sales law quiz

document.doc Printed: 5/3/23

1. (T/F) The scope of Article 2 includes secured transactions, i.e. those in which the seller retains a security interest in the goods.

1. False. 2-102.

2. (T/F) “Goods” include all things which are movable at the time of contract formation.

2. True 2-105(1).

3. Andy owns a hot dog cart in Balboa Park. He has a license from the park authority to operate the stand at a very visible and busy location in front of one of the museums. Andy contracts to sell the hot dog stand business, including the cart, the inventory, and the license, to Bill. Bill repudiates. At a subsequent trial for damages, which portions of the sale (i.e., the cart, the inventory, the license) will be governed by Article 2?

3. The answer depends on the local case law. By 2-102, Article 2 “applies to transactions in goods.” 2-105(1) defines “goods” as “all things...which are movable at the time of identification to the contract.” 2-501(1)(a) defines “identification” as occurring “when the contract is made if it is for the sale of goods already existing and identified.” Here, the “goods” are the cart and the inventory, but not the license. The license is an intangible. And since the goods were in existence at the time of contract formation, they have been identified to the contract, and movable at the time of identification to the contract. Some courts will use the “primary purpose” test to determine whether the entire contract is governed by Article 2. Here, the intent of the parties appears to be more than the sale of goods because the hot dog cart and the hot dogs themselves are worthless without the license to sell them in the lucrative location. In such a case, the sale of the cart and inventory would be viewed as “incidental” to the sale of the intangibles. However, other courts have broken the transaction down into component parts. In that case, Article 2 would apply only to the cart and inventory, but not the license.

4. (T/F) A “sale” is the passing of title from the seller to the buyer for a price.

4. True. 2-106(1)

5. (T/F) A contract for the sale of crops is a contract for the sale of goods regardless of whether the crops are to be harvested by the farmer or the buyer.

5. True. 2-107(2).

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6. (T/F) A contract for the sale of oil is a contract for the sale of goods regardless of whether the oil is to be extracted from the ground by the seller or the buyer.

6. False. 2-107(1).

7. (T/F) A contract fails for indefiniteness unless one party can prove when the moment of contract formation occurred.

7. False. 2-204(2)

8. On Tuesday, a hobby shop owner receives an order for a custom toy train that will need to be specially manufactured. That same day, the hobby shop owner begins building the toy train. On Friday, the buyer calls to cancel the order. During the conversation, the hobby shop owner insists on going through with the deal, and tells the buyer (for the first time) that he has already started making the train. Is the buyer legally bound by a contract to buy the toy train?

8. Under 2-206(1)(a), unless unambiguously indicated, “an offer to make a contract shall be construed as inviting acceptance in any manner...reasonable under the circumstances.” Specifically, under 2-206(2), “where the beginning of a requested performance is a reasonable mode of acceptance, an offeror who is not notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance.” Here, it is probably reasonable for the hobby shop owner to rely in the custom order in beginning to build the train. Thus, by beginning to build the train, he has bound the buyer contractually unless he does not notify the buyer of his acceptance within a reasonable time. Here, three days has elapsed since the hobby shop owner began building. It is a question of fact as to whether that is a reasonable time under these circumstances, but it probably is. Thus, the buyer is legally bound to buy the toy train.

9. The University called the Jolly Jelly Donut Co. late Friday night left an order for 100 jelly donuts for delivery the following day on their answering machine. While making the donuts, Jelly employees realized that they did not have enough jelly for all 100 donuts, and so it delivered only 50 jelly donuts, and 50 cake donuts. The University sued for breach. At trial, Jolly denied existence of a contract because they had not accepted the offer. Specifically, Jolly argued that “we did not give them what they ordered, and so we never accepted the offer.” What result?

9. Jelly is attempting to pull the “unilateral contract trick.” 2-206(1)(b) provides that “an order or other offer to buy goods for prompt or current shipment shall be construed as inviting acceptance...by the prompt or current shipment of conforming or non-conforming goods.” Here, the

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shipment by Jelly of non-conforming goods does not preclude acceptance because the order invited prompt shipment. Thus, Jelly is bound by contract and has breached by shipping non-conforming goods.

10. What if, in Question 9 above, Jelly had included a letter with the shipment stating, “although we are unable to fill your order completely, we are forwarding 50 cake donuts and 50 jelly donuts in hopes that they will be able to meet your needs on such short notice.” How would that change the outcome, if at all?

10. Yes. 2-206(1)(b) further provides that the shipment of non-conforming goods in response to an order “does not constitute acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer.” Here, the notice is seasonable because it was included in the shipment. Also, the notice indicates that it is merely an accommodation, and therefore not an acceptance of the offer made by the order.

11. StockNet, Inc. is an internet-based stock broker that provides full service securities transactions to customers by e-mail and the World Wide Web. Periodically, StockNet posts the following advertisement on the newsgroup misc.invest intended to stimulate immediate business from new customers:

“StockNet, a leader in internet stock trading, invites new clients to make a one-time stock purchase at no commission. Just place your electronic order via our World-Wide Web site at: http://www.stocknet.com before the close of the market today.”

Joe Netsurfer sees the post, and calls the broker by telephone and says that he would like to purchase 100 shares of IBM. When he gets the purchase order confirmation from StockNet, it includes a charge for commission. Joe is upset and refuses to pay the commission, insisting that StockNet is contractually bound to waive the commission fee based on the advertisement. Is Joe Right?

11. No. 2-206(1) provides that an offer may be accepted in any reasonable manner “unless otherwise unambiguously indicated by the language.” Here, the language unambiguously states that in order to get the commission-free service, the customer must place the electronic order over the web. Joe placed his order by phone, and so his act was not an acceptance of the language of the offer. Thus, there was no contract for a non-commission sale.

12. Contractor Bill makes a bid on a home remodeling job to supply materials at a given cost. On his standard bid form, which he signed, is a statement that “this offer is to be considered open for six months from the date of its preparation.” Homeowner Harry, after considering several other

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bids, finally gets around to calling Bill to accept his bid four months later. On the phone, Bill refuses to honor the original bid claiming that it has expired. Harry sues Bill claiming breach of contract. Bill claims that “by the UCC, no offer may extend past 3 months.” What result?

12. 2-205 provides that “An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable...during the time stated...but in no event may such period of irrevocability exceed three months.” Here, Bill is a “merchant” under 2-104 because he “deals in goods of the kind.” The writing was signed by Bill, and it gave assurances that it would be open for 6 months. Although the bid became revocable after 3 months, Bill did not take any action to revoke it. Under the common law “dispatch rule” incorporated by 1-103, an offer is irrevocable after the offeree notifies the offeror of acceptance. Here, although Bill could have revoked the offer after three months, he did not do so before Harry accepted by phone. As such, Bill is obligated to supply the materials according to his bid, which has been made binding by Harry’s timely acceptance.

13. (T/F) To be binding, an agreement modifying a contract for the sale of goods needs additional consideration and must satisfy the statute of frauds.

13. False. 2-209(1).

14. (T/F) A writing that does not contain a handwritten signature does not satisfy the statute of frauds requirement of UCC 2-201.

14. False. 1-201(39).

15. (T/F) A writing that satisfies the statute of frauds requirement of UCC 2-201 establishes, as a matter of law, the existence of a contract.

15. False. 2-201. (The statute of frauds only provides a bar as to when a contract is not enforceable, it does not provide conclusively that a contract exists. It is a two part analysis: First, satisfy the statute of frauds with a sufficient writing or otherwise, then you may argue that a contract exists based on all evidence, including oral evidence.)

16. Toro Lawnmower sells “Ride-Along” mowers for $500 each wholesale. On Sep. 15th, Johnson Hardware Co. placed a telephone order with Toro Lawnmower Co. for 100 “Ride-Along” mowers for delivery the following week. When then mowers did not show up on time, Johnson called Toro to inquire as to their status. Toro replied that there was no contract. If Johnson sues for breach, what result?

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16. 2-201(1) provides that “a contract for the sale of goods for the price of $500 or more is not enforceable by way of action...unless there is some writing.” Here there is no writing because the order was oral over the telephone. Since the price of the order is greater than $500, the contract is unenforceable.

17. Same facts as in Question 16 above, except that Toro, upon receipt of the order, dispatched a confirmation memorandum which stated: “This confirms your telephone order of September 15th, delivery instructions to follow.” Johnson produces this memo at trial. How would this affect the outcome, if at all?

17. 2-201(2) provides a limited exception to the signature requirement of 2-201(1) as between merchants. Specifically, “if within a reasonable time a writing in confirmation of the contract and sufficient against the sender is received...it satisfies the requirements of subsection (1).” Here, Toro and Johnson are merchants under 1-104 because they “deal in goods of the kind.” However, the writing is not sufficient against the seller, because it is does not contain a quantity term, and thus “is not enforceable...beyond the quantity of goods shown in such writing” under subsection (1). Thus, although the memo provides a date and some evidence of the existence of a contract, it is not sufficient to satisfy the statute of frauds, even between merchants.

18. Assume that the confirmation memo in question 17 above stated: “This confirms your telephone order of September 15th, quantity 100 mowers.” Johnson receives the memo without objection and Toro delivers the mowers. Then if Johnson were to refuse to pay, claiming that there was no contract, could Toro overcome the statute of frauds?

18. Yes. 2-201(2) provides that between merchants, a confirmation memo is sufficient to satisfy the statute of frauds if “sufficient against the sender...and the party receiving it has reason to know its contents...unless written notice of objection to its contents is given within 10 days after it is received.” Here, the memo is sufficient against the sender because it is “sufficient to indicate that a contract for sale has been made between the parties”, it is “signed” by the sender (at least it is on his letterhead or form and is thus authenticated under 1-201(39)), and it contains a quantity term. The receiving party is a merchant who just placed an order with Toro and therefore has reason to know the contents of the memo. Furthermore, there was no objection to the contents. Thus, the memo would overcome the statute of frauds.

19. Thermoplastic makes custom plastic parts for industrial use. Ace Plumbing supply orders 100 custom-made elbow-joint pipes from Thermoplastic by telephone. According to the specifications, each of the

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custom-made pipes is to be embossed with Ace’s logo. Thermoplastic immediately begins manufacture of the custom pipes. A day later, Ace calls to cancel the order. Thermoplastic sues for breach. Will Thermoplastic be able to overcome the statute of frauds even though there is no written evidence of the contract?

19. Yes. 2-201(3)(a) provides an exception to the writing requirement based on the partial performance of the manufacturer. Specifically, “if the goods are to be specially manufactured for the buyer, and are not suitable for sale to others” the contract is still enforceable if the manufacturer “has made...a substantial beginning of their manufacture” “before notice of repudiation is received and under circumstances which reasonably indicate that the goods are for the buyer.” Here, the goods are specially manufactured because they are custom made to the buyer’s specification. Furthermore, they are not suitable for resale because they are embossed with Ace’s logo. The manufacture was begun before repudiation. Also, since the goods have Ace’s logo, the circumstances reasonably indicate that they are for Ace. Thus, Thermoplastic can overcome the statute of frauds.

20. Suppose that in the above Question 19, Thermoplastic makes a first batch of 50 pipes, and delivers them to Ace. Ace then pays for the 50. Before Thermoplastic can begin manufacture of the second batch of 50, Ace states that they do not want any more. Thermoplastic sues for breach with respect to the remaining 50. Will Thermoplastic be able to overcome the statute of frauds with respect to the remaining 50 units?

20. Probably not. 2-201(3)(c) provides that a contract is enforceable “with respect to goods for which payment has been made.” Here, payment has been made with respect to the first 50. However, since manufacture or commitments for procurement of the next 50 has not yet begun, 2-201(3)(a) does not apply. Thus, the code does not provide for enforceability of the remainder of the oral contract in this case with respect to the goods for which payment has not yet been made.

21. (T/F) Evidence of course of dealing or usage of trade may not be offered to explain or supplement a confirmatory memorandum which was intended by the parties to be the final and complete expression of the parties’ agreement.

21. False. 2-202(a).

22. (T/F) Where a course of dealing between contracting parties is inconsistent with an applicable local usage of trade, the contract shall be interpreted according to the local trade usage.

22. False. 1-205(4).

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23. (T/F) Where the express terms of a contract is inconsistent with a course of performance, the contract shall be interpreted according to the express terms.

23. True 2-208(2).

24. (T/F) If the price is left to be agreed upon by the parties, and the parties fail to agree, and the parties otherwise intend to be contractually bound, then the price is a reasonable price at the time of delivery.

24. True. 2-305(1)(b)

25. (T/F) The obligation of the seller is to transfer and deliver the goods to the buyer.

25. True. 2-301

26. (T/F) Unless otherwise agreed, the seller determines the place for delivery of the goods.

26. False. 2-308

27. (T/F) Unless otherwise agreed, the buyer may treat the contract as being canceled upon the passing of a reasonable time without delivery of the goods by the seller.

27. False. 2-309

28. Seller contracts to sell 1,000 gizmos to the buyer for $3,000. The contract terms are “F.O.B. buyer’s place of business.”

a) What kind of contract is this?

a) This is a destination contract.

b) What kind of shipment does this contract require?

b) Under 2-319(b), this contract requires that the seller “must at his own expense and risk transport the goods” to the buyer’s place of business and “tender delivery of them in the manner provided in” 2-503.

c). When are the goods delivered?

c). Under 2-503(1), the goods are delivered when the seller “put[s] and hold[s] conforming goods at the buyer’s disposition and give[s] the buyer

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any notification reasonably necessary to enable him to take delivery.” In this example, it would be at the time that the goods arrived at the buyer’s place of business, and the buyer was notified.

d). When are the goods required to be delivered?

d). Since the contract does not expressly provide for a delivery date, then 2-309(a) provides that the goods shall be delivered within a “reasonable time.” If the reasonable period has already expired, the seller is not in breach unless the buyer has reasonably notified the seller what the reasonable time is. See comment 5 to 2-309.

e). Who pays the expense of the freight?

e) The seller must “at his own expense...transport the goods” under 2-319(1)(b).

f). When/Where is payment due?

f). Since it has been left out of the contract, 2-310(a) provides for payment at the “time and place at which the buyer is to receive the goods.” Here, that is the buyer’s place of business, on the date of delivery. The buyer has the right to inspect the goods under 2-513(1) before payment.

g). Who pays for inspection of the goods?

g). Under 2-513(2) the buyer pays for the inspection, but may recover inspection expenses from the seller if the buyer properly rejects.

29. (T/F) If the court finds a particular contract term to be unconscionable, it may refuse to enforce the entire contract, even those terms that are not unconscionable.

29. True. 2-302

30. A-1 Computers sells computer hardware and software to local schools. The University is setting up a new computer lab, and wants to purchase several new computers and associated accessories and software from A-1. A-1 knows that one of the maker of one of the software packages it sells the University is about to go out of business, meaning that technical support will no longer be available. The University is unaware of this future problem, and buys the software. About a year later, the University tries to expand their system, and finds out that they can not upgrade their software because the maker is out of business. The University sues A-1 computers for breach of the doctrine of goods faith, seeking to recover the enormous costs that they have already sunk into the system. What result?

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30. 1-203 incorporates a duty of good faith into every contract for the sale of goods. However, it only imposes the duty on “performance or enforcement” of the contract, not negotiation of the contract. Here, A-1 withheld knowledge during negotiation, but did not act in bad faith during performance or enforcement. 1-103 provides that common-law principles that are not superseded by the code are still applicable. Thus, the University must sue under one of the common law principles that regulates contract formation such as fraud, mistake or unconscionability. However, it is unlikely that any of these would be successful under these facts due to the relatively equal bargaining position and expected sophistication of the parties.

31. (T/F) “Good faith” in the case of a merchant means only “honesty in fact.”

31. False. 2-103(1)(b)

32. Harry’s Auto Shop enters into a requirements contract with Industrial Oil, Inc. to all of its requirements of motor oil from Industrial at a fixed cost. Shortly after the contract is made, the price of oil skyrockets due to a crisis in the middle east. Harry realizes that due to his low contract price he could resell some of the oil that he is getting from Industrial to other garages around town at a profit. So Harry immediately increases his monthly order to Industrial. When Industrial refuses to meet Harry’s increased demand, Harry comes to you with the idea that he will sue Industrial for breach. What should you tell Harry?

32. 2-306 covers requirements contracts. It provides that a quantity term which is measured by “the requirements of the buyer means such actual...requirements as may occur in good faith.” 2-103(1)(b) defines good faith in the a case of a merchant as “honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.” Here, Harry is ordering more than his “actual” requirements. Furthermore, it appears that Harry does not even satisfy the subjective standard of “honesty in fact” because he is intentionally trying to take advantage of the requirements contract. 1-203 further imposes a duty of good faith in the “enforcement” of a contract. Thus, Harry should be told that he has no case, and furthermore that he should withdraw his order for more oil and stop any enforcement actions because he has not acted in good faith.

33. Rowan is a car broker. Martin wishes to buy a particular model of car by a certain date to drive in a race. Tucker, owns such a car, and offers to sell it to Rowan for $13,000. However, once Tucker finds out that Rowan intends to resell the car for $15,000 to Martin, Tucker inists on a price

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increase to $14,500. Rowan finally agrees, knowing that he will lose any sale whatsoever if he doesn’t get the car and resell it to Martin by the day of the race. What advice of Rowan?

33. Although 2-209(1) provides that a modification to a contract requires no additional consideration to be binding, the comments to that section explain that the modifications must still meet the good faith test of 1-203. Tucker appears not to be a merchant under 2-104 because he does not deal in goods of the kind. Thus, the standard of “Good faith” as defined in 1-201(19) is “honesty in fact.” However, since this appears to be mere extortion, Tucker would probably not even meet that subjective standard. There must be a legitimate commercial reason for the modification, rather than mere extortion of a modification due to bad faith exploitation of the other party’s inability to cover at a late date.

34. John advertises a kitchen table and chairs for sale in the newspaper classifieds. Larry answers the ad, and comes over to pick up the furniture and pay for it. After Larry has paid John, he realizes that none of the furniture will fit in the back of his car. So Larry leaves the furniture in place and decides to quickly go borrow a truck from a friend and return. However, during the interim, the furniture is destroyed when John’s house burns down. Larry demands a refund of his payment. John refuses. Is Larry entitled to a refund?

34. No. 2-509(3) provides the risk of loss rules for sales of goods not involving shipment or a bailee. Specifically, “the risk of loss passes to the buyer on tender of delivery” if the seller is not a merchant. Here, John is clearly not a merchant because he does not deal in goods of the kind under 2-104(1). Also John is not a bailee because he simply allowed Larry to postpone the time of pickup, and thus does not fall under 2-509(2). Thus, the question is whether John tendered delivery. 2-503 provides that to tender delivery is to “put and hold conforming goods at the buyer’s disposition.” Here, the goods were clearly available for the buyer to dispose of them. It was the buyer who delayed in bringing the wrong vehicle. Thus, Larry is not entitled to a refund because the risk of loss passed to him before the house burned down.

35. Seller in L.A. contracts to ship 100 porcelain toilets to Buyer in N.Y. under a contract that provides shipment terms “F.O.B. Los Angeles.” Seller packages the toilets and arranges for their transport to N.Y. by train. During transportation, several of the porcelain toilets crack. Upon investigation, it is determined that faulty packaging during transit caused the cracks. The seller contends that since this was a shipment contract, the risk of loss passed to the buyer once the transportation was arranged and the toilets were loaded on the train. The buyer has come to you for advice. How do you advise the buyer concerning the risk of loss?

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35. 2-319(1)(a) provides that in a shipment contract, the seller bears the risk of putting the goods into the possession of the carrier and shipping them in the manner provided in 2-504. 2-504 states that the seller must “make such a contract for their transportation as may be reasonable having regard to the nature of the goods.” Here, the seller has improperly packaged the goods for transit because the nature of porcelain toilets is that they are susceptible to breakage from repeated vibration and shock. Thus, the seller did not make a proper contract for their transportation. Since the seller did not comply with the requirements of 2-504, the buyer should be advised that the risk of loss did not pass to him under 2-319(1)(a).

36. (T/F) The buyer must pay the contract price for conforming goods if they are lost or damaged within a commercially reasonable time after their risk of loss has passed to him.

36. True. 2-709(1)(a)

37. (T/F) If the cure of a non-conforming tender consists of replacing the non-conforming goods with a new tender, the risk of loss remains on the seller with respect to the non-conforming goods that were originally tendered.

37. True. 2-510(1)

38. A shipment contract calls for the seller in L.A. to ship 10,000 wooden brooms by rail to the buyer in N.Y.. Due to a mix-up in the seller’s warehouse, 10,000 plastic brooms are shipped instead. During transit, the train is derailed and the brooms are burned. During discovery for the seller’s action to recover the contract price from the buyer, the mistake comes to light. Where does the risk of loss lie? With the seller or with the buyer? Does it matter whether the buyer actually knew that non-conforming goods were shipped?

38. The risk of loss remains with the seller. 2-510(1) provides that “where a tender or delivery of goods...give[s] a right of rejection the risk of their loss remains on the seller until cure or acceptance.” Since the seller shipped plastic brooms instead of wooden brooms, the buyer has a right of rejection. This is true whether or not the buyer actually knew of the non-conformity. It is the right of rejection which controls the risk of loss, not an actual rejection. Thus, the risk of loss remains on the seller.

39. Industrial Lighting Co. purchased 2,000 light fixtures from General Electric. The goods were delivered and accepted without inspection at Industrial’s warehouse. During a subsequent inspection, Industrial

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realized that the fixtures were defective and immediately made a successful revocation. However, before General Electric could return to pick up the fixtures for rework, they were destroyed by vandals in Industrial’s warehouse. Industrial has sufficient insurance coverage to cover the loss. What amount of the loss, if any, is GE liable for?

39. None. GE has delivered non-conforming goods. However, their risk of loss passed to the buyer under 2-510(1) when they were originally accepted. Although Industrial has rightfully revoked, 2-510(2) provides that “where the buyer rightfully revokes acceptance he may to the extent of any deficiency in his effective insurance coverage treat the risk of loss as having rested on the seller from the beginning.” Here, Industrial has sufficient insurance to cover the entire loss. Thus, there is no deficiency to charge back to the seller.

40. Jenkins agreed to purchase goods from Smedley, F.O.B. Smedley’s plant. The goods in Smedley’s plant are separated and stenciled with Jenkins’ name. Jenkins then telephones Smedley and repudiates. The goods are subsequently destroyed by fire. Assume that Smedley had no insurance on the goods. If Smedley sues Jenkins for the purchase price, what result?

40. Under §2-709, Smedley may recover the price of “goods lost or damaged within a commercially reasonable time after risk of their loss has passed to the buyer.” Furthermore, under 2-510(3) “where the buyer as to [1] conforming goods [2] already identified to the contract for sale repudiates...before risk of loss has passed to him, the seller may to the extent of [3] any deficiency in his effective insurance coverage treat the risk of loss as resting on the buyer for a commercially reasonable time.” Here, the goods are assumed to be conforming. Also, the goods have been identified, and the deficiency in insurance coverage is 100%. Thus, the only issue is whether the risk of loss was on the buyer for a commercially reasonable time. If so, then Smedley may recover the entire amount because the risk of loss would have passed to the buyer.

41. Annette wishes to buy a car from a used car dealer. With regard to a particular Geo Metro on his lot, the dealer tells Annette, “I can really recommend this baby. She can really go. I know that you live in a hilly neighborhood, but this car can climb hills easily.” Annette purchases the car using a contract that disclaims all implied warranties. Shortly after purchasing the car, it stalls on the hill up to her home. Assuming that the implied warranty disclaimer was effective, would Annette have any basis to bring an action for breach of express warranty?

41. Yes. 2-313(1) provides guidance on the creation of express warranties. Specifically, any “affirmation of fact or promise” or

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“description of the goods” which is “part of the basis of the bargain” creates an express warranty that the goods will conform to the affirmation, promise, or description. However, 2-313(2) states that “an affirmation merely of the value of the goods...[or] the seller’s opinion or commendation of the goods does not create a warranty.” The salesman here has made several statements. “I can really recommend this baby” appears to be a clear statement of opinion or commendation, and thus has no legal effect. “She can really go” also appears to be an opinion or commendation, although it may be viewed as creating an express warranty that the car at least runs. The scope of the warranty created by that statement alone is probably insufficient to cover breakdown on a hill. However, by stating that the car can climb hills easily, the salesman appears to have affirmed or described that the car will at least climb hills. Especially given the context of the statement that he knows her neighborhood specifically. The statement is “part of the basis of the bargain” because Annette heard it during negotiations for purchase.

42. (T/F) A sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods will be of fair average quality.

42. False. 2-313(1)(c).

43. (T/F) Goods to be merchantable must be at least adequately contained, packaged, and labeled.

43. True. 2-314(2)(e)

44. Industrial Iron Works, Inc. is a commercial foundry. Dixieline Lumber entered a contract with Industrial to manufacture garden tools (rakes, hoes, etc.) for resale by Dixieline. Industrial recommended that the tools be manufactured from low grade iron rather than steel, in order to save costs. However, Dixieline received numerous complaints about the tools breaking under normal use by customers. Dixieline sues for breach of implied warranty of merchantability. Industrial claims that there is no breach because the tools have no manufacturing defects. Has there been a breach?

44. Yes. Industrial is a “merchant with respect to goods of that kind” for iron tools. Thus, under 2-314(2)(c) goods, to be merchantable, must be “fit for the ordinary purposes for which such goods are used.” Here, the ordinary purpose of a garden tool is normal use by customers in their garden. The tools in question do not satisfy that standard because of a design defect. Low grade iron is too weak for the use in garden tools. It does not matter whether the defect was a design defect or a manufacturing

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defect. Thus, there has been a breach of the implied warranty of merchantability.

45. Consumer purchases “Flounder Fillets” from the local retail grocery store, and is injured by a bone in the fillets. The grocery store’s procedure is to merely unpack the goods from their shipping containers, and place them on the shelves. Does the consumer have a claim against the grocery store for breach of the implied warranty of merchantability?

45. Probably not. There are two questions of fact here. First, the threshold issue is whether the grocery is a “merchant with respect to goods of the kind” under 2-314. Under 2-104 comment 2, the phrase “with respect to goods of that kind” limits the group of merchants for the purpose of implied warranties. Also, 2-314 comment 3 implies that a person is not a merchant unless he makes more than “isolated sales”. Here, however, the grocery would seem to be have made repeated sales. A counter-argument is that the grocery is not inspecting the goods, and so has no way of preventing the harm. However, assuming even if the grocery is a merchant, then there is the further issue of fact as to whether the presence of the bones violates the implied warranty of merchantability. This turns on whether any of the 2-314(2) standards have been violated. Even though a product causes harm, it is merchantable if its quality is consistent with these standards. Here, most fillets probably have bones, and it might be reasonable for a consumer to expect that a large bone would be present, particularly in the absence of any suggestion otherwise by the grocery. Thus, the fish would seem to be fit “for the ordinary purpose” under 2-314(2)(c).

46. (T/F) Goods do not breach the implied warranty of fitness for a particular purpose unless they are defective in some way.

46. False. 2-315

47. (T/F) Goods do not breach the implied warranty of merchantability unless they are defective in some way.

47. True. 2-314

48. John Smith owned a portable electric lift for working on his car. After several years of use, the hydraulic fluid had mostly leaked out due to leaking by the seals under normal use. John went to Kragen Auto, where he originally purchased the lift, and asked for assistance in selecting a replacement hydraulic fluid for his electric lift. The store clerk handed him a bottle of hydraulic fluid, and John made the replacement. However, due to the nature of the replacement fluid, which was not designed for electric

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lifts, the lift failed and damaged his car. What cause of action might John have against Kragen.

48. John probably has a breach of the implied warranty of fitness for a particular purpose under 2-315. 2-315 provides a warranty if [1] “the seller has reason to know [2] of the particular purpose for which the goods are required and [3] that the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods.” Here, John told the seller of his particular purpose of needing hydraulic fluid for his electric lift. Furthermore, John reasonably relied on the seller’s judgment in selecting the proper type of fluid.

49. Ben Miller purchased a new and expensive Whirlpool gas range home use from Corona Appliances, the local appliance store. The range malfunctioned and exploded during normal use. Although no persons were injured, the Miller’s next-door neighbor’s house burned down. Ben’s next door neighbor, Charlie, brings an action against Corona and Whirlpool for breach of implied warranty of merchantability, and for damages to his house. What must Charlie argue to recover?

49. Under 2-314(2)(c) the range violates the implied warranty of merchantability because it is not “fit for the ordinary purposes for which such goods are used.” However, the real issue is whether Charlie can recover 1) for the damages to his property (horizontal privity), and 2) against a remote manufacturer (vertical privity). Hopefully, Charlie’s jurisdiction has adopted Alternative “C” to 2-318 concerning horizontal privity. Alternative “C” provides that an implied warranty extends to any person “who is injured by breach of the warranty,” Provided that they “may reasonably be expected to...be affected by the goods.” Thus, Charlie would need to argue that he was reasonably expected to be affected by the goods to be able to recover for damages to his house from at least the local Corona Appliance store because of horizontal contractual privity. Whether Ben can recover against Whirlpool depends on whether the local jurisdiction requires absolute vertical privity. Charlie’s best argument is that forwarded in Randy Knitwear, that the manufacturer relies so heavily on advertising that it would be unfair for the manufacturer (who is not a retailer) to benefit substantially from the advertising that induces the local retail sales, but then claim lack of privity if the product fails.

50. (T/F) The disclaimer of an express warranty is effective to the extent that it is inconsistent with the language of the express warranty.

50. False. 2-316(1)

51. (T/F) A disclaimer of the implied warranty of fitness for a particular purpose must be in a conspicuous writing.

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51. True. 2-316(2).

52. (T/F) A disclaimer of the implied warranty of merchantability must be in a conspicuous writing.

52. False. 2-316(2)

53. Pacific Surf Shop wishes to buy 10 surfboards from Bill Minard, a local surfboard shaper. During contract negotiations over price, delivery schedule, etc., Bill insists that Pacific come by his shaping room and pre-inspect the boards to make sure that they are what Pacific wants. Pacific refuses to do so claiming that it does not have time. The contract for sale of the surfboards is signed, and the boards are delivered on time. Upon receipt of the boards, Pacific is unable to sell them because they are shaped for big waves, and Pacific’s customers mostly surf the smaller local waves. Pacific tries to return the boards, but Bill will not take them back. Pacific then sues for breach of the implied warranty of fitness for a particular purpose. What result?

53. 2-315 provides the implied warranty for fitness for a particular purpose. Here, it appears that Bill had “reason to know of the particular purpose” for which Pacific ordered the boards, i.e. for resale to local surfers. It also appears that Pacific relied on Bill’s skill and expertise in shaping the boards suitably. However, 2-316(3)(b) extinguishes implied warranties as to “defects which and examination ought to in the circumstances to have revealed to him” when “the buyer before entering the contract...has refused to examine the goods.” Here, Pacific refused to inspect the goods before contract formation. Thus, there is no implied warranty applicable to the sale, and Pacific will not be able to recover under that theory.

54. Consolidated Agricultural Supplies, Inc. manufactures tractors. Jim the farmer purchased a custom-made crop harvester from Consolidated. In the purchase contract, conspicuously worded, was a statement that read “Consolidated warranties that the tractor will be free from defects in material and workmanship for 5 years. The buyer’s exclusive remedy for defects in material and workmanship during the warranty period is repair or replacement of the defective part or assembly. Consolidated hereby disclaims all other express warranties and all implied warranties. Consolidated bears no liability beyond the exclusive remedies stated herein, and disclaims liability for any and all consequential damages.” Jim signed the contract and took delivery of the tractor. The tractor failed due to a latent defect in the engine during the first season’s harvest, causing Jim to lose 1/2 of his crops due to over-ripening while he waited for Consolidated

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to fix the tractor. Jim brings an action for damages for the loss of his crops due to breach of express warranty. What result?

54. Consolidated has expressly warranted under 2-313 that the materials will be free from defects, and there appears to be a plain breach of that warranty. 2-719 provides for the contractual modification or limitation of remedies. Specifically, 2-719(1)(a) provides that the seller may limit or alter the measure of damages “to repair and replacement of non-conforming goods or parts.” Here, the contract expressly states that limited remedy. 2-719(1)(b) provides that if the remedy is agreed to be exclusive, then it is the sole remedy. Here, the contract expressly states that it is the exclusive remedy. Furthermore, 2-719(3) states that “consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable.” Here, Consolidated has excluded consequential damages. Thus, the only issue is whether the exclusion is unconscionable. 2-719(3) provides the further guidance that “limitation of damages where the loss is commercial” is not prima facie unconscionable. Assuming that both parties have relatively equal bargaining power, or at least that a price concession was made for the disclaimers, Jim will probably not be able to recover the consequential damages to his crops.

55. Andy buys a new jet-ski from the local Kawasaki dealership. Andy takes the jet-ski home with him. The next day, during Andy’s first use of the jet-ski, it breaks down almost immediately in the middle of the bay. Andy returns the jet-ski to the dealer and demands his money back. The dealer refuses to refund his money, claiming that he has accepted the jet-ski, and thus is liable to pay the purchase price. Has Andy accepted?

55. No. Under 2-606, acceptance of the goods does not occur until “after a reasonable opportunity to inspect the goods [the buyer] signifies to the seller that the goods are conforming or that he will take or retain them in spite of the non-conformity.” Here, there was not a reasonable opportunity to inspect the goods. Although it is not clear how long a “reasonable opportunity” is, it is clear that it should include test-driving the jet-ski. Thus, Andy has not accepted the jet ski.

56. (T/F) Where a tender has been accepted, the buyer must notify the seller within a reasonable time of any breach that the buyer should have discovered or be barred from any remedy for that breach.

56. True. 2-607(3)(a)

57. (T/F) If the goods or tender of delivery fail in any respect to conform to the contract the buyer may reject the whole of the goods provided that such non-conformity causes material damage to the buyer.

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57. False. 2-601.

58. Hartz Seed Co. is a supplier of soy-beans. Colman contracted with Hartz for the delivery of one ton of soy-bean seeds, for delivery at Colman’s plant. After delivery, Colman began the process of inspecting the soy-bean seeds for quality. The inspection testing procedure is involved, and usually takes several weeks to complete because it involves growing at least some of the seeds. After one month, Colman noticed several defects in the seedlings that were growing. Colman immediately notified Hartz of the defects, and rejected the entire lot. Hartz comes to you for advice concerning a possible action for breach against Colman. Specifically, Hartz asks you whether Colman has accepted the seeds, or properly rejected the seeds. How do you advise Hartz?

58. To make an effective rejection, the buyer must have had the right to reject under 2-601. However, that standard is fairly low in that the buyer has the right to “reject the whole” if the goods “fail in any respect to conform to the contract.” Here, the seeds are defective, and thus Colman had the right to reject. Colman must take some affirmative action to exercise that right of rejection. Under 2-606(1)(b), acceptance may occur if the buyer “fails to make an effective rejection...but such acceptance does not occur until the buyer has had a reasonable opportunity to inspect the goods.” Furthermore, under 2-602 the rejection of the goods must occur “within a reasonable time after their tender or delivery,” and the rejection is “ineffective unless the buyer seasonably notifies the seller.” Thus, the issue here is whether the rejection and notice occurred within a reasonable time. Due to the involved nature of the inspection process, Colman did not have a “reasonable opportunity to inspect” the goods under 2-606(1)(b) until it grew some of the seedlings because it could not discover the defect until then. Thus, Hartz should be advised that Colman did not accept, but rather made an effective rejection of the seeds.

59. (T/F) The buyer’s failure to state in connection with a rejection a particular defect which is ascertainable by reasonable inspection precludes him from relying on the unstated defect to justify rejection where the seller could have cured the defect if the buyer had stated it seasonably.

59. True. 2-605

60. (T/F) If the time for performance has not yet expired, the seller may seasonably notify the buyer of his intent to cure, and then make a conforming delivery provided that the seller had reasonable grounds for believing that the non-conforming tender would be acceptable.

60. False. 2-508(1)

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61. Paul buys a toaster at the local appliance store. The toaster is in a box, factory sealed, and unopened. When Paul returns home and plugs in the toaster, it shorts out. Paul returns the toaster to the store and demands his money back. The appliance store manager tells Paul that he will fix the toaster by replacing a part. Paul refuses, demanding his money back. Does the appliance store have the right to repair the toaster instead of refunding the money?

61. Yes. Although Paul has the right to reject under 2-601, and has taken steps to rightfully reject under 2-602 (and thus has not accepted under 2-606 because of his right to inspect the goods before acceptance), the appliance store may suspend Paul’s right to reject for a “further reasonable time” under 2-508(2). Specifically, 2-508(2) requires that the seller “have reasonable grounds to believe” that the toaster would have been acceptable, and that he “seasonably notify the buyer” of his intent to cure. Here, assuming that the appliance store did not have a rash of defective toasters, it has reasonable grounds to believe that a toaster in a factory sealed unopened box would be acceptable to the buyer. Thus, the appliance store is entitled to the further reasonable time to cure the defective toaster by repairing. It would not affect the value of the toaster if it had a single part replaced, and thus repairing it would make it conform to the contract.

62. (T/F) In an installment contract, the buyer has the right to reject any installment which is non-conforming if the non-conformity substantially impairs the value of that installment and cannot be cured.

62. True. 2-612(2).

63. (T/F) In order for a seller to have the right to cure a defective tender of a particular installment in an installment contract, the seller must have had reasonable grounds to believe that the tender would have been acceptable.

63. False. 2-612(2)

64. (T/F) In a shipment contract, the buyer has the right to reject the goods if the tender or delivery fails in any manner to conform to the contract.

64. False. 2-504

65. Bill ordered an airplane from Fullerton Aircraft for his own personal use. Bill took delivery of the aircraft, and flew it for several months before determining that it caused him joint pain due to vibration. Bill wishes to return the airplane and either have the vibration dampened, or get a refund. In the purchase contract, no mention is made of particular vibration

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specifications, and a test of the aircraft shows that it does not experience more than an normal level of vibration. Bill has come to you for advice on whether to proceed with an action for breach of contract. How should you advise Bill?

65. Under 2-606(b), Bill has accepted the airplane because he has “failed to make an effective rejection” (i.e. he has not notified the seller in a reasonable time after delivery under 2-602) after a “reasonable opportunity to inspect” it. Here, Bill has flown the aircraft for several months, and that is probably beyond a reasonable time for initial rejection. Thus, Bill’s only option is to attempt to revoke. 2-608(1) provides that a buyer may revoke if the “non-conformity substantially impairs its value to him.” Here, Bill may be overly sensitive to vibration, so the value of the aircraft may actually be substantially less to him personally. However, this subjective standard only applies if there is a “non-conformity” in the first place, which is determined by reference to the contract. Here, the contract is silent on vibration, and so there is no express warranty. There is an implied warranty of merchantability under 2-314, but that only requires that the goods “be fit for their ordinary purpose” or “pass without objection in the trade.” Since the airplane only has a normal level of vibration, it does not breach the implied warranty of merchantability. Also, there is no implied warranty of fitness under 2-315 for Bill’s particular sensitivity because there is nothing in the facts to show that the seller “had reason to know” of Bill’s condition at the time of contracting. Thus, there appears to be no non-conformity which would give rise to a right to revoke.

66. Unique Systems, Inc. develops and manufactures hair spray. Zotos, Inc. is a distributor of cosmetic products. Zotos and Unique enter into a contract for Unique to develop a new hair spray, and for Zotos to purchase a large quantity of that hairspray for resale. After contract formation, but prior to delivery of the new hair spray, Zotos decides that it wishes to perform a marketability test of a small lot of the hairspray to determine the anticipated demand before committing to accepting delivery of the whole amount. Although the contract does not include any such provision, Zotos makes its intention not to comply with the contract unambiguously clear to Unique. Unique approaches you concerning its rights under the contract. Specifically, Unique asks you whether it may immediately stop production of this new hairspray and withhold any delivery without breaching the contract. How do you advise Unique?

66. 2-610 provides that “when either party repudiates the contract with respect to a performance not yet due the loss of which will substantially impair the value of the contract to the other, the aggrieved party may...suspend his own performance.” Here, Zotos has repudiated because it has clearly indicated its intention not comply with the contract by unilaterally inserting the additional testing requirement. Zotos’ obligation

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under 2-301 is to accept and pay in accordance with the contract. Clearly, this repudiation will substantially impair the value of the contract to Unique. Thus, Unique is entitled to suspend its own performance by stopping production and withholding any delivery.

67. (T/F) If a repudiating party timely retracts the repudiation, the aggrieved party may still demand adequate assurances of performance under 2-609.

67. True. 2-611(2).

68. S.J. Groves & Sons Co. is a general construction contractor. Warner Co. is a concrete supplier. Groves and Warner enter into an installment contract for Warner to supply Groves’ weekly requirements of concrete during its construction of a building. On several occasions, Warner’s deliveries are short because it is unable to keep up with Groves’ construction schedule. This results in heavy costs of overtime and schedule slippage to Groves. Groves has come to you seeking advice. Specifically, Groves wishes to know whether it can cancel the contract with Warner, and instead enter into a new and similar contract with a different supplier at the same price. How do you advise Groves?

68. Installment contracts are governed by 2-612. 2-612(3) provides that whenever “non-conformity or default with respect to one or more installments substantially impairs the value of the whole contract, there is a breach of the whole.” Here, more than one of the deliveries has been short. Also, since Groves has incurred considerable expenses and schedule slippage due to the short deliveries, the value of the whole contract is substantially impaired. Thus, Groves may treat the entire contract as being breached and cancel under 2-711(1). Since the new contract would be similar and at the same price, there is no appearance of bad faith for Groves to cancel the contract. However, Groves must be careful under 2-612(3) not to accept any further non-conforming installments without “seasonably notifying of cancellation”, otherwise, he may reinstate the contract. However, since it is more clear that “reasonable grounds for insecurity” have arisen than it is clear that the value of the whole contract is substantially impaired, a safer course may be for Groves to demand adequate assurances of performance under 2-609. For example, Groves may ask for payment for the losses already incurred and a performance bond against future losses. Failure of Warner to provide adequate assurance within a reasonable time would be repudiation under 2-609(4).

69. (T/F) Where the buyer rightfully rejects, then with respect to the goods involved, the buyer may cancel and whether or not he has canceled, may recover so much of the price as has been paid.

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69. True. 2-711(1)

70. A, in New York, contracts to buy lockers from B in V.A. for $80,000 F.O.B. seller’s plant in VA. The buyer, A, had already determined that shipping costs between VA and NY were $7,000, and that a local contractor would install them for $2,000, bringing the total cost to A to $89,000 installed. B, the seller, repudiated. After incurring $50 long distance phone bills, A covered under a contract with a local provider C that cost $92,000 delivered and installed. What are A’s damages against B?

70. 2-712(1) provides that the buyer may cover in good faith “any reasonable purchase of...goods in substitution for those due from the seller.” Here, it appears that the cover contract was a reasonable substitution because they were both for lockers. Under 2-712(2) the buyer may recover “the difference between the cost of cover and the contract price, together with any incidental or consequential damages...but less expenses saved in consequence of seller’s breach.” 2-715(1) defines incidental damages expenses “reasonably incurred...in connection with effecting cover.” Thus, the difference between the cost of cover and the contract price is $92,000-$80,000 = $12,000. The expenses saved in consequence of the seller’s breach were the shipping and installation costs of $7,000+$2,000=$9,000. Thus, the buyer may recover $12,000-$9,000=$3,000 on the contract, plus $50 of incidental damages for the long distance bill incurred in covering.

71. Seller (NY) and Buyer (LA) enter into a contract for the sale of a pot-hole filling material. The contract price is $2,000 and the shipping expense from NY to LA is $100. The shipment date by the seller is September 1st, at which time the price in NY has gone up to $2,100 and the price in LA has gone up to $2,200. The arrival date in LA is September 15th, at which time the price in NY has gone up to $2,300, and the price in LA has gone up to $2,400.

(a) Assume the contract terms are F.O.B. NY and that the goods are shipped properly. What are the buyers damages if buyer discovers non-conformity upon receipt inspection and properly rejects?

(a) Under 2-713(1) provides that the damages are the contract-market differential, together with incidental and consequential damages, less the amount saved by the breach. The time of measuring the market price is the time “the buyer learned of the breach.” Here, the buyer learned of the breach on the date of arrival. 2-713(2) provides that the market price is to be determined “in the cases of rejection after arrival..., as of the place of arrival.” Here, there is a rejection after arrival, so LA is the place of the market. The market price in LA on the date of arrival is $2,400. Thus, the

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damages are $2,400 (mkt.) - $2,000 (contract) - $100 (expenses saved) = $300.

(b) Assume that the contract terms are F.O.B. NY, but that the goods are not shipped. What are buyer’s damages if buyer is not aware of the non-shipment until his inquiry on the arrival date?

(b) 2-713(1) provides that the market price for damages is to be measured at the time the buyer learned of the breach. Here, that is the date of arrival. 2-713(2) provides that the place for measuring market price damages is “the place for tender” unless there is a rejection after arrival. Here the place for tender is N.Y. because this is a shipment contract under 2-319(1)(a). Thus, the market damages are to be measured from the NY market on the date of arrival. They are $2,300 (mkt.) - $2,000 (contract) = $300. There is no deduction for the cost of transportation, because that has not been saved. Furthermore, there is no addition for cost of transportation, because that is a cost the buyer would have borne under the original contract anyway.

(c) Assume the contract terms are F.O.B. LA (destination contract) but the goods are not shipped. What are the buyer’s damages if Buyer is not aware of the non-shipment until his inquiry on the arrival date?

(c) Like (b) above, the market price is measured on the date of arrival, i.e. when the buyer learned of the breach. However, since this was a shipment contract under 2-319(1)(b), the “place for tender” under 2-713(2) is the place of arrival. Thus, the market damages are to be measured from the LA market on the date of arrival. They are $2,400 (market) - $2,000 (contract) - $100 (expense saved) = $300.

72. Arthur’s Pawn Shop sells an electric guitar to Jim for $1,000. Arthur specifically warrants that the electric guitar is a genuine “Les Paul” model, and not a copy. The guitar has a defective pickup which fails about after about a week. Jim takes the guitar to a local repair shop to have it fixed, and finds out that the electric guitar is actually a copy, and thus is only worth about $400. Nevertheless, Jim decides to keep the guitar and fix it. The repairs cost $150. What damages would Jim be entitled to?

72. Arthur made an express warranty under 2-313(b) that the guitar was not a copy. That express warranty was breached. Furthermore, there is a breach of the implied warranty of merchantability under 2-314(2)(c) because an electric guitar with a broken pickup is not “fit for the ordinary purpose” of electric amplification. Thus, Jim would have a remedy for breach of warranty under 2-714(2) which provides, “the measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they

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would have had if they had been as warranted.” The goods, as accepted, are a copy of a guitar with a street value of $400, in need of $150 of repair. Thus, the goods as accepted are worth $400 - $150 = $250. The goods, if they were as warranted, would be worth the purchase price of $1,000. Thus, Jim is entitled to damages of $750.

73. (T/F) A buyer may recover consequential damages resulting from the seller’s breach including any injury to person or property proximately resulting from any breach of warranty, provided that the seller, at the time of contracting, had reason to know that the goods were dangerous.

73. False. 2-715(2)

74. Hayes, Inc. manufactures and sells computer modems. Earthnet, Inc. is an internet service provider that requires a large and complex modem to serve its customers. Due to high demand, Earthnet is planning to expand its customer base from 10,000 subscribers to 15,000 subscribers. 10,000 of the subscribers can be handled by the existing modems that Earthnet already has. However, in order to accommodate the additional 5,000 subscribers, Earthnet contracts with Hayes to purchase 5 additional modems at a cost of $2,000 each. The contract specifies a delivery date of March 1st. Earthnet spends $1,000 in advertising during the month of February announcing the planned service, and is confident that it will be able to sign up an additional 1,000 subscribers in the month of March after installation of the new modems. On Feb. 1st, Hayes calls and repudiates stating that it is unable to meet the March 1st delivery due to a backlog of orders, but would be able to deliver by April 1st. As of Feb. 1st, Earthnet would be able to cover at a cost of $2,300 per modem and get the replacement modems by March 1st, but it chooses to wait for the later delivery. After the modems are delivered and installed, Earthnet brings an action for the lost revenues from an anticipated 1,000 subscribers over the month of March ($20,000), the cost of advertising during the month of February ($1,000), and the cost of advertising during the month of March ($1,000). Which, if any, of these costs is recoverable?

74. Under 2-610, the buyer may only await performance by a repudiating party “for a commercially reasonable time.” Here, the repudiation occurred a month before time for delivery. Given that cover was immediately available, it would probably be a commercially unreasonable time to wait a month and rack up such substantial damages. Under 2-711(1), where the seller repudiates, the buyer may either cover under 2-712 or recover contract market damages under 2-713, and in either case, get incidental and consequential damages under 2-715. Since Earthnet chose not to cover, he must accept the contract market damages of $2,300 - $2,000 = $300 per modem times 5 modems = $1,500, plus incidental and consequential damages. As to the incidental cost of advertising during the

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month of February, that cost did not “result[] from the seller’s breach” because it would have been incurred regardless of the breach, and thus can not be counted as damages under 2-715(1). As to the cost of advertising during the month of March, it did not result from the seller’s breach either because if Earthnet had covered, it would not have been necessary. Finally, the consequential damages of $20,000 could have “reasonably [been] prevented by cover” and so likewise are not countable under 2-715(2)(a). As such, the total measure of damages is what Earthnet would have recovered if they had made a cover, because their wait was unreasonably long.

75. Charlie’s Chevrolet, Inc. contracts to sell Sedmak a limited edition Indy Pace Car Corvette. For the year of interest, there were only 10 of these models made, which include fancy paint and trim work. After contract formation, and while the car is being shipped across the country to be delivered to the lot, Charlie’s Chevrolet receives an order from another customer who will pay $20,000 more for the car. Charlie’s sells the car to the other customer, and offers Sedmak a refund of his money plus $5,000 in liquidated damages. Sedmak refuses the money and insists on the car itself. Sedmak has come to you seeking assistance. How do you advise Sedmak?

75. 2-716(1) provides that specific performance “may be decreed where the goods are unique or in other proper circumstances.” Here, the goods are a limited edition car. The code rejects the previous common law requirement that the goods be “one-of-a-kind.” Specifically, the code comments provide that market realities, such as inability to cover, are a relevant consideration and “strong evidence” of proper circumstances for specific performance. Thus, although Sedmak would be $5,000 richer if he accepted the liquidated damages, he would also not have the car he is entitled to by contract, and not be able to purchase one like it to cover. It would likely cost more than $5,000 more to convince one of the other 9 owners to part with their car, as is evidenced by the $20,000 higher bid locally. Thus, this would probably be a proper case for specific performance, especially since the bad faith of Charlie’s puts the balance of equity strongly in Sedmak’s favor.

76. Apex Oil Co. produces and sells industrial grade oil. The Belcher Co. contracted with Apex to buy 10,000 barrels of oil at $50 per barrel. The contract date of delivery was June 1st. The day before the date of delivery, Belcher called Apex to repudiate the contract. On June 1st, Apex sold 10,000 barrels of oil to another customer at $51 per barrel. Two months later, on August 1st Apex sold 10,000 barrels of oil to yet another customer for $48 per barrel. Apex brings a breach of contract action against Belcher for the difference between the contract price of $50 per barrel, and the

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August 1st resale price of $48 per barrel. Is this the proper measure of Apex’s damages?

76. No. Under 2-703(d), when a buyer breaches, the seller may resell and recover resale damages under 2-706. 2-706 provides that the measure of damages is the “difference between the resale price and the contract price” provided that the resale is “made in good faith and in a commercially reasonable manner.” 2-103(1)(b) provides an objective standard of good faith for merchants, in that they must observe “reasonable commercial standards of fair dealing.” Furthermore, 2-610 provides that when either party repudiates, the other party may only await performance “for a commercially reasonable time.” In this case, since the market price was higher on the contract date of delivery, but lower on the date of claimed resale, it is clear that Apex has not acted in a “commercially reasonable manner.” Furthermore, in a volatile market such as oil, waiting two months to resell is not a “commercially reasonable time.” Thus, Apex has violated good faith and commercial standards in waiting so long to resell, so that it could speculate on the market at Belcher’s expense. The more reasonable measure of damages would be to define the 10,000 sold on June 1st at $51 per barrel as the resale. This would give Apex no damages (except incidental damages, if any) because of the higher market price on the resale date.

77. (T/F) In the case of a repudiation by the buyer, the seller’s damages are determined according to the market price at the time the seller learned of the breach.

77. False. 2-708(1).

78. Pacific Marine, Inc. is a boat retailer. Pacific contracts to sell a 20’ sailboat to Fred Jones for $25,000. However, Fred repudiates before he is to take delivery. Pacific promptly resells the same boat to Shirley Walker for $25,500. At the time of the resale, Pacific had at least two other identical boats on its lot. Pacific purchased the boat wholesale for $20,000. Pacific brings an action for damages for Fred’s breach. Fred insists that since the same boat was resold for $500 more, that Pacific does not have any damages. Is Fred correct?

78. No. Fred appears to be calculating damages by 2-706(1) which provides the standard measure of damages for resale as the resale price minus the contract price (plus incidental damages and minus expenses saved). However, due to the nature of the seller, this is not a standard resale transaction. 2-708(2), if the standard measure of damages (i.e. contract - market) “is inadequate to put the seller in as good a position as performance would have done then the measure of damages is the profit...the seller would have made from full performance by the buyer.”

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Here, because Pacific would likely have sold the additional boat to Shirley regardless of Fred’s breach, Pacific’s real interest in the transaction was the profit generated by the sale. Thus Pacific’s real loss is the loss of profit from Fred’s sale. As such, Pacific may be characterized as a “lost volume” seller. Since the standard measure of damages would not put Pacific in as good a position as it would have been had Fred taken delivery, it is entitled to the profit of $5,000 that it would have made from the sale to Fred.

79. Creative Computers manufactures and sells custom computer systems. All-Day Car Rental places a custom order with Creative for the purchase of 10 specially designed computer terminals, and 1 central server computer. The contract price is $10,000. To fill this order Creative begins to assemble various components and parts to build the system. The total cost in parts and labor to Creative is $5,000 for a finished system like this one. When Creative is about half-way done with the order, All-Day calls to repudiate. What are Creative’s damages if it completes manufacture of the computers and resells the system to another customer for $9,000? What are Creative’s damages if it decides to stop manufacture and sell the partially assembled system for $4,000 scrap value after expending $2,000 in parts and $1,500 in labor?

79. Under 2-704(2), “where the goods are unfinished an aggrieved seller may in the exercise of reasonable commercial judgment...either complete the manufacture...or cease the manufacture and resell for scrap or salvage value.” Under 2-706(2), “it is not necessary that the goods be in existence” in order to perform a proper resale. Thus, if Creative resells the finished product, it may recover resale damages of $1,000 under 2-706 (i.e. contract price - resale price). However, if Creative decides to sell the scrap, then the standard measure of damages (market price - contract price of 2-708 = $1,000) would be “inadequate to put the seller in as good a position as performance would have done,” because performance would have given Creative a profit of $5,000. Thus, Creative is entitled to the lost profits of $5,000 under 2-708(2).

80. MagnaLite, Inc. of New York manufactures and sells flashlights. SDG&E of San Diego enters into a contract to purchase 1,000 flashlights from MagnaLite. The contract provides shipment terms of “F.O.B. seller’s plant.” MagnaLite properly ships the flashlights to SDG&E. SDG&E properly rejects them under 2-602 upon arrival due to a non-conformity reported by one of their receiving inspectors. However, when the flashlights get back to MagnaLite, it discovers that the rejection was wrongful because the alleged non-conformance did not actually exist (it was operator error by SDG&E’s inspector). MagnaLite thereafter sues, claiming that the rejection was wrongful, and so SDG&E is liable for the contract price. Is MagnaLite correct?

Roger W. Martin 27


80. No. Under 2-709(1)(a), a seller may recover the contract price “of goods accepted.” However, here SDG&E has properly rejected, even though it has not rightfully rejected. That is to say that although SDG&E did not have the right to reject, it did follow the procedures of 2-602. Thus, SDG&E has precluded acceptance under 2-607(2), and according to 2-602(3) the seller’s rights with respect to such “wrongfully rejected goods” are governed by 2-703. 2-703 provides that in a proper case, the seller may recover the contract price under 2-709, however since the goods were not accepted, this is not a proper case for recovery of contract price.

81. Assume the same facts as Question 80 above, except that the flashlights were destroyed during original shipment from MagnaLite to SDG&E (i.e. they never arrived). Would MagnaLite be entitled to the contract price?

81. Yes. Under 2-709(1) the buyer is liable for the price of “goods lost or damaged within a commercially reasonable time after risk of their loss has passed to the buyer.” Under 2-319(a), the F.O.B. term here creates a shipment contract. Thus, under 2-509(1)(a), since the goods were not required to be delivered at a particular destination, “the risk of loss passes to the buyer when the goods are duly delivered to the carrier.” The facts state that MagnaLite properly shipped the flashlights, and so the risk of loss passed to the buyer upon placing them with the carrier. Thus, SDG&E is liable for the contract price.

82. (T/F) When a buyer fails to pay the price as it becomes due, the seller may recover, together with any incidental and consequential damages, the price of goods accepted.

82. False. 2-709(1) (incidental damages only).

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