978-1285770178 Lecture Note Unit 4

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INTRODUCTION

This Focus on Ethics feature highlights some ethical issues that have emerged in the application of sales and

lease law.

Transactions involving sales of goods constitute a major portion of business activity in the commercial and

manufacturing sectors of this economy. Sales of goods are governed by the UCC in virtually every state. Many of the

UCC provisions express ethical standards.

FOCUS OUTLINE

I. Good Faith and Commercial Reasonableness

Good faith and commercial reasonableness—concepts that permeate the UCC—help to prevent unethical

behavior. For example, a party filling in a missing term may not deviate from what is commercially reasonable

in the context of the transaction.

2 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS

A. GOOD FAITH IN OUTPUT AND REQUIREMENTS CONTRACTS

The concept of good faith implies that one party will not manipulate contract terms to take advantage of

another party. The text notes that without the obligation of good faith, contract abuses in general could

be numerous, and discusses the example of requirements and output contracts.

B. BAD FAITH NOT REQUIRED FOR BREACH

A party can breach the obligation of good faith under the UCC even if the party did not act in bad faith.

The text discusses a recent case as an example.

C. COMMERCIAL REASONABLENESS

The text discusses the concept of commercial reasonableness in the context of commercial im–

practicability. The ethical principle in this doctrine is fairness—for example, is it fair to excuse a seller

based on reasonably foreseeable price increases (when either party might protect itself by including a

clause to prevent financial hardship)? Would a buyer act ethically if it refused to release the seller due to

a price change?

II. The Concept of the Good Faith Purchaser

The concept of the good faith purchaser reflects the UCC’s emphasis on protecting innocent parties (those

who buy goods unaware that the seller does not have good title). Ethical questions arise when a buyer

suspects that a seller may not have good title but the buyer allows the transaction go forward because it is a

“good deal.”

III. Unconscionability

The UCC’s provisions on unconscionability are based on ethical premises. UCC 2–302 allows courts to refuse

to enforce a contract or a clause in a contract, or limit its application, if it is too one-sided or unfair.

A. THE TEST FOR UNCONSCIONABILITY

The basic test is whether, under the circumstances at the time of the contract’s formation, and against

the general commercial background, the contract or clause was unfairly one sided.

B. UNCONSCIONABILITY—A CASE EXAMPLE

The text highlights a corporation-imposed consumer arbitration clause as an example.

IV. Warranties

A seller has an ethical obligation to provide safe products. An ethical issue arises when safety means higher

costs and therefore higher prices.

A. EXPRESS AND IMPLIED WARRANTIES

To what extent should manufacturers be responsible for repairing products that break down during

normal use? Warranty laws protect consumers from sellers who choose to neglect ethical concerns if

they are doing what is otherwise legal. In other words, the law imposes an ethical obligation on

merchants in statutory form.

B. WARRANTY DISCLAIMERS

The UCC requirement that warranty disclaimers be conspicuous is based on the ethical premise that

sellers should not take advantage of consumers who do not read the “fine print” on a standard contract

UNIT FOUR: FOCUS ON ETHICS—DOMESTIC SALES & LEASE CONTRACTS 3

form. If a disclaimer unfairly surprises a buyer, chances are that it was not conspicuous, and the

unfairness of the bargain will not have to be so great before a remedy will be granted.

C. FREEDOM OF CONTRACT VERSUS FREEDOM FROM CONTRACT—REVISITED

Freedom of contact represents a basic ethical principle, but courts will curb it if it leads to gross

unfairness. Until the UCC, courts did not often alter the effect of warranty disclaimers, however “hidden”

they might be. Today the test is most often whether a consumer is unfairly “surprised” by a disclaimer.

TEACHING SUGGESTIONS

1. Emphasize the problems posed by standard form contracts. By this time, inside or outside of class,

students may have had several opportunities to read and consider parts or all of standard purchase agree–

ments and, through their studies, should have an awareness of the problems that they engender.

Nevertheless, standard form contracts often present difficulties for student comprehension. Have them re-

view problem areas explored in this Unit together, perhaps in the context of the warranty disclaimers discus-

sion in this Focus.

2. Ask students the ethical issues that arise from the license agreements that come with software, and that

often cannot be read until the software has been loaded. Consider, too, the same agreements that come with

a point-and-click contract on the Web. From the different perspectives of the different parties to a

licensing agreement, what are the most important clauses? Are these agreements too one-sided to be

fair?

3. The “battle of the forms” raises an important ethical question: what is a fair and just solution to a

dispute created by differing standard forms? UCC 2–207 provides that a contract can be formed even

though the acceptance includes additional terms. For this reason, some buyers and sellers attempt to draft

their acceptances as “offers” or “counteroffers” (instead of acceptances) to dictate the terms of their contracts.

Under UCC 2–207(3) a contract consists of only those terms on which the parties agree, and all conflicting

terms are stricken from the deal.

Cyberlaw Link

What are the ethical issues in a sale of goods in the context of cyberspace? How do ethical stan-

dards impact e-contract formation, and the attribution and authentication of e-messages?

ADDITIONAL QUESTIONS

1. How does the concept of good faith affect performance under output and requirements contracts?

The concept of good faith implies that a party will not manipulate contract terms to take advantage of another party.

Under output and requirements contracts, quantity is “such actual output or requirements as may occur in good faith.”

4 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS

2. What does the requirement of commercial reasonableness mean? The requirement of commercial

reasonableness means, for example, that a contract term supplied by a party under UCC 2-311 should not come as a

surprise to the other party. (UCC 2-311 provides that when specifics of performance are to be supplied by one of the

parties later, “[a]ny such specification must be made in good faith and within limits set by commercial

reasonableness.”) A party filling in a missing term may not take advantage of the opportunity to add a term that will be

3. What is the ethical principle expressed in the doctrine of commercial impracticability? The ethical

principle expressed in the doctrine is fairness—it would not be fair to excuse a party from its contractual obligation

4. What is emphasized by the UCC’s concept of the good faith purchaser? The concept of the good faith

purchaser emphasizes protecting innocent parties. For instance, one who in good faith buys a television set for a fair

price from someone who appears to have good title is protected from the possibility that a party from whom the seller

5. What kind of sellers do warranty laws protect consumers from? Warranty laws protect consumers from

sellers who choose to neglect ethical concerns if they are doing what is otherwise legal (that is, the law imposes an

made by a seller that goods have certain characteristics. What does the UCC inject into contractual situations

through its recognition of a description as an express warranty? The UCC injects greater fairness into

conform to the description. What other laws impose higher standards on manufacturers? The Magnuson-Moss

6. What ethical premise is the basis for the UCC requirement that warranty disclaimers be conspicuous?

This requirement is based on the ethical premise that sellers should not take advantage of consumers who do not

ACTIVITY AND RESEARCH ASSIGNMENT

There are terms considered omnipresent in the UCC—good faith, commercial reasonableness, uncon–

scionability. These terms regulate all transactions under the UCC. Commercial reasonableness may be determined by

objective factors (course of dealing, usage of trade). Good faith, however, is defined according to a subjective

UNIT FOUR: FOCUS ON ETHICS—DOMESTIC SALES & LEASE CONTRACTS 5

standard (“honesty in fact in the conduct or transaction involved”). Unconscionability is not defined at all. Have

students break into small groups (four to five students in each) and imagine that they are reconsidering the definitions

of these terms for a revised UCC Article 2. How would they define unconscionability? What would they set as

determinants of commercial reasonableness? Would they change the standard for evaluating good faith? Ask

each group to share its revisions with the class.

DOMESTIC SALES AND LEASE CONTRACTS—

 ANSWERS TO THE LEGAL REASONING QUESTIONS 

1. How can a court objectively measure good faith and commercial reasonableness? The concepts of

good faith and commercial reasonableness permeate the UCC and help to prevent unethical behavior by

businesspersons. These two key concepts are read into every contract and impose certain duties on all

parties. Courts frequently look to course of dealing, usage of trade, and the surrounding circumstances in

determining what is commercially reasonable in a given situation.

For example, if the market price of the goods subject to a requirements contract rises rapidly and

dramatically because of an extreme shortage of materials necessary to their production, the buyer could claim

that her needs are equivalent to the seller’s entire output. Then, after buying all of the seller’s output at the

contract price (which is substantially below the market price), the buyer could turn around and sell the goods

that she does not need at the higher market price. Under the UCC, this type of unethical behavior is

prohibited, even though the buyer in this instance has not technically breached the contract.

2. Generally, the courts determine what constitutes “reasonable” behavior in disputes between

contract parties over whether a party has demonstrated commercial reasonableness. Should the UCC

be more specific in defining what will be deemed reasonable in particular circumstances so that the

courts do not have to decide the issue? Why or why not? Reasonability in the formation, performance,

and termination of contracts underlies almost all of the UCC’s provisions. The concept of good faith is closely

linked to commercial reasonableness. All commercial actions—including the performance and enforcement of

contract obligations—must display commercial reasonableness. A merchant is expected to act in a

reasonable manner according to reasonable commercial customs. The reliance of the UCC’s drafters on

commercial customs, or usage of trade, as a guideline to reasonable behavior in a given trade or industry

indicates the importance of good faith and commercial reasonableness in sales law.

Given the omnipresence of these concepts in the UCC, it is not possible to define specifically what would

be deemed reasonable in all of the particular circumstances that might arise under its provisions. There are

too many varieties of courses of dealing, usages of trade, and courses of performance—not to mention the

surrounding circumstances—to even begin a comprehensive list. And these attributes are likely to change

over time. It is a function of the courts to consider these factors and resolve disputes among contract parties

over these issues.

3. Why does the UCC protect innocent persons (good faith purchasers) who buy goods from sellers

with voidable title but not innocent persons who buy goods from sellers with void title? The concept

of the good faith purchaser reflects the UCC’s emphasis on protecting innocent parties. Suppose, for

example, that you innocently and in good faith purchase a boat for a fair market price from someone who

appears to have good title. Under the UCC, you are protected from the possibility that the real owner—from

whom the seller may have fraudulently obtained the boat—will later appear and demand his boat back.

6 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS

But another ethical issue is raised when the purchaser of goods is not quite so innocent. Suppose that

the purchaser has reason to suspect that the seller may not have good title to the goods being sold but

nonetheless goes ahead with the transaction because it is a “good deal.” Has this buyer crossed the

boundary that separates the good faith purchaser from one who purchases in bad faith? This boundary is

important in the law of sales because the UCC will not be a refuge for those who purchase in bad faith. The

term good faith purchaser means just that—one who enters into a contract for the purchase of goods without

knowing, or having any reason to know, that there is anything shady or illegal about the deal.

4. Review the UCC provisions that apply to the topics discussed in Chapters 16 through 19. Discuss

fully how various UCC provisions, excluding the provisions discussed above, reflect social values

and ethical standards. The concepts of good faith and commercial reasonableness permeate the UCC.

They are thereby read into every sales and lease contract, and impose duties on all of the parties.

Reasonability in the formation, performance, and termination of contracts also runs through most of the

UCC’s provisions. Together, the principles help to prevent unethical behavior by businesspersons.

This feature reviews these obligations as they occur in circumstances subject to the UCC’s provisions

governing open terms, output and requirement contracts, commercial impracticability, good faith purchasers,

unconscionability, and warranties. Every other provision of the UCC likewise reflects social values and ethical

standards—from negotiation through compromise, from sale through purchase, from title and risk of loss

through insurable interest, from delivery of conforming goods through payment. All of these rules are based

on honesty and fair dealing, which are integral to our social values and ethical standards.

