Suggested Additional Assignments
Drafting and Role Play: Contract Warranties and Remedies
The students will negotiate and draft a computer contract. Half of the students will represent Profit &
Densom, a firm of ten accountants. The others will represent Ibex, a computer consulting firm. The
parties have agreed that Ibex will create and install a new computer system for P & D. Ibex will purchase
all of the various hardware and software components, install them, and train P & D’s staff. The parties
have agreed on the parameters of the system. They both expect the total fee for installation to be about
$95,000, plus additional money for training. They are now negotiating warranties and liability. The two
groups should negotiate and draft a contract that covers five basic issues:
What happens if the system never performs at all? Must P & D still pay for all or part of
it? Suppose Ibex has spent $35,000 purchasing and preparing components. What if Ibex has
provided some training that has benefited P & D employees?
What happens if the system functions for a while but then crashes? What if it works for
one week? For six months? How long does Ibex remain responsible?
What happens if the system works well but crashes after P & D makes some minor
modifications? It is common for buyers to begin tinkering with new systems, to modify the
computer for their needs. Does Ibex retain any responsibility?
What happens if the system fails, in whole or in part, and P & D suffers financial losses?
Is Ibex responsible for lost time? Lost profits? Lost accounts?
What happens if the system harms a third party? The system might cause P & D to
prepare income tax returns improperly, or it could lose data, causing erroneous evaluations of a
company’s financial status.
Field Work: Interview
Students should interview a businessperson about one issue: How does trade usage, or course of dealing,
affect the real world of business? Which is more important: a written contract or trade usage and course of
dealing?
Chapter Overview
Chapter Theme
Performance and remedy under the Code reflect contemporary commercial practices but also demand a
satisfactory level of sensible, ethical behavior.
Obligation of All Parties: Good Faith
The Uniform Commercial Code (UCC) requires good faith in the performance and enforcement of every
contract. Good faith means honesty in fact. Between merchants, it also means the use of reasonable
commercial standards of fair dealing.
Seller’s Rights and Obligations
The seller must tender the goods, which means to make conforming goods available to the buyer.
Perfect Tender Rule Usage of Trade, Course of Dealing, and Course of
Performance
Under the perfect tender rule, the buyer may reject the goods if they fail in any respect to conform to the
contract. Of course, “perfect” doesn’t mean actually perfect. Imperfections that are typical of the trade
and typical of previous commercial transactions between the same parties may be acceptable. Or, if within
a single contract, one party accepts a particular flaw during an ongoing relationship, it is reasonable to
expect that they will continue to accept the same flaw.
Cure
When the buyer rejects non-conforming goods, the seller has the right to cure, by delivering conforming
goods before the contract deadline.
Case: Zion Temple First Pentecostal Church of Cincinnati, Ohio, Inc. v
Brighter Day Bookstore & Gifts1
Facts: Zion Temple First Pentecostal Church ordered new choir robes from Brighter Day Bookstore, a
retailer that sold robes manufactured by Murphy Cap & Gown.
When Brighter Day delivered the robes to the Zion Temple, the church members found many faults.
They did not like the color or material, which they considered very different from a sample they had
reviewed at Brighter Day. The sleeves had been attached facing the wrong way. And on the overlays, the
Velcro and tags were visible.
Zion complained to Murphy. The manufacturer offered to repair the sleeves, but Zion declined the
offer because of the other problems. Zion returned the robes, and when it failed to get its money back,
filed suit.
The trial court gave summary judgment for the defendants, and Zion Temple appealed.
Issue: Did Zion Temple afford Murphy a chance to cure?
Holding: Judgment for Murphy reversed and case remanded
Excerpts from Judge Doan’s Decision: The record shows that the choir members actually inspected the
robes when Brighter Day delivered them and Zion found what it deemed to be nonconformities. This
inspection was reasonable and was made within a reasonable time. Thus, Zion never accepted the robes,
but instead rejected them as not conforming to the contract. Since Zion rejected the goods, Murphy had a
right to cure.
Murphy offered to cure any problem with the sleeves. Where the buyer rejects a non-conforming
tender which the seller had reasonable ground to believe would be acceptable with or without money
allowance, the seller may, if he seasonably notifies the buyer, have a further reasonable time to substitute
a conforming tender. Murphy manufactured the sleeves on the robes according to its design specifications.
Because of an error in the catalog that Zion had consulted before placing its order, the sleeves as properly
manufactured appeared different from the sleeves as depicted in the catalog. Murphy clearly had the right
to cure this nonconformity and indicated its intention to do so within a reasonable time.
Zion had other reasons for contending that the robes did not conform to the contract. It claimed that
Velcro was visible on the reversible overlays and that the tags on the overlays could be seen when the
overlays were reversed. Murphy never indicated its intention to cure these alleged nonconformities.
Consequently, the trial court erred in granting Murphy’s motion for summary judgment.
We reverse the entry of summary judgment for Murphy and remand this case for trial or further
proceedings consistent with this court’s opinion.
Question: Why does the UCC require that a seller have a chance to cure?
Answer: No business does a perfect job all the time. The UCC provision is designed to protect
Question: What was the basis of Murphy’s warranties?
1 2004 WL 23150323 Court of Appeals of Ohio, 2004.
Answer: Murphy created express warranties by showing swatches of the robe material and by
Question: What should happen when the case is remanded to the trial court?
Answer: The court must hear evidence on whether the defects relating to the tags and Velcro violated
Substantial Impairment
Sometimes, the Code holds buyers to a higher standard and makes it more difficult to refuse goods.
Perfect tender is the usual rule, but in two circumstances a buyer who claims goods are non-conforming
must show that the defects substantially impair their value. This standard applies: (1) if the buyer is
revoking acceptance of goods, or (2) if the buyer is rejecting an installment.
Destruction of the Goods
If identified goods are totally destroyed before risk passes to the buyer, the contract is void. If identified
goods are partially destroyed, the buyer may choose whether to accept the goods at a reduced price or
void the contract.
Commercial Impracticability
Commercial impracticability means that a supervening event excuses performance of a contract, if the
event was not within the parties’ contemplation when they made the agreement.
You Be The Judge: United Aluminum Corporation v. Linde, Inc.2
Facts: United Aluminum Corporation (UAC) manufactured aluminum coil. For many years, Linde
supplied UAC with the nitrogen it needed for its manufacturing processes. The companies signed a long
term contract in 1997, which said, in part:
Linde agrees that at UAC’s sole option, UAC may extend the term of this Agreement for a maximum of
five years commencing upon August 31, 2008.
The contract also called for a price of $0.23 per unit of nitrogen.
In 2007, UAC sent Linde a letter which stated, in part, “UAC intends to exercise its option to extend the
term for an additional five years from September 1, 2008 to August 31, 2013.” Linde replied that the price
of nitrogen had risen significantly over the life of the contract, and that it would have to raise prices by
38%.
UAC sued, seeking the right to continue buying nitrogen from Linde at $0.23 per unit. Linde defended on
the grounds of commercial impracticability.
You Be the Judge: Should Linde be discharged on the grounds of commercial impracticability?
Argument for Linde: Your honor, our industry has seen substantial increases in costs since 1997. The
price of nitrogen is much higher, but that is just the tip of the iceberg. We must pay our workers more, our
property taxes have increased, and, because of the rising price of gasoline, our transportation costs are
much higher.
We did not anticipate these increases when we made the original agreement. At that time, costs in our
industry had been fairly stable for many years. We have small margins even under ideal circumstances. To
2 2009 U.S. Dist. LEXIS 74259, United States District Court for the District of Connecticut, 2009.
continue selling at 1997 prices forces us to operate at a substantial loss. Our request for a 38% price
increase is reasonable.
It is commercially impracticable for use to ship nitrogen for another five years at the prices quoted in
the original contract.
Argument for UAC: The Uniform Commercial Code does not allow for a claim of commercial
impracticability every time prices increase. It allows such a claim only in the case of an event that was not
in the parties’ contemplation when they made an agreement.
In some exceptional circumstances, excusing performance is entirely reasonable. But nothing unusual
or unforeseeable has happened here. Nitrogen prices have gone up. But over a decade, the price of nearly
everything increases. Gasoline, groceries, cable television – the list goes on. Surely Linde knew that price
increases were possible.
We made the original contract because Linde offered us long term stability on the price of nitrogen.
Without that part of the bargain, we would likely have sought another supplier. It is not right to allow
Linde to back out of its clear contractual obligations.
Holding: UAC’s motion for summary judgment was granted by the trial court.
Question: Under the Code, commercial impracticability requires a supervening event not within the
parties’ contemplation when they made the agreement. What is the supervening event in this case?
Question: Did the court agree?
Buyer’s Rights and Obligations
The buyer’s primary obligation is to accept conforming goods and pay for them.
Inspection and Acceptance
The buyer generally has the right to inspect the goods before paying or accepting.
Partial Acceptance
The buyer may accept some goods and reject others if they can be divided into commercial units.
Revocation
A buyer may revoke acceptance but only if the nonconformity substantially impairs the value of the goods
and only if she had a legitimate reason for the initial acceptance.
Rejection
The buyer may reject non-conforming goods by notifying the seller within a reasonable time.2
Case: Lile v. Kiesel3
Facts: Edward and Kelly Kiesel bought a trailer from James Lile. That same day, the Kiesels used the
trailer. The next morning, after an all-night rain, the Kiesels noticed water inside the trailer, near the door.
The next time it rained, Edward noticed more pooling. A week later, Edward brought the trailer in for
repairs.
Lile repaired the roof with new silicone. But a week later the trailer leaked again and Kelly reported it
to Lile and demanded a refund. Lile refused the refund but offered to make repairs. Instead, the Kiesels
3 871 N.E.2d 995, Indiana Court of Appeals, 2007.
took the trailer to a different shop and the owner told them that based on the extensive rust, the trailer had
been leaking for longer than the Kiesels had owned it.
The Kiesels sued. Lile claimed that the Kiesels had accepted the trailer and unfairly refused repairs.
The trial court awarded the Kiesels the full purchase price and, Lile appealed.
Issue: Were the Kiesels entitled to the full purchase price?
Holding: Yes, judgment for the Kiesels affirmed. Lile argued that the Kiesels accepted the trailer and
therefore could not later reject it. The court agreed. However, that did not mean that the Kiesels could not
revoke their acceptance. According to the UCC §2-608, a buyer may revoke acceptance if the
nonconformity substantially impairs the value of the good, and the nonconformity was difficult to
discover before acceptance of the goods. Here, the court found that Edward made several visits to Lile’s
before purchasing the trailer, and eventually negotiated a purchase price. The trailer leaked twice within
one week of buying it, and Edward reported the leaking problem promptly.
The court found that the leaking and rust damage substantially impaired the value of the trailer. Also,
because the leaks were due to rain, it would have been difficult for the Kiesel’s to have discovered them
prior to buying the trailer. Thus, the court found that the Kiesel’s met the requirements of §2-608 for
revocation of acceptance.
Lile also argued that the Kiesel’s acted in bad faith by not allowing him to cure the trailer’s defects.
However, because the Kiesels had accepted the goods, there was no obligation to allow Lile to cure. The
Kiesels could only revoke their acceptance. According to the court, there was no evidence that the Kiesels
acted in bad faith. To the contrary, Edward gave Lile an opportunity to repair the trailer even though he
was not obligated to do so.
Question: The trailer had water damage before the Kiesel’s purchased it. Why did Lile argue that
they were not entitled to their money back?
Answer: Lile argued that the Kiesels were not entitled to their money back because they had already
Question: Why would Lile want to fix the trailer, wouldn’t it be easier just to give them their money
back?
Seller’s Remedies
The seller can always cancel the contract when the buyer breaches. She may also be able to:
• Stop delivery of the goods
• Identify goods to the contract
• Resell and recover damages
• Obtain damages for non-acceptance
• Obtain the contract price
This case can serve as a general review of many of the issues discussed in this chapter, and a few from
earlier chapters.
Additional Case: Byblos U.S.A., Inc. v. Morris & Sons4
Facts: Byblos sold off-price designer clothing manufactured by an Italian parent company. Morris & Sons
was a Chicago retailer that had been selling men’s and women’s clothing for 40 years. Aaron Krichevsky,
the president of Morris, contacted Patricia Saracini, the sales manager for Byblos, to discuss buying some
Byblos clothing. He stated that he wanted only first-quality merchandise in good condition–no samples or
damaged goods. She agreed to send such items. He further described the kinds of clothing Morris
required. The parties agreed that Byblos’s sales representatives would select merchandise for Morris and
ship it, sight unseen, for approval or rejection. Over a three-year period, Byblos made about 14 shipments
4 1994 U.S. Asp. LEXIS 4976 Circuit Court of Appeals for the Seventh Circuit, 1994.
to Morris, with each shipment containing from 10 to 400 articles of clothing. Each shipment contained an
invoice, ranging from $1,000 to $12,000.
Morris sold some but not all of the clothing. Krichevsky testified that many of the goods were
defective. For example, some of the adult sweaters had an opening large enough only for an infant’s head.
Nonetheless, Morris continued to accept the shipments, and to sell what items it could. After the final
shipment, Morris still owed about $111,000, which it refused to pay because of the alleged defects.
Byblos sued.
Issue: Were the clothes non-conforming? Was Morris’s rejection of the goods effective?
Holding: Judgment for Byblos.
Question: Neither party said anything about warranties. Did the goods come with any warranties?
Question: What was the express warranty?
Answer: Krichevsky insisted on first-rate clothing in good condition, permitting no floor samples or
Question: What were the implied warranties and how were they created?
Answer: The Code implies warranties of merchantability (§2-314) and fitness (§2-315), and the
Question: What does the implied warranty of merchantability require?
Answer: It requires that the goods be fit for the ordinary purposes for which they are used–namely,
Question: What is the full name of the implied warranty of fitness, and what does it require?
Answer: The “implied warranty of fitness for a particular purpose” requires that if the seller knows of
Question: At trial, Byblos claimed that it did not intend any warranties to apply. Based on the facts as
described, rule on this claim.
Answer: It is a losing argument. Under §2-316, exclusions of warranties must be clearly stated. For
Question: The contract said nothing about Morris’s right to inspect the goods. Did the retailer have
such a right?
Answer: Yes. Section 2-513 permits the buyer to inspect the goods at a reasonable time, in a
Question: Suppose Morris found some clothing in one shipment to be defective. Could it reject the
entire shipment?
Question: If Morris found some clothing defective but other items acceptable, could it keep some and
reject the others?
Answer: Yes. Section 2-601(c) permits a buyer to accept any “commercial unit” and reject the rest.
“Commercial unit” means a unit of goods that by commercial usage is a single whole for purposes of
Question: Does the Code require rejection be in a certain form?
Answer: No. The Code does not require any particular form of rejection. The buyer may reject in any
Question: Byblos delivered about 14 shipments and had received only partial payment. What was its
most likely remedy?
Question: Morris did inspect all goods as they arrived. After Byblos sued to its contract price, Morris
rejected many of the goods. Comment.
Question: Inspection followed by silence amounts to what?
Question: Who won?
Buyer’s Remedies
If a seller fails to deliver goods, repudiates, or if the buyer rightfully rejects the goods, the buyer is
entitled to cancel the contract. She may also recover money paid to the seller, assuming she has not
received the goods. In addition, she may be entitled to:
• incidental and consequential damages
• specific performance
• cover
• damages for non-delivery
• accept then on-conforming goods and seek damages
• liquidated damages
Case: Smith v. Penbridge Associates, Inc.5
Facts: Donna and Alan Smith wanted to raise emus, which are flightless Australian birds that look like
ostriches. The creatures reproduce rapidly in almost any terrain and are sold for their meat, which is high
in protein and low in fat, and for their oil, leather, and feathers. The Smiths paid Tomie Clark, the
manager of Penbridge Farms, $4,000 as a down payment for a “proven breeder pair.” Since it is
impossible to discern an emu’s gender by looking, the Smiths asked Clark several times if the two birds
were male and female, and he assured them that the pair had successfully produced chicks the previous
breeding season.
The Smiths placed the prospective lovebirds in the same pen, but the breeding season passed without
a hint of romance. Donna Smith phoned Penbridge Farms, which advised her on a procedure used to
determine gender. Donna performed this task and learned that the emus were both gentlemen. The
would-be breeders asked for their money back but Penbridge refused, so the Smiths flew into court. The
trial judge awarded the couple $105,215, representing lost profits from their anticipated chicks. Penbridge
appealed, arguing that a buyer cannot count her chicks before they have hatched.
Issue: Did the trial court err by awarding lost profits?
Excerpts from Judge Popovich’s Decision: [Penbridge claimed that the] evidence was speculative and
insufficient to support an award of consequential damages, including damages for lost profits. [Penbridge
argued that, since] the breeding of emus is a relatively new business, and there is no reliable data to
project the ultimate success in breeding emus, the [Smiths’] claims for loss of chick production are
entirely speculative and do not meet the “reasonable certainty” requirement of the law of damages.
The Uniform Commercial Code provides the following circumstances for the recovery of
consequential damages resulting from the breach of the seller: any loss resulting from general or
particular requirements and needs of which the seller at the time of contracting had reason to know and
which could not reasonably be prevented by “cover” or otherwise. [UCC §2-715(2).]
5 440 Pa. Super. 410, 655 A.2d 1015, 1995 Pa. Super. LEXIS 574, Superior Court of Pennsylvania, 1995.
The determination of damages lies with the fact finder, who weighs the evidence and assesses the
credibility of the witnesses. Although the court recognized that emu breeding was a relatively new
commercial business, it determined that the award of consequential damages could be calculated with a
reasonable degree of certainty from the evidence adduced at trial. The court below initially found that the
value of a three-month old chick produced from the [previous] season was $5,000. The lower court then
concluded that [the Smiths] suffered incidental and consequential damages in the amount of $90,000.00.
From our thorough evaluation of the record, we conclude that the evidence was sufficient for the lower
court to measure lost profits with a reasonable degree of certainty. The basis for this rule is that the
breaching party should not be allowed to shift the loss to the injured party when damages, even if
uncertain in amount, were certainly the responsibility of the party in breach.
Order affirmed.
Question: The Smiths paid a total of $12,500 for the two male emus. How did the court award the
Smiths $105,215 in damages?
Answer: The court found that the experts testifying on behalf of the Smiths had specialized