Commercial Law Outline

COMMERCIAL LAW
Fall 2011 – Professor Marcantel
 
I. ARTICLE 1
 
A. THE BASICS OF ARTICLE 1
·         §1-103(b). Supplemental Principles of Law: Unless displaced by the UCC, the principles of law and equity supplement its provisions. This preserves the common law unless obviously changed by the code.
·         §1-304. Obligation of Good Faith: Every contract or duty within the UCC imposes an obligation of good faith in its performance and enforcement.
 
II. ARTICLE 2
 
A. SCOPE
 
Use current version of Article 1, NOT revised (this is still good law in SC even though many states have already adopted the revised version)
·         know difference between SC statute and UCC statute
 
Article 2
1.       Scope
a.       2-102; 2-105; 2-106; 2-107; 2-304
2.       Formations and Terms
a.       2-104; 2-204; 2-205; 2-206; 2-207; 2-312; 2-313; 2-314; 2-315; 2-316; 2-202; 1-205; 2-208; 2-719 (this could also go under remedies)
3.       Performance and Breach
a.       2-301, 2-507, 2-511; 
b.       2-601, 2-602, 2-605, 2-508; 
c.        2-606, 2-607, 2-608, 2-609, 2-610; 
d.       2-503, 2-504;  2-612; 
4.       Remedies
a.       2-701, 2-702, 2-703, 2-704, 2-705
b.       2-706, 2-708, 2-709, 2-710
5.       Defenses
a.       2-201
b.       Notice (2-607)(3)- Applies to 2-608 revocation
c.        Notice (2-605)- Applies to 2-508 rejection
d.       Privity (2-318)
e.        2-613, 2-614, 2-615
Article 3
·         scope
·         negotiation
·         enforcement
o    hidc
·         liability
·         dishonor
·         discharge
Article 4
 
A. TRANSACTIONS IN GOODS
o    §2-102. Scope: Unless the context otherwise requires, this Article applies to TRANSACTIONS IN GOODS
o    transaction not defined in the book, look to 2-102 (transactions in goods); SALE is synonymous with TRANSACTION
§  sale (2-106-1)= passage of title from seller to buyer for a price
§  price (2-304) = anything used as a medium of exchange, used to purchase the goods
o    Excludes: It does not apply to any transaction which although in the form of an unconditional contract to sell or present sale is intended to operate only as a security transaction nor does this Article impair or repeal any statute regulating sales to consumers, farmers or other specified classes of buyers.
o    Transactions in Goods
o    §2-105(1). “Goods”: means all things (including specially manufactured goods—important in the context of the predominance test and the word “designed”) which are MOVABLE at the time of identification to the contract for sale other than the money in which the price is to be paid (if it’s used as the medium of exchange), investment securities (Article 8) and things/chose in action (ie-insurance policies, membership at a gym, the contract piece of paper itself, etc.; benefit and value is derived from your ability to enforce it in court). “Goods” also includes the unborn young of animals and growing crops and other identified things attached to realty as described in the section on goods to be severed from realty (§2-107).
§  Moveable- If severence will cause material harm to the property, it must be severed by the seller, or it will not be covered by Article 2. If it will not cause material harm to property, it does not matter who severs. At the time of the identification to the contract, the seller must have severed the thing in order for it to be a “good” which invokes the code
·         Not-Moveable
o    Real property
·         No Material Harm (Severable by Buyer or Seller)
o    Timber, Crops
·         Material Harm (Must be Severed by Seller)
o    Minerals and oil causes material harm to the real property, so the seller must sever in order to be covered by Article 2.
o    §2-107. Goods to Be Severed from Realty:
§  (1) Minerals: A contract for the sale of minerals (oil and gas) to be removed from realty is covered by Article 2 if they are severed by the seller.
§  If the good is not attached to something, then 2-107 is not invoked; similarly, if the severance does not cause material harm to the property, then the code is not invoked
o    If Article 2 is not invoked, we look to common law to enforce the contract.
§  Not Included in Article 2
·         Investment Securities
·         Medium of payment – money
·         Realty
·         Things in Action- abstract value only exists because of ability to enforce the right in court
o    Insurance policy, intellectual property rights, licenses, debt
·         Services
·         Electiricty- split in courts (some say it’s a good, some say it’s a service); depends on the circuit
o    §2-106. Contract for Sale: (1) In this Article unless the context otherwise requires “contract” and “agreement” are limited to those relating to the present or future sale of goods. “Contract for Sale” includes both a present sale of goods and a contract to sell goods at a future time.
§  A “sale/transaction” consists in the passing of title from the seller to the buyer for a price. A “present sale” means a sale which is accomplished by the making of the contract.
·         §2-304(1). Price:  The price can be made payable in money or otherwise. If it is payable in whole or in part in goods each party is a seller of the goods which he is to transfer.
 
 
B. HYBRID TRANSACTIONS
 
§  Contract that mixes the sale of goods and services; or the piece of real property and goods
§  Predominant Purpose Test (3 Factor Test)
Whether a transaction is for goods or services? Is the essence or dominant factor in the formation of the contract regarding goods? LOOK AT: (go through this analysis on the final, but make sure to say that courts have continually found software to be a good)
o    1) Allocation of transaction that involves the goods and services (how much money goes to each)
o    2) What the buyer seeks, what is the nature of the supplier
o    3) Language of the contract – names of the line items
§  Milau Associates, Inc. v. North Avenue Development Corp. (NY App 1977): A burst in an underground section of pipe caused substantial water damage to textiles stored in a warehouse. Ps sought recovery against the general contractor who built the warehouse and the subcontractor which designed and installed the sprinkler system. P argued that Article 2 applied; therefore, the defective pipes caused a breach of implied warranty of fitness for particular purpose.
·         Holding: Given the predominantly service oriented character of the transaction, this is a service contract so the UCC could not be invoked to grant the extension of warranty protection (only claim for negligence allowed). The contracts were no more than a series of performance undertakings for the incorporation of the specialized system during the erection of the building – a predominantly labor-intensive endeavor.
·         Rule: When service predominates, and transfer of personal property is but an incidental feature of the transaction, it is for services. Those who hire experts for the predominant purpose of rendering services, relying on their special skills, cannot expect infallibility.
·         Court also makes note of the fact that the P had the opportunity to plead and test the construction of the written warranty provided in the work subcontract at the trial level. The P instead opted to prove fault, and if that failed, to seek enforcement of a warranty imposed by law for the sale of goods unfit for their intended purpose
o    Service cannot be expected to be perfect in the same way that a good can expected to be; so, if you’re really buying a service, no one would expect perfect service
§  Sale of Software
·         The vast majority of courts have routinely applied Article 2, finding that the sale of software is the sale of goods (specially manufactured good).
o    When you buy a cd, you’re actually buying a license to use the software (a license is a chose in action—now we’re not looking at a good). Herein lies the problem
·         Analysts Intern. Corp. v. Recycled Paper Products, Inc. (ILL 1987): D (RPP) hired P (AIC) to produce a computer-assisted merchandising program. When it was installed many problems developed because the program did not function properly. P continued working on the problems until it left because payments were not made by D. P filed suit to recover the unpaid balance. P argued that the contract was for programming services and not a good. D countersued for breach of warranty.
o    Rule: The “dominant purpose” test is used to determine whether an agreement is one for goods rather than for services and is therefore governed by Article 2 of the UCC – whether the “essence or dominant factor” in the formation of the contract was the provision of goods.
o    Holding: It was a transaction for goods and within the purview of the UCC. The programmers’ services were incidental to contract for software.
o    Reason: Any supplier of a specially designed item must necessarily perform whatever work is required to create or produce the item. That work does not make the undertaking a “service” to the purchaser of the item.
·         Anthony Pools v. Sheehan (MD 1983): D (Anothy) built diving board and pool for P; P was injured when he slipped from the pool and sued D under breach of implied warranty of merchantability. D argued the swimming pool is not “goods” and he could, therefore, exclude implied warranties from the contract. Since this was a hybrid transaction (goods+service rendered) the issue was whether the predominate purpose test should be applied to the sale of the diving board and whether it carries an implied warranty of merchantability.
o    New Test: (DO NOT NEED TO KNOW THIS TEST!!) Gravaman Test- the focus is on whether the gravamen of the action involves goods or services—in other words, if the injury occurred due to a faulty good the case might involve the sale of goods. If the injury occurred due to poor workmanship, the case might involve services, outside the scope of the UCC.
o    Holding: Yes, the diving board was a good that carried an implied warranty of merchantability. “Where, as part of a commercial transaction, consumer goods are sold which retain their character as consumer goods after completion of the performance promised to the consumer, and where monetary loss or personal injury is claimed to have resulted from a defect with the good, the provisions of the MD UCC dealing with implied warranties apply to the consumer goods, even if the transaction is predominantly one for the rendering of consumer sales.”
o    Reason:  the contract expressly stated that Anthony agrees to construct the pool AND sell the related equipment; the diving board was moveable; the diving board, considered alone, is goods
o    Wrap up:
§  2-102 (scope); 2-105 (Definitions)—goods, sale (106), severed goods (107)
§  Predominate Purpose Test: 3 factors test
 
C. MERCHANTS (Article 2: Formation & Terms-Warranties and Parole; and Defenses-SOF)
·         Whether someone is a merchant is irrelevant to invocation of the code. However, it may determine whether a particular section of the code will apply.
o    §2-104(1). Merchant- refers not only to those who deal in goods involved, but also those merchants who deal in the practices of the kind involved in the transaction. This definition changes depending on which portion of the code is invoked. (See comment 2 for the threshold requirement for the specific Article section you’re looking at.)
§  Thus, sections 2-201(2), 2-205, 2-207 and 2-209 rest on normal business practices which are or ought to be typical of or familiar to any person in the business. So, for purposes of these sections, almost every person in business would be deemed a “merchant.” Also, banks or universities may be considered “merchants.”
§  According to 2-314, the term “merchant” only applies to the person in his “mercantile capacity” though (so, a lawyer buying a fishing pole for his own use is not a merchant). This comes from the “goods of the kind” section of 2-104.
§  Section 2-324, on the other hand, implies a warrant of merchantability only “if the seller is a merchant with respect to goods of that kind.” So, if the seller is NOT a merchant, the warrant of merchantability will never apply
o    §2-201. Statute of Frauds- If (1) fails, (2) is satisfied if between merchants.
o    §2-205. Firm Offer- Seller who is not a merchant cannot make a firm offer, and must be in writing and signed by merchant.
o    §2-207. Battle of Forms- If between merchant and nonmerchant, additional terms are viewed as proposals and must be explicitly consented to or will not be included. Between two nonmerchants, additional terms are treated the same as proposals. If between merchants, additional terms are automatically included unless the offer expressly limits acceptance, materially alters, or other party objects in reasonable time period.
·         §2-104
o    (1) “Merchant” means a person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction or to whom such knowledge or skill may be attributed by his employment of an agent or broker or other intermediary who by his occupation holds himself out as having such knowledge or skill.
§  §2-314. Implied Warranty of Merchantability: Merchant has a narrow meaning of only those who deal in goods of the kind – applicable only to a person who, in a professional status, regularly sells the particular kind of goods giving rise to the warranty – cannot be isolated transaction.
§  §2-315. Particular Purpose: Does not require a merchant – only a peculiar purpose that is not ordinarily intended for the good. The seller must have reason to know of the purpose that buyer intended to use the good. The seller must have reason to know that buyer is relying on the seller to select the product for the buyer.
o    (3) “Between merchants” means in any transaction with respect to which both parties are chargeable with the knowledge or skill of merchants.
o    Siemen v. Alden: P was injured w