Environmental Engineering Chapter 13 October Superior Shipped The Boilers Which Arrived

Chapter 13

THE UCC: SALES AND SECURED

TRANSACTIONS

1

Suggested Additional Assignments

Good Faith

Students should write a short description of realistic commercial behavior that skirts the border between

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.

Ethics Problem: To Seize or Not to Seize

To the Students: You are the manager of a small bank in the western United States. Your bank loaned

$75,000 to a young farmer to help him purchase a tractor, planter, and harvester for his modest–sized

his farm and other assets. What will you do?

Research: Security Interests

Students should assume that they are loan officers. They are considering making a loan to a retail

Research: Financing Statements

Have students pick a local company and look online at the Secretary of State’s Office website for the

UCC filings for that company. To whom does that company owe money? What has been pledged as

collateral and to whom? If you were a loan officer at a bank, what would you look at to determine

whether this company is a good risk?

Chapter Overview

Chapter Theme

The Uniform Commercial Code enables merchants to form contracts quickly and easily. But along with

Development of the UCC

By mid-20th century, two problems had become apparent in the United States.

2 Unit 2 Contracts and the UCC

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.

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.

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:

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 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.

Chapter 13: The UCC: Sales and Secured Transactions 3

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?

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;

Scope Of Article 2

UCC §2-102: Article 2 applies to the sale of goods.1 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

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.

4 Unit 2 Contracts and the UCC

Additional Case: Jannusch v. Naffziger.2

Facts: Gene and Martha Jannusch owned a food concession business and believed they had agreed to sell

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

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

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.

[Application of the UCC]

Defendants argue the UCC should not apply because this case involves the sale of a business

[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.

2 2008 WL 540877, Illinois Court of Appeals, 2008.

Chapter 13: The UCC: Sales and Secured Transactions 5

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

Additional Case: Rapoca Energy Company, L.P. v AMCI Export Corporation3

Facts: Robert Moir, an AMCI executive, met with Rapoca’s officer, Gary Chilcot, at O’Charley’s

3 2001 WL 401424 United States District Court for the Western District of Virginia, 2001

6 Unit 2 Contracts and the UCC

never reached an oral agreement, that the P.O.s were inconsistent as to the quantity of coal, and that the

price was too low for a reasonable seller to have agreed. What is clear is that Rapoca did not respond in

writing to the P.O.s for several months.

Rapoca filed suit, seeking a declaration from the court that it had no contractual obligation to AMCI.

Issues: Did the purchase orders satisfy the statute of frauds?

Holding: Yes. Excerpts from the court’s opinion:

It is clear that there is no writing signed by Rapoca in this case sufficient to indicate that the contracts in

question were made. However, there is an exception to § 2-201. The parties were merchants within the

Some courts have held that a purchase order, particularly with language like this, is more akin to

an offer for a contract, rather than a confirmation of an existing agreement. However, I find from the

undisputed evidence in this case, that the clear trade practice was to use purchase orders such as these to

confirm oral agreements. [The court quoted from Chilcot’s testimony to support this conclusion.] In this

Question: What two issues does the court address?

Answer: (1) Was there a writing sufficient to indicate a contract? and (2) Did the purchase orders

satisfy the merchant exception?

Question: What sections of the UCC does the court look at to resolve these issues?

Answer:UCC section 2-201 requires a writing for any sale of goods worth $500 or more.

Question: The court acknowledges that the purchase orders, by their own terms, require a signature

or some other action by the recipient before they become valid. Rapoca never signed the P.O.s or

took any other step to indicate an oral agreement. Yet the court has found in favor of AMCI anyway.

Why did it do so? Did the court make the right choice?

Answer: The court has ruled that industry practice was to treat the P.O.s not as offers but as

Exceptions

In the following three sets of circumstances, the UCC statute of frauds is “turned off“.

Merchant Exception

Chapter 13: The UCC: Sales and Secured Transactions 7

This is a major change from the common law. When two merchants make an oral contract, and one sends

a confirming memo to the other within a reasonable time, and the memo is sufficiently definite that it

could be enforced against the sender herself, then the memo is also valid against the merchant who

receives it, unless he objects within 10 days.

Specialty Goods Exception

exceeds $500.

Judicial Admission Exception

Case: Delta Star, Inc. v. Michael’s Carpet World.4

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″.

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

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

4 276 Va. 524, Supreme Court of Virginia, 2008.

8 Unit 2 Contracts and the UCC

CODE PROVISIONS DISCUSSED IN THIS CASE

Issue Relevant Code Section

1. Is there a confirmatory memo? UCC 2-201(2)

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

Additional Case: Superior Boiler Works, Inc. v. R. J. Sanders, Inc.5

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

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?

Answer: The parties’ documents disagreed on a critical issue, the delivery date.

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

5 1998 R.I. LEXIS 153 Supreme Court of Rhode Island, 1998

Chapter 13: The UCC: Sales and Secured Transactions 9

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,

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.

UCC §2-309: The time for shipment or delivery if

Additional Case: i.Lan Systems, Inc. v. Netscout Service Level Corp.6

Facts: See summary of facts earlier in this manual.

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

6 183 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

10 Unit 2 Contracts and the UCC

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

[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.

Modification

Another way in which the UCC is pro-contract and pro-business is in its treatment of contract

modifications. If two sides have a contract and seek to make changes, are the changes enforceable? The

Additional Case: You Be the Judge: Marley Cooling Tower Co. v. Caldwell Energy &

Environmental, Inc.7

Facts: Caldwell agreed with Duke/Fluor Daniel (D/FD) to install a power plant cooling system in Aiken,

South Carolina. The contract stated that Caldwell would pay liquidated damages of $5,000 per day if the

system was late. Marley agreed to ship to Caldwell all of the material and equipment needed to build the

Chapter 13: The UCC: Sales and Secured Transactions 11

Marley sent Caldwell a letter, stating “We would like to work with you to resolve this issue.

However, before we can agree to these backcharges, we must have [certain specified] documents.”

Caldwell supplied the documents plus a change order indicating that Marley accepted the backcharges

You Be the Judge: Is Marley obligated to pay the backcharges?

Holding: Marley wins. Excerpts from the court’s opinion: The contract expressly prohibited oral

modifications, and there was no written modification. Caldwell’s only hope is that Marley waived the

writing requirement. But Marley’s conduct did not amount to a waiver. Yes, there was some evidence

that Marley orally agreed to modify. The telephone call is Caldwell’s best evidence. However, when

balanced against the contractual requirement of a writing, and Marley’s refusal to execute a written

modification, one phone call is not enough to create a waiver. (The court also expressed amazement that

Caldwell would agree to a $5,000 per day liquidated damage clause while not taking any steps to protect

itself, such as insurance, or a corresponding clause in the contract with Marley.)

Question: What two issues does this case raise?

Question: What sections of the UCC does the court look at to resolve these issues?

Answer:

§2-209(2): A signed agreement which excludes modification or rescission except by a signed

of subsection (2), it can operate as a waiver.

Question: Could the parties orally modify the contract?

Answer: Oral modification clearly fails under §2-209(2). The contract expressly prohibited oral

Question: Marley indicated some willingness to resolve the dispute. Did its conduct constitute

waiver of the modification prohibition?

Answer: No.

Question: Why not?

Answer: The evidence supporting the argument that Marley waived the prohibition does not

Question: Why isn’t the evidence sufficient to prove that Marley waived the prohibition on

modification?

Answer: The court required something more than Marley’s statement that it “would like to work

Buyer’s Remedies

A buyer has the right to inspect goods before paying for them. The buyer may accept or reject non–

conforming goods. If the buyer rejects the non-conforming goods, the seller has the right to cure, by

delivering conforming goods before the contract deadline, or if reasonable, even shortly after the

deadline.

12 Unit 2 Contracts and the UCC

Case: Hessler v Crystal Lake Chrysler-Plymouth, Inc.8

Facts: The facts are provided in the chapter opening. The trial court awarded Hessler $29,853,

representing the difference between his contract with Crystal Lake and the sum he ultimately spent

purchasing a new Prowler. Crystal Lake appealed, arguing that Hessler covered unreasonably.

Issue: Did Hessler cover reasonably?

Holding: Judgment for Hessler affirmed. Excerpts from the court’s opinion:

The trial court did not err in finding that defendant’s foregoing actions reasonably indicated to plaintiff

UCC §2-712 provides that the test of proper cover is whether at the time and place the buyer

acted in good faith and in a reasonable manner, and it is immaterial that hindsight may later prove that the

method of cover used was not the cheapest and most effective. In light of the evidence concerning

Hessler’s dealings with Rosenberg and his attempts to locate the car from another dealer, we conclude

that the court’s determination that plaintiff effected a proper cover was not against the manifest weight of

the evidence.

Question: The UCC’s cover provision requires the plaintiff act in good faith and a reasonable

manner. Why was Hessler’s conduct reasonable?

Answer: After Rosenberg clearly indicated to Hessler on September 22 that he would not sell him a

Seller’s Remedies

The seller can refuse to deliver goods if the buyer breaches before delivery is due. If the buyer unjustly

refuses to accept or pay for the goods, the seller may resell them. If the resale is commercially

reasonable, the seller may recover the difference (if any) between the resale price and the contract price,

plus incidental damages, minus expenses saved.

8 338 Ill.App.3d 1010, 788 N.E.2d 405, 273 Ill. Dec. 96 Appellate Court of Illinois, 2003

Chapter 13: The UCC: Sales and Secured Transactions 13

Warranties

Products can hurt people, and the law provides many possible remedies for the injured.

The injured party’s remedies may be derived from several legal ideas, including:

Express Warranties

A seller creates an express warranty with words or actions, when she clearly indicates to the buyer that

the goods being sold meet with certain standards.

Sellers often include disclaimers and remedy limitations in the sales contract. A disclaimer is a statement

that a particular warranty does not apply. The Code permits the seller to disclaim most warranties.

Question: What is the difference between a warranty disclaimer and a remedy limitation?

Answer:

• A disclaimer is a statement that a particular warranty does not apply. It determines whether the

Question: Give an example of each.

Answer:

• Warranty disclaimer: “These 1,000 fishing reels are sold with no warranty of merchantability.”

Question: Sellers often include this language: “Sold as is.” What does that mean, legally?

permits this.

Question: Remedy limitations that exclude consequential damages are common. Why do sellers

consider them so important?

Answer: The seller can probably anticipate a buyer’s compensatory damages; they are likely to be

Question: The law prohibits one limitation on consequential damages. What is it?

Question: When is such an exclusion unconscionable?

14 Unit 2 Contracts and the UCC

Answer: Exclusions, like any contract clauses, are unconscionable if shockingly one-sided and

fundamentally unfair.

ignore the limitation.

Question: Does that mean that if a consumer is injured, the company automatically has to pay?

Answer: No. The consumer still must prove negligence or strict liability. It simply means

that the seller may not defeat the claim based on the remedy limitation.

Additional Case: Rite Aid Corp v. Levy-Gray.9

Facts: Ellen Levy-Gray was diagnosed with Lyme disease and prescribed doxycycline. Her doctor told

Ms. Levy-Gray to stop breast feeding her son while she is taking the medication. Ms. Levy-Gray filled

her prescription at a Rite-Aid pharmacy. With the medication was a pamphlet called “Rite Advice”. The

cover page stated “Inside is everything you need to know about your prescription. It covers everything in

writing from dosage to side effects.” Inside the pamphlet it stated:

Ms. Levy-Gray sued Rite Aid for breach of express warranty, claiming the instructions to take the

medication with milk rendered the drug ineffective and caused her chronic condition. Her expert witness

testified that taking dairy products with this drug prevented the drug from being absorbed into the body.

Rite-Aid’s expert testified that any loss of absorption was minimal and had no effect on her treatment.

Rite Aid also claimed that the pamphlet could not have been part of the basis of the bargain because

Levy-Gray did not see it until after she purchased the medication.

The jury found for Levy-Gray and awarded $250,000 in damages. Rite Aid appealed.

Issue: Did Rite Aid breach an express warranty?

Holding: Yes, judgment for Levy-Gray affirmed.

Rite Aid argued that the pamphlet was not part of the basis of the bargain because Ms. Levy-Gray did not

9 391 Md. 698, 894 A.2d 563, Court of Appeals of Maryland, 2006.

Chapter 13: The UCC: Sales and Secured Transactions 15

been part of the basis of the bargain. However, the court held that a jury could have inferred that the

language on the pamphlet encouraged Ms. Levy-Gray to rely on the information contained therein. Thus

the statement “take with food or milk if upset stomach occurs” had the effect of warranting that for as

long as Ms. Levy-Gray was taking the medication, milk would not adversely affect her.

Question: What did Rite Aid expressly warrant to Ms. Levy-Gray?

medication with food or milk and would not be adversely affect by doing so.

Question: How is that an express warranty that dairy products would not adversely affect Ms. Levy–

Gray’s treatment?

Question: But, Ms. Levy-Gray not only took the drug with milk, she was consuming a large amount

of dairy. Does that make a difference?

Question: What is the “learned intermediary” doctrine?

Answer: The “learned intermediary” doctrine is a theory that explains the relationship between drug

Question: Why does Rite Aid raise this theory?

taking the drug, not the advice of the Rite Aid pharmacist.

Question: What did the court think about that argument?

Implied Warranties

Implied Warranty of Merchantability.“Merchantability” is a concept most non-lawyers are not familiar

with. It means that goods are fit for their normal purposes.

Case: Goodman v. Wenco Foods, Inc.10

Facts: Fred Goodman bit into a Wendy’s hamburger and was injured by a triangular piece of cow bone,

about one-sixteenth to one-quarter inch thick and one-half inch long. The restaurant purchased all of its

meat from Greensboro Meat Supply Company (GMSC). Wendy’s specifications required its meat to be

chopped and “free from bone or cartilage in excess of 1/8 inch in any dimension.” GMSC beef was

inspected continuously by state regulators and was certified by the United States Department of

Agriculture. The USDA considered any bone fragment less than three-quarters of an inch long to be

“insignificant.”

Goodman sued, claiming a breach of the implied warranty of merchantability. The trial court

10 333 N.C. 1, 423 S.E.2d 444, 1992 N.C. LEXIS 671 Supreme Court of North Carolina, 1992