QUESTION NO. 2
JULY 2005
OREGON BAR
EXAMINATION
Roger buys raw red bell peppers, processes them and sells them to retailers.
Roger had existing contracts with Oregon retailers to provide 1,000,000 pounds of
processed peppers. Fred the Farmer agreed to sell Roger 1,000,000 pounds of
unprocessed peppers at $ .30 per pound, with delivery from September through
November 2005. Fred and Roger signed a written contract outlining the above.
To fulfill his contract with Roger, Fred purchased pepper seeds through the
seed store, Peppers Plus. He spoke with a Peppers Plus’ employee and explained
that he needed to grow 1,000,000 pounds of peppers for an Oregon pepper
processor. Ultimately, Fred purchased the “Sweet Pepper Patty” variety because,
in the words of the Peppers Plus employee who assisted him, “it is the sweetest
pepper you have ever eaten—hands down.” One week after Fred planted the seeds,
Peppers Plus sent an invoice that contained a disclaimer of “all warranties,
including any implied warranties.” The disclaimer was in small writing in the far
lower left-hand corner of the invoice.
Fred began timely delivery of the peppers. In October, Roger asked Fred to
stop delivering peppers because of a scheduling problem on the processing line.
Roger explained that such delays were standard in the industry. Fred, a farmer for
20 years had never heard of this standard. Roger told Fred he did not know how
long the delay would last and he should do whatever he needed to get rid of his
peppers. Fred did not pick any peppers during the delay and the undelivered
peppers remained in storage bins and began to rot.
Ten days later, Roger told Fred that he could start delivering peppers again.
Roger asked Fred if he was going to be able to fulfill the contract, and Fred said
yes. At the end of November, Fred had only delivered 700,000 pounds of peppers to
Roger. The retailers that received the 700,000 pounds of peppers returned them to
Roger because they smelled and were sour.
To meet his contractual obligations to these retailers, Roger purchased
replacement peppers on the open market at a price much higher than $.30 per
pound. However, because of the changed market conditions, Roger was also able to
negotiate a significantly higher price from the retailers for the replacement
peppers.
Applying the Uniform Commercial Code, discuss the following:
45%
1.
What are Roger’s claims against Fred and Fred’s defenses, if
any?
20%
2.
If Roger prevails, what are his damages?
35%
3.
What are Fred’s claims against Peppers Plus and Peppers
Plus’s defenses, if any?
July 2005 Oregon Bar Examination
Question No. 2 – Issue Outline and
Answer That Addresses All Issues
Page 1 of 10
JULY 2005
OREGON BAR EXAMINATION
QUESTION NO. 2
UCC Art II.
ISSUE OUTLINE
1. What are Roger’s claims against Fred and Fred’s defenses, if any?
A.
Which law will govern? Uniform Commercial Code (UCC) Article 2,
since the contract involves the sale of a good (peppers).
B.
Roger’s Claims Against Fred
1. Breach of Contract
a. Was valid contract formed? Offer and acceptance.
b. Contract between merchants. 2-201(1). Roger and Fred are
both merchants since they deal with the goods of the kind (peppers) or
have an occupation which has knowledge or skill particular to the
goods involved.
c. Firm offer. 2-205, 2-204 and 2-206. and/or sufficient intent to
form a contract.
d. Definite acceptance. 2-206 and 2-207.
e. Fred breached the contract b/c he only delivered half of the
peppers to Roger and they smelled and were sour (breach of
warranty, see below).
2.
Statute of Frauds. 2-201. SoF requires contracts of over $500
to be in writing and signed by the party to be charged.
3.
Implied Warranty of Merchantabilty. 2-314. In every sale
by a merchant who deals in goods of the kind. Implies that
goods:
a.
b.
c.
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are merchantable (if fungible, are of fair average quality
within the description);
can pass without objection in the trade;
are fit for the ordinary purpose for which they are used;
July 2005 Oregon Bar Examination
Question No. 2 – Issue Outline and
Answer That Addresses All Issues
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d.
e.
f.
g.
h.
C
run, within variations permitted within the agreement, of
even kind, quality and quantity within each unit and
among all units involved;
are adequately contained, packaged and labeled as the
agreement may require; and
conform to promises/affirmations of fact made on
container or label.
Not disclaimed
Goods not merchantable—sour and smelled.
Fred’s Defenses
1.
Anticipatory Repudiation or Repudiation
a.
Fred will claim Roger repudiated the contract and
therefore, excused his performance.
i.
Repudiation, must be unequivocal communication
of intention or action which renders performance
impossible or demonstrates a clear determination
not to continue with performance
ii.
Anticipatory repudiation must substantially impair
the value of the contract
iii.
Indefinite statement as to future contingencies will
not alone constitute repudiation.
iv.
Roger told Fred there was a delay, he did not no
how long it would last and to do whatever he
needed to do with his peppers. This is an
unequivocal statement that Roger would in all
likelihood not be able to accept Fred’s future
peppers.
b.
Roger will claim the delay was not an anticipatory
repudiation it was a common industry practice--usage of
trade
i.
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To determine whether the parties’ performance
complied with the Contract, must look at the
language of the Contract and examine the usage of
trade and industry practice. UCC 1-205(2) and 2208.
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Question No. 2 – Issue Outline and
Answer That Addresses All Issues
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ii.
iii.
iv.
c.
Usage of trade is a practice that is typical in the
industry and justifies an expectation that it will
occur and be observed by the parties with respect to
the transaction at issue. ORS 1-205 (2).
Where a usage of trade is established, it is
incorporated into the terms of the contract.
Arguable whether the delay on a processing line
was a usage of trade—must be common and
accepted – Fred did not know of it.
Roger will also argue that he retracted repudiation
i.
ii.
iii.
iv.
v.
Roger will argue that even if repudiated, he
retracted repudiation and Fred agreed to perform.
Under the UCC retraction of repudiation reinstates
the repudiating party’s rights under the contract
with due excuse and allowance of to the aggrieved
party for any delay. 2-611.
Non repudiating party must not have: (1) cancelled
contract; or (2) materially changed position; or (3)
otherwise indicated that he or she considers
repudiation final.
UCC permits the repudiator to retract by any
method which clearly indicates to the aggrieved
party that the repudiating party intends to
perform.
Fred may argue he is partially excused from
performance b/c of Roger’s delay. However, Fred
made assurances of his ability to fully perform.
Moreover, the time in which he was delayed, he did
not adequately mitigate his damages.
2. If Roger prevails, what are his damages?
A.
UCC allows for compensatory damages, non-punitive.
1.
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Designed to place the non-breaching party in the position that
they would have been in if no breach.
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Answer That Addresses All Issues
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B.
C.
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2.
Must be reasonably foreseeable at the time of contracting and
not reasonably prevented by the non-breaching party.
3.
Must be proven by reasonable certainty.
4.
Must be caused by breach.
5.
Obligation to mitigate damages.
Roger is entitled to cover damages. 2-712
1.
In an effort to mitigate damages, Roger obtained “cover”
peppers. The UCC does not require a non-breaching buyer to
obtain cover.
2.
Damages for the buyer who purchases “cover” is entitled to
recover the difference between the cover price and the contract
price, less expenses saved. UCC 2-712. A buyer may cover by
making any reasonable purchase of goods in substitution for
those due from a seller. If a buyer covers, it is entitled to
recover damages equal to the difference between the cover price
and the contract price, less expenses saved.
2.
The fact that Roger passed the increased costs to his customers
and obtained a higher profit may not be relevant and have to be
deducted from damages. Some courts have held that a buyer
who covers is entitled to the cover measure of damages even
where the buyer is able to pass the additional costs of covering
on to a third party. See KGM Harvesting Co. v. Fresh Network,
42 Cal. Rptr. 2d 286 (Cal. Ct. App. 1995); Fertico Belgium S. A.
v. Phosphate Chem. Export Assoc., Inc., 510 N.E.2d 334 (N.Y. Ct.
App. 1987).
3.
Other authorities, including White & Summers, say the opposite
and that the buyer must subtract the increased profit as
“expenses saved incidental to seller’s breach.”
Incidental/consequential damages. 2-715. Buyer entitled to
recover consequential damages resulting from general or particular
requirements seller had reason to know.
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Question No. 2 – Issue Outline and
Answer That Addresses All Issues
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3. What are Fred’s claims against Peppers Plus and Peppers Plus’ defenses,
if any?
A.
Claims for Breach of Warranties.
1.
Express Warranties: 2-313. Any affirmation of fact or
promise which becomes the basis of the bargain. Statements
made by PP employee. Statements that relate to the seller’s
opinion do not create an express warranty but are instead
considered “puffery” or sales talk. This is probably not an
express warranty.
2.
Implied Warranty of Fitness for a Particular Purpose. 2315
a.
any seller has reason to know of buyer’s particular
purpose; and
b.
buyer relies on seller’s skill or judgment to select goods.
3.
Warranty of Merchantability. 2-314
In every sale by a merchant who deals in goods of the kind.
Implies that goods:
are merchantable (if fungible, are of fair average quality
within the description);
b.
can pass without objection in the trade;
c.
are fit for the ordinary purpose for which they are used;
d.
run, within variations permitted within the agreement, of
even kind, quality and quantity within each unit and
among all units involved;
e.
are adequately contained, packaged and labeled as the
agreement may require; and
f.
conform to promises/affirmations of fact made on
container or label.
a.
B.
Defenses.
1.
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Disclaimer of Warranties. Must be part of the basis of the
bargain. Arguably not part of the basis of the bargain—Fred
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had already purchased and accepted good before he learned of
the disclaimer. Regardless disclaimers are ineffective.
a.
Merchantability: May be disclaimed by language that
mentions merchantability and if in writing, is
conspicuous. 1-201(10): conspicuous means “a reasonable
person against whom it is to operate ought to have noticed
it.” Needs to be in capital letters, larger than other
language, or in a contrasting type/color. Not satisfied
here.Not satisfied here.
b.
Fitness: 2-316(10). Must be by a writing and
conspicuous. 1-201(10): conspicuous means “a reasonable
person against whom it is to operate ought to have noticed
it.” Needs to be in capital letters, larger than other
language, or in a contrasting type/color. Not satisfied
here.
c.
Express: Express warranties can be disclaimed, if
bargained for. 2-316. May not introduce evidence of oral
express warranty if final agreement is integrated and
disclaims express warranties. Not the case here.
ANSWER THAT ADDRESS ALL ISSUES
1. What are Roger’s claims against Fred and Fred’s defenses, if any?
The Uniform Commercial Code (UCC) Article 2 applies. The contract
between Roger and Fred involves the sale of goods (peppers).
Roger will assert a claim of breach of contract. A valid contract was formed.
It was a contract between merchants as both Roger and Fred are merchants—they
each deal with the goods of the kind (peppers) or have an occupation which has
knowledge or skill particular to the goods involved. UCC §2-201(1). The Statute of
Frauds requires contracts of over $500 to be in writing and signed by the party to be
charged. UCC §2-201. It applies and was satisfied (the facts indicate they signed a
written agreement).
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July 2005 Oregon Bar Examination
Question No. 2 – Issue Outline and
Answer That Addresses All Issues
Page 7 of 10
Moreover, Roger can claim that Fred breached the implied warranty of
merchantabilty. UCC §2-314. This warranty arises in every sale by a merchant
who deals in goods of the kind and arises without fault. The warranty implies that
the goods are merchantable, if fungible goods, are of fair average quality within the
description; can pass without objection in the trade; and are fit for the ordinary
purpose for which they are used. The warranty permits variations within the
agreement, of even kind, quality and quantity within each unit and among all units
involved. In this case because Fred is a merchant, the peppers must meet the
above. They clearly do not.
Fred has numerous defenses. First Fred will claim that the delay and
Roger’s statement that Fred “should do whatever he needed to get rid of his
peppers” was anticipatory repudiation of the contract. Such a repudiation must be
an unequivocal communication of intention or action which renders performance
impossible or demonstrates a clear determination not to continue with performance.
UCC §2-210. Moreover, the anticipatory repudiation must substantially impair the
value of the contract. Generally, indefinite statements as to future contingencies
will not alone constitute repudiation.
In this case, Roger told Fred there was a delay, he did not no how long it
would last and Fred should do whatever he needed to do with his peppers. More
likely than not, this statement was an unequivocal statement that Roger would not
accept Fred’s future peppers and Fred should mitigate his damages, i.e. a
repudiation.
Roger however, will claim the delay was not an anticipatory repudiation,
rather the delay was a common industry practice--usage of trade. To determine
whether the parties’ performance complied with the Contract, the UCC will look at
the language of the Contract and examine the usage of trade and industry practice.
UCC §§1-205(2) and 2-208. Usage of trade is a practice that is typical in the
industry and justifies an expectation that it will occur and be observed by the
parties with respect to the transaction at issue. UCC §1-205 (2). Where a usage of
trade is established, it is incorporated into the terms of the contract. Fred will
argue that the delay on processing line was not a usage of trade because it must be
common and accepted, yet, Fred, a farmer for more than 20 years did not know of it.
Roger will have to put up more evidence that the delay was a usage of trade.
Roger will also argue that he retracted the anticipatory repudiation and Fred
agreed to fully perform. Under the UCC retraction of repudiation reinstates the
repudiating party’s rights under the contract with due excuse and allowance to the
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Question No. 2 – Issue Outline and
Answer That Addresses All Issues
Page 8 of 10
aggrieved party for any delay. UCC §2-611. If the non repudiating party has: (1)
cancelled the contract; (2) materially changed position; or (3) otherwise indicated
that he or she considers repudiation final, the retraction is ineffective. The UCC
permits the repudiator to retract by any method which clearly indicates to the
aggrieved party that the repudiating party intends to perform.
In this case even if repudiation occurred, ten days later, Roger retracted his
repudiation verbally to Fred. Fred did not cancel the contract prior to that and did
not otherwise indicate that he considered the repudiation final. He may argue that
he materially changed his position because he allowed his peppers to rot. Fred may
also argue he is partially excused from performance b/c of Roger’s delay. However,
Fred made unequivocal assurances of his ability to fully perform the contract.
Moreover, the time in which he was delayed, he did not adequately mitigate his
damages. Fred’s defense will not excuse his performance under the contract.
2. If Roger prevails, what are his damages?
In general, basic contract damages are compensatory damages and nonpunitive. They are designed to place the non-breaching party in the position that
they would have been in if no breach. Damages are limited to those reasonably
foreseeable at the time of contracting and not reasonably prevented by the nonbreaching party and must be proven by reasonable certainty. Finally a party is
entitled to recover only those damages caused by the breach. The non-breaching
party has an obligation to mitigate damages.
Roger is entitled to cover damages. UCC §2-712. In an effort to mitigate
damages, Roger obtained “cover” peppers. The UCC does not require a nonbreaching buyer to obtain cover. Damages for the buyer who purchases “cover” is
entitled to recover the difference between the cover price and the contract price, less
expenses saved. UCC §2-712. A buyer may cover by making any reasonable
purchase of goods in substitution for those due from a seller.
There is an issue whether Roger’s increased profits will have to be subtracted
from his cover damages. The authorities are split. The fact that Roger passed the
increased costs to his customers and obtained a higher profit may not be relevant
and have to be deducted from damages. Some courts have held that a buyer who
covers is entitled to the cover measure of damages even where the buyer is able to
pass the additional costs of covering on to a third party. See KGM Harvesting Co. v.
Fresh Network, 42 Cal. Rptr. 2d 286 (Cal. Ct. App. 1995); Fertico Belgium S. A. v.
Phosphate Chem. Export Assoc., Inc., 510 N.E.2d 334 (N.Y. Ct. App. 1987). Other
Portland 56026.1
July 2005 Oregon Bar Examination
Question No. 2 – Issue Outline and
Answer That Addresses All Issues
Page 9 of 10
authorities, however, including White & Summers, say the opposite and that the
buyer must subtract the increased profit as “expenses saved incidental to seller’s
breach.” Roger is also entitled to incidental and/or consequential damages caused by
Fred’s breach. UCC §2-715. Buyer entitled to recover consequential damages
resulting from general or particular requirements seller had reason to know.
3. What are Fred’s claims against Peppers Plus and Peppers Plus’
defenses, if any?
Fred may have claims for breach of several different kinds of warranties.
First Fred may claim Peppers Plus gave an express warranty regarding the “Sweet
Pepper Patty” seed variety. UCC section 2-313 provides that any affirmation of fact
or promise which becomes the basis of the bargain creates an express warranty.
That statement must come at a time when the buyer relies on it when entering into
the contract. Statements that relate to the seller’s opinion do not create an express
warranty but are instead considered “puffery” or sales talk. The statement by the
Peppers Plus employee is really his opinion and is probably not an express
warranty.
Peppers Plus may have also created an implied warranty of fitness for a
particular purpose. UCC §2-315. This warranty arises when the seller has reason
to know of buyer’s particular purpose and the buyer relies on seller’s skill or
judgment to select goods. In this case, Fred explained that he had to produce a
large amount of peppers for a processor for the resale of a retail product. Further,
Fred relied on Peppers Plus in choosing the variety that best suited this need.
Accordingly, an implied warranty of fitness for a particular purpose arose. More
likely than not, this warranty was also breached because the peppers did not meet
their particular purpose. Instead, they were rejected uniformly by retailers.
Finally, Peppers Plus gave a warranty of merchantability to Fred. UCC §2314. This warranty arises in every sale by a merchant who deals in goods of the
kind and arises without fault. The warranty implies that the goods are
merchantable (if fungible, are of fair average quality within the description); can
pass without objection in the trade; and are fit for the ordinary purpose for which
they are used. The warranty permits variations within the agreement, of even
kind, quality and quantity within each unit and among all units involved. In this
case because Peppers Plus is a merchant, the pepper seeds must meet the above.
They do not.
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July 2005 Oregon Bar Examination
Question No. 2 – Issue Outline and
Answer That Addresses All Issues
Page 10 of 10
Pepper Plus’ main defense is that the above remedies were disclaimed by the
notation on the invoice. Such disclaimers must be part of the basis of the bargain.
In this case, Fred will argue that even if the disclaimer is effective (and it is not as
described below), the disclaimer was not part of the basis of the bargain--Fred had
already purchased and accepted the goods before he learned of the disclaimer.
Regardless disclaimers are ineffective.
Warranties of merchantability may be disclaimed by language that mentions
merchantability and if, in writing, is conspicuous. In this case, the disclaimer was
in writing but was not conspicuous. Conspicuous means “a reasonable person
against whom it is to operate ought to have noticed it.” Needs to be in capital
letters, larger than other language, or in a contrasting type/color. UCC §1-201(10).
Not satisfied here.
Implied warranties for fitness can only be disclaimed if in writing and
conspicuous. UCC §1-201(10): conspicuous means “a reasonable person against
whom it is to operate ought to have noticed it.” Needs to be in capital letters, larger
than other language, or in a contrasting type/color. This warranty can also be
disclaimed with general words such as “AS IS.” None of the above is satisfied here.
Express warranties can be disclaimed, if bargained for. UCC §2-316.
May not introduce evidence of oral express warranty if final agreement is integrated
and disclaims express warranties. Not the case here. No warranty so disclaimer
inapplicable.
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