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Contracts II
University of Kansas School of Law
Mulligan, Lumen N.

Contracts II Mulligan Fall 2014

Intro – Text of UCC Art. 1

· Coverage of Course

i. UCC (State Law)

1. Art. 1 – General Provisions and Definitions

2. Art. 2 – Transactions in Goods

ii. Magnuson-Moss Warranty Act (Federal Law)

1. Applies to consumer goods only

iii. CISG

1. Applies to sales of international goods

The K Cause of Action

iv. Valid K

1. Mutual Assent

2. Consideration

3. Legality of the Object

4. Capacity

v. Material Breach

1. Substantial impairment

2. Anticipatory repudiation

vi. Damages

1. Measuring expectation

2. Specific Performances

3. Liquidated Damages

4. Restitution

vii. Defenses

· What is a K?

i. A K represents a series of (mostly) voluntarily assumed rights and duties (i.e., promises), the breach of which normally empowers the non=breaching party to sue for damages.

ii. Contrasted with torts, which are mostly involuntarily assumed duties.

iii. “Contract” is a legal conclusion not a piece of paper (which is really a memorandum).

iv. Actual agreement +/- legally imposed default or mandatory terms = Contractual rights and duties.

v. Agreement and contract are defined differently:

vi. UCC §1-201(3) “Agreement” means the bargain of the parties in fact as found in their language or by implication from other circumstances including course of dealing or usage of trade or course of performance.

vii. UCC §1-201(12) “Contract” means the total legal obligation which results form the parties’ agreement as affected by this Act and any other applicable rules of law.

· Function of UCC

i. It is the Act, Art. 2, specifically, that provides these legally imposed default and mandatory rules that supplements “agreements”

ii. Default rules are those rules that apply if the parties are silent but which may be opted out of.

iii. The UCC adds all this stuff without having to write them in because they are default rules. You can K around these default rules in some cases.

· Benefits of Having Default Rules:

i. Certainty – Certainty = elimination of risk, which has value to interested parties. Certainty promotes economic activity because participants don’t have to hedge against unknown risks.

ii. Reduction in Transaction Costs – Parties can spend less time negotiating. Parties can engage in more contracts. Enforcement is easier because there are theoretically fewer litigated disputes.

· Optional Default Rules

i. Default rules may or may not be mandatory.

1. Parties can contract around non-mandatory default rules if those rules do not fit the parties’ transaction

2. Parties cannot K around or opt out of mandatory default rules.

ii. Most UCC terms are non-mandatory:

1. §1-302(a) “The effect of provisions of this Act may be varied by agreement, except as otherwise provided in this Act.”

2. §1-302(b) “The obligations of good faith, diligence, reasonableness and care prescribed by this Act may not be disclaimed by agreement.”

iii. Parties cannot change the Statute of Frauds

iv. It is important to know what the default rules are because it is the starting point.

· Statutory Analysis

i. Focus on language of the statute

1. Use definitions

2. Purpose: find out why the statute is there. Understanding the purpose will help digest the rule.

3. Scope: what’s covered, what’s not?

4. Addressee: commands whom?

5. Command: commands what?

a. Sometimes, this is called a permission

6. Exceptions: outs?

7. Look for logical operators like “if/then” “ands” & “ors”

8. Consequences: what if s/he doesn’t?

9. Precision: how easy to apply?

10. Consider ambiguities

ii. Other considerations

1. Legislative history (e.g., Official Comments)

2. Policy

iii. Cases and Statutory Analysis

· Role of the Common Law:

i. §1-103(b): Unless displaced by the particular provisions of this Act, the principles of law and equity shall supplement its provisions.

· General Definitions

i. (43) Written or writing includes printing, typewriting or any other intentional reduction to tangible form

ii. (31) Record means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable….

iii. (37) “Signed” includes any symbol executed or adopted by a party with present intention to authenticate a writing.

1. Statute of frauds doesn’t get in the way here.

iv. Federal E-Sign, 15 USC 7001(a): With respect to any transaction in or affecting interstate or foreign commerce—(1) a signature may not be denied legal effect, validity, or enforceability solely because it is in electronic form…

v. But see 1-108.

· 1-303. Course of Performance, Course of Dealing, and Usage of Trade

i. 1-303(a) Course of Performance is a sequence of conduct between the parties to a particular transaction that exists if:

1. The agreement of the parties with respect to the transaction involves repeated occasions for performance by a party; and

2. The other party, with knowledge of the nature of the performance and opportunity for objection to it, accepts the performance or acquiesces in it without objection.

ii. 1-303(b) Course of Dealing is a sequence of conduct concerning previous transactions between the parties to a particular transaction that is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.

1. (This is basically course of performance, but with a distinct contract).

iii. 1-303(c) Usage of Trade is any practice or method of dealing having such regularity of observance in a plcace, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question… see the rest.

iv. It is important to know the history of the K, the history of past dealings and the rules and norms of the industry. This is what makes the lawyer’s job challenging.

v. 1-303(e) – these three aspects must be construed whenever reasonable as consistent with each other. If such a construction is unreasonable, then a hierarchy is to be applied: (Ragus Co. v. City of Chicago – talking about rat-traps means you’re talking about pairs. The Ct. applied usage of trade to interpret the K ambiguity)

1. Express Terms trump all

2. Course of Performance

3. Course of Dealing

4. Usage of Trade

5. All these terms can be used to opt out of default rules. See 1-303 cmt. 3.

6. This is a different approach as opposed to just looking at the 4 corners of

.

1. They brought this as a K claim instead of a tort claim because:

a. Don’t have to prove fault—closer to strict liability standard.

b. The Duty of implied warranty of merchantability does not need to be in the agreement. Under tort law, there was to be an undertaking of a duty. The duty here is implied because it is in all UCC regulated Ks.

c. You would have to show fraudulent or negligent disregard and spend more time in trial.

2. The disadvantages are no punitives.

ii. D argues they aren’t merchants of the water; this isn’t a transaction of goods; they call it a service because they provide water: collect and serve. Only merchants have implied warranties.

iii. Rule of Law:

1. A warranty of merchantability is implied only if the seller is a merchant with respect to goods of that kind – 2-314

2. Water is a good under the UCC – an item can be a good even if the seller didn’t create or manufacture it.

3. The provision of goods always includes service elements such as storage and distribution. Thus, all sellers of goods will incur such costs and water providers are not unique in this regard.

iv. If we use the predominance test, then the predominant purpose is the water, which is a good.

v. Court’s Ruling:

1. They are merchants and water is a good. Therefore, a warranty of merchantability is implied in D’s sale of water.

· Mixed Contracts Tests – Ks involving a combination of goods and services, or a combo of goods and something other than services.

i. Predominance Test (majority): Whether the predominant purpose of the transaction is to sell goods or services. If it is goods, then Art. 2 applies to the whole transaction, even the services portion. If the predominant purpose is determined to be services, then Art. 2 does not apply to any part of the transaction, not even the goods portion.

1. It is unclear as to more of what: Price? Cost? Cost to buyer or seller?

ii. Gravamen of the Action Test (minority): Whether the gravamen of the action (the source of the complaint) is with the goods or the services portion of the transaction.

1. If the problem is with the goods, the Art. 2 applies even if the predominant purpose of the transaction is services rather than goods.

2. If the problem is with services, then Art. 2 does not apply, even if the predominant purpose of the transaction is goods rather than services.

3. Maybe the common law will apply to the portion not dealing with goods and the UCC will apply to the portion dealing with the goods.

· Nowhere does it say that a court cannot apply the principles of Art. 2 to subjects that are admittedly not with the formal scope of Art. 2. See 1-103, comment 1.