Commercial Transactions
Kosel
Fall 2010
COMMERCIAL TRANSACTIONS
I.History/Background
a. Not federal law; must be enacted individually be state legislators. Good reference pt.
b. For us, must understand choice of law and which version of the UCC governs transaction.
II.Structure of the UCC
I.Article 1: General policy setting article
a. UCC §1-102: Provides purposes; rules of construction; and variation by agreement
i. Liberally construed
ii. Provisions of act may be varied by agreement, exception as otherwise provided in this
Act and except that obligations of good faith, diligence, reasonableness, and care
prescribed by Act may not be disclaimed by agreement but the parties may by agreement
determine the standards by which the performance of such obligations is to be measured
if such standards are not manifestly unreasonable.
II. Common law survives unless specifically displaced (i.e. mistake, duress, offer, agency, etc.)—UCC §1-103:
III.Definitions:
a. General definitions—UCC §1-201
b. Obligation of Good Faith.—defined in UCC §1-201
c. “Time”;; “Reasonable Time”; and “Seasonably” definitions—UCC §1-204
d. “Course of Dealing” and “Usage of Trade” definitions—UCC §1-205
IV.Article 2: Sales (statutory contracts)
a. UCC §2-102: Scope
i. Article applies to transactions of goods.
ii. Does not apply to any transaction which although in the form of an unconditional
contract to sell or present sale is intended to operate only as a security transactions.
b. UCC §2-103: Definition and Index of Definitions
V.Overarching Themes
a. General Goals
i. Predictability in business transactions; facilitation of sales transaction that cross state
boundaries.
ii. Facilitate, not impede, commercial transactions
iii. Provide for certainty in the law.
iv. Flexibility (can always amend something if it does not work well)
b. Applying Goals to Statutory Interpretation
i. The UCC “must be liberally construed and applied to promote its (3) underlying purposes
and policies which are:
1. Simplifying, clarifying, modernizing the law governing commercial transactions
a. For example, eliminating the concept of consideration as a relevant variable.
i. I.e., you can have a modification without consideration (UCC §2209).
ii. Allows for:
1. protection in transactions against extortion by always
requiring good faith.
2. protection without eliminating legitimate needs for
modifications.
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3. You can also have a firm offer (irrevocable offer) without, so
long as such assurance of irrevocability is signed by the
offerror.
2. To permit the continued expansion of commercial practices through custom, usage,
and agreement of the parties
3. To make uniform the law among the various jurisdictions
c. 5 Changes From Common Law
i. Render irrelevant the concept of Title (except in one or two instances)
1. Ex. No title for risk of loss rules
ii. No Consideration
1. UCC 2-209(1) “Agreement modifying a K needs no consideration to be binding”
iii. Reduce formalities
1. Ex. Statute of Fraud pursuant to §2-201:
a. Only requires “some writing sufficient . . .” Takes away high level of
specificity required under CL.
2. Ex.: Contract formation –§2-206
a. Eliminates the notion of unilateral and bilateral offers from CL
i. Instead uses reasonable standard to determine whether offer and
acceptance made.
iv. Make it easier to enter contracts, but impose more burden once in contract.
v. Freedom of Contract:
1. Allows people to enter into contracts with whomever they want. Let them form
contract and use gap-fillers to determine the terms later.
a. Even allowed to leave an open price term (big departure from CL).
2. 2 Qualifiers (exceptions)
a. Protection for weaker parties—ie. Minimum rules of fair playe
i. Ex. 2-302—Unconsciounability (see infra ____)
b. Protect third parties from other parties’ exercise of freedom contract.
i. Ex: UCC 2-318 allows for warranties to be extended to third parties.
Essentially a products liability section.
d. NOTE:
i. Minimum rules of fair play that cannot be altered by parties’ agreement -> duty of good
faith;
1. Unconscionable contracts will not be enforced (UCC 2-302).
2. Protect traps for the unwary.
VI.Notes: Revisions
a. Proposed Article 2 is based on Revisions from 2003.
b. One major proposal is opposed by national association of manufacturers who do not like the
proposals with respect to third-party liability (i.e. 2-318).
c. Another major proposal relates to softwares because software industry feels that proposal does
more to confuse than to clarify, especially because article 2 is traditionally free of consumer
protection laws.
SCOPE OF ARTICLE 2
I. Determining Scope Under the UCC:
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a. First step - is this a transaction governed by Article 2 of the UCC?
b. 2-102:
i. It is a sale of goods
ii. 4 Considerations:
1. Type of prop or other subject matter of the transaction;
2. Nature and extent of rights transferred,
a. Eg. Sale v. lease
3. Location of the parties to the transaction,
4. What (if anything) agreement says about governing law
c. UCC Article 2 generally applies to sale of goods
i. NOTE: Or sales of intellectual property under certain circumstances.
d. BUT: Even when we are under Article 2, unless explicitly displaced, the principles of the common
law can still be valid and used.— UCC §1-103
i. UCC §1-103: Unless displaced by the particular provisions of this Act, the principles of law and equity,
including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud,
misrepresentation, duress, coercion, mistake, Bankruptcy, or other validating or invalidating cause shall
supplement its provisions
II.Goods
a. Definition of Goods-- UCC §2-105(1)
i. JK Def:
1. Tangible personal property
a. Ex: Insurance is intangible personal property—not a “good”
2. NOTE: Includes animals and crops
ii. UCC §2-105(1) – Definition of “Goods”
1. (1) "Goods" means all things (including specially manufactured goods) which are movable [i.e.
tangible] at the time of identification to the contract for sale other than the money in
which the price is to be paid, investment securities (Article 8) and things in action. "Goods" also
includes the unborn young of animals and growing crops and other identified things attached to realty
as described in the section on goods to be severed from realty (Section 2-107)
iii. NOTE: Goods can include future goods (UCC2-105(2))
1. Ex. Farmer selling crops before he grows them
b. “Severing Goods From Realty”
i. Goods to be severed from realty-- UCC §2-107
1. Ex. If a Victorian house is affixed to land, it is NOT article 2. If house is removed
from foundation and like on the back of a truck, it is a good within meaning of
article 2.
ii. UCC §2-107: Goods to be severed from realty
1. (1) A contract for the sale of minerals or the like (including oil and gas) or a structure or its
materials to be removed from realty is a contract for the sale of goods within this Article if they are to
be severed by the seller but until severance a purported present sale thereof which is not effective as a
transfer of an interest in land is effective only as a contract to sell
2. (2) A contract for the sale apart from the land of growing crops or other things attached to realty
and capable of severance without material harm thereto but not described in subsection (1) or of
timber to be cut is a contract for the sale of goods within this Article whether the subject matter is to
be severed by the buyer or by the seller even though it forms part of the realty at the time of
contracting, and the parties can by identification effect a present sale before severance
3. (3) The provisions of this section are subject to any third party rights provided by the law relating to
realty records, and the contract for sale may be executed and recorded as a document transferring an
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interest in land and shall then constitute notice to third parties of the buyer's rights under the
contract for sale
c. Notes:
i. Crops are always goods, even before it has been planted.
ii. No dollar requirements for goods.
III.Mixed goods/non-goods contracts:
a. Note: UCC is silent on what to do here, so courts have adopted different tests
b. Bifurcation Rule: Foster v. Colorado Radio Corp. (1967)
i. K bifurcated into areas where UCC applies, and areas where it does not
ii. Uniform Commercial Code found applicable to sale of radio station's office equipment and
furnishings which were movables and hence ‘goods,’ within meaning of code definitions
1. Even though rest of the K was not moveable—not goods
a. Station's license, good will (extra added benefit from buying or selling
something instead of liquidating it),
b. Real estate (the underlying real property and transmitting tower which is a
fixture),
c. Contracts with employees and advertising agencies,
d. Studios (the actual studio property)
e. Transmission equipment (fixture) which were sold under same contract were
not movables and hence not ‘goods' . . .”
c. UCC by-analogy rule –
i. Recent rule: if any portion of the transaction is clearly regulated by Article 2, then most
likely Article 2 is applied to the entire transaction
1. Rationale for this: try to apply UCC as much as possible; it has been around for 50
years and is something people are comfortable with and see as best governing rules.
IV. Mixed Goods/Service Transactions
d. Predominant Feature Test-- (used by some courts):
i. “If predominate feature of the transaction is one for a sale of goods, then the whole
contract is governed by the UCC as a sale of goods.”
1. 3 Considerations
a. The K language
b. Nature of supplier’s business
c. Value of materials v. value of service provided under the K
i. Ex. Going to dealer to get an oil change versus getting a new
transmission
1. Getting an oil change is probably more predominantly about
the service,
2. Getting a new transmission is probably predominantly about
the transmission
a. (Based on cost)
2. Looking at Skill Level Involved:
a. Window case -> buying window for office building, and having it installed by
the installers. UCC or not? Court said: look at the skill level: if low skill job,
then the sale is the predominant feature and it is governed by UCC. If high
skill job, then sale not predominant feature, not UCC, and should be
governed by CL.
ii. Criticism: difficult to apply with predictable certainty
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e. Gravamen of the Claim Test
i. Asks whether the claim [suit] relates to the goods or services
1. Ex. Suing the car mechanic about his shoddy service vs. suing about the quality of
the tire he put in your car
f. Note: Why people might want to take transaction outside of UCC:
i. UCC imposes a lot of liability and burden once it finds a contract pursuant to sale of goods
has been found (i.e. higher statute of limitation)
V. Software
g. Rule:
i. If you buy software via download, it is not a good,
ii. BUT if you buy it at a store, it is a good.
h. Reason for ambiguity
i. Is software a sale or a service? Not very well defined since software is usually seen as a
license.
i. Proposed Article 2-103k along with comments versus existing Article 2-103 (which just says, for
goods, go to 2-105 (see supra p._____)
i. PROPOSED §2-103k: “Goods” means all things that are movable at the time of identification to a
contract for sale. The term includes future goods, specially manufactured goods, the unborn young of animals,
growing crops, and other identified things attached to realty as described in Section 2- 107. The term
does not include information, the money in which the price is to be paid, investment securities under
Article 8, the subject matter of foreign exchange transactions, or choses in action
1. PROPOSED Comment 7: The definition of “goods” in this article has been amended to
exclude information not associated with goods. Thus, this article does not directly apply to an
electronic transfer of information. However, transactions often include both goods and information:
some are transactions in goods as that term is used in Section 2- 102, and some are not. For
example, the sale of “smart goods” such as an automobile is a transaction in goods fully within this
article even though the automobile contains many computer programs. On the other hand, an
architect's provision of architectural plans on a computer disk would not be a transaction in goods.
When a transaction includes both the sale of goods and the transfer of rights in
information, it is up to the courts to determine whether the transaction is entirely
within or outside of this article, or whether or to what extent this article should be applied to a
portion of the transaction.
a. This is the part of the proposal that drives Microsoft crazy – creates
uncertainty as to whether software is or is not governed by the UCC.
i. BUT: Proposed article 2 moves statutes of fraud back up to $5000,
and everyone thinks that is a good change.
1. However, this proposed amendment is holding everyone up.
1. JK hates this all or nothing system for amending the UCC.
VI. Fixtures
d. Two Tests for determining if something is a fixture (not a good)
i. Intentional Test:
1. If person who put moveable/real property together intended it to be a fixture—it is
a fixture
a. Considerations:
i. How difficult is it to separate?
ii. How much damage would you do?
ii. Institutional Test
1. Could the thing function without it?
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a. Ex. Chairs in movies theater
VII. Note Lease of Personal Property::
e. Lease of Personal Property: Used to be governed by UCC Article 2, but still left a lot of ambiguity as
to when it is UCC or when it is CL.
VIII. Note: Choice of Law Provisions—1-301
f. Gives Parties to opportunity to elect their own choice of law
g. Ergo—can change default rules
MERCHANTS
I. Definition—UCC §2-104:
a. UCC §2-104: Definitions: “Merchants”;; “Between Merchants”;; “Financing Agency
i. 1) "Merchant" means a person who deals in goods of the kind OR otherwise by his
occupation holds himself out as having knowledge or skill peculiar to the practices or
goods involved in the transaction OR to whom such knowledge or skill may be attributed by his
employment of an agent or broker or other intermediary who by his occupation holds himself out as having
such knowledge or skill
ii. (2) "Financing agency" . . .
iii. (3) "Between Merchants" means in any transaction with respect to which both parties are chargeable
with the knowledge or skill of merchants
II. Second line of inquiry after “are we under the UCC for a sale of goods” is do we have any merchants in the
transaction?
a. If we do have a merchant in transaction -> we may impose higher standard of duty on them.
i. i.e.: Statute of frauds (UCC §2-201), warranty of merchantability.
III. Mostly Easy
a. EXCEPTION: Is a farmer a merchant?
i. THE LOEB CASE
1. Facts
a. Loeb a family farmer
b. Statute of frauds at issue
c. Loeb never signed anything, but got written confirmation of written contract
2. Holding
a. Loeb not a merchant for SOF
ii. NOTE:
1. Sometime a farmer is a merchant
a. Ex. Warranty of merchantability for infested crops
FREEDOM OF CONTRACT
I. One principle behind UCC is to give parties freedom to contract
a. To promote parties entering into contract and to give parties the ability to create their own terms.
II. Variations—UCC §1-302
a. RULE:
i. While UCC proscribe certain rules, those rules are seen as gap-fillers, and where appropriate,
parties may contract out of those gap-fillers.
ii. UCC §1-302: Variation by Agreement
1. (a) Except as otherwise provided in subsection (b) or elsewhere in [the Uniform Commercial Code],
the effect of provisions of [the Uniform Commercial Code] may be varied by agreement
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2. (b) The obligations of good faith, diligence, reasonableness, and care prescribed by
[the Uniform Commercial Code] may not be disclaimed by agreement. The parties, by agreement,
may determine the standards by which the performance of those obligations is to be measured if those
standards are not manifestly unreasonable. Whenever [the Uniform Commercial Code] requires an
action to be taken within a reasonable time, a time that is not manifestly unreasonable may be
fixed by agreement
3. (c) The presence in certain provisions of the UCC of the phrase "unless otherwise agreed", or words
of similar import, does not imply that the effect of other provisions may not be varied by agreement
under this section
iii. Effect:
1. §1-302 says vast majority of Article 2 applies where parties did not explicitly agree to
b. 4 Different Kinds of Stylistic Variations
i. Clearly Variable:
1. Ex. is UCC §2-206 which provides for offer and acceptance in formation of
contracts
a. Rule:
i. An offer to make a contract shall be construed as inviting acceptance
in any manner and by any medium reasonable in the circumstances.
b. However, while it makes it easier to form a contract than the common law of
contract, if the parties so desire, they can retain the idea of unilateral and
bilateral offers.
i. They just have to alert the other party so that the simplistic formula
in Article 2 does not apply
2. The principle is that these are the rules that apply unless both parties specifically
understand that they are coming up w/ own rules
ii. Variable Within Limits
1. Ex. UCC §2-718(1), which is the liquidation or limitation of damages clause
a. Rule:
i. Allows the party to specify the types of damages provided for in case
of breach,
b. BUT only variable within limits
i. Can only do so if it is reasonable in the light of the anticipated or
actual harm caused by the breach.
ii. If terms unreasonably high or difficult to calculate, then court will
reject the liquidated damages clause. A term fixing large liquidated
damages is void as penalty
iii. No Freedom of K
1. Ex. §UCC 2-318, the third party beneficiaries express or implied warranties
a. Seller and buyer are obviously not going to want to protect third parties, so
why give them the freedom to “contract out” of providing for third party
warranties
iv. Silent on the Issue
1. UCC §1-302 (see supra ____), the Variation by Agreement, states that the presence
in certain provisions of the phrase, “unless otherwise agreed” or words of similar
import, does not imply that the effect of other provisions may not be varied by
agreement under this section
a. Drafters tell us certain provisions are labeled, but some are not, and the ones
that are do not impact the ones that are not.
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