Commercial Law Notes
Patterson Fall 2007
The Uniform Commercial Code (UCC) Generally. Used as a model to make state law for commercial transactions which vary from state to state upon adoption. Under § 1-103, where the common law and the Code conflict, the Code trumps the common law, but where the Code and the common law do not conflict the common law can be used. Under § 1-106 the remedies under the Code shall be liberally administered to the end that the aggrieved party may be put in as good a position as if the other party had fully performed.
Article 1. General provision applied throughout the code.
Article 2. The sale of goods (Not Real Estate).
Article 2A. Leases.
Article 3. Negotiable Instruments (checks).
Article 4. Bank Deposits
Article 5. Letters of Credit
Article 6. Bulk Transfers / Sales
Article 7. Warehouse Receipts, Etc.
Article 8. Investment Securities.
Article 9. Secured Transactions.
ARTICLE 2:
Formation Generally. Under §2-204(1), a contract for the sale of goods may be made in any manner sufficient to show agreement. The conduct of both parties may also be considered in determining whether a contract was formed. Under §2-204(3), even if one or more terms are left open, a contract for sale does not fail if the parties intended to make a contract.
The Statutes of Frauds apply only to formed executory contracts which have been yet to be performed.
· Express Warranties. Under §2-313, express warranties can be created as part of the bargain for the agreement. This includes reliance upon a sample model because it creates an express warranty that the goods sampled conform to the same level of quality as the whole. It is only required that there be an intention to warranty. No specific language is required.
· Implied Warranty of Merchantability. Under §2-314(1), a guarantee that a product will be merchantable, like goods of its kind, is implied.
It is implied in the contract that the goods will be of the regular run.
· Implied Warranty for Fitness of Particular Purpose. Under §2-315, there is an implied warranty that the good(s) are fit for their particular purpose, where the buyer relies upon the seller’s expertise. However, these warranties can be disclaimed. Under §2-314(3), unless excluded or modified, other implied warranties may arise from the course of dealing or usage of trade.
When a salesman recommends a product to the buyer, then it is implied that the goods should be fit for such a purpose.
· Whenever there is implied warranty of merchantability and warranty for fitness of purpose, there are also consequential damages. Consequential damages are the consequence of the failure of the product to work as advertised.
· Disclaimer of Warranties. Under §2-316(1), disclaimer of warranties are permissible and used in almost every contract. However, the disclaimer must be made at the time of formation. Plus, words or conduct limiting a warranty are subject to the parole evidence rule and may be excluded from admission to evidence.
· Limitation of Buyer’s Remedies. Usually the only remedy available for any product today is limited to repair or replacement of the product, thus, limiting consequential damages. This is permissible under §2-719(1), as long as the limitation of consequential damages is not unconscionable under §2-719(2-3). Limitation of remedies and disclaimer of warranties must occur at the time of formation.
· Requirements v. Output Contract. §2-306 permits requirements contracts, where a party sells something at a lower rate, but the buyer is required to purchase a certain quantity for the lower rate. An output contract, also permitted under §2-306 is where the seller agrees to meet the buyer’s demand.
Cases to cite
Hill v. BASF – Farmer sought direct and consequential damages for the breach of an implied warranty by a fertilizer salesman. The container of the fertilizer, which the farmer did read, contained a disclaimer of warranty stating that there was to be no other express or implied warranties and limited any remedy only to direct damages.
AGREEMENT & GOOD FAITH
Good Faith. Under §1-203, the duty of good faith is implied in all agreements under the Code and is not disclaimable by the parties. There are no independent actions for breach of good faith.
Good Faith:
See Sons of Thunder v. Borden. In Thunder, the court held that companies violate the doctrine of good faith when they behave in ways that are commercially unreasonable.
Sons of Thunder v. Borden – While stating that implied terms cannot override the express terms of an agreement, the court held that Borden violated the Code’s “honesty in fact” standard of good faith as well as NJ’s common law good faith by exercising an express termination clause in their contract with Son’s of Thunder, reasoning that Thunder had a right to receive the “fruits of their contract” which was destroyed through the exercise of an express termination clause. By exercising an express term, Borden violated good faith. The case opens up the flood gates for suits against larger companies for violations of good faith in NJ.
· Objective Good Faith Standard – Under §2-103(1)(b) “Good Faith” in the case of a merchant means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.
M.C.C. v. Ceramica – The court determined that where there was an international requirements contract for the sale of tiles, the CISG does not preclude parole evidence and the jury would need to determine the subjective intent of the parties, through witnesses, under the CISG to determine whether the parties intended to incorporate terms contained on the back of
their contract’s implied terms of price controls based on usage of trade and course of dealing, and for breach of good faith by not following implied price controls that were universal throughout the industry. The court held that a reasonable jury could have found price protection was incorporated into the original agreement, and that price protection was reasonably consistent with the express terms of the agreement.
· Seems this case was unfairly decided. Shell Oil was held accountable for giving price protection based upon usage of trade, however they did not take into account unforeseen events such as the oil embargo.
· Reasonable Consistency – Under §1-205(4) where the course of dealing and usage of trade combined are not reasonably consistent with the other express or implied terms of an agreement, the express terms of the agreement control.
Oregon Bank v. Nautilus Crane – Crane company owed the manufacturer $225,000 for the purchase of cranes. The mfg. assigned its Acct. Recievable to the Oregon Bank. The bank attempted to collect from Nautilus (crane company), who claims that they spent more $ repairing the cranes they purchased than they owed to mfg. Nautilus argues the course of performance between the two companies was such that if the cranes needed repairs, Nautilus would do them and deduct the money owed from current invoices with the Mfg. The bank is relying upon express terms of the warranty that come with each crane sold.
· A course of performance inconsistent with terms of a sales agreement may operate to waive a disclaimer and thereby reinstate warranties of merchantability and fitness for a particular purpose implied by law.
BATTLE OF THE FORMS
· Battle of the Forms. § 2-207. (1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.
· Incorporation of Proposed Terms. Under §2-207(2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:
