Commercial Law Outline

Commercial Law Outline
Professor Rowe
Fall 2010
 
1.       Introducing Commercial Law
i)        Understand the origin of the UCC and how it applies in states
(1)    Modern origins in the law merchant- the system of rules, customs and usages generally recognized and adopted by merchants and traders which constituted the law for the regulation of their transactions and the solution of their controversies.
(2)    What does the UCC cover? (1-102) Any matter that falls w/n the Code’s ten substantive articles.
ii)       Understand policy considerations and purpose underlying the UCC
(1)    UCC is liberally construed/applied to promote its underlying purposes and policies (1-103(a));
(a)    To simplify, clarify, and modernize the law governing commercial transactions;
(b)   To permit the continued expansion of commercial practices through custom, usage, and agreement of the parties; and
(c)    To make uniform the law among the various jurisdictions.
iii)     Understand some common themes and rules found within the UCC and how to navigate the UCC
(1)    The text of the UCC should be read in light of the purpose and policy of the rule or principle in question, and the application of the language should be construed narrowly or broadly, as the case may be, in conformity with the purposes and policies involved.
(2)    Generally there is “Freedom of Contract” but there are some exceptions (1-302):
(a)    Obligations of good faith, diligence, reasonableness, and care may not be disclaimed.
(b)   Certain Code sections explicitly preclude variations.
(c)    Some sections implicitly may not be varied.
(d)   Certain contracts and clauses thereof may not be enforceable due to unconscionability.
2.       Introducing Article 2
i)        Background
(1)    Article 2 applies to transactions in goods. This includes more than sales, e.g., leases, rentals, and gifts of goods, as well as sales. Most sections of article 2 only relate to sales.
(2)    A sale consists of the passing of title from the seller to the buyer for a price (2-106(1)). The price can be payable in money or otherwise, e.g., other goods, services, or realty (2-304).
ii)       Understand the difference between secured sales v. leases
(1)    Security Interest: (1-201(37) or (35))
(a)   Original term of lease is equal to or greater than remaining economic life of goods
(b)   Lessee is bound to renew the lease for the remaining economic life of the goods
(c)    Lessee has option to renew lease for remaining economic life of goods for no add’l or nominal consideration
(d)   Lessee has option to become the owner of goods for no add’l or nominal consideration
(2)    Lease v. Security Interest (1-203) Intent does not matter. Economic realities matter.
(a)    1-203(a) says it is fact-specific [meaning it is based on the economic realities] (b)   1-203(b) provides a bright-line rule:
1.       Transaction cast as lease creates a SI if consideration lessee is to pay is for right of possession for the term and can’t be terminated early by lessee AND [one of the following tests is met] a.       original term of lease is equal to or greater than the remaining economic life of goods (RELOG)
b.      lessee is bound to renew the lease for the RELOG OR bound to become owner of goods [mandatory] c.       lessee has an option to renew the lease for the RELOG for no add’l consideration OR for nominal consideration [meaning any reasonable lessee would renew b/c lessee has already paid for goods] d.      the lessee has the option to become the owner of goods for no add’l consideration OR for nominal consideration [meaning any reasonable lessee would exercise the option b/c lessee has already paid for goods] (c)    1-203(c) shows factors that don’t make it a SI (e.g., assuming ROL or paying taxes and insurance)
(d)   1-203(d) defines when add’l consideration is nominal [less than lessee’s reasonably predictable cost of performing] and not nominal [FMV or FMR] (e)   1-203(e) says RELOG and FMR, FMV are fact specific
(3)    NOTE: Parties’ intent does not matter in determining sale v. lease. Courts look to the economic realities of the transaction at the time the lease was entered into. It is a fact-specific inquiry. Also, please note that b.1 and b.2 deal with the lease term being for the RELOG, and b.3 and b.4 deal with options.
(4)    NOTE: The reason that the lease v. security interest (sale) is important is because of what may happen if the putative lessee files bankruptcy. If the transaction is a true lease, then lessee’s creditors cannot go after the goods because they still belong to the lessor. In a true lease, the lessee only has a leasehold estate, but the lessor is the true owner and has a reversionary interest (the goods revert back to the lessor). The reason for 1-203 is because if a lessor tries to say something is a lease when in fact he sold the goods and should have retained a security interest, then (as we will learn in Article 9) he should have taken the proper steps to create and perfect his security interest in order to keep priority in the goods as against the lessor/buyer’s creditors. This policy behind this provision is to disallow the disguised sale.
iii)     Understand the difference between sale of goods v. sale of services
(1)    “Goods” mean all things that are movable at the time of identification to the contract for sale, that is, tangible personal property, not realty (2-105 & 2-501). It does not include things in action (intangibles) such as money, investment securities, information, etc.
(2)    Specially manufactured goods = goods (not services). (2-105(1), 2-103(1)(k)).
(3)    Serving food or drinks to be consumed either on or off the premises of a restaurateur is a sale of goods, at least for the purpose of the implied warranty of merchantability (2-314(1)).
(4)    Why is it important to be considered a good? Implied Warranties kick in.
(5)    NC- predominant purpose
3.       Article 2 Property Interests
i)        Understand passing of title to goods under 2-401
(1)    Seller Completes performance by delivering conforming goods.
ii)       Understand when title to goods passes and how titles related to (1) risk of loss in the event of breach and no breach and (2) the passing of title and insurable interests.
(1)    ROL and Title are separate things. They can pass at separate times. Generally- title and ROL move together. ROL can pass earlier though, if buyer refuses to accept delivery of conforming goods and can pass later if seller delivers non conforming goods.
(2)    Insurable Interest (2-501)
(a)   Buyer: Title, ROL, or Identified (also by agreement)
(b)   Seller: Title or Security Interest (also ROL or by agreement)
4.       Warranties of Quality [Note. Professor Rowe LOVES warranties] i)        Understand what warranties of title are given under Art. 2
(1)    Warranty of title under 3-312(1) that the title conveyed is good and the transfer is rightful and that the goods are delivered free from any security interest, lien or encumbrance of which the buyer at the time of contracting has no [actual] knowledge. 
ii)       Understand how express warranties are created and if they can be disclaimed.
(1)    Warranties of Quality (2-313)
(a)   Very fact specific. But- no specific language is required.
(b)   (1) Warranty is made (2) b/c of warranty agreement is made (3) breach of warranty
(c)    Puffing: (1) lack of specificity in the statement made; (2) a statement that is made in an equivocal manner; (3) a statement which reveals that the goods are experimental in nature.
(2)    Burden is on the PL to show the existence of a particular warranty, that the warranty was breached, and that damage was proximately caused by the alleged breach. (2-317)
iii)     Understand how to satisfy the implied warranty of merchantability under 2-314.
(1)    Implied warranties arise at the moment of sale (unless they are disclaimed)
(2)    Implied warranties extend to new and used goods. For used- the standards might be a little less.
(3)    MUST BE MERCHANT
(4)    Breach of Implied Warranty of Merchantability (PL must prove)
(a)   The goods purchased were subject to an implied warranty of merchantability (implied at sale)
(b)   The goods did not comply with the warranty at the time of delivery
(c)    The purchasers damages were due to the unmerchantable nature of the goods
(d)   Damages were suffered as a result of the breach of the warranty
iv)     Understand how to satisfy the implied warranty of fitness for particular purpose under 2-315.
(1)    Implied warranties arise at the moment of sale (unless they are disclaimed)
(2)    Implied warranties extend to new and used goods. For used- the standards might be a little less.
(3)    Implied Warranty of fitness for a particular purpose
(a)   Seller does not have to be a merchant.
(b)   Seller knows/reason to know the purpose for which the goods are being bought
(c)    The buyer relies on that sellers knowledge
v)      Understand how to disclaim warranties under 2-316 and when disclaimers fail of essential purpose under 2-719(2)
(1)    2-316(3)(a) allo