· This is a course about risk allocation.
· Commercial enter into deals because they trust their partners.
· The law in this area does two things:
1. Creates a background allocation of risks, so it tells us who bears the risk.
2. Law becomes important when trust breaks down. Parties enter into commercial contracts in order to predict things when normal mechanisms turn out to be insufficient.
A seller is going to sell 20 carloads of coffee beans every month for 3 years and the buyer says that he would pay x amount of dollars subject to a consumer price index (so if the index goes up the price paid goes up) for the coffee beans.
Let’s say the beans are different type than what expected, but the same value, does the buyer has to pay for those coffee beans? Same value but different type, what should we do?
The lawyer’s job is to anticipate the problems.
The role model for this course is the planner and the adviser that can avoid the problems and takes care of the problem before they arise.
Uniform Commercial Code
It has to be interpreted in a holistic way.
Article 2 is state law, it’s not federal law. This survived intact from the 60’s to the 90’s, but later there were technological things that needed to be added. Finally a few years ago, there was a revision and 0 states have adopted the provision.
United Nations Convention
1990 the United Nations Convention was drafted by representatives of a lot of countries drafted it and as of today 65 states have adopted it. However, England, Japan and Brazil have not adopted.
These statutes are intended to govern a wide range of transactions.
A lot of this course is about interpretation.
The CISG doesn’t become the law of the nation, unless it’s adopted it.
This is enforced by national courts, there’s no international tribunal for this disputes. As a result, some level of non-uniformity is inevitable.
There are 6 authoritative versions of CISG in different languages. Therefore, there’s some non-uniformity because the courts are going to interpret it in different ways.
Also non-uniformity will arise from political issues because courts from other countries will be reluctant to follow interpretation from other courts
Article 2 of UCC
· The contract, not the property (title) dominates article 2. The rights and duties of the parties under the Code are determined by their contract so as to capture the intention of the parties, the Factual Bargaining of the buyer and seller.
· Applies to transactions in goods.
· Goods are defined in 2-105:
o Goods: all things including manufactured goods which are moveable at the time of identification to the contract for sale. It also includes other identified things attached to realty. So a house is not a good because it’s not moveable.
An interest in goods can only be passed if the goods are both existing and identified. If they are not then they are “future goods”.
o Natural goods: Goods attached to realty such as minerals, oil, gas, etc. These are goods if they are to be severed by the seller, but as realty if they are to severed by the purchaser. Growing crops are goods.
o Fixtures: this are other goods that may become attached to the realty, such as air conditioning, water heater, etc. However, article 2 avoids the use of the term fixtures.
Most of the substantive provisions of article 2 apply to sales or contract for sales or to buyers or sellers.
Sale: passing of title from the seller to the buyer for a price.
Scope of Article 2
First assignment problem –
You have entered into a binding contract with a cabinet maker to construct custom-made cabinets that are designed to hold stereo equipment in your home. The day after you enter into the contract, the cabinetmaker repudiates prior to completing manufacture of the cabinets.
In order to answer those questions, please be thoroughly familiar with sections 2-102, 2-105, 2-106, 2-401, and 2-501 of the UCC and with Articles 1-4, 7, 10, and 95 of the CISG.
a) Are the rights of the parties under the contract governed by Article 2 of the Uniform Commercial Code (UCC) are their rights governed under article 2?
This are future goods under 2-105 (2), so they are goods and this is a transaction goods under 2-105 if the cabinets are moveable at the time of identification of the contract for sale, not now.
Now, let’s see if there’s a sale, under 2-106 there’s a sale if there’s passing of title, if the title doesn’t pass then there isn’t a sale. Under 2-401(2) the title passes when the goods are delivered, but the title hasn’t passed but, 2-106 says a contract could be for the present or future sale of goods.
But the goods have to be moveable at the time of identification, under 2-501(b) the identification takes place when the goods are shipped, marked or designated by the seller as goods for the contract for sale.
So for purposes for article 2 this are goods, they will become goods at the time of the cabinets are made.
But in this case the cabinets weren’t build, so does article 2 apply or not? It seems this was but, article 2 deals with issues of repudiation, 2-610 talks about repudiation and deals with performance not yet due, so the cabinets are taken as goods for purposes of article 2.
2-102 doesn’t really govern all transactions in goods, because goods are defined as in sales, then leases and other things are not governed by article 2.
Hybrid contracts / Hypothetical
Seller will sell books to buyer at $10,000 and the buyer is going resale the same goods back to the seller for $10,500.
Is this governed by article 2? It look like a secured loan. There might be non-sale non-commercial reasons to do this, so if it really is a secured loan, then it’s governed by article 9, but not by article 2, even though the parties made it look like it.
Let’s say a lessor and a lessee entered into a transaction for a computer lease for 10 years and if the lessee is up to date with payments at the end of the 10 years, the lessee can purchase the computer for 1 dollar. so, the good has no value at the end of the 10 years. But if the buyers intended an installment sale why is it a lease? It could be for tax reasons. But the fact that we treat the transaction as a lease for tax purposes, it doesn’t mean it’s a lease for purposes of article 2 if the parties enter into a transaction that has all the characteristics of a sale, and then we treat it as a sale.
Bonebrake Test (Princess cruise article): We could ask what the predominant purpose of the transaction is.
We could also separate the transactions.
So, we have different tests to deal with the transactions, so why favor one test over the other. The majority of courts use the predominant purpose test.
Loughridge v Goodyear Tire & Rubber
Issue – is it a good or a fixture?
Heatway sells parts for hydronic radiant heating systems.
Goodyear manufactured and sold a hose used in Heatway’s radiant system.
Plaintiffs bring claims for breach of express warranty, breach of implied warranty of merchantability, and breach of implied warranty of fitness for a particular purpose against Goodyear.
Goodyear’s argument: the claims should be dismissed because the transaction didn’t involve a sale of goods but rather a fixture or realty.
The hose was moveable at the time of the identification of the contract for sale, making it a good.
Separate units of goods which are later incorporated into a home or building are still goods at the time that they are procured for installation.
The fact that materials sold might later be installed an
the convention would apply since it’s not supplying materials necessary for such goods.
i) What happens if the buyer provides material. The convention would apply depending on the interpretation of the word “substantial”,
Article 3(1) – the convention wouldn’t apply if the buyer supplied a substantial part of the materials necessary.
ii) Sale and maintain computers for 10 years. The convention would apply since the main purpose of the contract is the sale of computers and the service is incidental.
Article 3(2) – The CISG doesn’t apply to where the contracts have a preponderant part consist of service contracts.
* Preponderant in 3(2) makes you think that substantial in 3(1) is not a quantitative interpretation. Because preponderant makes you think of majority.
c) i) Suit is filed in NY does the CISG apply? the convention applies. NY court applies, but NY includes federal law, the CISG is federal law, so CISG apply. Or the court could say German law apply and since Germany has ratified the CISG, the CISG applies.
ii) Suit is filed in Germany – the convention applies. Same answer as above.
iii) Suit filed in England – the convention is applied. Even if England has not adopted the CISG, doesn’t mean the CISG won’t apply because they’ll look at conflict of laws and if the law of NY or the law of Germany apply, then CISG will apply.
c) Buyer’s country is Brazil, Brazil hadn’t ratified the CISG at the time of the contract. The application of conflict of laws leads to the application of German law. So, 1(1)(a) doesn’t apply because Brazil wasn’t a contracting States. But 1(1)(b) might apply which refers to the conflict of law rule, so if German law applies, then the CISG applies, even though Brazil is not a contracting State.
This is an argued rule because why would the residents of a country that didn’t adopt the convention should be governed by the CISG. So, article 95 allows to opt out of 1(1)(b).
January 12, 2006
e) buyer’s country is US. The convention doesn’t apply.
Even though we have an international transaction, even if one country adopted CISG and even the law governing is CISG, that country wouldn’t apply the CISG because there’s a reservation of article 95 and this case the US would apply the UCC.
This reveals a certain political element, so the CISG is written by diplomats and law professor and their objective is different from commercial parties. So, how effective is the CISG for purposes of commercial law? This is a good thing to think about.
Questions of page 29
2)no, according to article 5. doesn’t apply to liability of the seller for injury caused by the goods to any person.
3) the convention doesn’t apply under section 4(a) because this is a question of validity.
Article 6 / Party Autonomy
The CISG is open to the party autonomy. The parties can opt out of the CISG, so how do we know if they opt out. The Asante case tells us something about this.
Asante Technologies Inc. v PMC