismissed the negligence claim.
Were the “products” defective?
The plaintiffs also alleged that the defendants should be held liable in
strict product liability because the violence contained in their products
rendered those products “defective.” The court never reached the issue of
whether the products were defective, however, because it concluded that the
violence communicated by the videos, video games, and Internet transmissions
was not a “product.”
While videos and video games may be considered products for some
purposes, the communications within those videos and games were not
products for purposes of strict liability. The argument that an Internet
transmission could constitute a product also failed. The plaintiffs had asserted
that if electricity could be labeled a product, as it has been in some cases,
then Internet transmissions, which can be characterized as a series of electrical
impulses, should also be considered a product. The court pointed out, though,
that the relevant state law defined the term product as something tangible—
something that can be touched, felt, or otherwise perceived by the senses.
The communicative element (ideas and images) of an Internet transmission was
not a tangible object.
Furthermore, stated the court, even assuming that the videos, video
games, and Internet transmissions were products, the plaintiffs could not
succeed in a strict product liability action. For strict product liability to apply,
the injuries complained of must have been caused by the products themselves.
In this case, the injuries were caused not by the products but by Carneal’s
reaction to the products.
Assumption of Risk
Boles v. Sun Ergoline, Inc. (9th Ed.)
Where should the line be drawn between an individual’s responsibility to take
care of himself or herself, and society’s responsibility to protect that
individual? The question of determining the breadth of personal responsibility
underlies much of the law. Laws are created in situations in which individuals
are unable to protect themselves and society needs to provide a buffer
between an individual and someone or something else—himself or herself,
another individual, the government, or a business entity.
What did the court mean when it stated that strict product liability laws are
“not fully congruent” with classical tort law? A major difference between
classical tort law and strict product liability has to do with fault. Strict
liability, and thus strict product liability, is liability without fault. In other
words, a person does not have to intend to commit a wrongful act, or even
commit the act through his or her negligence, to be liable in strict liability. As
the court noted in this case, “In strict products liability, the focus is on the
nature of the product rather than the conduct of either the manufacturer or
the person injured.” Another important difference between classical tort law
and strict product liability has to do with the purpose of the laws. The basic
purpose of classical tort law is to provide remedies for the invasion by one
party of the protected interests of another. These interests include personal
physical safety, the security of personal property, and intangible interests in
such areas as privacy and reputation. The basic purpose of strict product
liability has to do with, as the court stated, “the relationship between
manufacturers and consumers.” Generally, manufacturers have the advantage
over consumers in terms of bargaining power, and strict product liability laws
are designed to overcome this imbalance to some extent by protecting the
consumer against unsafe products. Additionally, manufacturers are deemed to
be in a better position to assume liability for their defective products,
regardless of fault, because they can ultimately pass on the costs associated
with liability to other consumers in the form of higher prices.
Why would the enforcement of the exculpatory clause in this case conflict with
the rationale underlying strict product liability? One of the goals of strict
product liability laws is to protect consumers against unsafe products. Another
goal is that the costs associated with injuries caused by their products should
be borne by the manufacturers, sellers, or distributors of those products rather
than by consumers. This is because the manufacturers, sellers, or distributors
are in a better position to assume the burden, for they can pass on these costs
to other consumers in the form of higher prices. Enforcement of the
exculpatory clause in this case would conflict with these goals by placing
liability for injuries on the consumer rather than on the manufacturer, seller,
or distributor of the product. In other words, the goal of protecting consumers
from unsafe products would be thwarted, as would be the goal of having
manufacturers bear the cost burden created by the injuries caused by their
products.
Lecture Notes for Session 1
Business Law II continues the study of the law of contracts that we began in
Business Law I. I strongly recommend that you review that material as well as
the material on the both the federal and state court systems, common law and
stare decisis. Without this foundation, some of the material and terminology
that we cover this semester may be somewhat more difficult that it would
otherwise need to be.
The Uniform Commercial Code (UCC) is probably the most important piece of
commercial legislation in the history of the United States. It created a nearly
uniform body of law in each state, greatly facilitating interstate commerce.
Although it is nearly uniformly applied in almost every state, the UCC is not a
federal law. The UCC was (and remains) a joint effort of the National
Conference of Commissioners on Uniform State Laws and the American Law
Institute. All of its articles have been adopted with few changes by every state
(except Louisiana, which has adopted only part of it) and the District of
Columbia. Despite differences, the UCC contains many similarities to the
common law contract principles discussed in Business Law I. Indeed, such
similarities should be expected, because the UCC represents a statutory
codification of much of the common law of contracts.
The UCC covers all of the phases of an ordinary sale or lease of goods, including
the formation of the contract (Article 2 or 2A), payment (Articles 3, 4, and 4A),
title documents during storage (Article 7), and security for unpaid amounts
(Article 9). In addition, Article 6 – where it applies – concerns transfers by
merchants selling off the bulk of their inventory at one time, and Article 8
deals with transactions involving negotiable securities.
The UCC attempts to provide a consistent and integrated framework of rules to
deal with all phases ordinarily arising in a commercial sales transaction from
start to finish.
There are however, differences between the UCC and the common law of
contracts and many of those differences are the subject of Chapter 14 and
illustrated in a nice chart (I can’t give an exact page reference since everyone
is using a different edition). Basically, where there are differences between
the common law and the UCC, the reason is that the UCC is meant to reflect
what actually takes place from day to day in the commercial world. The fact
that the UCC permits acceptance of an offer by any reasonable means (as
opposed to the more stringent requirements of the common law) illustrates the
commercial flexibility built into the statute. When the UCC speaks, its
principles apply; when it is silent, other state statutes and the common law
apply.
Finally, you should be aware that our discussion of Article 2 of the UCC
specifically applies to contracts for the sale of goods, and merchants are
treated specially in a number of instances. I would pay particular attention to
the definitions of goods and of merchants in the text (that is, what is included
within the definitions and what is not). In addition, contracts for the sale of
goods is governed by the same common law (from Business Law I) that applies
to other contracts. The law concerning sales of goods has developed
specialized aspects, however, and it is these aspects that you should pay
attention to as you study the Uniform Commercial Code.
Mécanique C.N.C., Inc. v. Durr Environmental, Inc. (7th Ed.)
Durr Environmental, Inc., contracted with GE Quartz, Inc. (GE), to design and
install a system at GE’s plant to control the emission of nitrogen oxides.
Mécanique C.N.C., Inc. (CNC), bid on the manufacture and installation of the
ductwork. Durr eventually accepted the bid, and CNC began work. CNC was on
schedule to complete the work when Durr terminated CNC. CNC filed a suit in a
federal district court against Durr and others, alleging in part breach of
contract. Did Article 2 apply to the CNC contract? The defendants filed a
motion for summary judgment on this point.
The court held that the contract was predominantly for a sale of goods, with
services only incidentally involved, and granted the motion. CNC’s service,
“though extensive,” was incidental to Durr’s purpose of acquiring the
ductwork. CNC’s “compensation was tied to the goods produced rather than
the labor provided. There was no separate price for installation. * * * CNC
played no role in the design of the product. * * * Even more significantly, the
parties did not contemplate that CNC would be involved in any ongoing
servicing or testing of the ductwork once it was installed.”
What difference does it make whether Article 2 applies to the contract in this
case? At common law, if an offeror makes an offer that the offeree accepts
with modifications to the terms, there is no contract. This is the mirror-image
rule, discussed in a previous chapter. Under Article 2, however, a contract
exists, despite the added terms, and the question is whether those terms are
also part of the contract. Thus, in this case, determining whether the UCC
applies is also determining which rules apply to its terms. Projecting
conclusions based on those rules suggests to the parties the claims that would
be to their benefit. CNC argued that the common law applied. Durr contended
that Article 2 governed the deal.
Under what circumstances might a seller’s provision of services under a
contract predominate over a buyer’s goal to obtain a certain product? The
court provided an example of a case involving a software consultant paid by
the hour—rather than by the project or for separate products—to design and
implement a computer system. “[E]ven though the plaintiff’s ultimate goal was
to obtain an operational computer system well tailored to its business, the
contract was for services because the defendant did far more than sell
software to the plaintiff.” Under the contract, the defendant developed
requirements for individual applications, recommended configuration and
architecture for the computer system, and installed and supported the
software, which was bought from a third party.
Nautilus Insurance Co. v. Cheran Investments LLC (10th Ed.)
The analysis of who is entitled to the insurance proceeds for the damage to the
Attic’s assets in the fire does not end with the determination that Blasini was
the owner of those goods. Among the parties with an interest in the goods—the
buyer, the seller, and any third parties, such as a lender of the price on the
contract—the insurance proceeds should be disbursed according to whom
suffered a financial loss due to the damage of the goods in the fire. If Blasini
made no payments on the contract for the sale of the property, the party who
would have suffered the greatest financial loss would most likely be the seller.
The UCC defines a sale as “the passing of title from the seller to the buyer for
a price.” But what determines “the passing of title”? Before any interest in
goods can pass from the seller to the buyer, the goods must exist and they
must be identified as the specific goods designated in the contract. Whether
the goods exist can be obvious—a car can be identified by its vehicle
identification number (VIN), for instance. Future goods, such as unborn
livestock or unplanted crops, however, are not identifiable until conception or
the inception of their growth. Other future goods require that the seller ship,
mark, or otherwise designate the goods to which the contract refers. Title to
these goods then passes at the time and place of their delivery from the seller
to the buyer. Of course, the seller and buyer can agree otherwise. Delivery
arrangements can affect when title passes. Under a shipment contract, for
example, a seller is required only to deliver the goods into the hands of a
carrier. Once this occurs, title has passed to the buyer. When delivery is
affected without movement of the goods (when they are located in a
warehouse, for example), title generally passes when the buyer is given the
appropriate documents to obtain the goods.
Puget Sound Financial LLC v. Unisearch, Inc. (6th Ed.)
Puget also argued that, if the limitation-of-liability clause were recognized as
part of its contract with Unisearch, the clause was unenforceable as
unconscionable. The court held that “the totality of the circumstances support
the conscionability and enforceability of the liability limitation clause.” The
court concluded that “there were no indicia of unfair surprise under these
circumstances. Unlike the concern for unfair surprise, most commonly
associated with a maze of fine print in warranty disclaimers, the search reports
and invoices in this case were brief. The liability limitation clause printed on
the invoice did not alter or change during any of the 48 transactions.
Additionally, the invoices were directed to the attention of [Puget’s] principals
and [Puget’s] president testified that he contemporaneously examined the
invoices. [Puget] had received and paid numerous invoices prior to this dispute.
We find all of these factors conclusive that there was no unfair surprise in this
case.
“Next, by evaluating the totality of the circumstances, we further conclude
that the liability limitation clause . . . is not unconscionable and is therefore
enforceable.” The court found that the clause in this case met all of the
following factors: “(1) the conspicuousness of the clause in the agreement; (2)
the presence or absence of negotiations regarding the clause; (3) the custom
and usage of the trade; and (4) any policy developed between the parties
during the course of dealing.” The court also noted these factors supporting
the clause: “(1) the manner in which the parties entered into the contract, (2)
whether the parties had a reasonable opportunity to understand the terms of
the contract, and (3) whether the important terms were hidden in a maze of
fine print.”
Additional recent cases hinging on the effect of limitation-of-liability clauses
in terms of course of dealing include the following:
• Insurance Co. of North America v. NNR Aircargo Service (USA), Inc., 201 F.3d
1111 (9th Cir. 2000) (a shipper’s receipt of invoices containing language that
limited the shipper’s liability to $50 on forty-seven occasions before the
disputed transaction was sufficient to presume knowledge of the term and
enforce the limitation).
• M.A. Mortenson Co. v. Timberline Software Corp., 140 Wash.2d 568, 998
P.2d 305 (2000) (a shrinkwrap license, including a limitation-of-liability clause,
in the packaging and instruction manual of software was part of the contract
between the parties).
• Government of United Kingdom of Great Britain & Northern Ireland v.
Northstar Services, Inc., 1 F.Supp.2d 521 (D.Md. 1998) (terms and conditions of
service printed on the backs of invoices, limiting liability for damage to
shipments, were part of a contract when more than one hundred invoices were
sent and the shipper’s representative was aware of the terms and conditions).
• Capitol Converting Equipment, Inc. v. LEP Transportation, Inc., 965 F.2d 391
(7th Cir. 1992) (alleged unawareness of liability limitation clause in hundreds of
invoices was insufficient to invalidate the clause).
Wilson Fertilizer & Grain, Inc. v. ADM Milling Co. (7th Ed.)
How does a court determine when an additional term in an acceptance
“materially alters” the contract? This is a question of fact for the court to
decide. Generally, if the term involves an unreasonable element of surprise or
hardship, a court will likely conclude that the term materially alters the
contract. For instance, if the price for the grain was doubled, the modification
would be material.
Why does it matter whether the arbitration clause in ADM’s confirmation
“materially altered” the contract with Wilson? Under the UCC, in contracts
between merchants, a term in an acceptance that materially alters the terms
of the contract as proposed in the offer does not become part of the contract.
Jannusch v. Naffziger (8th Ed.)
If there had been no exchange of equipment, but only the use of the “Festival
Foods” name and Jannusch’s help in operating the business during the first
season, would the result in this case have been the same? The court cited the
predominant purpose test in making its decision that Article 2 of the UCC
covered the deal between the Jannusches and the Naffzigers. Without an
exchange of goods, even had the court found a contract in the deal, the UCC
would not have applied. But considering the other circumstances—Naffzigers’
operation of the business under the “Festival Foods” name, Jannusch’s
fulfilling the service part of the agreement, and so on—it is likely that the court
would have found an enforceable contract.
Suppose the contract had stated that the truck and other equipment were
worth $50,000 and the goodwill value of the business was $100,000. Would that
have changed the outcome? Why or why not? If the parties agreed that the
majority of the value in the contract was not in goods, then the contract would
fall under the common law, which has tighter standards to determine the
existence of the contract than does the UCC. So the outcome is not as clear,
but given that the price was determined and that the Naffzigers took
possession, it is possible there was an enforceable common law contract
nonetheless.
Given that the business was not what the Naffzigers expected it to be, and that
they returned everything, was it fair for the Jannuschs to demand full
payment? Yes. Otherwise, it would be like saying you should get to live in a
house for four months and, if you decide you do not like it, force the seller to
take it back. There was no claim that the Jannuschs were not cooperative or
misled the Naffzigers; the business activity was just not as profitable as they
had hoped it would be.
Recent cases in which the courts classified items as “goods” for purposes of
UCC Article 2 include the following.
• Neugent v. Beroth Oil Co., 560 S.E.2d 829 (N.C.App. 2002) (motor fuel—a sale
between a jobber, distributor, or oil company and a dealer is a sale of goods).
• BTA Oil Producers v. MDU Resources Group, Inc., 642 N.W.2d 873 (N.D. 2002)
(natural gas—the contract provided that title to the gas passed at the wellhead
before processing).
• Dakota Pork Industries v. City of Huron, 638 N.W.2d 884 (S.D. 2002) (water—
”movable at the time of identification to the contract for sale” by a city to a
meat processing company).
• Watkins and Son Pet Supplies v. Iams Co., 254 F.3d 607 (6th Cir. 2001)
(distributorship).
• SMR Technologies, Inc. v. Aircraft Parts International Combs, Inc., 141
F.Supp.2d 923 (W.D.Tenn. 2001) (aircraft de-icing parts, but not the contract’s
sale of services portion).
Amaya v. Brater (10th Ed.)
In this case, the court concluded that the duty of good faith and fair dealing
did not serve as a basis for a separate cause of action with respect to the
contract between the student and the university at the center of the dispute.
The court reasoned that the duty of good faith and fair dealing is a concept
created by the UCC and is generally restricted to contracts covered by the
UCC—in particular, contracts for the sale of goods. The contract here was not a
contract for a sale of goods but an implied contract for services. The contract
involved the legal relationship between a student and a university.
Of course, if Indiana University School of Medicine, the school involved in the
case, had acted in bad faith—which is not simply bad judgment or negligence
but the conscious doing of a wrong out of a dishonest, illegal, or unethical
purpose—and Amaya, the student here, had proved it, he could have stated a
valid claim.
Suncoast Merchandise Corp. v. Myron Corp. (8th Ed.)
How do jury instructions weigh in the “fairness” of a trial? The outcome in the
Sun case illustrates the significance of jury instructions. The court explained,
“Appropriate and correct jury instructions are essential for a fair trial. [J]ury
charges must outline the function of the jury, set forth the issues, correctly
state the applicable law in understandable language, and plainly spell out how
the jury should apply the legal principles to the facts as it may find them. . . .
[E]xamination of the entire charge [in this case]—and it is on the whole that a
charge must be judged—reveals that the judge did not provide the jury with
sufficient guidance in this difficult case because he failed to relate the
applicable legal principles to the parties’ specific contentions.”
How would the outcome of this case differ if the contract had been between a
merchant and an ordinary consumer rather than between two merchants?
Under the UCC, when one or both of the parties to a deal is not a merchant,
their contract is formed according to the terms of the original offer and not the
additional terms. In this case, that principle would indicate that the parties’
contract included only the terms of Myron’s four faxed orders, which Sun did
not fulfill.
Applying the correct principles to the facts in this case, how would you have
decided the issue? The court presented a review of the case that found support
for a binding contract between Sun and Myron, and grounds to refute that
finding. For example, Sun contended that a binding contract was formed on its
acceptance of Myron’s purchase orders and that the different delivery dates
“were merely offers to modify or add to the terms,” which, under UCC 2–
207(2), might or might not occur. It could be asserted that Myron’s intent was
to have the calculators available by the Christmas season, not necessarily on
the precise dates indicated in the orders.
Against this assertion, it could be maintained that strict and timely compliance
with the delivery schedule in the orders was material to the contract. Myron
argued in part that there was no contract because, as indicated by Sun’s
request for revised orders, the parties intended any modification of the terms
of the original orders to be in writing and signed by Myron, and there was no
such writing. In other words, Myron characterized its original orders as offers,
which Sun did not accept “but instead made a counteroffer with new delivery
dates.”
How does the UCC’s obligation of good faith relate to the application of the
principles concerning additional terms? The parties to a contract have an
obligation to perform in good faith [UCC 1–203]. Similar to the application of
this duty in the context of a contract’s modification, a party’s presentation of
additional terms in the context of the principles cited in the Sun case should
only be done in good faith.
Office Supply Store.com v. Kansas City School Board (9th Ed.)
Suppose that the school district had been deemed a “merchant” of office
supplies. Would the forum selection clause in Office Supply’s invoice have been
part of the parties’ contract for the purchase of the supplies? Probably not.
Most courts have concluded that a forum-selection clause in a confirmatory
writing such as the invoice here constitutes a material alteration of the
underlying contract. Under UCC 2–207(2)(b), the clause could not then become
part of the contract without both parties’ agreement to it. This would most
likely also be the result under the United Nations Convention on Contracts for
the International Sale of Goods for the same reason—because it would effect a
material alteration in the parties’ underlying agreement.
Why would a business such as Office Supply want to include a forum-selection
clause in the contracts with its buyers? A company that does extensive business
online may sell to customers in virtually any location in the world. It could be
costly to pursue the resolution of a dispute in any forum in which a buyer
resides.
Should the court have allowed the default judgment to be registered so that it
could have been enforced? Why or why not? No, from an ethical perspective the
court should not have allowed the registration of the default judgment so that
it could be enforced. Ethics has to do with the fairness, justness, rightness, or
wrongness of action. It would have been unfair to the school district to support
the enforcement of the default judgment. That judgment arose from a term
proposed for addition to the parties’ contract after the seller had performed
and imposed on the purported buyer without the buyer’s agreement.
Can an employee’s E-mail constitute a waiver of contract terms?
Under UCC 2–209, an agreement that excludes modification except by a signed
writing cannot be otherwise modified. If the written-modification requirement
is contained in a form supplied by one merchant to another, the other party
must separately sign the form for it to be binding. This rule has an exception,
though, which can be significant in the online environment. Under the UCC, an
attempt at modification that does not meet the writing requirement may
operate as a waiver [UCC 2–209(4)]. In other words, the parties can waive, or
give up, the right to require that contract modifications be in a signed writing.
Can an employee’s e-mail communications form a waiver of a contract’s
written modification requirement? This issue arose in Cloud Corp. v. Hasbro,
Inc.
The Contract Terms and the Parties’ Relationship
Cloud Corp. contracted to supply packets of a special powder to Hasbro, Inc.,
for use in Hasbro’s new “Wonder World Aquarium.” At the time of their initial
agreement, Hasbro sent a letter to Cloud containing a “terms and conditions”
form, which stated that Cloud, the supplier, could not deviate from a purchase
order without Hasbro’s written consent. Cloud signed and returned that form
to Hasbro as requested, and Hasbro began placing orders. Each time Hasbro
ordered packets, Cloud sent back an “order acknowledgment” form confirming
the quantity ordered.
After placing several orders, Hasbro told Cloud to change the formula in the
packets. As a result, Cloud was able to produce three times as many packets
using the same amount of material that it already had on hand to fill Hasbro’s
previous orders. Although Hasbro had not ordered any additional packets,
Cloud sent Hasbro an order acknowledgment for extra packets at a lower price.
Hasbro did not explicitly respond to Cloud’s acknowledgment form. One of
Hasbro’s employees, however, referred to the additional quantities of packets
at some point in her e-mail exchanges with Cloud. Several months later, after
Cloud had produced the additional packets, Hasbro quit making the Wonder
World Aquarium and refused to pay for the packets that it did not order. Cloud
then sued Hasbro for breach of contract.
Was the Employee’s E-mail a Waiver?
Ultimately, a federal appellate court held that because Hasbro’s employee had
referred to the additional packets in at least one e-mail, Hasbro must pay for
them. According to the court, the employee’s e-mail alone could be sufficient
to satisfy the requirement of written consent to modify the contract. Even if it
did not, however, the court held that it operated as a waiver. The court stated
that for the e-mail to operate as a waiver, Cloud “must show either that it
reasonably relied on the other party’s having waived the requirement of a
writing, or that the waiver was clear and unequivocal.” Here, the employee’s
e-mail had not clearly waived the writing requirement but there was
reasonable reliance. According to the court, Hasbro should have advised Cloud
if it did not want to be committed to buying the additional quantity rather than
“leading Cloud down the primrose path.”
Jones v. Star Credit Corp (6th- 10th Ed.)
We will be discussing this case in detail during this week’s discussion forum.
United States v. 2007 Custom Motorcycle (9th Ed.)
As in many cases, there may have been unstated reasons for the court’s
decision against Indy in this case. When asked whether Indy inquired into the
occupations of its customers, the seller said no, because if it did, it would
likely lose half of them. In response to queries about the price of Allen’s
custom cycle, Indy gave different answers at different times. The seller was
also not clear on how much the buyer still owed on the price. When asked how
long the cycle had been in storage, Indy provided a date that fell after the
cycle had been seized by law enforcement officers.
Is it ethical for the government to seize goods that arguably constitute the
proceeds of a crime even if those goods are not in the possession of the
criminal? Yes. Ethics has to do with the fairness, justness, rightness, or
wrongness of action. A crime is illegal and generally unethical—a crime is not
fair to its victims, whether they are individuals or society as a whole. It is just
and fair, however, for the government to seize goods that constitute the
proceeds of a crime, regardless of whose possession they are in, so that the
“wrongness” of the crime can be made right.
Should the passage of title be tied so closely to the possession of the goods?
Yes. Before the creation of the UC, title—the right of ownership—was the
central concept in sales law, controlling all of the issues of rights and remedies
of the parties to a sales contract. There are numerous problems with this
concept, however, making it difficult to predict and determine which party had
title and when. The UCC divorced the question of title as completely as
possible from the question of the rights and obligations of the parties,
replacing the concept in most situations with the concepts of identification,
risk of loss, and insurable interest. The concept of title is still relevant but its
passage is tied to the possession of the goods—once the seller has relinquished
possession of sold goods, the buyer has them, and the parties expect no further
action by the seller, the buyer also has title. The UCC allows the parties to
“otherwise explicitly agree.” This provides for the parties to create their own
rule to pass title. The UCC rules apply only if they do not otherwise agree.
Suppose that Indy had given the “Certificate of Origin” to Allen and had kept
the cycle. Would the result have been different? Possibly not. That goods have
not been delivered to the buyer can be determinative that title has not passed.
In the context of this case, however, Indy might still have had to prove its
ownership of the cycle. If the company were no more successful in proving
ownership; even with the cycle in its possession, than the company was in the
actual case, the result might have been the same. But evidence that Allen had
not paid for the cycle, coupled with Indy’s possession of it, would certainly
have leant support to Indy’s claim. If the court had viewed these circumstances
as a sufficient indication that title had not passed, the result might have been
different.
Person v. Bowman (10th Ed.)
Risk of loss does not necessarily pass with title. If the parties to a contract do
not specify when the risk of loss passes, and the goods are to be delivered
without their movement by the seller, when does the risk pass? If the seller
holds the goods and is a merchant, the risk of loss passes to the buyer when the
buyer takes physical possession of the goods. If the seller holds the goods and is
not a merchant, the risk of loss passes to the buyer on tender of delivery.
When a bailee is holding the goods, the risk of loss passes to the buyer when—
•
•
•
The buyer receives a negotiable document of title for the goods.
The bailee acknowledges the buyer’s right to possess the goods.
The buyer receives a nonnegotiable document of title and has had a
reasonable time to present the document to the bailee and demand the
goods.
Arguably, Stacy Bowman was a merchant, and the court ruled that Tammy
Herring was a buyer (not a lessee). In that case, the risk of loss passed to
Herring when she took physical possession of Toby. If Bowman did not qualify
as a merchant, then Herring took the risk on Bowman’s tender of the horse.
The theory of contract interpretation that supported the court’s reasoning in
the Person case was the objective theory of contracts, or as the court phrased
it, “the objective manifestation theory of contract interpretation, under which
courts try to ascertain the parties’ intent by focusing on the objective
manifestations of the agreement, rather than on the unexpressed subjective
intent of the parties.” Here, the court reasoned that, “while Herring’s
subjective belief may have been that she did not own Toby and that this was a
lease-like agreement, the parties’ objective manifestations are consistent with
this being a sale not a lease.”
If the agreement between Herring and the Bowmans at the center of this case
had been a lease, the result might not have been the same. Instead of holding
Herring liable for Person’s injuries, the court might have held Bowman liable.
Except in a finance lease (in which a lessor acquires goods to supply a lessee),
a lessor normally retains the risk unless the lease provides otherwise. In the
Person case, the contract did not provide otherwise—it was silent on the
question of passage of risk.
Recent cases involving the passage of title in a sales contract include the
following.
• Usinor Industeel v. Leeco Steel Products, Inc., 209 F.Supp.2d 880 (N.D.Ill.
2002) (title passed to the buyer at the time and place at which the seller
physically delivered the goods—steel—despite the seller’s reservation, in their
contract, of a security interest in the goods).
• Arcadia Financial, Ltd. v. Southwest-Tex Leasing Co., 78 S.W.3d 619
(Tex.App.—Austin 2002) (title to motor vehicles did not pass to the buyer on
the physical delivery of the goods because the parties had agreed that transfer
of title was contingent on the seller’s receipt of payment).
• In re Pro Page Partners, LLC, 270 Bankr. 221 (E.D.Tenn. 2001) (title passed to
the buyer at the time and place at which the seller physically delivered the
goods—office equipment—despite the seller’s reservation, in their contract, of
a security interest in the goods).
• Right Touch of Class, Inc. v. Superior Bank, FSB, 536 S.E.2d 181 (Ga.App.
2000) (title to motor vehicle passed to the buyer on the physical delivery of the
goods in a sale between used-car dealers for the express purpose of the
vehicle’s resale to a third party).
• Concord General Mutual Insurance Co. v. Sumner, 762 A.2d 849 (Vt. 2000)
(title to motor vehicle passed to the buyer on the physical delivery of the goods
in a sale between dealers).
Delivery and Bills of Lading
When a seller, a buyer, and the goods that serve as the subject of their
contract are located in the same city, delivery does not present many
problems. The buyer will pick up the goods, or the seller will deliver them.
When a seller, a buyer, and the goods that serve as the subject of their
contract are located in the same city, delivery does not present many
problems. The buyer will pick up the goods, or the seller will deliver them.
Most sellers are not in the delivery business. Generally, a seller uses
independent, common carriers (trucking companies, shipping companies,
railroads, airlines) to deliver goods. When a carrier receives goods from a
seller, the carrier issues a bill of lading to the seller. On the bill, the seller is
usually identified as the shipper (or consignor) and the buyer is named as the
consignee. A bill of lading serves as the seller’s receipt and as the contract
between the seller and the carrier for transportation of the goods.
There are two forms of bills of lading—negotiable bills and nonnegotiable bills.
Negotiable bills (or order bills) are easily recognizable. On a negotiable bill,
goods are consigned to the order of a party (usually the buyer). Typically, a
negotiable bill specifies that “[s]urrender of this original order bill of lading
properly indorsed is required prior to delivery of the property.” A negotiable
bill is normally printed on yellow paper, because yellow paper is required by
Interstate Commerce Commission regulations. If goods are shipped under a
negotiable bill, a carrier does not give the goods to the buyer until the original
copy of the negotiable bill is presented to the carrier. A carrier that delivers
goods to a party without insisting on the surrender of the original copy of the
negotiable bill may be held to have converted the goods and will be liable to
the holder of the negotiable bill [UCC 7–403]. To prevent this, the seller must
deliver the original copy of the negotiable bill to the buyer before the buyer
can obtain the goods from the carrier.
Most deliveries are made under nonnegotiable bills of lading. A nonnegotiable
bill (or straight bill) is also easily recognizable. Normally, somewhere on the
nonnegotiable bill is printed the words “straight bill of lading.” On a
nonnegotiable bill, goods are simply consigned to a party (rather than consigned to the order of a party). A nonnegotiable bill is usually printed on white
paper, as the Interstate Commerce Commission requires. If goods are
delivered under a nonnegotiable bill, the carrier will turn the goods over to the
named consignee (normally the buyer) without insisting on surrender of the
original copy of the bill. Sellers often send nonnegotiable bills to buyers
anyway. It is an easy way to fulfill the UCC’s notice requirement. (Under the
circumstances described in UCC 2–504, a seller must “promptly notify the buyer
of [a] shipment.”) Also, the buyer might need the bill to file a claim against
the carrier if the goods are lost.
Lecture Notes for Session 5
Nearly every time a retailer makes a significant purchase, a wholesaler buys a
large quantity of stock, or a manufacturer buys raw materials necessary for
production, secured credit is involved. A security interest is not a retention of
title to goods, but a lien on them. A secured transaction is a borrowing of
money for a security interest in goods (the debtor’s property).
Thus, a key to understanding a secured transaction is viewing it from a
creditor’s perspective. From this perspective, basic questions are: (1) If a
debtor defaults, does the creditor have an enforceable security interest in the
debtor’s property? (2) If an enforceable security interest in a debtor’s property
exists, will the creditor’s security interest take priority over other security
interests and creditors’ claims? The answers to these questions form the basis
for the law of secured transactions.
This chapter is pretty straight-forward. You need to focus on terminology,
creation and perfection of security interests, priorities of security interests,
rights and duties of debtors and creditors, and default and disposition of
collateral. There are, however, a few points that need clarification.
Article 9 Security Interest
Prior to the drafting of Article 9 of the Uniform Commercial Code and its
adoption by the states, secured transactions were governed by a patchwork of
security devices. The following summary of these devices will help you to
understand the significance and landmark status of Article 9.
Security Devices Prior to Article 9
The security devices in use prior to the adoption of Article 9 were replete with
variations that, according to many, made no logical sense. These devices
included chattel mortgages, trust receipts, conditional sales contracts,
assignments of accounts, and pledges. Additionally, each device had its own
jargon. Depending on the device used, for example, a debtor could be called
variously a pledgor, a mortgagor, a conditional vendee, an assignor, or a
borrower.
One of the earliest security devices, historically, is the pledge. A pledge is a
possessory security interest in which the secured party holds or controls
possession of the property involved, called the collateral, to secure the
payment or performance of the secured obligation. The pledge has existed
since at least the fourth or fifth century. The pledge concept also gave rise to
a device for obtaining a security interest in goods that could not be
conveniently moved from the debtor’s property. In such a situation, the
creditor would have an independent warehouser establish a warehouse on the
debtor’s premises to obtain possession of the goods. This was called a field
warehouse and dates from about 1900.
Article 9 Streamlined the Law Governing Secured Transactions
The pledge and many other types of security devices were all designed to
protect creditors’ interests.
Nonetheless, creditors still faced several legal
problems. For example, in many states, a security interest could not be taken
in inventory or stock in trade, such as cars for a car dealer or chocolate for a
candy manufacturer. Sometimes, highly technical limitations were placed on
the use of a particular security device. If a court determined that a particular
security device was not appropriate for a given transaction, it might void the
security interest.
The drafters of Article 9 concluded that two elements were common to all
security devices: (1) the objective of conferring on a creditor or secured party
priority in certain property (the collateral) against the risk of the debtor’s
nonpayment of the debt or the debtor’s insolvency or bankruptcy and (2) a
means of notifying other creditors of this prior security interest. With these
two elements in mind, the drafters created a new, simplified security device
with a single set of terms to cover all situations. What is this security device
called? It is called, simply, an Article 9 security interest.
Application to Today’s World
Although the law of secured transactions is still far from simple, it is now—
thanks to the drafters of Article 9—far more rational and uniform than it was in
the days prior to the UCC. The revised Article 9, which became totally
effective in 2001, further streamlined secured transactions law by, among
other things, simplifying the filing process and allowing secured transactions
documents to be filed electronically with the appropriate government officials.
Perfection of a Security Interest
The steps in insuring that a security interest was properly perfec…