Commercial Law Running Rule Document ARTICLE 2 §2-105; Definitions; Transferability; Goods 2-105(1) Definition Goods are defined as all things which are movable at the time of identification to the contract for sale. 2-204 and 2-206; Contract Formation; Offer and Acceptance 2-204 Formation A contract for the sale of goods may be made in any manner sufficient to show agreement. 2-206 Offer & Acceptance An offer inviting acceptance in any manner and by any medium reasonable by prompt or current shipment of conforming or nonconforming goods. Exception: If the seller sends nonconforming goods and seasonably notifies the buyer that the shipment is only accommodation to buyer. (Contract does not exist) 2-201; Statute of Frauds 2-201(1) Requirement A contract for the sale of goods for the price of $500 or more is not enforceable unless there is sufficient writing, the writing is signed by the party against whom enforcement is sought, and the quantity stated. 2-201(2) Between Merchants If within reasonable time, a writing in confirmation of the contract is sufficient against the sender to meet the writing requirement unless a written notice of objection is received within 10 days. *For test purposes must mention between merchant even if its not testing between merchants. 2-201(3) Exception The writing requirement for the statute of frauds has three exception: (1) Specially manufactured- if the goods were specifically manufactured for the buyer and not suitable for sale to others. (2) Admission- If the party whom enforcement is sought admits in his pleading, testimony (3) Part performance- which payments has been made and accepted 2-205; Merchant Firm Offer 2-205 There is a merchant firm offer if a merchant offeror provides a signed writing to an offeree for the sale of goods assuring that the offer will be irrevocable for three months (at the most). 2-207; Battle of the Forms 2-207(1) Acceptance/ whether additional A definite and seasonable expression of acceptance or written confirmation within a reasonable time is acceptance even though it states additional terms. 1 terms makes it a contract. Proviso Clause (exception): Unless the offeree makes the offeror’s assent conditional on the offeree’s additional terms. *Sellers cannot use Proviso to negate the existence of the contract. Because there is an already existing oral agreement. (Terms) Between Merchant and Non Merchant: Additional terms are a proposal for addition to the contract. Are the additional terms apart of the contract? Between Merchants: Additional terms become a part of the contract unless: - The offer expressly limits the acceptance; or - They materially alters it; or - Objects to the terms in a reasonable time 2-207(2) Example of materially alter: 2-207(3) Conduct Conduct by both parties which recognizes the existence of the contract makes the additional terms a part of the contract, however conflicting terms will not be apart of then agreement or K. Warranty 2-312: Warranty of Title and Against Infringement 2-312(1) Warranty of Title It is implied that in a contract for sale a seller warrants that the title conveyed shall be good,and its transfer rightful; and the goods shall be delivered free from any security interest or other lien or encumbrance of which the buyer at the time of contracting has no reason to know 2-312(2) Exclusion Warranty to good title can be excluded only if the seller specifically states that NO warranty of title is given OR buyer realizes or should realize that the seller does not own the good. 2-312(3) Infringement Given only by a merchant. Warrants good is free of intellectual property claims. 2-403: Power to Transfer ; “Entrusting”; Good Faith Purchase 2-403 \ (1) A purchaser of goods acquires all title which the transferor had or had power to transfer. A person with voidable title has power to transfer a good title to a good faith purchaser for value. (2) Any entrusting of possession of goods to a merchant who deals in the goods of the kind gives the merchant power to transfer all rights to a buyer in the ordinary course of business. -An owner who entrusts goods to a merchant bears the risk of an improper sale to innocent third party. 2 2-313: Express Warranty 2-313(1) Test 2 parts to (1) Express warranty can be created is by either address whether there (a-c) Any affirmation of fact or promise, description of the goods, sample or is an express model that becomes part of the basis of the bargain. warranty```````` ```````````````````` *Two part test-````````````` 1. First address whether there was any affirmation of fact, any description or sample. 2. Whether the buyer based these affirmations on the basis of the bargain. *Policy-- the precise time when words of description or affirmation are made or samples are not material. 2-313(2) Exclusion *Formal words such as “warranty” or guarantee” are not necessary. Exception: No warranty created when: if it is seller’s opinion, an affirmation of value; or seller’s praise. 2-314: Implied Warranty: Merchantability 2-314 When a merchant sells goods, he automatically makes, the broad warranty that the goods: (a)Pass without objection in trade (c ) are fit for the ordinary purpose for which such goods are used; (e) are adequately contained, packaged, and labeled as the agreement may require, - *If a nonmerchant knows of defects of the good and does not disclose the defect then an implied warranty of merchantability applies.* Comment (3) *Note: Selling and serving food or drink for consumption on or off the premise is a sale subject to the implied warranty of merchantability- the food must be fit for the ordinary purpose 2-315: Implied Warranty: Fitness for Particular Purpose 2-315 Seller make warranty when: - Seller has reason to know the particular purpose of the good at the time of contracting and the buyer relied on the seller’s skills and judgment to select good. *Comment 1 and 2 2-316:Exclusion or Modification of Warranties (Disclaimer) 2-316(1) 2-316(2) Express Warranty Words or conduct that negates or limits may exclude or modify an express warranty. Merchantability IWM exists unless excluded or modified. 3 If disclaimer of merchantability is oral or in writing, must: (i) mention the word “merchantability” (ii) if the disclaimer is in writing, it must be conspicuous. For test purposes - must mention usually merchantability must be stated to exclude (merchantability) then however as it pertains to phrases “As Is” or “with all faults” then the statement merchantability may not be needed. 2-316(2) Fitness To exclude or modify implied warranty of fitness: - Language must be in writing and conspicuous. For, example:”there are no warranties that extend beyond the description on its face thereof” 2-316(3) Catch all ***STILL MUST USE WORD “MERCHANTANILITY” FOR DISCLAIMING IWM. BUT, Generally.. Expression which exclude the following: (1) “As Is” or “with all faults” or other language that calls buyer’s attention to exclusion; AND (2) Buyer has examined the goods or a sample, or refuses to examine; AND (3) Course of dealings, Course of performance or usage of trade. 2-719: Limitation of Remedy 2-719 (1)Liquidation and limitation of damages: ○ May limit or alter the measure of damages recoverable ○ As by limiting the buyer’s remedies to return of the goods and ○ Repayment of price or ○ To repair and ○ Replacement of non-conforming goods or parts (2) Remedy may be had where circumstances cause an exclusive or limited remedy to fail of its essential purpose ○ In other words, did the remedy fix the problem? (3) Consequential damages may be limited or excluded UNLESS: ○ Limitation or exclusion is unconscionable ○ Limitation of consequential damages for injury to the person in case of consumer goods is UNCONSCIONABLE, BUT ○ Limitation of damages where loss is commercial is NOT UNCONSCIONABLE 2-607: Effect of Acceptance; Notice of Breach 2-607 Notice of Breach (1)Buyer must pay at K rate for any goods accepted. (2) Acceptance precludes rejection and if made with knowledge of nonconformity, cannot be revoked because of non-conformity UNLESS acceptance was on a reasonable assumption that conformity would be seasonably cured, but acceptance does not of itself impair any other remedy provided by Art 2 for non-conforming goods. 4 (3) Where tender has beem accepted: (a) A buyer is required to give the seller notice within a reasonable time after breach should have been discovered. (b) If claim is for infringement and buyer is sued as a result of breach=MUST notify seller within reasonable time after receiving notice of litigation or be barred from any remedy for liability by litigation. (4) Burden is on buyer to establish any breach. (5) Where buyer is sued for breach: (a) He may give seller written notice of litigation, If notice states seller may come in and defend and seller does not = seller will be BOUND in any action against him by buyer, Then unless seller after seasonable receipt of notice does come in and defend = seller is BOUND (b) If claim is for infringement = seller may demand in writing that buyer turn over to hi control of litigation including settlement OR Be barred from any remedy and If buyer agrees to bear all expense and satisfy any adverse judgment Then UNLESS buyer after seasonable receipt of demand does turn over control = buyer is barred *Reasonable time: - Merchant buyer- commercial standard - Retail consumer- Judged by different standards; not intended to deprive a good faith consumer of this remedy/ Issue Grouping2-609: Right to Adequate Assurance of Performance 2-609 If a party has reasonable grounds for insecurity that the counterparty is not going to perform, a party may suspend its performance, and make a written demand for assurances. If the counterparty fails to provide assurance within a reasonable time not exceeding 30 days, then it will be deemed to have repudiated, and the party may cancel contract. 2-610: Anticipatory Repudiation 2-610 When either party repudiates: Must be with respect to a performance not yet due the loss of which will substantially impair the value of the contract to the other the Aggrieved party may: 1. Await performance which means: Aggrieved party may remain inactive only for a commercially reasonable time and then must take action in mitigation. 2. Aggrieved party may seek any remedy for breach, even after notifying the repudiating party that the aggrieved party would await the contracted-for performance Important: A repudiation must be a definite refusal to perform 2-611: Retraction of Anticipatory Repudiation 5 2-611 A party may retract his repudiation until his next performance is due, unless: (iv) the affected party has cancelled, (ii) materially changed his position or (iii) indicated the repudiation is considered final. May be by any method that indicates that the repudiated party intends to perform. Must include any justifiable assurance. Retraction reinstates rights of repudiating party under the contract 2-703:Seller Remedies · Where buyer wrongfully rejects or revokes acceptance of goods · Or fails to make payment due on or before delivery · Or repudiates and · If breach is of whole K 2-703 · Seller may: (a) Withhold delivery of goods; (b) Stop delivery by any bailee; (d) Resell and recover damages (CP-RP); (e) Recover damages for non-acceptance (CP-MP) (f)Cancel 2:704:Seller’s Right to Identify Goods to Contract Notwithstanding Breach or to Salvage Unfinished Goods 2-704 (1)An aggrieved seller may: (a) Identify to K conforming goods not already identified; If at time he learned of breach they are in possession or control (b) Treat as subject of resale goods (2) Where goods are unfinished a seller may: In exercise of reasonably commercial judgment To avoid loss Complete manufacture and wholly identify goods to K OR Cease manufacture and resell for scrap OR Savage value OR Proceed in any other reasonable manner 2-711: Buyer’s Remedies in General 2-711 Buyer’s Remedy (1)Where seller fails to make delivery or repudiation OR buyer rightfully rejects OR justifiably revokes acceptance, buyer may: o Cancel, May recover price that has been paid (a) Cover and have damages to all goods affected (b) Recover damages for non-delivery (2) Where the seller fails to deliver or repudiates, buyer may: (a) Recover them IF goods have been repudiated 6 (b) Obtain specific performance or replevy the goods 2-712: Cover; Buyer’s Procurement of Substitute Goods 2-712 Buyer’s Cover (1)After breach, buyer may COVER by making in good faith and without unreasonable delay any reasonable purchase of or K to purchase goods in substitution for those due from seller. (2) Buyer may recover from seller damages: Cost of cover – Contract price + incidental or consequential damages – expenses saved in consequence of seller’s breach (3) Failure of buyer to effect cover within this section DOES NOT BAR him from any other remedy. Delivery Terms - when ROL Passes 2-319: FOB and FOS Terms 2-319 2-501: Insurable Interest in Goods; Manner of Identification of Goods 2-501 How goods are The buyer obtains a special property and insurable interest in goods by identification of identified? existing goods, as goods to which the contract refers, even though the goods so identified are non-conforming and he has an option to return or reject them. - In the absence of explicit agreement, identification occurs: o (a) when the contract is made if it is for the sale of goods already existing or identified. o (b) if the contract is for the sale of future goods , when the goods are to be shipped, marked, and otherwise designated by the SELLER as to the goods to which the contract refers. o (c) when the crops are planted or otherwise become growing crops or the young are conceived if the contract is for the sale of unborn young to be born within 12 months after contracting. *REMEMBER: identification MUST occur first before risk of loss can shift from seller to buyer. For questions dealing with risk of loss, start with identification FIRST. 2-502(2) Seller’s insurable interest Identification of the goods to the K does not divest the seller of an insurable interest therein until: (i) title passes to the buyer; and (ii) any security interest that the seller may have in the goods (to secure payment of the price) is preserved. *Otherwise put, the Seller retains an interest in getting PAID. 7 2-509: Risk of Loss in the Absence of Breach - Where the contract requires or authorizes the seller to ship the goods by carrier: 2-509 (1) Shipment K: if the contract does not require him to deliver goods at a particular destination, the risk of loss passes to the buyer when the goods are duly delivered to the carrier. (2) Destination K: if the contract does require him to deliver the goods at a particular destination, and the goods are there duly tendered while in possession of the carrier, the risk of loss passes to the buyer when the goods are duly so tendered as to enable the buyer to take delivery. (3) In any case not under subsection (1) or (2), the risk of loss passes to the buyer on his receipt of the goods if the seller is a merchant, otherwise the risk passes to the buyer on tender of delivery. *See shipment abbreviation handout for more on “F.O.B” “C.I.F” etc. 2-504: Shipment by Seller Seller’s duties on a shipment contract (4 Requirement) 1. 2-503: Manner of Seller’s Tender of Delivery 2-503 Put and Hold Tender of delivery requires that the seller put and hold conforming goods at the buyer’s disposition and give the buyer any notification reasonably necessary to enable him to take delivery. O Tender of delivery must be made at a reasonable hour. O This rule applies usually after the buyer has already paid, but has to pick the goods up. Seller has to make it easy for him to receive goods and protect them until they are picked up. Issue Grouping 2-601: Buyer’s Rights on Improper Delivery 2-601 Perfect Tender Rule If the goods or tender of delivery fail in any respect to conform to the K, the buyer may: (a) reject the whole; See 2-602 (b) accept the whole; See 2-606, 2-513 or (c) accept part and reject part. Two consequences of tender: + If conforms means and Buyer has right to inspect/ accepts…2507 BUYER IS ON THE SPOT!! + If fails to conform…see above option under 2-601on rejection - Notes about 2-601: ● In some cases, Substantial performance is sufficient: ● Installment sales: Buyer can reject an installment only if the nonconformity 8 ● substantially impairs the value of that installment (and even then the K is not breached unless the nonconformity of one or more installments substantially impairs the whole K). See UCC §2-612. Shipping arrangements: Buyer cannot reject unless the deviation in shipping proce­dures causes material delay or loss. See UCC §2-504. 2-602: Manner and Effect of Rightful Rejection 2-602 Rightful Rejection Rejection must be within a reasonable time and Rejection is INEFFECTIVE without NOTIFICATION. After rejection, any exercise of ownership is wrongful AND If buyer has, before rejection, taken physical possession of goods, he MUST hold them with reasonable care. 2-606: Acceptance of Goods occurs when 2-606(13) If the Buyer accepts?: What Constitutes Acceptance 2-606 (3 ways) Acceptance of goods occur when: (1) After a reasonable opportunity to inspect the goods, the buyer signifies to the seller that: (a) the goods are conforming; or (b) the buyer will take or retain them in spite of their nonconformity; (2) the buyer fails to make valid rejection within a reasonable time; or (3) the buyer does any act inconsistent with the seller's ownership (i.e. selling the goods to a 3rd party); and seller does not ratify such action. *Example: A buyer attempts to reject the goods (e.g. by sending a rejection letter to the seller, but then continues to use the goods (and seller does not ratify). 2-513: Buyer’s Right to Inspection of Goods 9 2-513 Before acceptance…B uyer’s Right to Inspect Reasonable opportunity to inspectWhere goods are: (i) tendered (seller 2-601 duty), or (ii) delivered, or (iii) identified… A buyer has a right to inspect before payment or acceptance at any reasonable place and time and manner to see if the goods conform. 2-608: Revocation of Acceptance of Goods 2-608(1) Revocation of Acceptance Buyer MAY revoke if: + he has accepted of a lot or commercial unit + the nonconformity substantially impairs the value of the goods "to him”(i.e., a defect in the goods and that the defect is of significance to the particular use to which he wanted to put the goods.) + his acceptance was on the reasonable assumption that nonconformity would be cured and it wasn’t done seasonably OR + without discovery of the nonconformity but acceptance was reasonably induced by difficulty or discovery (before accept) or by seller’s assurance. 2-508: Cure by Seller of Improper Tender 2-508(1) The seller’s has a right to cure. Both the buyer's right to reject and his right to revoke an acceptance are subject to the seller's right to cure the nonconformity If Tender or Delivery is rejected because Seller ships nonconforming goods and time for performance has not expired, he may always cure the nonconformity within the contract time, no matter how great the breach is, if Seller seasonably notifies intent. 2-508(2) Again..Remem ber Seller’s Right to Cure! Where the buyer rejects a non-conforming tender which the seller had reasonable grounds to believe would be acceptable… ….with or without money allowance, the seller may, if he seasonably notifies the buyer, have a further reasonable time to substitute a conforming tender. 10 Article 9 Article 9: Secured Transaction Overview Step 1: Attachment: Determine if the Creditor is SECURED 9-203 Attachment (1)A signed security agreement, or creditor has possession of the collateral; (2) creditor gives value; and (3) debtor has rights in the collateral. *Identify each creditor, and determine which collateral they are secured in. Each creditor has to have an attachment analysis. *If there is a PMSI creditor then complete analysis in same IRAC. 9-103 PMSI The seller who extends credit to the buyer or the lender who advances the money to enable the buyer to purchase the collateral. *PMSI Creditor is given SUPER-priority over already existing Secured, Perfected Creditors. Step 2: Perfection: Has the Creditor complied with one or more methods? Perfection Five methods of perfection: 1. Possession or Pledge 2. Filing financing statement 3. Automatic perfection 4. Temporary Perfection 5. Control *Must be analyzed with respect to each creditor claiming an interest in each item of debtor’s collateral. 9-312 Possession or Pledge A creditor can perfect their interest in (categories of collateral) by possession or pledge. - Negotiable documents, good, instruments, inventory Filing Financing Statement A creditor can perfect their interest in (categories of collateral) by filing a financing statement. Temporary Perfection Under 9-312(e) Creditor is temporarily perfected in (negotiable documents, certified securities, instruments) is perfected without filing or taking possession for 20 days after attachment requirements are met. Under 9-312(f) A perfected security interest in negotiable documents or goods in possession of bailee remains perfected 11 for 20 days without filing if secured party makes the document available to debtor for the purpose of sale exchange or loading, unloading, or preparing for sale. Under 9-312(g) Creditor is temporarily perfected in (negotiable documents, certified securities, instruments) for 20 days without filing it for sale presentment, collection, and enforcement. Automatic (PMSI in Consumer Goods only) Creditor is automatic perfected in consumer goods simply by attachment. ● Only in PMSI in consumer goods Step 3: Priority: Who wins as between multiple creditors (and others) General Priority Rule As between two conflicting secured, perfected creditors, the first in time to file or perfect. *Maybe different collateral and creditors, pay attention to what security interest each creditor has in each collateral. Battle between Creditors Priority Rule (1) Secured Credior vs. Unsecured Creditor = Secured Wins (2) Unperfected Creditor vs. Unperfected Creditor= First to Attach Wins (3) Judicial/ bankruptcy lien Creditor vs. Unperfected Creditor = Lien Creditor Wins (4) Perfected Creditor vs. Unperfected Creditor = Perfected Creditor Wins Super Priority PMSI (Consumer Goods) PMSI receives Super-priority over earlier perfected creditor if it is perfected when debtor receives possession or within 20 days. Super Priority PMSI (Equipment) PMSI takes super priority over earlier perfected creditors if it is perfected when debtor receives possession or within 20 days. Super Priority PMSI (Inventory) PMSI creditor has priority over a conflicting security interest in the same inventory if: (1) The security interest is perfected at the time the debtor gets possession of the inventory. (2) The purchase money secured party sends written notification to the holder of the conflicting security interest; (3) Notification received within 5 years before the debtor receives possession of the inventory; and (4) The notification states that the purchase money secured party has or expects to obtain a PMSI in the debtor’s inventory and describes the inventory by item or type. 9-320(A) Buyer in Ordinary General Priority Rule: Buyer takes collateral free of security interest created by the seller, even if the creditor is perfected. 12 Course of Business (BOCB) “Inventory” 9-320(B) 3C Buyer “Garage sale exception” “Consumer Goods” BOCB Rule: A buyer in ordinary course of business is one who buys goods (1) in good faith, (2) without knowledge that the sale violated the rights of another, (3) from a person who is in the business of selling goods of that kind. General Priority Rule: A 3C buyer takes free of a secured perfected creditor who is earlier in time. 3C Rule: must (1) take without knowledge of a security interest; (2) give value; and (3) a consumer buying consumer goods from a consumer debtor, and (4) before the filing of a financing statement covering the goods. ***Note: If PMSI creditor in consumer good wants to have priority over buyers of consumer goods, the PMSI creditor in consumer good needs to take additional step.. File a financing statement even though the creditor has automatic perfection. Bonafide Purchaser “Equipment” Priority Rule: Bonafide purchaser takes free of any unperfected creditor if: a bonafide purchaser has (1) given value, (2) taken deliver, (3) had no knowledge of security interest, and (4) before it is perfected. Step 4: Proceeds: What happens if the collateral is sold, traded, exchanged. Overview on Proceeds Definition: Proceeds is whatever acquired upon the sale, lease, license, exchange, or other disposition of collateral. What happens to the Creditor’s security interest in Debtor’s collateral if it sold? (1) A security interest continues in collateral notwithstanding sale, license, exchange, or other disposition thereof unless the secured party authorized the disposition free of the security interest or agricultural lien, Hence, the secured party will want to argue that they are SECURED and PERFECTED in the “proceeds” just as they are in the original collateral. General Rule A security interest in proceeds is a perfected security interest if the interest in the original collateral was perfected. Same Office Rule A perfected security interest in proceeds becomes unperfected on the 21st day after attachment unless the same office rule is satisfied. If the filed financing statement covers the proceeds and the proceeds are collateral that may be perfected filing in same office as original. ** Note: Not “reasonably identify” std here. This is true even if the description of the collateral in financing statement does not fit the proceeds. 13 Second Generation And Cash Proceeds Proceeds & Priority When do you need 20 days to re-perfect? 1. Same Office Does NOY Apply? - Creditor has 30-day period for re-perfection: a. If the place/office of filing is wrong for proceeds (same office does not apply) 2. Second Generation Proceeds b. The proceeds were cash proceeds and were then used to buy new collateral (“second generation proceeds”) Original Collateral → Cash → New Collateral A secured party’s priority as to its security interest in the proceeds will usually date from the time of the secured party’s priority in the original collateral for the purpose of applying the first-to-file-or perfect priority rule. Otherwise put, usual priority rule of fist to file or perfect wins govern most priority disputes for proceeds. Step 5: Default What is Default Definition: This is usually defined in the security agreement as to when debtor is considered to have defaulted. 1. Repossession 2. Resale 3. Redemption 4. Strict Foreclosure Repossession Rule: A secured creditor can repossess the collateral if doing so will not cause a “breach of peace” ** Creditor is NOT required to give debtor notice that they are in default before repossessing. Resale Resale Notification Rule: After default, a secured party may sell, lease, license, or otherwise dispose of any or all of the collateral: 1. In its present condition or 2. Following any commercially reasonable preparation or processing 3. If commercially reasonable, a secured party may dispose of collateral by public or private proceedings, by one or more contracts, as a unit or in parcels, and at any time and place and on any terms. Rule: A secured party that dispose of collateral shall send to the debtor an authenticated notification of disposition to the debtor. Rule: Non-consumer transactions, generally, debtor and other parties must receive written of resale within a reasonable time before the sale. (generally at least 10 days before the sale. Consumer transactions - the law specifically regulates content and form. 14 Redemption Rule: A debtor, any secondary obligor, or any other secured party or lienholder may redeem collateral by: - By tendering payment for of all obligations secured by the collateral; - And paying the reasonable expenses and attorneys’ fees. A redemption may occur at any time before a secured party disposes of collateral or has accepted collateral in full or partial satisfaction of the obligation it secures. Strict Foreclosure Rule: A secured party may accept collateral in full or partial satisfaction of the obligation it secures only if: 1. The debtor consents and 2. The secured party does not receive a notification of objection to the proposal within 20 days of receiving proposal. Creditor does not pursue debtor for any deficiency between value of collateral and loan repayment amount. Exceptions for Consumer Goods: Creditor must resell collateral if debtor has paid 60% of the cash price on a PMSI in consumer goods. 15