Suggested Additional Assignments
Good Faith
Students should write a short description of realistic commercial behavior that skirts the border between
lawful, aggressive business dealing and bad faith. Students should know in their own mind whether or
not the behavior is legitimate. Students will then exchange examples, read them out loud, and analyze
each other’s cases.
Drafting: UCC 2-207
Students should draft a short offer form to be used by the seller of goods. Students must include specific
terms on (1) price, (2) time and place of delivery, (3) method of payment, and (4) warranties. Students
must do their best to ensure that any resulting contract includes only these terms.
Harold and Maude (example of commercial contracts and UCC,
Facts: Harold and Maude were compulsive entrepreneurs. Harold negotiated a deal to sell 50 acres in
Texas for $300,000 more than it’s worth to a real estate developer in San Antonio. Maude bargained with
a toy manufacturer in Cleveland, to buy toy robots for five bucks each.
Issue: Maude scrawled a handwritten memo, which said, “Confirming our deal—100,000 Psychopath
Robots—you deliver Chicago—end of summer.” She didn’t mention a price, or an exact delivery date, or
when payment would be made. She signed her memo and faxed it to the toy manufacturer. Harold typed a
contract, describing precisely the land he was selling, the $2.3 million price, how and when each payment
would be made and the deed conveyed. He signed the contract and faxed it, along with a plot plan
showing the surveyed land.
Holding: Neither Harold nor Maude ever heard again from the other parties. The toy manufacturer sold
the Psychopath Robots to another retailer at a higher price. She sued. And the Texas property buyer
changed his mind, deciding to develop a Club Med in Greenland and refusing to pay Harold for his land.
He sued.
Question: Only one of the two plaintiffs succeeded. Which one?
Question: Why did Maude’s claim succeed?
Answer: Maude’s memorandum concerning psychotic robot toys was for the sale of goods and was
Question: Why did Harold’s claim fail?
Answer: Harold’s contract was for the sale of land and governed by the common law of contracts. The
common law statute of frauds requires any agreement for the sale of land to be in writing and signed by
Chapter Overview
Chapter Theme
The Uniform Commercial Code enables merchants to form contracts quickly and easily. But along with
this increased facility goes greater responsibility, as informal discussions may suddenly turn into a
contract.
Development of Commercial Law
By mid-20th century, two problems had become apparent in the United States.
1. Old contract law principles often did not reflect modern business practices.
2. Laws had become different from one state to another.
The UCC was created as an attempt to solve these two problems. It was a proposal written by legal
scholars and not a law drafted by members of Congress or state legislatures.
Additional Case: i.Lan Systems, Inc. v. Netscout Service Level Corp.1
Note: This case is presented here for the court’s explanation of its rationale to apply the UCC to a
software license. This case is also on p. 220 of this manual with the discussion of UCC §2-207.
Facts: i.LAN Systems, Inc. (“i.LAN”), helps companies monitor their computer networks. NetScout
Service Level Corp., formerly known as NextPoint Networks, Inc. (“NextPoint”), sells sophisticated
software that monitors networks. In 1998, i.LAN and NextPoint signed a detailed Value Added Reseller
(“VAR”) agreement whereby i.LAN agreed to resell NextPoint’s software to customers. This dispute
concerns a transaction that took place in 1999.
i.LAN claims that for $85,231.42 it purchased the unlimited right to use NextPoint’s software, replete
with perpetual upgrades and support, whereby it effectively could rent, rather than sell, NextPoint’s
software to customers. In support of its argument, i.LAN points to the purchase order associated with the
transaction. NextPoint, in response, points to the 1998 VAR agreement and the clickwrap license
agreement contained in the software itself to reach a different conclusion.
The parties continued their relationship for several months without confronting their conflicting
interpretations of the 1999 purchase order, but eventually the disagreement erupted into litigation. i.LAN
filed a complaint that alleges breach of contract. Both parties moved for summary judgment, i.LAN
arguing that it should be awarded specific performance—perpetual upgrades of NextPoint’s software and
unlimited support—and NextPoint arguing that even if i.LAN’s allegations were true, the clickwrap
license agreement limits NextPoint’s liability to the price paid for the software: $85,231.42.
Issue: What law should the court apply to resolve this conflict over the terms of clickwrap license
agreements for software?
Holding: The court held that it would interpret the clickwrap license pursuant to Article 2 of the UCC:
Two bodies of contract law might govern the clickwrap license agreement: Massachusetts common
law and the Uniform Commercial Code. Article 2 of the UCC applies to “transactions in goods.”
The purchase of software might seem like an ordinary contract for the sale of goods, but in fact the
purchaser merely obtains a license to use the software; never is there a “passing of title from the seller
to the buyer for a price.” Despite Article 2’s requirement of a sale, courts in Massachusetts have
assumed, without deciding, that Article 2 governs software licenses.
The Court will examine the license agreement through the lens of the UCC. The UCC technically
does not govern software licenses, and very likely does not govern the 1998 VAR agreement, but with
respect to the 1999 transaction, the UCC best fulfills the parties’ reasonable expectations.
In Massachusetts and across most of the nation, software licenses exist in a legislative void.
Legal scholars, among them the Uniform Commissioners on State Laws, have tried to fill that void,
but their efforts have not kept pace with the world of business. [The court discussed the unsuccessful
attempts to address software licenses through a new UCC Article 2B and the Uniform Computer
Information Transactions Act (“UCITA”).] Software licenses are entered into every day, and business
1 183 F. Supp. 2d 328; 2002 U.S. Dist. LEXIS 209; 68 U.S.P.Q.2D (BNA) 1832; 46 U.C.C. Rep. Serv. 2d
(Callaghan) 287 United States District Court for the District of Massachusetts, 2002
persons reasonably expect that some law will govern them. For the time being, Article 2’s familiar
provisions — which are the inspiration for UCITA — better fulfill those expectations than would the
common law. Article 2 technically does not, and certainly will not in the future, govern software
licenses, but for the time being, the Court will assume it does.
Question: What is the basis for i.LAN’s and NextPoint’s dispute?
Question: What law governs the software licenses in question?
Question: Then what law does the court use to resolve the dispute?
Question: Why?
Answer: Because business people are familiar with Article 2. The court decides that even though
Question: Do you mean the court ignores the common law—which arguably should apply in the
absence of any software license-specific legislation to the contrary—and applies Article 2 of the
UCC, which the court acknowledges does not apply to software licenses?
UCC Basics
Code’s Purpose
The Uniform Commercial Code proclaims its purposes clearly:
UCC §1-102(2): Underlying purposes and policies of this Act are
(a) to simplify, clarify and modernize the law governing commercial transactions;
(b) to permit the continued expansion of commercial practices through custom, usage and agreement
of the parties;
(c) to make uniform the law among the various jurisdictions.
Scope Of Article 2
UCC §2-102: Article 2 applies to the sale of goods. Goods are things that are movable, other than
money and investment securities.
Mixed Contracts
In a mixed contract involving sales and services, the UCC will govern if the predominant purpose is
the sale of goods, but the common law will control if the predominant purpose is services.
Merchants
The UCC frequently holds a merchant to a higher standard of conduct than a non-merchant. For
example, a merchant may be held to an oral contract if she received written confirmation of it, even
though the merchant herself never signed the confirmation.
Good Faith and Unconscionability
The UCC imposes a duty of good faith in the performance of all contracts. For non-merchants, good
faith means honesty in fact. For a merchant, good faith means honesty in fact plus the exercise of
reasonable commercial standards of fair dealing. A contract may be unconscionable if it is shockingly
one-sided and fundamentally unfair.
Contract Formation
Formation Basics: Section 2-204
UCC §2-204 provides three important rules that enable parties to make a contract quickly and informally:
1. The parties may make a contract in any manner sufficient to show that they reached an agreement.
2. The UCC will enforce a deal even though it is difficult, in common law terms, to say exactly when it
was formed.
3. Under the UCC, a court may enforce a bargain even though one or more terms were left open.
Case: Jannusch v. Na0ziger.2
Facts: Gene and Martha Jannusch owned a food concession business and believed they had agreed to sell
it to Lindsey and Louann Naffziger. When the Naffzigers backed out, the Jannuschs sued. The trial court
ruled that there had been no meeting of the minds, and thus no contract. The Jannuschs appealed.
Because the court’s decision refers to its exposition of the facts, we will allow a judge to explain what
happened.
Issues: Does the common law govern or the UCC? Did the parties form a contract?
Excerpts from Justice Cook’s Decision: Plaintiffs operated a business, Festival Foods, which
served concessions at festivals and events throughout Illinois and Indiana. The assets included a truck
and servicing trailer and equipment such as refrigerators, roasters, chairs and tables, and lighting
equipment.
Defendants were interested in purchasing the concession business, met several times with
plaintiffs, and observed the business in operation. Gene testified that plaintiffs entered into an oral
agreement to sell Festival Foods to defendants for $150,000. Defendants would receive the truck and
trailer, all necessary equipment, and the opportunity to work at event locations secured by plaintiffs.
Defendants paid $10,000 immediately, with the balance to be paid when defendants received their
loan money from the bank. Defendants took possession of Festival Foods the next day and operated
Festival Foods for the remainder of the season.
Louann acknowledged testifying during a deposition that an oral agreement to purchase Festival
Foods for $150,000 existed but later testified she could not recall specifically making an oral
agreement on any particular date. Lindsey testified she and Louann met with plaintiffs and paid the
$10,000 for the right to continue to purchase the business because plaintiffs had another interested
buyer. According to Lindsey, Gene suggested the parties sign something and she replied that
defendants were “in no position to sign anything” because they had not received any loan money
from the bank and did not have an attorney. Lindsey admitted taking possession of Festival Foods,
receiving the income from the business, purchasing inventory, replacing equipment, paying taxes on
the business and paying employees.
Defendants operated six events. Gene attended the first two festivals with defendants, who paid
him $10 an hour. Two days after the business season ended, defendants returned Festival Foods to the
storage facility where it had been stored by Gene. Lindsey testified one of the reasons defendants
returned Festival Foods was because the income from the events they operated was lower than
expected.
2 2008 WL 540877, Illinois Court of Appeals, 2008.
[Application of the UCC]
Defendants argue the UCC should not apply because this case involves the sale of a business
rather than just the sale of goods. The “predominant purpose” test is used to determine whether a
contract for both the sale of goods and the rendition of services falls within the scope of article 2 of
the UCC. Certainly significant tangible assets were involved in this case. The evidence presented in
this case was sufficient to support the conclusion that the proposed agreement was predominantly one
for the sale of goods.
[Formation of Contract]
Defendants argue that nothing was said in the contract about allocating a price for good will, a
covenant not to compete, allocating a price for the equipment, how to release liens, what would
happen if there was no loan approval, and other issues. Defendants argue these are essential terms for
the sale of a business.
A contract may be enforced even though some contract terms may be missing or left to be agreed
upon, but if the essential terms are so uncertain that there is no basis for deciding whether the
agreement has been kept or broken, there is no contract.
The essential terms were agreed upon in this case. The purchase price was $150,000, and the
items to be transferred were specified. No essential terms remained to be agreed upon; the only action
remaining was the performance of the contract. Defendants took possession of the items to be
transferred and used them as their own.
Louann admitted there was an agreement to purchase Festival Foods for $150,000 but could not
recall specifically making an oral agreement on any particular date. An agreement sufficient to
constitute a contract for sale may be found even though the moment of its making is undetermined.
Returning the goods at the end of the season was not a rejection of plaintiffs’ offer to sell, it was a
breach of contract.
We conclude there was an agreement to sell Festival Foods for the price of $150,000 and that
defendants breached that agreement. Reversed and remanded.
Question: What is the predominant purpose test?
Question: Why is this important?
Question: What is the point the Naffziger’s are making, albeit unsuccessfully, about the predominant
purpose of the contract?
Answer: The Naffziger’s are saying that because the contract included the sale of a business, the
Question: Why does the court disagree?
Answer: The court concluded although the contract did include the sale of a business, it also
Question: What evidence was there that the Naffziger’s intended to form an agreement to buy
Festival Foods?
Answer: According to the court, the Naffziger’s took possession of Festival Foods, operated it for
Statute of Frauds
UCC §2-201 requires a writing for any sale of goods worth $500 or more. However, under the UCC, the
writing need not completely summarize the agreement, and it need not even be entirely accurate. The
Code only requires a writing sufficient to indicate that the parties made a contract. In other words, the
writing need not be a contract. If the writing demonstrates the two sides reached an agreement, it satisfies
§2-201 even if it omits important terms or states them incorrectly. But one term is essential: quantity. The
Code will enforce the contract only up to the quantity of goods stated in the writing.
Case: Delta Star, Inc. v. Michael’s Carpet World.3
Facts: Ivan Tepper, the CEO of Delta Star, met with the sales manager at Michael’s, a flooring company.
In a verbal agreement, he hired Michael’s to install carpet in the entryway of his office suite, and tile in
his personal office and the office of Nash, his assistant.
Michael’s faxed Delta Star a purchase order which read, “Carpet for entrance to lobby, $832.22”.
Michael’s installed the carpet and Delta Star paid the $832.22. But, Delta Star sought to cancel part of the
remaining work installing tile, and Michael’s sued.
At trial, Delta Star argued that, because the tiling was priced at more than $500, the UCC statute of
frauds made the agreement unenforceable. The trial court disagreed, holding that the tile was specially
manufactured, because Michael’s had never ordered that type of tile for a customer before. The lower
court also determined that Delta Star had admitted the existence of the contract in its testimony, and that
the purchase order amounted to a writing in any event. Michael’s was awarded $2,565 in damages, and
Delta Star appealed.
Issue: Was the contract enforceable?
Excerpts from Judge Stephenson’s Decision: We first consider the trial court’s finding that the flooring
materials were specially manufactured goods or products for [Delta Star] and not readily suitable for sale
[to] others in the ordinary course of [Michael’s] business. The flooring materials chosen by Delta Star
were selected from samples displayed, were not altered in any way to suit only Delta Star, and were
suitable for sale to others in Michael’s ordinary course of business. Therefore, the flooring materials were
not “specifically manufactured” for Delta Star.
We next consider the trial court’s finding that there exists a confirmatory writing establishing an
enforceable contract. We do not agree that such a writing exists. At trial, Michael’s contended that its
invoice for the purchase and installation of flooring in Delta Star’s entryway constituted confirmatory
writings. [It] cannot serve as confirmation of a contract for the purchase and installation of flooring in
Tepper’s office. The invoice confirms only the parties’ agreement with regard to the entryway flooring.
Finally, we consider the trial court’s ruling that Delta Star admitted in its testimony the existence of a
contract for the purchase and installation of flooring in Tepper’s office. At trial, Michael’s contended that
Nash’s testimony regarding her attempt to cancel that portion of the alleged contract dealing with
Tepper’s office constituted an admission that a contract existed because “you can’t cancel something
unless you’re admitting that you got a contract and you want to cancel it.” Delta Star contends that Nash
did not admit that there existed a contract for the purchase and installation of flooring in Tepper’s office.
We agree with Delta Star. A review of Nash’s trial testimony reveals that she stated that Delta Star
“didn’t want to act on the estimate” [and] that Delta Star “hadn’t agreed to . . . order [the flooring for
Tepper’s office] yet.” Therefore, Nash did not admit the existence of a contract for the purchase and
installation of flooring in Tepper’s office. For the foregoing reasons, we hold that the trial court
3 276 Va. 524, Supreme Court of Virginia, 2008.
erred in overruling Delta Star’s Statute of Frauds defense and in finding that an enforceable contract
existed between Michael’s and Delta Star for the purchase and installation of flooring in Tepper’s office.
Reversed.
Question: Did the court find that the specialty goods exception applied in this case?
Question: Did the court find that the judicial admission exception applied in this case?
Question: Did the court find a sufficient memo for the merchant exception to apply?
CODE PROVISIONS DISCUSSED IN THIS CASE
Issue Relevant Code Section
1. Is there a confirmatory memo? UCC 2-201(2)
2. Has the buyer ordered specialty goods? UCC 2-201(3)(a)
3. Did the buyer admit in its testimony that an agreement existed? UCC 2-201(3)(b)
Added Terms: Section 2-207
UCC Section 2-207 deals with the “battle of the forms” that can arise when a buyer places an order using
its pre-printed form and the seller acknowledges with its own pre-printed form. Each party’s form
contains self-serving language, so the two forms rarely agree. Section 2-207 establishes the legal
consequences of such conflicting forms.
Note that Chapter 11, Agreement, discusses §2-207 in more detail.
Case: Superior Boiler Works, Inc. v. R. J. Sanders, Inc.4
Facts: R. J. Sanders, Inc. had a contract with the federal government to install the heating system at a
federal prison camp. The company negotiated with Superior Boiler Works to purchase three large
commercial units. On March 27, Superior sent a proposal to Sanders, offering to sell three boilers for a
total of $156,000, estimating time of delivery at four weeks. The parties exchanged further documents
and held various discussions. Finally, on July 20, Sanders sent a “purchase order” for three boilers,
agreeing to pay $145,827 and stating “Date required: 4 Weeks,” that is, August 20. On August 6, Superior
sent a “sales order,” agreeing to sell the three boilers at that price, but providing a shipping date of
October 1. This later delivery date forced Sanders to rent temporary boilers at a cost of $45,315. On
October 1, Superior shipped the boilers, which arrived on October 5. Sanders sent a check in the amount
of $100,000, claiming that Superior had delivered the boilers late and deducting the cost of its rental
equipment. Superior sued for the additional $45,000 and moved for summary judgment, which the trial
court granted. Sanders appealed, claiming that the contract had required Superior to deliver the boilers
within four weeks.
4 1998 R.I. LEXIS 153 Supreme Court of Rhode Island, 1998
Issue: Did Superior’s October delivery breach the contract?
Holding: Judgment for Superior affirmed. The documents agreed on all important provisions except one
(the date of delivery) and therefore the parties did form a contract. UCC 2-207 determines what happens
when terms conflict. States take differing approaches on this, but Rhode Island will side with the
majority, adopting the knock-out rule, whereby conflicting terms knock each other out, leaving a hole to
be filled by a Code gap-filler provision. UCC 2-309 provides that the delivery time, if not specified, is a
reasonable time. It is true that this may result in a delivery time that neither party wanted. However, the
parties are experienced merchants and could protect against this by making acceptance conditional on
assent to a particular term. Judging by industry standards, Superior’s delivery time was reasonable, and
the company is entitled to full payment.
Question: How did this lawsuit arise?
Question: Why didn’t the parties clear up the disagreement before going ahead with the deal?
Answer: Business people very frequently plow ahead with a deal, even when there is fairly obvious
Often, one or both parties spot the disagreement but ignore it, eager to make the deal and
Question: Sanders explicitly said it needed the boilers in August. Superior did not deliver until
October, yet the court is ruling that Superior wins. How can that be fair? Why shouldn’t Sanders get
what it ordered?
Answer: In the real world of business, parties don’t always get just what they want, and courts know
Question: How could Sanders have protected itself?
Answer: If Sanders could not tolerate any delivery date but the one it requested, it should have said,
delivery date or we will not purchase the equipment.”
CODE PROVISIONS DISCUSSED IN THIS CASE
Issue Relevant Code Section
1. Which are the terms of this agreement? UCC §2-207: Additional terms generally but not
always become part of the bargain. Different terms
generally cancel each other out.
2. What is the Code’s gap-filler provision
concerning delivery?
UCC §2-309: The time for shipment or delivery if
not agreed upon is a reasonable time.
3. What is a “reasonable” delivery time? UCC §1-204: A “reasonable” time depends on the
nature, purpose, and circumstances of the action.
Additional Case: i.Lan Systems, Inc. v. Netscout Service Level Corp.5
Facts: See summary of facts earlier in this manual.
5 183 F. Supp. 2d 328; 2002 U.S. Dist. LEXIS 209; 68 U.S.P.Q.2D (BNA) 1832; 46 U.C.C. Rep. Serv. 2d
(Callaghan) 287 United States District Court for the District of Massachusetts, 2002
Issue: Are the clickwrap license agreements enforceable?
Holding: Yes. Excerpts from the court’s opinion:
The clickwrap license agreement may be analyzed as either (i) forming a contract under UCC section
2-204 or (ii) adding terms to an existing contract under UCC section 2-207. If the proper analysis is
pursuant to UCC section 2-204, the analysis is simple: i.LAN manifested assent to the clickwrap
license agreement when it clicked on the box stating “I agree,” so the agreement is enforceable.
If the proper analysis is pursuant to UCC section 2-207, the analysis is more complicated. UCC
section 2-207 creates two forks in the road for the facts of this case. The first fork is whether or not
the clickwrap license agreement is a counteroffer — an acceptance to i.LAN’s purchase order
“expressly made conditional on assent to the additional or different terms,” here the additional terms
limiting NextPoint’s potential liability. The second fork is whether i.LAN accepted the additional
terms explicitly, implicitly, or by default. Finally, if the additional terms are not accepted either
explicitly or implicitly, but the conduct of the parties shows recognition of a contract, then the
gap-filler provisions of Article 2 kick in to fill the void with default terms.
With respect to the first fork, the clickwrap license agreement is best characterized as a
counteroffer, as its language mirrors the language provided after the comma in UCC section 2-207(1).
The first fork only has importance, however, if the parties disagree over the additional terms. i.LAN’s
purchase order was silent on the issue of liability, so NextPoint proposed additional terms which it
characterized as a counteroffer. If the original offer is silent on the issue of the additional terms, and
no objection ever is made to them, then it should not matter whether the additional terms are part of a
counteroffer or a proposal. All that should matter is whether i.LAN accepted the additional terms.
Article 2 does not limit liability by default, so if i.LAN accepted the clickwrap license agreement it
must have done so either explicitly, by clicking on “I agree,” or implicitly, as provided in UCC
section 2-207(2).
[The court reviewed the clickwrap license under Step-Saver Data Systems, Inc. v. Wyse
Technology, 939 F.2d 91 (3d Cir. 1991) and ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996).]
The analytical difference between Step-Saver and ProCD is whether “money now, terms later” forms
a contract (i) at the time of the purchase order or (ii) when the purchaser receives the box of software,
sees the license agreement, and does not return the software. If the purchase order is the contract,
UCC section 2-207 applies and material terms cannot be added to the contract without explicit assent.
If the contract is not formed until after the purchaser sees the shrinkwrap license agreement, UCC
section 2-204 applies and the act of keeping the software implicitly shows assent.
i.LAN explicitly accepted the clickwrap license agreement when it clicked on the box stating “I
agree.” Even if the Court were to agree with i.LAN that UCC section 2-207 governs, the Court would
hold that i.LAN implicitly accepted the clickwrap license agreement because its additional terms were
not material. The 1998 VAR agreement contains warranty disclaimers and limitations of liability
nearly identical to those found in the clickwrap license agreement. The 1998 VAR agreement also
incorporates the clickwrap license agreement by reference and specifically states that NextPoint’s
liability to end users of the software will be limited by the clickwrap license agreement. Finally,
i.LAN had installed the software on many occasions before the transaction in 1999, and each time
i.LAN necessarily ran across the clickwrap license agreement. NextPoint consistently included a
warranty disclaimer and limitation of liability in every contract it made.
NextPoint’s cross-motion for partial summary judgment was allowed. The Court held that if i.LAN were
to prevail on any of its other claims, it would be entitled to recover no more than the amount it paid for
the software license at issue, to wit, $85,231.42.
Open Terms: Section 2-305 and 2-306
The following case deals with UCC §§2-305 & 2-306. Under §2-305, the parties may conclude a contract
even though they have not settled the price. Under §2-306, an output contract obligates the seller to sell
all of his output to the buyer, who agrees to accept it.