Commercial Law Outline

Paula Franzese, Commercial Law Survey, Fall 2010
 
I.                 ARTICLE 2: CONTRACT FOR THE SALE OF GOODS
 
Always say: “Article 2 applies to contracts for the sale of goods, which means the passing of title from seller to buyer in exchange for a price.”
 
Guideposts:
 
(1)    Look for abuse during the formation stage and performance phase. 
a.       Abuses during the formation stage of a contract are to be regulated by the code’s unconscionability doctrine, which is defined under 2-302. 
                                                               i.      Unconscionability includes concealment, misrepresentation, wielding unfair advantage (vulnerability of other). 
b.      Abuses during the performance phases are to be regulated by the Good Faith Doctrine, which is defined under 1-201(20). 
                                                               i.      A violation would include getting more money without more consideration during the performance period.
(2)    Merchants are held to a higher standard (2-104)
a.       Merchant means a person who deals in the 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.
(3)    De-emphasis of formalities: Honor substance over form.
a.       If the parties intended to conclude the transaction with finality, the code will strive to give life to the parties’ agreement.
 
UCC Sections to sustain the Guideposts:
 
·         1-103: liberally construe the UCC.  The supplemental principles of law and equity continue to apply, unless clearly negated by the particular UCC provision.  Always consider equitable provisions: unjust enrichment, detrimental reliance, promissory estoppel, fraud, and conversion.
·         1-201: Definition.
·         1-301: Territorial Applicability.  Always stipulate to choice of law in the contract.
·         1-303: Triplets.  These three phrases always inform a contract.
 
General Guideposts for Article 2 Analysis:
Once you are sure you are within Article 2…
 
1.       Formation
2.       Content
3.       Performance
4.       Breach
5.       Remedies
 
 
 
 
ABUSES:
 
1.       Formation Stage: Unconscionability
During the formation stage of a contract, the code regulates, as a matter of law, abuses based on the unconscionability doctrine under 2-302.  While it is not defined in the code, common law defines it:
 
Unconscionability means a disparity in bargaining power coupled with contract terms that unreasonably favor the party with the superior bargaining power (i.e. unfair surprise or undue hardship to the party with lesser power).  According to 2-302’s comments, the basic test is whether, in light of the general commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract.
 
·          Under (2) of 2-302, when it is claimed or appears to the court that the contract or any clause thereof may be unconscionable:
o    The parties shall be afforded a reasonable opportunity to present evidence as to the commercial setting, purpose, and effect to aid the court.  The court’s failure to allow the opportunity to brief the issue is reversible error.
o    § 1-103: Never divorce the question of unconscionability from the contract’s commercial setting.  
o    Hindsight is irrelevant: gauge fairness on the facts as they existed at the contract’s formation
 
·          Under (1) of 2-302, If unconscionability is found, the court may:
1.       Refuse to enforce the contract as a whole
a.       (Consumer fraud cases)
2.       Enforce the remainder of the contract and nullify the offense term; or
a.       How to replace the nullified term:
                                                                           i.      Parties may reconvene and privately barter subject to the court’s approval;
                                                                         ii.      Parties may reconvene and privately barter, pursuant to mediation;
                                                                        iii.      Parties may reconvene and privately barter subject to a judicial floor and ceiling; or
                                                                       iv.      The court may use the UCC gap-filler sections (i.e. price under 2-305).
3.       Limit the application of any unconscionable clause to avoid any unconscionable result. 
a.       The court may redraft the offensive provision.
 
 
2.       Performance Stage: Good Faith
Good Faith means “honesty in fact and the observance of reasonable commercial standards of fair dealing; thus, the definition is both subjective and objective.  See 1-201(2)
 
·          Objective: observance of reasonable commercial standards of fair dealing
o    This helps the parties predict the outcome of an Article 2 contractual agreement.
o    Merchants are assumed to have knowledge of the reasonable commercial standard. 
 
·          Subjective: honesty in fact
o    Pure heart and empty head
 
1-304: Obligation of Good Faith.  Every contract or duty within the UCC imposes an obligation of good faith in its performance and enforcement.
 
MERCHANTS
 
2 Ways to be a Merchant:
1.       Person who deals in goods of the kind:
a.       Vendors and retailers.
b.      Presumption favors attaching merchant status.
2.       Person who by virtue of expertise, skill, experience, or training holds himself out as an expert, conversant with the goods at hand
a.       Broker, shoe cobbler, handy-man
 
Merchants are held to a higher standard.
·          The reason for the higher standard is that merchant reap the benefit of consumer trust and are though to know more than customers
·          Further, reasonable expectations of consumers demand high standards.
·          Merchants are only merchants for the purpose of the goods that they have an expertise in and when dealing in the market in which the goods are customarily sold.
·          Treated harsher when they seek remedial relief and when dealing with contractual breaches.
 
Standards imposed on merchants.
·          Implied warranty of merchantability – 2-314.
·          Reply Doctrine, binding merchants by writings they don’t sign – 2-201.
·          Presumed to know industry standards and trade usage – 1-303.
 
 
SCOPE OF ARTICLE 2
 
Article 2 applies to contracts for the sale of goods.
 
Sale:
·          A contract is the present sale of goods or a contract to sell goods at a future time.  A sale 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.  See 2-106(1).
o    Key: Passing of title from the seller to the buyer for a price.
o    Does not include:
§  Licenses (Purchasing a ticket)
§  Leases (Clothing or Property)
§  Bailment (Dry Cleaners)
§  Consignments (Transf