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1. (T/F) The scope of Article 2 includes secured transactions, i.e. those in which the
seller retains a security interest in the goods.
1. False. 2-102.
2. (T/F) “Goods” include all things which are movable at the time of contract
formation.
2. True 2-105(1).
3. Andy owns a hot dog cart in Balboa Park. He has a license from the park authority
to operate the stand at a very visible and busy location in front of one of the museums.
Andy contracts to sell the hot dog stand business, including the cart, the inventory, and
the license, to Bill. Bill repudiates. At a subsequent trial for damages, which portions
of the sale (i.e., the cart, the inventory, the license) will be governed by Article 2?
3. The answer depends on the local case law. By 2-102, Article 2 “applies to transactions in
goods.” 2-105(1) defines “goods” as “all things...which are movable at the time of identification
to the contract.” 2-501(1)(a) defines “identification” as occurring “when the contract is made
if it is for the sale of goods already existing and identified.” Here, the “goods” are the cart and
the inventory, but not the license. The license is an intangible. And since the goods were in
existence at the time of contract formation, they have been identified to the contract, and movable
at the time of identification to the contract. Some courts will use the “primary purpose” test to
determine whether the entire contract is governed by Article 2. Here, the intent of the parties
appears to be more than the sale of goods because the hot dog cart and the hot dogs themselves are
worthless without the license to sell them in the lucrative location. In such a case, the sale of the
cart and inventory would be viewed as “incidental” to the sale of the intangibles. However,
other courts have broken the transaction down into component parts. In that case, Article 2
would apply only to the cart and inventory, but not the license.
4. (T/F) A “sale” is the passing of title from the seller to the buyer for a price.
4. True. 2-106(1)
5. (T/F) A contract for the sale of crops is a contract for the sale of goods regardless
of whether the crops are to be harvested by the farmer or the buyer.
5. True. 2-107(2).
6. (T/F) A contract for the sale of oil is a contract for the sale of goods regardless of
whether the oil is to be extracted from the ground by the seller or the buyer.
6. False. 2-107(1).
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7. (T/F) A contract fails for indefiniteness unless one party can prove when the
moment of contract formation occurred.
7. False. 2-204(2)
8. On Tuesday, a hobby shop owner receives an order for a custom toy train that will
need to be specially manufactured. That same day, the hobby shop owner begins
building the toy train. On Friday, the buyer calls to cancel the order. During the
conversation, the hobby shop owner insists on going through with the deal, and tells
the buyer (for the first time) that he has already started making the train. Is the buyer
legally bound by a contract to buy the toy train?
8. Under 2-206(1)(a), unless unambiguously indicated, “an offer to make a contract shall be
construed as inviting acceptance in any manner...reasonable under the circumstances.”
Specifically, under 2-206(2), “where the beginning of a requested performance is a reasonable
mode of acceptance, an offeror who is not notified of acceptance within a reasonable time may
treat the offer as having lapsed before acceptance.” Here, it is probably reasonable for the hobby
shop owner to rely in the custom order in beginning to build the train. Thus, by beginning to
build the train, he has bound the buyer contractually unless he does not notify the buyer of his
acceptance within a reasonable time. Here, three days has elapsed since the hobby shop owner
began building. It is a question of fact as to whether that is a reasonable time under these
circumstances, but it probably is. Thus, the buyer is legally bound to buy the toy train.
9. The University called the Jolly Jelly Donut Co. late Friday night left an order for 100
jelly donuts for delivery the following day on their answering machine. While making
the donuts, Jelly employees realized that they did not have enough jelly for all 100
donuts, and so it delivered only 50 jelly donuts, and 50 cake donuts. The University
sued for breach. At trial, Jolly denied existence of a contract because they had not
accepted the offer. Specifically, Jolly argued that “we did not give them what they
ordered, and so we never accepted the offer.” What result?
9. Jelly is attempting to pull the “unilateral contract trick.” 2-206(1)(b) provides that “an
order or other offer to buy goods for prompt or current shipment shall be construed as inviting
acceptance...by the prompt or current shipment of conforming or non-conforming goods.” Here,
the shipment by Jelly of non-conforming goods does not preclude acceptance because the order
invited prompt shipment. Thus, Jelly is bound by contract and has breached by shipping
non-conforming goods.
10. What if, in Question 9 above, Jelly had included a letter with the shipment stating,
“although we are unable to fill your order completely, we are forwarding 50 cake
donuts and 50 jelly donuts in hopes that they will be able to meet your needs on such
short notice.” How would that change the outcome, if at all?
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10. Yes. 2-206(1)(b) further provides that the shipment of non-conforming goods in response to
an order “does not constitute acceptance if the seller seasonably notifies the buyer that the
shipment is offered only as an accommodation to the buyer.” Here, the notice is seasonable
because it was included in the shipment. Also, the notice indicates that it is merely an
accommodation, and therefore not an acceptance of the offer made by the order.
11. StockNet, Inc. is an internet-based stock broker that provides full service securities
transactions to customers by e-mail and the World Wide Web. Periodically, StockNet
posts the following advertisement on the newsgroup misc.invest intended to stimulate
immediate business from new customers:
“StockNet, a leader in internet stock trading, invites new clients to make a
one-time stock purchase at no commission. Just place your electronic order via
our World-Wide Web site at: http://www.stocknet.com before the close of the
market today.”
Joe Netsurfer sees the post, and calls the broker by telephone and says that he would
like to purchase 100 shares of IBM. When he gets the purchase order confirmation
from StockNet, it includes a charge for commission. Joe is upset and refuses to pay the
commission, insisting that StockNet is contractually bound to waive the commission fee
based on the advertisement. Is Joe Right?
11. No. 2-206(1) provides that an offer may be accepted in any reasonable manner “unless
otherwise unambiguously indicated by the language.” Here, the language unambiguously
states that in order to get the commission-free service, the customer must place the electronic
order over the web. Joe placed his order by phone, and so his act was not an acceptance of the
language of the offer. Thus, there was no contract for a non-commission sale.
12. Contractor Bill makes a bid on a home remodeling job to supply materials at a
given cost. On his standard bid form, which he signed, is a statement that “this offer is
to be considered open for six months from the date of its preparation.” Homeowner
Harry, after considering several other bids, finally gets around to calling Bill to accept
his bid four months later. On the phone, Bill refuses to honor the original bid claiming
that it has expired. Harry sues Bill claiming breach of contract. Bill claims that “by
the UCC, no offer may extend past 3 months.” What result?
12. 2-205 provides that “An offer by a merchant to buy or sell goods in a signed writing which
by its terms gives assurance that it will be held open is not revocable...during the time
stated...but in no event may such period of irrevocability exceed three months.” Here, Bill is a
“merchant” under 2-104 because he “deals in goods of the kind.” The writing was signed by
Bill, and it gave assurances that it would be open for 6 months. Although the bid became
revocable after 3 months, Bill did not take any action to revoke it. Under the common law
“dispatch rule” incorporated by 1-103, an offer is irrevocable after the offeree notifies the offeror
of acceptance. Here, although Bill could have revoked the offer after three months, he did not do
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so before Harry accepted by phone. As such, Bill is obligated to supply the materials according
to his bid, which has been made binding by Harry’s timely acceptance.
13. (T/F) To be binding, an agreement modifying a contract for the sale of goods needs
additional consideration and must satisfy the statute of frauds.
13. False. 2-209(1).
14. (T/F) A writing that does not contain a handwritten signature does not satisfy the
statute of frauds requirement of UCC 2-201.
14. False. 1-201(39).
15. (T/F) A writing that satisfies the statute of frauds requirement of UCC 2-201
establishes, as a matter of law, the existence of a contract.
15. False. 2-201. (The statute of frauds only provides a bar as to when a contract is not
enforceable, it does not provide conclusively that a contract exists. It is a two part analysis:
First, satisfy the statute of frauds with a sufficient writing or otherwise, then you may argue that
a contract exists based on all evidence, including oral evidence.)
16. Toro Lawnmower sells “Ride-Along” mowers for $500 each wholesale. On Sep.
15th, Johnson Hardware Co. placed a telephone order with Toro Lawnmower Co. for
100 “Ride-Along” mowers for delivery the following week. When then mowers did
not show up on time, Johnson called Toro to inquire as to their status. Toro replied
that there was no contract. If Johnson sues for breach, what result?
16. 2-201(1) provides that “a contract for the sale of goods for the price of $500 or more is not
enforceable by way of action...unless there is some writing.” Here there is no writing because
the order was oral over the telephone. Since the price of the order is greater than $500, the
contract is unenforceable.
17. Same facts as in Question 16 above, except that Toro, upon receipt of the order,
dispatched a confirmation memorandum which stated: “This confirms your telephone
order of September 15th, delivery instructions to follow.” Johnson produces this
memo at trial. How would this affect the outcome, if at all?
17. 2-201(2) provides a limited exception to the signature requirement of 2-201(1) as between
merchants. Specifically, “if within a reasonable time a writing in confirmation of the contract
and sufficient against the sender is received...it satisfies the requirements of subsection (1).”
Here, Toro and Johnson are merchants under 1-104 because they “deal in goods of the kind.”
However, the writing is not sufficient against the seller, because it is does not contain a quantity
term, and thus “is not enforceable...beyond the quantity of goods shown in such writing” under
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subsection (1). Thus, although the memo provides a date and some evidence of the existence of a
contract, it is not sufficient to satisfy the statute of frauds, even between merchants.
18. Assume that the confirmation memo in question 17 above stated: “This confirms
your telephone order of September 15th, quantity 100 mowers.” Johnson receives the
memo without objection and Toro delivers the mowers. Then if Johnson were to refuse
to pay, claiming that there was no contract, could Toro overcome the statute of frauds?
18. Yes. 2-201(2) provides that between merchants, a confirmation memo is sufficient to
satisfy the statute of frauds if “sufficient against the sender...and the party receiving it has
reason to know its contents...unless written notice of objection to its contents is given within 10
days after it is received.” Here, the memo is sufficient against the sender because it is
“sufficient to indicate that a contract for sale has been made between the parties”, it is “signed”
by the sender (at least it is on his letterhead or form and is thus authenticated under 1-201(39)),
and it contains a quantity term. The receiving party is a merchant who just placed an order
with Toro and therefore has reason to know the contents of the memo. Furthermore, there was
no objection to the contents. Thus, the memo would overcome the statute of frauds.
19. Thermoplastic makes custom plastic parts for industrial use. Ace Plumbing
supply orders 100 custom-made elbow-joint pipes from Thermoplastic by telephone.
According to the specifications, each of the custom-made pipes is to be embossed with
Ace’s logo. Thermoplastic immediately begins manufacture of the custom pipes. A
day later, Ace calls to cancel the order. Thermoplastic sues for breach. Will
Thermoplastic be able to overcome the statute of frauds even though there is no written
evidence of the contract?
19. Yes. 2-201(3)(a) provides an exception to the writing requirement based on the partial
performance of the manufacturer. Specifically, “if the goods are to be specially manufactured for
the buyer, and are not suitable for sale to others” the contract is still enforceable if the
manufacturer “has made...a substantial beginning of their manufacture” “before notice of
repudiation is received and under circumstances which reasonably indicate that the goods are for
the buyer.” Here, the goods are specially manufactured because they are custom made to the
buyer’s specification. Furthermore, they are not suitable for resale because they are embossed
with Ace’s logo. The manufacture was begun before repudiation. Also, since the goods have
Ace’s logo, the circumstances reasonably indicate that they are for Ace. Thus, Thermoplastic
can overcome the statute of frauds.
20. Suppose that in the above Question 19, Thermoplastic makes a first batch of 50
pipes, and delivers them to Ace. Ace then pays for the 50. Before Thermoplastic can
begin manufacture of the second batch of 50, Ace states that they do not want any more.
Thermoplastic sues for breach with respect to the remaining 50. Will Thermoplastic be
able to overcome the statute of frauds with respect to the remaining 50 units?
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20. Probably not. 2-201(3)(c) provides that a contract is enforceable “with respect to goods for
which payment has been made.” Here, payment has been made with respect to the first 50.
However, since manufacture or commitments for procurement of the next 50 has not yet begun,
2-201(3)(a) does not apply. Thus, the code does not provide for enforceability of the remainder
of the oral contract in this case with respect to the goods for which payment has not yet been
made.
21. (T/F) Evidence of course of dealing or usage of trade may not be offered to explain
or supplement a confirmatory memorandum which was intended by the parties to be
the final and complete expression of the parties’ agreement.
21. False. 2-202(a).
22. (T/F) Where a course of dealing between contracting parties is inconsistent with an
applicable local usage of trade, the contract shall be interpreted according to the local
trade usage.
22. False. 1-205(4).
23. (T/F) Where the express terms of a contract is inconsistent with a course of
performance, the contract shall be interpreted according to the express terms.
23. True 2-208(2).
24. (T/F) If the price is left to be agreed upon by the parties, and the parties fail to
agree, and the parties otherwise intend to be contractually bound, then the price is a
reasonable price at the time of delivery.
24. True. 2-305(1)(b)
25. (T/F) The obligation of the seller is to transfer and deliver the goods to the buyer.
25. True. 2-301
26. (T/F) Unless otherwise agreed, the seller determines the place for delivery of the
goods.
26. False. 2-308
27. (T/F) Unless otherwise agreed, the buyer may treat the contract as being canceled
upon the passing of a reasonable time without delivery of the goods by the seller.
27. False. 2-309
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28. Seller contracts to sell 1,000 gizmos to the buyer for $3,000. The contract terms are
“F.O.B. buyer’s place of business.”
a) What kind of contract is this?
a) This is a destination contract.
b) What kind of shipment does this contract require?
b) Under 2-319(b), this contract requires that the seller “must at his own expense and risk
transport the goods” to the buyer’s place of business and “tender delivery of them in the manner
provided in” 2-503.
c). When are the goods delivered?
c). Under 2-503(1), the goods are delivered when the seller “put[s] and hold[s] conforming goods
at the buyer’s disposition and give[s] the buyer any notification reasonably necessary to enable
him to take delivery.” In this example, it would be at the time that the goods arrived at the
buyer’s place of business, and the buyer was notified.
d). When are the goods required to be delivered?
d). Since the contract does not expressly provide for a delivery date, then 2-309(a) provides that
the goods shall be delivered within a “reasonable time.” If the reasonable period has already
expired, the seller is not in breach unless the buyer has reasonably notified the seller what the
reasonable time is. See comment 5 to 2-309.
e). Who pays the expense of the freight?
e) The seller must “at his own expense...transport the goods” under 2-319(1)(b).
f). When/Where is payment due?
f). Since it has been left out of the contract, 2-310(a) provides for payment at the “time and place
at which the buyer is to receive the goods.” Here, that is the buyer’s place of business, on the
date of delivery. The buyer has the right to inspect the goods under 2-513(1) before payment.
g). Who pays for inspection of the goods?
g). Under 2-513(2) the buyer pays for the inspection, but may recover inspection expenses from
the seller if the buyer properly rejects.
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29. (T/F) If the court finds a particular contract term to be unconscionable, it may
refuse to enforce the entire contract, even those terms that are not unconscionable.
29. True. 2-302
30. A-1 Computers sells computer hardware and software to local schools. The
University is setting up a new computer lab, and wants to purchase several new
computers and associated accessories and software from A-1. A-1 knows that one of
the maker of one of the software packages it sells the University is about to go out of
business, meaning that technical support will no longer be available. The University is
unaware of this future problem, and buys the software. About a year later, the
University tries to expand their system, and finds out that they can not upgrade their
software because the maker is out of business. The University sues A-1 computers for
breach of the doctrine of goods faith, seeking to recover the enormous costs that they
have already sunk into the system. What result?
30. 1-203 incorporates a duty of good faith into every contract for the sale of goods. However,
it only imposes the duty on “performance or enforcement” of the contract, not negotiation of the
contract. Here, A-1 withheld knowledge during negotiation, but did not act in bad faith during
performance or enforcement. 1-103 provides that common-law principles that are not
superseded by the code are still applicable. Thus, the University must sue under one of the
common law principles that regulates contract formation such as fraud, mistake or
unconscionability. However, it is unlikely that any of these would be successful under these
facts due to the relatively equal bargaining position and expected sophistication of the parties.
31. (T/F) “Good faith” in the case of a merchant means only “honesty in fact.”
31. False. 2-103(1)(b)
32. Harry’s Auto Shop enters into a requirements contract with Industrial Oil, Inc. to
all of its requirements of motor oil from Industrial at a fixed cost. Shortly after the
contract is made, the price of oil skyrockets due to a crisis in the middle east. Harry
realizes that due to his low contract price he could resell some of the oil that he is
getting from Industrial to other garages around town at a profit. So Harry
immediately increases his monthly order to Industrial. When Industrial refuses to
meet Harry’s increased demand, Harry comes to you with the idea that he will sue
Industrial for breach. What should you tell Harry?
32. 2-306 covers requirements contracts. It provides that a quantity term which is measured
by “the requirements of the buyer means such actual...requirements as may occur in good faith.”
2-103(1)(b) defines good faith in the a case of a merchant as “honesty in fact and the observance
of reasonable commercial standards of fair dealing in the trade.” Here, Harry is ordering more
than his “actual” requirements. Furthermore, it appears that Harry does not even satisfy the
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subjective standard of “honesty in fact” because he is intentionally trying to take advantage of
the requirements contract. 1-203 further imposes a duty of good faith in the “enforcement” of a
contract. Thus, Harry should be told that he has no case, and furthermore that he should
withdraw his order for more oil and stop any enforcement actions because he has not acted in
good faith.
33. Rowan is a car broker. Martin wishes to buy a particular model of car by a certain
date to drive in a race. Tucker, owns such a car, and offers to sell it to Rowan for
$13,000. However, once Tucker finds out that Rowan intends to resell the car for
$15,000 to Martin, Tucker inists on a price increase to $14,500. Rowan finally agrees,
knowing that he will lose any sale whatsoever if he doesn’t get the car and resell it to
Martin by the day of the race. What advice of Rowan?
33. Although 2-209(1) provides that a modification to a contract requires no additional
consideration to be binding, the comments to that section explain that the modifications must
still meet the good faith test of 1-203. Tucker appears not to be a merchant under 2-104 because
he does not deal in goods of the kind. Thus, the standard of “Good faith” as defined in
1-201(19) is “honesty in fact.” However, since this appears to be mere extortion, Tucker would
probably not even meet that subjective standard. There must be a legitimate commercial reason
for the modification, rather than mere extortion of a modification due to bad faith exploitation of
the other party’s inability to cover at a late date.
34. John advertises a kitchen table and chairs for sale in the newspaper classifieds.
Larry answers the ad, and comes over to pick up the furniture and pay for it. After
Larry has paid John, he realizes that none of the furniture will fit in the back of his car.
So Larry leaves the furniture in place and decides to quickly go borrow a truck from a
friend and return. However, during the interim, the furniture is destroyed when
John’s house burns down. Larry demands a refund of his payment. John refuses. Is
Larry entitled to a refund?
34. No. 2-509(3) provides the risk of loss rules for sales of goods not involving shipment or a
bailee. Specifically, “the risk of loss passes to the buyer on tender of delivery” if the seller is not
a merchant. Here, John is clearly not a merchant because he does not deal in goods of the kind
under 2-104(1). Also John is not a bailee because he simply allowed Larry to postpone the time
of pickup, and thus does not fall under 2-509(2). Thus, the question is whether John tendered
delivery. 2-503 provides that to tender delivery is to “put and hold conforming goods at the
buyer’s disposition.” Here, the goods were clearly available for the buyer to dispose of them. It
was the buyer who delayed in bringing the wrong vehicle. Thus, Larry is not entitled to a refund
because the risk of loss passed to him before the house burned down.
35. Seller in L.A. contracts to ship 100 porcelain toilets to Buyer in N.Y. under a
contract that provides shipment terms “F.O.B. Los Angeles.” Seller packages the toilets
and arranges for their transport to N.Y. by train. During transportation, several of the
porcelain toilets crack. Upon investigation, it is determined that faulty packaging
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during transit caused the cracks. The seller contends that since this was a shipment
contract, the risk of loss passed to the buyer once the transportation was arranged and
the toilets were loaded on the train. The buyer has come to you for advice. How do
you advise the buyer concerning the risk of loss?
35. 2-319(1)(a) provides that in a shipment contract, the seller bears the risk of putting the
goods into the possession of the carrier and shipping them in the manner provided in 2-504.
2-504 states that the seller must “make such a contract for their transportation as may be
reasonable having regard to the nature of the goods.” Here, the seller has improperly packaged
the goods for transit because the nature of porcelain toilets is that they are susceptible to breakage
from repeated vibration and shock. Thus, the seller did not make a proper contract for their
transportation. Since the seller did not comply with the requirements of 2-504, the buyer
should be advised that the risk of loss did not pass to him under 2-319(1)(a).
36. (T/F) The buyer must pay the contract price for conforming goods if they are lost
or damaged within a commercially reasonable time after their risk of loss has passed to
him.
36. True. 2-709(1)(a)
37. (T/F) If the cure of a non-conforming tender consists of replacing the
non-conforming goods with a new tender, the risk of loss remains on the seller with
respect to the non-conforming goods that were originally tendered.
37. True. 2-510(1)
38. A shipment contract calls for the seller in L.A. to ship 10,000 wooden brooms by
rail to the buyer in N.Y.. Due to a mix-up in the seller’s warehouse, 10,000 plastic
brooms are shipped instead. During transit, the train is derailed and the brooms are
burned. During discovery for the seller’s action to recover the contract price from the
buyer, the mistake comes to light. Where does the risk of loss lie? With the seller or
with the buyer? Does it matter whether the buyer actually knew that non-conforming
goods were shipped?
38. The risk of loss remains with the seller. 2-510(1) provides that “where a tender or delivery
of goods...give[s] a right of rejection the risk of their loss remains on the seller until cure or
acceptance.” Since the seller shipped plastic brooms instead of wooden brooms, the buyer has a
right of rejection. This is true whether or not the buyer actually knew of the non-conformity.
It is the right of rejection which controls the risk of loss, not an actual rejection. Thus, the risk
of loss remains on the seller.
39. Industrial Lighting Co. purchased 2,000 light fixtures from General Electric. The
goods were delivered and accepted without inspection at Industrial’s warehouse.
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During a subsequent inspection, Industrial realized that the fixtures were defective and
immediately made a successful revocation. However, before General Electric could
return to pick up the fixtures for rework, they were destroyed by vandals in Industrial’s
warehouse. Industrial has sufficient insurance coverage to cover the loss. What
amount of the loss, if any, is GE liable for?
39. None. GE has delivered non-conforming goods. However, their risk of loss passed to the
buyer under 2-510(1) when they were originally accepted. Although Industrial has rightfully
revoked, 2-510(2) provides that “where the buyer rightfully revokes acceptance he may to the
extent of any deficiency in his effective insurance coverage treat the risk of loss as having rested
on the seller from the beginning.” Here, Industrial has sufficient insurance to cover the entire
loss. Thus, there is no deficiency to charge back to the seller.
40. Jenkins agreed to purchase goods from Smedley, F.O.B. Smedley’s plant. The
goods in Smedley’s plant are separated and stenciled with Jenkins’ name. Jenkins then
telephones Smedley and repudiates. The goods are subsequently destroyed by fire.
Assume that Smedley had no insurance on the goods. If Smedley sues Jenkins for the
purchase price, what result?
40. Under §2-709, Smedley may recover the price of “goods lost or damaged within a
commercially reasonable time after risk of their loss has passed to the buyer.” Furthermore,
under 2-510(3) “where the buyer as to [1] conforming goods [2] already identified to the
contract for sale repudiates...before risk of loss has passed to him, the seller may to the extent of
[3] any deficiency in his effective insurance coverage treat the risk of loss as resting on the buyer
for a commercially reasonable time.” Here, the goods are assumed to be conforming. Also, the
goods have been identified, and the deficiency in insurance coverage is 100%. Thus, the only
issue is whether the risk of loss was on the buyer for a commercially reasonable time. If so, then
Smedley may recover the entire amount because the risk of loss would have passed to the buyer.
41. Annette wishes to buy a car from a used car dealer. With regard to a particular Geo
Metro on his lot, the dealer tells Annette, “I can really recommend this baby. She can
really go. I know that you live in a hilly neighborhood, but this car can climb hills
easily.” Annette purchases the car using a contract that disclaims all implied
warranties. Shortly after purchasing the car, it stalls on the hill up to her home.
Assuming that the implied warranty disclaimer was effective, would Annette have any
basis to bring an action for breach of express warranty?
41. Yes. 2-313(1) provides guidance on the creation of express warranties. Specifically, any
“affirmation of fact or promise” or “description of the goods” which is “part of the basis of the
bargain” creates an express warranty that the goods will conform to the affirmation, promise, or
description. However, 2-313(2) states that “an affirmation merely of the value of the
goods...[or] the seller’s opinion or commendation of the goods does not create a warranty.” The
salesman here has made several statements. “I can really recommend this baby” appears to be a
clear statement of opinion or commendation, and thus has no legal effect. “She can really go”
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also appears to be an opinion or commendation, although it may be viewed as creating an express
warranty that the car at least runs. The scope of the warranty created by that statement alone is
probably insufficient to cover breakdown on a hill. However, by stating that the car can climb
hills easily, the salesman appears to have affirmed or described that the car will at least climb
hills. Especially given the context of the statement that he knows her neighborhood specifically.
The statement is “part of the basis of the bargain” because Annette heard it during negotiations
for purchase.
42. (T/F) A sample or model which is made part of the basis of the bargain creates an
express warranty that the whole of the goods will be of fair average quality.
42. False. 2-313(1)(c).
43. (T/F) Goods to be merchantable must be at least adequately contained, packaged,
and labeled.
43. True. 2-314(2)(e)
44. Industrial Iron Works, Inc. is a commercial foundry. Dixieline Lumber entered a
contract with Industrial to manufacture garden tools (rakes, hoes, etc.) for resale by
Dixieline. Industrial recommended that the tools be manufactured from low grade
iron rather than steel, in order to save costs. However, Dixieline received numerous
complaints about the tools breaking under normal use by customers. Dixieline sues for
breach of implied warranty of merchantability. Industrial claims that there is no
breach because the tools have no manufacturing defects. Has there been a breach?
44. Yes. Industrial is a “merchant with respect to goods of that kind” for iron tools. Thus,
under 2-314(2)(c) goods, to be merchantable, must be “fit for the ordinary purposes for which
such goods are used.” Here, the ordinary purpose of a garden tool is normal use by customers
in their garden. The tools in question do not satisfy that standard because of a design defect.
Low grade iron is too weak for the use in garden tools. It does not matter whether the defect was
a design defect or a manufacturing defect. Thus, there has been a breach of the implied warranty
of merchantability.
45. Consumer purchases “Flounder Fillets” from the local retail grocery store, and is
injured by a bone in the fillets. The grocery store’s procedure is to merely unpack the
goods from their shipping containers, and place them on the shelves. Does the
consumer have a claim against the grocery store for breach of the implied warranty of
merchantability?
45. Probably not. There are two questions of fact here. First, the threshold issue is whether the
grocery is a “merchant with respect to goods of the kind” under 2-314. Under 2-104 comment
2, the phrase “with respect to goods of that kind” limits the group of merchants for the purpose of
implied warranties. Also, 2-314 comment 3 implies that a person is not a merchant unless he
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makes more than “isolated sales”. Here, however, the grocery would seem to be have made
repeated sales. A counter-argument is that the grocery is not inspecting the goods, and so has
no way of preventing the harm. However, assuming even if the grocery is a merchant, then
there is the further issue of fact as to whether the presence of the bones violates the implied
warranty of merchantability. This turns on whether any of the 2-314(2) standards have been
violated. Even though a product causes harm, it is merchantable if its quality is consistent with
these standards. Here, most fillets probably have bones, and it might be reasonable for a
consumer to expect that a large bone would be present, particularly in the absence of any
suggestion otherwise by the grocery. Thus, the fish would seem to be fit “for the ordinary
purpose” under 2-314(2)(c).
46. (T/F) Goods do not breach the implied warranty of fitness for a particular purpose
unless they are defective in some way.
46. False. 2-315
47. (T/F) Goods do not breach the implied warranty of merchantability unless they are
defective in some way.
47. True. 2-314
48. John Smith owned a portable electric lift for working on his car. After several
years of use, the hydraulic fluid had mostly leaked out due to leaking by the seals under
normal use. John went to Kragen Auto, where he originally purchased the lift, and
asked for assistance in selecting a replacement hydraulic fluid for his electric lift. The
store clerk handed him a bottle of hydraulic fluid, and John made the replacement.
However, due to the nature of the replacement fluid, which was not designed for
electric lifts, the lift failed and damaged his car. What cause of action might John have
against Kragen.
48. John probably has a breach of the implied warranty of fitness for a particular purpose under
2-315. 2-315 provides a warranty if [1] “the seller has reason to know [2] of the particular
purpose for which the goods are required and [3] that the buyer is relying on the seller’s skill or
judgment to select or furnish suitable goods.” Here, John told the seller of his particular
purpose of needing hydraulic fluid for his electric lift. Furthermore, John reasonably relied on
the seller’s judgment in selecting the proper type of fluid.
49. Ben Miller purchased a new and expensive Whirlpool gas range home use from
Corona Appliances, the local appliance store. The range malfunctioned and exploded
during normal use. Although no persons were injured, the Miller’s next-door
neighbor’s house burned down. Ben’s next door neighbor, Charlie, brings an action
against Corona and Whirlpool for breach of implied warranty of merchantability, and
for damages to his house. What must Charlie argue to recover?
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49. Under 2-314(2)(c) the range violates the implied warranty of merchantability because it is
not “fit for the ordinary purposes for which such goods are used.” However, the real issue is
whether Charlie can recover 1) for the damages to his property (horizontal privity), and 2)
against a remote manufacturer (vertical privity). Hopefully, Charlie’s jurisdiction has adopted
Alternative “C” to 2-318 concerning horizontal privity. Alternative “C” provides that an
implied warranty extends to any person “who is injured by breach of the warranty,” Provided
that they “may reasonably be expected to...be affected by the goods.” Thus, Charlie would need
to argue that he was reasonably expected to be affected by the goods to be able to recover for
damages to his house from at least the local Corona Appliance store because of horizontal
contractual privity. Whether Ben can recover against Whirlpool depends on whether the local
jurisdiction requires absolute vertical privity. Charlie’s best argument is that forwarded in
Randy Knitwear, that the manufacturer relies so heavily on advertising that it would be unfair
for the manufacturer (who is not a retailer) to benefit substantially from the advertising that
induces the local retail sales, but then claim lack of privity if the product fails.
50. (T/F) The disclaimer of an express warranty is effective to the extent that it is
inconsistent with the language of the express warranty.
50. False. 2-316(1)
51. (T/F) A disclaimer of the implied warranty of fitness for a particular purpose
must be in a conspicuous writing.
51. True. 2-316(2).
52. (T/F) A disclaimer of the implied warranty of merchantability must be in a
conspicuous writing.
52. False. 2-316(2)
53. Pacific Surf Shop wishes to buy 10 surfboards from Bill Minard, a local surfboard
shaper. During contract negotiations over price, delivery schedule, etc., Bill insists that
Pacific come by his shaping room and pre-inspect the boards to make sure that they are
what Pacific wants. Pacific refuses to do so claiming that it does not have time. The
contract for sale of the surfboards is signed, and the boards are delivered on time.
Upon receipt of the boards, Pacific is unable to sell them because they are shaped for big
waves, and Pacific’s customers mostly surf the smaller local waves. Pacific tries to
return the boards, but Bill will not take them back. Pacific then sues for breach of the
implied warranty of fitness for a particular purpose. What result?
53. 2-315 provides the implied warranty for fitness for a particular purpose. Here, it appears
that Bill had “reason to know of the particular purpose” for which Pacific ordered the boards, i.e.
for resale to local surfers. It also appears that Pacific relied on Bill’s skill and expertise in
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shaping the boards suitably. However, 2-316(3)(b) extinguishes implied warranties as to
“defects which and examination ought to in the circumstances to have revealed to him” when
“the buyer before entering the contract...has refused to examine the goods.” Here, Pacific refused
to inspect the goods before contract formation. Thus, there is no implied warranty applicable to
the sale, and Pacific will not be able to recover under that theory.
54. Consolidated Agricultural Supplies, Inc. manufactures tractors. Jim the farmer
purchased a custom-made crop harvester from Consolidated. In the purchase contract,
conspicuously worded, was a statement that read “Consolidated warranties that the
tractor will be free from defects in material and workmanship for 5 years. The buyer’s
exclusive remedy for defects in material and workmanship during the warranty period
is repair or replacement of the defective part or assembly. Consolidated hereby
disclaims all other express warranties and all implied warranties. Consolidated bears
no liability beyond the exclusive remedies stated herein, and disclaims liability for any
and all consequential damages.” Jim signed the contract and took delivery of the
tractor. The tractor failed due to a latent defect in the engine during the first season’s
harvest, causing Jim to lose 1/2 of his crops due to over-ripening while he waited for
Consolidated to fix the tractor. Jim brings an action for damages for the loss of his
crops due to breach of express warranty. What result?
54. Consolidated has expressly warranted under 2-313 that the materials will be free from
defects, and there appears to be a plain breach of that warranty. 2-719 provides for the
contractual modification or limitation of remedies. Specifically, 2-719(1)(a) provides that the
seller may limit or alter the measure of damages “to repair and replacement of non-conforming
goods or parts.” Here, the contract expressly states that limited remedy. 2-719(1)(b) provides
that if the remedy is agreed to be exclusive, then it is the sole remedy. Here, the contract
expressly states that it is the exclusive remedy.
Furthermore, 2-719(3) states that
“consequential damages may be limited or excluded unless the limitation or exclusion is
unconscionable.” Here, Consolidated has excluded consequential damages. Thus, the only
issue is whether the exclusion is unconscionable. 2-719(3) provides the further guidance that
“limitation of damages where the loss is commercial” is not prima facie unconscionable.
Assuming that both parties have relatively equal bargaining power, or at least that a price
concession was made for the disclaimers, Jim will probably not be able to recover the
consequential damages to his crops.
55. Andy buys a new jet-ski from the local Kawasaki dealership. Andy takes the
jet-ski home with him. The next day, during Andy’s first use of the jet-ski, it breaks
down almost immediately in the middle of the bay. Andy returns the jet-ski to the
dealer and demands his money back. The dealer refuses to refund his money, claiming
that he has accepted the jet-ski, and thus is liable to pay the purchase price. Has Andy
accepted?
55. No. Under 2-606, acceptance of the goods does not occur until “after a reasonable
opportunity to inspect the goods [the buyer] signifies to the seller that the goods are conforming
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or that he will take or retain them in spite of the non-conformity.” Here, there was not a
reasonable opportunity to inspect the goods. Although it is not clear how long a “reasonable
opportunity” is, it is clear that it should include test-driving the jet-ski. Thus, Andy has not
accepted the jet ski.
56. (T/F) Where a tender has been accepted, the buyer must notify the seller within a
reasonable time of any breach that the buyer should have discovered or be barred from
any remedy for that breach.
56. True. 2-607(3)(a)
57. (T/F) If the goods or tender of delivery fail in any respect to conform to the contract
the buyer may reject the whole of the goods provided that such non-conformity causes
material damage to the buyer.
57. False. 2-601.
58. Hartz Seed Co. is a supplier of soy-beans. Colman contracted with Hartz for the
delivery of one ton of soy-bean seeds, for delivery at Colman’s plant. After delivery,
Colman began the process of inspecting the soy-bean seeds for quality. The inspection
testing procedure is involved, and usually takes several weeks to complete because it
involves growing at least some of the seeds. After one month, Colman noticed several
defects in the seedlings that were growing. Colman immediately notified Hartz of the
defects, and rejected the entire lot. Hartz comes to you for advice concerning a
possible action for breach against Colman. Specifically, Hartz asks you whether
Colman has accepted the seeds, or properly rejected the seeds. How do you advise
Hartz?
58. To make an effective rejection, the buyer must have had the right to reject under 2-601.
However, that standard is fairly low in that the buyer has the right to “reject the whole” if the
goods “fail in any respect to conform to the contract.” Here, the seeds are defective, and thus
Colman had the right to reject. Colman must take some affirmative action to exercise that right of
rejection. Under 2-606(1)(b), acceptance may occur if the buyer “fails to make an effective
rejection...but such acceptance does not occur until the buyer has had a reasonable opportunity to
inspect the goods.” Furthermore, under 2-602 the rejection of the goods must occur “within a
reasonable time after their tender or delivery,” and the rejection is “ineffective unless the buyer
seasonably notifies the seller.” Thus, the issue here is whether the rejection and notice occurred
within a reasonable time. Due to the involved nature of the inspection process, Colman did not
have a “reasonable opportunity to inspect” the goods under 2-606(1)(b) until it grew some of the
seedlings because it could not discover the defect until then. Thus, Hartz should be advised that
Colman did not accept, but rather made an effective rejection of the seeds.
59. (T/F) The buyer’s failure to state in connection with a rejection a particular defect
which is ascertainable by reasonable inspection precludes him from relying on the
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unstated defect to justify rejection where the seller could have cured the defect if the
buyer had stated it seasonably.
59. True. 2-605
60. (T/F) If the time for performance has not yet expired, the seller may seasonably
notify the buyer of his intent to cure, and then make a conforming delivery provided
that the seller had reasonable grounds for believing that the non-conforming tender
would be acceptable.
60. False. 2-508(1)
61. Paul buys a toaster at the local appliance store. The toaster is in a box, factory
sealed, and unopened. When Paul returns home and plugs in the toaster, it shorts out.
Paul returns the toaster to the store and demands his money back. The appliance store
manager tells Paul that he will fix the toaster by replacing a part. Paul refuses,
demanding his money back. Does the appliance store have the right to repair the
toaster instead of refunding the money?
61. Yes. Although Paul has the right to reject under 2-601, and has taken steps to rightfully
reject under 2-602 (and thus has not accepted under 2-606 because of his right to inspect the
goods before acceptance), the appliance store may suspend Paul’s right to reject for a “further
reasonable time” under 2-508(2). Specifically, 2-508(2) requires that the seller “have
reasonable grounds to believe” that the toaster would have been acceptable, and that he
“seasonably notify the buyer” of his intent to cure. Here, assuming that the appliance store did
not have a rash of defective toasters, it has reasonable grounds to believe that a toaster in a
factory sealed unopened box would be acceptable to the buyer. Thus, the appliance store is
entitled to the further reasonable time to cure the defective toaster by repairing. It would not
affect the value of the toaster if it had a single part replaced, and thus repairing it would make it
conform to the contract.
62. (T/F) In an installment contract, the buyer has the right to reject any installment
which is non-conforming if the non-conformity substantially impairs the value of that
installment and cannot be cured.
62. True. 2-612(2).
63. (T/F) In order for a seller to have the right to cure a defective tender of a particular
installment in an installment contract, the seller must have had reasonable grounds to
believe that the tender would have been acceptable.
63. False. 2-612(2)
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64. (T/F) In a shipment contract, the buyer has the right to reject the goods if the
tender or delivery fails in any manner to conform to the contract.
64. False. 2-504
65. Bill ordered an airplane from Fullerton Aircraft for his own personal use. Bill took
delivery of the aircraft, and flew it for several months before determining that it caused
him joint pain due to vibration. Bill wishes to return the airplane and either have the
vibration dampened, or get a refund. In the purchase contract, no mention is made of
particular vibration specifications, and a test of the aircraft shows that it does not
experience more than an normal level of vibration. Bill has come to you for advice on
whether to proceed with an action for breach of contract. How should you advise Bill?
65. Under 2-606(b), Bill has accepted the airplane because he has “failed to make an effective
rejection” (i.e. he has not notified the seller in a reasonable time after delivery under 2-602) after
a “reasonable opportunity to inspect” it. Here, Bill has flown the aircraft for several months,
and that is probably beyond a reasonable time for initial rejection. Thus, Bill’s only option is to
attempt to revoke. 2-608(1) provides that a buyer may revoke if the “non-conformity
substantially impairs its value to him.” Here, Bill may be overly sensitive to vibration, so the
value of the aircraft may actually be substantially less to him personally. However, this
subjective standard only applies if there is a “non-conformity” in the first place, which is
determined by reference to the contract. Here, the contract is silent on vibration, and so there is
no express warranty. There is an implied warranty of merchantability under 2-314, but that
only requires that the goods “be fit for their ordinary purpose” or “pass without objection in the
trade.” Since the airplane only has a normal level of vibration, it does not breach the implied
warranty of merchantability. Also, there is no implied warranty of fitness under 2-315 for
Bill’s particular sensitivity because there is nothing in the facts to show that the seller “had
reason to know” of Bill’s condition at the time of contracting. Thus, there appears to be no
non-conformity which would give rise to a right to revoke.
66. Unique Systems, Inc. develops and manufactures hair spray. Zotos, Inc. is a
distributor of cosmetic products. Zotos and Unique enter into a contract for Unique to
develop a new hair spray, and for Zotos to purchase a large quantity of that hairspray
for resale. After contract formation, but prior to delivery of the new hair spray, Zotos
decides that it wishes to perform a marketability test of a small lot of the hairspray to
determine the anticipated demand before committing to accepting delivery of the whole
amount. Although the contract does not include any such provision, Zotos makes its
intention not to comply with the contract unambiguously clear to Unique. Unique
approaches you concerning its rights under the contract. Specifically, Unique asks you
whether it may immediately stop production of this new hairspray and withhold any
delivery without breaching the contract. How do you advise Unique?
66. 2-610 provides that “when either party repudiates the contract with respect to a
performance not yet due the loss of which will substantially impair the value of the contract to
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the other, the aggrieved party may...suspend his own performance.” Here, Zotos has repudiated
because it has clearly indicated its intention not comply with the contract by unilaterally
inserting the additional testing requirement. Zotos’ obligation under 2-301 is to accept and pay
in accordance with the contract. Clearly, this repudiation will substantially impair the value of
the contract to Unique. Thus, Unique is entitled to suspend its own performance by stopping
production and withholding any delivery.
67. (T/F) If a repudiating party timely retracts the repudiation, the aggrieved party may
still demand adequate assurances of performance under 2-609.
67. True. 2-611(2).
68. S.J. Groves & Sons Co. is a general construction contractor. Warner Co. is a
concrete supplier. Groves and Warner enter into an installment contract for Warner to
supply Groves’ weekly requirements of concrete during its construction of a building.
On several occasions, Warner’s deliveries are short because it is unable to keep up with
Groves’ construction schedule. This results in heavy costs of overtime and schedule
slippage to Groves. Groves has come to you seeking advice. Specifically, Groves
wishes to know whether it can cancel the contract with Warner, and instead enter into a
new and similar contract with a different supplier at the same price. How do you
advise Groves?
68. Installment contracts are governed by 2-612. 2-612(3) provides that whenever
“non-conformity or default with respect to one or more installments substantially impairs the
value of the whole contract, there is a breach of the whole.” Here, more than one of the deliveries
has been short. Also, since Groves has incurred considerable expenses and schedule slippage
due to the short deliveries, the value of the whole contract is substantially impaired. Thus,
Groves may treat the entire contract as being breached and cancel under 2-711(1). Since the new
contract would be similar and at the same price, there is no appearance of bad faith for Groves to
cancel the contract. However, Groves must be careful under 2-612(3) not to accept any further
non-conforming installments without “seasonably notifying of cancellation”, otherwise, he may
reinstate the contract. However, since it is more clear that “reasonable grounds for insecurity”
have arisen than it is clear that the value of the whole contract is substantially impaired, a safer
course may be for Groves to demand adequate assurances of performance under 2-609. For
example, Groves may ask for payment for the losses already incurred and a performance bond
against future losses. Failure of Warner to provide adequate assurance within a reasonable time
would be repudiation under 2-609(4).
69. (T/F) Where the buyer rightfully rejects, then with respect to the goods involved,
the buyer may cancel and whether or not he has canceled, may recover so much of the
price as has been paid.
69. True. 2-711(1)
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70. A, in New York, contracts to buy lockers from B in V.A. for $80,000 F.O.B. seller’s
plant in VA. The buyer, A, had already determined that shipping costs between VA
and NY were $7,000, and that a local contractor would install them for $2,000, bringing
the total cost to A to $89,000 installed. B, the seller, repudiated. After incurring $50
long distance phone bills, A covered under a contract with a local provider C that cost
$92,000 delivered and installed. What are A’s damages against B?
70. 2-712(1) provides that the buyer may cover in good faith “any reasonable purchase
of...goods in substitution for those due from the seller.” Here, it appears that the cover contract
was a reasonable substitution because they were both for lockers. Under 2-712(2) the buyer
may recover “the difference between the cost of cover and the contract price, together with any
incidental or consequential damages...but less expenses saved in consequence of seller’s breach.”
2-715(1) defines incidental damages expenses “reasonably incurred...in connection with
effecting cover.” Thus, the difference between the cost of cover and the contract price is
$92,000-$80,000 = $12,000. The expenses saved in consequence of the seller’s breach were the
shipping and installation costs of $7,000+$2,000=$9,000. Thus, the buyer may recover
$12,000-$9,000=$3,000 on the contract, plus $50 of incidental damages for the long distance bill
incurred in covering.
71. Seller (NY) and Buyer (LA) enter into a contract for the sale of a pot-hole filling
material. The contract price is $2,000 and the shipping expense from NY to LA is $100.
The shipment date by the seller is September 1st, at which time the price in NY has gone
up to $2,100 and the price in LA has gone up to $2,200. The arrival date in LA is
September 15th, at which time the price in NY has gone up to $2,300, and the price in
LA has gone up to $2,400.
(a) Assume the contract terms are F.O.B. NY and that the goods are shipped properly.
What are the buyers damages if buyer discovers non-conformity upon receipt
inspection and properly rejects?
(a) Under 2-713(1) provides that the damages are the contract-market differential, together with
incidental and consequential damages, less the amount saved by the breach. The time of
measuring the market price is the time “the buyer learned of the breach.” Here, the buyer
learned of the breach on the date of arrival. 2-713(2) provides that the market price is to be
determined “in the cases of rejection after arrival..., as of the place of arrival.” Here, there is a
rejection after arrival, so LA is the place of the market. The market price in LA on the date of
arrival is $2,400. Thus, the damages are $2,400 (mkt.) - $2,000 (contract) - $100 (expenses
saved) = $300.
(b) Assume that the contract terms are F.O.B. NY, but that the goods are not shipped.
What are buyer’s damages if buyer is not aware of the non-shipment until his inquiry
on the arrival date?
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(b) 2-713(1) provides that the market price for damages is to be measured at the time the buyer
learned of the breach. Here, that is the date of arrival. 2-713(2) provides that the place for
measuring market price damages is “the place for tender” unless there is a rejection after arrival.
Here the place for tender is N.Y. because this is a shipment contract under 2-319(1)(a). Thus,
the market damages are to be measured from the NY market on the date of arrival. They are
$2,300 (mkt.) - $2,000 (contract) = $300. There is no deduction for the cost of transportation,
because that has not been saved. Furthermore, there is no addition for cost of transportation,
because that is a cost the buyer would have borne under the original contract anyway.
(c) Assume the contract terms are F.O.B. LA (destination contract) but the goods are not
shipped. What are the buyer’s damages if Buyer is not aware of the non-shipment
until his inquiry on the arrival date?
(c) Like (b) above, the market price is measured on the date of arrival, i.e. when the buyer learned
of the breach. However, since this was a shipment contract under 2-319(1)(b), the “place for
tender” under 2-713(2) is the place of arrival. Thus, the market damages are to be measured
from the LA market on the date of arrival. They are $2,400 (market) - $2,000 (contract) - $100
(expense saved) = $300.
72. Arthur’s Pawn Shop sells an electric guitar to Jim for $1,000. Arthur specifically
warrants that the electric guitar is a genuine “Les Paul” model, and not a copy. The
guitar has a defective pickup which fails about after about a week. Jim takes the guitar
to a local repair shop to have it fixed, and finds out that the electric guitar is actually a
copy, and thus is only worth about $400. Nevertheless, Jim decides to keep the guitar
and fix it. The repairs cost $150. What damages would Jim be entitled to?
72. Arthur made an express warranty under 2-313(b) that the guitar was not a copy. That
express warranty was breached. Furthermore, there is a breach of the implied warranty of
merchantability under 2-314(2)(c) because an electric guitar with a broken pickup is not “fit for
the ordinary purpose” of electric amplification. Thus, Jim would have a remedy for breach of
warranty under 2-714(2) which provides, “the measure of damages for breach of warranty is the
difference at the time and place of acceptance between the value of the goods accepted and the
value they would have had if they had been as warranted.” The goods, as accepted, are a copy of
a guitar with a street value of $400, in need of $150 of repair. Thus, the goods as accepted are
worth $400 - $150 = $250. The goods, if they were as warranted, would be worth the purchase
price of $1,000. Thus, Jim is entitled to damages of $750.
73. (T/F) A buyer may recover consequential damages resulting from the seller’s
breach including any injury to person or property proximately resulting from any
breach of warranty, provided that the seller, at the time of contracting, had reason to
know that the goods were dangerous.
73. False. 2-715(2)
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74. Hayes, Inc. manufactures and sells computer modems. Earthnet, Inc. is an
internet service provider that requires a large and complex modem to serve its
customers. Due to high demand, Earthnet is planning to expand its customer base
from 10,000 subscribers to 15,000 subscribers. 10,000 of the subscribers can be handled
by the existing modems that Earthnet already has. However, in order to accommodate
the additional 5,000 subscribers, Earthnet contracts with Hayes to purchase 5 additional
modems at a cost of $2,000 each. The contract specifies a delivery date of March 1st.
Earthnet spends $1,000 in advertising during the month of February announcing the
planned service, and is confident that it will be able to sign up an additional 1,000
subscribers in the month of March after installation of the new modems. On Feb. 1st,
Hayes calls and repudiates stating that it is unable to meet the March 1st delivery due to
a backlog of orders, but would be able to deliver by April 1st. As of Feb. 1st, Earthnet
would be able to cover at a cost of $2,300 per modem and get the replacement modems
by March 1st, but it chooses to wait for the later delivery. After the modems are
delivered and installed, Earthnet brings an action for the lost revenues from an
anticipated 1,000 subscribers over the month of March ($20,000), the cost of advertising
during the month of February ($1,000), and the cost of advertising during the month of
March ($1,000). Which, if any, of these costs is recoverable?
74. Under 2-610, the buyer may only await performance by a repudiating party “for a
commercially reasonable time.” Here, the repudiation occurred a month before time for delivery.
Given that cover was immediately available, it would probably be a commercially unreasonable
time to wait a month and rack up such substantial damages. Under 2-711(1), where the seller
repudiates, the buyer may either cover under 2-712 or recover contract market damages under
2-713, and in either case, get incidental and consequential damages under 2-715. Since
Earthnet chose not to cover, he must accept the contract market damages of $2,300 - $2,000 =
$300 per modem times 5 modems = $1,500, plus incidental and consequential damages. As to
the incidental cost of advertising during the month of February, that cost did not “result[] from
the seller’s breach” because it would have been incurred regardless of the breach, and thus can
not be counted as damages under 2-715(1). As to the cost of advertising during the month of
March, it did not result from the seller’s breach either because if Earthnet had covered, it would
not have been necessary. Finally, the consequential damages of $20,000 could have “reasonably
[been] prevented by cover” and so likewise are not countable under 2-715(2)(a). As such, the
total measure of damages is what Earthnet would have recovered if they had made a cover,
because their wait was unreasonably long.
75. Charlie’s Chevrolet, Inc. contracts to sell Sedmak a limited edition Indy Pace Car
Corvette. For the year of interest, there were only 10 of these models made, which
include fancy paint and trim work. After contract formation, and while the car is being
shipped across the country to be delivered to the lot, Charlie’s Chevrolet receives an
order from another customer who will pay $20,000 more for the car. Charlie’s sells the
car to the other customer, and offers Sedmak a refund of his money plus $5,000 in
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liquidated damages. Sedmak refuses the money and insists on the car itself. Sedmak
has come to you seeking assistance. How do you advise Sedmak?
75. 2-716(1) provides that specific performance “may be decreed where the goods are unique or
in other proper circumstances.” Here, the goods are a limited edition car. The code rejects the
previous common law requirement that the goods be “one-of-a-kind.” Specifically, the code
comments provide that market realities, such as inability to cover, are a relevant consideration
and “strong evidence” of proper circumstances for specific performance. Thus, although
Sedmak would be $5,000 richer if he accepted the liquidated damages, he would also not have the
car he is entitled to by contract, and not be able to purchase one like it to cover. It would likely
cost more than $5,000 more to convince one of the other 9 owners to part with their car, as is
evidenced by the $20,000 higher bid locally. Thus, this would probably be a proper case for
specific performance, especially since the bad faith of Charlie’s puts the balance of equity strongly
in Sedmak’s favor.
76. Apex Oil Co. produces and sells industrial grade oil. The Belcher Co. contracted
with Apex to buy 10,000 barrels of oil at $50 per barrel. The contract date of delivery
was June 1st. The day before the date of delivery, Belcher called Apex to repudiate the
contract. On June 1st, Apex sold 10,000 barrels of oil to another customer at $51 per
barrel. Two months later, on August 1st Apex sold 10,000 barrels of oil to yet another
customer for $48 per barrel. Apex brings a breach of contract action against Belcher for
the difference between the contract price of $50 per barrel, and the August 1st resale
price of $48 per barrel. Is this the proper measure of Apex’s damages?
76. No. Under 2-703(d), when a buyer breaches, the seller may resell and recover resale
damages under 2-706. 2-706 provides that the measure of damages is the “difference between
the resale price and the contract price” provided that the resale is “made in good faith and in a
commercially reasonable manner.” 2-103(1)(b) provides an objective standard of good faith for
merchants, in that they must observe “reasonable commercial standards of fair dealing.”
Furthermore, 2-610 provides that when either party repudiates, the other party may only await
performance “for a commercially reasonable time.” In this case, since the market price was
higher on the contract date of delivery, but lower on the date of claimed resale, it is clear that
Apex has not acted in a “commercially reasonable manner.” Furthermore, in a volatile market
such as oil, waiting two months to resell is not a “commercially reasonable time.” Thus, Apex
has violated good faith and commercial standards in waiting so long to resell, so that it could
speculate on the market at Belcher’s expense. The more reasonable measure of damages would
be to define the 10,000 sold on June 1st at $51 per barrel as the resale. This would give Apex no
damages (except incidental damages, if any) because of the higher market price on the resale date.
77. (T/F) In the case of a repudiation by the buyer, the seller’s damages are
determined according to the market price at the time the seller learned of the breach.
77. False. 2-708(1).
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78. Pacific Marine, Inc. is a boat retailer. Pacific contracts to sell a 20’ sailboat to Fred
Jones for $25,000. However, Fred repudiates before he is to take delivery. Pacific
promptly resells the same boat to Shirley Walker for $25,500. At the time of the resale,
Pacific had at least two other identical boats on its lot. Pacific purchased the boat
wholesale for $20,000. Pacific brings an action for damages for Fred’s breach. Fred
insists that since the same boat was resold for $500 more, that Pacific does not have any
damages. Is Fred correct?
78. No. Fred appears to be calculating damages by 2-706(1) which provides the standard
measure of damages for resale as the resale price minus the contract price (plus incidental
damages and minus expenses saved). However, due to the nature of the seller, this is not a
standard resale transaction. 2-708(2), if the standard measure of damages (i.e. contract market) “is inadequate to put the seller in as good a position as performance would have done
then the measure of damages is the profit...the seller would have made from full performance by
the buyer.” Here, because Pacific would likely have sold the additional boat to Shirley
regardless of Fred’s breach, Pacific’s real interest in the transaction was the profit generated by
the sale. Thus Pacific’s real loss is the loss of profit from Fred’s sale. As such, Pacific may be
characterized as a “lost volume” seller. Since the standard measure of damages would not put
Pacific in as good a position as it would have been had Fred taken delivery, it is entitled to the
profit of $5,000 that it would have made from the sale to Fred.
79. Creative Computers manufactures and sells custom computer systems. All-Day
Car Rental places a custom order with Creative for the purchase of 10 specially
designed computer terminals, and 1 central server computer. The contract price is
$10,000. To fill this order Creative begins to assemble various components and parts to
build the system. The total cost in parts and labor to Creative is $5,000 for a finished
system like this one. When Creative is about half-way done with the order, All-Day
calls to repudiate. What are Creative’s damages if it completes manufacture of the
computers and resells the system to another customer for $9,000? What are Creative’s
damages if it decides to stop manufacture and sell the partially assembled system for
$4,000 scrap value after expending $2,000 in parts and $1,500 in labor?
79. Under 2-704(2), “where the goods are unfinished an aggrieved seller may in the exercise of
reasonable commercial judgment...either complete the manufacture...or cease the manufacture
and resell for scrap or salvage value.” Under 2-706(2), “it is not necessary that the goods be in
existence” in order to perform a proper resale. Thus, if Creative resells the finished product, it
may recover resale damages of $1,000 under 2-706 (i.e. contract price - resale price). However,
if Creative decides to sell the scrap, then the standard measure of damages (market price contract price of 2-708 = $1,000) would be “inadequate to put the seller in as good a position as
performance would have done,” because performance would have given Creative a profit of
$5,000. Thus, Creative is entitled to the lost profits of $5,000 under 2-708(2).
80. MagnaLite, Inc. of New York manufactures and sells flashlights. SDG&E of San
Diego enters into a contract to purchase 1,000 flashlights from MagnaLite. The contract
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provides shipment terms of “F.O.B. seller’s plant.” MagnaLite properly ships the
flashlights to SDG&E. SDG&E properly rejects them under 2-602 upon arrival due to a
non-conformity reported by one of their receiving inspectors. However, when the
flashlights get back to MagnaLite, it discovers that the rejection was wrongful because
the alleged non-conformance did not actually exist (it was operator error by SDG&E’s
inspector). MagnaLite thereafter sues, claiming that the rejection was wrongful, and so
SDG&E is liable for the contract price. Is MagnaLite correct?
80. No. Under 2-709(1)(a), a seller may recover the contract price “of goods accepted.”
However, here SDG&E has properly rejected, even though it has not rightfully rejected. That is
to say that although SDG&E did not have the right to reject, it did follow the procedures of
2-602. Thus, SDG&E has precluded acceptance under 2-607(2), and according to 2-602(3) the
seller’s rights with respect to such “wrongfully rejected goods” are governed by 2-703. 2-703
provides that in a proper case, the seller may recover the contract price under 2-709, however
since the goods were not accepted, this is not a proper case for recovery of contract price.
81. Assume the same facts as Question 80 above, except that the flashlights were
destroyed during original shipment from MagnaLite to SDG&E (i.e. they never arrived).
Would MagnaLite be entitled to the contract price?
81. Yes. Under 2-709(1) the buyer is liable for the price of “goods lost or damaged within a
commercially reasonable time after risk of their loss has passed to the buyer.” Under 2-319(a),
the F.O.B. term here creates a shipment contract. Thus, under 2-509(1)(a), since the goods
were not required to be delivered at a particular destination, “the risk of loss passes to the buyer
when the goods are duly delivered to the carrier.” The facts state that MagnaLite properly
shipped the flashlights, and so the risk of loss passed to the buyer upon placing them with the
carrier. Thus, SDG&E is liable for the contract price.
82. (T/F) When a buyer fails to pay the price as it becomes due, the seller may recover,
together with any incidental and consequential damages, the price of goods accepted.
82. False. 2-709(1) (incidental damages only).
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