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1) Contract made [§2-204] a) Offer and acceptance [§2-206] b) Establish K terms [2-207] c) statutes of fraud [§2-201] d) Statute of Fraud exceptions 2) Rejection [§2-601] 3) Acceptance Made [§2-606] 4) Revocation [§2-608] 5) Buyer’s Remedies after Rejection/Revocation [§2-711] a) Right to cover [§2-712] b) Contract-Market Damages [§2-713] c) Lost Profits [§2-715(2)] 6) Seller’s Remedies after Buyer Breaches K [§2-703] a) action for price [2-709] b) resale damages [2-706] c) market damages [2-708(1) and (2)] d) Lost profits [2-708(2)] e) Concept of Mitigation [1-305, Case Law, Hill] 7) Revocation passed (time limit) [§2-608(2)] 8) WARRANTY Remedies [see §2-314 comment15]: a) the warranty was made (chapter 8) i) Express [§2-313] ii) Implied (Merchantability) [§2-314(1);(2)] iii) Implied (Usage of trade) [§2-314(3)] iv) Implied (Fitness for part. purpose) [§2-315] v) Good Faith Obligation (tell knowledge of defects) [§1-304] vi) Express “Obligations” to remote purchasers [§2-313A; §2-313B] vii) Remedial Promise [§2-103(1)(p); §2-313] viii) Title Warranty (1) Title Warranty exists [§2-312(1)] (2) No Title Disclaimer [§2-312(2)] (3) Category of Title [§2-403] (a) Good title (b) Void Title (c) Voidable Title (d) Entrustment b) the warranty was breached c) The breach of warranty caused the harm complained of (Causation) [§2-314 comment 15] d) the extent of your damages (Damages) i) Seller remedies e) that you have an ability to fend off affirmative defenses, including: i) disclaimers (“as is” etc.; Magnuson-Moss) ii) statutes of limitations [§2-201] iii) lack of notice (hill says pay attention to) [§2-607(3)(a)] iv) lack of Privity (1) Horizontal [§1-103; mostly dispelled with in common law] (2) Vertical [§2-318] v) Seller’s right to cure [§2-508(2)] vi) Excuse / Impracticability (a) Casualty to identified goods [§2-613] (b) Default Excuse Rule [§2-615] vii) Unconscionability [§2-302] viii) assumption of the risk (that the defendant never took on the risk)

1 Commercial Law CISG

1) Closing/Rejection under CISG [Assignment 19] 2) CISG Seller Remedies [Assignment 23] a) Seller that “avoids” contract: b) Seller suing for price, not avoiding K 3) CISG Buyer's remedies [Assignment 26] a) Buyer Remedies when not avoiding b) Avoiding buyer may sue the seller for 4) CISG Finance Leases, International Leases [Assignment 11]

Hill: We are given a series of interrelated steps 2-301: obligation is seller to accept and deliver and buyer accept and pay 2-503: how you tender delivery 2-308: tells you where the default place of delivery is: the seller's place of business 2-310: Open time for Payment or running of credit. 2-511: Tender of payment 2-513: Buyer has a right to inspection 2-606: acceptance 2-607 tells us the consequences of acceptance 2-608: important: revoke acceptance.

2 Commercial Law PAYMENT SYSTEMS 1. Definitions [4-104] a. Overdraft[§4-401(a)] b. Overdraft not customer’s fault[§4-401(b)] c. Post Dating[§3-113] d. Stopping Payment[§4-403(a)] i. Stop payment lasts 6 months [§4-403(b)] ii. Improper payment remedy applies to Consequential Damages [§4-402(b)] e. Stale Checks [§4-404]: applies to greater than 6 mos. old f. Subrogation of rights [4-407] g. Ordinary Care[§4-103] 2. Payor Bank's Obligation to Payee a. payee has no rights against the payor bank: 3. Special checks a. Certified check [§3-409(d)]: a "pre-accepted" check b. "Cashier's" or "teller's" check: [§3-104(g),(h) 4. Process of Collection ( Payee obtains payment) a. Cash the check [§4-301(a)] i. Cash payment is final. [§§4-215(a)(2), 4-215 comment 4 (paragraph 5)] ii. Obtain direct payment b. depositor credit ("provisional settlement") i. "midnight deadline" to decide whether to honor check [§4-301(a),(b)] ii. (midnight of the next banking day, [§4-104(a)(10)]) 1. payor bank honors check, 2. payor bank decides not to honor payee/customer. 3. Payor bank does nothing, it loses the right to dishonor [§4-214(c), §4-301(b)] 5. transfer and presentment warranties. a. Transfer of an instrument [§3-203(a)] b. "person entitled to enforce" an instrument [§3-301] c. “Holder” definition[1-201(b)(21)] d. Allocating Losses§3-415 6. Indorsement: Simple way to transfer rights a. Indorsement Methods i. blank" indorsement: [§3-204] ii. "Special" indorsement[§3-205(a)] iii. "restrictive indorsements"[ §3-206] iv. Stale Indorsements [3-415(e)] – 30 days b. Indorser-Liability Rule[§3-415] i. Indorser liability [§3-415] ii. Drawer liability [§3-414] 7. Risk of Loss in Checking system a. SEE pp 24-25 in STUDENT OUTLINE b. No Delivery of check = no conversion claim [§3-420(a)(ii)] c. Employee Theft [§3-405(b)] d. Imposter/Lack of intent to issue payee [§3-404(b)(1)] i. Bank must exercise ord. care to avoid obligation [§3-404(d); see §4-103] e. Uncertified chk dishonored, if obligor owes obligation, obligee can enforce [§3-310(b) i. If 3rd party check, then when instrument discharged, so is obligation. 8. Letters Of Credit a. International Use b. Advising and Confirming Banks[§5-107(b),(c); UCP 7(a)]. c. Choice of Law UCP [§5-116(c)] d. Consideration[§5-105]. e. Issuing LOC[§5-106(a)] f. Reimbursement g. Drawing on the Credit. i. Reimbursement: 9. Negotiable Instruments 3 Commercial Law a. Defining if Neg. Instrument [3-104]: b. Two broad categories of neg inst. 3-104(e) c. Negotiable instrument must [Hill says work through 3-104(a) d. Effect of Instrument on underlying obligations i. SEE p 42 STUDENT OUTLINE ii. Near cash instruments [§3-310(a, c)] iii. Ordinary instruments [§3-310(b)] iv. Accord and Satisfaction [§3-311] 10. Transfer and Enforcement of Negotiable Instruments [Assignment 22] a. Thief on indorsed check b. types of indorsements 3-205 and 3-206. i. Special indorsement (it is to a person), ii. blank indorsement (anything other than person), and iii. anomalous iv. restrictive indorsement 11. Assignment 23: Holders in Due Course a. Requirements for Holder in Due Course Status. b. Rights of Holders in Due Course[§3-305(b)]. i. Real Defenses (four) [§3-305(a)(1)] c. Payment and Discharge d. Transferees Without Holder-in-Due Course Status

4 Commercial Law Contract Made

FORMATION OF THE SALES CONTRACT (UCC 2-201 to 2-210)  2-201 to 2-210 – rules for formation of a sales contract. They are exceptional rules. Overall, simple contract rules of formation apply to sales law.  Generally, price, time and place of payment or delivery, general quality of goods, or any particular warranties not needed to form a contract. See Comments to 2- 201. Question is whether there was intent to create a contract.  Contract formation and related issues: i. Whether a contract was formed. ii. What are the terms of the contract. iii. Whether the contract is enforceable. Do you need some writing to make the contract enforceable? This is different question than whether a contract was formed.  Hypo. Suppose A and B at party around pool and drinking and close to drunk. Seller, A, brags that his company manufactures a brand new modern efficient vacuum cleaner without a filter bag and it is hottest item around. B, a supplier of home appliances, listens to this puffery and says “I want a 100 of these.” Next day, A, who was probably more sober sends an email “confirming your order of 100 vacuum cleaners price $400 per vacuum cleaner.” Was an enforceable contract created? Raises issues of S/F and indefiniteness.

A. OFFER AND ACCEPT ANCE. Determining whether a contract was formed is the first analytical piece. [§2-206]  Principal code provisions for K formation - 2-204 (Formation in General) and 2-206 (Offer and Acceptance in Formation of Contract).  Contract Formation in General. "A contract for sale of goods may be made in any manner sufficient to show agreement, including offer and acceptance, conduct by both parties that recognizes existence of the contract, ..." 2-204(1). "Even though one or more terms are left open a contract for sale does not fail for indefiniteness, if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy." 2-204(3).  Offer and Acceptance in Formation of Contract. "Unless otherwise unambiguously indicated by the language or circumstances, (a) an offer to make a K shall be construed as inviting acceptance in any manner and by any medium reasonable; (b) an offer or other offer to buy goods for prompt shipment is construed as inviting acceptance wither by prompt promise to ship or by prompt or current shipment of conforming or nonconforming goods, but shipment of nonconforming goods is not acceptance if seller seasonably notifies buyer that it is offered only as accommodation to buyer." 2- 206(1).  Acceptance not required to be mirror image of offer to form a contract - discrepancies between offer and acceptance permitted. "A definite and seasonable expression of acceptance in a record operates as acceptance even if it contains terms additional to or different from the offer." 2-206(3).  Record needed for Quantity of goods and price greater than $5000 2-201(1) says "A contract for sale of goods for price of $5,000 or more is not enforceable unless some record sufficient to indicate a K was made and signed by party against which enforcement is sought. A record is not insufficient because it omits or incorrectly states a term agreed upon but a K is not enforceable under this subsection beyond the quantity of goods shown in the record

B. WHAT ARE THE TERMS OF THE CONTRACT? The second analytical question. Presuming a contract is formed, revised 2-207 talks of the contract terms.

5 Commercial Law C. IS THE CONTRACT ENFORCEABLE - THE STATUTE OF FRAUD. The third analytical question. 2-201(1), the SIF provision that applies to the sale of goods, says a contract for sale of goods for more than $5K is not enforceable without a writing. Exceptions

 Between merchants, if within a reasonable time a record confirming the contract is sent, and the party receiving it has reason to know its contents, it satisfies the SIF unless the recipient sends notice of objection within 10 days. 2-201(2).  2-201(3) says a contract that does not satisfy 2-201(1) is still enforceable if: o The goods are specially manufactured for buyer and not suitable for sale to others in ordinary course of seller's business and seller has already made substantial beginning of their manufacture or commitments for their procurement; or o Party against which enforcement is sought admits in a pleading, or in testimony, or otherwise under oath that a K was made, but not beyond the quantity of goods admitted; or o With respect to goods for which payment was made and accepted or which have been received and accepted.  Volume Sellers. See 2-708(2).  "Course of dealing is a sequence of previous conduct between parties to particular transaction which is fairly regarded as establishing a common basis of understanding for interpreting their expressions and other conduct. § 1-205(1).  Two part inquiry as to whether contract exists and is it enforceable. Hill says don't focus on what the terms are, but: (1) whether there is a K at all; then, (2) If you find a K, why is there a K? Is there a K because of conduct of the parties or because of a writing between the parties, or because of an exchange of forms.  2-204(1) - Formation in General. 2-204 is the starting point for contract formation  2-206 - Offer and Acceptance in Formation of Contract. A 2-204 subspecies. Talks about an offer and acceptance  Contracts formed by conduct of the parties. E.g., A ships goods to B, and he pays. We assume there is a K for sale of goods.  Contract formed by “definite and seasonable expression of acceptance.” 2- 206(3) says: “A definite and seasonable expression of acceptance in a record operates as an acceptance even if it contains terms additional to or different from the offer.” i. “Seasonable expression” means timely expression. Defined in 1-205. E.g., A sends offer to B to buy product. B immediately sends the product and 3 days later sends a confirmation with different terms from the offer. It may be that we will not exclude that acceptance even though it came in 3 days later. That is a seasonable acceptance.  Under 2-206, conflicting terms do not prevent formation of a contract.  Sometimes conflicting terms do prevent formation of a contract.

E. DETERMINING IF A CONTRACT IS ENFORCEABLE - STATUTE OF FRAUDS  Difference between K formation and S/F . They are two different things. Once you find a K, then there is a Q as to whether the K is enforceable. It mayor may not depending on whether the SIF is applicable and whether you complied with the S/F  2-201- Formal Requirements; Statute of Frauds. New 2-201 says for the sale of goods for $5K or more, all you need is a record sufficient to say a K has been made and signed by the party against whom enforcement is sought. It must be signed at least by the person against whom you are trying to enforce it.  2-201 requires "a record sufficient to indicate a K ... has been made" and Official Comment suggests leniency.  Per 2-201(2), record in confirmation of oral agreement is not effective against a non- merchant. E.g., in Decatur Cooperative the co-op sent a written confirmation to the farmer to confirm an oral agreement to buy wheat. Farmer successfully argued he was not a merchant 6 Commercial Law  Merchant defined. 2-104 says " A merchant is a person who deals in goods of the kind or otherwise holds itself out by occupation as having knowledge or skill peculiar to the practices or goods involved in the transaction ..." Hill would argue the farmer is a merchant. -Comment 4 to 2-201 supports finding a farmer is a merchant. Comment 4 to 2-201 says, "thus a farmer or professional should be a merchant ..."

Acceptance 1. Accepting Goods [§2-606] a. Created in three ways, when the buyer: [§2-606(1)] i. “signifies to the seller that the goods are conforming” or will take despite, after “reasonable opportunity to inspect goods” [§2-606(1)(a)] ii. “fails to make an effective rejection” after reasonable opportunity to inspect goods; [§2-606(1)(b)] iii. “does any act inconsistent with the seller’s ownership” [§2-606; see §2-608(4)] b. Buyer is always given the “right before payment or acceptance to inspect [goods] at any reasonable place and time and in any reasonable manner.” [§2-513(1)] i. Until inspection, buyer may “reject” goods ii. After inspection time and acceptance, buyer may “revoke” acceptance c. Requires the buyer: [§2-607] “effect of acceptance” i. Pay K rate for any accepted goods [§2-607(1)] ii. Be precluded from rejection of goods iii. Be precluded from revocation of goods if made with knowledge of nonconformity unless there was an assumption of cure.

Rejection: Useful b/c allows buyer (but does not require), to cancel the contract with seller 1. Rejection is effective where[§2-601]: a. There has been no acceptance [§2-607(1)] b. it occurs within a reasonable time after delivery of goods [§2-605(1)] c. goods "fail in any respect to conform to the K" (the "perfect tender" rule) [§2-601], exceptions include: i. Installment K (series of separate deliveries): buyer may reject installment only if “non-conformity substantially impairs the value of that installment and cannot be cured." §2-612(2) ii. Explicit K limits: buyer remedies may be contractually limited, including right to reject, thereby obligating buyer to accept seller's efforts to repair or replace defective parts. iii. Right to Cure by Seller: seller's right to cure often reverses buyer's rejection. iv. Commercial leeway: concepts such as usage of trade, course of dealing, and course of performance may allow some "commercial leeways in performance" precluding rejection of less than perfect tender [official comment 2 to §2-106] d. buyer seasonably notifies the seller [§2-602] e. buyer states specific rejection grounds (or risk losing grounds to justify rejection) [§2-605] 2. Rejection requires: a. Buyer exercise good faith; and b. If Non-merchant buyer: hold goods (little responsibility) [§2-602(2)(b)] i. with reasonable care; and ii. for a time sufficient to enable seller to remove them c. If Merchant Buyers: (slightly higher duty) [§2-603(1)] i. When goods are 1. in buyer's possession; and 2. Seller has no agent at place of rejection, ii. Merchant Buyer must follow 1. any reasonable instructions of the seller to resale, storage, or like

7 Commercial Law 2. If goods are perishable (or will quickly lose value), buyer must sell on seller's behalf Revocation [§2-608] Useful where buyer has accepted or the has lost legal right to reject [§2-607(2)] 1. Revocation is effective if [§2-608]: a. Non-conformity will "substantially impair" the value of goods [§2-608(1)]; and b. buyer seasonably notifies the seller [§2-608(2)]; and c. Buyer must have either [§2-608(1)]: i. reasonably believed problem would be cured and Problem has not been cured; or [(a)] ii. been unaware of problem; and lack of awareness is due to: [(b)] 1. seller's assurances; or [see N.A. Light v. Hopkins Mfg 7th 1994] 2. problem was too hard to discover before acceptance

Buyer’s Remedies after Revocation or Rejection [§2-711]: If Seller in breach, buyer has [§2-711]: 1. Right to get money back 2. Right to cover [(d); §2-712] (Useful where buyer buys replacement goods) a. Eligible where i. Seller "wrongfully fails to deliver or repudiates," or Buyer "rightfully rejects or justifiably revokes acceptance"[§2-712(1)] 1. Repudiation Includes: a. Language reasonably interpreted to mean other party will not or cannot make a performance still due [§2-610(2)], or b. Affirmative conduct that would appear to a reasonable person that future performance by other party impossible. [§2-610(2)] c. If reasonable grounds for insecurity: i. following seller receipt of justified demand and failure to provide within a reasonable time (not exceeding 30 days) adequate assurance of due performance [§2- 609(4)] d. May be retracted [§2-611] ii. Buyer makes "reasonable purchase" (or contract to purchase) [§2-712(1)] 1. for "goods in substitution for those due from seller" a. Were the goods really the same as the contract goods? 2. in good faith a. Did the buyer pay too much to cover goods (would go to good faith and reasonability of purchase)? 3. "without unreasonable delay" a. Did the buyer wait too long to cover? iii. For anticipatory repudiation, explicitly states aggrieved party (buyer) may "for a commercially reasonable time await performance" [§2-610(1)] iv. "The proper test is whether at time and place of cover buyer acted in good faith and in a reasonable manner" [Comment 4 of §2-712] b. Damage Formula is [§2-712(2), §2-715, §1-305] i. RBPP + CC - KP + ID + CD - ES, where [§2-712(2)]: 1. RBPP = Return of any Purchase price paid by buyer 2. CC = Cost of Cover [Comment 4 for §2-712] a. Definition of cover is flexible 3. KP = Contract Price 4. ID = Incidental Damages [§2-715(1)] a. Incident to delay or other breach, expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charge, expenses or commissions in connection with effecting cover or expenses 5. CD = Consequential Damages [§2-715(2)] a. Category I allows damages (due to breach) [§2-715(2)(a)] i. of any kind, including purely economic loss 8 Commercial Law ii. of a particular requirement or need which seller had reason to know at time of contracting 1. selling "wares to one in the business of reselling . . . is one of the requirements of which the seller has reason to know" [Comment 6 of §2-715] 2. follows common law which makes seller liable for all consequential damages he had "reason to know" in advance but modified by mitigation need [§2-715 Comment 2; Hadley v. Baxendale (on forseeability)] iii. that were "caused in fact" (mere "but-for" cause rather than "proximate cause") iv. that could not be prevented "by cover or otherwise (basic mitigation principle) v. includes Lost Profits [Jetpac v. Bostek (D. Mass. 1996)] b. Category II allows damages which are [§2-715(2)(b)] i. personal injury or property damage (economic loss does not qualify here), and ii. proximately caused by seller's breach (mere but-for cause is not enough) iii. and there is no: 1. Hadley v. Baxendale foreseeability limit, nor 2. explicit language to mitigate. 6. ES = Expenses Saved as a result of seller's breach ii. Cover remedy is optional, whereby failure to cover "does not bar the buyer from any other remedy" [§2-712(3)] iii. Lost Profits Limit (minority of courts) [§1-305] 1. Damage Formula losses may not exceed lost profits. a. No court has yet used §1-305 to limit contract-cover damages. i. Possible where initial buyer (B1) has K with own buyer (B2) whereby B1 profit is unaffected by MP (e.g. a "cost plus" valid expenses K). [see KGM Harvesting v. Fresh Network (Cal. Ct. App. 1995)] 1. If seller backs out, B2 must pay additional expenses. 2. B1 may then get K-market damages, and unless he passes on to B2, B1 gets windfall, contrary to §1-305 b. Under K-Market i. Some courts have said this limit does not apply, if windfall occurs it should go to non breaching party [Texpar v. Murphy Oil (7th Cir. 1995)] ii. Some courts have said limit does apply under §1-305 [Allied Canners v. Victor Packing (Cal Ct. App., 1984)] 3. Right to Contract-Market Damages [§2-713] (Useful where buyer rejected, revoked, or never received goods and isn’t covering) a. Eligible where [§2-712(1)] i. Seller "wrongfully fails to deliver or repudiates"; or ii. Buyer "rightfully rejects or justifiably revokes acceptance" b. Damage formula: i. RBPP + MP - KP + ID + CD - ES, where [§2-713]: 1. RBPP = Return of any Purchase price paid by buyer 2. MP = Market Price; a. Measure Time at [see §2-713(1)(a),(b)]:

9 Commercial Law i. For seller non-delivery, buyer rejection or revocation: Time for Tender [§2-713(1)(a)] ii. For seller anticipatory repudiation: Commercially reasonable time after buyer learned of repudiation, but no later than time for tender. [§2-713(1)(b)] iii. Repudiation includes: 1. Language reasonably interpreted to mean other party will not or cannot make a performance still due [§2-610(2)], or 2. Affirmative conduct that would appear to a reasonable person that future performance by other party impossible. [§2-610(2)] 3. If reasonable grounds for insecurity: 4. following seller receipt of justified demand and failure to provide within a reasonable time (not exceeding 30 days) adequate assurance of due performance [§2-609(4)] iv. Repudiation may be retracted [§2-611] b. Measure Place at [§2-713(2)] i. "Place for tender," (most cases) or ii. "Place of arrival" for rejection or revocation occurring after arrival 3. KP = Contract Price 4. CD = Consequential Damages [§2-715(2)] a. Category I allows damages due to breach [§2-715(2)(a)] i. of any kind, including purely economic loss ii. of a particular requirement or need which seller had reason to know at time of contracting 1. selling "wares to one in the business of reselling . . . is one of the requirements of which the seller has reason to know" [Comment 6 of §2-715] 2. follows common law which makes seller liable for all consequential damages he had "reason to know" in advance but modified by mitigation need [§2-715 Comment 2; Hadley v. Baxendale (on forseeability)] iii. that were "caused in fact" (mere "but-for" cause rather than "proximate cause") iv. that could not be prevented "by cover or otherwise (basic mitigation principle) Which include Lost Profits v. Includes lost profits [Jetpac v. Bostek (D. Mass. 1996)] b. Category II allows damages which are [§2-715(2)(b)] i. personal injury or property damage (economic loss does not qualify here), and ii. proximately caused by seller's breach (mere but-for cause is not enough) iii. and there is no: 1. Hadley v. Baxendale foreseeability limit, nor 2. explicit language to mitigate. 5. ID = Incidental Damages [§2-715(1)] ii. Lost Profits Limit (minority of courts) [§1-305, caselaw] 1. Damage Formula losses may not exceed lost profits [§1-305] a. Some courts have said this limit does not apply, if windfall occurs it should go to non breaching party [Texpar v. Murphy Oil (7th Cir. 1995)]

10 Commercial Law b. Some courts have said limit does apply under §1-305. Court said limit applies if: [Allied Canners v. Victor Packing (Cal Ct. App., 1984)] i. seller knew of buyer resale K ii. buyer unable to show it will pay damages to its own buyer iii. seller acted in good faith 4. Right to Specific Performance (certain circumstances) 5. Right to hold goods [§2-711(3)] a. Useful where buyer (applying a self help remedy) [Text 393]: i. Still holds goods it intends to revoke or reject ii. Has paid either all or some of purchase price b. Eligible where buyer i. Has "rightful rejection or justifiable revocation of acceptance" [§2-711(3)] c. Buyer receives (damage formula): i. Security Interest in goods in buyer's control as security for repayment of [§2- 711(3)] 1. Buyer's purchase price ("any payments made on their [goods] price"), and 2. any expenses the buyer incurs in holding or storing the goods (inspection, receipt , transportation, care and custody) ii. Right to resell goods "in like manner as an aggrieved seller" [§2-711(3); see §2- 706(1)]

Seller’s Remedies after Buyer Breaches Contract Two general UCC provisions related to seller's remedies

"Spirit of the remedies" section, sets down two principles [§1-305]:

1. Goal of all remedy provisions is "that the aggrieved party may be put in as good a position as if the other party had fully performed" [§1-305(a)]. a. "Benefit of the bargain" idea from common law b. Provides way to measure conflicting interpretations of each seller's remedies c. Contextual 2. Consequential damages are not allowed unless a specific provision allows [§1-305(a)]. a. Seller's Consequential damages apply where [§2-710]: i. Buyer breach [§2-710(2)]. ii. Loss results from Seller's general or particular reqmnts or needs [§2-710(2)]. iii. Buyer (at time of contracting) had reason to know of req. and needs. [§2-710(2)]. iv. Losses "could not reasonably be prevented by resale or otherwise." [§2-710(2)]. v. Recovery not from a Consumer ("may not recover CD from a consumer") [§2- 710(3)] b. Broad definition of "incidental damages" under §2-710 often supplies way around this provision, whereby CD become indistunguisable from Incidenal damages [see Firwood Mfg Co. v. General Tire (6th Cir. 1996)]

Seller's Remedies in General; section lists [§2-703]: 1. Ways buyer might breach contract include [§2-703(1)]: a. Five acts listed explicitly [§2-703(1)]: i. Wrongfully reject goods ii. Wrongfully revoke acceptance iii. Fail to perform a contractual obligation iv. Fail to make a payment when due, or v. Anticipatorily repudiate the contract 1. Involve buyer failing to timely pay the full price for goods purchased. [§2-703(1)]. 2. Remedies available to seller include [§2-703(2)]: a. Actions seller may take to limit damages [§2-703(2)(a)-(e)] 11 Commercial Law i. Withhold delivery [(a); §2-703A] ii. Stop delivery in “possession of a carrier or other bailee" [(b); §2-705] iii. Identify goods to the contract (anticipatory repudiation) [(c); §2-704] 1. Apex Oil v. Belcher: page 6: has discussion on what identification means, includes §2-103(2);§2-501 iv. Reclaim goods if [(d); §2-507(2); §2-702(2)] 1. “Delivery on Condition” [§2-507(2)] 2. Payment due and demanded on delivery of goods (or documents of title) [§2-507(2)]; a. Refers to a seller receiving a check later dishonored [Comment 3 §2-507] 3. Demand to reclaim is made within reasonable time after: a. seller discovers (or should have discovered) payment was not made 4. “Buyer has received goods on credit while insolvent” [§2-702(2)] a. Buyer received goods on credit b. Buyer was insolvent c. Demand to reclaim made within a reasonable time after: i. Buyer’s receipt of goods v. Require payment directly from buyer if [(e); §2-325(c)] b. Measures of monetary damages. [§2-703] i. Resell and recover damages [(g); §2-706] 1. Seller is eligible whenever [§2-706]: a. Buyer breaches [§2-706(1)], b. Resale made in good faith & commercially reasonable manner [§2-706(1)], i. Hill takes this as a Mitigation hint c. Seller reasonably identifies goods being resold as referring to broken contract [§2-706(2)], d. Seller gives buyer notice of resale [§2-706(3); (4)(b)(c)]; and i. Except in case of perishable goods or subject to quick decline in value. [§2-706(4)(b)] e. Seller resells goods at a public or private resale [§2-706(2)]. 2. The damages formula is: [§2-706(1)] a. KP – RP + ID – ES, where i. KP = contract price ii. RP = resale price iii. ID = incidental damages iv. ES = expenses saved due to buyer’s breach v. CD = consequential damages b. Any resale profit belongs to Seller [§2-706(6)]. 3. When resale takes place over extended period of time, two issues raised are: a. May seller’s resale still be considered commercially reasonable? b. will seller be compensated for time value of money lost to the delay c. Case: Firwood Mfg. Co. v. General Tire (6th Cir 1996) 4. Firwood suggest wisdom of allowing sellers be eligible for consequential damages. a. §2-709(1)(b): “if seller is unable after reasonable effort to resell at a reasonable price or the circumstances reasonably indicate that such effort will be unavailing” b. Had seller in Firwood case sued immediately for price. Despite good faith efforts that mainly benefit breaching buyer, sixth circuit was not willing to give seller time value of its money. c. Policy not is seller is in much better position than buyer to dispose of goods for highest possible price.

12 Commercial Law d. If sellers are encouraged to immediately sue for price rather than wait to resell, it will be the buyer rather than the seller that will ultimately have to dispose of the goods. ii. Recover contract-market damages [(h); §2-708(1)] (without resale) 1. Eligible where buyer [§2-708(1)] a. Non-accepts (wrongfully) [§2-708(1); §2-703(1)] b. Repudiates, [§2-708(1)] 2. Damage formula is [§2-708]: a. KP – MP + (ID + CD) – ES; where i. KP = contract price ii. MP = Market price at time and place for tender 1. Time: earlier of a. K tender time [§2-708(1)(a)]; or b. “commercially reasonable time” after seller learned of a repudiation [§2- 708(1)(b)] 2. Place: function of the delivery term. iii. ID = incidental damages [§2-708(1)(a); §2-710] iv. ES = expenses saved as a consequence of buyers breach [§2-708(1)(a)] v. CD = consequential damages iii. Recover Lost Profits §2-708(2): Complicated formula will be covered in assignment 24. 1. Think of lost-profits seller as one who, had buyer not breached, would have sold those same goods to another buyer and made an additional profit. Thus, the seller will have lost a profit by buyer’s breach, and 2. neither contract-resale nor contract-market damage measures truly puts this seller in the same position had buyer not breached. iv. Sue for the price under §2-709; [(j);§2-709] 1. This remedy is the seller’s right of specific performance: it allows seller to file suit forcing the buyer to pay the agreed upon price. 2. Remedy not always available. Seller is eligible to sue for price in any of the following three circumstances (all of which assume buyer has not paid) where: a. Buyer has accepted goods or b. There are: or i. Conforming goods, whether or not accepted, have been lost or damaged ii. and loss or Damage occurred “within a commercially reasonable time after risk of loss passed to buyer c. Seller has i. identified goods to contract and ii. there is no reasonable prospect of reselling them [§2- 709(1)] d. If none of circumstances exists, seller cannot sue for price i. Case: Weil v. Murray (S.D.N.Y. 2001) 3. Requirements a. If seller sues for price, seller must hold contracted goods for buyer [§2-709(2)]. b. If buyer has to pay, the buyer is entitled to goods. c. If while seller is holding goods, resale becomes possible then seller may resell and must deduct from its action any proceeds of resale. §2-709(2). i. Seller who sues for price is also eligible to recover incidental damages (under §2-709 amended, consequential damages as well). 1. Incidental damages are defined as 13 Commercial Law a. “any commercially reasonable charges, expenses or commissions b. incurred in stopping delivery, transportation, care and custody of goods after buyer’s breach, c. in connection with return or release of the goods or otherwise resulting from the breach.” [§2-710] 2. Consequential damages defined in §2-710 amended in same way as buyer’s consequential damages in §2-715(2)(a): a. any loss resulting from breach that breaching party had “reason to know” at time of contracting and that b. could not be prevented by the aggrieved party. v. Damages in any manner “reasonable under the circumstances.”[(m)] c. Other remedies i. Cancel the contract [(f); 2-703A] ii. Specific performance [(k); §2-716] iii. Liquidated damages [(l); §2-718] iv. Damages in any manner “reasonable under the circumstances.”[(m)] i. Note that 1. First three remedies listed are actually actions seller may take to limit damages [§2-703(a)- (c)] 2. Last four represent measures of damages. [§2- 703] 3. Remedies set out in §2-703 are probably intended to encompass all of seller’s remedies, but are not meant to be mutually exclusive to each other. a. Example: ii. Buyer anticipatorily repudiated contract before seller identified the goods. iii. Seller could theoretically pursue four of the listed remedies: 1. Withhold delivery, 2. Identify them to contract, 3. Resell them to a third party buyer and sue for resale damages, and 4. Cancel the original contract (since the “canceling” party always retains the right to sue for breach, §2-106(4)) iv. Whether pursuit of one remedy should bar another is not always as simple as the example. a. Example: v. If aggrieved seller resells goods intended for original contract prior to original performance date, 1. Can seller later choose to pursue contract- market damages rather than resale damages if former end up being more lucrative than latter? vi. UCC guidance is cryptic [comment 1 to §2-703]: 1. “rejects any doctrine of election of remedy as a fundamental policy" and thus:

14 Commercial Law a. "Remedies are essentially cumulative in nature and include all of the available remedies for breach." b. "Whether the pursuit of one remedy base another depends entirely on the facts of the individual case” Concept of Mitigation [1-305, Case Law, Hill] Nothing in code requires mitigation, but Hill believes: 1. if you have a good faith concept that says you must exercise of in executing a K, that may have mitigation effects 2. Case law is there for mitigation (Hill knows it is in NJ) 3. There is a dictate in the UCC that you behave reasonably, commercially reasonably

Revocation Time limits [§2-608(2)] 1. Revocation must occur within: [§2-608(2)] a. a reasonable time after the buyer actually discovered or should have discovered grounds for revocation; and b. Before any substantial change in goods that were not caused by own defects. 2. As with rejection, revocation is not effective until buyer notifies seller of it.

Post Rejection/Revocation Remedies:

"Deduction of Damages from Price" [2-717] (Useful where buyer only seeks damages to unpaid purchase price) 1. Eligible where buyer [§2-717] a. Notified seller of intention to deduct damages 2. Gives buyer power to (damage formula) [§2-717] b. Deduct: "all or any part of the damages" due to contract breach c. Deduct from: "any part of the price still due under same contract"

Sue under Breach of Warranty ("Breach in Regard to Accepted Goods") [§2-714]: Useful where buyer can no longer reject or revoke [Comment 1 §2-714]. 1. Eligible where buyer a. Accepted; whereby buyer has either [§2-714(1); §2-606(1)] i. Had reasonable time to inspect and [§2-606(1)(a),(b)]: 1. Signified to buyer goods are conforming or that will retain despite nonconformity [§2-606(1)(a)]; or 2. Failed to make effective rejection under §2-602(1) [§2-606(1)(b)]; or ii. Does any act inconsistent with seller's ownership [§2-606(1)(c)] 1. Subject to rules defining buyer use after a rightful rejection or revocation. [§2-606(1)(c); 2-608(4)] b. Given notice "within a reasonable time after the buyer discovers or should have discovered any breach." [§2-714(1), §2-607(3)] i. Failure to give notice bars remedy as far as seller prejudiced by failure c. Fulfilled other requirements of warranty application [my own comment] i. Privity; meet a warranty provision in code (such as warranty of title, warranty of merchantability, particular use) 2. Damage formula is [§2-714]: a. If Repair possible: Cost of repair [Text 393; §2-714(1); §1-305(a)] i. Viewed as an acceptable surrogate to VCG - VNCG value 1. Buyer is permitted to recover for his loss 'in any manner which is reasonable'" [Comment 2 of §2-714] 2. Buyer may "recover as damages for any nonconformity. . . the loss resulting . . . from the seller's breach as determined in any reasonable manner" [§2-714(1)] 3. "recover damages in any manner that is reasonable under circumstances" [§2-711(j)] 15 Commercial Law ii. Practical way to provide buyer with expectation [see 1-305(a)] 1. If practical, most cases apply even when repair cost exceeds (VCG - VNCG) b. If Repair impossible: VCG - VNCG + ID + CD; i. VCG = Value of Conforming goods at time and place of acceptance 1. Hill: calculate value as if the "goods arrived as warranted," not Contract Price (KP). KP is evidence of the "Value as Warranted," but not the value itself. ii. VNCG = Value of Non-Conforming Goods that buyer in fact received (Accepted goods) at time and place of acceptance iii. ID = Incidental Damages iv. CD = Consequential Damages. [§2-715(2)] 1. Category I allows damages due to breach [§2-715(2)(a)] a. of any kind, including purely economic loss b. of a particular requirement or need which seller had reason to know at time of contracting i. follows common law which makes seller liable for all consequential damages he had "reason to know" in advance but modified by mitigation need [§2-715 Comment 2; Hadley v. Baxendale (on forseeability)] c. that were "caused in fact" (mere "but-for" cause rather than "proximate cause") d. that could not be prevented "by cover or otherwise (basic mitigation principle) 2. Category II allows damages which are [§2-715(2)(b)] a. personal injury or property damage (economic loss does not qualify here), and b. proximately caused by seller's breach (mere but-for cause is not enough) c. and there is no: i. Hadley v. Baxendale foreseeability limit, nor ii. explicit language to mitigate.

Warranties Available 1. Express Warranty by Affirmation, Promise, Description, Samplem[§2-313] a. Express warranty created if i. Transaction between Seller to Immediate buyer 1. “Immediate buyer” means a “buyer that enters into a contract with the seller” [§2-313(1)] a. “contract” means the total legal obligation that results from the parties’ agreement, determined by UCC and “any other applicable laws.” [§1-201(12)] b. “buyer” is a person that buys or contracts to buy goods. [§2- 103(1)(a)] ii. Seller makes any 1. “affirmation of fact or promise which:” [§2-313(2)(a)] or a. relates to the goods; and b. becomes part of the basis of bargain 2. “description of the goods which is made part of the basis of bargain” [§2- 313(2)(b)]; Or 3. “sample or model” made part of bargain basis for “whole of goods” b. Requires goods or “whole of goods” conform to the fact, promise, description, or sample i. If not clear what requirement is, then warranty may not apply (like saying a car “runs like a camel on gas”, what did he promise? what is the remedy?) 2. Implied Warranty: Merchantability; [§2-314] a. Implied warranty created if i. Seller is a merchant with respect to goods of that kind [§2-314] 1. “merchant” means a person that [§2-104(1)] 16 Commercial Law a. deals in goods of the kind; or b. “holds itself out by occupation as having knowledge or skill peculiar to the practices or goods” in the transaction; or c. employs “an agent or broker or other intermediary that holds itself out by occupation as having knowledge or skill” ii. Because Merchantability warranty “is so commonly taken for granted” exclusion from the contract is “a matter threatening surprise and therefore requiring special precaution.” b. Requires that goods be Merchantable, that they: [§2-314(1); §2-314(2)] i. pass w/out objection in the trade under K description [§2-314(2)(a)] ii. if fungible goods, are of fair average quality within description [§(b)] 1. “fungible goods” means goods which any unit, by nature or trade usage, “is the equivalent of any other like unit”; or goods treated as equivalent by agreement [§1-201(18)] iii. “are fit for ordinary purposes for which goods of that description are used” [(c)] c. Causation: ascertaining Proximate Cause often a factor [see §2-314 comment 15] 3. Implied Warranty: Usage of trade/ Course of dealing [§2-314(3)] a. “Implied Warranties may arise from course of dealing or usage of trade” 4. Implied Warranty: Fitness for Particular Purpose [§2-315] a. Implied warranty created if [§2-315] i. Seller at time of contracting has reason to know any particular purpose for which the goods are required; and ii. the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods, b. Requires that the goods shall be fit for such purpose 5. Obligation to tell knowledge of any defects; Good Faith [§1-304] a. Hill thinks seller should have an obligation to expose this hidden defect which he is aware. i. Good Faith requirement: “every contract or duty within the UCC imposes an obligation of good faith in its performance and enforcement” [§1-304] ii. Supplement law to UCC includes “misrepresentation” [§1-103(b)] iii. “Seller’s knowledge of any defects not apparent…in keeping with underlying reason of [UCC Section 2] and provisions on good faith, impose an obligation that known material but hidden defects be fully disclosed” [§2-314 comment 4 last sentence] 6. Express “Obligations” to remote purchasers [§2-313A; §2-313B] (page 144 text) a. Created where: i. Expressions are present that “relate to the goods” & include an affirmation of fact, descriptions, or promise concerning product w/in either [§2-313A&B]: And 1. Statements made by the non-immediate seller in any record that accompanies the goods [§2-313A]; or a. “Record’ [§2-103] 2. Communications (e.g. advertising) made by seller to public [§2-313B] ii. Affirmations are not merely the seller’s opinion and a reasonable purchaser should know that (“puffing”) [§2-313A/B (3)]; and iii. Seller did not include limitation to purchaser limiting remedies available (such as state “no later than the time of purchase” [§2-313A/B(4)(a)];and iv. Seller only responsible for breach of obligations when the breach existed at the time the goods left seller’s control [§2-313A/B(5)] b. Requires 7. Remedial Promise [§2-103(1)(p); §2-313] a. Defined as “a promise by the seller to repair or replace goods or to refund all or part of the price upon the happening of a specified event” [§2-103(1)(p)] b. Not a warranty b/c it is not a promise about goods quality, but rather a commitment that the seller act in a certain way in the future c. Key functional distinction between a warranty and a remedial promise is how each is treated under the statute of limitations. i. Since Remedial Promise not a warranty, should not expire before the buyer knows or should have known about the breach. [§2-725] 17 Commercial Law 1. SOL: the later of either four years from when the cause of action accrued or one year after the buyer knows or should have known of the breach. a. Remedial Promise: right of action does not accrue until promise is not performed when due [§2-715(2)(c)] b. Warranty: right of action accrues upon seller’s tender of goods whether or not the warranty breach is evident at that point. 8. Warranty of Title [Assignment 16] a. Warranty of title i. Created Where 1. There is a sale by any seller [§2-312(1)] 2. Broadest implied warranty of Art 2 a. Most warranties attach to sales by merchant sellers ii. Requires that 1. Seller strictly liable a. No matter if seller completely ignorant of title problems or completely innocent 2. Seller warrants title of goods sold: [§2-312(1)] a. has good title, and b. that its transfer is rightful, and c. is delivered free of third-party liens or encumbrances which buyer is unaware. 3. possession does not equate to good title (though usually) e.g. thief b. Disclaiming Warranty of Title [§2-312(2)] i. Requires seller wishing to disclaim to[§2-312(2)]: 1. use very specific language to that effect; Or 2. If Under special circumstances (such as a sheriff's sale), by implication. 3. Though an implied warranty, unable to disclaim as other implied warranties (such as merchantability or fitness for a particular purpose). c. Three categories of titles (help distinguish loss when wrongdoer is judgment-proof or not available [§2-403] i. "Good title" ii. Void Title: "Bona fide purchaser from a thief gets nothing" [§2-403] 1. Created where [common law] a. thief in title chain prevents any later party having good title, though statute doesn’t explicitly state so [Courts; §2-403] i. Common law interpretation equates to: "Bona fide purchaser from a thief gets nothing" ii. all subject to statute of limitations rules, rules of equity, and other applicable principles. 2. Power to Transfer [Common law; §2-403(1)] a. Any party acquiring goods after a thief stole them has "void title,” (no title) i. Innocence or good faith of buyer irrelevant ii. Buyer will not have good title, since thief had no title: “a purchaser of goods acquires all title which his transferor had" [§2-403(1)] iii. Voidable Title: transfers only to "a good faith purchaser for value" 1. Determining Title status: void vs. voidable a. Did transferor intend, at exchange time, to transfer title of goods. i. Yes: transferee will have a least voidable title, if not good title. ii. No: transferee did not intend to transfer title, transferee has void title 2. Created where [§2-403(1)] a. Seller does not itself have good title [else would be good title] b. "Goods have been delivered" [§2-403(1)]; and

18 Commercial Law i. all things exchanged "are moveable at the time of identification to a K for sale” [§2-103(k) “goods”] ii. there is a voluntary transfer of physical possession or control of goods [§2-103(1)(e) “delivery”] 1. title holder tricked true owner to voluntary transfer possession of goods [§2-403(1)]. c. "Delivery is under transaction of purchase" [§2-403(1)] i. the transfer is a "voluntary transaction creating an interest in property [§1-201(29) ‘purchase”]; or d. Explicitly includes the following transfers: [§2-403(a)(1)-(4)] i. Transferor was "deceived as to identity of purchaser” [(1)] or ii. Delivery was "in exchange for a check ... later dishonored" [(2)] or iii. "it was agreed that the transaction was to be a 'cash sale'" [(3)] or iv. "the delivery was procured through criminal fraud" [(4)] or 3. Voidable title transfer can create good title where [§2-403(1)] a. There is a person with voidable title [§2-403(1)] b. There is a good faith purchaser for value: [§2-403(1)] i. The transfer is a "voluntary transaction creating an interest in property [§1-201(29) purchase] ii. The purchase exhibits "honesty in fact and observance of reasonable commercial standards of fair dealing" [§1-201(20); §2-103(1)(j) "Good faith"] iii. The person acquires rights: [§1-204 "value"] 1. in return for a binding commitment to extend credit 2. as security for a preexisting claim 3. by accepting delivery under a preexisting contract for purchase 4. in return for any consideration sufficient to support a simple K c. Otherwise, only voidable title has been passed i. "a purchaser of goods acquires all title which his transferor had" [§2-403(1)] iv. Entrustment (conceptually close to voidable title doctrine) 1. Entrustment created [§2-403(3)] a. in any delivery or acquiescence of possession i. there is a voluntary transfer of physical possession or control of goods [§2-103(1)(e) delivery defined] b. only by true owner c. “regardless of any condition expressed between parties to the delivery or acquiescence.” 2. Entrustee has power to transfer all rights of the entruster if [UCC §2- 403(2)]: a. “any entrusting of possession of goods” [see §2-403(3)] b. Entrustee is a “merchant” c. Entrustee deals in goods of that kind (being entrusted) d. Transferee is a buyer e. Transfer occurs in ordinary course of business [must see §1- 201(9) "buyer in ordinary course of business" defined] i. Person buys goods in good faith 1. The purchase exhibits "honesty in fact and observance of reasonable commercial standards of fair dealing" [§1-201(20); §2- 103(1)(j) "Good faith" defined] 19 Commercial Law 2. Test for good faith is actual belief, not the reasonableness of that belief (Case law) ii. No knowledge that sale violates rights of another person iii. Sale is in ordinary course 1. sale comports with the usual or customary practices a. of “the kind of business in which seller is engaged” or b. of the seller procedures himself (seller’s own usual and customary practices) 2. Cannot be a pawnbroker (explicitly left out) 3. person “may buy for cash, by exchange of other property, or on secured or unsecured credit, and may acquire goods or documents of title under preexisting contract” iv. Sale is from a person in the business of selling goods of that kind 3. Example: you bring computer in for repairs at a computer dealer who both sells and repairs computers. If dealer sells computer to a buyer in ordinary course of business (whether accidentally or purposively), you would have an action against computer dealer, but not against new owner of computer. v. Differences between Voidable Title Rule and Entrustment Rule 1. Merchant Requirement a. Voidable Title rule takes affect when any party - merchant or not - dupes owner into delivering possession. b. Entrustment rule operates only when goods are entrusted to a merchant who deals in goods of that kind. 2. “Good Faith Purchaser for Value” vs. “buyer in ordinary course of business a. Voidable rule requires there be a good-faith purchaser for value b. Entrustment rule requires a buyer in the ordinary course of business (slightly narrower)

Part III: The breach of warranty caused the harm complained of (Causation)

1. Causation [§2-314 comment 15]: a. To recover, the breach of warranty must be “the proximate cause of the loss sustained.” [§2-314 comment 15, see also §1-103(b)] b. The loss cannot have “resulted from some action or event following the seller’s delivery of goods.” [2-314 comment 15] i. No breach if the injury was caused by factors other than the product’s defect. 1. Relevant is whether the seller “exercise[d] care in the manufacture, processing, or selection of goods” [§2-314 comment 15] 2. For fungible goods, warranty only requires goods to be “of fair average quality within description” [§2-314(2)(b)] a. “fungible goods” means goods which any unit, by nature or trade usage, “is the equivalent of any other like unit” [§1- 201(18)] 3. Defect can be alleged as caused by the buyer following purchase, and therefore no breach of warranty by seller at all

20 Commercial Law Part V: that you have an ability to fend off affirmative defenses, including

2. Disclaimers a. In problems, ask self [Hill]: i. What is the warranty we believe seller made? ii. What is he trying to disclaim (all warranties, implied warranties, implied warranty of merchantability, etc.)? iii. Is this a limitation on warranty or an attempt by seller to reduce or limit remedy (e.g. may say only remedy available is repair of a part) b. Seller may Disclaim: [§2-316] i. “all implied warranties are excluded” by: [§2-316(3)] 1. “expressions like ‘as is’, ‘with all faults’ or other language that in common understanding calls buyer’s attention to wrrnty exclusion” and makes plain there is no implied warranty; and 2. In a consumer K w/ record, by setting “forth conspicuously in record.” ii. Implied warranty of Merchantability/Fitness (or any part of it) if: [§2-316(2)] 1. language in a record 2. Conspicuous [see §1-201(b)(10)]: "so written so that a reasonable person ought to notice." , e.g.: capital letters, large type, colors, something to make it stand out. Issue for court 3. seller states for a. Merchantability: “The seller undertakes no responsibility for the qualty of the goods except as otherwise provided in this k” b. Fitness: “The seller assumes no responsibility that the goods will be fit for any particular purpose for which you may be buying these goods, except as otherwise provided in the K” iii. Regardless if buyer read (don’t want to penalize people for reading K) c. Seller may Limit remedies if i. included in agreement are provisions that “limit or alter the measure of damages recoverable.” [§2-719(a)] ii. Limitation is not “unconscionable” [§2-719(3)] 1. limits to injury consequential damages are prima fascia unconscionable iii. Limitation causes the remedy “to fail of its essential purpose.” [§2-719(2)]. 1. Ask: what is the essential purpose of the remedy being limited. In class, a. given a remedy on parts, Hill found “essential purpose” to be the implied remedy of merchantability and not a more specific remedy of replacing exact parts mentioned. b. Given a remedy that excludes in writing all warranties iv. Even if all warranties disclaimed (and no limitation exists to apply 2-719), may invoke “Unconscionable K or Terms” provision (but success unlikely) [§2-302] d. Seller may use Express Warranty to limit other warranties [§2-317(c)] i. “Express warranties displace inconsistent implied warranties other than implied warranty of fitness for a particular purpose” 3. Statute of Limitations 4. Notice [§2-607(3)(a)]:[Hill says don’t overlook] a. Buyer must, following acceptance [§2-607(3)(a)]: i. Notify seller within a reasonable time after the buyer “discovers or should have discovered any breach.” 1. Means buyer must follow customary inspection procedures or risk waiving right to warranty. 2. unreasonable delay in notice if [Hebron v. American Isuzu Motors (4th cir. 1995)]: a. No reason presented for delay; and b. Actual prejudice occurred 3. Hill: where consumer sues sellers higher in the Privity ladder, Hill thinks clear example of need to give notice. Hill says could say notice wan’t required under circumstances. I say consumer should be judged by

21 Commercial Law circumstances and looked at if this was bad faith. See Hebron case. [Hill] b. failure to give timely notice “bars the buyer from a remedy only to the extent that the seller is prejudiced by the failure.” [§2-607(3)(a)] [Hill thinks word “prejudiced” allows court to give justice in any case] 5. Privity: a. Plaintiff must show privity because warranty is contract law based (“supplemental principle of law”), therefore a warrantor is directly liable only to party he contracted with. [§1-103] i. In practice, most manufacturers will treat warranties as if they run directly to ultimate purchaser (as a matter of good business). b. Plaintiff must over come lack of: i. Vertical Privity: the ability of a buyer to sue a seller other than its immediate seller. 1. Common Law: Most states have common law that allows consumers to press claim despite lack of vertical privity. [Spring Motors Case]. 2. “Vouch in” allows a seller 2 being sued to “vouch in” seller 1 to defend the suit against a buyer. [§2-607(5)(a)] a. Applies to an obligation seller 1 should have been responsible. b. Seller 2 (or the buyer being sued for a subsequent sale) may give the first seller written notice of litigation. c. If seller 1 refuses to come in and defend for seller 2, then seller 1 will be bound by any finding of fact in the first litigation when seller2 sues seller 1 ii. Horizontal Privity: the ability of a non-buyer who uses or is affected by a product to sue a seller for breach of warranty. [§2-318] 1. Offers injured buyers unable to recover from immediate seller based on tort theory (negligence or strict products liability) to claim against first seller though lack of Privity is evident. [§2-318] 2. Three different alternatives for adoption. Designed to create exceptions to the usual Privity requirement of any damages on a warranty theory (not necessarily excluding any one type, such as economic loss). [§2- 318(2)] a. Alternative A (majority of states) – removes horizontal Privity barrier. If claimant: i. family member or household guests of buyer, and ii. the non-buyers has suffered personal injury, and iii. Injury is due to seller’s breach of warranty. b. Alternative B (broader class of plaintiffs) –Privity removed for i. “any natural person who may reasonably be expected to use, consume, or be affected by the goods,” and ii. suffered personal injury, and iii. Injury due to seller’s breach of warranty c. Alternative C (broadest, eliminating need for injury) – i. any natural person who may reasonably be expected to use, consume, or be affected by the goods,” 1. means that property damage or economic loss recoverable 6. Excuse/Impractability a. Created where i. neither party could reasonably anticipate occurrence. ii. There are no “Force Majeure” Clauses 1. excuse provisions within agreement or K 2. Such provisions supersede applicable UCC sections, yet often provide no more guidance on excuse issue than the fuzzy UCC standard itself. iii. There has been either an: 1. Unexpected failure of seller supply source: excuse basis for seller only [§2-613] 22 Commercial Law 2. Dramatic price fluctuation: excuse basis for seller or buyer [§2-615] b. “Casualty to Identified Goods” §2-613 (seller only) i. Applies only where the K 1. “requires for its performance goods identified;” and a. K cannot simply identify goods, must require for performance i. e.g. “I’ll buy that painting”; “I’ll sell my tennis racket” ii. fungible goods don’t qualify (use §2-615) 2. goods are damaged or destroyed; and 3. No fault of either party in damage; and 4. damage occurs before risk passed to buyer 5. Buyer Excuse a. UCC does not define what circumstances excuse a party from its performance obligations, speaking strictly in terms of seller’s ability of excuse in §2-613 and §2-616. b. Courts have considered a buyer’s defense of excuse by applying either: i. Analogy to §2-615 “Commercial impracticability” rules for sellers; or ii. Common law of excuse. ii. Remedy: 1. “Total” loss: Contract is avoided completely 2. “Partial” Loss: Buyer may demand inspection and a. either [2-613 (b)]: i. “Treat the contract as avoided,” or ii. “Accept the goods with due allowance from K price for deterioration” c. §2-615: the Default excuse rule [§2-615] i. Applies only if party seeking excuse: 1. Gives Notice [§2-615(c)] a. Seller who wishes to claim excuse is required to notify buyer of any delay or non-delivery 2. Had an inability to Avert Event; considers: a. Foreseeability [§2-615(a)] i. Event causing excuse must be “a contingency the non- occurrence of which was a basic assumption on which the contract was made.” b. Good Faith[§2-615(a)] i. Good-faith compliance with government regulations (by seller) is a permissible basis for excuse ii. Allows party seeking to excuse a: 1. Delay in delivery [§2-615(a)] a. Delay in delivery (or “performance”) or a complete non- delivery is not a breach of seller’s duty under contract (if seller that qualifies for excuse) 2. Price Fluctuation [§2-615 Comment 4] a. “Increased cost alone does not excuse performance unless rise in cost is: i. “due to some unforeseen contingency” and ii. event altering “the essential nature of the performance” 3. Seller Supply Source Failing if (inability of a particular supplier) [Comment 5 §2-615] a. both buyer and seller had reason to believe b. Source of supply was to be seller’s excusive source 4. In practice, commercial buyers not as harsh as comment 5 suggests. [Alamance County BOE v. Murray Chevy N.C. 1996] a. buyer’s willingness to accept supplier-related excuses from the seller significantly diminished when the buyer’s dealing with

23 Commercial Law the seller are not a long term relationship as it is a one shot proposition. iii. Limited Ability to Perform [§2-615(b)] 1. Often, problems with obtaining adequate supply will affect only a portion of seller’s ability to perform, or only some of those buyers. 2. Applies to seller who is a. Claiming excuse under §2-615 b. has more than one buyer, and c. has Limited capacity to perform 3. Requires that seller: a. Must allocate production and delivery among its customers in a “fair and reasonable” manner. Does not give exactly what constitutes fair and reasonable allocation. b. may still (leeway given) i. Include regular customers not under contract ii. Honor own requirements iv. Seller’s allocation in times of shortage 1. Premise of §2-615 is seller should not be free in time of shortage to disregard his long term commitments and favor short term buyers who will pay higher prices. Rarely justify addition of new customers under §2-615 in time of shortage. 2. Ways sellers deviated from pro-rata distribution in time of shortage: a. diverting greater than pro-rata share to their internal uses b. sold to new customers despite not fulfilling all of obligations to customers already under contract c. giving grater than pro-rata share to favored customers v. Willingness to grant a customers request for a price modification 1. Most common reasons: a. request was reasonable in the trade b. long-tome valued customer 2. Hypothetical: long-term supply contract and price fluctuation would put seller out of business if original price enforced. a. Best solution in a harsh long term contract appears to be “splitting the baby”: having a court re-write contract. b. However, American courts rarely believe in adjusting terms of contract (unlike German Law). 3. If judicial contract reformulation is not a viable approach, only other approaches would be either: a. never allow any price increase as basis for commercial excuse: i. Encourages parties to be prudent in making contracts. Parties who act imprudently, making no reasonable attempt to draft protection into the contrac, should not be favorablhy received. b. Allow only very significant price increases to be basis: i. Has serious theoretical problems, such as where do you draw line: 95% increase? 100%?, question of fairness vi. Commercial Impracticability and International Sales 1. UCC and CISG approach to excuse is essentially the same: a. CISG Article 79 excuses party from performance where: i. inability due “to an impediment beyond control” of seller; ii. impediment was unavoidable; and iii. Neither party reasonably expected impediment at contract formation 2. One respect CISG excuse is arguably stingier than UCC §2-615 is case where source of supply fails to deliver to the seller.

24 Commercial Law a. UCC official Comment 5 to §2-615 suggests as long as both parties assumed source to be the exclusive source for seller, seller is excused. b. CISG by contrast says party is only excused by the failure of a 3rd party source when the 3rd part source itself has a valid basis of excuse. 7. Unconscionability [Assignment 15] a. The concept of unconscionability is i. an amorphous feature of the sales system. ii. basis by which a party in an otherwise enforceable sales agreement may avoid that agreement. iii. While impossibility used most successfully by commercial seller, unconscionability used by consumer buyer. b. §2-302: basic Unconscionability section [§2-302] i. Unconscionability is not defined within the statute. Closest definition appears in §2-302 comment 1: 1. Basic test: in light of commercial background and commercial needs of particular case, are clauses so one-sided to be unconscionable under circumstances existing at K making. 2. principle is prevention of oppression and unfair surprise, not disturbance of risk allocation due to superior bargaining power ii. Definition used by courts [Williams v. Walker-Thomas (DC 1965)] 1. A successful unconscionability defense usually will require defendant to show: a. Procedural Unconscionability: "absence of meaningful choice" on the part of one of the parties. b. Substantive Unconscionability: "unreasonably favorable terms" of contract to the party not lacking choice. 2. Some courts require both elements to show unconscionability, some believe either one or the other will suffice. c. Guidelines to Unconscionability in practice (UCC §2-302) i. Though undefined, UCC gives useful information pieces on how unconscionability is to operate in practice: [§2-302] 1. Unconscionability determination is a matter of law, out of the hands of a likely consumer friendly jury. [§2-302(1)] 2. Indicates appropriate time for measuring unconscionability of a K or clause is when contract was made. Fact K a terrible deal in retrospect should not be sufficient [§2-302(1)] 3. Functional consequences (On finding K unconscionable, judge has three options [§2-302(1)]: a. Refuse to enforce contract at all b. Enforce reminder of K w/out unconscionable clause c. Limit application of any unconscionable clause to avoid unconscionable result 4. Requires a hearing afforded to parties giving "a reasonable opportunity to present evidence as to commercial setting, purpose and effect to aid the court in making unconscionable determination." a. Idea is unconscionability very contextual, thus parties have specific opportunity to present context evidence. d. Unconscionability Policy i. claims rarely succeed. Most likely to be successful involving unsophisticated consumer buyer and an aggressive seller with onerous terms. It is not uncommon for "substantive unconscionability" to consist in part credit terms that strike the court as overreaching. ii. personal views of he judge must be contended with. iii. Unconscionability doctrine not taken lightly by courts. If routinely allowed for escaping contract liability, entire sales system would suffer from uncertainty.

25 Commercial Law iv. Excuse doctrines must also minimize the potential for costly opportunism, thereby encouraging parties to bargain more effectively. e. Unconscionability with International Sales i. It is unlikely a court would recognize an unconscionability argument raised in a sales contract covered by CISG because: 1. CISG also does not apply because: a. CISG does not include any provision on unconscionability (even though it contains a commercial impracticability provision) b. CISG specifically excludes sales of goods to consumers. [CISG Art. 2(a)] i. UCC §2-302 is generally applied to consumers, while c. CISG does not concern itself with the "validity of the contract or of any of its provisions" [CISG Art. 4(a)] 8. Assumption of risk General Points 1. Negligent Party Bears Loss: If destruction or damage occurs through fault of either buyer or seller, a. negligent party must bear loss and b. usual risk of loss rules do not come into play. 2. Insurance companies: in practice, a. ROL fights usually involve insurance companies, either: i. Against each other ii. Against the buyer or seller b. Insurance Use i. Common Carriers: if seller uses a common carrier, carrier almost always has insurance to cover losses in transit ii. Buyers and sellers: have back up insurance policies c. Real question in ROL: which party (buyer or seller) will have to deal with hassle of going against carrier’s insurance company 3. Business considerations: Business considerations may cause parties to agree to another result technically inconsistent with legal obligations. a. Example: Contract may state that i. ROL shifts to buyer when goods leave seller’s factory ii. seller will arrange transportation, charging buyer for use of seller’s captured carrier (applies especially to High volume sellers) 4. All ROL rules, just like rules for ROL involving a carrier, are subject to three important qualifications: a. if parties specifically agree when ROL will pass, agreement governs b. if one party cause the loss, negligent party assumes that loss c. if one party is in breach under contract, then special rules of §2-510 will determine when risk passes from seller to buyer. Delivery Terms

Whenever a third party carrier is involved, seller and buyer almost always specify when risk of loss passes. FOB means “free on board” literally means:  Seller must pay all charges necessary for merchandise to arrive, on board, at the designated location, free of charge to buyer.

1. Two basic delivery terms: a. Shipment Contract (FOB Seller’s Place) [§2-509(1)(a)]: i. Risk of loss shifts to buyer: when goods are delivered to carrier ii. Buyer responsible for costs of Freight iii. Seller must [“Shipment by Seller” §2-504]: 1. Put goods in possession of carrier [§2-504(a)]; 2. Make a reasonable contract for transportation;[? Code says “proper”] a. Case: Cook Specialty Co. v. Schrlock (E.D. Pa. 1991) 3. Deliver any document necessary [§2-504(b)]; and a. “to enable buyer to take delivery”; or b. required by agreement or usage of trade 26 Commercial Law 4. Promptly notify buyer of shipment [§2-504(c)] b. Destination Contract (FOB Buyer’s Place) [§2-509(1)(b)]: i. Risk of loss shifts to buyer: when goods are tendered to buyer at stated destination (not before). ii. Seller responsible for cost of freight. iii. Seller must [“Seller’s tender of delivery” §2-503]: [hill says use if carrier] 1. Put and hold goods at the buyer’s disposition [§2-503(1)]; 2. Keep goods available for “period necessary for buyer to take possession” [§2-503(1)(a)]; 3. Give buyer “any notification reasonably necessary” to allow delivery [§2-503(1)] 4. Give buyer any documents needed for buyer to take delivery. [? Not sure where explicit] 2. If no delivery term specified: a. Default Rule [§2-308(a); official comment 5 to §2-503]: i. shipment contract applies if parties fail to specify a delivery term

Meaning of “reasonable contract” What constitutes “reasonable contract” for goods’ transportation is not always clear. Case: Cook Specialty Co. v. Schrlock (E.D. Pa. 1991)

Operation of §2-504: Ambiguous last sentence Ambiguities in §2-504 besides what constitutes a "reasonable” contract: Uncertainty about operation of §2-504 from last sentence of section:

"Failure to notify buyer under paragraph (c) or to make a proper contract under paragraph (a) is a ground for rejection only if material delay or loss ensues"

Last sentence raises question: Are requirements for proper shipment by seller under §2-504: 1. are truly prerequisites for passing risk of loss to the buyer or 2. Instead are merely requirements on which buyer can rely to recover damages directly related to seller's inability to fulfill them.

Different scenarios: 1. Can seller argue buyer has risk of loss since seller delivered to the carrier and promptly notified buyer 2. Can buyer argue that seller still has the risk since seller did not make a reasonable contract of transportation required under §2-504(a). 3. Can seller counter that even if it failed in its obligation, its failure was not the cause of the loss and therefore, under the "no harm, no foul" concept of last sentence, buyer cannot complain therefore.

No clear answer in case law. Oft cited is North Carolina Court, where seller's failure to notify caused the buyer's loss to “ensue.”

ROL under Breached Contract In a case where buyer or seller is in breach of underlying contract, UCC gives way to a special set of ROL rules.

1. §2-510: Effect of breach by either buyer or seller on passage of ROL. a. §2-510(1) provides “where a tender or delivery of goods fails to conform to contract as to give right of rejection, the ROL remains on the seller until cure or acceptance.” i. Example: 1. Seller agrees to ship buyer 24 Z model bikes to FOB Sellers Factory (shipment contract). 2. Seller mistakenly ships 24 X model Bikes 3. If Delivery is destroyed in transit through no fault of either party, seller keeps ROL since goods delivered “so failed to conform to contract as to give a right of rejection” 27 Commercial Law b. §2-510(2): provides when buyer rightfully revokes acceptance, buyer may treat ROL as if it had rested on seller from the beginning, but only to the extent of a deficiency in the buyer’s insurance coverage. i. Example: suppose same bike model above 1. Suppose buyer a. received X model bikes, and b. accepted them without discovery of nonconformity (which was difficult to discover), c. Then revoked acceptance by notifying seller. 2. While waiting for seller to pick up bikes, bikes destroyed through no fault of buyer 3. if buyer a. had insurance that covered destroyed machines, insurer would pay for loss b. did not have insurance, then ROL would be with seller i. Normally a shipment contract would put risk with buyer as soon as seller delivered goods to carrier c. §2-510(3): effect of breach by buyer on ROL. Provides where buyer repudiated conforming goods already identified to contract, ROL will be on buyer for a commercially reasonable time to the extent of any deficiency in sellers’ insurance coverage. i. Example: 1. suppose a. bike seller had identified to contract 12 dozen machines that conformed to contract with buyer b. buyer called seller before machines left sellers warehouse and told seller deal was off c. shortly after call, machines destroyed in fire at seller warehouse 2. Buyer would have ROL if sellers insurance were deficient. True even though seller never delververed the goods to the tird party carrier (which maramlly would be required for seller to pass risk to buyer even in a shipment contract here) ROL in Non-carrier situations 1. Seller is using third party bailee to hold goods for buyer. ROL passes to buyer at the first of three events [§2-509(2)] a. Buyer receives a negotiable document of title covering goods b. Baillee acknowledges the buyer’s right to possession of the goods; or c. Buyer receives a non-negotiable document of title or other written direction to bailee to deliver 2. Default rule of ROL involving neither third party carrier nor a bailee (such as buyer is coming to sellers to pick up goods). If seller is a [§2-509(3)]: a. Merchant: Risk passes to buyer on receipt of goods if seller is a merchant b. Not a merchant: risk passes to the buyer when seller tenders delivery of goods to buyer.

CISG

Closing/Rejection under CISG [Assignment 19]

Difference in "closing" concepts between international sales system and domestic sales system is international system is much more averse to letting buyers use goods-oriented remedies.

CISG: only two situations where buyer may "avoid" K [CISG Art. 49(1)]. 1.) Where seller has committed a "fundamental breach" of contract i. Fundamental breach: is a breach that amounts to a substantial deprivation of aggrieved party's benefit of the bargain. [CISG Art. 25] 1. Must give notice 28 Commercial Law 2. Notice must come in a reasonable period following 3. Time where buyer a. Knew, or b. Should have known defect 2.) Where Seller's delivery is later than the agreed due date plus any additional time that buyer has agreed to give seller [CISG Art. 49(1)(b)] i. Where buyer gives seller additional time, buyer does not affect its right to damages for delay [CISG Art. 47(2)].

CISG Seller Remedies [Assignment 23]

CISG creates a major distinction between seller that avoids a contract and one that does not.

Two features to note on CISG remedy structure 1. CISG combines in single articles: a. Buyer’s “cover” remedy (asgmnt 26) with seller’s resale remedy [Art. 75] b. both buyers and seller’s contract-market damages [Art. 76] 2. CISG Combines in single article buyer’s incidental and consequential damages with seller’s incidental and consequential damages (including “lost profit”) [Art.74]. a. describes damages solely as CD [Art 74] and contains the Hadley v. Baxendale limit on foreseeability of the harm ultimately suffered by the aggrieved party.

Seller that “avoids” contract: 1. May avoid only when buyer commits a “fundamental breach” [Art. 64(1)(a)] a. “Fundamental Breach”[Art. 25]: i. breach that substantially deprives the other party of “what he is entitled to expect under contract” ii. does not include losses that 1. party did not foresee; and 2. reasonable person of the same kind in the same circumstances would not have foreseen 2. Result of Contract Avoidance by either party is it a. Releases both parties of obligations [Art 81(1)], i. Thus seller that chooses to avoid contract may no longer bring “an action for price” since buyer is no longer obligated to pay. b. Reserves right to sue for damages by Avoiding party [Art 81(1)] i. Avoiding seller may sue the buyer for 1. Contract-resale damages [Art 75]; or a. Applies where i. Contract is avoided ii. Seller has resold goods iii. Resale occurs a reasonable time after avoidance. b. May recover i. difference between contract price and price in substitute transaction: KP - RS ii. Any further damages under Art 74, which includes losses [Art 75; Art 74]: 1. “as a consequence of the breach” [Art 74] a. Includes thereby incidental or consequential damages to be calculated under article 75 and 76 2. Not to "exceed the loss which party in breach foresaw or ought to have foreseen" [Art 74]

2. Contract-market damages [Art. 76]. a. Applies where i. Contract is avoided ii. There is current price for goods 29 Commercial Law b. May recover i. Difference between price fixed by contract and current price at time of avoidance: KP – CP time of avoidance; and 1. CPtime of avoidance is [Art 76(2)] a. “price prevailing at the place where delivery of the goods should have been made” or, b. if there is no current price at that place, the price at such other place serves as a reasonable substitute.  Must make due allowance for differences in cost of transporting goods ii. Any further damages under Art 74, which includes losses [Art 76(1); Art 74]: 1. “as a consequence of the breach” [Art 74] a. Includes thereby incidental or consequential damages to be calculated under article 75 and 76 b. Not to "exceed the loss which party in breach foresaw or ought to have foreseen" [Art 74] iii. If seller avoided after taking over the goods, the current price at time of avoidance applies. iv. Must not make a purchase or resale under Art 75

3. Seller may recover losses [Art. 74] a. “as a consequence of the breach” i. Includes thereby incidental or consequential damages to be calculated under article 75 and 76 b. Not to "exceed the loss which party in breach foresaw or ought to have foreseen"

Seller suing for price, not avoiding K 1. Generally: a. “Seller may require the buyer to [Art 62]: i. Pay the price, ii. take delivery or iii. perform his other obligations, b. Requirements do not apply if seller [Art 62] i. has resorted to a remedy which is inconsistent with these requirements 2. Limitations: there are some limits on seller’s right to demand specific performance comes. a. General mitigation rule [Art 77]: i. Party "must take such measures as are reasonable in the circumstances to mitigate loss" ii. If fails to mitigate, may claim reduction in damages in amount that "should have been mitigated." b. Seller must resell for buyer’s benefit where [Art. 88(2)]: i. Seller is still in possession of the goods, ii. Goods subject to 1. Rapid deterioration; or 2. Preservation involves unreasonable expense. c. Specific performance not required unless domestic sales law of forum court would similarly require specific performance [Art 28] i. Most significant limitation, ii. In an American Court, seller’s action for price seemingly limited to UCC §2-709.

30 Commercial Law CISG Buyer's remedies [Assignment 26 ] General Points CISG has four articles which cover buyer's damages. Once again, CISG makes a differentiation between contracts that have been avoided and those that have not. Look at what I did in chapter 23.

Non-avoiding Buyer If "fundamental breach", buyer may ask for specific performance under CISG Art 46(2) subject to again to limitation in Art 28 on forum court.

Buyer Remedies when not avoiding Article 28: Specific Performance Article 74 1. Useful where buyer: a. receives non-conforming goods and does not wish or is ineligible for specific performance, b. does not show seller had a “fundamental breach” needed for specific performance or avoidance 2. Eligible where: a. Seller breaches b. Buyer does not avoid contract (which Releases both parties of contractual obligations) [Art 81(1)] 3. Damage Formula: a. buyer is entitled to "loss suffered... as a consequence of [seller's] breach CISG Art 74 [its goods are measured in much the same way as a similarly aggrieved buyer under the UCC]. i. Presumably difference between value of goods promised and value of goods given with nonconformity, plus ID and CD b. “may not exceed the loss which the party in breach foresaw” (“or ought to have foreseen at time”) at contract conclusion, as possible consequences of the breach of K

Avoiding buyer may sue the seller for 1. Contract-cover damages [Art 75]; or a. Eligible where [Art 75, Art 77] i. Contract is avoided ii. Buyer “has bought goods in replacement” iii. Buyer action occurs “in a reasonable manner and within a reasonable time after avoidance. iv. aggrieved party took reasonable measures “to mitigate the loss, including loss of profit, resulting from breach” [Art77] b. Damages Formula [Art 75]: i. KP (contract price) – RS (price in substitute transaction) + (CD + ID) - ME; 1. (CD + ID) = “Any further damages under Art 74” [Art 75]: a. “as a consequence of the breach” [Art 74] i. Includes thereby incidental or consequential damages to be calculated under article 75 and 76 ii. Not to "exceed the loss which party in breach foresaw or ought to have foreseen" [Art 74] 1. This is unlike UCC, where only economic damages must be foreseeable) 4. 2. ME = reduction in damages in amount loss should have been mitigated. [Art 77] 2. Contract-market damages (for buyer) [Art. 76]. a. Eligible where [Art 76(1), Art 77] i. Contract is avoided [Art 76(1)] ii. “There is a current (market) price for the goods” [Art 76(1)] iii. buyer “has not made a purchase or resale under Art 75” [Art 76(1)] iv. aggrieved party took reasonable measures “to mitigate the loss, including loss of profit, resulting from breach” [Art77] 31 Commercial Law 1. Damages are reduced by amount “loss should have been mitigated” b. Damage Formula” [Art 76(1)] i. KP – MP+ (CD + ID) - ME [Art 76(1), Art 77]; where 1. KP = “price fixed by contract” [Art 76(1)]

2. MP is [Art 76(2)]: a. Measure Time at [Art 76(1)]: i. Time buyer avoided contract; or ii. Time buyer took over the goods if buyer avoided after “taking over the goods.” b. Measure Place at [Art 76(2)] i. Place “where delivery of the goods should have been made” ii. Place serving as reasonable substitute (making allowance for differences in transportation cost) if no current price at agreed delivery place [Art 76(2)]. 3. (CD + ID) = “Any further damages under Art 74” [Art 75]: a. “as a consequence of the breach” [Art 74] i. Includes thereby incidental or consequential damages to be calculated under article 75 and 76 ii. Not to "exceed the loss which party in breach foresaw or ought to have foreseen" [Art 74] 1. This is unlike UCC, where only economic damages must be foreseeable) 4. ME = reduction in damages in amount loss should have been mitigated. [Art 77] ii. Seller may recover losses [Art. 74] a. “as a consequence of the breach” i. Includes thereby incidental or consequential damages to be calculated under article 75 and 76 b. Not to "exceed the loss which party in breach foresaw or ought to have foreseen" at time of contracting

CISG Finance Leases, International Leases [Assignment 11]

Two main points we must remember in analyzing leases in this course 1. Whether something is a lease to begin with (or rather a security/sale) 2. Whether it is a normal lease or a finance lease.

Finance lease; a lease transaction that [UCC §2A-103(1)(L)]: 1. Involves three parties a. Supplier: supplies the goods that will be leased to the lessee b. Lessor: the financier (bank). Lessor has nothing to do with selection, manufacturer, or supply of the leased goods, which the lessor purchases from the supplier solely in connection with the particular finance lease c. Lessee: the party that identifies the goods to be leased, and will have an opportunity to review the purchase contract between the supplier and the lessor 2. Creates an agreement that: a. “Must first qualify as a lease” [§2A-103 Comment (g)] i. Lease is "a transfer of the right to possession and use of goods for a period in return for consideration." [§2A-103(1)(p)] ii. Cannot be a sale or security interest. [§2A-103(1)(b); see §1-203], 1. Security interest is created (and not a lease) [§1-203]: a. Hill: courts look at the economic realities of the situation, “the facts of each case” [§1-203(a)] b. if the consideration lessee pays lessor is: [§1-203(b)] i. an obligation for the term of the lease; and ii. “not subject to termination by the lessee”; and 32 Commercial Law iii. Either 1. original lease term is ≥ the goods’ remaining economic life [§(1)]; or 2. lessee is bound to [§(2)]: or a. renew the lease for goods’ remaining economic life; or b. become the owner of the goods 3. for no or nominal additional consideration, lessee has option to: a. renew lease for goods’ remaining economic life [§(3)]; or b. become owner of goods [§(4)] iv. Where 1. Additional considertion nominal if “less than the lessee’s reasonably predictable cost of performing under lease agreement if option unperformed”[§(d)] c. Not merely because [see §1-203(c)] … lists (1)-(6) acceptable transaction details. b. Must meet finance lease requirements [§2A-103(1)(L)]: i. "The lessor (bank) does not select, manufacture, or supply the goods." [§2A- 103(1)(L)(i)) ii. "the lessor acquires the goods or the right to possession and use of the goods in connection with the lease" [§2A-103(1)(l)(ii)] iii. Finance lessee should see a copy of sales or lease contract between the supplier and the finance lessor before signing its own lease contract with finance lessor]; explicitly must show [§2A-103(1)(l)(iii)] : 1. Lessee receives a copy of the agreement by which the lessor acquired (or wishes to acquire) the goods [§(A)]; or 2. Lessee's approval of the agreement, under which lessor acquired goods from supplier, is a condition to the lease becoming in effect [§(B)]; or 3. Lessee receives an accurate and complete statement designating the promises and warranties and disclaimers that the lessor received from the supplier before signing lease [§(C)] 3. Requires, if Finance lease exists, a. “Hell or High-water” clause: Lessee’s promises become irrevocable once lessee accepts goods from Lessor [§2A-407]. i. bank is just an intermediary, lessee's obligation to pay the lessor continues even if “lessor’s performance after acceptance is not in accordance with the lease contract” (equipment does not work) [§2A-407 Comment 2] ii. up to lessee to sue manufacturer b. Implied lease warranties do not apply, (fitness and merchantability) (“Except in a finance lease” wording). [§2A-212(1); §2A-213(1)] c. Express Warranties remain (no wording of “except …”) [2A-210] i. Argue that a warranty was express from financier (lessor) d. Any warranty rights finance lessor receives from supplier go directly to finance lessee (regardless of implied or express warranty). [§2A-209(1); see sales warranties] 1. Contrast Finance lease privity (warranty runs to the lessee) to Normal sales privity (warranty runs only to the buyer)

PAYMENT SYSTEMS 33 Commercial Law If you look at 3-102, says Regulations by Board of Governors of Federal Reserve System Then if you go deeply in to regulation CC, any federal code that goes contrary to CC, CC governs.

Overdraft A bank can honor a check and charge customer even if it creates an over draft [§4-401(a)]

Overdraft not customer’s fault Customer is not liable for the amount of an overdraft if the customer neither signed the item nor benefited from the proceeds of the item. [§4-401(b)]

Post Dating "The date stated determines the time of payment the instrument is payable at a fixed period after date. Except as provided by 4-401(c)" [§3-113]

“Bank can charge customer even though payment was made before date on check.” Unless gave effective notice to the bank “of the postdating describing the check with reasonable certainty. [4- 401(c)] What it is saying if you give notice, you have to give it time to process the order, but 6months later, the bank is free to pay the postdated check. Is the notice if given, have to give it time, but it will only last 6 months b/c it incorporates the stop payment timeframe.

Stopping Payment Code says you can stop payment on a check [§4-403(a)]

Once customer gives a stop payment order, that bank cannot honor check. [§4-401(a)]

If bank goes ahead and honors check, did customer lose anything (damages)? Look at code that says need to prove harm burden "is on the customer". [§4-401(a)]

Subrogation of rights [4-407] If a party has paid someone else's obligation, the party that has paid the obligation can jump into the shoes of that other person.

If bank puts money back in account and the buyer has now breached, the argument should be the buyer, not the bank, should bare the economic loss. Buyer breaching should not benefit just b/c he put a stop payment order on his check.

If seller was in breach of warranty, now Bank can act as buyer if payment stopped and sue Seller.

Ordinary Care Banks must exercise “ordinary care”, not “good faith.” [§4-103]

Discharge of Obligation to check Obligation on uncertified check continues until dishonor of the check or until it is paid or certified. [§3- 310(b)(1)]

Discharge of note held by third person [§4-410(3)] Discharge by obligor on the instrument also discharges the obligation

Assignment 3: Collection of Checks

34 Commercial Law Pyaee accepting check (a noncash payment) has task of converting the payment into cash raises two separate questions: 1. whether payee has a legal right to force the payor bank to pay the check 2. How does the payee obtain payment

Payor Bank's Obligation to Payee Though UCC describes a Payee (or any bank that acquires check from the payee) as a "person entitled to enforce" an instrument [UCC §3-301], code does not say anything about the payee's rights to collect from payor bank.

In actuality, payee has no rights against the payor bank:

1. Drawer cannot complain if a payor bank dishonors a check b/c account has insufficient funds. [§4- 402(a)] 2. Payee cannot force bank to pay even if account does have sufficient funds. [§3-408] a. check "does not of itself operate as an assignment of funds" and "drawee is not liable on the instruments until the drawee accepts it." [§3-408]

Although the payor bank liable to drawer for wrongful dishonor, payee ordinarily can do nothing to force payor bank to pay check. Following case illustrates the principle in question.

If payee concerned possibility payor bank will decline to pay, it can protect itself in several ways, such as refuse to accept ordinary check. Drawback is such checks are inconvenient. Special checks (offering assurance payor bank will pay presented check): - Certified check [§3-409(d)]: a "pre-accepted" check - "Cashier's" or "teller's" check: a check drawn on a bank itself (type depends on whether drawer and drawee banks were the same or different institutions). [§3-104(g),(h)

Process of Collection

Even though payor bank not legally obligated to pay the check, reality is payor banks pay more than 99% of check presented. Nevertheless, b/c payee starts out not knowing whether particular check will be paid, collection process must complete two distinct functions: 1. Payee has to find out whether payment is coming 2. Payee has to obtain payment

Payee can obtain payment payor bank in two ways: 1. Cash the check, where payee presents check "for immediate payment over the counter." [§4-301(a)] a. Cash payment is final. [§§4-215(a)(2), 4-215 comment 4 (paragraph 5)] b. Example: Archie cashed Cliff's check "over the counter" at Rocky Bank, rocky Bank could not recover from Archie even if Cliff's account did not have enough money to cover check. c. Problem not particularly significant, b/c payor bank normally would refuse to case check if drawer's account did not contain funds sufficient. 2. Obtain direct payment when payee has an account at the same bank as drawer. a. Payee gets the check to the payor bank when payee deposits the check in its own account. From perspective of payor/depositary bank, produces an "on-us" item: an item drawn "on us". b. Ordinarily payor bank gives the depositor credit ("provisional settlement") for the item on the day it receives the item. i. As long as payor bank provides provisional settlement on the day it receives item, payor bank has until its "midnight deadline" (midnight of the next banking day, [§4-104(a)(10)]) to decide whther to honor check [§4-301(a),(b)] 1. If payor bank honors check, it credits (increases) the payee's account by amount of check and deducts corresponding sum from drawer's account. a. Example: Archie deposits Cliff's $1K check in Cliff's account and adds same amount to Archie's account. B\c offsetting entries, transaction has no net effect on Rocky Bank. 35 Commercial Law 2. Alternatively, if payor bank decides not to honor the check, sends a notice of dishonor to payee/customer. 3. Payor bank does nothing, if it fails to send a notice of dishonor by midnight deadline, it loses the right to dishonor the check [§4-214(c), §4- 301(b)]

Assignment 4

Class Discussion: Went over transfer and presentment warranties.

Hill distinguished "presentment" between payor bank and depository bank from transfers between other parties in chain (illustrated in book).

Problem Set 4 4.1 Dorothea (Drawer) wrote $300 check to Dr. Lydgate (payee) Bulstrode Bank honored the check, now in Nicholas's possession. Check bears what appears to be a blank indorsement by Lydgate, followed indorsements by Casaubon and Wessex Bank. Lydgate claims he never received check.

Transfer of an instrument [§3-203(a)] An instrument is transferred when it is delivered by a person other than its issuer for purposes of giving to the person receiving delivery the right to enforce the instrument. [§3-203(a)]

"person entitled to enforce" an instrument [§3-301] (i) the holder of the instrument, (ii) a nonholder in possession of the instrument who has the rights of a holder, or (iii) a person not in possession of the instrument who is entitled to enforce the instrument pursuant to 3-309 or 3-418(d).

A person may be a person entitled to enforce the instrument even though the person is not the owner of the instrument or is in wrongful possession of the instrument. [§3-301]

“ Holder” definition[1-201(21)] "holder" means a person in possession of a negotiable instrument that is payable to bearer or identified person. [1-201(21)]

Allocating Losses§3-415 §3-415 is principal statutory mechanism for allocating losses.

Class Answer:

Dorthy (drawer) - - [$300] - - - > Lydgate (payee) ------Bad Will forged Lydgates signature --- Casrubon ---- Wessex Bank (depository bank) ----[Presents]- Bulstrode (Paid Check)

First ask a couple of questions. Each of the parties indorsed the check. Is there any liability by Bulstrode against Casrubon or Wessex Bank?

The bad signature is the indorsement, not the drawer signature. Hill, Bulstrode has two choice: 1. find some liability under a present warranty, or 2. find liability on the indorsement 36 Commercial Law Either 3-415 or 3-417(which is the same as 4-208)

Hill: Look at 3-301, a person entitled to enforce an instrument is "the holder of the instrument" Then take a look at revised, says a

Now, if Dr. Lydgate was the person to indorse this check ( and it was not forged) Will would have had an indorsed check. And 3-403, says an unauthorized signature is ineffective exce Therefore, if you go back to 4-208 Bulstrodes remedy is to enforce the presentment warranty.

In perfect world, Bad Will should be liable, but he is not always available or insolvent.

Student brought up 4-208(a)(3). Hill says that code applies to forged signature of drawer. This is a forged indorsement and not a forged indorsement signature.

The warranty that is breached is that the warrantor

4.2 Hill: basically what could Wessex have done Bulstrode dishonored the check. First, there has been a dishonor, so Bulstrode did not pay (off the hook). It is Wessex that paid out. Class Answer: Wessex doesn't have to have right to enforce, can use transfer warranty.

4.3 Class Answer: Hill drew picture like in book figure 4.1, but with names of parties in there. See problem or two above Dorthy (drawer who was forged) - - [Forger Indorses] - - - > Lydgate (cashes) ------Chettam (claims w/o recourse, w/o warrnty) --- Bulstrode -- ----[dishonor] ---Wessex Bank

B/c Chettam enforced check without Transfer Warranties cannot be Disclaimed (Attempt by Chettam to disclaim the warranty fails §§ 3-416 and 4-207 Bulstrode can pursue Chettam, Lydate, and the Forger. Bulstrode can in theory bring suit against the Forger as the drawer of the check.

4.4 Wessex cannot try and enforce a transfer warranty, b/c it is the payee bank and is not a transferee (there was a presentment). Wessex can only enforce on a breach of presentment warranty, but question becomes which present warranty did Bulstrode breach? Point Hill is making is that, unlike a forged indorsement, which makes everything thereafter unenforceable, that is not true with a forged drawer's signature. See page 72 and 73, idea of Price v. Neal. The basic liability for a forged drawer signature is laid squarely on the soldiers of the drawee bank.

4.5 Hill: is there a possibility of going after depositor bank under a presentment warranty due to a deviation in check. But under 4-208(c), there may be a defense to that which we will get to in chapter five. Basically, if the payor bank could go after its own customer for the deviation...

4.6 Involves a 3-407 situation, where there has been an alteration making a 1000 check into a 10,000 check. Can clearly get the 1000 out of Carol, and bank can go after other bank on the presentment warranty.

i. 37 Commercial Law Indorsement: Simple way to transfer rights

Basic role of indorsement is to provide a simple method for transferring checks.

Check starts out being payable to the payee to whom the drawer issues it. If payee wants to transfer, simplest way to proceed is to indorse the check to party acquiring it.

Payee could sell check without indorsing, but under negotiability principles, the transferee acquires greater rights in the check if he acquires by indorsement.

Indorsement Methods

 "blank" indorsement: o Indorsement need be nothing more than a signature by the person selling the check [§3- 204]. o Has legal effect of making the check "bearer paper" . so any party subsequently in possession of the check (even a thief) would be entitled to enforce it. [§3-205(b)]  "Special" indorsement o indorser makes paper payable to a particular person, adding a statement identifying the person (Pay to Otto's Check Cashing Outlet") [§3-205(a)] o Makes check an "order paper" . Can be enforced only by the identified party. [§3-205(a)]  "restrictive indorsements" o restrict right of later parties to transfer check except in accordance with indorsement. [ §3- 206]. Might wish to indorse check . "for deposit only" . "for collection"

Indorser-Liability Rule

Indorser liability a. Applies if instrument is dishonored [§3-415(a)] a. Means a payor bank will have no action (can only receive check if it honors it) b. Requires indorser to: a. Pay amount due on the instrument [§3-415]: i. According to terms of the instrument at the time it was indorsed [§3-415(a)(i)], or ii. According to its terms when completed (if indorser indorsed an incomplete instrument) [§3-415(a)(ii), see §§3-115 and §3-407]

Drawer liability [§3-414] a. Applies if draft a. is not a cahier's check or other draft drawn on the drawer [§3-414(a)] b. is a dishonored unaccepted draft [§3-414(b)] c. is not accepted by a bank [§314(c)] b. Requires indorser to: a. Pay draft i. Accordint to its terms at time of issue, or (if not issued) at the time it first came into possession of a holder, or ii. If the draer signed an incomplete instrument, according to its terms when completed,

Indorsement: confers a right to enforce the instrument. Import because indorsement carries a form of liability that shifts the loss when payor bank refuses to pay check.

38 Commercial Law Each party that indorses a check makes an implied contract with subsequent parties that acquire the check. That contract obligates the indorser to pay the check if payor bank dishonors it. [§3-415]

Because each party that indorses the check is liable, and because each party's liability runs to a subsequent owners, rule results in a chain of liability under which each party can pass a dishonored check back up the chain to the last person in the chain able to pay.

Leaves the loss with the party that made the poor decision to purchase check from an insolvent entity. Underlying principle is being careful when you purchase financial instruments from parties of questionable financial strength.

Liability is also assigned to the drawer of the check.[§3-414(b)] However, If check dishonored, it is likely check will not be paid, people whose checks are dishonored often are insolvent.

Otto pays the payee for the check but cannot recover from the drawer (§3-415 does not apply b/c drawer does not indorse instrument, and §3-414(b) not enforceable b/c insolvent), the payee (§3-415 does apply, but in example he is insolvent) the payor bank (Otto is not a subsequent party to payor bank, and payor bank was not a transfer)

Transfer Warranties

Chapter 5

Hill First Point: Chapter 4 deals with first level of analysis with respect to forged checks and the like. Who in the stream initially bears the risk due to the forgery. Thing that complicates, is there are also a set of further rules that attempt to allocate the risk of loss to the person who. These transfer and presentment warranties are in actuality strict negligence. We want to look at where people are in position to affect the loss.

§3-406 - person whose failure to exercise ordinary care, if contributes, that person is ...

Then you'll see in some language in 3-406(b) - if the person asserting the , the loss is allocated between the person serving the preclusion and the other person.

If you put this in example, if you had a forged drawer signature, a bank could not pay that check b/c it is not a check that is properly payable b/c signature of drawer is forged. But let's suppose that the drawer left checkbook out in open, and check was stolen and she lost money on a forgery. May be 4-208 standard, payor bank may be able to preclude b/c of negligence.

It is a comparative negligence like standard.

Second point: 4-406 Has to do with bank statements. Customer's responsibility to examine statements promptly. Allocating loss to the customer, if the customer should have reasonably discovered the unauthorized payment and failed to notify bank. More importantly, if same forger does it again, the subsequent forgeries are the ones that the bank is going to be able to throw back at the customer, b/c the customer should have been in position to stop the problem.

Third point: 3-405, will see in certain circumstances, an employer is reasonable of. Two situations, A. .... b. check intercepted, employee ... 39 Commercial Law And finally point, 3-404: Imposters. Example: someone comes in to place of business claiing to be someone and convinces the business to give him a check. Fictitious payees. Dealt with in 3-404.

General rule, do any of the actions or position affect the general liability.

Problems, Assignment 5 5.1 Hill, where do you go to enforce this check? Start as Mr. Janeway, may have a cause of action under 3-420 against bank Then look arguably at 3-406 and see if Mr. Janeway is precluded from asserting the forgery b/c of his negligence 3-310 look at now, lost stolen or destroyed, obligation may not be enforced. So if the 2000 dollars was the total amount of the obligation. Goes on to say that the enforcement of the obliges rights are limited to the enforcement of the instrument. But he goes on to past instrument, treis to go after drawer. Drawer can say either that it has already been paid or that it is 3-309: procedure for a lost or stolen instrument.

Hill: answer is there basically is a claim against bank 3-420 that cashed/payed the check. Then look at negligence of Mr. Janeway and whether it should preclude him.

Thursday: Some of the problems left in 5. won't do all. Will move on to wire transfer system, assignment 10. skipping 6 7 8 and 9.

Chapter 5 cont'd

Two General Principles* (there are exceptions) a. Payor Bank Liable if Drawer's Signature Forged b. If Indorsement forged presenting bank breaches presentment

5.2.a. Hill draws this diagram: [Spode's Account] ---- [ Payee ] ------[Indorsement] ----[Depostory bank/ Presenting bank] (value) --- [ Payor Bank]

Class Answer: Clearly Spode has some liability, but the bank owes some duty of care, whether it is sophisticated check review or observance of industry statndards.

5.2.b. Hill: So Spode is just in this big room, someone is. Someone indorces the check in the name of the payee. See 3-404(a) This provision says that the indorsement is effective, and now the Depository bank has not breached a presentment warranty. Payor bank starts out with a 4-401 problem, but then says that 3-404(a) applies and says Spode is responsible.

5.2.c. Gussie is forger/drawer, spode is actual drawer, payee is basset, pinker (basset) is the indorser. Two problems in this case again. Have forged drawer signature and maybe a forged indorsement. 3-110(a). Let's take a look at Gussie forging signature, it is Gussie's (Forger) intent that matters, not Spodes (drawer).

Next, Gussie intended to pay Stinker. Hill: Forgerd drawer signature and forged indorsement means check not payable for two reasons. 40 Commercial Law Start out by saying depository/presenting bank breached the presentment warranty on the indorsement to Payor bank. But 3-404 is saying we are going to treat the indorsement as okay, and Gussiey's forger is probably going to be dealt with on 3-406 (possibility of comparative negligence now in play) So this is another case wehre Spode (drawer account holder) is going to be left holding the loss.

5.2.d. Now we have a completely fictitious person, otherwise same as question 5.2.c. 3-404(b)(2). Answer will come out same as 5.2.c.

5.2.e Let's take a look at 3-402 Hill:Student asked dumb question, Hill responded that under agency law, if a person is in a position of authority to sign things, if he acts in that area where he has to act, he will bind his agent in principle. B/c he authority to sign checks, he can bind agent.

5.2.f. Take a look at case #4 of comment 2 of 3-404. So it is Spodes fault for leaveing check around.

Now must also ask was bank negligent? Did depository bank do what it was supposed to do, excersise ordinary care? If Pinker indorses yatme's

5.2.g. Hill: This is the case of the incoming check. let's say 3-405 is a specific rule that deals with indorsements (not drawer signatures) with someone in a position to cover that function (looking at checks that come in). then the person (employee) will be stuck with the loss, not bank. Subject to 3-405 b, where the bank presparing was negligent in allowing this.

5.2.h. Hill: it's the same answer as incoming check. If the person responsible for the outcoiming check, and he indorses. The employer is potentially (actually odds are heavily in favor that the employer is going to be held for responsible for the indorsement) responsible.

5.3. Hill: does not care about the planning answer, but for us to be aware of the operative provisions of 4-406. Premise of 4-406 ( a loss shifting provision): loss shifting occurs if customer of bank does not honor obligation to review statement, particulairy if review of the statement would have disclosed the problem. Must report promptly. Couple of ways to look at this. 1 30 60 2 33 Happens at day 2 Customer doesn't get statement until day 33. How much time does b 4-406(c), says customer must promptly notifty bank of facts. First question is, if customer does call withing 60, days, D says that "if customer fails to comply with an item

Suppose customer notifies between 30 and 60 days. If it happened on day 2, and you notifed on day 45, nothing bank could have really done. So relief on day 45 is probably not good for bank.

Suppose however customer does not notify at all. 12.

Letters Of Credit

41 Commercial Law Also, 5-109(a)(2) - good faith mentioned in various parts of reading. We were told good faith has two meaning from beginning, honesty in fact and good dealing. When you get to article five, good faith meaing is defined soley as honesty in fact. Means did the party act honesty only question, not if acted negligently.

Important to know "independence principle" - that Important to know that if you confirm, you have become liable even though you are not issuer. Nominating bank is a facilitator for the seller/beneficiary, somewhere for

5-108(a) - issuer shall honor a presentation strictly to comply with a presentation.

Assignment 13: Letters of Credit - The Basics

Letter of credit is a letter from a financial institution promising to pay a stated sum of money upon receipt of specified documents. Prospective payor goes to a bank, asks it to issue a letter of credit to prospective payee.

Attractive to payee because provides assurance of payment that has two particularly favorable aspects: 1. stakeholder (a bank) provides an advance commitment that it will make payment when actual date for payment arrives 2. transaction payor has no right to cancel payment after institution makes that commitment.

Payee that receives a letter of credit before performing faces a small risk of nonpayment after it performs. Therefore, LOC are different from all payment systems discussed before this assignment, because none provides advance assurance of payment as firm as LOC transactions.

Growth of other modern payment systems has limited types of transactions where they are useful. Continue to be widely used in international transactions. Only major domestic context involves "standby" letter of credit (assignment 20). This assignment considers "commercial" letter of credit, used in sale of goods transactions.

Interantional Use International use of LOC makes uniformity important. Banks have responded to a need for reliability and uniformity by providing rules under Uniform Customs and Practice for Documentary Credits (UCP), a publication of the International Chamber of Commerce (ICC), currently in version ICC Publication No. 500 (1993).

Revised version of Article 5 of UCC designed to bring American law into closer conformity with UCP. [§5- 101 comment] If UCC Article 5 conflicts with UCP (or "rules of custom or practice), then UCP applies if the "relevant undertaking incorporates" the UCP [§5-116(c)]

Advising and Confirming Banks[§5-107(b),(c); UCP 7(a)].

Advising Banks/ Nominated Persons: Neither status as an adviser (advises on issuance of credit) or nominated person (processes payment) create any obligation to honor request for payment under LOC [§5- 107(b),(c); UCP 7(a)]. Purely procedural roles.

Often though, beneficiary not satisfied with just an adviser or nominated person, concerns about stability of issuer. Protect itself from risk and relying on issuer bank by seeking drect commitment of payment from local bank.

Confriming Bank: If bank wishes to "confirm" LOC, will have implicitly accepted direct liability on LOC, just as if it had issued credit itself. [§5-107(a)]

Choice of Law UCP [§5-116(c)]  If UCC Article 5 conflicts with UCP (or "rules of custom or practice), then UCP applies if the "relevant undertaking incorporates" the UCP [§5-116(c)]  If LOC contains

42 Commercial Law o clause indicating choice of law (a) or forum (e) will govern jurisdiction and "need not bear any relation to the transaction." [ §5-116(a),(e)] o no clause indicating choice of law clause, liability of party obligated on the LOC (i.e. issuer) is governed by the law where that party is located. [§5-116(b)] . No choice of law for applicant, UCC thinks that any action by applicant under Article 5 will be related to a party obligated on the LOC (issuer, nominated person, or advisor) [§5-116 comment 1]

Consideration[§5-105]. Consideration is not required to issue, amend, transfer, or cancel a LOC, advice, or confirmation [§5-105].

Issuing LOC[§5-106(a)] LOC is issued and enforceable according to its terms against issuer when issuer sends or otherwise transmits it. [§5-106(a)] After LOC issued, obliagations of beneficiary and parties are not affected by an amendment or censcelation that parties did not consent to, except to the extent that the LOC provides.[§5-106(b)]

When issuer instructs adviser by authenticated teletransmission to advise credit (or credit amendment), teletransmission will be deemed to be operative credit instrument, and no mail confirmation sent. Should confirmation be mailed anyway, it will have no effect and advising bank will have no obligation to check such mail confirmation against operative credit instrument [UCP 11(a)(i)]

Reimbursement  If beneficiary makes appropriate draft and confirming bank honors draft and pays, confirming bank has a statutory right to immediate reimbursement from issuing bank. [UCP art. 14(a); §5-107(a); §5- 105(i)(1)]

 An issuer that has honored a presentation as permitted or required "is entitled to be reimbursed by the applicant in immediately available funds, not later than the date of its payment of funds"[§5- 108(i)(1)]  confirmer/issuer relationship is governed by same rights that apply to the issuer/applicant relationship. [§5-107(a)].

Drawing on the Credit. Once seller/beneficiary performed its obligations, obtaining payment is simple. 1. Seller collects the documents called for by the credit and prepares a "draft" a. Draft is a letter written to the issuer, from the beneficiary, identifying the credit and seeking to "draw" on the credit. 2. Issuer (bank) receives the draft and docs, compares them with the LOC. a. Review time shall be reasonable, i. not to exceed beyond receipt of docs: 1. 7 banking days [UCP 13(b)] 2. 7 business days of issuer [§5-108(b)] ii. Failure to act timely constitutes dishonor (and also wrongful dishonor b/c failed notice) [§5-108 comment 2 last Paragraph] b. Requires issuer to (as ministerial as possible) i. If documents conform , 1. honor draft and pay sum [§5-108(a); UCP 14(a)] ii. If documents do not conform, 1. dishonor the draft and refuse to pay [§5-108(a); UCP 14(b)] 2. give beneficiary/confirmer prompt notice of defect they perceive in drafts [UCP 14(d); §5-108(b)(3)] a. Notice must be i. expeditious means, no later than close of 7th banking day following day of receipt of the docs [UCP 14(d)].

43 Commercial Law ii. "not beyond the end of the seventh business day of the issuer after the day of its receipt of docs" [§5-108(b) (3)]. b. If notice improper, cannot refer to perceived defect to justify decision to dishonor [UCP 14(e); §5-108(c), §5-108 comment 3] 3. Seek waiver from applicant of identifiable defects [UCP 14(c); §5- 108(a)] a. If waived, honor (very common, satisfies applicant's underlying contract) b. If not waived, send notice to beneficiary specifying defects identified and give beneficiary opportunity to cure doc defects c. To determine conformity: "strict Compliance" Standard: i. "An issuer shall honor a presentation [§5-108(a)]: 1. "That appears on its face strictly to comply with terms and conditions of LOC" a. Strict compliance determined in accordance with i. "Standard practice of financial institutions that regularly issue LOC" [UCC 5-108(e)] ii. "International standard banking practice" [UCP art. 13(a)]. b. "Oppressive perfectionism" and "slavish conformity" to literal terms of the credit neither required nor appropriate [5-108 comment 1] i. Honor drafts involving trivial and plainly nonsubstantive typographical errors (abbreviations, lower case, superfluities) [5-108 comment 1]. ii. Ignore obvious typo, even if prevents precise compliance of documents (e.g. "Parl" instead of "Park") [ICC Opinions, Response No. 209] c. Rejects "substantial compliance standard"[§5-108 comment 1] d. Closely related to independence principle, helps insulate issuer's obligation from disputes about quality of beneficiary's performance 2. Regardless of circumstances not evident from the face of documents submitted [§5-108(f)] ii. Term Clarification 1. Time Terms a. Words "to", "until", "from" or similar (applying to any date or period in the Credit referring to shipment): "include the date mentioned"[UPC art 47(a)] b. Terms of a month shall be construed as (all dates inclusive) [UPC art 47(d)]: i. "beginning" = 1st to 10th ii. "middle" = 11th to 20th iii. "end" = 21st to last day 2. Quantity Terms, if amount of credit or goods quantity stated [UCP 39]: a. Is "about," "approximately," or "circa" some numerical figure, allow 10% variance. [UCP 39(a)] b. Is without any qualification, 5% variance [UCP 39(b)] c. "must not be exceeded or reduced" or specifies a "number of packing units or individual items": precise adherence [UCP 39(b)] 3. Reimbursement: a. If beneficiary/confirmer makes appropriate draft and confirmer/issuer honors draft and pays, confirmer/issuer has a statutory right to immediate reimbursement from issuing bank. [UCP 14(a); §5-107(a); §5-105(i)(1); §5-108 comment 1 1st Paragraph]

44 Commercial Law i. An issuer that has honored a presentation as permitted or required "is entitled to be reimbursed by the applicant in immediately available funds, not later than the date of its payment of funds"[§5-108(i)(1)] ii. confirmer/issuer relationship is governed by same rights that apply to the issuer/applicant relationship. [§5-107(a)]. b. Confirming bank ordinarily obtains reimbursement by forwarding issuing bank documents on which the confirming bank paid. If the issuing bank agrees draft was proper, issuing bank reimburses confirming bank. c. Issuing bank then has a right to reimbursement from applicant [§5-108(i)(1)]. Ordinarily right to reimbursement not significant b/c issuer ordinarily will have obtained payment from applicant in advance or, at a minimum, required a deposit account balance to cover amount of credit. 13.

Negotiable Instruments

Hill wants us to understand how you get to be a holder in due course, and what does it mean to be a holder in due course.

Defining if Neg. Instrument [3-104]:

1. Is the document you are looking plain and simple? 2. Is the document easily transferable? That you can hand over the paper and be paid.

Two broad categories of neg inst. 3-104(e) 1. an instrument is a note if it is a promise 2. promise to pay, defined 3-104(e) 1.) example: Check, cashier's check, teller's check (draft drawn on one bank on another bank), certificate of deposit (order

Negotiable instrument must [Hill says work through 3-104(a)]  Thought process is liquidity, simple, able to know rights quickly.  obligation requires payment of money. [3-104(a)(3)]. Money is defined in 1-201(b)(24)  be an unconditional promise or order to pay [§3-104(a)]. Unconditional is defined in [§3-106] o may make an argument that part of the interest obligation is conditional, that you have a drafter who has taken a great amount of care, that you perceive the max interest ot exceed the max lawful rate, can say that that interest obligation is conditional.  until drawee accepts a check, drawee is under no obligation to honor it, especially in some unusual manner.

Asignment 22: Transfer and Enforcement of Negotiable Instruments Thief on indorsed check Check payable to cash. Thief picks up check. Hill 1-201(b)(21): he is a holder of the check. If he gives it to someone else, the fact that he is a thief is not going to stop some third party from being paid on it.

Next, have to decide the various types of indorsements 3-205 and 3-206.  Special indorsement (it is to a person),  blank indorsement (anthing ogher than person), and  anomolous (don't know why person indorces, comes up in problem with guarantor),  restrictive indorsement (put on check that it is for deposit only in this bank)

§3-201 "Negotiation": a transfer of possession to a person have to decide whether we have 1. a holder, or 2. there was a negotiation [§3-201(a)]

45 Commercial Law Assignment 23: Holders in Due Course Holder in Due Course Status

Concept of holder in due course, a specially favored type of transferee that is immune from most defenses that the issuer of an instrument could raise against original payee.

Implements the idea (from colonial common law) that enhancing the ability of transferees to enforce instruments increases the liquidity of negotiable instruments by making negotiable instruments more negotiable.

Requirements for Holder in Due Course Status.

Purchaser of an instrument must satisfy two sets of rules to become a HIDC. 1. Purchaser must become a holder: obtain the instrument through the process of negotiation described in chap 22. a. Person that acquires through some other process (e.g. simple sale with no negotiation) will not become a holder and thus cannot become a HIDC. 2. Must meet special qualifications to elevate status a. Generally, must take instrument (three tests), [§3-302(a)(2)] i. For value [(i); see §3-303(a)] 1. requirement generally excludes transfers made as a gift or other insignificant reasons. Similar (but stricter) to concept of consideration (can have consideration but not value). 2. distinguished from Art 1value definition: "any consideration sufficient to support a simple K" [§1-204(4)] 3. value applies if the instrument is issued or transferred [§3-303(a)]: a. for a promise of performance, "to the extent the promise has been performed"(means future performance is not value) [(1)] b. for a security interest or lien other than "obtained by judicial proceeding" c. as payment of, or security for, a preexisting claim (payment or release of claim is value) [(3)] d. in exchange for a negotiable instrument; or e. for an irrevocable obligation to a third party taking the instrument ii. In good faith [(ii); see §3-103(a)(6); see §1-201(20)] 1. good faith requires (uses UCC modern def) [§3-103(a)(6); §1-201(20)]: a. "honesty in fact"; and b. "the observance of reasonable commercial standards of fair dealing" 2. Lenders should not rely on HIDC status for instruments they acquire from entities they deal regularly a. lack of good faith when lender (purchaser of instrument) has a close and long-term relationship w/business (issuer) and tries to insulate self from defenses that would've been valid against its longtime client. [Gen Investmnt Corp. v. Angelini (1971)] b. "close connection" has been found to mean no sale at all, meaning purchaser of note subject to all defenses that could have been asserted against the seller [St. James v. Diversified Commercial Finance Corp. (1986)] iii. Without notice of certain problems: 1. person who purchases an instrument w/notice of problem cannot use HIDC to protect itself. Rests on concept of anonymous unknowing purchaser. 2. "notice" of fact when person [1-202(a)]: a. has actual knowledge of the fact [§1-202(a)(1)]; or b. "has reason to know" of the fact based on "all the facts and circumstances known to him at the time"[§1-202(a)(3)] 46 Commercial Law 3. Presence of notice must be in one of four classes listed (otherwise only significance is to undermine holder's good faith in acquiring the instrument): a. the instrument [(iii)] i. is overdue [see §3-304] 1. Instrument payable on demand becomes overdue [3-304] a. On the day after the day demand for payment is duly made [(a)(1)]; or b. Automatically i. If a check, 90 days after its date; or[(a)(2)] ii. If not a check, after being outstanding for an unreasonably long time by "nature of instrument and usage of trade" [(a)(3)] 2. Instruments payable at a definite time overdue [§3-304(b)]: a. If installments: i. Upon failure to make a scheduled payment of principal or [(1)] ii. upon any other event that results in acceleration of the date of maturity. iii. instrument is overdue until default is cleared [[(1)]; §3- 304 comment 2]. b. If no installments and due date not accelerated: instrument overdue on day after due date. [(2)] 3. Unless due date of principal accelerated, does not become over due if there is a default in payment of interest but not of principle.[§3- 304(c) ii. has been dishonored [see §3-502]; or 1. occurs when a. instrument presented to a party obligated to pay; and b. party fails to pay the instrument in accordance with its obligation. iii. is in default b. the instrument has a "forgery or alteration or is not otherwise so irregular or incomplete"[(iv); §3-302(a)(1)] c. a third party claims to own all or part of the instrument [(v); see §3-306]] d. one of the obligors has a defense or claim that would limit or bar enforcement of the instrument by the original payee[(vi); see §3- 305]

Rights of Holders in Due Course  HIDC is immune from most defenses of payment and ordinary contract claims or defenses ("recoupment") [§3-305(b)].

 Only defenses that bind a HIDC are the four "real" defenses described in UCC §3-305(a)(1). o Reflects pragmatic recognition of strong public policies that in unusual circumstances can override free transferability concerns. 47 Commercial Law Real Defenses (four) [§3-305(a)(1)] 1. Infancy: a. Even a holder in due course cannot enforce an instrument issued by a minor that has no capacity under state law to bind itself to a simple contract [§3-305(a)(1)(i)] b. Use state law to define infant [§3-305 comment 1] 2. Duress, lack of legal capacity, or illegality [§3-305(a)(1)(ii)] a. HIDC cannot enforce an instrument if the underlying transaction in which the instrument was issued occurred under circumstances that would make the original obligation completely void. b. Exception interpreted narrowly i. Court found a crime (bribery) only makes instrument voidable, not void, upholding HIDC status [Bankers Trust Co. v. Littion Sys. (1979) ii. Laws affect HIDC status only if they render obligations "entirely null and void," not "merely" voidable. [§3-305 comment 1 para 4] 3. Fraud that induced issuance of the instrument (signing by the obligor) "with neither knowledge nor reasonable opportunity to learn of its character or essential terms [§3-305(a)(1)(iii)] a. Interpreted quite narrowly i. Obligor must examine and read note. If he relies upon word of stranger he makes that stranger his agent, he "cannot disaffirm the acts of that agent." [Ort v. Fowler (Kan. 1884)] 4. Discharge of the obligor in insolvency proceedings [§3-305(a)(1)(iv)] a. Defense accepts reality of Federal Law supremacy: discharge of liability under federal bankruptcy laws bars enforcement of same liability under Art 3.

Payment and Discharge

Problem with Defenses of payment and discharge: Defenses of payment and discharge require special rules b/c an instrument can be paid in part, or a party can be discharged, even without any default or other problem with the instrument. Examples:  fact that a party partially paid an instrument by making monthly payments does not suggest a problem that should bar HIDC status.  Fact that one party has been discharged from liability does not indicate a problem with enforcing the note against remaining parties.  An accommodation party might be discharged under §3-605 (assignment 19) when a holder grants the borrower an extension of the due date. There is no reason that a subsequent purchaser with knowledge of that fact should not become a holder in due course able to enforce the instrument against the principal obligor.

Two Step Solution: 1. HIDC status is not precluded by notice of payment or discharge (other than real defense of discharge in insolvency proceedings) [§3-302(b)] a. "discharge of the obligation of a party is not effective against a person acquiring rights of a HIDC without notice" [§3-601(b)] b. an instrument is paid to the extent payment is made by or on behalf of a party obliged to pay the instrument, and to a person entitled to enforce the instrument. [3-602(b)] 2. Any whole or partial discharge is effective against a person that takes with notice of the discharge [§3-302(b)] 3. Another Rule: a. Obligor pays to the wrong Person i. 3-602(b) says payment applies when given to "a person that formerly was entitled to enforce the note only if at the time of the payment the" obligor has not received adequate notification that the note has been transferred. [§3-602(b)]. ii. Then UCC created a constructive notice provision in 3-602(d) "a party that has acquired rights in the instrument ... is deemed to have notice of any payment that is made under subsection (b)"

48 Commercial Law b. Payment by mistake [§3-418]

Look again at Examples:  fact that a party partially paid an instrument by making monthly payments does not suggest a problem that should bar HIDC status. 1. purchaser should become a holder in due course free from personal defenses of the maker, but the purchaser would be bound to recognize the decrease in the amount owed on the note caused by the payments of which the purchaser had notice.  Fact that one party has been discharged from liability does not indicate a problem with enforcing the note against remaining parties. 1. if the financier was on notice of that discharge, the discharge of the accommodation party would be binding on the holder in due course. [§3-302(b)]. 2. discharge would not be binding on a HIDC that took without notice of discharge [ §3- 601(b)  An accommodation party might be discharged under §3-605 (assignment 19) when a holder grants the borrower an extension of the due date. There is no reason that a subsequent purchaser with knowledge of that fact should not become a holder in due course able to enforce the instrument against the principal obligor. 1.

Fortiori: a party that purchased an instrument would take free of a payment that a borrower made to the transferor after the date of the transfer.

Transferees Without Holder-in-Due Course Status

 Position of a purchaser without holder-in-due-course status is not so bad:

o Worst problem the purchaser faces from the absence of HIDC is his exposure to defenses that would have been effective against the original payee of the instrument.  Art 3 includes two rules that make position of purchaser who is not HIDC even better than that of purchaser of nonnegotiable obligation. o Rule 1: . Applies when the only problem is the purchaser' failure to obtain an indorsement from the seller. . A purchaser of order paper cannot become a holder of the instrument unless it obtains an indorsement from the previous owner.  Thus, a purchaser that gave value for order paper and purchased it in good faith and without notice of any problems would not become a holder in due course unless it also obtained the requisite indorsement.  o Rule 2 "shelter rule" . Implements the basic property principle that a purchaser of property obtains all of the rights that its seller had in the purchased property. . Rule allows a purchaser that fails to obtain its own HIDC status to assert any HIDC rights that the seller had before the sale. [§3-203(b)]  Example: if Jodi donates a note it negotiated and holds HIDC status, the donee would not have HIDC status due to lack of valu, but under shelter rule would have nearly the same protection had it purchased the note and attained its own hlder in due course status.  Does not apply if transferee"engaged in fraud or illegality affecting the instrument"

MM Assignment 10: Magnuson-Moss 49 Commercial Law The Magnuson-Moss Act is a federal statute intended to protect consumers from unscrupulous warrantors, especially abuse of written warranties. The Act impacts: 1. warranty disclaimers (see assign 13), 2. warranty creation 3. warranty enforcement.

Warranty Creation: Acts as a truth in labeling law, setting minimum standards relating to warranties, such as duration of implied warranties, then requires consumer product warrantors either meet standards or conspicuously designate warranty as "limited warranty."

Created guidelines in §2302 exactly what has to be in a warranty: Minimum Standards: 1. parties in warranties 2. d 3. d 4. legal remedies available to consumer

Keep in mind that "written warranty" is a term of art. It is defined by act. See p 925 to see key to USC to pre-enacted section. Labeling Warranty 15 USC §§2303, 2304 b. If warranty does not meet minimum federal standards. i. Label "Limited Warranty": c. If warranty does meet standards i. Label "Full Warranty" ii. Must also indicate duration in heading, e.g. "Full Two-Year Warranty"

Statute does not require that there be a written warranty, or any warranty at all, only that if there is one that it must conform to these rules.

If supplier makes a written warranty covered by MM, you cannot disclaim implied warranties. 2308, and . Caveat to that is that if someone makes a limited warranty, you may be able to limit the duration of any implied warranty.

Why is MM important? Because attorney fees may be paid for, so better than USC.

"Consumer Product" §101(1) of M-M act defines consumer product as 1. A tangible personal property that is 2. Normally used for personal, family or household purposes

Case: Kemp v. Pfizer, Inc. (E.D. Mich. 1993) p167 Facts: Does a heart valve represent a "consumer product"? Holding: Goods that are not customarily available to the ordinary person are not consumer products.

Attorney Fees 15 USC §2310(d): M-M Act provides for recovery of costs and attorneys' fees for successful plaintiffs in actions brought under MM. Policy: Congress realized problem with enforcement of consumer warranty actions was the small aomounts in controvery.

Case: Jordan v. Transnational (Mich. Ct. App. 1995) Facts: the policy goal of MM act is to provide: "a means for consumers to protect their rights and obtain judgments where otherwise prohibited by monetary constraints"

50 Commercial Law Holding: In MM actions and awarding of fees, "after considering all of the usual factors, a court must also consider the consider special circumstances (policy goals of the MM Act)."

"Writing Warranty" Requirement In order to bring action under MM, a plaintiff must have been 1. damaged by the failure of a seller to comply with its obligations 2. under a warranty with respect to 3. a consumer product 4. Courts Split: seller must make a "written warranty" as defined by MM act.

Case: McCurdy v. Texar, Inc. (Fla. Dist. CT. App. 1991) Facts: Defective Boat but no written warranties Reasoning: 15 USC§2310(d)(1) - o Statute states: consumer damaged by the failure of a seller to fulfill any obligation under MM act or under a written warranty or implied warranty, may bring suit for damages. Holding: "clearly" 15 USC§2310(d)(1)  "Encompasses implied warranties which are obviously not in writing" and therefore writing is not required to bring suit under MM.

Case: McNamara v. Nomeco Building Specialties, Inc. (D. Minn. 1998 Facts: Fog free window Reasoning: .  Sections seem in conflict o Based on §2310(d) allows actions for implied warranties o Based on §2308 it is implied that . An "action for the breach of implied warranty would not lie, under MM, in the absence of a written warranty."  However, Court believes "adoption of a State law standard, for the definition of "implied warranty" reveals Congress' rejection of a wholesale, Federal regulation of implied warranties which have not been accompanied by a written warranty Holding: "[A] party may not bring an implied warranty claim under MM, in the absence of an adjoining written warranty."

"Consumer" under MM

Horizontal Privity: MM definition of "consumer" allows plaintiff to over come horizontal privity problem. "Consumer" includes (15 USC §2301(3)): 1. Purchaser of the product, and 2. "any person to whom such product is transferred during the duration of an implied or written warranty"

Vertical Privity: A. Written Warrenty: consumer shuld overcome any vertical privity problems and sue remote sellers B. Implied Warranty: Courts are split under two views 1. No direct suits by remote buyers unless State allows: supporters say the tone of MM, especially how State Law is used to define "implied warranty", means state law should be used. 2. Direct Suits allowed by remote buyers: supporter point out MM §110(d) [or 15 USC §2310(d)] allows a consumer to sue a "supplier," which includes a manufacture for breach of "written warranty, implied warranty, or service contract."

Jurisdiction: State court vs. Federal 51 Commercial Law Congress did not wish to flood federal courts with small value consumder warrarnty suits. Jurisdiction provisions of MM: 15 USC §2310(d)(3) 1. Suits may be brought under the statute in any state court §2310(d)(1)(A) 2. Federal jurisdiction limited to amounts at least $50,000. §2310(d)(1)(B) and §2310(d)(3)

BringingAlso we must heed §23

Tuesday bick up with Magnus and Maus: Whether if you can only sue on an implied warranty under 2-314 b;c there is no written warranty at all - do you have a cause of action under M and M. You do have a case if you use McCurdy v. Texar, Inc. and the reasoning that 15 USC§2310(d)(1) - Statute states: consumer damaged by the failure of a seller to fulfill any obligation under MM act or under a written warranty or implied warranty, may bring suit for damages. Holding: "clearly" 15 USC§2310(d)(1) "Encompasses implied warranties which are obviously not in writing" and therefore writing is not required to bring suit under MM.

But 15 USC §2308 says "no supplier may disclaim or modify" if (1) "such supplier makes any written warranty to the consumer". This implies therefore that unless the implied warranty is in writing, it can be modified.

Also think about under the definition of "written warranty" 2301 item 6 - is it broader or narroarwer thatn express language found in 2-314 of the code. Also

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