978-1285860381 Chapter 23 Solution Manual Part 1

Unlock access to all the studying documents.

View Full Document

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 10 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 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.

In the following case, the contract was clear, but one party’s behavior was opaque. Was it bad faith? You

be the judge.

You Be The Judge: The Burton Corp. v. Shanghai ViQuest

Precision Industries Co.

Facts: Burton is a Vermont-based designer, manufacturer, and seller of snowboards. ViQuest is a

manufacturer of injection-molded products based in Shanghai, China. Burton and ViQuest contracted for

ViQuest to manufacture Burton’s snowboard bindings.

The agreement also contained the following provisions:

1. The agreement’s initial term was one year, with automatic successive one-year renewals.

2. Burton could terminate the Agreement at any time if it determined that “ViQuest’s financial

position posed a risk to Burton’s business.”

3. Any dispute between the parties would go to arbitration.

The agreement automatically renewed for a second one-year period. Things appeared to be going well

until, two months later, when Burton unexpectedly terminated the agreement, claiming that “ViQuest’s

financial position” was too risky. However, the opposite seemed to be true: Burton owed ViQuest

approximately $1.8 million in unpaid purchase orders, which it refused to pay.

An arbitration panel ruled for ViQuest after it determined that Burton’s reasons for terminating the

contract lacked any basis in fact and was in bad faith. Burton asked that the court vacate the award,

claiming the arbitrators misconstrued the contract by imposing an additional duty to prove that ViQuest

was indeed risky. A court reviewed the panel’s decision.

Issue: Did Burton’s terminate the contract in bad faith?

You be the Judge:

Argument for Burton: Business is business. Contracts are contracts. And the contract language is clear:

Burton had the right to terminate at any time if it determined that “ViQuest’s financial position posed a

risk.” Burton had no duty to prove how it reached this conclusion or whether it was reasonable. It was

simply a business decision—an area where courts and arbitrators should not meddle. The arbitrators

exceeded their authority by reading into the contract a requirement to prove that ViQuest was financially

challenged. This decision was based what the arbitrators thought the contract should have said, not on the

actual terms of the deal. Stick to the contract.

Argument for ViQuest: The UCC imposes a covenant of good faith and fair dealing in the performance

and enforcement of every contract—including this one. This duty is implicit. Burton argues that the

contract allowed it to terminate if it unilaterally determined ViQuest’s financial position was risky—a

determination it reached based on . . . nothing. In effect, Burton is saying that it could, at its whim,

terminate the contract at any time just by saying so, without producing any reason or evidence. But that is

not what the contract said. And it should not be interpreted that way. Burton terminated the contract in bad

faith and, as such, is sledding on very thin ice.

Holding: Judgment for ViQuest. The district court found that Burton did not provide an adequate basis to

vacate the arbitral panel’s conclusion. Burton did not have reasonable grounds to terminate the Agreement

and breached its duty of good faith and fair dealing under the UCC.

Question: In general, what does “good faith” mean?

Question: What does “good faith” mean between merchants?

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 nonconforming

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?

Answer: Murphy created express warranties by showing swatches of the robe material and by

Question: What was the cause of the nonconformities?

1 2004 WL 23150323 Court of Appeals of Ohio, 2004

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 partially destroyed, the buyer may choose whether to accept the goods at a reduced

price or void the contract. 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.

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 non-conformity 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.

Case: Lile v. Kiesel2

Facts: Edward and Kelly Kiesel bought a trailer from James Lile, the owner of Lile’s Trailer Sales. 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 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.

2 871 N.E.2d 995, Indiana Court of Appeals, 2007.

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 trailer’s 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

non-conformity substantially impairs the value of the good, and the non-conformity 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. 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, or

• 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 & Sons3

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 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.

3 1994 U.S. Asp. LEXIS 4976 Circuit Court of Appeals for the Seventh Circuit, 1994

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 nonconforming? 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

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

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?