End of Chapter Questions for Text: LA450

Chapters 19, 18, 20, 21, 22, 23.

Chapter 19:1. In the Quake case, the appellate court ruled:

(a) The Letter of Intent was a valid contract.(b) Letters of Intent are never a valid contract.(c) A Letter of Intent can be a valid contract, but this one was not. (d) The trial court had to determine if the Letter of Intent was a valid contract.Answer: D.

2. In the Cipriano case: (a) The jury decided in favor of Cipriano because arson is vandalism.(b) The jury decided against Cipriano because arson is not vandalism.(c) The judge dismissed the motion for summary judgment because the contract was ambiguous.(d) The judge granted the motion for summary judgment because the contract was not ambiguous. Answer: C.

3. In the case of a scrivener’s error:(a) A court will not reform the contract. The parties must live with the document they signed.(b) A court will reform the contract if there is clear and convincing evidence that the clause in

question does not reflect the true intent of the parties.(c) A court will reform the contract if a preponderance of the evidence indicates that that the clause

in question does not reflect the true intent of the parties.(d) A court will invalidate the contract in its entirety.Answer: B.

4. In the LeMond case, the court ruled:(a) PTI’s failure to supply marketing and media plans was a material breach of the contract because,

without those plans, LCI could not monitor sales.(b) PTI’s failure to supply marketing and media plans was a material breach of the contract because

PTI had agreed to supply the plans.(c) The requirement that PTI use commercially reasonable means to promote the Product Line was

not enforceable because the term was ambiguous.(d) PTI’s failure to supply marketing and media plans was not a material breach of the contract.Answer: D.

5. A contract states (1) that Buzz Co. legally exists and (2) will provide 2,000 lbs. of wild salmon each week.

(a) Clause 1 is a covenant and Clause 2 is a representation. (b) Clause 1 is a representation and Clause 2 is a covenant. (c) Both clauses are representations.(d) Both clauses are covenants.Answer: B.

Essay Questions1. List three types of contracts that should definitely be in writing. and one that probably does not need

to be. Answer: Should be in writing: The sale of stock, a merger agreement, the sale of land, anything that falls under the statute of frauds. Need not be in writing:: an agreement with friends in which not much money is involved – to chip in to buy a present together. It is with someone with whom you have an on-going relationship and who has proved to be trustworthy in the past, and you can afford the loss – a routine supplier. You do not have time to do a proper written contract and you would prefer to bear the risk of loss over the risk of not getting the deal done.

2. Make a list of provisions that you would expect in an employment contract.Answer: Duties, Status (job title), period of employment, full-time and energy, compensation – fixed and incentive, stock options, perquisites, vacation, termination without cause, for cause, for death or disability, by the employee, compensation after termination, covenant not to compete, trade secrets, confidential information, solicitation of customers, boilerplate provisions.

3. List three provisions in a contract that would be material and three that would not be. Answer: Material: payment, item to be sold or services to be rendered, term of the contract, not material: notices, choice of law, arbitration, attorney’s fees.

4. Slimline and Distributor signed a contract which provided that Distributor would use reasonable efforts to promote and sell Slimline’s diet drink. Slimline was already being sold in Warehouse Club. After the contract was signed, Distributor stopped conducting in-store demos of Slimline. It did not repackage the product as Slimline and Warehouse requested. Sales of Slimline continued to increase during the term of the contract. Slimline sued Distributor, alleging a violation of the agreement. Who should win?Answer: The issue is whether Distributor used “reasonable efforts.” The fact that sales increased is irrelevant.

5. You Be the Judge: WRITING PROBLEM Chip bought an insurance policy on his house from Insurance Co. The policy covered damage from fire but explicitly excluded coverage for harm caused “by or through an earthquake.” When an earthquake struck, Chip’s house suffered no fire damage but the earthquake caused a building some blocks away to catch on fire. That fire ultimately spread to Chip’s house, burning it down. Is Insurance Co. liable to Chip? Argument for Insurance Co.: The policy could not have been clearer or more explicit. If there had been no earthquake, Chip’s house would still be standing. The policy does not cover his loss. Argument for Chip: His house was not damaged by an earthquake, it burned down. The policy covered fire damage. If a contract is ambiguous, it must be interpreted against the drafter of the contract.

Answer: Chip won. The court ruled that the provision was ambiguous and so should be interpreted against the drafter – in this case Insurance Co.

Discussion Questions1. In the movie contract, which side was the more successful negotiator? Can you think of any terms

that either party left out? Are any of the provisions unreasonable? Answer: Answers will vary.

2. What are the advantages and disadvantages of hiring a lawyer to draft or review a contract?Answer: Advantages: Lawyers understand the law. They can protect you against unexpected events in the future. They can be the “bad guys” in negotiations – you can blame them for playing hardball. Important signal to the other side that you are well-protected. Contracts are more likely to be internally consistent without obvious mistakes. Less likely to make typographical errors. Disadvantages: Lawyers cost time and money.

3. What are the penalties if Artist breaches the movie contract? Why are the penalties so light? Answer: Producer does not have to pay Artist any further compensation but Artist gets to keep what he has been paid to date. No Producer wants a reputation for playing hardball with an actor. (Note that even for a drug violation, Artist gets one free pass.) Los Angeles is a city of second chances. Many actors have behaved badly on one movie, only to be a star in the next one. If, for whatever reason, Artist decides he is not interested in completing the movie, it is unlikely the movie will turn out well if Producer forces him to continue.

4. ETHICS In the Heritage case, the two companies had agreed to $.01. When Heritage’s lawyer pointed out to his client the change to $.10, the Heritage officer did not tell Phibro. The change was subtle in appearance but important in its financial impact. Was Heritage’s behavior ethical? When the opposing side makes a mistake in a contract, do you have an ethical obligation to tell them? What principles would you apply in this situation?Answer: Answers will vary.

5. Blair Co.’s top officers approached an investment bank to find a buyer for the company. The Bank sent an engagement letter to Blair with the following language:If, within 24 months after the termination of this agreement, Blair is bought by anyone with whom Bank has had substantial discussions about such a sale, Blair must pay Bank its full fee. Is there any problem with the drafting of this provision? What could be done to clarify the language?Answer: Answers will vary. This case ended up in litigation over the definition of the word “substantial.” Litigation is never a happy result.

Bonus Exam Strategy

Question: The nudity provision in the movie contract is vague. Rewrite it so that it accurately expresses the agreement between the parties.

Strategy: This is easy! Just say what the parties intended the deal to be.

Result: “The script for the Picture includes scenes showing Artist (a) with frontal nudity from the waist up and with rear below-the-waist nudity (but no frontal below-the-waist nudity) and (b) in simulated sex scenes. However, no scenes shall be shot in which Artist’s buttocks and/or genitalia are shown, depicted or otherwise visible without Artist's prior written consent. Artist shall have the absolute right not to perform in any nude scene or simulated sex scene. If shot, no nude or sex scenes may appear in the Picture without Artist’s prior written consent.”

Chapter 18:

Multiple Choice Questions1. CPA QUESTION Master Mfg., Inc. contracted with Accur Computer Repair Corp. to maintain

Master’s computer system. Master’s manufacturing process depends on its computer system operating properly at all times. A liquidated damages clause in the contract provided that Accur would pay $1,000 to Master for each day that Accur was late responding to a service request. On January 12, Accur was notified that Master’s computer system had failed. Accur did not respond to Master’s service request until January 15. If Master sues Accur under the liquidated damage provision of the contract, Master will:(a) Win, unless the liquidated damages provision is determined to be a penalty(b) Win, because under all circumstances liquidated damage provisions are enforceable(c) Lose, because Accur’s breach was not material(d) Lose, because liquidated damage provisions violate public policyAnswer: A. CPA Examination, May 1993, #25.

2. CPA QUESTION Kaye contracted to sell Hodges a building for $310,000. The contract required Hodges to pay the entire amount at closing. Kaye refused to close the sale of the building. Hodges sued Kaye. To what relief is Hodges entitled?(a) Punitive damages and direct damages(b) Specific performance and direct damages(c) Consequential damages or punitive damage(d) Direct damages or specific performanceAnswer: D. CPA Examination, May 1992, #35.

3. A manufacturer delivers a new tractor to Farmer Ted on the first day of the harvest season. But, the tractor will not start. It takes two weeks for the right parts to be delivered and installed. The repair bill comes to $1000. During the two weeks, some acres of Farmer Ted's crops die. He argues in court that his lost profit on those acres is $60,000. If a jury awards $1000 for tractor repairs, it will be in the form of _____________ damages. If it awards $60,000 for the lost crops, it will be in the form of ___________________ damages.(a) direct; direct(b) direct; consequential(c) consequential; direct(d) consequential; consequential(e) direct; incidentalAnswer: B.

4. Julie signs a contract to buy Nick's 2002 Mustang GT for $5,000. Later, Nick changes his mind and refuses to sell his car. Julie soon buys a similar 2002 Mustang GT for $5,500. She then sues Nick and wins $500. The $500 represents her _________________.(a) expectation interest(b) reliance interest(c) restitution interest(d) none of the aboveAnswer: A.

5. Under the Uniform Commercial Code, a seller ________ generally entitled to recover consequential damages. Under the UCC, a buyer ________ generally entitled to recover consequential damages.(a) is; is(b) is; is not(c) is not; is(d) is not; is notAnswer: C.

Essay Questions1. Lewis signed a contract for the rights to all timber located on Nine Mile Mine. He agreed to pay $70

per thousand board feet ($70/mbf). As he began work, Nine Mile became convinced that Lewis lacked sufficient equipment to do the job well and forbade him to enter the land. Lewis sued. Nine Mile moved for summary judgment. The mine offered proof that the market value of the timber was exactly $70/mbf, and Lewis had no evidence to contradict Nine Mile. The evidence about market value proved decisive. Why? Please rule on the summary judgment motion.Answer: Motion granted. Nine Mile may have breached the agreement, but there is no evidence that Lewis lost money. To win he must demonstrate a difference between the contract price and the

market value of the timber. There was no difference, and he recovers nothing. Lewis v. Nine Mile Mines, Inc., 886 P.2d 912, 1994 Mont. LEXIS 283 (Mont. 1994).

2. Twin Creeks Entertainment signed a deal with U.S. JVC Corp. in which JVC would buy 60,000 feature film videocassettes from Twin Creeks over a three-year period. JVC intended to distribute the cassettes nationwide. Relying on its deal with JVC, Twin Creeks signed an agreement with Paramount Pictures, agreeing to purchase a minimum of $600,000 worth of Paramount cassettes over a two-year period. JVC breached its deal with Twin Creeks and refused to accept the cassettes it had agreed upon. Twin Creeks sued and claimed, among other damages, the money it owed to Paramount. JVC moved to dismiss the claim based on the Paramount contract, on the ground that Twin Creeks, the seller of goods, was not entitled to such damages. What kind of damages is Twin Creeks seeking? Please rule on the motion to dismiss.Answer: Twin Creeks's claim is dismissed. The Paramount losses are consequential damages. Under the UCC, a seller may not recover consequential damages for the sale of goods. Twin Creeks Entertainment, Inc. v. U.S. JVC Corp., 1995 U.S. Dist. LEXIS 2413 (N.D. Cal. 1995).

3. Racicky was in the process of buying 320 acres of ranch land. While that sale was being negotiated, Racicky signed a contract to sell the land to Simon. Simon paid $144,000, the full price of the land. But Racicky then went bankrupt, before he could complete the purchase of the land, let alone its sale. Which of these remedies should Simon seek: expectation, restitution, specific performance, or reformation?Answer: He should, and did, seek restitution. Expectation damages will be unavailable since Racicky is bankrupt. Specific performance is impossible because Racicky does not own the land. Reformation is irrelevant. Simon gets restitution, since he has conferred a benefit on Racicky and it would be unjust for the defendant to keep it. Racicky v. Simon, 831 P.2d 241, 1992 Wyo. LEXIS 60 (Wyo. 1992).

4. Parkinson was injured in an auto accident by a driver who had no insurance. Parkinson filed a claim with her insurer, Liberty Mutual, for $2,000 under her “uninsured motorist” coverage. Liberty Mutual told her that if she sought that money, her premiums would go “sky high,” so Parkinson dropped the claim. Later, after she had spoken with an attorney, Parkinson sued. What additional claim was her attorney likely to make?Answer: A claim for punitive damages, based on Liberty Mutual's bad faith in discouraging Parkinson from filing a claim for money to which she was entitled. The court awarded her $2,000 for uninsured motorist coverage and $40,000 punitive damages. Liberty Mutual Insurance Co. v. Parkinson, 487 N.E.2d 162, reh'g denied, 491 N.E.2d 229 (Ind. Ct. App. 1986).

5. You Be the Judge: WRITING PROBLEM John and Susan Verba sold a Vermont lakeshore lot to Shane and Deborah Rancourt for $115,000. The Rancourts intended to build a house on the property, but after preparing the land for construction, they learned that a wetland protection law prevented building near the lake. They sued, seeking rescission of the contract. The trial court concluded that the parties had reached their agreement under a “mutual, but innocent, misunderstanding.” The trial judge gave the Verbas a choice: they could rescind the contract and refund the purchase price, or they could give the Rancourts $55,000, the difference between the sales price and the actual market value of the land. The Rancourts appealed. Were the Rancourts entitled to rescission of the contract?

Argument for the Rancourts: When the parties have made a mutual mistake about an important factual issue, either party is entitled to rescind the contract. The land is of no use to us and we want our money back. Argument for the Verbas: Both sides were acting in good faith and both sides made an honest mistake. We are willing to acknowledge that the land is worth somewhat less than we all thought, and we are willing to refund $55,000. The buyers shouldn’t complain—they are getting the property at about half the original price, and the error was as much their fault as ours.Answer: The Rancourts win, and are entitled to rescission. Both parties clearly intended that the Rancourts would build a house near the lake. They cannot do so. That is a basic error of fact, and the Rancourts get their money back. The judge has no power to reshape the contract to express expectations that neither party ever held.

Discussion Questions1. ETHICS The National Football League owns the copyright to the broadcasts of its games. It licenses

local television stations to telecast certain games and maintains a “blackout rule,” which prohibits stations from broadcasting home games that are not sold out 72 hours before the game starts. Certain home games of the Cleveland Browns team were not sold out, and the NFL blocked local broadcast. But several bars in the Cleveland area were able to pick up the game’s signal by using special antennas. The NFL wanted the bars to stop showing the games. What did it do? Was it unethical of the bars to broadcast the games that they were able to pick up? Apart from the NFL’s legal rights, do you think it had the moral right to stop the bars from broadcasting the games?Answer: Answers will vary.

2. Consequential damages can be many times higher than direct damages. Consider the "Farmer Ted" scenario raised in multiple choice question 3, which is based on a real case.1 Is it fair if consequential damages are 60 times higher than direct damages? The Supreme Court is skeptical that punitive damages should be more than nine times compensatory damages in a tort case. Should a similar "soft limit" apply to consequential damages in contract cases?Answer: Answers will vary.

3. Is reformation ever a reasonable remedy? Should courts be in the business of rewriting contracts, or should they stick to determining whether agreements are enforceable? Answer: Answers will vary.

4. If someone breaks a contract, the other party can generally sue and win some form of damages. But for centuries, the law has considered land to be unique. And so, a lawsuit that involves a broken agreement for a sale of land will usually result in an order of specific performance. Is this ancient rule still reasonable? If someone backs out of an agreement to sell an acre of land, should he be ordered to turn over the land itself? Why not just require him to pay an appropriate number of dollars in damages? Answer: Answers will vary.

1 Prutch v. Ford 574 P.2d 102 (Colo. 1977)

5. Is it reasonable to require the mitigation of damages? If a person is wronged because the other side breached a contract, should she have any obligations at all? For example, suppose that a tenant breaches a lease by leaving early. Should the landlord have an obligation to try to find another tenant before the end of the lease?Answer: Answers will vary.

Chapter 20:1. For a contract governed by the UCC sales article, which one of the following statements is correct?

(a) Merchants and non-merchants are treated alike.(b) The contract may involve the sale of any type of personal property.(c) The obligations of the parties to the contract must be performed in good faith.(d) The contract must involve the sale of goods for a price $500 or more.Answer: C.

2. Which one of the following transactions is not governed by Article 2 of the UCC?(a) Purchasing an automobile for $35,000(b) Leasing an automobile worth $35,000(c) Purchasing a stereo worth $501(d) Purchasing a stereo worth $499Answer: B.

3. Fred assembles computers in his garage and sells them. He makes an agreement with Alpha Company under which Alpha will deliver 100 keyboards. The agreement does not specify when payment is due. Which of the following is true?(a) Fred has no obligation to pay, because there was no "meeting of the minds" and no contract was

formed(b) Fred must pay within 10 days of making the agreement.(c) Fred must pay within 10 days of accepting the keyboards.(d) Fred must pay within a commercially reasonable time. Answer: D.

4. Under the UCC Statute of Frauds, a contract must be signed by the ________________ to count as being "in writing”. Also, the _____________ of the goods must be written.(a) plaintiff; price(b) plaintiff; quantity(c) defendant; price(d) defendant; quantityAnswer: D.

5. Assume that a contract is modified. New consideration must be present for the modification to be binding if the deal is governed by:(a) The common law(b) The UCC(c) Both A and B(d) Neither A nor BAnswer: A.

Essay Questions1. The Massachusetts Bay Transit Authority (MBTA) awarded the Perini Corp. a large contract to

rehabilitate a section of railroad tracks. The work involved undercutting the existing track, removing the ballast and foundation, rebuilding the track, and disposing of the old material. Perini solicited an offer from Atlantic Track & Turnout Co. for Atlantic to buy whatever salvageable material Perini removed. Perini estimated the quantity of salvageable material that would be available. Atlantic offered to purchase “all available” material over the course of Perini’s deal with the MBTA, and Perini accepted. But three months into the project, the MBTA ran short of money and told Perini to stop the undercutting part of the project. That was the work that made Perini its profit, so Perini requested that the MBTA terminate the agreement, which the agency did. By that point Perini had delivered to Atlantic only about 15 percent of the salvageable material that it had estimated. Atlantic sued. What kind of contract do the parties have? Who should win and why?Answer: The parties have an output contract, because Perini has promised to deliver to Atlantic 100 percent of its output of certain material and Atlantic has agreed to buy it all. Under UCC §2-306, such contracts are valid, even though the quantity of goods is, by definition, not stated. The parties must act in good faith. Here, Perini's reason for stopping delivery is entirely legitimate: the original contract with MBTA has been terminated for business reasons. In an output contract the buyer assumes the risk that the seller may have a legitimate reason for greatly reducing, or even halting, its supply of goods. Judgment for Perini. Atlantic Track & Turnout Co. v. Perini Corporation, 989 F.2d 541, 1993 U.S. App. LEXIS 6248 (1st Cir. 1993).

2. Hasbro used to manufacture a toy called "Wonder World Aquarium". The toy included a powder that, when mixed with water, formed a gel that filled a plastic aquarium. Children could then place plastic fish in the aquarium and create underwater scenes. Cloud Corporation supplied the powder to Hasbro. The toy sold poorly, and Hasbro's need for the powder diminished, The two companies discussed changing the powder's formula. Cloud believed the conversation amounted to an indication that Hasbro would continue to buy powder, so it produced large quantities. Although it did not receive an order from Hasbro, Cloud sent an order acknowledgement for 9.5 million packets to Hasbro. Hasbro made no objection to it.Did the order acknowledgement creat an enforceable agreement? What specific facts determine your answer?Answer: Because both Cloud and Hasbro are merchants, a confirmatory memo sent and not objected to within 10 days carves out an exception to the statute of frauds. The only essential term is a quantity term, and the order acknowledgement contained one: 9.5 million packets. Cloud was reasonable in relying on the conversation about switching its formula as evidence of future orders, and it acted in good faith. The appellate court found that an enforceable agreement existed and remanded the case for a calculation of damages.

3. Nina owns a used car lot. She signs and sends a fax to Seth, a used car wholesaler who has a huge lot of cars in the same city. The fax says, “Confirming our agrmt—I pick any 15 cars fr yr lot—30% below blue book.” Seth reads the fax, laughs, and throws it away. Two weeks later, Nina arrives and demands to purchase 15 of Seth’s cars. Is he obligated to sell?Answer: Probably. Under UCC §2-201(2), a signed memo between merchants that would be binding against the sender is sufficient to satisfy the statute of frauds against the recipient if he reads it and fails to object within 10 days.

4. The Brugger Corp. owned a farm, operated by Jason Weimer, who acted as the company’s business agent. Tri-Circle, Inc. was a farm equipment company. On behalf of Brugger, Weimer offered to buy from Tri-Circle certain equipment for use on the farm. Tri-Circle accepted the offer, using a pre-printed form. The form included a finance charge for late payment. Weimer’s offer had said nothing about finance charges, but he made no objection to the new term. Tri-Circle supplied the farm equipment but later alleged that Brugger had refused to pay for $12,000 worth of the supplies. Tri-Circle sued. In deciding whether Tri-Circle was entitled to finance charges, the court first inquired whether Brugger, Weimer, and Tri-Circle were merchants. Why did it look into that issue? Were they merchants?Answer: Tri-Circle has added an additional term to Weimer's offer. Under UCC §2-207, in a contract between merchants an additional term becomes part of the contract unless (1) the offer insisted on its own terms, (2) the additional term materially alters the offer, or (3) the offeror promptly objects to the added term. None of those things occurred, so the additional term was part of the sales agreement if all three parties were merchants. They routinely dealt in farm goods, so they were merchants and thus the finance charge was binding. Tri-Circle, Inc. v. Brugger Corporation, 121 Idaho 950, 829 P.2d 540, 1992 Idaho App. LEXIS 29 (1992).

5. You Be the Judge: WRITING PROBLEM Brewster manufactured plastic bottles. Dial made personal care products at many plants around the country, including one in Salem,

Virginia. The companies agreed that Dial would purchase from Brewster all of the plastic bottles it needed for its Salem factory. Dial estimated its requirements for one year at 7,850,000 bottles, but added a clause stating that “quantities are estimated only and do not bind Dial to purchase any minimum quantity.” A few months later, Dial concluded that its Salem plant was unprofitable. The company closed the factory and notified Brewster that it would buy no bottles at all. Brewster sued. Did Dial have the right to reduce its orders to zero? Argument for Brewster: The parties had a clear contract for a massive number of bottles. Dial knew that this contract was extremely important to Brewster. Although Dial had some right to adjust its orders, it had no right to reduce them to zero. Argument for Dial: The issue is whether Dial acted in good faith. It did. The company had a legitimate reason for closing the factory—it was losing money—and with no factory it certainly did not need any bottles.Answer: The evidence indicates that the parties did reach an oral agreement in their phone conversation. Because the writings contained conflicting versions of the escape clause, UCC §2-207 determines the contract terms. The conflicting terms drop out and the contract encompasses the oral agreement, which was Brewster's version. Dial could escape only on the anniversary date. However, the buyer in a requirement contract may reduce its demands to zero, provided it does so in good faith. (The buyer does not have the opposite right, to raise its demands disproportionately.) Here, Dial decided to eliminate its requirements because of legitimate concerns about the plant's profitability, not because the company wanted to avoid its obligation to Brewster. Dial acted in good faith. Brewster of Lynchburg, Inc. v. Dial Corp., 33 F.3d 355, 1994 U.S. App. LEXIS 23657, (U.S. Ct. App. 4th Cir, 1994).

Discussion Questions

Apply the following facts to the next two questions.

England vs. America: Does the Statute of Frauds Encourage or Prevent Fraud in Modern Times?

The publication of the original UCC in 1952 sparked an expansion of the statute of frauds in the United States to cover sales of goods of $500 or more. At about the same time (in 1954), the British Parliament repealed its longstanding statute of frauds as applied to sales of goods. Some have argued that we should scrap UCC 2-201 on the grounds that it encourages misdealing as much as it prevents fraud. Consider the following two hypotheticals:

(In the U.S.) Johnny is looking at a used Chevy Tahoe. He knows that the $7000 price is a good one, but he wants to go online and see if he can find an even better deal. In the twenty minutes he has been with the car's current owner, the owner has received three phone calls about the car. Johnny wants to make sure that no one else buys the car while he is thinking the deal over, so he makes a verbal agreement to buy the car and shakes the seller's hand. He knows that, because of the statute of frauds, and the fact that that nothing is in writing, he does not yet have any enforceable obligation to buy the car.

(In the U.K.) Nigel sells used Peugeots in Liverpool. When he senses interest from customers, he aggressively badgers them until they verbally commit to buy. If the customers later get cold feet and try to back out of the deal, he holds them to the verbal contracts. Because there is no longer a UCC-style statute of frauds in Britain, the buyers are stuck.

1. Rate the degree to which you believe Johnny and Nigel acted wrongfully. Did one behave more wrongfully than the other? If so, which one, and why? Answer: Answers will vary.

2. Do you think that the UCC statute of frauds as it currently exists is more likely to prevent fraud, or is it more likely to encourage misunderstandings and deception? Why? Overall, is it sensible to require that purchases of big-ticket items be in writing before they are final? Answer: Answers will vary.

3. The Uniform Commercial Code was written by a group of scholars and adopted by elected state legislators. But many contracts that do not involve a sale of goods are still governed by old common law principles that have been created by judges over a period of centuries. Who makes for better lawmakers – judges or legislators? Do you prefer the way in which common law principles or UCC rules were created?Answer: Answers will vary.

4. Under the UCC section 2-207, "added terms" in an acceptance can become part of a contract between merchants. Does this seem reasonable to you? Are businesses likely to take advantage of it? Answer: Answers will vary.

5. This chapter revisits the idea of unconscionability. Courts will sometimes refuse to enforce deals that are, as UCC 2-302 states it, "shocking and fundamentally unfair". Consider the following two cases. In each, an electronics store sells an HDTV with a fair market value of $600 for $1500.

a. Sale #1 is made to Ann. She has a terrible credit score, and is willing to pay $1500 because the store offers to finance the TV, and she has no other available credit.

b. Sale #2 is made to Franklin J. Moneypenny, a very wealthy investment banker, on Christmas Eve. He knows the price is much too high, but he is in a big hurry to finish his last minute shopping.

In both cases, the consumers paid 2.5 times the fair value of the TV. In your opinion, is either transaction unconscionable? If so, why? If not, why not? Answer: Answers will vary.

Bonus Exam Strategy:Question: Dana Owens hired Jeff Smith to decorate her apartment. Jeff Smith's business is furniture "staging," where he is usually hired to re-arrange the owner's existing furniture and accessories. Occasionally, Jeff purchases new pieces on behalf of the owner. Dana and Jeff have exchanged e-mails describing what Dana is looking for and Jeff's thoughts on her ideas. They never signed a formal agreement. Based on their e-mails, Jeff re-arranged Dana's existing furniture charging Dana $850 for his work. Jeff also spent $450 on a new side chair for her den. Dana does not like the chair and refuses to pay Jeff for it, or any of his work. Do the parties have a contract?

Strategy: There is a lot going on in the question. First, identify an agreement: Dana hired Jeff and the two exchanged e-mails about the details. Jeff provided his services, which is consideration. So far so good. Is this a contract for the sale of goods (the chair) or services (the decorating)? If the predominant purpose of the contract is the sale of goods, then the UCC applies. If the predominant purpose is the services, common law applies. Under common law, any written agreement needs to be explicit, containing all of the essential terms and conditions of the agreement.

Result: Using the predominant purpose test, the agreement between Dana and Jeff is for services, rather than goods. Dana hired Jeff to redecorate, and the chair was one small part of that service. Because this is a contract for a service, the UCC does not apply, and all essential terms and conditions need to be spelled out clearly in writing. Dana and Jeff did not have their agreement in writing, thus there is no contract.

Chapter 21:1. CPA QUESTION On Monday, Wolfe paid Aston Co., a furniture retailer, $500 for a table. On

Thursday, Aston notified Wolfe that the table was ready to be picked up. On Saturday, while Aston was still in possession of the table, it was destroyed in a fire. Who bears the loss of the table?(a) Wolfe, because Wolfe had title to the table at the time of loss(b) Aston, unless Wolfe is a merchant(c) Wolfe, unless Aston breached the contract(d) Aston, because Wolfe had not yet taken possession of the tableAnswer: D. CPA Examination, November 1989, #49.

2. CPA QUESTION Under UCC Article 9 on secured transactions, which of the following statements is correct concerning the disposition of goods by a secured creditor after a debtor defaults on a loan?(a) A good faith purchaser of the goods for value and without knowledge of any defects in the sale

takes free of any security interest.(b) The debtor may not redeem the goods after the default.(c) Secured creditors retain the right to redeem the goods after they are sold to a third party.(d) The goods may be disposed of only at a public sale.Answer: A. CPA Examination, May 1993, #50.

3. CPA QUESTION Quick Corp. agreed to purchase 200 typewriters from Union Suppliers, Inc. Union is a wholesaler of appliances and Quick is an appliance retailer. The contract required Union to ship the typewriters to Quick by common carrier, “FOB Union Suppliers, Inc. Loading Dock.” Which of the parties bears the risk of loss during shipment?(a) Union, because the risk of loss passes only when Quick receives the typewriters(b) Union, because both parties are merchants(c) Quick, because title to the typewriters passed to Quick at the time of shipment(d) Quick, because the risk of loss passes when the typewriters are delivered to the carrierAnswer: D. CPA Examination, May 1994, #45.

4. Sheri signs a contract with Farmer Charlie on February 1 Under the deal, she will pay $25,000 for Charlie's entire pumpkin crop on October 1. Charlie plants pumpkin seeds on March 1, and they begin to sprout on April 1. When are the pumpkins identified?(a) February 1(b) March 1(c) April 1(d) October 1 Answer: B.

5. Sam obtains a Patek Philipe watch from Greg by fraud. It has a retail price of $10,000. He sells it to Melissa for $9000. She believes he owns the watch. Melissa ________ a bona fide purchaser. Sam

disappears. If Greg discovers that she has the watch and demands that it be returned, Melissa _________ have to give the watch to Greg. (a) is; will(b) is; will not(c) is not; will(d) is not; will notAnswer: B.

Essay Questions1. Franklin Miller operated Miller Seed Co. in Pea Ridge, Arkansas. He bought, processed, and sold

fescue seed, which is used for growing pasture and fodder grass. Farmers brought seed to Miller who would normally clean, bag, and store it. In some cases the farmers authorized Miller to sell the seed, in some cases not. Miller mixed together the seed that was for sale with the seed in storage so that a customer could not see any difference between them. Miller defaulted on a $380,000 loan from the First State Bank of Purdy. First State attempted to seize all of the seed in the store. Tony Havelka, a farmer, protested that his 490,000 pounds of seed was merely in storage and not subject to First State’s claim. Who is entitled to the seed?Answer: First State gets it. UCC §2-326(3) creates a presumption in favor of creditors. When goods are delivered to be sold, the goods are subject to the creditors' claims unless the owner (Havelka) takes one of the statutory steps to protect himself, such as posting a sign indicating that he owns the merchandise. He did not do that here. The only issue is whether Havelka delivered the seed to sell. The court held that because Havelka and other farmers had used Miller to sell seed in the past, which the bank knew, and because the stored seed was indistinguishable from the seed for sale, the purpose of §2-326 would be accomplished by protecting the creditor. The bank had no way of knowing that some of the goods that Miller appeared to own really belonged to others. First State Bank of Purdy v. Miller, 119 Bankr. 660, 1990 U.S. Dist. LEXIS 12407, (W.D. Ark. 1990).

2. ETHICS Myrna and James Brown ordered a $35,000 motor home from R.V. Kingdom, Inc. The manufacturer delivered the vehicle to R.V. Kingdom, with title in the dealer’s name. The Browns agreed to accept the motor home, but soon regretted spending the money and asked R.V. Kingdom to resell it. The motor home stayed on R.V. Kingdom’s lot for quite a few months, but when the Browns decided to come get it, they learned that R.V. Kingdom had illegally used the vehicle as collateral for a loan and that a bank had repossessed it. The Browns filed a claim with their insurance company, State Farm. The insurer agreed that the vehicle had been stolen and agreed that the Browns’ policy covered newly acquired vehicles. But the company refused to pay, claiming that the Browns had not taken title or possession to the goods and therefore had no insurable interest. The Browns sued. Please rule on their case. Let us also look at the ethics of the case by creating a contrasting hypothetical. Suppose that among the insurance company’s thousands of customers was Arvee, a recreational vehicle dealership similar to the one in the real case. Imagine that Arvee had taken in an automobile for resale from a customer named Parker, and kept the vehicle on its lot. If Parker’s auto were stolen, what argument would the insurance company be making? How would the company define insurable interest in that case?Answer: The Browns win. They had neither title nor possession, but they don't need either. A buyer gets an insurable interest when the goods are identified to the contract. When the motor home arrived at R.V.Kingdom and the Browns agreed to take it, it was identified to the contract and the Browns had an insurable interest. The Browns won the value of the vehicle, interest, and substantial

attorneys' fees, for a total of $80,616.29. Brown v. State Farm Fire & Casualty Co., 66 Wash. App. 273, 831 P.2d 1122, 1992 Wash. App. LEXIS 281 (Wash. Ct. App. 1992). The ethics hypothetical simply reverses the parties. Now the R.V. dealership (Arvee) has an automobile on its lot and the car is stolen. It is in the interest of Arvee’s insurance company to claim that Parker still had an insurable interest in his car, and that the risk of loss was his. That is just what the insurance company will argue, probably with success. It is hard to justify the same company making the opposite argument merely to avoid liability.

3. John C. Clark, using an alias, rented a Lexus from Alamo Rent-A-Car in San Diego, California. Clark never returned the car to Alamo and obtained a California “quick title” using forged signatures. He then advertised in the Las Vegas Review Journal newspaper and sold the car to Terry and Vyonne Mendenhall for $34,000 in cash. The Mendenhalls made improvements to the car, had it insured, smog and safety tested, registered, licensed, and titled in the state of Utah. When Alamo reported the car stolen, the Nevada Department of Motor Vehicles seized the auto and returned it to Alamo. The Mendenhalls sued Alamo. The trial court concluded that the Mendenhalls had purchased the car for value and without notice that it was stolen, and were bona fide purchasers entitled to the Lexus. Alamo appealed. Please rule.Answer: Clark was a thief. He obtained no title and could pass on no valid title to any purchaser. “The lower court seemed to equate Clark's fraudulently obtained but facially valid California "quick title" with voidable title capable of transferring ownership. The law does not support this conclusion.” Alamo was permitted to keep the auto; however, because the Mendenhalls had acted in good faith, the court held that they were entitled to the value of the improvements they had made. Alamo Rent-A-Car, Inc. v. Mendenhall, 937 P.2d 69 (Nev. 1997).

4. Universal Consolidated Cos. contracted with China Metallurgical Import and Export Corp. (CMIEC) to provide CMIEC with new and used equipment for a cold rolling steel mill. Universal then contracted with Pittsburgh Industrial Furnace Co. (Pifcom) to engineer and build much of the equipment. The contract required Pifcom to deliver the finished equipment to a trucking company, which would then transport it to Universal. Pifcom delivered the goods to the trucking company as scheduled. But before all of the goods reached Universal, CMIEC notified Universal it was canceling the deal. Universal, in turn, notified Pifcom to stop work, but all goods had been delivered to the shipper and ultimately reached Universal. Pifcom claimed that it retained title to the goods, but Universal claimed that title had passed to it. Who is right?Answer: Universal is right. UCC §2401 provides that when goods are being moved, title passes to the buyer when the seller completes whatever transportation it is obligated to do. Pifcom completed its work by delivering to the trucking company, at which time title passed. Pittsburgh Industrial Furnace Co. v. Universal Consolidated Companies, Inc., 789 F. Supp. 184, 1991 U.S. Dist. LEXIS 19936 (W.D. Pa. 1991).

5. You Be the Judge: WRITING PROBLEM Construction Helicopters paid Heli-Dyne Systems $315,000 for three helicopters that were in Argentina. Two were ready to fly and one was disassembled for routine maintenance. The contract said nothing about risk of loss (the parties could have saved a lot of money by reading this chapter). Heli-Dyne arranged for an Argentine company to oversee their loading on board the freight ship Lynx. The two helicopters and 25 crates containing the disassembled craft were properly loaded, but when the ship arrived in Miami, only 7 of the crates appeared. Heli-Dyne refused to supply more parts and Construction sued. Who bears the loss? Argument for Construction: Construction had no control over the goods until they reached

Miami. Although we do not know exactly what happened to the crates, we know the one party that had nothing to do with the loss: Construction. The company should not pay for damage it never caused. Argument for Heli-Dyne: Because the contract failed to specify risk of loss, it is a shipment contract. In such an agreement, risk of loss passes to the buyer when the seller delivers the goods to a carrier. Heli-Dyne delivered the goods and has no further responsibility.Answer: Because the contract did not specify risk of loss, and provided no FOB terms or other language about delivery, it is deemed a shipment contract. The risk of loss therefore passed to the buyer when the seller delivered the goods to the carrier under a reasonable contract of carriage. Since Heli-Dyne fulfilled that obligation, the risk transferred to Construction, which must bear the loss. Construction Helicopters, Inc. v. Heli-Dyne Systems, Inc., 875 F.2d 862, 1989 U.S. App. LEXIS 7273 (U.S. Ct. App. 6th Cir., 1989).

Discussion Questions1. In the opening scenario with the con artist and the cattle, we learned that the original owner would be

left out in the cold under the UCC. Is this a fair result? Would it be better to require Vandermeer and the buyer in Omaha to share the loss?Answer: Answers will vary.

2. In the Bakalar case involving artwork stolen during World War II, do you agree with the court's decision? Should the heirs get a chance to recover the drawing that was stolen from their ancestor? Or should Bakalar, who has owned the drawing for fifty years and knew nothing about its origin, be able to keep ownership? Answer: Answers will vary.

3. Imagine that your laptop gets a virus, and you take it to a local computer repair shop. The shop sells your computer to Heidi. Under the entrustment rules in the UCC, Heidi is a buyer in the ordinary course of business. And so, even if you find Heidi and demand that she return your laptop, she gets to keep it. Is this fair? Does the law give too much protection to purchasers in this situation, and not enough to victims?Answer: Answers will vary.

4. You are about to move, and you take your furniture to a consignment shop. The shop's creditors seize everything in the store, including your furniture. You demand that the creditors give back your stuff, but under UCC 2-326, they don't have to. Is this fair? Should the law change?Answer: Answers will vary.

5. Greg manufactures and sells t shirts. As a seller, would he be better off if his contracts indicated "FOB (place of shipment)", or "FOB (place of destination)". Explain your answer.Answer: Answers will vary.

Bonus Exam Strategy:Question: Gina takes her diamond ring to Sparkle Jewelry to have the prongs holding the diamond

retipped and to have the ring cleaned. The clerk at Sparkle told Gina that she would have to leave the ring and that it should be ready in about a week. When Gina returns in a week to get her ring, she finds out that the ring has been sold. Does Gina have any recourse against the store?

Strategy: First, look at the relationship between Gina and the store. Entrustment is when the owner of a good, in this case Gina voluntarily leaves that good with a merchant of the same goods, Sparkle Jewelry. Next, what are Gina’s rights in this relationship: When there is an entrustment, the merchant has the power, but not the right, to transfer all of the rights in the good to a buyer in the ordinary course.

Result: Because Gina voluntarily left her ring with Sparkle Jewelry, a merchant, she has entrusted her ring to the store. The store has the power, but not the right to sell her ring to a buyer in the ordinary course. The question asks about Gina’s recourse against the store. In this case, Gina can sue the store for the value of the ring.

Chapter 22:1. CPA QUESTION Vick bought a used boat from Ocean Marina that disclaimed “any and all

warranties.” Ocean was unaware the boat had been stolen from Kidd. Vick surrendered it to Kidd when confronted with proof of the theft. Vick sued Ocean. Who prevails?(a) Vick, because the implied warranty of title has been breached(b) Vick, because a merchant cannot disclaim implied warranties(c) Ocean, because of the disclaimer of warranties(d) Ocean, because Vick surrendered the boat to KiddAnswer: A. CPA Examination, May 1994, #43.

2. CPA QUESTION To establish a cause of action based on strict liability in tort for personal injuries resulting from using a defective product, one of the elements the plaintiff must prove is that the seller (defendant):(a) Failed to exercise due care(b) Was in privity of contract with the plaintiff(c) Defectively designed the product(d) Was engaged in the business of selling the productAnswer: D. CPA Examination, November 1993, #54.

3. CPA QUESTION Which of the following conditions must be met for an implied warranty of fitness for a particular purpose to arise? : I. The warranty must be in writing. II. The seller must know that the buyer was relying on the seller in selecting the goods.(a) I only(b) II only(c) Both I and II(d) Neither I nor IIAnswer: B. CPA Examination, May 1992, #55.

4. CPA QUESTION Under the UCC sales article, an action for breach of the implied warranty of merchantability by a party who sustains personal injuries may be successful against the seller of the product only when:(a) The seller is a merchant of the product involved(b) An action based on negligence can also be successfully maintained(c) The injured party is in privity of contract with the seller(d) An action based on strict liability in tort can also be successfully maintainedAnswer: A. CPA Examination, May 1992, #57.

5. CPA QUESTION Which of the following factors is least important in determining whether a manufacturer is strictly liable in tort for a defective product?(a) The negligence of the manufacturer(b) The contributory negligence of the plaintiff(c) Modifications to the product by the wholesaler(d) Whether the product caused injuriesAnswer: A. CPA Examination, November 1989, #45.

Essay Questions1. . Leighton Industries needed steel pipe to build furnaces for a customer. Leighton sent Callier Steel an

order for a certain quantity of “A 106 Grade B” steel. Callier confirmed the order and created a contract by sending an invoice to Leighton, stating that it would send “A 106 Grade B” steel, as ordered. Callier delivered the steel and Leighton built the furnaces, but they leaked badly and required rebuilding. Tests demonstrated that the steel was not, in fact, “A 106 Grade B,” but an inferior steel. Leighton sued. Who wins?Answer: The one-line description of the steel, in Callier's invoice, created an express warranty. Assuming that the steel delivered actually was inferior, Leighton would win its warranty claim, even if Callier had made no other warranty, oral or written. Leighton Industries, Inc. v. Callier Steel Pipe & Tube, Inc., 1991 U.S. Dist. LEXIS 1749 (N.D. Ill. 1991).

2. You Be the Judge: WRITING PROBLEM United Technologies advertised a used Beechcraft Baron airplane for sale in an aviation journal. Attorney Thompson Comerford was interested and spoke with a United agent who described the plane as “excellently maintained” and said it had been operated “under §135 flight regulations,” meaning the plane had been subject to airworthiness inspections every 100 hours. Comerford arrived at a Dallas airport to pick up the plane, where he paid $80,000 for it. He signed a sales agreement stating that the plane was sold “as is” and that there were “no representations or warranties, express or implied, including the condition of the aircraft, its merchantability or its fitness for any particular purpose.” Comerford attempted to fly the plane home, but immediately experienced problems with its brakes, steering, ability to climb, and performance while cruising. (Otherwise it was fine.) He sued, claiming breach of express and implied warranties. Did United Technologies breach express or implied warranties? Argument for Comerford: United described the airplane as “excellently maintained,” knowing that Mr. Comerford would rely on that information. United bragged about §135 servicing, when that was obviously a lie. The company should not be allowed to say one thing and put the opposite in writing. Argument for United Technologies: Comerford is a lawyer, and we assume he can read. The contract could not have been clearer. The plane was sold as is. There were no warranties. If Comerford disliked the terms, he should have bargained for a different contract—or walked away. He knew he was buying a risky plane, and it is his to keep.Answer: United Technologies won. United had made express warranties but had effectively disclaimed both the express and all implied warranties. Ace, Inc. v. Maynard, 108 N.C. App. 241, 423 S.E.2d 504, 1992 N.C. App. LEXIS 882 (N.C. Ct. App. 1992).

3. Round Tire Co. sells 1,000 tires to Green Rent-a-Car for use on Green’s fleet. The same day it sells one new tire to Betty Blue for use on her car. For both sales, Round uses a sales agreement that includes: “LIMITATION OF REMEDIES. Round agrees to repair or replace any tire which Round determines was defective, within 12 months or 25,000, whichever comes first. Buyer agrees that this is Buyer’s SOLE REMEDY; Buyer is not entitled to consequential or incidental damages or any other remedy of any kind.” All of Round’s tires prove defective. Green is so disgusted it immediately purchases substitute tires from another manufacturer. Green loses $12,000 in extra tire costs and $75,000 in lost rental payments because many of its cars must be off the road waiting for tires. Betty Blue’s new tire blows out as she is driving to church, and Betty suffers broken bones. Green and Blue both sue. Predict the outcomes. Answer: Betty will win because the remedy limitation is unconscionable. Courts dislike the limitations when they apply to consumer goods, especially in cases of personal injury. See Collins v. Uniroyal, 64 N.J. 260, 315 A.2d 16 (1974) (tire blowout causes buyer's death; sales agreement limiting remedy to repair or replacement held unconscionable). But in commercial cases, where the loss is purely economic, the remedy limitation is enforceable and Green will recover nothing. See, e.g., Golden Reward Mining Co. v. Jervis B. Webb. Co., 772 F. Supp. 1118, 1991 U.S. Dist. LEXIS 12601 (W.D. S. Dak. 1991) (exclusion of consequential damages is not unconscionable in commercial contract with purely economic loss).

4. Texaco, Inc., and other oil companies sold mineral spirits in bulk to distributors, which then resold to retailers. Mineral spirits are used for cleaning. Texaco allegedly knew that the retailers, such as hardware stores, frequently packaged the mineral spirits (illegally) in used half-gallon milk containers and sold them to consumers, often with no warnings on the packages. Mineral spirits are harmful or fatal if swallowed. David Hunnings, aged 21 months, found a milk container in his home, swallowed the mineral spirits, and died. The Hunnings sued Texaco in negligence. The trial court dismissed the complaint and the Hunnings appealed. What is the legal standard in a negligence case? Have the

plaintiffs made out a valid case of negligence? Remember that at this stage a court is not deciding who wins, but what standard a plaintiff must meet in order to take its case to a jury. Assume that Texaco knew about the repackaging and the grave risk, but continued to sell in bulk because doing so was profitable. (If the plaintiffs cannot prove those facts, they will lose even if they do get to a jury.) Would that make you angry? Does that mean such a case should go to a jury? Or would you conclude that the fault still lies with the retailer and/or the parents? Answer: The standard is whether the defendant acted as a “reasonable person” would have. The appeals court reversed, holding that the plaintiffs had made out a valid negligence claim and were entitled to take their evidence to a jury. Plaintiffs could argue, e.g., that Texaco should have provided warnings of the danger, should have discouraged distributors from selling to retailers who illegally packaged the goods in used milk containers, and should have refused to sell to distributors who didn't cooperate. Hunnings v. Texaco, Inc., 29 F.3d 1480, 1994 U.S. LEXIS 21833 (11th Cir. 1994).

5. Boboli Co. wanted to promote its “California style” pizza, which it sold in supermarkets. The company contracted with Highland Group, Inc., to produce two million recipe brochures, which would be inserted in the carton when the freshly baked pizza was still very hot. Highland contracted with Comark Merchandising to print the brochures. But when Comark asked for details concerning the pizza, the carton, and so forth, Highland refused to supply the information. Comark printed the first lot of 72,000 brochures, which Highland delivered to Boboli. Unfortunately, the hot bread caused the ink to run, and customers opening the carton often found red or blue splotches on their pizzas. Highland refused to accept additional brochures, and Comark sued for breach of contract. Highland defended by claiming that Comark had breached its warranty of merchantability. Please comment.Answer: Highland lost. The merchantability warranty requires that goods be fit “for their ordinary purpose.” Brochures are not normally placed in contact with very hot pizza. Comark had no idea the brochure would be subjected to such heat, and was entitled to its contract damages . Compared Merchandising, Inc. v. Highland Group, 932 F.2d 1196, 1991 U.S. Asp. LEXIS 10470 (Ruth Cir. 1991).

Discussion Questions1. Consider the opening scenario in which a diner cracked a tooth on a fragment of bone hidden in a

hamburger. Would society be better off if lawsuits over such injuries were more difficult to win and yielded smaller damages? Or should the person with the cracked tooth have a good chance to get a large payday in court? Does your answer depend upon whether you are the person with the cracked tooth?Answer: Answers will vary.

2. A seller can disclaim all implied warranties by stating that goods are sold "as is" (or by using other, more specific language). Is this fair? The UCC's implied warranties seem reasonable – that goods are fit for their normal purposes, for example. Should it be so easy for sellers to escape their obligations? Answer: Answers will vary.

3. After learning more about implied warranties and disclaimers, would you ever buy an item sold "as is"? Imagine a car salesman who offers you a car for $8000, but who also says that he can knock the price down to $6500 if you will buy the car "as is". If you live in a state that does not give consumers special protections, which deal would be more appealing?

Answer: Answers will vary.

4. Assume that two computer manufacturers - Alpha and Beta - deliver identical shipments of malfunctioning laptops. The defective machines each cause customers $10,000 in direct damages and $50,000 in consequential damages. Alpha's contract contained a limitation of damages clause, and it pays only $10,000. Beta's contract had no such clause, and it is on the hook for $60,000. Is this fair?Answer: Answers will vary.

5. "Lemon laws" usually only cover cars. Are there other products that should be covered by similar laws? If so, which ones?Answer: Answers will vary.

Bonus Exam Strategy:Question: Riker sold his Xbox game player to his friend Allison. Allison did not know that Riker had

borrowed money from his roommate to buy the Xbox and that Riker had promised his roommate that until Riker paid off the balance, the roommate would have the right to use the game player, and if Riker could not re-pay his roommate, the roommate could keep the game player. Has Riker breached any warranty to Allison?

Strategy: A seller of goods makes several warranties. Here, because there is no issue about the quality of the good, many warranties can be eliminated. There is an issue about Riker’s roommate having rights in the XBox at the time Riker sold it to Allison. According to the warranty of title, when a seller sells goods, he warrants that he has good title to the goods, and no one else has any security interest in the good.

Result: When Riker sold his XBox to Allison, he promised that he had full title to the goods, and that no one else had a security interest in the gameplayer. But Riker promised his roommate that if he could not repay the loan, the roommate could take the XBox. Because Riker failed to disclose to Allison his roommate’s interest in the XBox, Riker has breached the warranty of title.

Chapter 23:1. CPA QUESTION Cara Fabricating Co. and Taso Corp. agreed orally that Taso would custom

manufacture a compressor for Cara at a price of $120,000. After Taso completed the work at a cost of $90,000, Cara notified Taso that the compressor was no longer needed. Taso is holding the compressor and has requested payment from Cara. Taso has been unable to resell the compressor for

any price. Taso incurred storage fees of $2,000. If Cara refuses to pay Taso and Taso sues Cara, the most Taso will be entitled to recover is:(a) $92,000(b) $105,000(c) $120,000(d) $122,000Answer: D. CPA Examination, November 1993, #57.

2. CPA QUESTION On February 15, Mazur Corp. contracted to sell 1,000 bushels of wheat to Good Bread, Inc., at $6 per bushel with delivery to be made on June 23. On June 1, Good advised Mazur that it would not accept or pay for the wheat. On June 2, Mazur sold the wheat to another customer at the market price of $5 per bushel. Mazur had advised Good that it intended to resell the wheat. Which of the following statements is correct?(a) Mazur can successfully sue Good for the difference between the resale price and the contract

price.(b) Mazur can resell the wheat only after June 23.(c) Good can retract its anticipatory breach at any time before June 23.(d) Good can successfully sue Mazur for specific performance.Answer: A. CPA Examination, May 1992, #56.

3.Under the UCC, to tender delivery, a seller must:(a) Make the goods available at a reasonable time, (b) Keep the goods available for a reasonable period(c) Deliver to the buyer any documents that it needs to take possession(d) All of the above(e) None of the aboveAnswer: D

4. Blackburn FC (go Rovers!) orders 10,000 soccer jerseys from Alpha Co. to sell in its stadium store. They are to be delivered on July 10. When they arrive early on July 2, Blackburn is disappointed because the collars, which are supposed to be white, are blue. Blackburn notifies Alpha of the error. Alpha says that it wants a chance to "make it right". If Alpha delivers another shipment of 10,000 conforming jerseys on July 10, Blackburn…(a) absolutely must accept the new shipment(b) must accept the new shipment if Alpha offers a reasonable discount(c) must accept the new shipment if it has suffered no measureable losses(d) may accept the new shipment, but has the option to reject it.Answer: A

5. Assume that a year has passed, and Blackburn FC once again orders 10,000 soccer jerseys from Alpha to be delivered on July 10. This time, nonconforming jerseys are delivered on July 10. Alpha thoroughly inspected the shirts before shipping, and had no reason to spot the error. When Blackburn notifies Alpha of the problem, Alpha says that it intends to cure the defect. If Blackburn cannot show

that it will suffer any serious harm, does the UCC require Blackburn to give Alpha a chance to cure this time?(a) No, because the contract's deadline has passed.(b) Yes, it must give Alpha until July 17 to cure.(c) Yes, it must give Alpha until July 20 to cure.(d) Yes, it must give Alpha a reasonable amount of time to cure. Answer: D

Essay Questions1. Jewell-Rung was a Canadian corporation that imported and sold men’s clothing at wholesale. Haddad

was a New York corporation that manufactured and sold men’s clothing under the “Lakeland” label. The companies agreed that Haddad would sell 2,325 Lakeland garments to Jewell-Rung, for $250,000. Jewell-Rung began to take orders for the garments from its Canadian customers. Jewell-Rung had orders for about 372 garments when it learned that Haddad planned to allow another company, Olympic, the exclusive Canadian right to manufacture and sell Lakeland garments. Jewell-Rung sued Haddad for its lost profits. Haddad moved for summary judgment, claiming that Jewell-Rung could not recover lost profits because it had not “covered.” Is Haddad right? Why might Jewell-Rung not have covered?Answer: Lost profits are consequential damages. Haddad is right that a buyer may not recover consequential damages that it could have prevented by cover. But Jewell-Rung offered legitimate reasons for not covering: the only Lakeland garments now available to it were those made by Olympic. Olympic would not sell a competitor the garments at reasonable prices. Further, Jewell-Rung could not rely on the quality of the garments manufactured by a different company. Jewell-Rung's failure to cover was reasonable and the company was entitled to prove its lost profits. Jewell-Rung Agency, Inc. v. Haddad Organization, Ltd., 814 F. Supp. 337, 1993 U.S. Dist. LEXIS 1923 (S.D.N.Y. 1993).

2. Mastercraft Boat manufactured boats and often used instrument panels and electrical systems assembled and/or manufactured by Ace Industries. Typically, Ace would order electrical instruments and other parts and assemble them to specifications that Mastercraft provided. Mastercraft decided to work with a different assembler, M & G Electronics, so it terminated its relationship with Ace. Mastercraft then requested that Ace deliver all of the remaining instruments and other parts that it had purchased for use in Mastercraft boats. Ace delivered the inventory to Mastercraft, which inspected it and kept some of the items, but returned others to Ace, stating that the shipment had been unauthorized. Later, Mastercraft requested that Ace deliver the remaining parts (which Mastercraft had sent back to Ace) to M & G, which Ace did. Mastercraft then refused to pay for these parts, claiming that they were non-conforming. Is Ace entitled to its money for the parts?Answer: Yes, Ace is entitled to its money because inspection sometimes creates acceptance. Mastercraft inspected the goods, kept some, and returned others, without stating that they were non-conforming. Mastercraft later ordered Ace to forward the goods to M & G. An inspection without a reasonably prompt rejection is generally an acceptance. Mastercraft's instruction to ship the goods to M & G also establishes acceptance, since such a request indicates that Mastercraft owns them. Ace Industries, Inc. v Mastercraft Boat Co., 1995 Tenn. App. LEXIS 286 (Tenn. Ct. App. 1995).

3. Lewis River Golf, Inc., grew and sold sod. It bought seed from defendant, O. M. Scott & Sons, under an express warranty. But the sod grown from the Scott seeds developed weeds, a breach of Scott’s warranty. Several of Lewis River’s customers sued, unhappy with the weeds in their grass. Lewis River lost most of its customers, cut back its production from 275 acres to 45 acres, and destroyed all remaining sod grown from Scott’s seeds. Eventually, Lewis River sold its business at a large loss. A jury awarded Lewis River $1,026,800, largely for lost profits and loss of goodwill. Scott appealed, claiming that a plaintiff may not recover for lost profits and goodwill. Comment.Answer: Scott is wrong. Lost profits and goodwill are both consequential damages, and both are potentially recoverable. The court can measure lost profits by contracts actually cancelled, by the decreased sod production, and by diminished sales. Goodwill refers to future business lost, and for that a court can rely on financial forecasts made by experts, based on the buyer's history of sales. The court affirmed Lewis River's verdict. Lewis River Golf, Inc. v. 0. M. Scott & Sons, 120 Wash. 2d 712,845 P.2d 987, 1993 Wash. LEXIS 48 (1993).

4. The AM/PM Franchise association was a group of 150 owners of ARCO Mini-Market franchises in Pennsylvania and New York. Each owner had an agreement to operate a gas station and mini-market, obtaining all gasoline, food, and other products, from ARCO. The Association sued, claiming that ARCO had experimented with its formula for unleaded gasoline, using oxinol, and that the poor-quality gas had caused serious engine problems and a steep drop in customers. The Association demanded (1) lost profits for gasoline sales, (2) lost profits for food and other items, and (3) loss of goodwill. The trial court dismissed the case, ruling that the plaintiff’s claims were too speculative, and the Association appealed. Please rule.Answer: Reversed. The Association's members can potentially recover consequential damages for lost profits. The losses could represent lost sales of gasoline, lost sales of other items in the mini-marts, and lost goodwill. Gasoline is a legitimate lost profit because, under the agreement with ARCO, the owners could not cover by purchasing gasoline elsewhere. It is reasonable to assume that if gasoline sales dropped, there was a ripple effect on mini-mart sales. Finally, as long as the plaintiffs can provide a reasonable basis from which the jury can calculate goodwill damages, they may pursue that issue as well.

5.You Be the Judge: WRITING PROBLEM Clark Oil agreed to sell Amerada Hess several hundred thousand barrels of oil at $24 each by January 31, with the sulfur

content not to exceed 1 percent. On January 26, Clark tendered oil from various ships. Most of the oil met specifications, but a small amount contained excess sulfur. Hess rejected all of the oil. Clark recirculated the oil, meaning that it blended the high-sulfur oil with the rest, and notified Amerada that it could deliver 100 percent of the oil, as specified, by January 31. Hess did not respond. On January 30, Clark offered to replace the oil with an entirely new shipment, due to arrive February 1. Hess rejected the offer. On February 6, Clark retendered the original oil, all of which met contract terms, and Hess rejected it. Clark sold the oil elsewhere for $17.75 per barrel and filed suit. Is Clark entitled to damages? Argument for Clark: A seller is entitled to cure any defects. Clark did so in good faith and offered all of the oil by the contract deadline. Clark went even further, offering an entirely new shipment of oil. Hess acted in bad faith, seeking to obtain cheaper oil. Clark is entitled to the difference between the contract price and its resale price. Argument for Hess: Hess was entitled to conforming goods, and Clark failed to deliver. Under the perfect tender rule, that is the end of the discussion. Hess had the right to reject non-conforming goods, and it promptly did so. Hess chose not to deal further with Clark because it had lost confidence in Clark’s ability to perform.Answer: The court granted Clark’s motion for summary judgment. Clark’s statement that it would reblend the oil was a legally sufficient offer to cure. Hess responded by offering to pay less, which

was a counteroffer, that is, a rejection of the offer to cure. That entitled Clark to summary judgment under UCC section 2-508(1). The company is also entitled to summary judgment under section 2-508(2), because a seller is allowed a reasonable time to cure following expiration of the contract if it reasonably believed that the original goods conformed. Clark’s belief that the goods conformed was reasonable because its tests indicated as much. Clark Oil Trading Co. v. Amerada Hess Trading Co., 1993 U.S. Dist. LEXIS 10801, U.S. Dist. Ct., So. Dist. N.Y. 1993.

Discussion Questions1. ETHICS Laura and Bruce Trethewey hired Basement Waterproofing Nationwide, Inc., to

waterproof the walls in their basement for a fee of $2,500. BWNI’s contract stated: “BWNI will service any seepage in the areas waterproofed at no additional cost to the customer. All labor and materials will be at the company’s expense. Liability for any damage shall be limited to the total price paid for this contract.” The material that BWNI used to waterproof the Tretheweys’ walls swelled and caused large cracks to open in the walls. Water poured into the basement, and the Tretheweys ultimately spent $38,000 to repair the damage. They sued, claiming negligence and breach of warranty, but BWNI claimed its liability was limited to $2,500. Please rule. Apart from the legal ruling, comment on ethics. BWNI wanted to protect itself against unlimited damage claims. Is this a legitimate way to do it? Is this how BWNI would wish to be treated itself? If you think BWNI did behave ethically, what advice would you have for consumers who hire home improvement companies? If you believe the company did not behave ethically, imagine that you are a BWNI executive, charged with drafting a standard contract for customers. How would you protect your company’s interests while still acting in a way you consider moral?Answer: The court ruled that regardless of whether the liability limitation was interpreted as a liquidated damage clause or a limitation of consequential damages, the Trethewey's won. As a liquidated damages clause, the court held, the parties had intended it to cover cases in which the waterproofing did not work as intended, not cases where BWNI did its work negligently. It does not apply. As a limitation of consequential damages it is unconscionable. No reasonable person would agree to a $2,500 limit to damage done to his house, and since the Trethewey's were consumers they would not be expected to have BWNI's sophistication. The court held that there was no limit to the amount of damages the Trethewey's could recover. Clearly this is not how BWNI would like to be treated. In fact it probably would refuse to be treated this way, declining to enter into a contract with such a restrictive limit on liability. Because the average homeowner is less likely than a corporation to understand such remedy limitations, courts generally reject these clauses in consumer contracts. Trethewey v. Basement Waterproofing Nationwide, Inc., 1994 Del. Super. LEXIS 504 (Del. Super. Ct. 1994).

2. Consider the UCC's exceptions to the perfect tender rule: usage of trade, course of dealing, and course of performance. Do these all seem reasonable, or are they too lenient on sellers who deliver nonconforming goods? Answer: The answers will vary.

3. Are the UCC's rules related to cure sensible? If a seller ships goods that are not what you ordered, should you (in many circumstances) be required to give them a chance to "make it right?"Answer: The answers will vary.

4. The opening scenario presented the true story of a man who paid a great deal of money for a Plymouth Prowler. Do you agree with the court's decision to award him nearly $30,000 in damages? Or do you agree with the Devil's Advocate feature, and think that he was overcompensated for foolish spending?Answer: The answers will vary.

5. Review the section "Damages for Non-Acceptance". In that section's example, Refinery refused Oilko's shipment on November 1, when the oil was worth $99 per barrel. Oilko waited three months to resell the oil, and at that time it received only $92 per barrel. In such a case, the UCC allows Oilko to receive only $1 per barrel in damages, rather than the $8 per barrel reduction in price it actually received. Is this fair? Would it be more sensible to allow a company like Oilko to receive $8 per barrel in damages? Answer: The answers will vary.

Bonus Exam Strategy:Question: The City of Metropolis contracted to buy 2,000 gallons of gas for its fleet of police cruisers

from Value Gas Co, to be delivered every week for one year. Shipment number 5 only contained 1,985 gallons of gas. Can Metropolis sue for breach?

Strategy: This question is really about proper rejection. In order to sue for breach, first the City must reject the goods. Let’s look at the contract, it is an installment contract: 2000 gallons of gas every week for one year. Are the goods non-conforming? Yes, the delivery is 15 gallons short. A buyer can reject non-conforming goods in an installment contract only if the non-conformance substantially impairs the value of that installment and cannot be cured.

Result: While the installment is non-conforming, it does not seem that a 15 gallon shortage of a 2,000 gallon delivery substantially impairs the value of that installment. Also, this type of non-conformance is easily cured. Metropolis cannot sue for breach.