Week 5: Sales and the UCC

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Case reading assignment for Week Six on October 9:

Oswald Machine & Equipment, Inc. v. Yip, 10 Cal. App. 4th 1238 (1992)

L&B Real Estate v. Wells Fargo Bank, 2008 Cal. App. Unpub. LEXIS 5060 (2008)

Chapter 18: Sales Contracts: UCC Art. 2

UCC Background

Link to California Commercial Code

"(2) (The) underlying purposes and policies of this code are:

(a) To simplify, clarify and modernize the law governing commercial transactions;

(b) To permit the continued expansion of commercial practices through custom, usage and agreement of the parties;

(c) To make uniform the law among the various jurisdictions."

Salient features of the UCC

Largely the work of a few legal scholars. Many subtle internal linkages anticipate issues and problems

Modifies "classic" contract rules to facilitate commercial transactions in many ways:

Favored open-ended standards over firm rules

Avoided formalities

Required and facilitated the "purposive interpretation" of its provisions

Did not attempt to provide an exclusive statement of the law, but instead directed courts to supplement its rules with general legal and equitable principles

Provided a range of remedies that principally served to make injured parties whole.

For more background on the UCC's emphasis on legal realism instead of formalism, see reprint of Karl Llewellyn's article on Canons of Statutory Construction, 5 Green Bag 2d 297 (Spr. 2002), available by searching Academic Universe in Legal Research /Law Reviews ^fn1

Scope of UCC Article 2

"Sales" that transfer "title" (ownership rights) to "goods" (tangible moveables) for a price

If both goods and services, see which predominates

"Merchant": important defined term

One who deals in the goods or holds self out as having special expertise as to this type of goods. Often different standards and rules apply to merchants as opposed to other buyers and sellers

How UCC modifies classic contract law

Not need consideration for merchant's firm offers

Merchant's firm offer stays open for stated time (or "reasonable", max 3 months), even if no consideration was given to hold offer open

Also, contract modifications don't need new consideration. Allows flexible renegotiation

Acceptance UCC 2-206

By reasonable medium of communication: Mailbox rule

Can also accept simply by shipping conforming goods

Acceptance and breach at the same time by shipment of nonconforming goods -- Unless shipment was made as an "accomodation", which is treated as a counteroffer

Additional terms on acceptance: UCC 2-207(1)

If either is nonmerchant, additional terms are proposed additions, but:

If both are merchants UCC 2-207(2) says new terms are in the contract, unless:

Offer expressly limits acceptance to its terms

The additional terms materially alter the contract, or

Other party objects w/in a reasonable time

Reason for rule: the battle of the forms

Does it work? Some say "No!" Others agree.

Gap filling for Open Terms: UCC 2-204(3) and 305 ff

If no price is stated, there may still be a contract

"Reasonable price" at time & place of delivery. Parties may agree on market price, or choose 3rd person to determine it

Where one party is to fix price, must do so in "good faith"

If no payment terms, then "COD"

If no time set, reasonable time

If assortment left open, buyer may choose, reasonably

Quantity must be specified, except for output and requirements contracts

UCC Statute of Frauds

Writing is usually required if goods cost over $500

For Merchants tho, the Written Confirmation rule

Binds both if one sends written confirm and other does not object w/in 10 days of receipt

Also exceptions for specially manufactured goods, admissions by a party, part performance

UCC Parole Evidence Rule

Not allow integrated writing to be contradicted by prior written or oral, or contemporary oral. UCC 2-202

Except: additional terms that don't contradict

If language is ambiguous, look to course of performance, course of dealing, usage of trade

Chapter 20: UCC Sales Breaches and Remedies

S's obligation: deliver conforming goods (UCC 2-301)

B's payment is due on tender of delivery unless parties agree to credit terms

Where to Deliver

If no carrier, S's place of business. (If none, S's residence)

If carrier, and shipment contract, S is to arrange shipping, deliver documents, notify B. B may reject goods damaged by improper shipment or improper notice

If carrier, and destination contract, S is to tender delivery at stated location

Perfect Tender Rule

If goods don't conform, B can accept or reject as to some or all. BUT 2-605: B must state particular reasons for rejection. Allows S to cure after rejection (if time remains for performance)

If Installment contracts for multiple deliveries

B may reject a non conforming installment if value is materially impaired

B may reject entire contract if default substantially impairs entire contract

B must accept if only this shipment is impaired and S gives adequate assurance of cure

B's obligation: take conforming goods and pay for them

B may inspect goods before accepting or paying

Unless: payment is due on receipt of documents of title, or it's a COD shipment.

Manner of payment:

Anything which is acceptable in ordinary course of business

S who demands cash must give B time to get it

If B's check bounces, S may reclaim goods

If credit terms, period begins when goods are shipped

If B fails to pay for goods bought on credit, S can seek money but can't get the goods back

How B accepts the goods

• Tells S by words or conduct that the goods conform
• Tells S that B will retain non-conforming goods
• Fails to effectively reject goods within a reasonable time after delivery
• Acts inconsistently with S's ownership rights: for example, resells the goods

If B discovers problems after acceptance

Can no longer "reject", but can "revoke" acceptance by notifying seller within reasonable time: 2-608. B may lose right to reject if too long a delay in inspecting

Adequate assurance of performance: UCC 2-609

If either party has reasonable grounds to fear impairment, they may demand assurance. The other has 30 days to provide assurance, and requesting party may suspend performance pending assurance. "Adequate assurance" depends on the facts -- from "give it my attention" to "replace the defective goods" to "post a guarantee".

Official Commentary: " The section rests on the recognition of the fact that the essential purpose of a contract between commercial men is actual performance and they do not bargain merely for a promise, or for a promise plus the right to win a law suit and that a continuing sense of reliance and security that the promised performance will be forthcoming when due, is an important feature of the bargain. If either the willingness or the ability of a party to perform declines materially between the time of contracting and the time for performance, the other party is threatened with the loss of a substantial part of what he has bargained for. A seller needs protection not merely against having to deliver on credit to a shaky buyer, but also against having to procure and manufacture the goods, perhaps turning down other customers. Once he has been given reason to believe that the buyer's performance has become uncertain, it is an undue hardship to force him to continue his own performance. Similarly, a buyer who believes that the seller's deliveries have become uncertain cannot safely wait for the due date of performance when he has been buying to assure himself of materials for his current manufacturing or to replenish his stock of merchandise."

If explicit anticipatory repudiation, or if "assurance" not forthcoming

Requesting party may: await performance, resort to remedy for breach, suspend own performance

May be retracted if no cancellation or change in reliance

S's Remedies for B's breach: (See Concept Summary, p. 304 and UCC Sec. 2701 ff.)

Key Questions affecting remedies

Who has the goods? S, Carrier, B? Is B insolvent?

UCC 1-201 (23) "A person is "insolvent" who either has ceased to pay his or her debts in the ordinary course of business, cannot pay his or her debts as they become due, or is insolvent within the meaning of the federal bankruptcy law."

1) S holds goods when B breaches. S can:

Withhold delivery
Require COD if B insolvent
Sell to someone else in good faith and commercially reasonable manner, crediting B with proceeds, less disposition costs
Sue for damages (contract price less market price)
Cancel

2) Carrier holds goods. S can:

• Stop delivery of a carload lot if B fails to pay, or repudiates contract
• Stop delivery of less-then-carload if B is insolvent

3) B has goods, S can:

Reclaim within 10 days of receipt if B is insolvent, or bounces check

Reclaim beyond 10 days if an insolvent B lied in writing to S about solvency w/in last 90 days

Sue for unpaid contract price

B's remedies for S's breach (see Concept Summary, p. 307)

Key issues: do the goods conform? Does B want them?

1) S delivers nothing, or unwanted nonconforming goods

Reject nonconforming goods
Revoke acceptance of nonconforming goods
Cover (buy elsewhere)
Sue for damages
Cancel contract

2) B accepts nonconforming goods

Sue for damages
Deduct damages from unpaid purchase price

3) S delivers nothing, B wants the goods

Sue for specific performance (if available)

Replevy if goods identified and B can't "cover"

Recover goods from insolvent seller

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