COMMERCIAL LAW
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Chapter 1 & 2: Introduction to Payment Systems & Negotiable Instruments
Two Types of Negotiable Instruments:
1.
NOTES (2 party paper)
Promises to Pay
df.
2.
DRAFTS (check 3 party )
Orders to Pay
df.
Payable to bearer or order
Identification of person to whom instrument is payable.
Issue of an instrument.
Holder
Chapter 3:
A.
df.
§ 3-109
§ 3-110
§ 3-105
§ 1-201(b)(21)
Contract Liability on a Negotiable Instrument
INCURRING THE OBLIGATION TO PAY
1. Signature
a. Signature on instrument determines who incurs contract liability
2. Capacity
a. Maker – person who promises payment in draft
§ 3-401, § 3-402
df.
c.l.
b. Drawer – person who orders payment in draft
§ 3-104(a)(5)
§ 3-412
df.
c.l.
unless draft is also drawn on the drawee, then contract liability of an issue
Discharge of Drawers Contract liablitity to payee
c.l.
§ 3-103(a)(3)
§ 3-414
§ 3-412
§ 3-414(c)(d)
c. Drawee (ex. Bank)
drawee who has not signed instrument – no contract liability
“accepts” – signs (not possession)
ex. Certified check
df.
c.l.
§ 3-103(a)(2)
§ 3-408
§ 3-409(d)
§ 3-409(d)
d. Indorser (Indorsement)
df.
c.l.
§ 3-204
§ 3-415
§ 3-415(d)
df.
§ 3-419
c.l.
§ 3-605(g)
Contract liability may change
e. Accommodation Party
Test is 3-419(c)
Discharge – comment 10
B.
§ 3-104(e)
§ 3-104(e)
WHEN THE OBLIGATION IS DUE
1. Presentment
Person entitled to enforce the instrument demands payment (or Acceptance)Presentment
df.
1
§ 3-301
c.l.
§ 3-501(a)
2. Dishonor
Dishonored – if presentment is properly made and the maker or drawer refuses to
pay, or the drawer refuses to accept the draft.
Rules of Dishonor
§ 3-502
Notice of Dishonor is
§ 3-503
If dishonored you go back to liablility
Contract liability: drawer
Contract liability: indorser
3. Excuse
Presentment and notice of dishonor may be excused
C.
§ 3-414
§ 3-415
§ 3-504
TO WHOM THE OBLIGATION IS OWED
Person entitled to enforce the instrument
df.
§ 3-301
Three Ways a person may be entitled to enforce:
1.
Holder
df.
§ 1-201(b)(21)
(21) “Holder” means
(A) the person in possession of a negotiable instrument that is
payable either to bearer or to an identified person that is the person
in possession; or
(B) the person in possession of a document of title if goods are deliverable
either to the bearer or to the order of the person in possession.
2.
Non-Holder in possession of the instrument who has the rights of a holder
3.
A person not in possession of the instrument who is entitled to enforce the instrument
pursuant to 3-309
ISSUANCE/TRANSFER/NEGOTIATION
1. issuance of the instrument
2. negotiation of the instrument
3. Transfer of the instrument (requires purpose)
ex.
1. Drawer makes check payable to cash
2. Gives to someone else
§ 3-105
§ 3-201
§ 3-203
Bearer Instrument
issued under § 3-105
not negotiated
§ 3-201
Possession - holder
under
§ 1-201(b)(2)
Entitled to enforcement
§ 3-301
Given to another person – transfer –negotiation
§ 3-201
Compare
§ 3-203
Ex. Order Instrument
§ 3-109
When given to someone else
Issuance
§ 3-105
Not a Negotiation – not a holder
§ 3-201
Order to Payee – Payee a holder
§ 1-201(b)(21)
Entitled to Enforce
§ 3-301
In order to make someone else a holder, Payee must:
a.
transfer possession
b.
indorse
2
Indorsement
Indorsement with more than one payer with more than one payer
Indorsement
df.
c.l.
§ 3-110(d)
§ 3-204
§ 3-415
Types of Indorsements:
i. special or blank
df.
§ 3-205
ii. qualified or unqualified
indorsement without recourse considered a type of
qualified indorsement
df.
§ 3-415(b)
iii. Restricted or unrestricted
Restricted indorsements are related to the
Bank collection process
§ 3-206
Person cannot indorse an instrument in such a way as to attempt to:
a.
restrict further transfer or negotiation of that instrument; or
b.
condition the right of the indorsee to receive payment
§ 3-206(a)(b)
Other Upstream Theories
Other persons who are able to enforce the contract obligation of a party on the
Instrument.
Issuer/Maker
Drawer
Indorser
Warranties
D.
§ 3-412
§ 3-414,
§3-415
ENFORCEMENT OF THE OBLIGATION
§ 3-308
Structure of litigation concerning contract liability on the instrument
§ 3-308
1. Defenses
“Real Defenses”
“Personal Defenses”
Defenses
§ 3-305(a) (1)
§ 3-305(a)(2)
§ 3-305, Comment 2
Holder in Due Course – subject to the real defenses (§ 3-305(a) (1) but not subject
to the personal defenses (§ 3-305(a)(2)
§ 3-305(b)
Not all defenses are listed in §3-305(b).
Holder in Due Course – Subject to Defenses of:
 Real Defenses under §3-305(b)
 Forgery of a signature: you are not a HIDC
§ 3-401, § 3-308
 Alteration of the instrument: you are not a HIDC
§ 3-407
 Discharge of which had notice: you are not a HIDC 3-305(c)
§ 3-601
 Discharges arising contemporaneously or subsequent to the transfer of
the instrument to the holder in due course.
 Defenses as a result of holder in due course’s own behavior.
E.
DISCHARGE OF THE OBLIGATION
1. Contract Obligation on the Instrument
3
Once contract liability is discharged, the party discharged cannot be sued to enforce that
contract liability except by a holder in due course who took the instrument without notice of the
discharge.
§ 3-302(b), § 3-601(b)
Discharge is a “personal” defense, not a real defense.
Discharge is a defense to payment (even though Article 3 does not treat as defense)
Comment 3 to § 3-302
Methods of Discharge:
1. Payment
§ 3-602
2. Tender of Payment
§ 3-603
3. Cancellation
§ 3-604
4. Any action that would discharge an obligation on a simple contract. § 3-601
2. Underlying Obligation
The underlying obligation is suspended until the check is dishonored or paid § 3-310 (b)
If dishonored, holder may sue either for:
a.
drawer’s contract liability on check.
b.
underlying obligation to pay for the goods.
§ 3-414
§ 3-310
3. Accord and Satisfaction (When you see “paid in full” on the check)
Accord & Satisfaction – payment of a disputed debt, often for less than debtor is entitled, which
satisfactorily settles obligation for all concerned. Black’s.
Requirements of Accord and Satisfaction
§ 3-311(a)
Effect of Payment on underlying obligation.
§ 3-311(b)
F. ACCOMODATION PARTIES
Accommodation Party
df.
Person signs an instrument for the purpose of incurring liability but not
receiving the benefit of the value given for the instrument.
Test for determining is signed is signed for accommodation.
Accommodated Party - The issuer under part (a)
df.
Anomalous indorsement.
§ 3-419(a)
§ 3-419(c)
§ 3-419(c)
§ 3-205
An accommodation party is a party to a negotiable instrument who is a surety for the
accommodated party.
Accommodation Party – Contract Liability – depends on capacity in which
the person signed.
Accommodation maker
Accommodation drawer
Accommodation indorser
Accommodation acceptor
Defenses of the Accommodated Party
§ 3-305 (d)
Indorser is not an accommodation party unless it meets test.
§ 3-419
Discharge of Accommodation party (secondary obligor)
§ 3-605
4
Chapter 4:
A.
NEGOTIABLE INSTRUMENTS AS PERSONAL PROPERTY
CLAIMS TO THE INSTRUMENT (Upstream Claims on One Sheet Wonder)
1. Claims to the Instrument
The Person entitled to enforce the contract liability on an instrument is not necessarily the owner of the
instrument under property of law principles.
Comment 1 § 3-203
Claims to a negotiable instrument.
§ 3-306.
Conversion
§ 3-420
2. Asserting Upstream Claims (Not contract liability claims such as 412/414/415 , not warranty claims)
Whether the person in possession of the negotiable instrument is subject to the claims
depends upon whether that person is a holder in due course.
§3-306
Person who takes negotiable instrument with notice of a claim is not a holder in due
course of the instrument.
§3-302(a) (2) (v)
Only security Interest
§3-302(e)
Notice of a claim = notice of a defense
§1-202
Another person’s claim as defense
§ 3-305 (c)
Payment discharging obligation with another person’s claim
§ 3-602
When a taker of a negotiable instrument has notice of the claim of a represented person
to the instrument based upon the wrongdoing of a fiduciary.
§ 3-307, § 3-206(d)
Drawer Negligence – negligence contributing to forged signature
§3-406
B.
WARRANTY LIABILITY
Person transferring a negotiable instrument about the state of title and quality of that instrument.
Two types of warranty:
a.
transfer warranties
§ 3-416
b.
presentment warranty (presentment is to the payee)
§ 3-417
Transfer Warranties – made upon transfer of the instrument.
§3-416, §3-203
a.
transfer has to be for consideration.
b.
If indorsed, “Runs” with the instrument to subsequent transferees.
§ 3-416(a)
c.
Damages for Breach of Warranty
§ 3-416(b)
d.
Statute of limitations for breach of warranty. (3 years)
§ 3-118(g)
h.
Disclaimer of contract liability “without recourse”, is not sufficient disclaimer
of warranty liability.
Comment 3 to § 3-416.
i.
Transfer warranties in the bank collection process
§ 4 -207
1.
1.
Presentment Warranties – made by the person presenting the negotiable instrument
5
and prior transferors of the instrument to the person paying the instrument or to a
drawee accepting a draft.
§ 3-417
a.
b.
c.
d.
e.
f.
g.
Presentment
§ 3-501
Presentment Warranties made.
§ 3-417(a) & (d)(1)
Rights of a drawee to whom a presentment warranty is made, including
certain defenses a warrantor may assert to a breach of warranty claim and
the amount the drawee may recover on the breach of warranty claims.
§ 3-417 (b) & (c)
Rights of a payor of a dishonored draft or other instrument.
§ 3-417(d)(2)
Notice of breach of warranty claim and accrual of the cause of action.
§ 3-417 (e) & (f)
Disclaimed by specific language to that effect except as limited
§ 3-417 (e)
Presentment warranties in the bank collection process.
§ 4-208
Chapter 5: ARTICLE 4-COLLECTION THROUGH THE BARKING SYSTEM
A.
OVERVIEW
1. Article 4 governs the collection of items through the banking system.
§ 4-104(a)(9)
a. Mostly checks, but also notes or other promises or orders.
§ 4-101, comment 2
b. If there is a conflict between Article 3 and Article 4, article 4 governs.
§ 4-102
c. Other Rules by the Federal Reserve affect collection in the banking system
Regulation CC - pg 1456,1476
12 C.F.R. Part 229
Regulation J - pg 1417 –just stuff sent to fed reserve
12 C.F.R. Part 210
Supplements the rules in Articles 3 & 4, preempt state law only when there is a conflict
between state law and the regulation.
Federal Reserve also promulgates operating circulars which may vary the effect
of Article 4 Provisions. Can be modified by agreement
B.
BANK AND CUSTOMER RELATIONSHIPS
Relationship based on Contract
Bank evaluates whether the item is properly payable from the customer’s account.
§ 4-401
If Bank returns an item that is properly payable from the account, it has wrongfully
dishonored the item.
§ 4-402
Presentment Warranties
(compare to § 3 –417)
C.
§ 4-208
THE COLLECTION PROCESS – AN OVERVIEW
Collecting through the Banking System Overview):
1.
Definition of Banks
D.
§ 4-103(b)
§ 4-105
COLLECTING BANK: FORWARD COLLECTION
Forward Collection Process:
§ 4-201
6
1.
Each succeeding bank gives the bank that transferred the item (or presented in
the case of the payor bank) a provisional settlement.
Revoke provisional credit by midnight deadline
§ 4-201
§ 4-301(a)
2.
Collecting bank must send the item for collection by a reasonably prompt method. § 4-204
a.
within a certain time frame and with a certain standard of care
§ 4-202
b.
Time of receipt of items
2pm cutoff
§ 4-108
c.
Whether a branch is considered a separate bank for computing deadlines. § 4-107
d.
Excuses for delay – good faith delay = 2 additional days
§ 4-109
e.
Bank’s ability to define ordinary care & the obligation of good faith.
§ 4-103
f.
Definition of ordinary care.
§ 4 -104(c) & § 3-103(a)
3.
4.
A depository bank may become a holder
§ 4-205
In transferring the item to a collecting bank, customer and collecting bank makes
transfer warranties.
§ 4-207
Regulation CC 12 C.F.R. § 229.36(d)
a.
provides provisional settlements made in the forward collection process are
final in order to speed up the process.
b.
Final settlement under CC does not:
CC Commentary o §229.36(d)
(i)
limit the collecting bank’s ability to revoke provisional settlement § 4-214
(ii)
does not constitute final payment under U.C.C.
§ 4-215
Regulation J has rules that govern items sent through the Federal Reserve System.
Reg. J, 12 C.F.R. §§ 210.4, 210.5, 210.6, 210.7
5.
6.
E.
PAYOR BANK: SETTLEMENT AND FINAL PAYMENT
1.
8.
Payor bank makes provision payment by midnight of the banking day of receipt unless
item is immediately paid over the counter. Ie Demand Item
§ 4-301
a.
If provisional settlement, can revoke the settlement and return the item by
midnight deadline.
§ 4-301
b.
If item is timely returned, it has been dishonored.
§ 4-301(c)
c.
Item is returned.
§ 4-301
If payor bank makes provisional settlement but does not return by midnight deadline, payment
becomes final.
§ 4-215
a.
If bank fails to make provisional settlement by the deadline.
§ 4-302
Payor Bank Liability is strict liability, not dependant upon the degree of care.
§ 4-302
Other sections dealing with compliance within time frames.
§§ 4-107, 4-108, & 4-109
Regulation CC allows extension of midnight deadline if complies with
12 C.F.R. § 229.30(c)
Final payment firms up provisional credits into final settlement.
§ 4-215(c)
a.
Effect of final payment on contract liability?
§ 3-602
b.
Effect of final payment on underlying obligation for which instrument is
issued?
§ 3-310
Theories Payor Banks can use to seek recovery:
a.
Breach of Presentment Warranty or fraud
§ 4-302(b)
b.
Common law
§ 1-103(b)
c.
Statutory right of restitution for payments made by mistake.
§ 3-418
If check is presented to Federal Reserve Bank
Reg. J, 12 C.F.R. §210.9 & §210.12
F.
ITEM RETURN AND CHARGEBACK
2.
3.
4.
5.
6.
7.
7
1.
2.
G.
Payor bank physically returns the check to someone else.
§ 4-301
Payor bank also revokes the provisional credit it gave the entity that presented the
check. Send notice under 301, act of taking back or charging is 214
§ 4-214/4-301(a)
A timely return is a dishonor of the check.
§ 4-301(c)
Collecting bank revoke provisional settlements and can chargeback their customer’s
accounts or obtain a refund from their customer.
§ 4-214
a.
Obligation of collecting bank who has physical possession of a returned item
or knows it has been returned.
§ 4-202
b.
Bank must act by its deadline after it learns the facts.
§ 4-214
Regulation CC provides additional rules.
a.
Payor bank must act expeditiously
Reg. CC, 12 C.F.R. § 229.30
(i)
If amount is large
Reg. CC, 12 C.F.R. § 229.33
b.
Returning bank other than Payor bank
Reg. CC, 12 C.F.R. § 229.31
c.
Depository Bank obligations
Reg. CC, 12 C.F.R. § 229.32
d.
Settlement of the check
Reg. CC, 12 C.F.R. § 229.36(f)
e.
Warranties made in returns made by payor and returning banks. CC, 12.C.F.R. § 229.34
f.
Bank’s liability for failure to comply with Regulation CC. Reg. CC, 12 C.F.R. § 229.38
g.
Payor bank’s obligations under § 4-301 & § 4-302 are separate and distinct from
obligations under Reg. CC.
Regulation J applies when banks are returned through Federal Reserve.
Reg. J, 12 C.F.R. §§ 210.12, 210.13, 210.14
FUNDS AVAILABILTY
1.
When a credit becomes final, a bank is liable to its customer.
3.
4.
5.
6.
CHAPTER 6:
§ 4-215(a)
FORGERY AND FRAUD IN THE USE OF NEGOTIABLE INSTRUMENTS
5 Types
1) Drawee Honors Forged Drawer
a. Payor bank/Drawee suffers loss because they have a signature card and should have checked
b. Drawer will be upset because it was not properly payable under 4-401
c. Drawee bank doesn’t have a claim against the presenting bank because of 4-208, know
knowledge of the signature. 4-208 is the only warranty the payee bank has but he cant assert
it. 4-208(a)(3)
2) Drawee Dishonors Forged Drawer
a. The person who took from the thief is the loser or the thief himself (if known) is the loser.
b. This is on warranty theory 4-207/3-416.
3) Drawee Honors Forged Indorser
a. Depository Bank gets stuck because they need to look at ID.
b. Payee asserts a 3-420 claim against the depository bank and drawee.
c. 4-208 (a) (1) works because nobody was entitled to enforce, so no HIDC
4) Drawee Dishonors Forged Indorser
a. Depository Bank gets stuck because they need to look at ID.
b. Only works if thief doesn’t get paid. Can do a 3-309
5) Forged Indorser/Forged Drawer
a. Treated the same as a forged Drawer
Alteration
1) Treated as a forged indorser
2) 4-401(d) – payor bank can only pay up to the original amount. They are stuck for the rest.
8
ARTICLE 2 –SALES – 100’s Definitions, 200’s – Form/Formation, 300’s- Obligation/Warranty,
700’s- Remedies
FORMATION
1) How to determine a good or a service (if a service it is Tort )
a. 2-102 – Article applies to transaction in goods
b. 2-105 – Goods defined
c. 2-501 – Manner of identification of Goods
2) 3 – Ways to Determine a good or Service
a. Service Predominates – Majority Rule . – cost of kidney is 2k, cost of surgery is 100k
b. Gravaman – “What we are complaining about” – pg 13
c. Split the transaction – Tort for services, K for goods
3) When do you have an agreement/Kontract? Big Article 2 Exam?
a. 2-204 – Made in any manner sufficient to show agreement, including conduct by both
parties. Even though they send wrong goods and they accept it’s a K.
b. 2-206 – Offer and acceptance in formation of a K - under (B) you can send nonconforming goods and if the buy accepts it it’s a K.
c. 2-207 – Wildly different?? Where??? Comment 3?
4) Two methods of Acceptance
a. Buyer clicks on website to buy computer, Offer is the click, acceptance is the
company/seller shipping the product
b. Offer was shipping the computer, Acceptance is when the buyer keeps the computer for
over the 30 day return period – Hill v. Gateway pg 42
5) Assignment 3 Problems
a. 2-719 – contractual modifications or limitation of remedies – consequential damages cant
be unconscionable – they have to be reasonable under comment 1
b. Rolling Contract, Under Hill yes, under 2-206, 2-207
c. 3.2 – 2 merchants, she performed by shipping
d. 3.3a – she is stuck
i. 3.3b –wildly different, no expression of acceptance
ii. 3.3c – no acceptance because it was expressly made conditional
iii. 3.3d –2-207(3)
6) Parole Evidence/Statute of Frauds
a. Statute of Frauds – 2-201
i. Signed by the party against whom enforcement is sought (against who y’all is suin)
ii. If between MERCHANTS – a writing in confirmation of the contract is received it
satisfies the requirement of subsection 1. An acknowledgment form serves as a
written contract between merchants
iii. 1-201(b)(37) – signed includes using any symbol executed or adopted
iv. Comment 37 of 1-201 A complete signature is not necessary. A billhead or
letterhead will suffice. (if its on your letterhead it’s a signature)
v. A writing is not insufficient because it omits or incorrectly states a term but it is not
enforceable beyond the quantity of goods shown in the writing.
b. Parole Evidence – 2-202 – terms included therein may not be contradicted by evidence of
any prior agreement or of a contemporaneous oral agreement but may be explained or
supplemented by…
i. By course of performance, course of dealing, or usage of trade (1-303)
ii. By evidence of CONSISTENT additional terms unless there is a MERGER Clause
(complete and exclusive statement)
9
7) Problem 5.1a – Mike is SOL because she didn’t sign anything.
8) Problem 6
a. Not consistent terms, she would breach
b. Now a merger so you cant bring in a consistent terms. This is a subsequent oral agreement
so 2-202 doesn’t apply. Look at 2-209 Modification, Rescission and Waiver –
modification has to be in writing (satisfy the statute of frauds). Potentially waving a term of
the K..price??
c. Merger clause and course of dealing.
d. Merger clause and usage of trade.
e. 6.2 – statute of frauds, what she sent was the offer. The first oral contract fails Statute of
frauds. (see handout!!)
9) Warranties
a. EXPRESS – 2-313
i. . How to tell if you have an express warranty or just puffery? This is the FTC test.
1. Its specific
2. Its measurable
3. Stated as a fact and not an opinion.
b. Implied Warranty of Merchantability - 2-314- Applies to Merchants Only. The test is…
i. Pass without objection in the trade under the contract description
ii. If a fungible good it has to be Fair average quality
iii. Fit for the ordinary purpose for which such goods are used
iv. The rest are part of 2-314(2)
v. DEFENSE – the loss resulting from some action or event following his own
delivery of the goods can operate as a defense for the seller.
c. Implied Warranty of Fitness 2-315 – 3 part test from Ohio Horse case Leal v Holtvogt
i. Seller must have reason to know of the buyers particular purpose
ii. The seller must have reason to know that the buyer is relying on the sellers skill or
judgment to furnish or select appropriate goods.
iii. The buyer must in fact rely on the seller’s skill or judgment.
d. Sealed Container Defense – Sears case – sears isn’t responsible but the manufacturer is
because sears is a middleman. The elements are:
i. defense to property damage or personal injury,
ii. caused by defective design.
iii. Acquired and sold or leased by seller who had know knowledge of defect
iv. Could not have discovered the defect (catalog sale)
v. Did not manufacture the product
vi. Did not alter or assemble it.
vii. This defense is not available if the salesman made any express warranties.
e. Problem Set 8.1 –
i. A – no, not a merchant under 2-314
ii. B – Still no, not a merchant. Comment 8 says it could be fraud or misrepresentation
iii. C – No, puffery
iv. D – Question here is is the law school a merchant?
f. Problem Set 8.2
i. A – puffery
ii. B – Puffery
iii. C – Mom tells you….no reliance on Bob
iv. D – no express because of puffery but implied under 2-315 Warranty
v. E – No express because after the contract but could be modification under 2-209.
vi. F – 2-313 yes, because it was done at the time of the bargin
10
g. Start 8.4 – see 2-314 comment 13
h. Third party beneficiaries of Warranties – 2-318
i. Privity (3 different jurisdictions, you have to see which one you are in)
1. Alternative A = have to be in the family or household of the buyer
2. Alternative B = Only for injury
3. Alternative C = can be both economic and Jury.
4. Horizontal – Who can sue?
5. Vertical - Who may we sue (add y’all if speaking Texan)?
i. Magnuson Moss – doesn’t apply to merchant to merchant transactions
i. Has to be in writing
ii. Only covers consumer goods not services
iii. Only covers consumer transactions not business transactions
j. Modification/Exclusion of Warranties – 2-316
i. Conspicuous – 1-201(10)
ii. Express warranty you disclaim
iii. Implied warranty of merchantability – yes, written or oral and if you do the
disclaimer in a writing it has to be conspicuous and mention “merchantability”.
iv. Fitness of purpose – has to be in writing and conspicuous
v. Problem 12.1 – wasn’t conspicuous
1. 12.2- Refused to examine, but was there a demand ? She didn’t refuse
because there was no demand so she has a warranty
2. 12.3 – you cant disclaim a warranty that you make
10) 2-613 - What happens to goods damaged before the risk of loss occurs?
a. Excuse out of a contract. Book explains it on 224
b. If (a) then the K is avoided
c. If (b) then the buyer gets a choice…reduces the cost by the amount of damage.
11) 2-615 – Excuse by failure of presupposed conditions (fungible goods only)
a. You cant get out of a contract if the price goes against you (mkt price falls or goes up) – see
comment 4 on pg 147
12) Unconsionability – has to have two parts
a. Procedural – lack of bargaining power, unequal bargaining power
b. Substantive – bad deal
13) Risk of Loss –
a. 2-308 is the default rule, the place for delivery is the sellers place of business.
b. 2-319 –
i. FOB Shipperii. FOB Destinationc. 2-509 – This is the important section
i. 1(a)- “shipping contract” - the risk of loss passes to the buyer when the goods are
delivered to the carrier.
ii. 1(b) – “destination contract” – When the carrier brings the goods to the place of
delivery the risk passes to the buyer.
iii. (3) default rule, risk of loss passes to the buyer on receipt of the goods if the seller is
a merchant. Otherwise, risk to the buyer on tender of delivery (2-503 Tender of
delivery)
iv. 20.1 – lou is merchant, use default rule ..doesn’t pass to buyer because never
received goods
11
v. 20.2 – 2-510 – effect of breach on risk of loss – if buyer revokes then Lou is sol,
otherwise it’s the buyers loss. She never revoked..
14) REMEDIES- Sellers Remedies (2-703, sellers remedies in general)
a. Comment 1 – there is no election of remedies, seller can choose which one to use
15) 1-305 – Remedies to be liberally administered – put the aggrieved party in as good a position as if
the other party had fully performed.
16) 2-709 – Action for Price, 3-part test that gives you the agreed upon price + incidental damages pg
345 – Here buyer accepted the Goods unlike 2-706 and 2-708
a. Three Part Test
i. They had to have had a contract
ii. The buyer failed to pay the purchase price
iii. The buyer accepted the goods
b. If you resell, 2-709(b) requires that the net proceeds form the resale are credited back to the
buyer
17) 2-706 – Sellers Resale including contract for resale – If the goods are repudiated, the seller can
resell and get the difference if the resale is made in good faith and commercially reasonable.
a. 2-706(3) – Where the resale is a private sale the seller must give the buyer reasonable
notification of his intention to resell. Penalty for not following this is in Comment # 2
18) 2-708 – Sellers Damages for Repudiation - **Seller cant get consequential damages, only buyer
can!! MKT price is determined at the time and place for tender!!
a. 2-708(1) – Sucker provision –
i. Formula : K – MKT = damages + incidentals – expenses saved = Final Damages
ii. If K-MKT = 0 this is your clue to go to 2-708(2)
b. 2-708(2) – Used for middleman(jobbers/component parts, etc.)
i. Formula: Net Profit = Gross Profit + incidental damages – variable costs (do not
count in fixed costs)
ii. Buyer’s Argument – that you use the tax return annual income / number of units
sold. However this takes into account fixed costs and this number is only obtained if
the seller gets his bigger profit on all units.
c. If 2-708 puts you in a better position than 2-706 would have, you only get put back into the
position you would have been if the K had been performed by using 1-305.
19) Lost Value Seller –2 Part Test
a. Has the capacity to make the goods
b. Would have made the 2nd sale
20) REMEDIES – Buyers Remedies (2-711 in general) Buyer gets Consequential Damages!!
21) 1-305 – Remedies to be liberally administered – put the aggrieved party in as good a position as if
the other party had fully performed.
22) Cover – Seller can cover under 2-712
a. Formula: Cover Price – K = damages +incidental +consequential – expenses saved = Final
Damages
b. 2-712(3) – Buyer has no obligation to cover.
23) 2-713 – Sucker Provision (similar to 708) MKT price is determined as of the place for tender or in
cases of rejection/revocation at the place of arrival….when the buyer learns of the breach.
a. Formula: MKT – K = damages + incidentals + consequential – expenses saved = final
damages
24) 2-714- Breach in regard to when the buyer has accepted the goods for non-conformity
a. K – value as warranted = damages
b. Tile case – tiles warranted at 40k but delivered wrong worth Zero… so the accepted price is
really the K price – the price to cure
25) 2-715 – Incidental and consequential damages – Explains what they are
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a. You have a duty to mitigate aka cover under 2-715(2)(a)
26) LOST PROFIT BUYER – Three- part calculation. 1) The part from the seller and 2) the part to
your buyer – consequential profits on forward contracts 3) Incidental on post breech expenses.
However, can all be overruled by 1-305.
a. Part 1: 2-712, 2-713,-2-714
b. Part 2: 2-715
c. Part 3: 2-715
27) Problem 27: pg 434 –
a. Part 1: 2-713 – Place of tender is OK, so 94/ton ..94-52 = 420K (this is the virtual cover)
b. Part 2: 2-715 ….55 – 52 = 30000 – 12000 in savings = 18000
i. Now PTW will sue -.. 86 – 55 = 310,000 – 3000 = 307000
c. Part 3: No incidentals
d. However, if performed he would have only made 18K. So 1-305 gives us the 18K + what
he will get sued for = 307,000 so damages = 18+307 = 325,000!!!
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