Business Law Exam #3
Implied Warranty of Merchantability/Strict Liability in Tort. Yes, Allen may recover damages. When Allen purchased the half-gallon of milk from defendant Ideal Milk Co., the glass jug container was inherently necessary both in the delivery of the milk and the possession of it prior to use by the buyer. With respect to the container, the transaction is a bailment essentially tied into the sale of the milk. The buyer had the right to use the container along with its original contents although under a duty to return the container when empty. The implied warranty of merchantability and strict tort liability therefore attached both to the container and its contents. Ideal may have an action based on design defect against the manufacturer of the bottle, if it is shown that squeezing caused the bottle to explode.
A route salesperson for Ideal Milk Company delivered a half-gallon glass jug of milk to Allen's home. The next day, when Allen grasped the milk container by its neck to take it out of his refrigerator, it shattered in his hand and caused serious injury. Allen paid Ideal on a monthly basis for the regular delivery of milk. Ideal's milk bottles each contained the legend "Property of Ideal--to be returned," and the route salesman would pick up the empty bottles when he delivered milk. Can Allen recover damages from Ideal Milk Company? Why?
Answer: Contractual Modifications/Statute of Frauds. No. This problem brings out two significant problems: (1) can the contract be modified without consideration and (2) what is the effect, if any, of the statute of frauds upon the modification. Concerning the first point, the U.C.C., Section 2-209(1) provides that "an agreement modifying a contract within this article needs no consideration to be binding." However, the U.C.C. statute of frauds provision, Section 2-201, renders this oral modification unenforceable. A contract for the sale of goods costing $500 or more must be in writing or otherwise comply with the requirements of the statute of frauds. The key question concerning a modification of a prior contract is whether the modification brings or retains the contract within the statute of frauds, i.e., whether the contract as modified is for $500 or more. In this case, the contract is for $5,000 and the modification does not change that, so the contract is within the statute of frauds. Answer: Sales By and Between Merchants. Ten days after receiving the telegram International Widget would be bound by the written memorandum as if they signed it. U.C.C. Section 2-201(2) provides that, between merchants, a written confirmation which is sufficient against the sender is also sufficient against the recipient unless the recipient gives written notice of his objection within 10 days of receipt of the confirmation.
Adams orders one thousand widgets at $5 per widget from International Widget to be delivered within sixty days. After the contract is consummated and signed, Adams requests that International deliver the widgets within thirty days rather than sixty days. International agrees. Is the contractual modification enforceable? What effect, if any, would the following letter have? International Widget: In accordance with our agreement of this date you will deliver the 1,000 previously ordered widgets within thirty days. Thank you for your cooperation in this matter. (signed) Adams
Answer: Place of Tender. Benny would have a cause of action against Sheree. Section 2-308(a) of the U.C.C. provides that unless otherwise agreed, the place for delivery of the goods is Benny's place of business. The conforming goods were in a deliverable state at the place where Sheree was under a duty to accept them. The demand of Sheree that Benny deliver the flour to Sheree's place of business indicates an unwillingness to accept delivery at the place where the flour was located and would excuse any further tender by Benny. Sheree would not have a cause of action against Benny because of Sheree's failure to accept on demand the specific goods at the place where they were deliverable, and also by reason of her failure to make a tender of payment of the price as required by $2-511 of the Code.
Benny and Sheree entered into a contract for the sale of one hundred barrels of flour. No mention was made of any place of delivery. Thereafter, Sheree demanded that Benny deliver the flour at her place of business, and Benny demanded that Sheree come and take the flour from his place of business. Neither party acceded to the demand of the other. Has either one a right of action against the other?
Answer: Void and Voidable Title to Goods. Judgment for Hough. Navarro acquired voidable title to the automobile when Navarro purchased it with a check drawn on an account with insufficient funds. This empowered Navarro to transfer good title to Hough since Hough was a good faith (bona fide) purchaser for value. Section 2-403 (1)(b) and (c) of the U.C.C. provides: "A person with voidable title has power to transfer a good title to a good faith purchaser for value."
Brilles offered to sell a used automobile to Navarro for $12,600 cash. Navarro agreed to buy the car, gave Brilles a check for $12,600, and drove away in the car. The next day Navarro sold the car for $13,000 to Hough, a bona fide purchaser. The bank in which Brilles had deposited the check returned it to Brilles because of insufficient funds in Navarro's account. Brilles brings an action against Hough to recover the automobile. What judgment?
Answer: Open Price. Parties to a contract for the sale of goods do not necessarily have to reach an agreement on price. The Code provides that the price will be a reasonable one based on the time and place of delivery. Three requirements must be met in order for this provision to apply: a) the agreement must say nothing as to price, b) the agreement must provide that the parties shall agree later on price and they subsequently fail to agree, and c) the agreement fixes the price in terms of some agreed upon market or other standard which has not been set. Judgment could be for Courts depending on how the contract deals with factor (c). UCC 2-305(1). However, if Eastinghouse had additional costs because of the "rush basis" of the contract, the invoice price could be found reasonable.
Courts Distributors needed 200 compact refrigerators on a rush basis. It contacted Eastinghouse Corporation, a manufacturer of refrigerators. Eastinghouse said it would take some time to quote a price on an order of that size. Courts replied, Send the refrigerators immediately and bill us later." The refrigerators were delivered three days later, and the invoice arrived ten days after that. The invoice price was $140,000. Courts believe that the wholesale market price of the refrigerators is only $120,000. X Share Click to add notes Do the parties have a contract? If so, what is the price? Explain.
Answer: Place of Tender. No. U.C.C. Section 2-308 provides that in the absence of a specified place for delivery of "identified goods which to the knowledge of the parties at the time of contracting are in some other place [than the seller's business], that place is the place of their delivery."
Edwin sells a sofa to Jack for $800. Edwin and Jack both know that the sofa is in Edwin's warehouse, located approximately ten miles from Jack's home. The contract does not specify the place of delivery, and Jack insists that the place of delivery is either his house or Edwin's store. Is Jack correct?
Answer: Strict Liability: Privity. Wolf would be able to prevail under a strict liability cause of action against Harts, Ange Motor Company, and Jammer, Inc., but not against Lyon. Ange Motor Co., the manufacturer, however, should bear the ultimate responsibility due to the defective parts. The fact that Wolf was an innocent by-stander is not significant in that strict liability in tort does not recognize the lack of privity as a defense. In addition, Section 402A has been applied to sellers and non-sellers, such as bailors and lessors, of personal property. A cause of action premised upon a breach of the implied warranty of merchantability would present the problems of privity and non-seller of goods. Comment 2 to Section 2-313 invites utilization of warranty theory to bailments for hire and most courts have so ruled.
Fred Lyon of New York, while on vacation in California, rented a new model Home Run automobile from Hart's Drive-A-Car. The car was manufactured by the Ange Motor Company and was purchased by Hart's from Jammer, Inc., an automobile importer. Lyon was driving the car on a street in San Jose when, due to a defect in the steering mechanism, it suddenly became impossible to steer. The speed of the car at the time was thirty miles per hour, but before Lyon could bring it to a stop, the car jumped a low curb and struck Peter Wolf, who was standing on the sidewalk, breaking both of his legs and causing other injuries. What rights does Wolf have against (a) Hart's Drive-A-Car, (b) Ange Motor Company, (c) Jammer, and (d) Lyon?
Answer: Unconscionability. The contract price of $1500 for a $450 refrigerator could be held to be unconscionable and, thus, void as against public policy. Such result is heightened by their ages and immigrant backgrounds, as well unreasonableness.
Henry and Wilma, an elderly immigrant couple, agreed to purchase from Brown a refrigerator with a fair market value of $450 for twenty-five monthly installments of $60 per month ($1,500 total payments). Henry and Wilma now wish to void the contract, asserting that they did not realize the exorbitant price they were paying. Result?
Answer: Strict Liability in Tort. Judgment for John Doe. Roe is a "merchant" within the meaning of the U.C.C. since he is a "person who deals in goods of the kind." Section 2- 104. Unless excluded or modified, which it is not in this case, a merchant seller impliedly warrants that the goods which he sells are merchantable. Section 2-314. John Doe would also prevail under a strict liability in tort cause of action since Roe is a merchant who sold a defective product that was unreasonably dangerous. It might further be noted that Roe would have a cause of action based upon both warranty and strict liability theory against the manufacturer of the bleach as well as any seller in his chain of title.
John Doe purchased a bottle of "Bleach-All," a well-known brand, from Roe's combination service station and grocery store. When John used the "Bleach-All," his clothes severely deteriorated due to an error in mixing the chemicals during the detergent's manufacture. John brings an action against Roe to recover damages. Explain whether John will be successful in his lawsuit.
Answer: Seller Remedy: Damages for Non-Acceptance or Repudiation. No, Lloyd is not correct. Decision for Mae. Under Section 2-708 of the U.C.C., upon the buyer's repudiation of the contract, the seller is entitled to recover the difference between the market price of the goods at the time and place for tender and the contract price of the goods. This section does not require notice to the buyer. Mae would, however, have to prove that $4.60 was the market price. If she provides satisfactory proof of this, Lloyd would owe her $400 plus any incidental damages she reasonably sustained.
Mae contracted to sell 1,000 bushels of wheat to Lloyd at $5.00 per bushel. Just before Mae was to deliver the wheat, Lloyd notified her that he would not accept the wheat when delivered. Id notes Mae sold the wheat for $4.60 per bushel, the market price, and later sued Lloyd for the difference of $400. Lloyd claims he was not notified by Mae of the resale and, hence, is not liable. Is Lloyd correct? Why?
Answer: Seller Remedy: Damages for Non-Acceptance or Repudiation. In Forte's attempt to recover the contract price, judgment would be in favor of Betty, the buyer. This is a contract to sell specific goods whereby the seller is obligated to stain the piano and make the tone more brilliant in order to put the goods in a deliverable condition. Betty gave notice of cancellation before any work had been done on the piano. Under Section 2-401 and Section 2-509 of the U.C.C., neither title nor risk of loss passed to the buyer, and the seller is not entitled to recover the contract price but only damages for breach of contract as provided in Section 2-708 of the U.C.C. Under this section, upon the buyer's repudiation of the contract, the seller is entitled to recover the difference between the market price of the goods at the time and place for tender and the contract price of the goods. This section does not require notice to the buyer.
On January 10, Betty, of Emanon, Missouri, visited the showrooms of the Forte Piano Company in St. Louis and selected a piano. A sales memorandum of the transaction signed both by Betty and by the salesman of the Forte Piano Company read as follows: "Sold to Betty one new Andover piano, factory number 46832, price $3,300, to be shipped to the buyer at Emanon, Missouri, freight prepaid, before February 1. Prior to shipment, seller will stain the case a darker color in accordance with buyer's directions and will make the tone more brilliant. 8 Share On January 15, Betty repudiated the contract by letter to the Forte Piano Company. The company subsequently stained the case, made the tone more brilliant, and offered to ship the piano to Betty on January 26. Betty persisted in her refusal to accept the piano. The Forte Piano Company sued Betty to recover the contract price. To what remedy, if any, is Forte entitled?
Answer: Sale on Approval/Sale or Return. This problem presents a question whether the transaction is a "sale on approval", or a "sale or return." Section 2-316 (1) of the U.C.C. provides: "Unless otherwise agreed, if delivered goods may be returned by the buyer even though they conform to the contract, the transaction is (a) a sale on approval' if the goods are delivered primarily for use." As the milking machine was primarily for the use of the buyer, Clark, the transaction is therefore a sale on approval. Neither title nor risk of loss passed to Clark upon delivery and installation of the machine. The seller, Adair Company, bears the risk of loss until the buyer manifests his approval of the goods. The machine, excepting the double utility unit, was destroyed though no fault of Clark and before Clark had signified his approval or acceptance to the Adair Company. If the goods had been delivered to the buyer primarily for the purpose of resale, under Section 2-316(b) of the U.C.C., the transaction would be a "sale or return." In such case, title and risk of loss would be transferred to Clark with the privilege of divesting himself thereof within the stated period of 30 days free trial. Decision in favor of Clark.
On May 10, the Adair Company, acting through Brown, entered into a contract with Clark for the installation of a milking machine at Clark's farm. Following the enumeration of the articles to be furnished, together with the price of each article, the written contract provided: "This outfit is subject to thirty days' free trial and is to be installed about June 1. 19 Within thirty days after installation the entire outfit, excepting a double utility unit, was destroyed by fire through no fault of Clark. The Adair Company sued Clark to recover the value of the articles destroyed. Explain who bears the risk of loss.
Answer: Cure by the Seller. Kim should prevail. Tender entitles the seller to acceptance of goods and payment of the purchase price. U.C.C. Section 2-507. Where any tender is rejected because non-conforming and the time for performance has not expired, the seller may seasonably notify the buyer of the seller's intention to cure and may then, within the contract time, make a conforming delivery. U.C.C. §2-508. § notes The contract was for delivery by December 12. Since the second shipment cured the deficiency in quantity before the time of performance had expired, Kim has performed her obligations under the contract. Lynn breached by wrongfully rejecting the goods. Kim is entitled to damages for breach of contract.
On November 4, Kim contracted to sell to Lynn 500 sacks of flour at $4 each to be delivered to Lynn by December 12. On November 27, Kim shipped the flour. By December 5, when the car arrived, containing only 450 sacks, the market price of flour had fallen. Lynn refused to accept delivery or to pay. Kim shipped 50 more sacks of flour, which arrived December 10. Lynn refused delivery. Kim resold the 500 sacks of flour for $3 per sack. What are Kim's rights against Lynn?
Answer: Risk of Loss: Shipment Contracts. Chase has title to the tomatoes, and must bear the loss. Where goods are shipped by common carrier C.O.D., title and risk of loss pass to the buyer, unless otherwise agreed, at the time and place of delivery to the carrier. The Code regards a C.O.D. contract as a "shipment" contract.
Regan received a letter from Chase, the material portion of which stated: "Chase hereby places an order with you for fifty cases of Red Top Tomatoes. Ship them C.O.D." As soon as he received the letter, Regan shipped the tomatoes to Chase. While enroute, the railroad car carrying the tomatoes was wrecked. When Chase refused to pay for the tomatoes, Regan started an action to recover the purchase price. Chase defended on the ground that because the shipment was C.O.D., neither title to the tomatoes nor risk of loss passed until their delivery to Chase. Who has title? Who has the risk of loss? Explain.
Answer: Void and Voidable Title to Goods. No, because Brown & Co. was a good faith purchaser for value. Smith intended to pass title to the gems to the person physically before Smith, the jewel thief and impostor impersonating Brown. The transaction between Smith and the impostor resulted in the latter acquiring voidable title to the gems. Section 2-403 (1)(a) provides: "a person with voidable title has power to transfer good title to a good faith purchaser for value. When goods have been delivered under a transaction of purchase the purchaser has such power even though (a) the transferor was deceived as to the identity of the purchaser" (emphasis added). Under these facts, Brown & Co. is a good faith purchaser for value.
Smith was approached by a person who introduced them self as Brown of Brown & Co. Smith, who did not know Brown, asked Dun & Bradstreet for a credit report on Brown. Smith thereupon sold Brown some expensive gems and billed Brown & Co. "Brown" turned out to be a clever jewel thief, who later sold the gems to Brown & Co. for valuable consideration. Brown & Co. was unaware of "Brown's" transaction with Smith. I Can Smith successfully sue Brown & Co. for either the return of the gems or the price as billed to Brown & Co.?
Answer: Contractual Modifications/Statute of Frauds. This problem raises three separate but interrelated issues: (1) Modification of a prior contract. As indicated in the answer to the first problem, the Code, Section 2-209(1), does not require consideration to be given in order to validly modify an existing contract. All that is necessary is a good faith intent to alter the contract. (2) Oral modification of a contract for the sale of goods costing $500 or more. Under the Code, Section 2-201, this oral modification (to a cost of $4,000) would keep the transaction within the statute of frauds and therefore to be valid must comply with its requirements. (3) Compliance with the statute of frauds by delivery and acceptance of the goods-U.C.C. Section 2-201(3)(c) provides that an oral agreement is valid, even though it is for a sale of goods costing $500 or more, if the goods have been received and accepted as in this case. Consequently, Reinfort must pay Bylinski $4,000, unless Reinfort can prove lack of intent to enter into the contract (for example, economic duress).
Reinfort executed a written contract with Bylinski to purchase an assorted collection of shoes for $3,000. A week before the agreed shipment date, Bylinski called Reinfort and said, "We cannot deliver at $3,000; unless you agree to pay $4,000, we will cancel the order." After considerable discussion, Reinfort agreed to pay $4,000 if Bylinski would ship as agreed in the contract. After the shoes had been delivered and accepted by Reinfort, Reinfort refused to pay $4,000 and insisted on paying only $3,000. Is the contractual modification binding? Explain.
Answer: Inspection. Judgment for Beyer who has the right of inspection under Section 2-513 of the U.C.C. The contract did not by its terms provide for payment of the price upon presentation of documents of title, nor did Beyer in any other way waive the right of inspection. The refusal of Smith to permit Beyer to inspect the goods, where Beyer has not agreed or contracted to give up such right of inspection, is justification for Beyer's refusal to pay for the goods.
Smith, having contracted to sell to Beyer thirty tons of described fertilizer, shipped to Beyer by carrier thirty tons of fertilizer that Beer stated conformed to the contract. Nothing was stated in the contract as to time of payment, but Smith demanded payment as a condition of handing over the fertilizer to Beyer. Beyer refused to pay unless given the opportunity to inspect the fertilizer. Who is correct? Explain.
Answer: Buyer Remedies. The remedies available to Blake, the buyer, under the UCC are: (1) To accept and keep the twenty-five motors for which he has paid and to recover damages from the seller as provided in Section 2-714. (2) To reject the goods as provided in Section 2-602 and thereafter hold them for the seller's instructions or resell them for the seller's account under Section 2-603. (3) To recover from the seller the price paid for the twenty-five motors rejected and to have a security interest in the rejected goods as provided in Section 2-711. (4) To refuse to accept any further shipment of motors under the contract and to recover damages for non-delivery or repudiation under Section 2-713. (5) To effect "cover" by making in good faith and without reasonable delay a contract to purchase goods in substitution for those due from seller. (6) To recover incidental and consequential damages from the seller as provided in Section 2-715. (7) To obtain adequate assurance of performance by the seller under Section 2-609. (8) To revoke this acceptance of the twenty-five motors and retain his rights against the seller under Section 2-608. (9) To treat the seller's breach of warranty as an anticipatory repudiation and have the rights as provided in Section 2-610. (10) To suspend any further performance of the contract on his part under Section 6- 610(c). (11) To rescind the contract by reason of the seller's breach and retain all claims for damages against the seller under Section 2-720. (12) To treat the seller's breach of an installment contract by delivery of twenty-five defective motors of the first installment as a breach of the entire contract as provided in Section 2-612.
Sims contracted in writing to sell Blake one hundred electric motors at a price of $100 each, freight prepaid to Blake's warehouse. By the contract of sale, Sims expressly warranted that each motor would develop twenty-five brake horsepower. The contract provided that the motors would be delivered in lots of twenty-five per week beginning January 2 and that Blake should pay for each lot of twenty-five motors as delivered, but that Blake was to have right of inspection on delivery. Immediately on delivery of the first lot of twenty-five motors on January 2, Blake forwarded Sims a check for $2,500, but on testing each of the twenty-five motors, Blake determined that none of them would develop more than fifteen brake horsepower. State all of the remedies under the U.C.C. available to Blake.
Answer: Risk of Loss. Beal must bear the loss. Since Stein was not a "merchant" within the meaning of Section 2-104, U.C.C., the risk of loss passes upon tender of delivery. Section 2-509(3). Therefore since Stein has held "conforming goods at the buyer's disposition" and has given Stein "notification reasonably necessary to enable him to take delivery" (Section 2-503(1)), Stein has made a proper tender and the loss falls on Beal.
Stein, a mechanic, and Beal, a life insurance agent, entered into a written contract for the sale of Stein's tractor to Beal for $6,800 cash. It was agreed that Stein would tune the motor on the tractor. Stein fulfilled this obligation and on the night of July 1 telephoned Beal that the tractor was ready to be picked up on Beal's making payment. Beal responded, "I'll be there in the morning with the money." On the next morning, however, Beal was approached by an insurance prospect and decided to get the tractor at a later date. On the night of July 2, the tractor was destroyed by fire of unknown origin. Neither Stein nor Beal had any fire insurance. Who must bear the loss?
Answer: (a) Rejection. After the buyer has rejected the goods, the Code allows buyer to exercise no ownership of them. As a result, Kristine has lost her right to reject the machine, although she has a cause of action for damages against the seller if there is a breach of warranty. Upon learning that the machine was defective and that it did not conform to the contract of sale, Kristine could have rejected it by promptly notifying the seller and returning it to the seller or tendering it to the seller. However, Kristine's continued use of the machine for three months after knowledge of the defect was an acceptance of the goods which precludes rejection. U.C.C. $2-607. (b). Revocation of Acceptance. Kristine would have the right to revoke if (1) she accepted the machine on the reasonable assumption that its non-conformity would be cured, (2) it has not been seasonably cured and (3) the non-conformity substantially impairs the value of the machine. If these conditions are met Kristine, as seems likely on the facts, may revoke her acceptance if she does so within a reasonable time after the seller fails to seasonably cure. U.C.C. §2-608(2).
Tammie contracted with Kristine to manufacture, sell, and deliver to Kristine and put in running order a certain machine. After Tammie set up the machine and put it in running order, Kristine found it unsatisfactory and notified Tammie that she rejected the machine. Kristine continued to use it for three months but continually complained of its defective condition. At the end of the three months, she notified Tammie to come and get it. Has Kristine lost her right (a) to reject the machine? (b) to revoke acceptance of the machine?
Answer: Implied Warranty of Merchantability/Strict Liability in Tort. Bird has no right of action against Dently because the perfume was a gift from Dently to Bird. However, Bird has a right of action against both Young and Talent Co. under both strict liability in tort and implied warranty of merchantability. Bird is the direct third party beneficiary of the implied warranty of merchantability. Privity is not likely to be an obstacle to the strict liability action and most likely should not be a problem to the warranty action since most states have abrogated this doctrine. See, Section 2-318.
The Talent Company, manufacturer of a widely advertised and expensive perfume, sold a quantity of this product to Young, a retail druggist. Dentley and Bird visited Young's store and Dentley, desiring to make a gift to Bird, purchased from Young a bottle of this perfume, asking for it by its trade name. Young wrapped up the bottle and handed it directly to Bird. The perfume contained a foreign chemical that, upon the first use of the perfume by Bird, severely burned her face and caused a permanent facial disfigurement. What are the rights of Bird, if any, against Dentley, Young, and the Talent Company, respectively?
Answer: Design Defect. The facts as presented are premised upon those found in Buccery v. General Motors Corp., 60 Cal. App. 3d 533, 132 Cal. Rptr. 605 (1976). The court held that the vehicle was defectively designed in that a headrest should have been installed for safety purposes, even though they were not required by state or federal regulations at the time the truck was manufactured. Headrests were required for new automobiles at the time of the purchase. In most states compliance with government or industry-wide standards does not provide a safe-harbor, but is merely a factor to be considered.
The plaintiff, while driving a pickup manufactured by the defendant, was struck in the rear by another motor vehicle. Upon impact, the plaintiff's head was jarred backward against the rear window of the cab, causing the plaintiff serious injury. The pickup was not equipped with a headrest, and none was required at the time. Should the plaintiff prevail on a cause of action based upon strict liability in tort? Why? Why not?