Commercial Transactions- Midterm 1 Outline

Chapter 16

I. Scope of Article 2a. Sale – “consists in the passing of title from the seller to the buyer for a price”

UCC § 2-106(1)b. Good – All things (including manufactured goods) that are movable at the time

of identification to the contract for sale; tangible personal property (automobiles…)

c. Merchant – Person who deals in goods of the kind II. K Formation and Modification

a. Offers. -Under Common law, offers are freely revocable at any time prior to acceptance unless, the parties have agreed to an ‘option ‘contract to keep the offer open.- General Rule Option K: a promise to hold an offer open NEEDS consideration to be binding. EXCEPTION: firm offer

i. Open Terms - K exists as long as 1) parties intended to form K and 2) court has a reasonable basis to grant remedy

1. Price - reasonable price at time of delivery2. Payment - Payment due at time and place of delivery AND any

commercially reasonable means of payment.3. Delivery - Sellers place of business.4. Quantity

a. Requirements Kb. Output

ii. “Firm offer” – merchant offeror gives assurances in signed writing that offer will remain open for a stated period of time or reasonable period (either case no more than 3 months) but does not need consideration.

b. Acceptance. i. Methods of acceptance - Any means of communication reasonable

under the circumstances unless K states otherwise.((UCC, a definite and seasonable expression of acceptance operates as acceptance even if it contains terms in addition to, or differenct from, the offer). Modifications in code contracts do not need consideration.

1. “Mirror Image Rule” – Acceptance must exactly conform to (mirror) the terms of the offer.

ii. Unilateral offers - acceptance by prompt shipment/promise to ship of conforming OR nonconforming goods. PROMISE OR PERFORMANCE

1. Nonconforming - both acceptance and breach, except where seller SEASONABLY notifies buyer that nonconformity is ACCOMMODATION AND NOT ACCEPTANCE.

a. “Unilateral Contract Trick”- if the offeree seller elects to ship, the UCC provides that acceptance occurs by the prompt or current shipment of conforming or non-conforming goods.

i. So, if someone sends the wrong goods, it’s still an acceptance and essentially a breach.

b. “Accommodation Substitution” –Sending 500 blue fans instead of 500 black fans. IF buyer can use them-acceptance. If not- buyer returns them without legal consequence.

2. Notification - IF BEGIN PERFORMANCE (like building something), must notify offeror within a reasonable period of time or offeror can treat as no acceptance.

a. ANY UNILATERAL CONTRACT, notification does not creat the contract; but performance does.

iii. Additional Terms ("Battle of the Forms")Designed to enforce the intent of the parties. Neither party is allowed to escape contractual obligation because of MINOR DESCREPANCIFES BETWEEN PREPRINTED FORMS

1. Merchant/non-merchant or non-merchant/non-merchant - Offeror's terms control. Offeree additional terms only proposals.

2. Merchant/Merchant - Offeree's terms control. Additional terms automatically become part of K unless: 1) Offeror limits acceptance to his/her terms only, 2) Additional terms materially alter K, or 3) offeror objects within reasonable period of time.

3. Conditional acceptances - if acceptance w/ additional terms conditioned on offeror acceptance of additional terms is counteroffer and not acceptance.

4. "Court strike" - if conduct of parties implies K, but have battle of the form problems, K consists of the agreed to terms

iv. Silence. [Maybe if explicit statement from offeree; trade custom; express agreement; prior course of dealing]

1. Offeree’s failure to respond to the offer does not constitute acceptance.

v. “Mailbox Acceptance Rule” (p153)1. An acceptance is normally effective when SENT (placed in

mailbox)2. Reasonable medium is effective when sent3. Unreasonable medium is effective when received4. Under an option contract (30 days), notification sent but not

received within that period is ineffective. 5. Rejection- effective when received. Acceptance- effective when

sentc. Consideration.

If sought in good faith, need NO consideration to be binding.i. Modifications. No consideration but must be in good faith. NOTE - may

need to be in writing if SOF involved or K says otherwise.1. If both seller and buyer change their duties, consideration

would exist on both sides2. If a K modification is granted by one party it needs no

consideration to be bindingd. Legality.

i. Unconscionability. 1. SUBSTANTIVE/OPPRESSION- When K is unreasonably harsh or

unfair- super bargaining power of one party2. PROCEDURAL/UNFAIR SURPRISE- When a person signs a form K

containing a provision, usually in fine print, that substantially alters his or her reasonable expectations under the agreement.

3. Usually person signing has limited intelligence, financial resources, educ etc.

4. Current trend away from.5. Rule - absence of meaningful choice on the part of one party

together with terms unreasonably favorable to other party (gross bargaining inequality)

6. Result - 1) avoid K, 2) enforce remainder w/o provision, 3) limit provision to avoid harm.

e. Statute of Frauds. i. RULE - K where goods priced at $500.00 or more must be in writing.

ii. Writing sufficiency and modification.1. Writing or memo sufficient as long as it indicates parties

intended to K, states quantity, and signed by party to be charged- needs not any other term

2. Merchant/Merchant - after oral agreement one party sends signed, written confirmation indicated terms AND receiving merchant must have reason to know of its contents. Must object within 10 days of receipt or cannot argue SOF.

a. In a modification, SOF is applied to the new modified contract that contains terms found in both the original and the modifying contract.

3. EXCEPTIONS:a. Part performance - ONLY to the extent of payment

received/accepted or goods received/accepted.b. Specially manufactured goods - ONLY if 1) goods are

specially manufactured for a particular buyer, 2) not suitable for resale in ordinary course of business, and 3) already substantial performance.

c. admissions in court proceedingsf. Parol Evidence.

i. Rule - if integrated K or confirming memo of parties agreement, terms cannot be contradicted by evidence of any prior agreement/contemporaneous oral agreements; HOWEVER, terms may be explained/supplemented by CONSISTENT ADDITONAL TERMS or by COURSE OF DEALING, TRADE USAGE, or COURSE OF PERFORMANCE.

ii. EXCEPTIONS1. Course of Dealing - Sequence of conduct b/n parties prior to the

agreement. EX: previous contracts btw parties may establish a pattern of conduct useful in interpreting the disputed k

2. Trade Usage – Any regularly observed practice or method of dealing in a trade, place, or location. Ex: 2x4 piece of wood is not actually 2 inches by 4 inches

3. Course of Performance – Action taken by the parties pursuant of a K involving REPEATED occasions for performance such as installment k knowledge of the nature of the others performance.

iii. Priority of terms: 1) express K terms, 2) C of P, 3) C of D, and 4) T U. a. Terms > COP, COP>COD & U of T; COD> U of T

III. General Obligations of the Partiesa. Performance - good faith and fair dealing.

i. Perfect Tender Rule (Substantial Performance)- If goods or the tender of delivery fail in any respect to conform to the K, the buyer may reject entire shipment.

1. EXCEPTIONS:a. Installment K – Requiring the seller to deliver the good

in separate lots to be separately accepted by buyer.b. Perfect Tender Rule (p 272) – Means that there is no

“substantial performance” doctrine applicable to contracts for the sale of goods. Perfect tender is not required if the parties’ contract allows a less strict standard of performance.

c. Under one UCC provision, gives seller the opportunity to cure or correct a defective performance without liability of breach

d. Buyer may lose right to reject tender through failure to make an adequate rejection

e. Buyer may revoke a PREVIOUS ACCEPTANCE OF GOODS but only if the nonconformity substantially impairs their value to him.

ii. Adequate assurance (safeguarding expectation of performance)1. Rule - Whenever reasonable grounds for insecurity arise

concerning the willingness or ability of either party to perform, the "insecure" party may:

a. Demand adequate assurance of due performance in writing AND

b. Until he receives such assurance may, if commercially reasonable, suspend any performance for which he has not already received the agreed return

2. Once demanded and received, other party has a reasonable time (not more than 30 days) to provide adequate assurance or the failure is treated as an ANTICIPATORY REPUDIATION.

iii. Anticipatory Repudiation. 1. Occurs when a party, by words or conduct, unequivocally

indicates its inability or unwillingness to perform without breach.

2. Gives the other party an immediate claim against the repudiating party for damages for total breach of the K even though the time agreed upon for performance has not yet arrived.

3. Note that the loss must SUBSTANTIALLY IMPAIR the value of the K.

4. Remedies: 1) wait to see if perform or 2) seek remedy.5. May retract unless aggrieved party has;

a. materially changed position in reliance on repudiation or

b. Canceled or indicated that repudiation considered final.iv. Excuses for non-performance

1. Commercial impracticability – unforeseen event happen making it impossible to perform. Contract duties are discharged under the doctrine of impracticability not only if performance is objectively impossible, but also if it is rendered impracticable due to circumstances causing extreme or unreasonable difficulty or expense.

a. Examples - always think foreseeability i. Death or Incapacity of person necessary for

performance - ii. Destruction of necessary subject matter -

1. Failure to anticipated source of supply – If k said make cloth- must be made. If k said make cloth in specific factory, factory burns down- discharged.

2. Casualty to identified goods – When goods which have been identified to the contract are destroyed prior to performance. Under 2-613, if (1) the contract involves the sale of goods indentified when the contract is made, and (2) the goods suffer casualty through no fault of either party, (3) before risk of loss passes to the buyer, then:

- If the loss is total, the contract is avoided(restricted)

- If the loss is partial or if the goods have deteriorated so as no longer to conform to the contract, the buyer may demand inspection and elect either to avoid the contract or accept the goods with an allowance against the price for the deterioration or deficiency in quality.

- If total loss, the buyer has no action for breach against the seller.

iii. Supervening illegality, gov't regs/order – Parties to a contract assume that, subsequent to formation of a contract, the government will not (1) make acts required for performance illegal, or (2) otherwise intervene by regulation or order to make performance impracticable.

iv. Increased costs- Circumstances making performance more expensive or difficult than anticipated usually do not form a basis for impracticability.

2. Frustration of Purpose – doctrine relieves a contracting party of her duty to perform when the underlying purpose of the contract is defeated. In such cases, due to a supervening event, the value of the other party’s performance becomes virtually worthless to the obligator.

b. Seller's Obligationsi. Tender of delivery - The parties to a sale of goods usually expressly

provide for the time, place, and manner of delivery1. Time – Reasonable time. Usually within the seller’s discretion2. Manner –The seller must (1) put and hold conforming goods at

the buyer’s disposition and (2) give the buyer reasonable notification to take delivery

a. If K requires payment ON delivery, seller may retain control of goods until payment

b. Buyer MUST furnish facilities (a truck) for receiving the goods

c. If in possession of a bailee (carrier) written direction must be made to give buyer right to complete control of the goods

ii. Place of delivery –Seller’s place of business. If none, then his residenceiii. Delivery by Lots – requires the seller to tender all goods called for the by

the k in a single delivery and the buyer’s payment is due upon that tender.

1. Payment only required for say 4 of the 8 goods that were delivered

iv. Delivery by carrier1. Types of K’s

a. Shipment K - the seller is required to ship the goods to the buyer but is NOT required to deliver them at any particular destination.

Sellers obligations in Shipment K are (1) put goods in possession of carrier (2) obtain/deliver and doc. Necessary for buyer to obtain possession (3) notify buyer of shipment

b. Destination K – Seller is required to transport the goods to a stated destination and there tender them to the buyer

2. Termsa. FOB - “Free on board” - indicates selling price includes

transpiration costs to the specific FOB place named in K.

Keep in mind - FOB Seller's city OR place of business; FOB Buyer's city OR place of business. Which is what (destination or shipment K)?

i. If it’s F.O.B., place of destination- seller is required (at sellers expense and risk) to transport the goods to the named destination and there tender delivery to the buyer- creates destination k

ii. If it’s F.O.B., and names a specific vessel or car, then the seller is additionally obligated (at expense and risk) to load the goods on board.

b. FAS – “Free Along Side”- seller, at his own expense, must deliver the goods alongside the carrier.

i. Seller obligated to deliver the goods alongside the vessel in the manner usual in that port and obtain and tender to the buyer a receipt for the goods.

ii. Under both FOB and FAS, the buyer must promptly give the seller any instruction necessary to make delivery

c. C.I.F – price of the goods include the cost of goods, insurance and freight to the named destination

i. “landed” or “duty paid” requires the seller to pay import duties imposed by buyer’s country

d. Ex-Ship - think "delivery from the carrying vessel" Destination k, requiring the seller to bear the expense and risk of the ocean voyage and of unloading the goods at the named port of destination.

i. Does NOT require any delivery from any particular vessel

ii. Risk on seller until goods leave the shipe. “No arrival, NO sale” – sometimes used in destination

k’s to relieve the seller from liability for breach of K if the goods fail to arrive

v. SELLER’S OBLIGATIONS IN SHIPPING K1. Must be goods in the possession of the carrier and make k for

their transportation to the buyer2. Must obtain and promptly deliver or tender any document

necessary to enable buyer to obtain possession of the goods3. Promptly notify the buyer of shipment

a. Failure of these requirements is NOT a ground for rejection unless material loss or delay ensues.

c. Buyer's Obligationsi. Duty of Payment -

1. Payment and delivery are exchanged simultaneously2. Acceptable payment is what is agreed upon3. Seller can’t demand cash when check was agreed

ii. Right of Inspection –

1. Buyer must tender payment at time and place at which buyer is to receive the goods

2. Buyer has a right before payment to inspect goods3. Seller is not required to relinquish possession during inspection 4. Expense of inspection must be borne by buyer. May be

recovered if nonconformity revealed by inspection5. IN CIF and CF and C.O.D. CONTRACTS, THE UBYER IS NOT

ENTITLED TO INSPECT BEFORE PAYMENT - Must pay before.a. Payment does not constitute acceptance in case of

nonconformityIV. Auctions

a. What is it? Is a public sale of property (either real or personal) to the highest bidder by an auctioneer, who is authorized or licensed by law to conduct such sales.

b. How does it work? The auctioneer (agent of seller) makes a bid(offer) from prospective buyers present at the sale. The auction is complete when the highest bidder’s offer is accepted – if a bid is made while the hammer is falling, the auctioneer may either reopen the bidding, or declare the goods sold at the bid on which the hammer was falling.

c. With reserve – This means that the auctioneer (seller) may withdraw the goods at any time prior to announcing completion of the sale as indicated above.

d. Without reserve – The auctioneer, after the calls for bids, may not withdraw an article or lot, unless no bids are received within a reasonable time.

-REGARDLESS of the character of the auction, any bidder may retract his bid prior to the auctioneer’s announcement of the completion of the sale. However, one bidder’s retraction doers not revive any prior bid.- The seller may bid at the auction provided notice is given that liberty for such bidding is reserved. If no notice is given, and the auctioneer knowingly receives a bid on the seller’s behalf or the seller makes or procures such a bid, the buyer may, at his option, either 1) avoid the sale, or 2) take the goods at the last good faith bid prior to completion of the sale.

-This rule does not apply if the seller’s bid is made at a “forced sale” – not voluntarily made by the seller but prescribed by law to satisfy some obligation of the seller, such as mortage, debt etc.

Chapter 17Title and ROL

V. Identificationa. Definition - refers to the process by which the particular goods to which the

contract refers are designated or specified. 1. Does title pass w/o ID? Goods must be both existing and

identified before any interest in them, including title can pass. ii. Other problems when no ID? Risk of Loss- determines the rights of the

parties if the goods involved in the contract are lost, destroyed or stolen. Risk of loss principles determines when the risk of such casualties passes from seller to the buyer.

iii. Goods not both existing and identified are known as future goods, Article 2 covers both present sale of goods and a sale of future goods.

b. Time/Manner of ID- parties may explicitly agree as to the time and manner of identification. In the absence of such agreement

1. If the goods already exist and identified, identification occurs when the contract is made. It is identified to the contract at the time of.

2. If the goods are future goods, identification occurs when the goods are shipped, marked or otherwise designated by the seller as goods to which the contract refers.

3. Unborn young of animals are identified when they are conceived if the young are to born within 12 months after contracting (WEIRD)

4. Growing crops are identified when they are planted if the crops are to be harvested within 12 months or the next normal harvesting season after contracting, whichever is LONGER.

c. Effectsi. Insurable interest- Identification gives the buyer an “insurable

interest” in the goods. A person has insurable interest if she will be exposed to monetary injury in the event of loss, damage, destruction or theft of the property. This distinguishes an insurance policy from a gambling contract.

ii. Third Parties- Identification gives the buyer the right to sue third parties who tortuously damage or destroy the good.

a. The seller has a right of action if it has either title to, or a security interest in, the goods.

b. After identification, both parties may proceed against the third party. Prior to identification, only the SELLER has such right.

iii. Other- The risk of loss does not ordinarily pass to the buyer upon identification. Identification merely gives the buyer the right to insure the goods to whatever extent to he is exposed to the possibility of monetary loss in the event of the good’ destruction.

iv. The buyer has the right to replevy (RECOVER POSSESSION OF) identified goods from the seller in certain situations,

VI. Titlea. When does it pass? – Each provision of this Article with regard to the right

obligations and remedies of the seller, buyer, purchaser or third parties applies irrespective of title to the goods except where the provisions refers to such title.

b. Although insurable interest and risk of loss are determined without regard to title, title is relevant in resolving a number of legal issues.

c. Title may be relevant in determining whether creditors can attach an owner’s property or in assessing of property taxes.

d. GENERAL RULE- unless otherwise agreed, title passes to the buyer at the time and place which the SELLER completes performance with respect to physical delivery of the goods.

Movement of Goods1. Shipment K – if the contract requires or authorizes the seller to

ship the goods to the buyer, but does not require delivery at a particular destination. A SHIPMENT contract is used- title passes to the BUYER at the time and place of the shipment.

2. Destination K – If shipment is required or authorized but delivery at a destination is required. A DESTINATION contract is uses- title passes on tender at the DESTINATION.

ii. Non-movement of Goods – Goods sold that never move. If the parties do not explicitly agree and the goods are to be delivered without being moved, passage of title depends upon whether a document of title is involved

iii. If the seller is to deliver a document of title, title passes at the time and place the document is delivered.

iv. If no document of title is to be delivered, and the good are identified at the time of the contract, title passes at the TIME and PLACE of contracting.

e. Transfer of Titlei. Definitions

1. Purchaser- usually synonymous with the word buyer, but the term purchaser is defined broadly in the Code to include any person taking “by sale, lease, discount, negotiation, mortgage, pledge, lien, security interest, issue or re-issue, GIFT (talked about in class, you can’t “buy” a gift) , or any other voluntary transaction creating an interest in property.

2. Buyer- GENERAL RULE- unless otherwise agreed, title passes to the buyer at the time and place which the SELLER completes performance with respect to physical delivery of the goods.

Types2. Good - always good (assuming all transferors have good title) 3. Voidable – “Voidable title rule” – applies if a transferee of goods

is a “good faith purchaser for value” – A person with voidable title has power to transfer good title to a good faith purchaser for value.

1. Misrepresentation. 2. Bad Checks3. “Cash Sale” Title will not pass until price

is paid4. Procured the fraud.

To acquire good title under the voidable title rule, the purchaser must act in good faith and give VALUE. Value is to include, generally, any consideration sufficient to support a simple contract.

4. Void - always void from point void title createdii. Shelter/Umbrella Rule – Transforer with good title can transfer good

title, even though the transferee might otherwise be subject to the claims of a former owner.

1. Purpose of this protection is to assure the SELLER a free market for what he has.

iii. Entrustment – Any entrusting (basically means to give to) of possession of goods to a merchant who deal in goods of that kind gives the merchant the power to transfer all rights of the entruster to a buyer in the ordinary course of business.

1. The buyer cuts off the entruster’s claim to the goods, the entruster is then limited to a claim against the merchant in tort or contract.

2. The purpose of this provision is to protect a person who BUYS goods in the ordinary course out of a dealers inventory from ownership claims of third parties.

iv. Ostensible Ownership Rule – A buyer who leaves goods in the seller’s possession after sale creates the misleading impression that the seller actually OWNS them.

1. Deceives both buyers from and creditors of the seller. Can be void

a. However, the seller is a MERCHANT dealing in good of the kind, retention is not fraudulent as against creditors if the possession is 1) in good faith 2) in the current course of trade and 3) only for a commercially reasonable time.

VII. ROLa. Absence of Breach- Generally places the risk on the person controlling

possession of the goods, who is more likely to be insured against their loss, theft, or destruction.

i. Movement of Goods1. Shipment K – If the seller is NOT required to deliver the goods at

a particular destination- risk of loss passes to the BUYER when the goods are duly delivered to the carrier. Risk of Loss in transit in shipment contract is borne by the BUYER.

2. Destination K – If the seller is required to deliver at the destination, a destination contract, the risk of loss passes to the buyer when the goods are TENDERED at the destination, so as to enable the buyer to take deliver. Thus, risk of loss in transit in a DESTINATION contract remains on the SELLER.

ii. Non-movement of Goods – When the goods are held and are to be delivered without being moved, risk of loss passes to the BUYER.

iii. SPECIAL RULE1. Tender of delivery v. physical possession – If the seller is a

merchant, risk of loss passes when the buyer takes physical possession of the goods. If the seller is not a merchant, risk of loss passes on TENDER of delivery. So with a merchant risk of loss can be after tender.

b. Sale on Approval –“use”, “re-sale”. If the goods delivered but the seller may be returned by the BUYER even though conforming, the transaction is a sale on approval if the good re delivered primarily for use.

c. Sale or Return (consignment) – If the goods are delivered primarily for re-sale. i. If the goods can be returned even though they are wholly warranted,

delivery to a consumer for use is a sale on approval, and delivery to a merchant for resale is a sale or return.

d. Breach (Material)i. Seller breaches –If the seller’s tender or delivery so fails to conform to

the contract as to give the buyer the right to reject the goods, risk of loss remains on the seller until cure by seller or acceptance by the buyer.

ii. Buyer breaches 1. 2-510(3) – if the buyer, with respect to conforming goods

already identified to the contract, repudiates or otherwise breaches before risk of loss passes to it, risk of loss rests on the BUYER for a commercially reasonable time to the extent the seller is not covered by insurance.

2. 2-510(2) – If the buyer accepts goods but then rightfully revokes the acceptance. Risk of loss is deemed to rest on the seller from the beginning to the intent of any deficiency in the buyer’s effective insurance coverage.

The purpose of (3) and (2) is to give an injured party who controls the goods the benefit of breaching party’s insurance coverage to the extent the loss or damage is not covered by the injured party’s insurance.

These provisions effectively place risk of loss on the INJURED PARTY to the extent of its insurance.

3. **UCC sections only to help sort, don't need to know the section numbers

Ch. 17 QUESTIONS and partially answers

17.1 Contract- 2 copiers, FOB shipping point, ½ paid/ ½ delivery 1/2/ Identification (buyer insurable interest)

1/3 Delivery to carrier1/4 carrier delivers1/5 buyer pays the final installment. (½ paid)

When does title pass? Time and place of shipment. Shipment contract- title passes the 3rd. upon (delivery) What about risk of loss? Passes to buyer when goods are delivered to the carrier, so the 3rd again. 1/3 seller interest ceases.

17.2 K Terms. – FOB seller’s business. Seller will installRisk Of Loss -> tender of deliveryUCCThis is a shipment contract, title passes time of place of shipment

Risk of loss passes the same, but not here—because contract says different. If title passes prior then it is taxable. It is taxable, because title passed prior to installation.

17.3 Voidable title ruleShould the court make Simpson give the truck to buyer 1- no, acting in good faith, and title issue (not good title) voidable title, As long as I don’t have void title I can transfer voidable title. But the purchaser has to give value. Buyer 2 gets it, because acted in good faith. Buyer 1 is screwed because he doesn’t get the truck. The seller acted in bad faith, they breached the contract.

17.4 fraud makes for bad title. Consignment sell or return. If the goods are delivered primarily for resale. When does risk of loss pass- risk of loss passed from WTHI to AAA when the consigned the cars to them.

17.8 Who bear the risk of loss at the time of the fire. We have a destination clause. They agreed to deliver is not specific enough to be destinationRisk of loss stays on 7 seas. B doesn’t matter.

Chapter 18– The Sales Contract—Remedies

- Freedom of K permits the parties to provide for remedies in the K in addition to or in substitution for those outlined in the UCC and to limit or alter the measure of damages otherwise available

- If remedies are unconscionable, they may be deleted or modified

- Buyers’ Obligations - If goods or tender of delivery fail in any respect to conform to the K, buyer may;

reject entire shipment, accept entire shipment, or accept any commercial units and reject the rest

o Rejection- Buyer’s Obligations Buyer may reject, if after inspection, the goods are found to be non-

conforming. Rejection must be: Made within reasonable time after tender or delivery Buyer must seasonable notify seller of rejection

Buyer should also state the particular defects justifying rejection If Seller fails to give instructions within a reasonable time after

notification of rejection, the buyer may: Store the rejected goods Reship them to the seller Resell them for the seller’s account – Buyer is entitled to

reimbursement for all expenses of the above Cure

Protects the seller in 2 specific situations against the effects of a rejection by the buyer. Cure severely limits the buyer’s right to rejection for minor defects

o Given right to cure if the buyer rejects a nonconforming tender or delivery and the time for performance agreed in the K has NOT passed

o Also given the right to cure when the buyer rejects a nonconforming tender that the seller had reasonable grounds to believe it would be acceptable

If seller cures, buyer may no longer rejecto Acceptance of Goods

Occurs when: After a reasonable opportunity to inspect, the buyer

indicates to the seller that the goods ARE conforming or that he will take them despite their nonconformity

After a reasonable opportunity to inspect, the buyer fails to make an effective rejection

Acceptance by any act inconsistent with an initial claim of rejection

Once buyer has accepted the goods: Buyer must pay the K rate for any goods accepted Buyer may no longer reject the goods. Important to note

that buyer’s remedies differ depending on acceptance or rejection

If tender has been accepted, buyer must notify the seller within a reasonable time after the discovery of any breach or is barred from any remedy

After acceptance, buyer has burden of establishing any breach

o Revocation of Acceptance Allows a buyer to revoke a previous acceptance in 2 situations only

if the nonconformity of the goods “substantially impairs” their value to him

Buyer may accept goods known to be nonconforming on the assumption that said nonconformity will be cured. If seller fails to cure, buyer may revoke acceptance

If buyer is unaware of the nonconformity at time of acceptance, may revoke acceptance if it was induced by the difficulty of discovering the nonconformity before acceptance, or by seller’s assurance causing the buyer to delay discovery

Revocation of acceptance must be made within a reasonable time after the buyer discovers the defect and before any substantial change in the condition of the goods. Also, revocation is not effective until the buyer notifies the seller of it

- Buyers’ Remedies

- Remedies are available to an injured buyero When the buyer rightfully rejects the goods o When the buyer justifiably revokes acceptanceo When the seller fails to deliver o When the seller repudiates the K

- Cancellation and recover of amount paid o Cancellation occurs when either party puts an end to a K because of the

breach by the other. Discharges all obligations still executory on both sides. Cancelling Party retains all remedies available for breach relations both to prior and future performance

- Recovery of Damageso Buyer entitled to recover damages in addition to prior payments on the

price - Recovery of Identified Goods or Specific Performance

o If goods have been identified to the K, and the seller fails to deliver/repudiates, the buyer may recover them from the seller in certain limited circumstances

- Recovery of Damageso Cover- after breach the buyer may cover by purchasing or K’g to purchase

goods to substitute for those due from the seller. Is a primary means used my buyers in sales k’s to mitigate damages after breach

Buyer may only recover for consequential damage which could not reasonably be prevented by cover or otherwise

Incidental Damages Include:

o Expenses incurred in inspection, receipt, transportation, and care of rightfully rejected goods

o Expenses and commissions incurred in effecting cover

o Any other reasonable expenses incident to the breach

o Damages in Absence of Cover If buyer does not cover, the are awarded the difference between

the mkt price at the time the buyer learned of the breach and the K price PLUS incidental damages PLUS consequential damages MINUS expenses saved as a consequence of the seller’s breach

Market price is determined at the place for tender. In cases of rejection after arrival or revocation of acceptance, market price is determined at place of arrival (2-713(2))

- Recovery of Identified Goodso Buyer may recover goods from seller under 2 situations:

Replevin- legal remedy whereby a person entitled to possession of goods recovers them from a person who has either wrongfully taken or detained them. Basically gives buyer a right to the goods

If goods identified, replevin orders specific performance in favor of injured buyer

If not identified, buyer still has a very strong case for specific performance

Recovery from and Insolvent Seller If identified goods are in possession of the seller, and the

buyer has paid all or part of the purchase price, buyer may recover goods from the seller by tendering any unpaid portion of the price if:

o Seller becomes insolvent within 10 days after receipt of the 1st installment on the price

o The K involves consumer goods, and the seller repudiates or fails to deliver as required by the K

-Sellers’ Remedies- A buyer may breach contract by:

o Repudiating it before the seller’s performance is dueo Failing to pay the purchase price of goods deliveredo Wrongfully rejecting conforming goodso Wrongfully revoking a previous acceptance of conforming goods

- Sellers’ Damages with Resaleo Upon repudiation, breach, or insolvency of the buyer, seller in possession of

the goods has the right to resell them to another buyer. This is equivalent to the buyer’s remedy of “cover”.

o Seller may recover the difference between the resale price and the K price PLUS incidental damages MINUS expenses saved as a consequence of the buyer’s breach

o Seller’s incidental damages include any commercially reasonable charges incurred in connection with:

Stopping delivery Transportation, care, and custody of the goods after the buyer’s

breach Return or resale of the goods or otherwise resulting from the

breach ***Must be noted that seller is not entitled to recover

consequential damages, because a buyer’s breach almost always involved a failure to pay the price

o Unidentified of Unfinished Goods If goods are unfinished at the time of breach, the seller may:

Complete manufacture and wholly identify the goods to the K

Cease manufacture and resell for scrap or salvage value Seller is protected by acting reasonably in completing unfinished

goods even if it later appears that it could have better avoided a loss by stopping manufacture (burden on buyer)

o Manner of Resale In resale of goods, seller must act in good faith and in a

commercially reasonable manner to realize as high a price as possible under the circumstances

If resale is private, seller must simply give reasonable notification to the buyer of intent to resell

If by public auction, seller must notify buyer of the time and place of the public sale of goods unless they are perishable or threaten to decline speedily in value

- Sellers’ Damages Without Resale o When buyer breaches as sales K, resale is not always an appropriate remedy

i.e. repudiation breach. When this happens the seller is entitled to the difference between mkt price at the time and place for tender and the unpaid K price PLUS incidental damages MINUS expenses saved in consequence of the buyer’s breach

- Lost Profits—An Alternative Measure of Damageso When the measures of damages are inadequate to place the injured seller in

the same position as full performance, the seller may recover the PROFIT which the seller would have made from full performance by the buyer PLUS incidental damages PLUS costs reasonable incurred by the seller in manufacture or procurement MINUS payments made by the buyer and proceeds of resale of goods

o Above is designed to compensate the seller when: The lost volume case The seller is to manufacture, assemble, or acquire goods for the

buyer, but prior to their manufacture or acquisition, the buyer breaches

o The Lost Volume Seller One who but for the buyer’s breach would have had the benefit of

BOTH the original K and the resale K When many businesses sell standardized products/ products in

unlimited supply Seller’s basic remedy is the lost profit on the sale

o Buyer Breach Before or During Manufacture Allows lost profits to be recovered together with any incidental

damages provided, due allowance for costs reasonable incurred and due credit for payments or proceeds of resale

Intended to apply when a seller discovers the buyer’ breach while in the process of manufacturing the goods

Language allows the injured seller to recoup expenditures made on the buyer’s behalf and to realize by resale the junk or salvage value of the unfinished goods or their components, giving credit to the buyer for the proceeds of the salvage

Recovery is not limited to manufactures/ assemblers, but also available to a “jobber” (a middleman who acquires goods from a third party and sells them to the buyer)

- Sellers’ Recovery of the Purchase Priceo In three limited situations, the seller may recover the entire purchase price

of the goods from the buyer. If buyer fails to pay the price as it comes due,

the seller is entitled to recover (together with incidental damages) the price when:

The goods have been accepted by the buyer The goods have been identified to the K and the seller cannot resell

them The goods have been damaged or destroyed after risk of loss has

passed to the buyer- Sellers’ Remedies on Discovery of Buyer’s Insolvency

o Stopping Delivery Assuming the buyer has not yet taken possession, seller who learns

of buyer’s insolvency may: Refuse delivery except for cash, including payment for prior

deliveries Stop delivery of goods in the hands of a carrier or other

bailee (***may also do this when buyer has repudiated or has failed to make a payment due before delivery)

Right to stop delivery for reasons other than insolvency is limited to large shipments

o Reclamation from and Insolvent Buyer Seller who discovers that buyer has received goods on credit while

insolvent may reclaim goods by making a demand for their return within 10 days after the goods are received by the buyer

10 day limit does not apply if the buyer has made a written misrepresentation of solvency to the particular seller seeking to reclaim the goods within 3 months prior to delivery

In dealing with buyer’s creditors, the buyer’s trustee must honor the seller’s right to reclaim if the seller sold the goods in ordinary course of business to a buyer, who received them while insolvent within 45 before the bankruptcy filing. To use this provision, seller must make a written reclamation demand on the buyer:

Within 45 days after the buyer received the goods Within 20 days after the bankruptcy petition is filed, if the

45 day period expires after that filing - Statute of Limitations

- Generally, action for breach of sales K must be commenced within 4 years after the cause of action arises

- S.O.L. begins to run when the breach occurs, whether or not the aggrieved party knows of its occurrence

- In general, a breach of warranty occurs upon the seller’s tender of delivery, unless warranty explicitly extends to future performance of the goods and discovery of any breach must await the time of that performance

Chapter 19-Warranties

Introduction

ANALOGY – all Ks are either oral or written. All warranties are either express or implied. (Title warranties are considered implied as they are created by operation of law.)

Warranty – Statement or other representation made by a seller concerning the quality, character, or capabilities of the goods being sold.

Disclaimer – a contractual limit, modification or exclusion to warranties in a K. Warranty Disclaimers have a great potential for unconscionable application, particularly

when the term is imposed upon a consumer buyer in a standardized form K

Strict liability (no fault liability) – No seller intent or negligence necessary

Express Warranties

-Any affirmation of fact or promise made by the seller to the buyer that (1) relates to the goods, and (2) becomes part of the basis of the bargain, creates an express warranty that the goods will conform to the affirmation or promise.

Ways created The seller’s affirmation of fact concerning the goods made during the bargaining process

are part of the description of the goods. Not necessary that the seller use the words “warrant,” “warranty,” or “guarantee.” Not necessary that the seller intend to create a warranty. “The whole purpose of the law of warranty is to determine what it is that the seller has

in essence agreed to sell.”

Express Warranty-By fact or opinion – Ordinarily, the express warranties are created by explicit oral or written statements made by the seller regarding the quality, character, or capabilities of the goods being sold.

WATCH OUT FOR – facts v. opinion (puffery). A major problem is to distinguish statements constituting mere “seller’s talk” or “puffing” from those creating express warranties

DISTINCTION- “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.”

Facts = warranty Opinion = no warranty HELPFUL HINT: the more specific the statement concerning qualities, the more likely

construed as statement of fact.

Express Warranty -By description – 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 the description.

o Examples: technical specs, blueprints, etc. Evidence of the negotiations of the parties and the buyer’s awareness of the subject

matter’s condition and relevant to determine the content of the warranty.

Express Warranty- By sample/model - Any sample or model that 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.

Sample – actually drawn from the bulk of goods involved in sale (1 bolt drawn from the 500 bolts sold).

Model – not drawn from the goods involved in sale, but offered for inspection when the goods themselves are not at hand (model car in showroom, perhaps).

Time of express warranty The time when the seller’s representations are made is not material in determining

whether or not they constitute express warranties. The Sole test on timing is whether the warranty became part of the K. Can create

warranty after K thru modification under UCC.

express warranty and Fraud A seller acting in good faith belief in the accuracy of his statements concerning the

goods may nevertheless be held liable for breach if the goods subsequently fail to conform to the seller’s statements.

If seller lies or is grossly negligent in making warranty, then have fraud liability as well as breach of warranty.

Written Warranty and Disclaiming

Rule - Words or conduct relevant to the creation of an express warranty and words or conduct tending to negate or limit warranty shall be construed wherever reasonable as consistent with each other

i. InconsistencyWritten warranty v. written disclaimer – general boiler-plate language disclaiming all warranties is not effective against a written express warranty.Oral warranty v. written disclaimer – Parole evidence bars testimony about prior oral warranties if the written K is the final expression of the parties’ agreement.

The buyer may be protected, however, if the court finds either that the writing is not a final expression of the agreement or that enforcement of the disclaimer would be unconscionable.

Implied Warranties-2 implied warranties are recognized under the code: The warranty of merchantability, and the warranty of fitness for a particular purpose

Merchantability – requires that the goods sold meet certain minimum quality standards Unless excluded or modified, an implied warranty of merchantability exists in a contract

for their sale if 1. The seller is a merchant with respect to goods of that kind. Under this section the

serving for value of food or drink AND2. The goods must be at least such as:

a. pass without objection in the trade under the contract description; b. in the case of fungible goods, are of fair average quality within the description; c. are fit for the ordinary purposes for which goods of that description are used; d. run, within the variations permitted by the agreement, of even kind, quality and

quantity within each unit and among all units involved; are adequately contained, packaged, and labeled as the agreement may require; and

e. conform to the promise or affirmations of fact made on the container or label if any.

Fitness for a particular purpose – is given by a seller who has reason to know of a particular purpose for which the buyer requires the goods and that the buyer is relying upon the seller’s skill and judgment to choose suitable goods.

If the seller, (merchant or nonmerchant), at the time of contracting, has reason to know (1) of any particular purpose for which the buyer requires the goods, and (2) that the buyer is relying upon the seller’s skill or judgment to select or furnish suitable goods then, unless properly disclaimed

The seller need only have “reason to know” (not necessarily actual knowledge) of the buyer’s purpose.

Disclaiming of Implied Warranties

Disclaiming Merchantability – Language must mention merchantability and, if in writing, must be conspicuous. (Unless it says “AS IS”)

a term is conspicuous if “it is so written that a reasonable person against which it is to operate ought to have noticed it…. Conspicuous terms include the following:

o a heading in capitals equal to or greater in size that the surrounding text, or in contrasting type, font, or color to the surrounding text of the same or lesser size; and

o language in the body of a record or display in larger type than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same size, or set off from surrounding text of the same size by symbols or other marks that call attention to the language.

The test is “whether attention can reasonably be expected to be called to” the term or clause involved.

All implied warranties – All implied warranties are excluded by expressions like "as is", "with all faults" or other language that in common understanding calls the buyer's attention to the exclusion of warranties, makes plain that there is no implied warranty

Warranty of Title and Against Infringement

Creation of Warranty of Title Unless properly disclaimed, the seller in a contract for sale warrants that (1) the title

conveyed will be good and its transfer rightful, and (2) the goods will be delivered free of security interests or other liens, except those known to the buyer.

Purpose of this warranty of title is to simply provide what any good faith buyer of goods expects to receive, “a good, clean title transferred to him also in a rightful manner so that he will not be exposed to a lawsuit in order to protect it.”

-Warranty of Title is given whether or not the seller (1) is a merchant, (2) knew or was ignorant of the defect of title, or (3) was in possession of the goods at the time the sale or K to sell was made.

What sellers? ALL SELLERS both merchant and non-merchant. Knowledge of title defects? Irrelevant In possession (seller)? Irrelevant

Creation of Warranty against Infringement A seller that is a merchant regularly dealing in goods of the kind warrants that the

goods shall be delivered free of the rightful claim of any third person by way of infringement or the like but a buyer that furnishes specifications to the seller must hold the seller harmless against any such claim that arises out of compliance with the specifications.

1. Examples: copyright/trademark/patent infringement, etc.

Disclaimer of Warranty of Title Rule – Both title and infringement warranties may be disclaimed or modified only by

specific language or by circumstances that give the buyer reason to know that 2. The seller does not claim title, 3. That the seller is purporting to sell only the right or title as the

seller or a third person may have, OR 4. That the seller is selling subject to any claims of infringement or

the like.

Conflict of Warranties

-A seller may make several warranties concerning the same goods. To the extent they can coexist, the buyer has the benefit of all of them. The warranties are cumulative.

A seller acting in good faith may, however, make inconsistent warranties. In this situation the intent of the parties determines which of the conflicting warranties applies. In ascertaining that intention the following rules apply:

o Exact or technical specifications displace an inconsistent sample or model or general language of description.

o A sample from an existing bulk displaces inconsistent general language of description.

o Express warranties displace inconsistent implied warranties other than an implied warranty of fitness for a particular purpose.

a. Rule of Thumb – THE MORE SPECIFIC THE BETTERb. If seller acts in bad faith in leading buyer to believe no conflicts, than seller

cannot raise inconsistency as defense (Estoppel).Remedies for Breach of Warranty

-In warranty actions, the buyer has accepted the goods, but seeks to recover damages from the seller because the goods are not as warranted.

Rule 1 (MOST COMMON) – Breach of warranty damages = value of goods accepted at the time and place of acceptance - the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount + incidental damages + consequential damages.

The buyer must notify seller within reasonable time of discovery (or should have discovered) or is barred from recovery.

o Why? (1) Seller has time to correct, (2) seller has opportunity to prepare for negotiations/litigation, (3) protects against stale claims.

Consequential Damages (usually lost profits)

-Authorizes recovery of incidental and consequential damages in appropriate cases to supplement the basic measure of damages.

May be recoverable under the foreseeability test AND/OR injury to person/property proximately resulting from any breach of warranty.

Deducting Damages from Price

(ALTERNATIVE) – Upon notification to seller, buyer may deduct all or any part of damages for seller’s breach from any part of purchase price still owing under same K.

This provision only applies if the breach involved is of the same K for which the price is claimed.

Magnuson-Moss Warranty Act-Regulates written warranties that accompany the same of consumer goods.

Designed to accomplish several purposeso It requires that the terms of written warranties be fully and conspicuously

disclosed in simple and readily understood language.o It requires that such warranties be conspicuously designated as “full” or

“limited.” To be designated as “full” the warranty must incorporate certain

minimum federal standards.o It prohibits the use of written warranties as a means to disclaim or modify the

implied warranties of merchantability and fitness

o It encourages warrantors to set up informal mechanisms to settle disputes, which the consumer must use before commencing court action.

o It allows actions for breach of warranty to be brought in federal court under limited circumstances.

NOTE- the Act applies only if the seller provides a written warranty. The law does not require that a consumer product or any of its components be warranted, or prescribe the duration of written warranties.

a. Purpose – Prevent use of crappy express warranties and disclaimer of all implied warranties.

Content of Warranties “In order to improve the adequacy of info available to consumers, prevent deception,

and improve competition in the marketing of consumer products, any warrantor warranting a consumer product to a consumer by means of a written warranty shall, to the extent of rules required by the FTC, fully and conspicuously disclose in a simple and readily understood language the terms and conditions of such warranty.

At present, FTC regs requiring that written warranties covering consumer products contain the following info if the goods actually cost the consumer more than $15 exclusive of taxes:

o The identity of the party or parties to whom the written warranty is extended;o a clear description & identification of products or parts covered by & excluded

from the warranty;o a statement of what the warrantor will do in the event of a defect, malfunction,

or failure to conform with the written warranty;o the point in time when the warranty term commences, if different from the

purchase date, and the duration of the warranty;o a step-be-step explanation of the procedure that the consumer should follow in

order to obtain performance of any warranty obligation;o information about any informal dispute settlement mechanism, if any, available

to the consumer;o any limitation on the duration of the implied warranties of merchantability and

fitness accompanied by the following statement: “Some states do not allow limitation on how long an implied warranty

lasts, so the above limitation may not apply to you”o any limitations on relief such as incidental or consequential damages,

accompanied by the following statement: “Some States do not allow the exclusion or limitation of incidental or

consequential damages, so the above limitation or exclusion may not apply to you.”

o a statement in the following language: “This warranty gives you specific legal rights, and you may also have

other rights which vary from State to State.”

NOTE- must be made available to the consumer prior to the sale of the product.

Designation of Warranties as “Full” or “Limited”

A consumer product actually costing more than $10 must clearly and conspicuously designate the warranty as either “full” (stating the duration), or “limited.”

-Full warranty- is one that meets the federal minimum standards for a warranty.-Limited warranty- a warranty not meeting the federal standards

-4 Elements to meet in order to meet federal minimum standards for a full warranty1. In the event of a defect, malfunction, or failure to conform with the written warranty,

the seller must, at a minimum, remedy the product within a reasonable time without charge.

2. No limitation may be imposed on the duration of any implied warranty3. Consequential damages for breach of any written or implied warranty may not be

limited or excluded unless the exclusion or limitation appears conspicuously on the face of the warranty.

4. If the product (or a component part), continues to be defective after a reasonable number of attempts by the seller to resolve the problem, the seller must afford the buyer the option to elect either a refund of the purchase price or replacement. If the replacement involves a component part, the seller must install the part in the product without change.

NOTE- Must not impose any duty upon the buyer, other than notification, as a condition to securing a remedy.

The seller may, however, avoid warranty obligations by establishing the failure to perform as warranted was caused by damage while in the consumer’s possession or by the consumer’s unreasonable use, including the failure to provide for maintenance.

Limitation or Disclaimer of Implied Warranties

-Prohibits disclaimer or modification of implied warranties (merchantability and fitness) by a supplier who makes any written warranty to a consumer in connection with the sale of a consumer product.

-The implied warranties may not be disclaimed if, at the time of the sale or within 90 days thereafter, the supplier enters into a K with the consumer to maintain or repair the product for a specified period of time

Although the seller may not disclaim implied warranties, it may limit their duration unless it is giving a “full” warranty.

The duration of implied warranties may be limited to the duration of the written warranty if

1. The duration of the written warranty is reasonable2. The limitation is not unconscionable, and3. it is contained in clear and unmistakable language, prominently displayed on the

face of the warranty.Remedies

-If the warrantor establishes an informal dispute settlement procedure and incorporates it into the written warranty, then the consumer must first resort to the warrantor’s procedure before commencing court action.

Assuming no such procedure was created:-a consumer injured by a breach of warranty may bring a civil suit for damages or other relief in state court.

The judgment may include court costs, attorneys’ fees, and other expenses incurred. may sue not only for the seller’s failure to comply with Magnuson-Moss provisions, but

also for breach of express or implied warranty under UCC

Chapter 20Products Liability

I. Overview

Products liability. The area of law imposing liability upon manufacturers and other suppliers of goods for personal injury and property damage caused by the products they sell.

Early American courts, applied 17 century precenents of “caveat emptor” (buyer beware) This means that an injured party could recover only by proving fraud or that the seller had guaranteed specificity or quality of the product and that it had failed.

Today, There are 3 theories that hold sellers liable for defective products:

1. Negligence2. breach of warranty 3. Strict liability in tort. primary basis for recovery.

Product liability law provides compensation to individuals for personal injury and property damage.

a. Privity of Contracti. Privity of K - persons who have entered into a contractual relationship

with each other.It is important issue in all product liability cases is to what extent the injured persons not in Privity with the seller may recover.

1. OLD RULE - No cause of action if not in privity.2. NEW RULE - Lack of privity does not necessarily bar recovery.3. What if not in privity? Persons not in Privity have either a

vertical or horizontal relationship to the manufacturer or other supplier from whom they seek to recover.

a. Vertical relationship - buyer of the goods who is one or more steps removed from the seller in the distribution chain.

b. Horizontal relationship - Not buyers but others who by use, consumption, or other contact with the goods are injured by them.

II. 3 Liability Theories that make a. Negligence- “imposes liability for injuries proximately caused by a person’s

failure to use “reasonable” or “ordinary” care. The amount of care a prudent person would use otherwise. To declare negligence the plaintiff must show that (1) defendant owed plaintiff a duty to not be negligent (2) defendany breached that duty by failing to exercise reasonable or ordinary care, and (3) defendant’s breach of duty was the “proximate” or “legal” cause of (4) an actual loss or injury suffered by the plaintiff.

The law of negligence imposes a duty upon the manufacturer or other supplier to exercise reasonable care in the design. The seller owes this duty to all reasonable foreseeable persons who may be injured. The plaintiff must establish that the defendant owed the duty to reasonable exercise care, and that the defendant breached that duty, the plaintiff must then prove that the breach had actual cause or proximate cause that led to injury of the plaintiff. The plaintiff has the burden of proving by a “preponderance” (more likely than not) the defendants negligence. The plaintiff is often aided by the doctrine of “res ipsa loquitur” (the thing speaks for itself)

Lack of Privity is no longer a defense in product liability actions based on negligence.

i. Rule - Duty, Breach, Actual Cause, Proximate Cause, Injuryii. **Res Ipsa Loquitur - "the thing speaks for itself". Plaintiff's burden of

proof if:

1. The event is of a kind that ordinarily does not occur in the absence of negligence: and

2. Other responsible causes, including the conduct of the plaintiff and third persons are sufficiently eliminated by the evidence.

**Res ipsa loquitur means that the responsibility of the defendant is proved by eliminating any responsibility held by any other person. This causes the defendant to be at fault without direct evidence.

iii. Defenses1. Assumption of Risk2. Contributory/Comparative negligence

b. Breach of Warranty ( a branch of contract law ex. Contracts for the sale of goods may include an express warranty, an implied warranty of merchantability, and an implied warranty of fitness for a particular purpose.)

i. STRICT LIABILITY: as with contract liability generally, warranty liability is strict- liability is imposed without fault. “liability for breach of warranty

does no tdepend upon the seller’s knowledge or reason to know of the product’s defectiveness or upon negligence.” UCC 2-715 (2)(b) expressly authorizes recovery – as consequential damages – for “injury to person or property proximately resulting from any breach of warranty.”

ii. Plaintiff must show warranty in effect at time of breach: the plaintiff must show that the defendant (seller) made an express or implied warranty and that it was breached and was the approximate cause of injury.

Three warranties and how they are breached (josh add)Express warranty requires some affirmative representation by the seller…(car crash example. Seller says nothing of the airbags, but the material furnished by the manufacturuer suggests that the airbags would deploy in a sever frontal impact, this affirmed that an express warranty was created and that the airbags would work).

In product liability case, the implied warranty of merchantability is breached if the product was defective when it le the manufacturer’s or seller’s possession. The cars airbags did not deploy and was not “fit for the ordinary purpose for which such a product is to be used.” In a breach of implied warranty of merchantability, the consumer is not necessarily required to produce direct evidence of the cause of the defective condition or the improper function… rather the consumer may satisfy this burden by showing that a product functioned improperly under normal use.

Implied warranty fit for a particular purpose: arises if the seller has reason to know of a particular purpose for which the goods are acquired and that the buer is relying on the seller’s skill or expertise in selecting the goods. The “particular purpose must be a particular non-ordinary purpose.”

“the ordinary purpose for which goods are used are those included in the concept of merchantability and go to uses that are customarily made of the goods.”

***Judgment over three types of warranties being breached regarding failed airbags. 1. There was a breach for the express warranty… 2. There was a breach of implied warranty of merchantability…. 3. there was NOT a breach of implied warranty of fitness for a particular purpose… as

the airbags particular purpose is to deploy during a wreck, and is an ordinary purpose.

iii. Defenses: 1. Notification within reasonable time of breach:

UCC2-607(3)(a) requires that the buyer notify the seller of breach within a reasonable amount of time after discovery. (A) The time of notification is to be determined by applying “Commercial standards for merchant buyer.” “the rule of requiring notification is designed to defeat commercial bad faith, not to deprive a good faith consumer of his remedy.” (B) Reasonable standards for consumer (more liberally applied). Filing a lawsuit may be sufficient as to provide notice.

2. Disclaimer – “generally allows the parties to contractually modify or limit remedies available for breach. LOOK FOR

UNCONSCIONABILITY (harder to disclaim warranty for liablility for personal as opposed to commercial, injury.)

3. Privity (the UCC statutorily eliminates Privity of contract as a defense to products liability cases based on breach of warranty). The alternatives to “Privity of contract” are as follows:

a. A – (Oklahoma and majority states) Horizontal to family/household of buyer or guest in home if reasonable to expect person to use, etc.

b. B – extends “A” to include horizontal and vertically to any natural person who may reasonably be expected to use, etc. and suffers injury.

c. C – extends "B" reasonable people plus property. (Plaintiff may collect for personal and property damages.)

c. Strict Liability in tort: imposes liability without fault. “not govenered by law of contractual warranties but by the law of strict liability in tort”

RESTATEMENT (SECOND) OF TORTS 402A

i. One who sells any product in a defective condition unreasonably dangerous to the user or consumer or to his property is subject to liability for physical harm thereby caused to the ultimate user or consumer, or to his property, if:….

[SIDE NOTE: (Defined: Unreasonably dangerous/defective - a product that fails to perform in the manner reasonably to be expected in light of its nature and intended function.) The condition of the product is unreasonably dangerous “if the danger cannot be reasonably be perceived and appreciated by the user or consumer.” ]

if:……a) The seller is engaged in the business of selling such a

product, and b) It is expected to and does reach the user or consumer

without substantial change in the condition in which it was sold.

The Rules state that (A) the seller has exercised all possible care in the preparation and sale of his product (B) the user or consumer has not bought the product from or entereid into any contractual relation with the seller…..

ii. …..THEREFORE…Rule – The Plaintiff generally must show that:

1. The product was in an unreasonably dangerous condition (defective);

2. The unreasonably dangerous condition existed at the time the product left seller's control; AND

3. The unreasonably dangerous condition caused injury/damage to Plaintiff (CAUSATION).

Side NOTE: Liability exists despite the seller’s lack of negligence (the “strict” aspect of the liability) and without regard to whether any contractual relationship (privity of contract) exists between the seller and the injured party. Therefore strict liability may be viewed, as an implied warranty IMPOSED by law and GROUNDED on the considerations of public policy… implied warranty of merchantability.. stripped of the contractual defenses of defect, Privity, and disclaimer.

iii. Public Policy Reasons1. Human life and healthy citizens.2. Incentive to not make unreasonably dangerous products.3. Businesses are in a much better financial position to suffer the

monetary "damages" than is the injured person.

General Rule: seller is in a better position to determine if a product is “unreasonably dangerous”

ii. 3 Strict Liability Theories (PRODUCT DEFECT CATEGORIES)

1. Manufacturing defect - occurs when a product, as made, fails to meet the manufacturer's specifications. (THINK- 1 good on the assembly line out of the thousands produced)

2. Design defect - occurs when the risk of defects resulting from the product's design outweigh the design's benefits (THINK - all goods on the assembly line. Inherent in the product line itself, not an individual item).

Side Note: Consumer-expectation or consumer-contemplation test: means a product is unreasonable dangerous, when it is dangerous to an extent beyond that which would be contemplated by the ordinary consumer who purchases it, with ordinary knowledge as to the products characteristics.

“risk-utility or risk-benefit test” do the risks outweigh the benefits?

A plaintiff may….present evidence that the product fails to satisfy the consumer expectation test. Or demonstrate a design defect by presenting evidence that the risk of danger inherent in the challenged esign outweighs the benefits of the design.

Depends on if the courts follow the “consumer-expectation” or “risk-benefit” analysis to determine liability.

Risk-utility: (some examples from John Wade, Vanderbuilt Law Dean)1) usefulness and desirability of the product- to users and public as a whole. 2) safety- likelihood of injury3) availability of substitutes4)manufacturers ability to eliminate the unsafe character of product5) users ability to avoid danger6) users anticipated awareness of the inherent danger7) feasibility

3. Warning defects - occurs when manufacturer makes inadequate warnings as to the inherent NON-OBVIOUS dangers of the product regardless if no manufacturing or design defects exist.

iii. Privity?1. Plaintiff - Any reasonably foreseeable plaintiff injured by the

defective product is entitled to sue. 2. Defendant - Any entity in the supply chain from retailer,

wholesaler, to manufacturer, retailer, distributor, restaurant owner, etc. All may be sued or 1 may be sued.

Side Note: The term “SELLER” has been interpreted broadly to include all those responsible for placing the product in the stream of commerce even if an actual sale was not involved.

a. If retailer, etc. sued, then retailer, etc. may seek indemnification (reimbursement) up the supply chain.

b. . Public policy? Encourages entities closest to consumer to demand quality in goods being sold.

c. CAUTION - Many states, like Oklahoma, limit the use of strict liability against occasional sellers of used goods.

iv. Defenses1. No contributory negligence per se, but allowed assumption of

risk and product misuse defenses. (this means that if the plaintiff had any fault, they would not recover any damages from defendant…this is why it’s a “defense”)

a. Note that misuse merely rebuts proof of defective condition/causation (elements of strict liability)

Side note: contributory negligence: as defined in the restatement refers to the plaintiff’s unobservant, inattentive, or ignorant failure to discover or guard against the defect causing injury. (i.e. if a defendant is the “most” at fault then you must pay) Classic defenses are “Assumption of risk” “intended use”

Plaintiff’s contributory conduct: 1) assumption of risk 2) outright misuse of the product constitutes an absolute defense. Comparative (is the % at fault)

b. Absolute bars to recovery if no comparative fault2. Comparative fault? Varies by state. ONLY NEED TO KNOW

THAT TREND IS TOWARD MORE COMPARATIVE FAULT WHEN RISK ASSUMED AND MISUSE.

Most courts have abandoned contributory negligence as a defense in negligence actons and replaced it with some form of comparative negligence, inwhic the relative degrees of afault are weight by te jury and plaintiff’s total damages are reduced in proportion to his own fault. Compatative negligence has the effect of providing some compensations (reduced in proportion to his fault) to a plaintiff whowould be denied any recovery under the contributory negligence approach.

b. Strict Liability and Tort Reformi. Pros for making reform efforts?

ii. Cons for making reform efforts?