POLICY GOALS (1-103)
· (1) Clarify, simplify, and modernize the law governing commercial transactions
· (2) Making the law uniform among the various jurisdictions
· (3) Permit continued expansion of commercial practices
SCOPE (2-102; 2-15; 2-106; 2-107)
· Art II applies to “transactions in goods,” unless context otherwise requires (i.e. usage of trade, custom).
o “Goods” (2-105)
§ goods are all things which are movable at the time of identification to the contract
o unburn young (2-105, cmt. 1); growing crops and timber to be cut, regardless of who severs (2-107(2))
o Minerals/oil/gas and goods to be severed from realty IF severed by seller (2-107(1))
o future goods (2-105(2))
· NOT including:
o money in which the price is to be paid (money defined in 1-201(24)); although cmt 1 to 2-105suggests that where money is the subject matter of the transaction or a commodity (i.e. in the purchase of foreign currency), it is goods (unless it is an electronic transfer of foreign currency).
o investment securities
o things in action (e.g. xfer of a right to collect money from a 3rd party; xfer of the right to sue someone)
o real property
o intellectual property alone (not movable), although not clear if bought on tangible medium (i.e. an album). Def not downloads.
o software alone (here you are purchasing a license), although “smart goods” not clear
o transactions intended only to act as a security transaction (2-104), but Art 2 will apply to goods portion in mixed transaction
o cases in which other law preempts or in which Art 2 conflicts with state/federal law (2-102).
§ Taken to mean “sale,”
· But Art 2 doesn’t expressly limit it to “sales,” and sometimes apply UCC by analogy. Two approaches:
o Policy Oriented (majority): court will apply Art 2 to things other than “sales” if application of Art 2 would generate a consistent policy result.
o Transaction Oriented: court will apply Art 2 to transactions that operate like sales. Isn’t really used now that Art 2A covers leases.
o Hybrid Goods/Transactions
§ Three Tests:
· Predominate Purpose Test: looks to (1) contract language (do parties opt in/out of UCC? do parties treat goods/services as incidental?); (2) nature of supplier’s business (are they a manufacturer or a service company?); (3) value of the materials v. services provided.
o If services predominate, Art 2 does not apply at all
o If goods predominate, Art 2 applies to the whole transaction
· Gravamen of the Action Test: whether the claim relates to the goods or services portion.
o If claim relates to services, Art 2 does not apply
o If claim relates to goods, Art 2 applies to the whole contract
· Sheehan Approach (rare): applies Art 2 to the goods portion, other law to the services.
§ Specially manufactured goods are part of the definition of goods, so we don’t consider the “design aspect” services
o Art II is supplemented by the common law unless expressly displaced (1-103)
o CISG applies to contracts for sale of goods where
§ (1) parties’ places of business are in different contracting states (if multiple places of business, it is the one with the closest relationship to the contract. if none, it is the residence)
§ (2) where rules of private int’l law point to the CISG (i.e., where a court determines the law of X state applies and that state is a contracting party) (Art 95 allows countries to opt out of this, as the U.S. has done)
§ Does NOT apply:
· (1) where the sale of goods is for personal/family use unless seller neither knew nor ought to have known it would be for personal use.
o One may opt out of CISG, but only by doing it with explicit reference to the CISG.
o Mixed transactions: Something akin to predominate purpose test.
LEASE v. SERCURITY INTEREST (1-203) (just annotate code)
· Economic realities test: If the economic realities of the lease is that the lessor is going to get the goods back, and he or she is going to get the goods back when those goods have some meaningful economic life. If there is no meaningful economic life remaining (i.e. the goods are “extinguished,” then in fact what we really have is a sale with a security interest.
o We have a presumptive security interest IF: (1) the lease must not be subject to termination by the lessee (i.e., if the lease term is two years, the lessee must hang onto… the goods for the two years; the lessee must not be able to terminate); (2) the original term of the lease is equal to or greater than the remaining economic life of the goods OR the lessee is bound to renew the lease for the remaining economic life of the goods OR the lessee is bound to become the owner of the goods OR the lessee has the option of renewing the lease for the remaining economic life of the goods for no or nominal additional consideration OR the lessee has the option to become the owner of the goods for no or nominal consideration.
§ There is a definition of nominal basically, if we have fair market value, it is not nominal consideration. You can also compare the aggregate cost of the lease payments to the payment in question to determine whether consideration to renew/buy is nominal. You can also look to the original purchase price.
§ If these conditions aren’t met, it doesn’t mean that there is no security interest, it just means we don’t have a presumptive security interest. So if we don’t have these, then we go to look at the economic realities of the transaction.
o When we look at the economic realities of a transaction, we look at the realities at the time the contract was formed. But when we are looking to determine whether something is nominal consideration, we are looking at it at the time the person has the option to renew/buy.
· Hierarchy (1-303(e)):
o (1) Express terms
o (2) Course of performance (1-303; 2-208) – four requirements: (1) repeated conduct (one incidence not sufficient; (2) must be in relation to this particular contract (3) parties must have knowledge of the nature of performance; (4) parties must have an opportunity for objection (if a party consistently objects to the conduct, no course of performance is established).
o (3) Course of dealing (1-303) – (1) sequence of conduct (2) concerning previous transactions (3) that form a common basis for understanding.
o (4) Usage of trade – practice or method of dealing having great normally observed in the trade. This applies if the reasonable person in the trade would have known of the practice, even if there was no actual knowledge here.
· A lens through which to interpret the contract.
· Functions of trade terms (1-303(d))
o (1) assistance in interpretation
o (2) operation as gap fillers
· 2-204 (formation generally)
o K can be formed in any matter sufficient to show agreement, including conduct.
o No offer and acceptance need be precisely identified so long as the conduct of both parties shows an agreement
o If where terms are left open there can be a contract so long as (1) the parties intended to form one; (2) there is a reasonably certain basis for remedy.
· 2-205 (firm offers)
§ (1) Offeror must be a merchant
§ (2) must be in a writing separately signed by offeror (cmt 4) (1-201(37) has def of “signed,” letterhead sufficient)
§ (3) must have assurances that offer will be held up (i.e., “respond by May 15” insufficient)
o If met, offer must be held open for time stated, or, if none, for reasonable time.
o Can never exceed three months.
o When we aren’t in this provision:
§ If consideration is paid, (offer can be held open for > 3 months).
§ If (1)-(3) above aren’t met, we are in common-law and offer can be revoked any time before acceptance.
· 2-206 (offer and acceptance)
o Unless offeror unambiguously indicates otherwise, there are three means of acceptance:
§ (1) performance;
· Prompt shipment of conforming goods = acceptance at time of shipment (not time of delivery)
· Prompt shipment of nonconforming goods = acceptance and breach,
o unless offeree indicates that it is just for accommodation purposes, then there is no acceptance (it is a counter offer)
§ (2) promise to perform (viewed from perspective of reasonable offeror);
§ (3) beginning performance if offeror is notified within a reasonable time.
· 2-207 (battle of the forms)
o Sub (1): Is a contract formed?
§ A contract is formed if there is an expression of acceptance (or a confirming memo) that is
· (1) definite (i.e. clear that offeree wanted to form a contract; if terms vary too much, it isn’t plausible that it was an acceptance) and
· (2) seasonable (i.e. offer hasn’t lapsed),
o Unless acceptance is expressly made conditional on asset to additional/different terms.
§ Three tests from Diatom. Acceptance is expressly made conditional when offere’s response:
· (1) materially alters the obligations of the parties solely to the disadvantage of the offeror (Roto-Lith (overruled)).
· (2) predicates acceptance on clarification of additional terms (Construction Aggregates, middle ground)
· (3) makes it clear that offeree absolutely will not go fo
Viewed from the time the contract was entered into
· Many courts require both substantive and procedural; others will find unconscionability if there is an abundance of one
· Unconscionability is typically found in the consumer context
GOOD FAITH (1-304)
· Every contract within the UCC imposes a duty of good faith in its performance and enforcement.
· You can’t opt out of good faith.
· This duty does not arise until a contract exists, and it creates no independent action (more like a lens through which to view the terms, cmt 1 to 1-304)
· Good Faith Standards (jurisdictions are split as to these two):
o (1) Unrevised Art 1:
§ Non-merchants: Honesty in fact
§ Merchants: Honesty in fact AND observance of reasonable commercial standards of fair dealing in the trade
o (2) Revised Art 1:
§ Honesty in fact and the observance of reasonable commercial standards of fair dealing.
· The commercial reasonableness standards is more about fair dealing
· How do define good faith? Contractual morality? Fiduciary duty? Honest in fact? Commercial reasonableness? Absence of fraud?
· Duty of good faith does not exist at formation/negotiation stage
· Market Street: You can exploit superior knowledge of the market, but not a parties’ oversight of contractual rights/obligations. No sharp dealing. Good faith means avoiding opportunism in what should be a cooperative relationship.
· Agreements can be expressly modified at any time by assent of the parties (no consideration needed) (2-209), but there is a good faith policing mechanism.
· Good faith standard in modification (violation of any one of the elements will constitute bad faith):
o (1) Roth Steel and 2-209, cmt 2: The party asserting modification must demonstrate he/she:
§ (a) sought modification as the result of a factor which would cause the ordinary merchant to seek a modification of the contract (commercial reasonableness)
§ (b) was actually motivated by a legitimate commercial reason and that such reason is not offered merely as a pretext (honesty in fact)
§ (c) used permissible means of obtaining the modification (i.e. no extortion or overreaching) (Roth Steel)
· Although coercive conduct is evidence that a modification is sought in bad faith, it can be rebutted by the other party (Roth Steel)
· Ways the contract can be changed:
o Modification: some kind of offer to modify and assent by the other party
o Waiver: some voluntary relinquishment of a known right. A failed modification can act as a waiver under 2-209(4). Waiver can be retracted as to future performance as long as the other party hasn’t relied (2-209(5)).
o Estoppel: some sort of reliance
o Course of performance: non-express modification occurring from repeated conduct, so long as such conduct does not conflict with the express terms of the agreement (1-303(f)). – just relevant to show an express term has been waived or modified
· Modification and Statute of Frauds (2-209(3)):
o Modification will be subject to statute of frauds in some situations. It is unclear.
§ Four approaches – Contract must be in writing IF:
§ (1) the original contract was within 2-201, any modification must be in writing
§ (2) the terms it adds brings the entire deal within 2-201 for the first time (e.g. $200 to $501)
§ (3) the modification itself is over $500
§ (4) the modification change the quantity term of an agreement that originally fell within 2-201.
· No Oral Modifications Clause/Private Statute of Frauds (2-209(2)) – this eliminates party’s ability to argue modification without a writing, but waiver and estoppel are still possible.