Commercial LawClass 7Performance

Professor Rowe

Spring 2015

Broad Course Overview• Article 2 (Sales)

o Scopeo The UCC Take on General Contract Principleso Property Interestso Warrantieso Performanceo Remedieso Rights of Third Parties

• Article 9 (Secured Transactions)o Introductiono Perfectiono Prioritieso Default

§ 2-601: Buyer’s Rights on Improper Delivery

• If the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may reject the whole, accept the whole, or accept any commercial unit(s) and reject the rest.o This is the “perfect tender rule”

• Installment contracts are subject to a different rule. (See § 2-612)

• The parties are always free to contract around this, i.e., by limiting the buyer’s remedies or requiring the buyer to accept goods even if there is a non-conformity.

Limitations on Perfect Tender Rule1. In a shipment contract, failure to make proper contract for

transportation or to notify buyer is a ground for rejection only if material delay or loss ensues. (§ 2-504)

2. Where an agreed manner of delivery becomes commercially impracticable, a commercially reasonable substitute must be tendered and accepted. (§ 2-614(1))

3. In an installment contract, buyer may not reject any installment which is non-conforming if the non-conformity does not substantially impair the value of that installment. (§ 2-612(2))

4. There may be an enforceable agreement that buyer will accept goods even though there is a non-conformity. (§ 2-601)

Limitations on PTR5. Course of dealing, usage of trade, course of performance and the

obligation of good faith may afford some leeway.

6. Seller in appropriate circumstances has the right to cure an improper tender or delivery. (§ 2-508)

7. Buyer, if he does not meet certain procedural requirements, i.e., timely notice of rejection, will have accepted the goods. (§ 2-602(1); § 2-606(1)(b))

8. Buyer, after accepting, may revoke his acceptance (which gives buyer the same rights as if he had rejected the goods), but only if the non-conformity substantially impairs the value of the goods to buyer. (§ 2-608)

§ 2-602: Manner and Effect of Rightful Rejection

• The buyer must reject within a reasonable time after the delivery or tender of the goods. (§ 2-602(1))

• The buyer’s rejection is ineffective unless he seasonably notifies the seller. (§ 2-602(1))

• After rejection, any exercise of ownership by the buyer as to the goods is wrongful as against the seller. (§ 2-602(2)(a))

• If the buyer has taken physical possession of the goods before rejection, he has a duty after rejection to hold the goods with reasonable care for a sufficient time to permit the seller to remove them. (§ 2-602(2)(b))

• The buyer has no further obligations with regard to goods rightfully rejected. (§ 2-602(2)(c))

How to Determine Reasonable Time for Rejection

1. The difficulty of discovering the defect

2. The terms of the contract

3. The relative perishability of the goods

4. The course of performance after the sale and before the formal rejection.

§ 2-603: Merchant Buyer’s Duties As

to Rightfully Rejected Goods

• If the seller has no agent or place of business at the market of rejection, a merchant buyer has a duty after rejection of goods in his possession or control to follow any reasonable instructions received from the seller with respect to the goods. (§ 2-603(1))

• In the absence of instructions from the seller, a merchant buyer must make reasonable efforts to sell the goods for the seller’s account if they are perishable or threaten to decline in value speedily. (§ 2-603(1))

• If the merchant buyer sells the goods, he is entitled to recover his expenses and a reasonable commission. (§ 2-603(2))

§ 2-604: Buyer’s Options As to Salvage

of Rightfully Rejected Goods

• If the seller gives no instructions within a reasonable time after notification of rejection, the buyer may store the rejected goods for the seller’s account, reship them to him, or resell them for the seller’s account. (What Magic West argued in Borges v. Magic West case)

• These actions do not constitute acceptance or conversion.

§ 2-605(1): Waiver of Buyer’s Objections by Failure to Particularize

The buyer’s failure to state in connection with rejection a particular defect which could be ascertained by reasonable inspection precludes him from relying on the unstated defect to justify rejection or establish breach in two circumstances:

o Where the seller could have cured the defect if it had been stated seasonably

o Between merchants, where the seller has after rejection made a written request for a full and final written statement of all defects on which the buyer proposes to rely

§ 2-606: What Constitutes Acceptance of Goods

• Acceptance of goods occurs when the buyer, after a reasonable opportunity to inspect, signifies to the seller that the goods are conforming or that he will take or retain them in spite of their non-conformity. (§ 2-606(1)(a))

• Acceptance also occurs when the buyer fails to make an effective rejection, but not until the buyer has had a reasonable opportunity to inspect the goods. (§ 2-606(1)(b))

 • Acceptance also occurs when the buyer does any act

inconsistent with the seller’s ownership; but if such act is wrongful as against the seller it is an acceptance only if ratified by him [seller]. (§ 2-606(1)(c))

§ 2-607(1), (2): Effect of Acceptance• The buyer must pay at the contract rate for any goods

accepted. (§ 2-607(1))

• Acceptance of goods by the buyer precludes rejection of the goods accepted. (§ 2-607(2))

• If acceptance is made with knowledge of a non-conformity, it cannot be revoked because of the non-conformity unless the acceptance was on the reasonable assumption that the non-conformity would be seasonably cured. (§ 2-607(2))

• Acceptance does not of itself impair any other remedy for non-conformity. (§ 2-607(2))

Borges v. Magic Valley Foods, Inc.

Weil v. Murray

Use After Rejection or Revocation of Acceptance

• General rule is that buyer cannot continue to use the goods. If buyer does, then that is an acceptance. The buyer should return the non-conforming good, purchase a replacement, and sue for breach.

• EXCEPTIONS:o The cost of replacement or inconvenience to buyer is high

(e.g., lemon mobile home in North River, pp. 165-66)o Seller refuses buyer’s return of the goods (e.g., seller

refused the return of labels in Credit Institute, p. 166)o NOTE: This is fact specific, depending on the nature of the

goods.

2-602(1): Reasonable Time for Rejection

• Buyer must reject the goods within a reasonable time after their tender or delivery, or the rejection will be ineffective.

• See Fanok v. Carver Boat, p. 167 (buyer’s use of yacht with minor nonconformities for three months before it was destroyed was an acceptance)

• Reasonable time factors: difficulty of discovering the defect, terms of the contract, relative perishability of the goods, and course of performance after sale and before formal rejection

§ 2-607(3), (4): Notice of Breach; Burden of Establishing Breach

• Where a tender has been accepted, the buyer must within a reasonable time after he discovers or should have discovered any breach notify the seller of the breach or be barred from any remedy. (§ 2-607(3))

• The burden is on the buyer to establish any breach with respect to the goods accepted. (§ 2-607(4))

Hobbs v. General Motors Corp.

Justifications for Notice Requirement

1. Prevent stale claims

2. Allow the seller to marshal evidence for a defense

3. Allow the seller to correct the defect or mitigate damages

Other Rules on Notice• Third-party beneficiaries of consumer warranties who suffer personal

injury do not have to give notice. Filing suit is sufficient, because injury has already occurred.

• Buyers suing on warranties for economic loss must give notice

• Usually notice to retail seller is sufficient for notice to manufacturer

• Notice must be pled in the complaint for economic injury

• Reasonable notice is a question of fact for the jury unless no notice was given (see Hobbs v. General Motors)

• Failure to give timely notice bars buyer from a remedy only to the extent seller was prejudiced

Timeliness of Notice• Mazur Bros. & Jaffe Fish, Inc.

Other Notice Requirements

• See notes pp. 172-74

• Contractual time limits will be usually be upheld unless it deprives buyer of any meaningful remedy

• Must give particularized description of defects (see example at top of p. 173)

• No notice required if seller has actual knowledge of defect in that particular product (seller’s general knowledge of product defects is NOT sufficient; must notify seller that there are problems with that particular transaction is troublesome & must be watched)