Scope of Article 2
Article 2 of the Uniform Commercial Code (“U.C.C.”) applies to “transactions in goods” and defines “goods” to include all things that are “movable at the time of identification to the contract.” Courts tend to read section 2-102 more narrowly than its text, by applying Article 2 to present sales of goods and to contracts for the future sale of goods.
In mixed-sales transactions, such as those involving goods and services, courts often apply a predominant purpose test. Under this test, Article 2 applies if the transaction is predominantly for the sale of goods, but it does not apply if the transaction is predominantly for the provision of services. The application of this test is illustrated by an interesting case decided since the publication of the last survey.
In Vermillion State Bank v. Tennis Sanitation, LLC, the court considered, among other things, whether the U.C.C. applied to an oral contract between Vermillion State Bank (“Vermillion”) and Tennis Sanitation, LLC (“Tennis”), whereby Vermillion agreed to sell garbage trucks and customer routes it purchased in a bankruptcy auction for $5.4 million to Tennis for $6.1 million. A dispute developed when Tennis repudiated the contract and Vermillion sold the assets to another party for a much lower price and included additional assets. Vermillion brought suit for breach of contract and related claims against Tennis. After trial, the jury, applying the common law, found in favor of Vermillion and awarded the bank $1,920,000 in damages. Tennis moved post-trial for judgment as a matter of law or for a new trial, asserting that the contract was not enforceable if the U.C.C. applied, which the trial court denied and the court of appeals affirmed.
The court first noted that the predominant purpose test applies to “hybrid transactions,” such as the one at issue involving goods and intangible assets. The court rejected Tennis’ argument for applying the “bifurcation approach” because the transaction involved goods and intangible assets, rather than goods and services. The court noted that bifurcation is a minority approach and that the predominant purpose test applied to transactions involving goods and non-goods of any type. The court noted the predominant purpose test furthers a party’s intent and that “[i]f Vermillion sold all the garbage trucks, bins, and other garbage-hauling equipment, but included one token customer route to avoid the UCC warranties, the predominant purpose test would ensure that the UCC would still cover the contract.” Moreover, the court held that application of the predominant purpose test is a question of law.
Applying the predominant purpose test, the court noted that “[w]hen classifying a hybrid contract, the relative price or value of a contract's component parts is an important consideration, but it is not the sole or determinative consideration,” and that the court should also consider “all relevant evidence.” Although Tennis put forth a valuation that the majority of the price was for the trucks, the evidence was that: (1) at the parties’ meeting they attributed $5.3 million of the $9.1 million value to the customer routes; (2) Gregory Tennis testified that the trucks were only 30 percent of the value; (3) the accountant testified that the customer routes were the “driving force” for the transaction; and (4) the bankruptcy specialist assessed the customer routes at 70–75 percent of the value. As such, “the dominant characteristic of the contract was the customer routes, an intangible asset, and therefore the common law governs the contract, rather than the UCC.”
Statute of Frauds
To be enforceable, an agreement to buy and sell goods for a price of $500 or more must normally be evidenced by one or more signed writings unless an exception applies. In Houlihan Trading Co. v. CTI Foods, LLC, the court considered a claim by CTI Foods, LLC (“CTI”) that it had a contract for the purchase of chicken-breast trim from Houlihan Trading Co. (“Houlihan”) based on several email communications. After a request for proposal by CTI, several emails followed. In a November 2020 email, Houlihan stated it “could provide approximately one truckload per week of frozen chicken-breast trim at 69 cents per pound.” CTI alleged it accepted the offer by telephone call and Houlihan sent multiple truckloads to CTI for months. Several months into the arrangement, Houlihan notified CTI that it could not provide the frozen chicken. CTI inquired about fresh chicken instead and Houlihan responded by email that it “had been ‘honoring our deal and bringing in frozen with a loss all year.’” After Houlihan did not supply the chicken, CTI purchased cover at market prices and Houlihan brought an action for a declaratory judgement. CTI filed a counterclaim for breach of contract, which Houlihan moved to dismiss. Houlihan asserted that there was only an oral contract and that any writings lacked a quantity term. The court denied Houlihan’s motion to dismiss, concluding that Houlihan’s emails “in combination” did “supply a quantity term and indicate the consummation of a contract.” In particular, the email regarding “one truckload per week” and the other recognizing the “deal.” Because the writings evidenced a contract and a quantity term, the motion to dismiss was not appropriate.
Sections 2-204 through 2-207 govern contract formation under Article 2. Section 2-204 abrogates a strict requirement of offer and acceptance, providing instead that an agreement may be reached in any manner and can subsequently be found to exist even if the moment of its creation cannot be determined. Section 2-205 validates firm offers made by merchants in a signed writing even in the absence of consideration. Section 2-206 permits a party to accept an offer by “prompt or current shipment” of goods or a promise to do so, whereas section 2-207 permits formation of a contract even when an acceptance contains additional or different terms, so long as acceptance is not expressly conditioned on assent to the terms.
The decision in Antifun Ltd. T/A Premium Vape v. Wayne Industries LLC turned on the application of section 2-204. Wayne Industries LLC and its owner Douglas Ruth (collectively “Wayne”) contacted Antifun Limited T/A Premium Vape (“Antifun”) in May 2021 with a WhatsApp message “[W]e have an option on 2k Mango 4 from UA if you are interested . . . $23 shipped,” and later sent another message with an invoice for the vaping pods. Antifun replied “[t]hanks I'll get it paid and send receipt as usual,” and later paid the full invoice of $48,000, but only received half of the vaping pods. In June 2021, Antifun ordered 11,393 vaping pods and paid after receiving an invoice from Wayne, which it paid, but did not receive any of the vaping pods it ordered. Antifun did not receive the vaping pods and sued for breach of contract and other claims and Wayne moved to dismiss on the grounds that no contract existed for the vaping pods. The court found that the parties manifested sufficient agreement under section 2-204 for the May and June 2021 orders through the messages and invoices and that there was consideration for the contract by virtue of the payments for the pods. Moreover, the parties’ prior dealing had included similar WhatsApp messaging orders with contemporaneous invoices. Finally, the court found that the parties agreed to “central terms of the transaction—including price, quantity, shipping addresses, and billing information.” Accordingly, the court denied Wayne’s motion to dismiss as Antifun had properly pled the existence of an agreement between the parties.
The analysis in Ballou v. Asset Marketing Services, LLC involved section 2-207, focusing on an attempt by buyers who bought collectible coins by phone to recover damages from the seller, Asset Marketing Services, LLC (“AMS”), after the buyers discovered the coins were worth much less than the amount paid. After the purchase, AMS sent the buyers shipping invoices with Terms and Conditions, including an arbitration clause. AMS asserted that the parties formed “shrinkwap” contracts where the buyers paid for the purchased coins in response to an offer from AMS, but later received the AMS terms of sale that include the additional arbitration term. Accordingly, AMS moved to compel arbitration.
The court concluded that “shrinkwrap analysis applies” in cases where the seller makes an offer and specifies the buyer’s conduct that will be the acceptance, to which the buyer performs accordingly. When the buyer makes the offer and the seller accepts and the buyer later sends additional or different terms, section 2-207 applies. The court reasoned that in the phone conversation, AMS provided information to the buyers who then offered to pay, which offer AMS accepted. The court concluded that the buyers and AMS formed oral contracts on the phone such that 2-207 applied to the additional terms sent by AMS later. Accordingly, the court concluded that the AMS terms and conditions were “written confirmations” that included additional terms under section 2-207(1). Because the buyers were not merchants, the merchant exceptions for inclusion of the proposed additional terms under 2-207(2) did not apply and there were questions of fact as to whether the buyers assented to the AMS terms and conditions at any point. Furthermore, the court held there was a question of fact as to whether AMS might have, in some of the transactions, made its acceptance expressly conditional on buyers’ assent to its terms and conditions, thus preventing formation of a contract under 2-207(1). Because questions of material fact existed as to inclusion of the AMS terms and conditions, the court remanded the case for trial on the arbitration issue.
Output, Requirements, and Exclusive Dealings
Section 2-306 recognizes that parties may make a contract whereby the quantity is measured by the good-faith output or requirements of the parties and can also make contracts for exclusive dealings. Applying this provision, the analysis in Big Pop's Fresh Louisiana Seafood, LLC v. Bass Pro, LLC, involved a breach of contract claim brought by Big Pop’s Fresh Louisiana Seafood, LLC (Big Pop’s), a seller of alligator meat. Big Pop’s contracted to be the exclusive supplier of alligator meat to Bass Pro, LLC (“Bass”), whereby the contract stated that Bass “has the obligation to order and purchase from [Big Pop’s] a minimum of 150,000 pounds” of alligator meat per year during the contract term. Bass did not purchase 150,000 during any year and during the COVID-19 pandemic closed most of its restaurants completely. Big Pop’s brought suit for breach of contract, and Bass moved for summary judgment. The court rejected Bass’ argument that it was entitled to summary judgment because the exclusive dealing contract was a requirements contract whereby it could purchase its requirements in good faith under section 2-306. In particular, the court noted that the contract was a requirements contract, but one with a 150,000 pound minimum purchase per year. While the contract permitted Bass to change its volume requirements, the minimum still applied. As such, summary judgment for Bass was not appropriate because Bass did not have the ability to set its requirements below the minimum.
Privity of contract is generally required to assert a successful breach of contract action, but in the warranty context, the traditional notions of privity are sometimes relaxed. The court in Harris v. Pfizer Inc. applied the New York version of section 2-318; however, it underscored the importance of the character of the claim and the alternative adopted in the jurisdiction. In Harris, buyers used a smoking cessation medication, Chantix, that they purchased from a pharmacy, rather than the manufacturer, Pfizer. The medication was later recalled due to contamination and the buyers brought claims against Pfizer that included breach of express and implied warranties. The manufacturer moved to dismiss the breach of implied warranty claims for lack of privity, asserting that New York law precluded the claims for lack of privity where the buyers did not allege personal injury. The court found that the buyers did not properly allege a breach of express warranty claim and that section 2-318 precluded the breach of implied warranty claim for lack of privity where buyers were not personally injured. Accordingly, buyers could not assert a claim for breach of implied warranty against the manufacturer.
Warranty Creation and Disclaimers
“Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain” can create an express warranty. The decision in Bryant v. BMW of N.A. LLC turned on express warranties and claims made under the Magnuson-Moss Warranty Act (“MMWA”). In Bryant, Steamer Motor Company, a used car dealership owned by Benjamin Schaefer (“Steamer”), purchased a new 2009 BMW from a BMW dealer and Clint Bryant purchased a used “Certified Pre-Owned” (“CPO”) 2010 BMW from an authorized BMW dealer, with both buyers receiving the BMW “New Vehicle Limited Warranty.” Bryant also received a “buyer’s guide” specifying the CPO warranty. Both cars experienced excessive oil consumption which caused the engine to smoke, a problem often associated with defective valve stem seals, and received service at a BMW service center. Bryant’s repairs included replacement of valve stem seals, among other repairs. Both buyers brought suit against BMW for breach of warranty and the MMWA and all parties moved for summary judgment.
Denying the buyers’ motion for summary judgment and BMW’s in part, the court first noted that with respect to the 2009 BMW, Steamer was the buyer for purposes of section 2-313 where the company name was on the title and the car had dealer plates. The court declined to disregard the corporate form of Steamer in favor or Schaefer who brought the suit in his personal capacity as it found he was not a buyer, even though he was the sole owner of Steamer, paid for the car with his own money, and attended to the service needs of the car. As such, Schaefer was not the party in interest and did not qualify as a buyer or consumer under the MMWA. Moreover, the MMWA would not apply to the transaction with Steamer, a corporation, as it is not a “consumer” for purposes of the MMWA. As such, summary judgment in favor of BMW was appropriate and Schaefer’s motion was denied.
As to Bryant, though, the court concluded that the claims could not be resolved on summary judgment. With respect to express warranties arising under state law, Bryant could make out a case against BMW for express warranties made in the new car and the CPO warranties to repair or replace defective goods. However, the parties’ experts disputed whether BMW had remedied the defects in Bryant’s BMW in a reasonable time. Moreover, BMW’s expert asserted that the problems with the vehicle were the result of poor maintenance by Bryant. The court noted that “[w]here rival experts meet in the ring, the jury, not the Court, scores the fight.” As such, the court denied both parties’ motions for summary judgment as to Bryant’s vehicle.
The decision in Lekovic v. Puppy Boutique turned on the implied warranty of merchantability under section 2-314. Tatsiana Lazovik (“Lazovik”) purchased a five-month-old female Maltese puppy from Puppy Boutique. Lazovik brought suit for breach of contract and warranty after the puppy became sick from congenital portosystemic liver shunt and required surgery to save the puppy’s life and correct the problem. The court held that Puppy Boutique breached the implied warranty of merchantability by selling a puppy with a congenital condition which existed at the time of sale. Accordingly, Lazovik was entitled to damages.
The decision in Spinal Techs., LLC v. Mazor Robotics Inc. turned on a claim for breach of express and implied warranties and a disclaimer under section 2-316. Spinal Technologies, LLC (“Spinal”) purchased a surgical guidance system from Mazor Robotics Inc. (“Mazor”) that allegedly malfunctioned. Mazor argued that the sales agreement properly disclaimed any implied warranties in all capital letters and provided that the sole and exclusive remedy was repair or replacement. The court agreed, comparing the disclaimer provisions to the rest of the agreement, noting “the law does not require use of multiple, distinguishing devices to make a disclaimer text distinct,” and that the “[d]isclaimer clause stands out from the rest of the text by being the only capitalized text (with other disclaiming provisions in the [a]greement).” As to Spinal’s express warranty claim, the court dismissed the claims, finding that the sole remedy for the defects was repair or replacement and that there was no allegation that Mazor had failed to do repairs. HTS and the former owner brought suit against Sikorsky for claims that included breach of the implied warranty of merchantability, and Sikorsky moved for summary judgment. As such, the court granted summary judgment to Mazor on both the implied and express warranty claims.
Title, Creditors, and Good Faith
Section 2-401 provides that the title to goods does not pass prior to identification of the goods in the contract, but unless otherwise agreed, title passes when the seller completes his performance regarding physical delivery of the goods. Section 2-403 permits: (i) a person possessing only voidable title to transfer good title to a good-faith purchaser for value, and (ii) a merchant who deals in goods of the kind to transfer all rights of an “entruster” of the goods to a buyer in the ordinary course.
Performance and Breach
Section 2-615 provides excuse for a breach of contract where performance is made “impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made” and permits a seller to allocate production where the cause does not affect the seller’s entire capacity. Guilbert Tex, Inc. v. United States Fed Grp. Consortium Syndicate involved a claim by a buyer of N95 respirator masks for breach of contract where the sellers failed to deliver the masks and claimed their nonperformance was excused due to impracticability arising from an increase in demand for its products. The buyer had paid a deposit of $258,450 and the contract provided “Seller guarantees goods shall be delivered within thirty [d]ays [sic] or Seller shall issue Buyer FULL and COMPLETE refund for all deposits and fees paid.” When the sellers did not provide the masks or return the deposit, the buyer sued for breach of contract, and all parties moved for summary judgment. The court granted the buyer’s motion and denied the seller’s motion for summary judgment, concluding that the sellers did not allege alternate sources of masks were unavailable. Moreover, even if the masks were not available, the sellers had assumed a greater obligation under the contract pursuant to section 2-615 where the contract provided for an alternate performance by the sellers refunding to the buyer the deposit it paid. Accordingly, impracticability did not provide a grounds to excuse the seller’s nonperformance and the court concluded that the buyer was entitled to summary judgment.
Rejection, Acceptance, and Revocation of Acceptance
Section 2-601 provides that a buyer receiving a non-conforming tender can reject, accept, or accept any commercial units and reject the remainder. A buyer that fails to make an effective rejection under section 2-602, though, is deemed to have accepted the goods under section 2-606. Section 2-608 provides aggrieved buyers with a limited right to revoke acceptance of non-conforming goods. For a buyer to exercise this right under section 2-608, the nonconformity must substantially impair the value of the goods, and the buyer must have accepted the goods either on the reasonable assumption that the nonconformity would be cured or without discovering the nonconformity because discovery would be difficult, or because of the seller’s assurances.
The decision in Frozen Wheels, LLC v. Potomac Valley Home Med., Inc. turned on the application of sections 2-601 and 2-602. Potomac Valley Home Medical, Inc. (“Potomac”) contracted to purchase 4,000,000 KN-95 masks from Frozen Wheels LLC (“Frozen Wheels”) with delivery by May 19, 2020, so that Potomac could complete a contract it had with the State of Maryland for 10,000,000 masks. By May 20, Frozen Wheels had delivered only 3,506,960 masks and on May 26, 2020, Potomac ordered 1,500,000 KN-95 masks from Frozen Wheels with delivery by May 30, 2020, so that it could finish the State of Maryland order. A dispute developed over whether Frozen Wheels delivered the 1.5 million masks by May 30 and Potomac stored 506,960 surplus KN-95 masks it received from Frozen Wheels as the State would not take them. Frozen Wheels brought suit for breach of contract, Potomac counter-claimed and Frozen Wheels moved for summary judgment. Denying Frozen Wheels’ motion for summary judgment, the court held that whether the goods were late was in dispute and that section 2-601’s perfect tender rule would permit the rejection of the masks by Potomac under section 2-602, which it appears to have done, if Frozen Wheels did not make timely delivery. Moreover, Potomac’s storage of the masks would be consistent with section 2-604’s provision on storage of rejected goods. As such, summary judgement was not appropriate at the time.
The decision in Degan v. Five State Dodge, Inc. turned on the application of section 2-608. Andrew Degan purchased a 2016 Dodge Journey SUV on August 16, 2019, from Five Star Dodge, Inc. (“Five Star”), which had purchased the Journey from Jerry Stutts on July 31, 2019. Degan received a temporary tag for the Journey, which was titled in Ohio, and took possession. Five Star experienced delays in getting a Georgia title for the Degans due to a loss of the Ohio title in the mail and a name discrepancy that required Five Star to have the application completed by Stutts personally. As a result of the delays in obtaining the Georgia title and tag, Degan notified Five Star by letter dated November 1, 2019, that they were cancelling the contract due to the failure to transfer ownership to them of the Journey. Five Star ultimately provided the Georgia title and tag to Degan on November 21, 2019. Degan brought suit for claims including breach of contract and Five Star moved for summary judgment. Applying section 2-608, the magistrate judge cast doubt on whether the delay of Five Star beyond thirty days to obtain the Georgia title and tag resulted in the Journey being “nonconforming.” Nevertheless, the court concluded that even if the Journey was nonconforming, that Five Star cured the defect in a timely manner within three weeks of receiving the cancellation notice. Accordingly, the magistrate judge recommended the grant of summary judgment to Five Star.
Section 2-703 generally permits an aggrieved seller to withhold delivery of goods, cancel, and to pursue specified remedies, including resale, under section 2-706, by a seller who has possession of the goods; recovery of the difference between the market price and the contract price, under section 2-708; or recovery of the price under section 2-709. Sellers are also entitled to incidental damages but not consequential damages.
Section 2-711 generally permits an aggrieved buyer to pursue specified remedies, including the recovery of payments made to the breaching seller. Section 2-712 entitles an aggrieved buyer to “recover” by making reasonable, good faith purchases of substitute goods. In cases where the goods are accepted, an aggrieved buyer may pursue recovery under section 2-714, which provides that an aggrieved buyer’s damages are measured by the difference between the value of the goods as accepted and the value of the goods as warranted. An aggrieved buyer can also deduct its damages from the price owed to the seller for the goods under the same contract. Buyers are additionally entitled to incidental damages and consequential damages. Limitations of, additions to, or substitutions for remedies set forth in Article 2 are permitted pursuant to section 2-719, unless the agreed remedy fails of its essential purpose.
The decision in Lazovik v. Puppy Boutique applied section 2-714 to evaluate the buyer’s claim for consequential damages of $8,255 and the price of $1,357 after the seller delivered an unhealthy puppy. The small claims court found that the buyer of the puppy proved with reasonable certainty the damages and awarded $9,612. The civil court agreed that the buyer was entitled to the $8,255 for the veterinary expenses as damages under section 2-714, but disallowed the price of $1,357 as the buyer kept the puppy. Therefore, the buyer was entitled to damages of $8,255.
Pursuant to section 2-716, buyers are sometimes entitled to specific performance by the seller where the goods are unique or in other proper circumstances. In the case of Cheng v. Continental Classic Motors, Inc., Continental Classic Motors (“Continental”) agreed on March 3, 2022, to sell a Ferrari F8 Tributo to Cheng for $475,994. Cheng argued that the Ferrari was rare and unique, was the only one like it in the world, the only one in the Rosso Fiorano color, and that Ferrari no longer makes the particular car. On March 5, 2022, Continental sold the car to another buyer. Cheng brought suit for breach of contract against Continental, requesting relief that included specific performance and monetary relief. Continental moved to dismiss the claim for specific performance. The court noted that “[c]ourts generally disfavor granting specific performance unless monetary damages are inadequate.” Notwithstanding that position, the court found the car to be unique and that specific performance might be available to Cheng. The court found, however, that if a bona fide purchaser had the car, then specific performance would not be available as such a purchaser would take free of the claim of Cheng. Ultimately, the court dismissed Cheng’s claim on jurisdictional grounds, but permitted leave to amend.
This result can be compared to the result in Jet Experts, LLC v. Asian Pac. Aviation Ltd. where Jet Experts, LLC (“Jet Experts”) contracted with Asian Pacific Aviation Limited (“Aviation”) to purchase a used aircraft that would be used for organ transplant transportation. Aviation cancelled the contract after it found a buyer willing to pay a higher price and Jet Experts brought suit for breach of contract and requested specific performance. The court observed that “[t]he law has been slow to order specific performance of a disowned contract in cases where the performance consisted in turning over an article which is mass-produced.” The court agreed with Jet Experts that there was not an available aircraft that served the organ transplant needs and that the general characteristics were unique with “low flight hours, overhauled engines, three-piece divan, already inspected APU, completion of all required inspections, including its 96-month inspection.” Moreover, Jet Experts had worked with Aviation for significant restoration of the aircraft such that there were no other similar aircraft and Jet Experts was entitled to specific performance. As such, the court entered judgment in favor of Jet Experts on its claim for specific performance and directed Aviation to transfer the aircraft to Jet Experts.
Statute of Limitations
Article 2 generally requires that actions for breach must be brought within four years of when the cause of action accrues, but the parties may shorten the limitations period to “not less than one year.” A cause of action accrues generally at the time of tender of delivery but a warranty can run to future performance such that the statute of limitations runs from the time of discovery of the breach (possibly extending beyond four years of the sale) under section 2-725(2). Plaintiffs who delay filing a lawsuit and come up against the statute of limitations often make creative arguments to avoid the dismissal of their suits as time-barred.
Whether the limitations period can be tolled may turn on the buyer’s actions and interactions with the seller of the breach and was at issue in Grover v. BMW of North America, LLC. Buyers purchased BMW vehicles from different sellers that allegedly used excessive oil. The buyers alleged that they raised the oil consumption issue with the dealers and were advised that it was “normal.” Buyers brought suit for breach of warranty, MMWA, and other claims in 2019 and BMW moved for summary judgment on grounds that the buyer’s warranty claims were time-barred. First, the court rejected the buyers’ discovery rule argument, finding the discovery rule only applies when a warranty runs to future performance “and a warranty obligation to repair or replace a defective product within the warranty period does not guarantee future performance free from defect.” As such, the statute of limitations on the breach of the repair or replace obligation would not accrue on delivery of the vehicle but would accrue on the failure of BMW to perform the repair. Second, as to implied warranties, the statute of limitations ran from the date of tender of the vehicles, which was more than four years prior to the filing of the action in 2019.
As to tolling for buyers that might be beyond the limitations period for the repair or replace, the buyers argued fraudulent concealment and class action tolling. As to fraudulent concealment, the court found that the evidence raised an issue of fact precluding summary judgment as to whether BMW concealed the defect by assuring buyers that the oil use was “normal” and whether buyers were “diligent” in their interactions with BWM for servicing the car. As such, fraudulent concealment might toll the statute of limitations. As to class action tolling, the court was ultimately persuaded by BMW’s argument that the doctrine applied “to actions where class status was denied, not where, as here, the class action at issue reached a settlement and plaintiffs, as putative class members, opted out of the settlement.” The court concluded that summary judgement on the warranty claims was not appropriate as to most buyers based on factual issues regarding the application or extension of the statute of limitations.