Can a Seller Collect More than Expectation Damages? Yes, Says the Oregon Supreme Court

Law students learn early in their study of Contracts that an aggrieved party is entitled to collect its expectation interest.  But, is that always true?  Well, the Supreme Court of Oregon recently held that an aggrieved seller under Article 2 might be able to claim more than its expectation interest.

 

The breadth of the remedies available to a seller who has resold goods after a buyer’s breach was at issue in the case of Peace River Seed Co-Operative, Limited v. Proseeds Marketing, Incorporated.  Proseeds Marketing (“Proseeds”) was to purchase seeds from Peace River Seed Co-Operative (“Peace River”) at a fixed price over a period of two years.  During the contract period, the price of grass seeds fell dramatically and Proseeds refused to provide shipping and delivery confirmation to Peace River for the shipment of the seeds.  Therefore, Peace River cancelled the contracts and brought suit, claiming market price damages even though it had resold some of the seed.

Ultimately at issue was whether an aggrieved seller who resold goods (section 2-706) can recover the difference between the unpaid contract price and the market price, even where the market price damages would exceed resale damages actually suffered by the seller.   If Peace River could collect market price damages even where it resold the goods at a profit, it would arguably receive a windfall on the transaction.  Conversely, the court could restrict Peace River to recovery of an amount of damages no greater than it recovered in its resale.   Somewhat surprisingly, the Supreme Court of Oregon held that owing to the lack of clarity in the Code itself, “the text, context, and legislative history of the sellers’ remedies provisions support a seller’s right to recover either market price damages or resale price damages, even if market price damages lead to a larger recovery.”    The court reasoned that the index of remedies provided by section 2-703, coupled with the comments rejecting election of remedies, indicated that a seller could resell at a higher price and still collect a larger market-based remedy where available. 

 
Despite the decision in Peace River, a seller who attempts to claim the higher remedy under 2-708 after resale should expect a challenge from the buyer.  While the decision in Peace River is based on the Code’s rejection of an election of remedies and the “liberal” administration of remedies,  it does not necessarily follow that an aggrieved seller should be able to collect more than its expectation interest.   In such a case, it seems the seller should not have been able to obtain more than the benefit of the bargain.   One must also question whether the Court might have concluded that the resale price and market were equivalent.  But this may not be the case in a rapidly changing market.  Moreover, while the Code rejects election of remedies, it also provides that “[w]hether the pursuit of one remedy bars another depends entirely on the facts of the individual case.”   It might be argued that the pursuit of the market-based remedy when it exceeds the benefit-of-the-bargain, would entirely be the appropriate circumstance in which to bar the election of the higher remedy.

 

- JSM

Courts Continue to Examine Mixed Goods Cases

In mixed-sales transactions, those involving goods and services, most courts apply a predominant purpose test to determine if Article 2 of the UCC applies to the transaction applying sections 2-102 and 2-105. See, e.g., Warshaw v. QBE Ins. Corp., 78 U.C.C. Rep. Serv. 2d 434 (D. Mass. 2012)(providing that “where a contract implicates both goods and services, the test to determine the applicability of art[icle] 2 is whether ‘the predominant factor, thrust or purpose of the contract is . . . the rendition of service, with goods incidentally involved.’”). Under this test, Article 2 applies if the transaction is predominantly for the sale of goods, but does not apply if the transaction is predominantly for the provision of services. Courts continue to look at how this test works in individual cases.

For instance, in Audio Visual Artistry v.Tanzer, No. W2012–00216–COA–R3–CV, 2012 WL 6697600, at *1 (Tenn. Ct. App. Dec. 26, 2012), the court considered whether a contract for the installation of a “smart home system” during the construction of a new home was one for the sale of goods. Stephen Tanzer (“Tanzer”) and Audio Visual Artistry (“AVA) contracted for the sale and installation of electronic and entertainment equipment in Tanzer’s home, which was under construction. The contract, which was for a custom home theater, music, phone and lighting system, itemized the pricing for the contract into components that included equipment, labor, and cable, with the equipment forming the bulk of the price. A dispute developed over the functionality of some components of the Tanzer system. AVA filed suit for breach of contract to recover unpaid invoice amounts and Tanzer filed a counter-complaint. Accordingly, the court correctly ruled that Article 2 governs transactions where goods and services are bundled if “the goods element predominated.”

The court outlined four factors key to application of the predominant purpose test: (1) the language of the contract; (2) the nature of the seller’s business; (3) the purpose of the contract; and (4) the amounts paid toward the goods and services components of the contract. Although the AVA-Tanzer transaction involved a service, the installation of the smart home system during the construction phase, the court concluded that the contract was distinguishable from other construction agreements typically outside the scope of Article 2. The language of the contract, which repeatedly referred to the purchase of equipment and the installation of the components into the home, did not change the moveability of the goods sold. Moreover, AVA’s business was the sale of “smart home” components of multiple manufacturers, with installation being incidental to the sales aspect. Additionally, even Tanzer described the contract as one for electronic equipment and the contract amounts paid for the equipment far outweighed the installation charges, indicating that the contract was predominantly for the sale of goods.

- JSM

Can I pay a "reasonable price" please?

Sure, Article 2 applies to sales of goods. Sure, it provides a flexible approach to commercial transactions by facilitating deals where the parties have failed to provide all terms. Sure, open prices are filled with a "reasonable price." U.C.C. 2-305. I tell my students the virtues of the reasonable price as a saver of deals where the parties just never get around to deciding. After all, who could complain about paying a reasonable price and what seller would complain about receiving one?

So, here's a toast to the reasonable price. The price of the Friday night libation has surely gotten out of hand. Apparently, a Boston lawyer complained at a Cheesecake Factory about the price of a Margarita, which was not disclosed and the waitress could not provide the actual price. (See ABA Journal). This, of course, comes on the heels of the shocked restaurant patron who received a bill for a $275 spaghetti dinner in New York. (See, New York Times).

The sobering reality is that the Cheesecake Factory will now post prices in advance. A wonderful development for those who don't like to be shocked by the bill at the end of the evening. Otherwise, the reasonable price would seem to be all that is due.


- JSM

New Twists on the Economic Loss Rule?

What most of us remember: Section 1-103(b) of the Uniform Commercial Code embraces liberal supplementation of the Code by directing that “[u]nless displaced by the particular provisions of this Act, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, Bankruptcy, or other validating or invalidating cause shall supplement its provisions.” What sometimes gets tricky is reading this premise of liberal supplementation alongside Article 2’s remedy provisions and the common law’s economic loss rule which precludes a plaintiff from recovering in tort, for purely economic losses. Even Section 2-721’s directives regarding fraud in the sales of goods that provides that remedies for fraud or misrepresentation under Article 2 include remedies for sales of goods that do not involve fraud is read to constrain non-breaching parties to contract remedies under Article 2 in most cases.

An interesting issue that courts are taking a closer look at is whether plaintiffs can bring client claims for tort damages is whether a second product commonly attached to another to make a whole product constitutes one product in terms of damages for purposes of the economic loss rule. In a decision that appears to expand the economic loss rule, the court in OneBeacon Ins. Co. v. Deere & Co., 2011 U.S. Dist. LEXIS 25156 (E.D. Mo. Mar. 11, 2011) considered the case of a combine that suddenly caught fire and destroyed the combine and damaged an attached cornhead. While the two formed an integrated harvesting unit, the plaintiff purchased the Deere & Co. combine and cornhead on separate occasions secondhand from a reseller with no warranty furnished by Deere & Co. The court reasoned that if the part of the whole could be considered part of the product, then the economic loss doctrine would bar the tort action. If the part of the whole was a separate product, then damage to the part would be “additional damage” and the economic loss doctrine would not apply. The court, examined the relationship of the combine and cornhead under three prevailing tests that look to whether the product is “integrated;” whether a commercial purchaser could foresee the risk of harm at the time of purchase; and whether the object of the bargain was for separate products. Ultimately, with electing any of the three tests, the court determined that because the cornhead could only be used with the Deere & Co. combine, the cornhead was not separate property and the economic loss rule precluded the tort claims.

Moreover, the plaintiff, as a secondhand purchaser of used equipment from another seller, did not have a warranty claim against Deere &Co., the manufacturer in tort. In concluding that the economic loss doctrine applies to secondhand purchasers, the court explained, “[p]laintiff’s reasoning- that the economic loss doctrine should not apply to secondhand purchasers because they cannot negotiate with the manufacturer- would apparently give secondhand purchasers a better warranty and more remedies than the party who originally purchased the equipment new. That cannot be the law.” Id.

The scope of the economic loss rule has important implications for buyers and sellers of goods. The traditional scope of cases governed by the economic loss rule to preclude recovery of tort damages would be those which are (1) governed by UCC Article two, and (2) where the only property damage (if any) is to the product that was purchased itself. But see, Lott v. Swift Transportation Co. Inc., F.Supp.2d 923, 931 (W.D. Tenn. 2010)(court declined to extend the economic loss doctrine, to cases “not involving UCC remedies, especially those concerning the provision of services”). In cases such as Tennis, the court did not apply the rule to damage to the property stored in the nearby warehouse that the vehicle fire destroyed. Yet, other courts such as Deere & Co. have expanded the doctrine when property might be seen as one product. Importantly, the Deere & Co. court observed that some courts have opened the door to allow for possible expansion of the doctrine even to “other nearby property of commercial purchasers who could foresee such risks at the time of purchase.” Deere & Co., supra, at *10 (emphasis supplied). See also, Travelers Indem. Co. v. Dammann & Co., Inc., 594 F.3d 238, 243-44 (3rd Cir. 2010)(tort claims barred “where a plaintiff could have contractually allocated the risk”). This is a potentially significant expansion of the doctrine, because it allows the economic loss doctrine to bar tort recovery even where there is additional harm or damage to other property, other than the product at issue in the lawsuit. As a result, this potential expansion of the doctrines’ application has important implications in the future of the doctrine and the sale of goods as a whole.

- JSM

2011 Sales Survey

I just put the draft of the Sales Survey up on SSRN. It will appear in the Business Lawyer in August or September, but there are some really great cases this year. Yes, some really good examination ideas as well!

- JSM

Specific Performance, Parol Evidence and the Naughty Monkey

Here is a great case about specific performance, parol evidence and a yacht named the "Naughty Monkey!"

U.C.C. section 2-716 provides a more liberal attitude toward the remedy of specific performance of contracts for the sale of goods than the common law traditionally does, and a concomitant broader view about when the goods are unique. In Naughty Monkey LLC v. Marinemax Northeast LLC, No. C.A. 5095-VCN, 2010 WL 5545409 (Del. Ch. Dec. 23, 2010, the court considered a request for specific performance based on language in a yacht sales contract providing “TRADE VALUE GUARANTEED TO 15% LOSS WITHIN 18 MONTHS (PER ANDREW SCHNEIDER) SUBJ. TO MARINE SURVEY AND FINANCING” (the “Buyer Protection Clause”). Michael Stock (“Stock”) contacted Marinemax Northeast LLC (“Marinemax”) about the purchase of a new boat after seeing their boats at the National Harbor Boat Show. Eventually, Stock purchased a 62-foot Azimut yacht, which he named the Naughty Monkey, for $1,825,000 through an entity he named the Naughty Monkey LLC (“Naughty Monkey”). Concerned about losses on a yacht of this price, Stock negotiated some down side price protection in the form of the Buyer Protection Clause. About a year later, Stock decided that he did not want the Naughty Monkey and proposed that he trade the boat back to Marinemax for a boat for $2900 and Marinemax would make a cash payment to him for $1,633.350, the difference under the contract. Marinemax refused this request, taking the position that the agreement only allowed Stock to trade the Naughty Monkey in toward the purchase of a more expensive yacht. Stock brought suit for specific performance on the contract, as well as damages related to financing, insurance and maintenance costs for the yacht.

The first issue the court considered was the meaning of the Buyer Protection Clause. Without any reference to section 2-202, the court instead initially referenced certain traditional notions of interpretation, namely to “effect to the clear terms of agreements, regardless of the intent of the parties at the time of contract formation” and to use the “customary, ordinary and accepted meaning of the language.” Nevertheless, the court considered extrinsic evidence to select a meaning of the Buyer Protection Clause that neither party argued: that Stock could trade in the Naughty Monkey to Marinemax, but not for cash, toward the purchase of any merchandise, not only boats of higher value.

Turning to the issue of specific performance under section 2-716, the court ruled that a “remedy at law would do complete injustice in this case.” The court observed that having Marinemax pay monetary damages would inevitably deprive it of the benefit of the bargain which would permit it to sell Stock another yacht at retail cost which it only paid wholesale. Similarly, if the court were to give Stock monetary relief then he would get a liquid asset, which is more than he would have received under the agreement. Accordingly, specific performance, was the appropriate remedy.

- JSM

Good Faith in the Termination of Sales Contracts

Courts in several cases addressed claims for breach of contract based on a party’s failure to act in good faith. So, what does good faith require under UCC section 1-304? In the following case, the court did a nice job of tying an arbitration panel's implication of a reasonability requirement in the application of a termination provision in an agreement with the obligation of good faith.

In Burton Corp. v. Shanghai Viquest Precesion Industries Co., Ltd., No. 10 Civ. 3163(DLC), 2010 WL 3024319 (S.D.N.Y. August 03, 2010), the court affirmed an arbitration award in favor of Shanghai Viquest Precesion Industries Co., Ltd. (“Viquest”) to recover for unpaid shipments of snowboard bindings made to Burton Corp. (“Burton”) for use in its snowboards and for wrongful termination of the sales agreement. The agreement permitted Burton to terminate if Viquest’s “financial position pose[d] a risk to Burton's business.” Additionally, the agreement provided that Viquest would, upon request, return Burton’s molds upon termination for any reason. During the term of the agreement and while Burton owed Viquest $1.8 million for unpaid shipments, Burton terminated, claiming financial concerns, and requested return of the molds.

When Viquest did not return the molds, Burton had to replace the molds and filed an arbitration to recover its cost of replacement as the agreement provided for arbitration of disputes. Viquest counterclaimed for its lost profits due to the early termination. The arbitration panel concluded that Burton could only terminate under the financial clause if it reasonably believed that Viquest’s financial position threatened its prospects, which Burton did not prove. Accordingly, the arbitration panel awarded Viquest its lost profits for the early termination and denied Burton’s request for the cost of replacing the molds as Burton was not itself in conformance with the agreement and owed Viquest substantial sums.

The District Court for the Southern District of New York denied Burton’s request to vacate the arbitration award against it, confirming the award in full. The court treated the reasonableness as derived from the covenant of good faith and fair dealing, citing to the U.C.C. section 1-304 obligation of good faith contained in every contract. The court observed that the obligation of good faith required Burton to have a reasonable basis for terminating the agreement. Moreover, Burton’s failure to pay Viquest for outstanding invoices put pressure on Viquest’s financial condition.


- JSM

The Predominant Purpose Test Still Predominates Mixed Goods/Services Transactions

Here is another little bit from the upcoming Sales Survey in the business lawyer. Here are a couple of nice examples of recent mixed-goods/services transactions under UCC section 2-102. Use of the predominates test has been pretty consistent in cases I've seen of late.

In Blesi-Evans Co. v. Western Mechanical Service, Inc., 72 U.C.C. Rep. Serv. 2d (Callaghan) 115 (W.D.S.D. 2010), the court examined whether a contract for a boiler purchased for installation at the South Dakota School of Mines and Technology (SDSM&T) campus was one for the sale of goods. Western Mechanical Service (Western) had a contract for the replacement of the SDSM&T boiler that required it to pay $500 per day in liquidated damages if the installation was not substantially complete by October 13, 2006. Western ordered the boiler from Blesi-Evans (Blesi), which agreed to also provide start up and training for the boiler. When Blesi failed to deliver the boiler in time to meet the SDSM&T contract, Western installed a temporary boiler. Blesi brought suit for its contract price on the boiler and Western claimed the expense of the temporary boiler. The court correctly ruled that Article 2 governs transactions where goods and services are bundled if the “predominant purpose” of the contract was for the sale of goods and the services are merely incidental. The court noted that Blesi was to provide a boiler, something clearly movable. The court noted that some of the purchase documents failed even to mention the related services and the dispute that actually arose was one related to the provision of the good in a timely manner, not the services.

Similarly in Connie Beale, Inc. v. Plimpton, 2010 WL 398903 (Conn.Super. January 13, 2010), the court considered a claim for breach of an interior decorating contract. Applying the predominant purpose test, the court found a contract for interior design is predominantly one for services, even though the designer would present furniture, upholstery, window coverings, fabrics and flooring to the buyer for consideration. The court noted that “[a] transaction that requires the incorporation of materials does not make it an agreement for a sale . . . .” Moreover, the parties did not label the contract a sale of furnishings, even though decorating services would surely include some goods.

- jsm

2-204 Still Requires Contract Basics

It is the time of the year when I am working on the ABA's Sales Survey of Article 2 cases from 2010. So, I'll pass along a few nice ones here. Perhaps some of these will make good examination questions or just good basics. And the lesson of today's 2010 case, yes, an Article 2 contract still requires a basic agreement at least some definite terms.

While much litigation and scholarly attention surrounding contract formation under Article 2 centers on section 2 207, the decision in Teter v. Glass Onion, Inc., 723 F.Supp.2d 1138 (W.D. Mo. 2010) turned on the application of section 2 204. Gary Teter (“Teter”), an artist who paints historic scenes, met with the owners of the Glass Onion, Inc. (“Glass Onion”), the purchaser of a gallery with which Teter had done business in the past to discuss the continuation of the business relationship with the gallery under Glass Onion’s ownership. Thereafter, the parties had several sales transactions for original paintings by Teter where Glass Onion purchased the paintings and posted an image on its website. After some period of time, however, Teter’s agent advised that to continue the relationship, Glass Onion would need to execute a Dealership Agreement.

When Glass Onion did not become an authorized dealer, Teter’s agent requested that Glass Onion remove images from its web site and advertising. When Glass Onion did not remove the images, Teter brought suit against Glass Onion on various claims related to Glass Onion’s use of Teter’s works in its advertising. Glass Onion brought counterclaims on the grounds that Teter breached a contract to sell art to Glass Onion and provide it a geographic exclusivity. The court granted Teter’s motion for summary judgment on Glass Onion’s counterclaims. The court noted that while section 2-204 permits the making of a contract based on conduct of the parties, the basic elements of an agreement must still be present. While the eight purchases of artwork constituted contracts, the alleged ongoing agreement to sell artwork to Glass Onion for resale on the same terms as the predecessor owner of the gallery was too indefinite and lacked consideration to constitute a contract under section 2-204. Accordingly, Teter was under no firm obligation with Glass Onion or the previous gallery owner to continue selling artwork and could stop selling or refuse to sell paintings to the gallery without recourse.

For similar lines of reasoning, see Key Items, Inc. v. Ultima Diamonds, Inc., No. 09 Civ. 3729(HBP), 2010 WL 3291582 (S.D.N.Y. August 17, 2010) (companies related to buyer were not responsible on unpaid contract to which they were not a party); Harman Invs., Ltd. v. Shah Safari, Inc., No. C10-0216RSL, 2010 WL 3522517 (W.D. Wash. September 07, 2010)(financier was not party to contract for purchase of goods and not liable for non-payment thereon).

- JSM

Would you like some cadmium with your soft drink?

Yesterday, the Consumer Product Safety Commission (CPSC), in conjunction with fast-food giant McDonald’s®, voluntarily recalled about 12 million Shrek Forever After™ collectible drinking glasses sold or awaiting sale at McDonald’s® locations throughout the U.S. after someone in Representative Jackie Speier's (D-CA) office alerted the CPSC that the movie-character illustrations on the glasses contained cadmium, prolonged exposure to which may pose a serious long-term health risk.

Millville, NJ-based Durand Glass Manufacturing Co. (DGMC), a subsidiary of Arques, France-based Arc International, manufactured the movie-themed glasses, which another Arc International subsidiary, Millville-based Arc International North America, distributed exclusively to McDonald's. McDonald's locations nationwide sold the glasses in May and early June 2010.

McDonald's web site addresses the recall through a series of FAQs (and answers). (For the benefit of those with short attention spans, every answer to which the statement would be germane includes the statement "the CPSC has said the glassware is not toxic.") Arc International deployed a press release. Representative Speier posted a statement on her web site, which also includes a link to a Los Angeles Times article about the recall. Only DreamWorks™ appears to be mum on the subject -- so far, at least. (Perhaps the Shrek-iverse's creators didn't retain all of the product licensing-rights like George Lucas did, not so long ago and not so far away, with the original Star Wars™ trilogy or they made McDonald's pay a non-refundable lump sum to market the glassware.) Rumors of a replacement glass featuring an image of McDonald's CEO Jim Skinner that transmogrifies into a Shrek-alike when filled with any non-Coca-Cola® brand soft or sport drink appear to be completely unfounded.

All fun aside, why is a commercial law blog interested in allegedly cadmium-contaminated glassware products introduced into the stream of commerce without any warning about or disclaimer regarding the possibility that they might contain an alleged carcinogen?

If this were a tort law or products liability blog, we might opine about the inevitable class-action product liability lawsuit against some combination of McDonald's, Arc International, Arc International North America, Durand Glass Manufacturing Co., the as-yet undisclosed supplier(s) of the cadmium-contaminated paint or other ingredient Durand used to commemorate Shrek™, Fiona™, Donkey™, and Puss in Boots™ (okay, Puss is probably not trademarked, given that the character's name dates from the late Seventeenth century, but we want to minimize our exposure to IP liability because most of us teach at public universities and neither we nor our employers can afford, in the current fiscal climate, to defend any infringement claim that survives a Rule 12(b)(6) motion) on the glassware (and, perhaps, DreamWorks -- for making a movie about which McDonald's predicted sufficient interest that it undertook to procure the offending glassware for resale).

If this were a civil procedure blog we might weigh whether the terms and conditions (no doubt, conveniently located somewhere on the Internet) purportedly governing McDonald's sale of the collectible glassware unconscionably compel non-class arbitration (assuming facts not in evidence) in light of the Supreme Court's recent grant of certiorari in AT&T Mobility LLC v. Concepcion, No. 09-893 (cert. granted May 24, 2010), about which my friend and UNLV colleague Jean Sternlight and my friend and ContractsProf Blog colleague Meredith Miller have recently blogged here and here, respectively.

If this were a consumer law blog, we might wring our hands or cluck our tongues at yet another clear example of Corporate America's crass exploitation of our children and squeeze-the-last-penny sellers who outsource production of low-priced, lower-cost consumer goods to Third World outposts like ... New Jersey. (Just kidding, Jay.)

But, again, what's the commercial law angle on collectible glassware manufactured for and sold to McDonald's for resale to McDonald's retail customers?

It should go without saying that the most interesting legal issues arising out of this scenario involve (1) what express and implied UCC Article 2 warranties each seller in the chain from DGMC (or DGMC's ingredient supplier) to McDonald's made to anyone who purchased or used the glassware; (2) to what extent, if any, each seller in that chain may have disclaimed some or all of its warranty liability, limited the remedies available to the buyer, user, or other person affected by the glassware's use, or both; (3) whether one or more warranty-making sellers breached one or more warranties to one or more buyer, user, or other person affected by the glassware's use; and (4) what remedies Article 2 affords any person to whom any seller is liable for breach of warranty.

For those wanting to add some international spice to the mix, the CBC reports here that the recall has spread to include all Canadian McDonald's restaurants. Information from the Associated Press and Reuters, reported here, indicates that recalling the glassware sent to Canadian McDonald's restaurants raises the total number of recalled glasses to 13.4 million. Both the U.S. and Canada are parties to the U.N. Convention on Contracts for the International Sale of Goods (CISG). To the extent that the Canadian McDonald's restaurants purchased their Shrek Forever After™ collectible glassware from New Jersey-based DGMC or New Jersey-based Arc International North America, that transaction constituted a sale of specially-manufactured goods (CISG art. 3(1)), purchased for resale, rather than personal, family, or household use (CISG art. 2(a)), by a buyer located in one CISG "contracting state" from a seller located in a different "contracting state" (CISG art. 1(1)(a)). Therefore, unless the Canadian McDonald's buyers and New Jersey-based DGMC or New Jersey-based Arc International North America effectively opted out of the CISG (CISG art. 6), any breach of warranty claim the Canadian buyers might have (CISG art. 35), the extent to which any U.S. seller disclaimed any warranty or limited its liability for breaching any warranty (CISG arts. 6 & 35), and the available remedies (CISG arts. 45-52 & 74-78), will be matters for the CISG to resolve.

New Sales Survey Available!

I've just put the new Sales Survey up on SSRN. It will be out in the Business Lawyer sometime next summer. An excerpt regarding a a fun warranty case, Nigro v. Lee, 63 A.D.3d 1490 (N.Y.A.D. 3 Dept. 2009) about a car sold on Ebay:

Whether a seller’s statements made during negotiations or through advertising constitute an express warranty is a common point of contention between disgruntled buyers and their sellers. The Supreme Court, Appellate Division, of New York upheld summary judgment in favor of the defendant seller from Nevada who advertised a 1995 Mercedes Benz automobile on Ebay as “gorgeous” and with just minor blemishes, but sold the car “as is.” Upon arrival of the car to the buyer in New York, the buyer discovered the car had been damaged in an accident and had been painted, the upholstery was stained, the undercoating was worn out and parts were rusted, and that body work would cost $1,741.66. While the court recognized that any description of the goods could create an express warranty, the seller’s generalized expression was merely the seller's opinion of the car and constitutes “no more than ‘puffery,’ which should not have been relied upon as an inducement to purchase the vehicle,” particularly in light of the fact that this was a used car transaction. Moreover, the plaintiff could have discovered any deficiencies in the car by performing a routine inspection, which he did not do.

See U.C.C. 2-313.

- JSM

UCC Legislative Update

It has been a fairly quiet eight months on the UCC legislative front since my last update.

Revised Article 1

As of March 1, 2010, Revised Article 1 was in effect in thirty-seven states: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Minnesota, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, and West Virginia.

State legislatures continue to grapple with the definition of "good faith," although the uniform § R1-201(b)(20) definition has the upper hand. Of the 37 enacting states, 26 have adopted the uniform definition, while 11 have retained the pre-revised definition that, in conjunction with § 2-103(1)(b), imposes a different good faith standard on merchants and non-merchants. Effective July 1, 2010, one of those eleven minority states (Indiana) will join the majority as SB 501, enacted in 2009 primarily for the purpose of amending Articles 3 and 4, also revises Ind. Code § 26-1-1-201(19) to require all parties to act honestly and to observe reasonable commercial standards of fair dealing. (At present, Indiana's Revised Article 1 requires only “honesty in fact.”) This change will take effect July 1, 2010, and further tip the balance among enacting states in favor of the unitary good faith definition in uniform R1-201(b)(20).

With many state legislatures occupied with more pressing issues of the moment, 2009 yielded only three new adoptions -- Alaska, Maine, and Oregon -- down from five in 2008, and seven in 2007. While a downward trend in new enactments eventually becomes inevitable once two-thirds of the states have signed on, 2009's three enactments were the fewest in a year since 2003 (when Idaho became the third state overall to enact Revised Article 1).

As of March 1, only two states -- Mississippi and Wisconsin -- appear to be serious candidates to enact Revised Article 1 in 2010.

Mississippi SB 2419, introduced and amended (to replace a choice-of-law provision that appeared to have derived from the original § R1-301 that all 37 enacting states have declined to adopt and the ALI and NCCUSL have disavowed with one that reflected the substitute § R1-301 the ALI and NCCUSL promulgated in 2008) in January, unanimously passed the Mississippi Senate on February 10. It is presently before the House Judiciary Committee.

Wisconsin AB 687, introduced on January 25 and amended on February 16 to replace the uniform R1-201(b)(20) "good faith" definition with the pre-revised 1-201(19) version, received the Assembly Committee on Financial Institutions's unanimous approval on February 26. It is presently before the Assembly Rules Committee.

Two other bills, Massachusetts HB 89 and Washington SB 5155, seem less likely to produce results.

Massachusetts HB 89, the fifth attempt to enact Revised Article 1 in the Commonwealth, was assigned to the Joint Committee on Economic Development and Emerging Technologies on January 20, 2009. No further action had been reported as of March 1, 2010.

Washington SB 5155, introduced on January 15, 2009, appeared to be drawn directly from the language of official Revised Article 1 circa 2001, including the original version of § R1-301. At an initial public hearing on January 23, 2009, all those testifying in support of and in opposition to the bill opposed the choice-of-law provision. The Washington Senate appears to have taken no further action except to "reintroduce and retain [the bill] in present status" on January 11, 2010.


Article 2 and 2A Amendments

As of March 1, 2010, only three state legislatures (Kansas, Nevada, and Oklahoma) have considered bills proposing to enact the 2003 amendments to UCC Articles 2 and 2A. The Kansas and Nevada bills died on the vine.

In 2005, Oklahoma amended Sections 2-105 and 2A-103 of its Commercial Code to add that the definition of “goods” for purposes of Articles 2 and 2A, respectively, “does not include information,” see 12A Okla. Stat. Ann. §§ 2-105(1) & 2A-103(1)(h) (West 2009), and amended its Section 2-106 to add that “contract for sale” for purposes of Article 2 “does not include a license of information,” see id. § 2-106(1). The net effect is similar to having enacted Amended §§ 2-103(k) & 2A-103(1)(n), both of which exclude information from the meaning of “goods” for purposes of Article 2 and 2A, respectively. Otherwise, no state has enacted any of the 2003 amendments.

While the list of states enacting any of the 2003 amendments may not change in the near future, the number of amendments Oklahoma enacts may. Introduced on February 1, 2010, Oklahoma HB 3104 proposes amendments to forty-nine sections of Article 2 and four sections of Article 2A. The bill includes neither the reformulation of Sections 2-206 and 2-207 nor the addition of Sections 2-313A and 2-313B included in the 2003 Article 2 amendments. Many of the amendments appear designed to facilitate electronic signatures and transactions and to accommodate the terminology surrounding them that grows out of UETA, E-SIGN, and Revised UCC Articles 1 and 7, or to otherwise align Article 2 and 2A terminology with that used in Revised Articles 1 and 7. That is not to say that HB 3104 proposes only cosmetic changes to Oklahoma's versions of Articles 2 and 2A. Several of the proposed amendments alter existing substantive rights, obligations, or remedies. Some of those alterations (e.g., raising the § 2-201 floor from $500 to $5,000) do not seem to be inherently controversial; some (e.g., granting/recognizing a right to cure after a justifiable revocation) may or may not be controversial depending on how courts have interpreted the current Article 2; and some (e.g., giving sellers the right to recover consequential damages) do seem inherently controversial. More on this if the bill progresses.


Article 3 and 4 Amendments

As of March 1, 2010, the 2002 amendments to Articles 3 and 4 were in effect in eight states: Arkansas, Kentucky, Minnesota, Nevada, New Mexico, Oklahoma (for a second time), South Carolina, and Texas. They will take effect in Indiana on July 1, 2010.

As of March 1, 2010, the only pending Articles 3 and 4 bill is Massachusetts HB 90, which has been languishing for more than a year.


Revised Article 7

As of March 1, 2010, Revised UCC Article 7 was in effect in thirty-six states: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas, Utah, Virginia, and West Virginia.

Additional bills are currently pending in Georgia, Massachusetts, Washington, and Wisconsin; but only the Wisconsin bill appears to be making any progress.

First introduced on February 18, 2009, Georgia HB 451 won unanimous approval in the Georgia House on March 12, and the Senate Judiciary Committee recommended passage on March 26. However, the legislature adjourned on April 3 without a third reading and final action in the senate. HB 451 was "recommitted" to the Georgia Senate on January 11, 2010. No further action has been reported.

Massachusetts HB 89, which also proposes adopting Revised Article 1, was assigned to the Joint Committee on Economic Development and Emerging Technologies on January 20, 2009. No further action has been reported.

Washington SB 5154 was introduced on January 15, 2009, scheduled for a public hearing on January 23, 2009, and then stalled, like its Revised Article 1 counterpart, but without as compelling a reason. It was "reintroduced and retained in present status" on January 11, 2010. No further action has been reported.

Wisconsin AB 688 was introduced on January 25, 2010. On February 22, the Assembly Committee on Jobs, the Economy and Small Business unanimously recommended passage. The bill is now before the Assembly Rules Committee.