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Contracts II
University of Kansas School of Law
Meyer, Keith G.

CONTRACTS II                                         Professor K. Meyer                                                           Spring 2003
 
1-103: Supplementary general provision; The provisions of the code displace any common law to the contrary, but the common law shall supplement the provisions of the code as necessary.
 
I. ROLE AND SCOPE OF UCC A2
 
A. ROLE – The UCC acts as a contract gap-filler. However, courts will only look to the UCC gap-fillers, if they lack a more specific indication of what the parties intended with respect to a term of dispute in a contract. Where the UCC specifically addresses a common law issue the UCC will trump the common law. However where the UCC does not address an issue the common law is presumed to supplement the code. 1-103: Supplementary general provision; The provisions of the code shall displace any common law to the contrary, but the common law shall supplement the provisions of the code as necessary.
 
1. Contract Interpretation – Before turning to gap-fillers, the court shall consider, in order: (1) the express language of the contract; (2) course of performance; (3) course of dealing; and (4) usage of trade, prior to applying A2 gap-fillers in determining the meaning of an agreement; and whenever possible should seek to construe the express terms of an agreement as consistent with the course of dealing or usage of trade.
 
a) Express Language -1-102(3): Gap-filler will not apply if the express language of the contract specifies terms. The provisions of the code may be varied (trumped) by express agreement, as long as the agreement is within the limits of good faith and commercial reasonableness. 
 
b) Course of Performance – 2-208(1): Where a written contract is silent on a particular matter, the parties’ course of performance within that contract may establish an agreement by implication concerning that matter. “Where the K for sale involves repeated occasions for performance by either party with knowledge of the nature of performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection shall be relevant to determining the meaning of the agreement.”   
 
c) Course of Dealing – 1-205(1): “A course of dealing is a sequence of previous conduct b/t parties to a transaction, which establishes a common basis of understanding for interpreting their expressions and conduct,” and that history may establish by implication certain standard contract terms b/t the parties. 
 
d) Usage of Trade – 1-205(2): “A usage of trade is any practice having such regularity of observance in a place or vocation as to justify an expectation that it will be observed with respect to the transaction in question.” If there is a custom in a particular industry concerning a performance term, that custom will trump the gap-filler when the two are inconsistent. 
 
2. SCOPE – 2-102:Scope; A2 applies “to transactions (sales) in goods.”
 
a) Goods Defined – 2-105(1): “Goods; all things (including specially manufactured goods) which are moveable at the time of identification to the K for sale. Goods also include the unborn young of animals and growing crops and other identified things attached to realty as described in 2-107. 
 
(1) Future Goods – 2-105(2): “Goods must be both existing and identified before any interest in them can pass. Goods which are not both existing and identified are future goods (and assumed covered by A2, under 2-105(com. 2)).” A future good is a good for which a contract has been made to acquire it at a future time, whereas a contingent right is a K for the right to acquire a good at a future time if a specified contingency occurs. Future goods are covered by A2, but contingent goods (“things in action”) are not.
 
(2) Goods to be removed from the land –
(a)  Severed with harm -2-107(1): Goods to be severed from realty; K for the sale of minerals (including oil and gas) or a structure to be removed from realty is w/in A2, if they are to be severed by the seller.
(b) Severed without harm – 2-107(2): K for the sale apart from the land of growing crops, timber, or other things readily severable w/o harm to the realty are within A2 whether the subject matter is to be severed by the buyer or the seller.
 
b) Sale Defined – 2-106: “A sale consists in the passing of title form the seller to the buyer for a price.” A2 predominantly addresses sales, however, it also applies to transaction in goods beyond sales, including bailments or other transaction in goods. Transactions are not specifically defined by the UCC.
 
3. MIXED CONTRACTS – A contract that involves the transaction of both goods and services may be covered by A2, depending on:
 
a) Predominant purpose test – The court decides whether the predominant purpose of the transaction is to sell goods or services. If it is goods, A2 applies to the whole transaction, even the services portions of it. If the predominant purpose is services, A2 does not apply to any part of the transaction, not even the goods portion. Predominant purpose is determined typically by the cost allocation b/t the goods and service components. 
 
b) Gravamen of the action test: The court determines whether the gravamen of the action is with the goods or service portion of the transaction. If the gravamen lies with the goods portion, then Article 2 will apply regardless of the predominant purpose of the transaction.
 
c) Specially manufactured goods – 2-105(1): “Goods; all things (including specially manufactured goods)…” If goods are specially manufactured the predominant cost of the contract may be due to the service of specially manufacturing the goods, nonetheless, the specially manufactured goods will fall under A2, despite the allocation of costs b/t the service and the good sold (e.g., specially fitted and manufactured contact lenses).  
 
4. MERCHANTS – Whether or not a transaction is b/t merchants will not effect whether the A2 applies, but many of A2’s substantive provision apply exclusively to merchants (e.g., implied warranties).  
 
a) Merchant defined – 2-104(1): A merchant is either a person (1) who deals in goods of the kind in question or (2) holds himself out as having the knowledge of skill peculiar to the practice or goods involved in the transaction. 
 
b) Varying requirements to be a merchant, pursuant to specific A2 provisions – 2-104(com 2):
 
(1) “Almost every person in business would be deemed a merchant,” under the language of 2-104(1). Because the substance of the UCC provisions to which this category apply “only require practices which ought to be familiar to any person in business, such as answering mail.” Those sections are: 2-201(2): statute of frauds; 2-205: firm offers; 2-207: battle of the forms; and 2-209: modification. However, this requirement only applies to a merchant acting in his mercantile capacity, rather than in a private capacity (e.g., lawyer buying fishing tackle).
 
(2) The seller is a merchant only if “the seller is a merchant with respect to goods of that kind (1).” The sections requiring this interpretation of a merchant are: 2-314: the warranty of merchantability; and 2-403(2) entrustment of goods to a merchant.
 
(3) The seller may qualify as a merchant under either the “goods of kind” or knowledge…of practices requirement (2).” The sections requiring this interpretation of a merchant are: 1-103(1)(b): requirement of good faith; 2-327(1)(c), 2-603 and 2-605 all dealing with a merchant buyers responsibility to follow seller’s instructions; 2-509: risk of loss, 2-609; adequate assurance of performance.
 
II. SCOPE ISSUES WITH LEASES
 
A. SCOPE – A2 only applies to transaction in goods, exclusive of leases. Article 2A, governs the lease of goods.
 
B. LEASEDEFINED-2A-103(1)(j): Lease; means a transfer of the right to the possession and use of goods for a term in return for consideration, but a sale is not a lease.
 
C.  SECURITY INTEREST –
 
1. Dispositive – 1-201(37)(2nd P): A transaction creates a security interest (anything other than a true lease) if: (1) the “lessee” is to pay consideration for the right of possession and use of the goods; (2) the obligation is not subject to termination by the “lessee,” and (3) any one of the following:
(a)     the original term of the lease is equal to or greater than the remaining economic life of the goods, or
(b)     the lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the goods, or
(c)     the lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement, or
(d)     the lessee has an option to own the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement.
 
* If these conditions are met the conclusion is certain that the arrangement is not a lease. If conditions are not met, “whether a transaction creates a lease or security interest is determined by the facts of each case” with consideration given to any of the above factors, as well as any additional facts related to the ultimate question of whether the grantor intended at the end of the arrangement to receive back the transacted good. 
 
2. Not Dispositive – 1-201(37) (3rd P): A transaction does not create a security interest merely because it provides that: 
(a)     the present value of the consideration the lessee is obligated to pay the lessor for the right to possession and use of the goods is substantially equal to or is greater than the fair market value of the goods at the time the lease is entered into,
(b)     the lessee assumes risk of loss of the goods, or agrees to pay taxes, insurance, filing recording, or registration fees, or service, or maintenance costs with respect to the goods, 
(c)     the lessee has an option to renew the lease or to become the owner of the goods,
(d)      the lessee has option to renew the lease for a fixed rent that is equal to or greater than the reasonably predictable fair market rent for the use of the goods for the term or the renewal at the time the option is to be performed, or
(e)     the lessee has an option to become the owner of the goods for a fixed price that is equal to or greater than the reasonably predictable fair market value of the goods at the time the option is to performed. 
 
* These factors are indicative of a security interest, but simply not dispositive.
 
D. DIFFERENTIATING – True lease vs. Disguised sale (security interest) – economic realities test – Considers the likelihood, at the time the transaction is entered into, whether the lessor will receive the goods back at a time when the goods still have meaningful economic life. If there is a reasonable likelihood that the lessor will indeed retain some residual interest in the goods, then the transaction is a true lease. If not, the transaction is a disguised sale intended for security (a sale in which the seller sells the goods on credit, but retains a special right to foreclose on the goods in the buyer’s hands).
 
1. Intent – 1-201(com. 37): The intent of the parties to create a lease or a security interest is not influential in determining which the transaction is.
 
 
E. CONSEQUENCES OF SALE V. LEASE– (1) determines whether the lessor or the creditor of the lessee has priority to the leased goods in case of default by the lessee on other obligations; (2) accounting-lease payments may be treated as periodic expenses, whereas a the purchase price of a secured sale will be treated as debt on the balance sheet; (3) taxes-lease payments may be deducted as they accrue, whereas the purchase price of an asset must be deducted as it depreciates over a statutorily prescribed period; (4) application of law- determines whether UCC Article 2, 2A, or 9 applies.
 
1. Perfection –2A-103(com. j): If the transaction creates a security interest disguised as a lease, the transaction will be governed by Article 9 and the lessor will be required to file a financing statement or take other action to perfect its interest in the goods against third parties. There is no such requirement with respect to leases under the common law and, except with respect to leases of fixture (2A-309), 2A imposes no such requirements either.
 
III. SALES CONTRACT FORMATION
 
A. FORMATION PROVISIONS – The common law requirements for contract formation are not changed, under the UCC, but the UCC is takes a much more permissive approach and will work to find a contract. The UCC does not specifically address the consideration, but it is clearly incorporated under 1-103: Supplementary general provision.  
 
1. 2-204: Formation in general;(1)A K for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract. (2) An agreement sufficient to constitute a contract for the sale may be found even though the moment of its makings it undetermined. (3) Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy (quantity needed). 
 
2. 2-206: Offer and acceptance in formation of a contract; (1) Unless otherwise unambiguously indicated by language or circumstances: (a) an offer to make a K shall be construed as inviting acceptance in any manner and medium reasonable in the circumstances; (b) a (purchase) order or other offer to buy goods for prompt current shipment shall be construed as inviting acceptance either by a prompt promise to ship or by the prompt or current shipment of conforming or non-confirming goods, but such a shipment of non-conforming goods does not constitute an acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation. 
 
3. 2-205: Firm offers; An offer by a merchant to buy or sell goods in a signed (1-201(39)) writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, not to exceed three months. 
 
B. BATTLE OF THE FORMS/CONFLICTING WRITINGS – 2-207
 
1.  Usage – 2-207(com. 1): 2-207 is applicable in two distinct situations: (1) Where an agreement has been reached in either orally or by informal correspondence and is followed by a formal confirmatory memorandum, from one or both parties, embodying the terms agreed upon, and adding terms not discussed; (2) The other is the battle of the forms, where there is an offer and acceptance, in which correspondence intended to act as an acceptance adds further minor additional or different terms (e.g., exchange of purchase order and acceptance).   
 
2. Dickered Terms – 2-207 is not meant to deal with orally dickered terms, but rather conflicting writings.
 
3. 2-207 Language –
 
a) 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 (applies to writings only), unless acceptance is expressly made conditional on assent to the additional or different terms.
 
(1) Ways in which a purported acceptance may not qualify as a definite and seasonable expression of acceptance: (1) The acceptance was not timely; or (2) The terms of the acceptance were fundamentally different from the terms of the offer (e.g., offer for apples, acceptance of oranges), however, the acceptance may differ in “material” respects; or (3) The acceptance was expressly made conditional on assent to the additional or different terms. This is accomplished by the inclusion of language that tracks the, “…, unless acceptance is expressly made conditional,” — last clause of 2-207(1).
 
b) 2-207(2): The additional terms are to be construed as proposals (to be expressly accepted or denied) for addition to the contract (b/t non-merchants). Between merchants such terms become part of the contract unless:
(1) The offer expressly limits acceptance to the terms of the offer; or
(2) They materially alter it; (com. 4 & 5, a term materially alters an agreement if it would cause “surprise or hardship if incorporated w/o express awareness,” determined in part by whether the terms are common to the industry. A disclaimer of warranties is an example of a term which would materially alter an agreement); or
(3) Notification of objection to the terms has already been given or is given within a reasonable time after notice of them is received.
 
c

nded by the parties to be a final expression of their agreement, parities may always introduce evidence of side agreements that occurred after the writing in question. This means that parties are always free to modify previous agreements regardless of how comprehensive or complete they were. Additionally, under the UCC no consideration is needed in support of contract modification. 2-209(1) Modification; An agreement modifying a contract within A2 needs no consideration to be binding.
 
2. No integration – If the writing that seeks to keep evidence out is not intended by both parties to be a final expression of the parties’ agreement, with respect to the terms included therein, then it will not serve to keep out any parol evidence.
 
3. Partial integration – final expression – Evidence of contradictory terms may not be introduced, but evidence consistent additional terms may be.
 
4. Total integration – complete and exclusive statement – No evidence of either contradictory or additional terms may be introduced, but a contract term may be explained by usage of trade, course of dealing, or course of performance
 
5. Explanation or supplementation of an existing agreement – Parties may always introduce evidence of usage of trade (1-205(2)), course of dealing (1-205(1)), or course of performance to explain or supplement the writing, regardless of the completeness of the contract, unless language in the contract specifically negates this possibility.
 
VI. WARRANTIES WITH THE SALE OF GOODS
 
A. OVERVIEW–
 
1. Express warranty –Was an express warranty made by a statement of fact, promise, description, model, or sample relating to the goods and a basis of the bargain?  
 
2. Implied warranty – Are any implied warranties created by law? Specifically look for:
 
a) Warranty of merchantability – A merchant with respect to goods of the kind sold warrants that the goods are of “merchantable” quality; or
 
b) Fitness for a particular purpose – Any seller (merchant or non-merchant) who has reason to know of the use contemplated by the buyer and that the buyer is relying on the seller’s judgment warrants that the goods are fit for that particular purpose.
 
3. Disclaimer – Have any warranties been effectively disclaimed? Remember that disclaimers are narrowly constued and that some have special requirements.
 
a) To disclaim the warranty of merchantability, the word “merchantability” must be specifically mentioned; the disclaimer may be oral or written, but if written, it must be conspicuous.
 
b) To disclaim the warranty of fitness for a particular purpose, the disclaimer must be in writing and must be conspicuous.
 
4. Breach – Has any warranty been breached, and, if so, what is the effect of the breach? If the goods have not lived up to the warranty, consider the UCC requirements of proximate cause and notice, and the available remedies. Also if the goods are consumer goods, think about the effects of the Magnuson-Moss Act.
 
B. EXPRESS WARRANTIES
 
1. 2-313:Express warranties; (1) Express warranties by the seller are created as follows: (a) Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise. (b) Any description of the goods, which is made part of the basis of the bargain, creates an express warranty that the goods shall conform to description. (c) Any sample or model, which is made part of the basis of the bargain, creates an express warranty that the whole of the goods shall conform to the sample or model. (2) It is not necessary to the creation of an express warranty that the seller use formal words such as “warrant” or “guarantee” or that he have a specific intention to make a warranty, but an affirmation merely of the value of the goods or a statement purporting to be merely the seller’s opinion or commendation of the goods does not create a warranty.
 
2. Creation – Express warranties must be affirmatively created by the seller through affirmations of fact, promises, descriptions, samples, or models, and must become part of the basis of the bargain.
 
a) No technical words – Any affirmation of fact (“this is a new car”), promise made in connection with the sale (“if it doesn’t work I will fix it”), description of goods (when it arrive, it will be orange”), or sample or model (“it will look just like this baby here”) may be sufficient. It is not necessary that the seller use technical words like “guaranty” or “warranty.”
 
b) Written or oral – An express warranty may be created by words or writing.
 
c) Seller’s intent or culpability immaterial – No intent to warrant is required. If the word used amount to a warranty, it is not material that the seller did not intend to create a warranty or to be bound by it. Where the warranty is breached the seller becomes absolutely liable. The fact that the warranty was given in good faith, or that the seller was not negligent is immaterial.
 
3. Fact vs. Opinion – In determining whether portions of a sales pitch constitute an express warranty, 2-313(2) provides “an affirmation merely of the value of the goods or statement purporting to be merely the seller’s opinion or commendation of the goods does not create a warranty.” Thus a seller will be held liable only for statements of factor promises – not mere puffing.
 
a) Whether a particular statement by a seller amounts to a true express warranty or mere puffing is a fact specific determination. Relevant factors to the inquiry include:
(1) Specific language is more likely to be construed as a warranty than are vague assertions. For example, “this car get 22 miles to the gallon is a better bet to be an express warranty than “this is a great car.”
(2) A written statement is more likely to be construed as a warranty than an oral statement.
(3) The context in which the seller’s statement was made will normally be important in deciding whether the statement is an express warranty rather than puffing. For example, in a context where the seller was making a statement in response to the buyer’s request that the seller give his opinion of the product, that is at least a factor that weighs in favor of the seller’s statement being puffing.
(4) The reasonableness of the buyer’s reliance on the seller’s statement. If the buyer’s reliance on the seller’s statement was reasonable under the circumstances, that argues in favor of an express warranty rather than puffing. See Asai Corp, CB 122.
 
(5) Puffing – 2-313(com 8): Concerning the affirmation of value or a seller’s commendation, under 2-313(2), all of the statements of the seller likely are viewed as becomin