BA 3302 University of Houston Downtown Commercial Law Presentation

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BA 3302 Commercial Law – Power Point Presentation Professor Lee Usnick, JD* HOW TO CREATE YOUR POWER POINT RECORDED PRESENTATION – STEP BY STEP 1. Select a ‘current events’ article. Find a news article on a topic we have studied or will study this semester. The publication date must be after the start of our long semester (or in summer semester, within the past 40 days from the start of the term, June 7, 2021). The article must describe a business situation with legal and ethical implications. The topic must be relevant to business professionals who will make corporate management decisions, or who practice a profession such as a CPA. Ideally, use one of these publications: Bloomberg, The Economist, New York Times, Washington Post, Financial Times, Houston Chronicle, Texas Monthly, or Wall Street Journal, U.S. Securities and Exchange Commission (https://www.sec.gov/litigation/litreleases.shtml), U.S. Dept. of Justice (https://www.justice.gov/news), Houston Chronicle, or the Houston Business Journal. You may need to use the UHD Library to access these later publications. Get article approval first if using a different publication. 2. Create Power Point #1: State your name and the date you are submitting your Zoom presentation. State the article title, article’s author (or publication source) and date of article publication or post. Be sure to include the working URL to the article. 3. Create Power Point #2: Describe the problem or dilemma or management decision presented in the article. What went wrong with the business decision(s) described in your article? Or what does the business need to decide, to change, to implement? Why is the company now in the public spotlight? Which laws and/or administrative agency regulations are involved? (You do not need to research the law itself. Example, you could say something like ‘the banking regulations under Dodd-Frank Act’ or ‘financial regulations from the Consumer Finance Protection Bureau’). This slide will sum up these answers in brief bullet points. 4. Create Power Point #3: Explain how current practices are a problem, and identify options (2 or 3 ideas are sufficient) the company can do to fix them. Put yourself in the role as consultant hired in to advise the company its next steps. Which laws and regulations, if any, are violated or under investigation. Which ethical principles seem to be violated by current conduct? Why are current practices not in the company’s best interest? This slide covers the details of the conduct, and your ideas on management’s options for improving and/or solving the problems. 5. Create Power Point #4: Select one ethics principle or theory from our text or print lecture to apply to the situation described in your article. This is your decision-making model. Explain the principle or model to your audience, and state why you recommend using this decision-making model. This slide covers the ethics principle or theory you believe will best address the problems. 6. Create Power Point #5: Based on the decision-making model you select in Step 4, recommend a specific course of conduct for the company. Show how your model is applied and how it supports the course of action you recommend for going forward. This slide shows how your recommended course of action is derived from your decision-making model. You may have a couple of additional slides if needed. Five slides is the minimum number. 6/2/2021 BA 3302 OER Master Name BA 3302 Power Point Recorded Presentation Description Rubric Detail Levels of Achievement Novice/Minima[ Criteria Coverage or Adequate/Average Exceptional Skill Clearly Identifies and explains the management problem behavior{s) Weight 25.00% Moral theory/ethical principles clearly incorporated into analysis of problems and as basis of solutions 70.00 % 83.00 % 95.00 % 100.00 % Vague explanation of the problems, why the actions are unethical and/or illegal Explanation of problem with management's behaviors is too brief Identifies and explains adequately the problem's with management's acts Detailed explanation of the ethical/legal problem with management's acts 70.00 % 83.00 % 95.00 % 100.00 % Omits an ethical principle or moral theory as basis for solutions Vague explanation of ethical principle or moral theory for solution Uses ethical principle or moral theory in partial support of solutions Clearly shows how ethical principle or moral theory is the foundation for solutions 70.00 % 83.00 % 95.00 % 100.00 % Article does not meet date criterion Article meets date criterion; topic has only minor relevance to management behavior Article meets date criterion; topic is somewhat relevant to management behavior Article meets date criterion; topic is highly relevant to management behavior 70.00 % 83.00 % 95.00 % 100.00 % Three or more of the listed skills are not demonstrated Two listed traits are not demonstrated All but one trait clearly demonstrated All traits demonstrated, overall presentation is businessprofessional Weight 25.00% Article meets selection criteria Weight 25.00% Overall oral communication skills (professional attire, wellrehearsed, audience connection, overall professional appearance} Weight 25.00% https://bb.uhd.edu/webapps/rubric/do/course/manageRubrics?dispatch=view&context=course&rubricld=_33956_ 1&course_id=_75893_ 1 1/2 This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work’s original creator or licensee. Property – Assigned Reading is Highlighted in THIS Color. Highlights added by Professor Usnick. Chapter 31 Introduction to Property: Personal Property and Fixtures LEARNING OBJECTIVES After reading this chapter, you should understand the following: 1. The difference between personal property and other types of property 2. How rights in personal property are acquired and maintained 3. How some kinds of personal property can become real property, and how to determine who has rights in fixtures that are part of real property In this chapter, we examine the general nature of property rights and the law relating to personal property—with special emphasis on acquisition and fixtures. In Chapter 32 "Intellectual Property", we discuss intellectual property, a kind of personal property that is increasingly profitable. In Chapter 33 "The Nature and Regulation of Real Estate and the Environment" through Chapter 35 "Landlord and Tenant Law", we focus on real property, including its nature and regulation, its acquisition by purchase (and some other methods), and its acquisition by lease (landlord and tenant law). In Chapter 36 "Estate Planning: Wills, Estates, and Trusts" and Chapter 37 "Insurance", we discuss estate planning and insurance—two areas of the law that relate to both personal and real property. 31.1 The General Nature of Property Rights LEARNING OBJECTIVES 1. Understand the elastic and evolving boundaries of what the law recognizes as property that can be bought or sold on the market. 2. Distinguish real property from personal property. Definition of Property Property, which seems like a commonsense concept, is difficult to define in an intelligible way; philosophers have been striving to define it for the past 2,500 years. To say that “property is what we own” is to beg the question—that is, to substitute a synonym for the word we are trying to define. Blackstone’s famous definition is somewhat wordy: “The right of property is that sole and despotic dominion which one man claims and exercises over the external things of the world, in total exclusion of the right of any other individual in the universe. It consists in the free use, enjoyment, and disposal of all a person’s acquisitions, without any control or diminution save only by the laws of the land.” A more concise definition, but perhaps too broad, comes from the Restatement of the Law of Property, which defines property as the “legal relationship between persons with respect to a thing.” The Restatement’s definition makes an important point: property is a legal relationship, the power of one person to use objects in ways that affect others, to exclude others from the property, and to acquire and transfer property. Still, this definition does not contain a specific list of those nonhuman “objects” that could be in such a relationship. We all know that we can own personal objects like iPods and DVDs, and even more complex objects like homes and minerals under the ground. Property also embraces objects whose worth is representative or symbolic: ownership of stock in a corporation is valued not for the piece of paper called a stock certificate but for dividends, the power to vote for directors, and the right to sell the stock on the open market. Wholly intangible things or objects like copyrights and patents and bank accounts are capable of being owned as property. But the list of things that can be property is not fixed, for our concept of property continues to evolve. Collateralized debt obligations (CDOs) and structured investment vehicles (SIVs), prime players in the subprime mortgage crisis, were not on anyone’s list of possible property even fifteen years ago. The Economist’s View Property is not just a legal concept, of course, and different disciplines express different philosophies about the purpose of property and the nature of property rights. To the jurist, property rights should be protected because it is just to do so. To an economist, the legal protection of property rights functions to create incentives to use resources efficiently. For a truly efficient system of property rights, some economists would require universality (everything is owned), exclusivity (the owners of each thing may exclude all others from using it), and transferability (owners may exchange their property). Together, these aspects of property would lead, under an appropriate economic model, to efficient production and distribution of goods. But the law of property does not entirely conform to the economic conception of the ownership of productive property by private parties; there remain many kinds of property that are not privately owned and some parts of the earth that are considered part of “the commons.” For example, large areas of the earth’s oceans are not “owned” by any one person or nation-state, and certain land areas (e.g., Yellowstone National Park) are not in private hands. Classification of Property Property can be classified in various ways, including tangible versus intangible, private versus public, and personal versus real. Tangible property is that which physically exists, like a building, a popsicle stand, a hair dryer, or a steamroller.Intangible property is something without physical reality that entitles the owner to certain benefits; stocks, bonds, and intellectual property would be common examples.Public property is that which is owned by any branch of government;private property is that which is owned by anyone else, including a corporation. Perhaps the most important distinction is between real and personal property. Essentially, real property is immovable; personal property is movable. At common law, personal property has been referred to as “chattels.” When chattels become affixed to real property in a certain manner, they are called fixtures and are treated as real property. (For example, a bathroom cabinet purchased at Home Depot and screwed into the bathroom wall may be converted to part of the real property when it is affixed.) Fixtures are discussed in Section 31.3 "Fixtures" of this chapter. Importance of the Distinction between Real and Personal Property In our legal system, the distinction between real and personal property is significant in several ways. For example, the sale of personal property, but not real property, is governed by Article 2 of the Uniform Commercial Code (UCC). Real estate transactions, by contrast, are governed by the general law of contracts. Suppose goods are exchanged for realty. Section 2-304 of the UCC says that the transfer of the goods and the seller’s obligations with reference to them are subject to Article 2, but not the transfer of the interests in realty nor the transferor’s obligations in connection with them. The form of transfer depends on whether the property is real or personal. Real property is normally transferred by a deed, which must meet formal requirements dictated by state law. By contrast, transfer of personal property often can take place without any documents at all. Another difference can be found in the law that governs the transfer of property on death. A person’s heirs depend on the law of the state for distribution of his property if he dies intestate—that is, without a will. Who the heirs are and what their share of the property will be may depend on whether the property is real or personal. For example, widows may be entitled to a different percentage of real property than personal property when their husbands die intestate. Tax laws also differ in their approach to real and personal property. In particular, the rules of valuation, depreciation, and enforcement depend on the character of the property. Thus real property depreciates more slowly than personal property, and real property owners generally have a longer time than personal property owners to make good unpaid taxes before the state seizes the property. KEY TAKEAWAY Property is difficult to define conclusively, and there are many different classifications of property. There can be public property as well as private property, tangible property as well as intangible property, and, most importantly, real property as well as personal property. These are important distinctions, with many legal consequences. EXERCISES 1. Kristen buys a parcel of land on Marion Street, a new and publicly maintained roadway. Her town’s ordinances say that each property owner on a public street must also provide a sidewalk within ten feet of the curb. A year after buying the parcel, Kristen commissions a house to be built on the land, and the contractor begins by building a sidewalk in accordance with the town’s ordinance. Is the sidewalk public property or private property? If it snows, and if Kristen fails to remove the snow and it melts and ices over and a pedestrian slips and falls, who is responsible for the pedestrian’s injuries? 2. When can private property become public property? Does public property ever become private property? 31.2 Personal Property LEARNING OBJECTIVE 1. Explain the various ways that personal property can be acquired by means other than purchase. Most legal issues about personal property center on its acquisition. Acquisition by purchase is the most common way we acquire personal property, but there are at least five other ways to legally acquire personal property: (1) possession, (2) finding lost or misplaced property, (3) gift, (4) accession, and (5) confusion. Possession It is often said that “possession is nine-tenths of the law.” There is an element of truth to this, but it’s not the whole truth. For our purposes, the more important question is, what is meant by “possession”? Its meaning is not intuitively obvious, as a moment’s reflection will reveal. For example, you might suppose than you possess something when it is physically within your control, but what do you say when a hurricane deposits a boat onto your land? What if you are not even home when this happens? Do you possess the boat? Ordinarily, we would say that you don’t, because you don’t have physical control when you are absent. You may not even have the intention to control the boat; perhaps instead of a fancy speedboat in relatively good shape, the boat is a rust bucket badly in need of repair, and you want it removed from your front yard. Even the element of physical domination of the object may not be necessary. Suppose you give your new class ring to a friend to examine. Is it in the friend’s possession? No: the friend has custody, not possession, and you retain the right to permit a second friend to take it from her hands. This is different from the case of a bailment, in which the bailor gives possession of an object to the bailee. For example, a garage (a bailee) entrusted with a car for the evening, and not the owner, has the right to exclude others from the car; the owner could not demand that the garage attendants refrain from moving the car around as necessary. From these examples, we can see that possession or physical control must usually be understood as the power to exclude others from using the object. Otherwise, anomalies arise from the difficulty of physically controlling certain objects. It is more difficult to exercise control over a one-hundred-foot television antenna than a diamond ring. Moreover, in what sense do you possess your household furniture when you are out of the house? Only, we suggest, in the power to exclude others. But this power is not purely a physical one: being absent from the house, you could not physically restrain anyone. Thus the concept of possession must inevitably be mixed with legal rules that do or could control others. Possession confers ownership in a restricted class of cases only: when no person was the owner at the time the current owner took the object into his possession. The most obvious categories of objects to which this rule of possession applies are wild animals and abandoned goods. The rule requires that the would-be owner actually take possession of the animal or goods; the hunter who is pursuing a particular wild animal has no legal claim until he has actually captured it. Two hunters are perfectly free to pursue the same animal, and whoever actually grabs it will be the owner. But even this simple rule is fraught with difficulties in the case of both wild animals and abandoned goods. We examine abandoned goods in Section 31.2.2 "Lost or Misplaced Property". In the case of wild game, fish in a stream, and the like, the general rule is subject to the rights of the owner of the land on which the animals are caught. Thus even if the animals caught by a hunter are wild, as long as they are on another’s land, the landowner’s rights are superior to the hunter’s. Suppose a hunter captures a wild animal, which subsequently escapes, and a second hunter thereafter captures it. Does the first hunter have a claim to the animal? The usual rule is that he does not, for once an animal returns to the wild, ownership ceases. Lost or Misplaced Property At common law, a technical distinction arose between lost and misplaced property. An object is lost if the owner inadvertently and unknowingly lets it out of his possession. It is merely misplaced if the owner intentionally puts it down, intending to recover it, even if he subsequently forgets to retrieve it. These definitions are important in considering the old saying “Finders keepers, losers weepers.” This is a misconception that is, at best, only partially true, and more often false. The following hierarchy of ownership claims determines the rights of finders and losers. First, the owner is entitled to the return of the property unless he has intentionally abandoned it. The finder is said to be a quasi-bailee for the true owner, and as bailee she owes the owner certain duties of care. The finder who knows the owner or has reasonable means of discovering the owner’s identity commits larceny if she holds on to the object with the intent that it be hers. This rule applies only if the finder actually takes the object into her possession. For example, if you spot someone’s wallet on the street you have no obligation to pick it up; but if you do pick it up and see the owner’s name in it, your legal obligation is to return it to the rightful owner. The finder who returns the object is not automatically entitled to a reward, but if the loser has offered a reward, the act of returning it constitutes performance of a unilateral contract. Moreover, if the finder has had expenses in connection with finding the owner and returning the property, she is entitled to reasonable reimbursement as a quasi-bailee. But the rights of the owner are frequently subject to specific statutes, such as the one discussed in Bishop v. Ellsworth in Section 31.4.1 "Lost or Misplaced Property". Second, if the owner fails to claim the property within the time allowed by statute or has abandoned it, then the property goes to the owner of the real estate on which it was found if (1) the finder was a trespasser, (2) the goods are found in a private place (though what exactly constitutes a private place is open to question: is the aisle of a grocery store a private place? the back of the food rack? the stockroom?), (3) the goods are buried, or (4) the goods are misplaced rather than lost. If none of these conditions apply, then the finder is the owner. These rules are considered in the Bishop case, (see Section 31.4.1 "Lost or Misplaced Property"). Gift A gift is a voluntary transfer of property without consideration or compensation. It is distinguished from a sale, which requires consideration. It is distinguished from a promise to give, which is a declaration of an intention to give in the future rather than a present transfer. It is distinguished from a testamentary disposition (will), which takes effect only upon death, not upon the preparation of the documents. Two other distinctions are worth noting. An inter vivos (enter VYE vos) gift is one made between living persons without conditions attached. A causa mortis (KAW zuh mor duz) gift is made by someone contemplating death in the near future. Requirements Figure 31.1 Gift Requirements To make an effective gift inter vivos or causa mortis, the law imposes three requirements: (1) the donor must deliver a deed or object to the donee; (2) the donor must actually intend to make a gift, and (3) the donee must accept (see Figure 31.1 "Gift Requirements"). Delivery Although it is firmly established that the object be delivered, it is not so clear what constitutes delivery. On the face of it, the requirement seems to be that the object must be transferred to the donee’s possession. Suppose your friend tells you he is making a gift to you of certain books that are lying in a locked trunk. If he actually gives you the trunk so that you can carry it away, a gift has been made. Suppose, however, that he had merely given you the key, so that you could come back the next day with your car. If this were the sole key, the courts would probably construe the transfer of the key as possession of the trunk. Suppose, instead, that the books were in a bank vault and the friend made out a legal document giving both you and him the power to take from the bank vault. This would not be a valid gift, since he retained power over the goods. Intent The intent to make a gift must be an intent to give the property at the present time, not later. For example, suppose a person has her savings account passbook put in her name and a friend’s name, intending that on her death the friend will be able to draw out whatever money is left. She has not made a gift, because she did not intend to give the money when she changed the passbook. The intent requirement can sometimes be sidestepped if legal title to the object is actually transferred, postponing to the donee only the use or enjoyment of the property until later. Had the passbook been made out in the name of the donee only and delivered to a third party to hold until the death of the donor, then a valid gift may have been made. Although it is sometimes difficult to discern this distinction in practice, a more accurate statement of the rule of intent is this: Intention to give in the future does not constitute the requisite intent, whereas present gifts of future interests will be upheld. Acceptance In the usual case, the rule requiring acceptance poses no difficulties. A friend hands you a new book and says, “I would like you to have this.” Your taking the book and saying “thank-you” is enough to constitute your acceptance. But suppose that the friend had given you property without your knowing it. For example, a secret admirer puts her stock certificates jointly in your name and hers without telling you. Later, you marry someone else, and she asks you to transfer the certificates back to her name. This is the first you have heard of the transaction. Has a gift been made? The usual answer is that even though you had not accepted the stock when the name change was made, the transaction was a gift that took effect immediately, subject to your right to repudiate when you find out about it. If you do not reject the gift, you have joint rights in the stock. But if you expressly refuse to accept a gift or indicate in some manner that you might not have accepted it, then the gift is not effective. For example, suppose you are running for office. A lobbyist whom you despise gives you a donation. If you refuse the money, no gift has been made. Gifts Causa Mortis Even though the requirements of delivery, intent, and acceptance apply to gifts causa mortis as well as inter vivos, a gift causa mortis (one made in contemplation of death) may be distinguished from a gift inter vivos on other grounds. The difference between the two lies in the power of the donor to revoke the gift before he dies; in other words, the gift is conditional on his death. Since the law does not permit gifts that take place in the future contingent on some happening, how can it be that a gift causa mortis is effective? The answer lies in the nature of the transfer: the donee takes actual title when the gift is made; should the donor not in fact die or should he revoke the gift before he dies, then and only then will the donee lose title. The difference is subtle and amounts to the difference between saying “If I die, the watch is yours” and “The watch is yours, unless I survive.” In the former case, known as a condition precedent, there is no valid gift; in the latter case, known as a condition subsequent, the gift is valid. Gifts to Minors Every state has adopted either the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), both of which establish the manner by which irrevocable gifts are made to minors. Under these acts, a custodian holds the gifts until the minor reaches the age of eighteen, twenty-one, or twenty-five, depending on state law. Gifts under UGMA are limited for the most part to money or securities, while UTMA allows other types of gifts as well, such as real estate or tangible personal property. Gift Tax The federal government and many states impose gift taxes on gifts above a certain dollar amount. We discuss gift taxes in connection with estate taxes in Chapter 36 "Estate Planning: Wills, Estates, and Trusts". Accession An accession is something that is added to what one already possesses. In general, the rule is that the owner of the thing owns the additional thing that comes to be attached to it. For example, the owner of a cow owns her calves when she gives birth. But when one person adds value to another person’s property, either through labor alone or by adding new materials, the rule must be stated somewhat differently. The general rule is this: when goods are added to goods, the owner of the principal goods becomes the owner of the enhanced product. For example, a garage uses its paint to repaint its customer’s automobile. The car owner, not the painter, is the owner of the finished product. When someone has wrongfully converted—that is, taken as her own—the property of another, the owner may sue for damages, either to recover his property or its value. But a problem arises when the converter has added to the value of that property. In general, the courts hold that when the conversion is willful, the owner is entitled to the full value of the goods as enhanced by the converter. Suppose that a carpenter enters a ten-acre forest that he knows belongs to his neighbor, cuts down one hundred trees, transports them to his shop, and cuts them up into standard lumber, thus increasing their market value. The owner is entitled to this full value, and the carpenter will get nothing for his trouble. Thus the willful converter loses the value of his labor or materials. If, on the other hand, the conversion was innocent, or at most negligent, the rule is somewhat more uncertain. Generally the courts will award the forest owner the value of the standing timber, giving the carpenter the excess attributable to his labor and transportation. A more favorable treatment of the owner is to give her the full value of the lumber as cut, remitting to the carpenter the value of his expenses. Confusion In accession, the goods of one owner are transformed into a more valuable commodity or are inextricably united with the goods of another to form a constituent part. Still another type of joining is known as confusion, and it occurs when goods of different owners, while maintaining their original form, are commingled. A common example is the intermingling of grain in a silo. But goods that are identifiable as belonging to a particular person—branded cattle, for instance—are not confused, no matter how difficult it may be to separate herds that have been put together. When the goods are identical, no particular problem of division arises. Assuming that each owner can show how much he has contributed to the confused mass, he is entitled to that quantity, and it does not matter which particular grains or kernels he extracts. So if a person, seeing a container of grain sitting on the side of the road, mistakes it for his own and empties it into a larger container in his truck, the remedy is simply to restore a like quantity to the original owner. When owners of like substances consent to have those substances combined (such as in a grain silo), they are said to be tenants in common, holding a proportional share in the whole. In the case of willful confusion of goods, many courts hold that the wrongdoer forfeits all his property unless he can identify his particular property. Other courts have modified this harsh rule by shifting the burden of proof to the wrongdoer, leaving it up to him to claim whatever he can establish was his. If he cannot establish what was his, then he will forfeit all. Likewise, when the defendant has confused the goods negligently, without intending to do so, most courts will tend to shift to the defendant the burden of proving how much of the mass belongs to him. KEY TAKEAWAY Other than outright purchase of personal property, there are various ways in which to acquire legal title. Among these are possession, gift, accession, confusion, and finding property that is abandoned, lost, or mislaid, especially if the abandoned, lost, or mislaid property is found on real property that you own. EXERCISES 1. Dan captures a wild boar on US Forest Service land. He takes it home and puts it in a cage, but the boar escapes and runs wild for a few days before being caught by Romero, some four miles distant from Dan’s house. Romero wants to keep the boar. Does he “own” it? Or does it belong to Dan, or to someone else? 2. Harriet finds a wallet in the college library, among the stacks. The wallet has $140 in it, but no credit cards or identification. The library has a lost and found at the circulation desk, and the people at the circulation desk are honest and reliable. The wallet itself is unique enough to be identified by its owner. (a) Who owns the wallet and its contents? (b) As a matter of ethics, should Harriet keep the money if the wallet is “legally” hers? 31.3 Fixtures LEARNING OBJECTIVE 1. Know the three tests for when personal property becomes a fixture and thus becomes real property. Definition A fixture is an object that was once personal property but that has become so affixed to land or structures that it is considered legally a part of the real property. For example, a stove bolted to the floor of a kitchen and connected to the gas lines is usually considered a fixture, either in a contract for sale, or for testamentary transfer (by will). For tax purposes, fixtures are treated as real property. Tests Figure 31.2 Fixture Tests Obviously, no clear line can be drawn between what is and what is not a fixture. In general, the courts look to three tests to determine whether a particular object has become a fixture: annexation, adaptation, and intention (see Figure 31.2 "Fixture Tests"). Annexation The object must be annexed or affixed to the real property. A door on a house is affixed. Suppose the door is broken and the owner has purchased a new door made to fit, but the house is sold before the new door is installed. Most courts would consider that new door a fixture under a rule of constructive annexation. Sometimes courts have said that an item is a fixture if its removal would damage the real property, but this test is not always followed. Must the object be attached with nails, screws, glue, bolts, or some other physical device? In one case, the court held that a four-ton statue was sufficiently affixed merely by its weight. [1] Adaptation Another test is whether the object is adapted to the use or enjoyment of the real property. Examples are home furnaces, power equipment in a mill, and computer systems in bank buildings. Intention Recent decisions suggest that the controlling test is whether the person who actually annexes the object intends by so doing to make it a permanent part of the real estate. The intention is usually deduced from the circumstances, not from what a person might later say her intention was. If an owner installs a heating system in her house, the law will presume she intended it as a fixture because the installation was intended to benefit the house; she would not be allowed to remove the heating system when she sold the house by claiming that she had not intended to make it a fixture. Fixture Disputes Because fixtures have a hybrid nature (once personal property, subsequently real property), they generate a large number of disputes. We have already examined two types of these disputes in other contexts: (1) disputes between mortgagees and secured parties (Chapter 28 "Secured Transactions and Suretyship") and (2) disputes over whether the sale of property attached to real estate (such as crops or a structure) but about to be severed is a sale of goods or real estate (Chapter 17 "Introduction to Sales and Leases"). Two other types of disputes remain. Transfer of Real Estate When a homeowner sells her house, the problem frequently crops up as to whether certain items in the home have been sold or may be removed by the seller. Is a refrigerator, which simply plugs into the wall, a fixture or an item of personal property? If a dispute arises, the courts will apply the three tests— annexation, adaptation, and intention. Of course, the simplest way of avoiding the dispute is to incorporate specific reference to questionable items in the contract for sale, indicating whether the buyer or the seller is to keep them. Tenant’s Fixtures Tenants frequently install fixtures in the buildings they rent or the property they occupy. A company may install tens of thousands of dollars worth of equipment; a tenant in an apartment may bolt a bookshelf into the wall or install shades over a window. Who owns the fixtures when the tenant’s lease expires? The older rule was that any fixture, determined by the usual tests, must remain with the landlord. Today, however, certain types of fixtures—known as tenant’s fixtures—stay with the tenant. These fall into three categories: (1) trade fixtures—articles placed on the premises to enable the tenant to carry on his or her trade or business in the rented premises; (2) agricultural fixtures—devices installed to carry on farming activities (e.g., milling plants and silos); (3) domestic fixtures—items that make a tenant’s personal life more comfortable (carpeting, screens, doors, washing machines, bookshelves, and the like). The three types of tenant’s fixtures remain personal property and may be removed by the tenant if the following three conditions are met: (1) They must be installed for the requisite purposes of carrying on the trade or business or the farming or agricultural pursuits or for making the home more comfortable, (2) they must be removable without causing substantial damage to the landlord’s property, and (3) they must be removed before the tenant turns over possession of the premises to the landlord. Again, any debatable points can be resolved in advance by specifying them in the written lease. KEY TAKEAWAY Personal property is often converted to real property when it is affixed to real property. There are three tests that courts use to determine whether a particular object has become a fixture and thus has become real property: annexation, adaptation, and intention. Disputes over fixtures often arise in the transfer of real property and in landlord-tenant relations. EXERCISES 1. Jim and Donna Stoner contract to sell their house in Rochester, Michigan, to Clem and Clara Hovenkamp. Clara thinks that the decorative chandelier in the entryway is lovely and gives the house an immediate appeal. The chandelier was a gift from Donna’s mother, “to enhance the entryway” and provide “a touch of beauty” for Jim and Donna’s house. Clem and Clara assume that the chandelier will stay, and nothing specific is mentioned about the chandelier in the contract for sale. Clem and Clara are shocked when they move in and find the chandelier is gone. Have Jim and Donna breached their contract of sale? 2. Blaine Goodfellow rents a house from Associated Properties in Abilene, Texas. He is there for two years, and during that time he installs a ceiling fan, custom-builds a bookcase for an alcove on the main floor, and replaces the screening on the front and back doors, saving the old screening in the furnace room. When his lease expires, he leaves, and the bookcase remains behind. Blaine does, however, take the new screening after replacing it with the old screening, and he removes the ceiling fan and puts back the light. He causes no damage to Associated Properties’ house in doing any of this. Discuss who is the rightful owner of the screening, the bookcase, and the ceiling fan after the lease expires. [1] Snedeker v. Warring, 12 N.Y. 170 (1854). 31.4 Case Lost or Misplaced Property Bishop v. Ellsworth 91 Ill. App.2d 386, 234 N.E. 2d 50 (1968) OPINION BY: STOUDER, Presiding Justice Dwayne Bishop, plaintiff, filed a complaint alleging that on July 21, 1965, defendants, Mark and Jeff Ellsworth and David Gibson, three small boys, entered his salvage yard premises at 427 Mulberry Street in Canton, without his permission, and while there happened upon a bottle partially embedded in the loose earth on top of a landfill, wherein they discovered the sum of $12,590 in US currency. It is further alleged that said boys delivered the money to the municipal chief of police who deposited it with defendant, Canton State Bank. The complaint also alleges defendants caused preliminary notices to be given as required by Ill. Rev. Stats., chapter 50, subsections 27 and 28 (1965), but that such statute or compliance therewith does not affect the rights of the plaintiff. [The trial court dismissed the plaintiff’s complaint.] …It is defendant’s contention that the provisions of Ill Rev Stats, chapter 50, subsections 27 and 28 govern this case. The relevant portions of this statute are as follows: “27. Lost goods…If any person or persons shall hereafter find any lost goods, money, bank notes, or other choses in action, of any description whatever, such person or persons shall inform the owner thereof, if known, and shall make restitution of the same, without any compensation whatever, except the same shall be voluntarily given on the part of the owner. If the owner be unknown, and if such property found is of the value of $ 15 or upwards, the finder…shall, within five days after such finding…appear before some judge or magistrate…and make affidavit of the description thereof, the time and place when and where the same was found, that no alteration has been made in the appearance thereof since the finding of the same, that the owner thereof is unknown to him and that he has not secreted, withheld or disposed of any part thereof. The judge or magistrate shall enter the value of the property found as near as he can ascertain in his estray book together with the affidavit of the finder, and shall also, within ten days after the proceedings have been entered on his estray book, transmit to the county clerk a certified copy thereof, to be by him recorded in his estray book and to file the same in his office…28. Advertisement…If the value thereof exceeds the sum of $ 15, the county clerk, within 20 days after receiving the certified copy of the judge or magistrate’s estray record shall cause an advertisement to be set up on the court house door, and in 3 other of the most public places in the county, and also a notice thereof to be published for 3 weeks successively in some public newspaper printed in this state and if the owner of such goods, money, bank notes, or other choses in action does not appear and claim the same and pay the finder’s charges and expenses within one year after the advertisement thereof as aforesaid, the ownership of such property shall vest in the finder.” *** We think it apparent that the statute to which defendants make reference provides a means of vesting title to lost property in the finder where the prescribed search for the owner proves fruitless. This statute does not purport to provide for the disposition of property deemed mislaid or abandoned nor does it purport to describe or determine the right to possession against any party other than the true owner. The plain meaning of this statute does not support plaintiff’s position that common law is wholly abrogated thereby. The provisions of the statute are designed to provide a procedure whereby the discoverer of “lost” property may be vested with the ownership of said property even as against the true owner thereof, a right which theretofore did not exist at common law. In the absence of any language in the statute from which the contrary can be inferred it must be assumed that the term “lost” was used in its generally accepted legal sense and no extension of the term was intended. Thus the right to possession of discovered property still depends upon the relative rights of the discoverer and the owner of the locus in quo and the distinctions which exist between property which is abandoned, mislaid, lost or is treasure trove. The statute assumes that the discoverer is in the rightful possession of lost property and proceedings under such statute is (sic) not a bar where the issue is a claim to the contrary. There is a presumption that the owner or occupant of land or premises has custody of property found on it or actually imbedded in the land. The ownership or possession of the locus in quo is related to the right to possession of property discovered thereon or imbedded therein in two respects. First, if the premises on which the property is discovered are private it is deemed that the property discovered thereon is and always has been in the constructive possession of the owner of said premises and in a legal sense the property can be neither mislaid nor lost. Pyle v. Springfield Marine Bank, 330 Ill App 1, 70 NE2d 257. Second, the question of whether the property is mislaid or lost in a legal sense depends upon the intent of the true owner. The ownership or possession of the premises is an important factor in determining such intent. If the property be determined to be mislaid, the owner of the premises is entitled to the possession thereof against the discoverer. It would also appear that if the discoverer is a trespasser such trespasser can have no claim to possession of such property even if it might otherwise be considered lost. …The facts as alleged in substance are that the Plaintiff was the owner and in possession of real estate, that the money was discovered in a private area of said premises in a bottle partially imbedded in the soil and that such property was removed from the premises by the finders without any right or authority and in effect as trespassers. We believe the averment of facts in the complaint substantially informs the defendants of the nature of and basis for the claim and is sufficient to state a cause of action. [The trial court’s dismissal of the Plaintiff’s complaint is reversed and the case is remanded.] CASE QUESTIONS 1. What is the actual result in this case? Do the young boys get any of the money that they found? Why or why not? 2. Who is Dwayne Bishop, and why is he a plaintiff here? Was it Bishop that put the $12,590 in US currency in a bottle in the landfill at the salvage yard? If not, then who did? 3. If Bishop is not the original owner of the currency, what are the rights of the original owner in this case? Did the original owner “lose” the currency? Did the original owner “misplace” the currency? What difference does it make whether the original owner “lost” or “misplaced” the currency? Can the original owner, after viewing the legal advertisement, have a claim superior to Dwayne Bishop’s claim? 31.5 Summary and Exercises Summary Property is the legal relationship between persons with respect to things. The law spells out what can be owned and the degree to which one person can assert an interest in someone else’s things. Property is classified in several ways: personal versus real, tangible versus intangible, private versus public. The first distinction, between real and personal, is the most important, for different legal principles often apply to each. Personal property is movable, whereas real property is immovable. Among the ways personal property can be acquired are: by (1) possession, (2) finding, (3) gift, (4) accession, and (5) confusion. Possession means the power to exclude others from using an object. Possession confers ownership only when there is no owner at the time the current owner takes possession. “Finders keepers, losers weepers” is not a universal rule; the previous owner is entitled to return of his goods if it is reasonably possible to locate him. If not, or if the owner does not claim his property, then it goes to the owner of the real estate on which it was found, if the finder was a trespasser, or the goods were buried, were in a private place, or were misplaced rather than lost. If none of these conditions applies, the property goes to the finder. A gift is a voluntary transfer of property without consideration. Two kinds of gifts are possible: inter vivos and causa mortis. To make an effective gift, (1) the donor must make out a deed or physically deliver the object to the donee, (2) the donor must intend to make a gift, and (3) the donee must accept the gift. Delivery does not always require physical transfer; sometimes, surrender of control is sufficient. The donor must intend to give the gift now, not later. Accession is an addition to that which is already owned—for example, the birth of calves to a cow owned by a farmer. But when someone else, through labor or by supplying material, adds value, the accession goes to the owner of the principal goods. Confusion is the intermingling of like goods so that each, while maintaining its form, becomes a part of a larger whole, like grain mixed in a silo. As long as the goods are identical, they can easily enough be divided among their owners. A fixture is a type of property that ceases to be personal property and becomes real property when it is annexed or affixed to land or buildings on the land and adapted to the use and enjoyment of the real property. The common-law rules governing fixtures do not employ clear-cut tests, and sellers and buyers can avoid many disputes by specifying in their contracts what goes with the land. Tenant’s fixtures remain the property of the tenant if they are for the convenience of the tenant, do not cause substantial damage to the property when removed, and are removed before possession is returned to the landlord. EXERCISES 1. Kate owns a guitar, stock in a corporation, and an antique bookcase that is built into the wall of her apartment. How would you classify each kind of property? 2. After her last business law class, Ingrid casually throws her textbook into a trash can and mutters to herself, “I’m glad I don’t have to read that stuff anymore.” Tom immediately retrieves the book from the can. Days later, Ingrid realizes that the book will come in handy, sees Tom with it, and demands that he return the book. Tom refuses. Who is entitled to the book? Why? 3. In Exercise 2, suppose that Ingrid had accidentally left the book on a table in a restaurant. Tom finds it, and chanting “Finders keepers, losers weepers,” he refuses to return the book. Is Ingrid entitled to the book? Why? 4. In Exercise 3, if the owner of the book (Ingrid) is never found, who is entitled to the book—the owner of the restaurant or Tom? Why? 5. Matilda owned an expensive necklace. On her deathbed, Matilda handed the necklace to her best friend, Sadie, saying, “If I die, I want you to have this.” Sadie accepted the gift and placed it in her safe-deposit box. Matilda died without a will, and now her only heir, Ralph, claims the necklace. Is he entitled to it? Why or why not? SELF-TEST QUESTIONS 1. Personal property is defined as property that is a. not a chattel b. owned by an individual c. movable d. immovable Personal property can be acquired by a. accession b. finding c. gift d. all of the above A gift causa mortis is a. an irrevocable gift b. a gift made after death c. a gift made in contemplation of death d. none of the above To make a gift effective, a. the donor must intend to make a gift b. the donor must either make out a deed or deliver the gift to the donee c. the donee must accept the gift d. all of the above are required Tenant’s fixtures a. remain with the landlord in all cases b. remain the property of the tenant in all cases c. remain the property of the tenant if they are removable without substantial damage to the landlord’s property d. refer to any fixture installed by a tenant SELF-TEST ANSWERS 1. c 2. d 3. c 4. d 5. c This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work’s original creator or licensee. Saylor URL: http://www.saylor.org/books Read highlighted text Highlights by Professor Usnick Chapter 17 Introduction to Sales and Leases LEARNING OBJECTIVES After reading this chapter, you should understand the following: 1. Why the law of commercial transactions is separate from the common law 2. What is meant by “commercial transactions” and how the Uniform Commercial Code (UCC) deals with them in general 3. The scope of Article 2, Article 2A, and the Convention on Contracts for the International Sale of Goods 4. What obligations similar to the common law’s are imposed on parties to a UCC contract, and what obligations different from the common law’s are imposed 5. The difference between a consumer lease and a finance lease 17.1 Commercial Transactions: the Uniform Commercial Code LEARNING OBJECTIVES 1. Understand why there is a separate body of law governing commercial transactions. 2. Be aware of the scope of the Uniform Commercial Code. 3. Have a sense of this text’s presentation of the law of commercial transactions. History of the UCC In Chapter 8 "Introduction to Contract Law" we introduced the Uniform Commercial Code. As we noted, the UCC has become a national law, adopted in every state—although Louisiana has not enacted Article 2, and differences in the law exist from state to state. Of all the uniform laws related to commercial transactions, the UCC is by far the most successful, and its history goes back to feudal times. In a mostly agricultural, self-sufficient society there is little need for trade, and almost all law deals with things related to land (real estate): its sale, lease, and devising (transmission of ownership by inheritance); services performed on the land; and damages to the land or to things related to it or to its productive capacity (torts). Such trade as existed in England before the late fourteenth century was dominated by foreigners. But after the pandemic of the Black Death in 1348–49 (when something like 30 percent to 40 percent of the English population died), the self-sufficient feudal manors began to break down. There was a shortage of labor. People could move off the manors to find better work, and no longer tied immediately to the old estates, they migrated to towns. Urban centers—cities—began to develop. Urbanization inevitably reached the point where citizens’ needs could not be met locally. Enterprising people recognized that some places had a surplus of a product and that other places were in need of that surplus and had a surplus of their own to exchange for it. So then, by necessity, people developed the means to transport the surpluses. Enter ships, roads, some medium of exchange, standardized weights and measures, accountants, lawyers, and rules governing merchandising. And enter merchants. The power of merchants was expressed through franchises obtained from the government which entitled merchants to create their own rules of law and to enforce these rules through their own courts. Franchises to hold fairs [retail exchanges] were temporary; but the franchises of the staple cities, empowered to deal in certain basic commodities [and to have mercantile courts], were permanent.…Many trading towns had their own adaptations of commercial law.… The seventeenth century movement toward national governments resulted in a decline of separate mercantile franchises and their courts. The staple towns…had outlived their usefulness. When the law merchant became incorporated into a national system of laws enforced by national courts of general jurisdiction, the local codes were finally extinguished. But national systems of law necessarily depended upon the older codes for their stock of ideas and on the changing customs of merchants for new developments. [1] When the American colonies declared independence from Britain, they continued to use British law, including the laws related to commercial transactions. By the early twentieth century, the states had inconsistent rules, making interstate commerce difficult and problematic. Several uniform laws affecting commercial transactions were floated in the late nineteenth century, but few were widely adopted. In 1942, the American Law Institute (ALI) [2] hired staff to begin work on a rationalized, simplified, and harmonized national body of modern commercial law. The ALI’s first draft of the UCC was completed in 1951.The UCC was adopted by Pennsylvania two years later, and other states followed in the 1950s and 1960s. In the 1980s and 1990s, the leasing of personal property became a significant factor in commercial transactions, and although the UCC had some sections that were applicable to leases, the law regarding the sale of goods was inadequate to address leases. Article 2A governing the leasing of goods was approved by the ALI in 1987. It essentially repeats Article 2 but applies to leases instead of sales. In 2001, amendments to Article 1—which applies to the entire UCC—were proposed and subsequently have been adopted by over half the states. No state has yet adopted the modernizing amendments to Article 2 and 2A that the ALI proposed in 2003. That’s the short history of why the body of commercial transaction law is separate from the common law. Scope of the UCC and This Text’s Presentation of the UCC The UCC embraces the law of commercial transactions, a term of some ambiguity. A commercial transaction may seem to be a series of separate transactions; it may include, for example, the making of a contract for the sale of goods, the signing of a check, the endorsement of the check, the shipment of goods under a bill of lading, and so on. However, the UCC presupposes that each of these transactions is a facet of one single transaction: the lease or sale of, and payment for, goods. The code deals with phases of this transaction from start to finish. These phases are organized according to the following articles: • Sales (Article 2) • Leases (Article 2A) • Commercial Paper (Article 3) • Bank Deposits and Collections (Article 4) • Funds Transfers (Article 4A) • Letters of Credit (Article 5) • Bulk Transfers (Article 6) • Warehouse Receipts, Bills of Lading, and Other Documents of Title (Article 7) • Investment Securities (Article 8) • Secured Transactions; Sales of Accounts and Chattel Paper (Article 9) Although the UCC comprehensively covers commercial transactions, it does not deal with every aspect of commercial law. Among the subjects not covered are the sale of real property, mortgages, insurance contracts, suretyship transactions (unless the surety is party to a negotiable instrument), and bankruptcy. Moreover, common-law principles of contract law that were examined in previous chapters continue to apply to many transactions covered in a particular way by the UCC. These principles include capacity to contract, misrepresentation, coercion, and mistake. Many federal laws supersede the UCC; these include the Bills of Lading Act, the Consumer Credit Protection Act, the warranty provisions of the MagnusonMoss Act, and other regulatory statutes. We follow the general outlines of the UCC in this chapter and in Chapter 18 "Title and Risk of Loss" and Chapter 19 "Performance and Remedies". In this chapter, we cover the law governing sales (Article 2) and make some reference to leases (Article 2A), though space constraints preclude an exhaustive analysis of leases. The use of documents of title to ship and store goods is closely related to sales, and so we cover documents of title (Article 7) as well as the law of bailments in Chapter 21 "Bailments and the Storage, Shipment, and Leasing of Goods". In Chapter 22 "Nature and Form of Commercial Paper", Chapter 23 "Negotiation of Commercial Paper", Chapter 24 "Holder in Due Course and Defenses", and Chapter 25 "Liability and Discharge", we cover the giving of a check, draft, or note (commercial paper) for part or all of the purchase price and the negotiation of the commercial paper (Article 3). Related matters, such as bank deposits and collections (Article 4), funds transfers (Article 4A), and letters of credit (Article 5), are also covered there. In Chapter 28 "Secured Transactions and Suretyship" we turn to acceptance of security by the seller or lender for financing the balance of the payment due. Key to this area is the law of secured transactions (Article 9), but other types of security (e.g., mortgages and suretyship) not covered in the UCC will also be discussed in Chapter 29 "Mortgages and Nonconsensual Liens". Chapter 27 "Consumer Credit Transactions" covers consumer credit transactions and Chapter 30 "Bankruptcy" covers bankruptcy law; these topics are important for all creditors, even those lacking some form of security. Finally, the specialized topic of Article 8, investment securities (e.g., corporate stocks and bonds), is treated in Chapter 43 "Corporation: General Characteristics and Formation". We now turn our attention to the sale—the first facet, and the cornerstone, of the commercial transaction. KEY TAKEAWAY In the development of the English legal system, commercial transactions were originally of such little importance that the rules governing them were left to the merchants themselves. They had their own courts and adopted their own rules based on their customary usage. By the 1700s, the separate courts had been absorbed into the English common law, but the distinct rules applicable to commercial transactions remained and have carried over to the modern UCC. The UCC treats commercial transactions in phases, and this text basically traces those phases. EXERCISES 1. Why were medieval merchants compelled to develop their own rules about commercial transactions? 2. Why was the UCC developed, and when was the period of its initial adoption by states? [1] Frederick G. Kempin Jr., Historical Introduction to Anglo-American Law (Eagan, MN: West, 1973), 217–18, 219– 20, 221. [2] American Law Insitute, “ALI Overview,” accessed March 1, 2011,http://www.ali.org/index.cfm?fuseaction=about.overview. 17.2 Introduction to Sales and Lease Law, and the Convention on Contracts for the International Sale of Goods LEARNING OBJECTIVES 1. Understand that the law of sales not only incorporates many aspects of common-law contract but also addresses some distinct issues that do not occur in contracts for the sale of real estate or services. 2. Understand the scope of Article 2 and the definitions of sale and goods. 3. Learn how courts deal with hybrid situations: mixtures of the sale of goods and of real estate, mixtures of goods and services. 4. Recognize the scope of Article 2A and the definitions of lease, consumer lease, and finance lease. 5. Learn about the Convention on Contracts for the International Sale of Goods and why it is relevant to our discussion of Article 2. Scope of Articles 2 and 2A and Definitions In dealing with any statute, it is of course very important to understand the statute’s scope or coverage. Article 2 does not govern all commercial transactions, only sales. It does not cover all sales, only the sale of goods. Article 2A governs leases, but only of personal property (goods), not real estate. The Convention on Contracts for the International Sale of Goods (CISG)—kind of an international Article 2—“applies to contracts of sale of goods between parties whose places of business are in different States [i.e., countries]” (CISG, Article 1). So we need to consider the definitions of sale, goods, and lease. Definition of Sale A sale “consists in the passing of title from the seller to the buyer for a price.” [1] Sales are distinguished from gifts, bailments, leases, and secured transactions. Article 2 sales should be distinguished from gifts, bailments, leases, and secured transactions. A gift is the transfer of title without consideration, and a “contract” for a gift of goods is unenforceable under the Uniform Commercial Code (UCC) or otherwise (with some exceptions). A bailment is the transfer of possession but not title or use; parking your car in a commercial garage often creates a bailment with the garage owner. A lease (see the formal definition later in this chapter) is a fixed-term arrangement for possession and use of something— computer equipment, for example—and does not transfer title. In a secured transaction, the owner-debtor gives a security interest in collateral to a creditor that allows the creditor to repossess the collateral if the owner defaults. Definition of Goods Even if the transaction is considered a sale, the question still remains whether the contract concerns the sale of goods. Article 2 applies only to goods; sales of real estate and services are governed by non-UCC law. Section 2-105(1) of the UCC defines goods as “all things…which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid.” Money can be considered goods subject to Article 2 if it is the object of the contract—for example, foreign currency. In certain cases, the courts have difficulty applying this definition because the item in question can also be viewed as realty or service. Most borderline cases raise one of two general questions: 1. Is the contract for the sale of the real estate, or is it for the sale of goods? 2. Is the contract for the sale of goods, or is it for services? Real Estate versus Goods The dilemma is this: A landowner enters into a contract to sell crops, timber, minerals, oil, or gas. If the items have already been detached from the land—for example, timber has been cut and the seller agrees to sell logs—they are goods, and the UCC governs the sale. But what if, at the time the contract is made, the items are still part of the land? Is a contract for the sale of uncut timber governed by the UCC or by real estate law? The UCC governs under either of two circumstances: (1) if the contract calls for the seller to sever the items or (2) if the contract calls for the buyer to sever the items and if the goods can be severed without material harm to the real estate. [2] The second provision specifically includes growing crops and timber. By contrast, the law of real property governs if the buyer’s severance of the items will materially harm the real estate; for example, the removal of minerals, oil, gas, and structures by the buyer will cause the law of real property to govern. (See Figure 17.1 "Governing Law".) Figure 17.1 Governing Law Goods versus Services Distinguishing goods from services is the other major difficulty that arises in determining the nature of the object of a sales contract. The problem: how can goods and services be separated in contracts calling for the seller to deliver a combination of goods and services? That issue is examined in Section 17.5.1 "Mixed Goods and Services Contracts: The “Predominant Factor” Test" (Pittsley v. Houser), where the court applied the common “predominant factor” (also sometimes “predominate purpose” or “predominant thrust”) test—that is, it asked whether the transaction was predominantly a contract for goods or for services. However, the results of this analysis are not always consistent. Compare Epstein v. Giannattasio, in which the court held that no sale of goods had been made because the plaintiff received a treatment in which the cosmetics were only incidentally used, with Newmark v. Gimble’s, Inc., in which the court said “[i]f the permanent wave lotion were sold…for home consumption…unquestionably an implied warranty of fitness for that purpose would have been an integral incident of the sale.” [3] The New Jersey court rejected the defendant’s argument that by actually applying the lotion to the patron’s head, the salon lessened the liability it otherwise would have had if it had simply sold her the lotion. In two areas, state legislatures have taken the goods-versus-services issue out of the courts’ hands and resolved the issue through legislation. Food sold in restaurants is a sale of goods, whether it is to be consumed on or off the premises. Blood transfusions (really the sale of blood) in hospitals have been legislatively declared a service, not a sale of goods, in more than forty states, thus relieving the suppliers and hospitals of an onerous burden for liability from selling blood tainted with the undetectable hepatitis virus. Definition of Lease Section 2A-103(j) of the UCC defines a lease as “a transfer of the right to possession and use of goods for a term in return for consideration.” The lessor is the one who transfers the right to possession to the lessee. If Alice rents a party canopy from Equipment Supply, Equipment Supply is the lessor and Alice is the lessee. Two Types of Leases The UCC recognizes two kinds of leases: consumer leases and finance leases. Aconsumer lease is used when a lessor leases goods to “an individual…primarily for personal, family, or household purposes,” where total lease payments are less than $25,000. [4] The UCC grants some special protections to consumer lessees. Afinance lease is used when a lessor “acquires the goods or the right to [them]” and leases them to the lessee. [5] The person from whom the lessor acquires the goods is a supplier, and the lessor is simply financing the deal. Jack wants to lease a boom lift (personnel aerial lift, also known as a cherry picker) for a commercial roof renovation. First Bank agrees to buy (or itself lease) the machine from Equipment Supply and in turn lease it to Jack. First Bank is the lessor, Jack is the lessee, and Equipment Supply is the supplier. International Sales of Goods The UCC is, of course, American law, adopted by the states of the United States. The reason it has been adopted is because of the inconvenience of doing interstate business when each state had a different law for the sale of goods. The same problem presents itself in international transactions. As a result, the United Nations Commission on International Trade Law developed an international equivalent of the UCC, the Convention on Contracts for the International Sale of Goods (CISG), first mentioned inChapter 8 "Introduction to Contract Law". It was promulgated in Vienna in 1980. As of July 2010, the convention (a type of treaty) has been adopted by seventy-six countries, including the United States and all its major trading partners except the United Kingdom. One commentator opined on why the United Kingdom is an odd country out: it is “perhaps because of pride in its longstanding common law legal imperialism or in its long-treasured feeling of the superiority of English law to anything else that could even challenge it.” [6] The CISG is interesting for two reasons. First, assuming globalization continues, the CISG will become increasingly important around the world as the law governing international sale contracts. Its preamble states, “The adoption of uniform rules which govern contracts for the international sale of goods and take into account the different social, economic and legal systems [will] contribute to the removal of legal barriers in international trade and promote the development of international trade.” Second, it is interesting to compare the legal culture informing the common law to that informing the CISG, which is not of the English common-law tradition. Throughout our discussion of Article 2, we will make reference to the CISG, the complete text of which is available online. [7] References to the CISG are in bold. As to the CISG’s scope, CISG Article 1 provides that it “applies to contracts of sale of goods between parties whose places of business are in different States [i.e., countries]; it “governs only the formation of the contract of sale and the rights and obligations of the seller and the buyer arising from such a contract,” and has nothing to do “with the validity of the contract or of any of its provisions or of any usage” (Article 4). It excludes sales (a) of goods bought for personal, family or household use, unless the seller, at any time before or at the conclusion of the contract, neither knew nor ought to have known that the goods were bought for any such use; (b) by auction; (c) on execution or otherwise by authority of law; (d) of stocks, shares, investment securities, negotiable instruments or money; (e) of ships, vessels, hovercraft or aircraft; (f) of electricity (Article 2). Parties are free to exclude the application of the Convention or, with a limited exception, vary the effect of any of its provisions (Article 6). KEY TAKEAWAY Article 2 of the UCC deals with the sale of goods. Sale and goods have defined meanings. Article 2A of the UCC deals with the leasing of goods. Lease has a defined meaning, and the UCC recognizes two types of leases: consumer leases and finance leases. Similar in purpose to the UCC of the United States is the Convention on Contracts for the International Sale of Goods, which has been widely adopted around the world. EXERCISES 1. Why is there a separate body of statutory law governing contracts for the sale of goods as opposed to the common law, which governs contracts affecting real estate and services? 2. What is a consumer lease? A finance lease? 3. What is the Convention on Contracts for the International Sale of Goods? [1] Uniform Commercial Code, Section 2-106. [2] Uniform Commercial Code, Section 2-107. [3] Epstein v. Giannattasio 197 A.2d 342 (Conn. 1963); Newmark v. Gimble’s, Inc., 258 A.2d 697 (N.J. 1969). [4] Uniform Commercial Code, Section 2A-103(e). [5] Uniform Commercial Code, Section 2A-103(g). [6] A. F. M. Maniruzzaman, quoted by Albert H. Kritzer, Pace Law School Institute of International Commercial Law, CISG: Table of Contracting States, accessed March 1, 2011,http://www.cisg.law.pace.edu/cisg/countries/cntries.html. [7] Pace Law School, “United Nations Convention on Contracts for the International Sale of Goods (1980) [CISG]” CISG Database, accessed March 1, 2011,http://www.cisg.law.pace.edu/cisg/text/treaty.html. 17.3 Sales Law Compared with Common-Law Contracts and the CISG LEARNING OBJECTIVE 1. Recognize the differences and similarities among the Uniform Commercial Code (UCC), commonlaw contracts, and the CISG as related to the following contract issues: o Offer and acceptance o Revocability o Consideration o The requirement of a writing and contractual interpretation (form and meaning) Sales law deals with the sale of goods. Sales law is a special type of contract law, but the common law informs much of Article 2 of the UCC—with some differences, however. Some of the similarities and differences were discussed in previous chapters that covered common-law contracts, but a review here is appropriate, and we can refer briefly to the CISG’s treatment of similar issues. Mutual Assent: Offer and Acceptance Definiteness of the Offer The common law requires more definiteness than the UCC. Under the UCC, a contractual obligation may arise even if the agreement has open terms. Under Section 2-204(3), such an agreement for sale is not voidable for indefiniteness, as in the common law, if the parties have intended to make a contract and the court can find a reasonably certain basis for giving an appropriate remedy. Perhaps the most important example is the open price term. The open price term is covered in detail in Section 2-305. At common law, a contract that fails to specify price or a means of accurately ascertaining price will almost always fail. This is not so under the UCC provision regarding open price terms. If the contract says nothing about price, or if it permits the parties to agree on price but they fail to agree, or if it delegates the power to fix price to a third person who fails to do so, then Section 2-305(1) “plugs” the open term and decrees that the price to be awarded is a “reasonable price at the time for delivery.” When one party is permitted to fix the price, Section 2-305(2) requires that it be fixed in good faith. However, if the parties intendnot to be bound unless the price is first fixed or agreed on, and it is not fixed or agreed on, then no contract results. [1] Another illustration of the open term is in regard to particulars of performance. Section 2-311(1) provides that a contract for sale of goods is not invalid just because it leaves to one of the parties the power to specify a particular means of performing. However, “any such specification must be made in good faith and within limits set by commercial reasonableness.” (Performance will be covered in greater detail in Chapter 18 "Title and Risk of Loss".) The CISG (Article 14) provides the following: “A proposal for concluding a contract addressed to one or more specific persons constitutes an offer if it is sufficiently definite and indicates the intention of the offeror to be bound in case of acceptance. A proposal is sufficiently definite if it indicates the goods and expressly or implicitly fixes or makes provision for determining the quantity and the price.” Acceptance Varying from Offer: Battle of the Forms The concepts of offer and acceptance are basic to any agreement, but the UCC makes a change from the common law in its treatment of an acceptance that varies from the offer (this was discussed in Chapter 8 "Introduction to Contract Law"). At common law, where the “mirror image rule” reigns, if the acceptance differs from the offer, no contract results. If that were the rule for sales contracts, with the pervasive use of form contracts—where each side’s form tends to favor that side—it would be very problematic. Section 2-207 of the UCC attempts to resolve this “battle of the forms” by providing that additional terms or conditions in an acceptance operate as such unless the acceptance is conditioned on the offeror’s consent to the new or different terms. The new terms are construed as offers but are automatically incorporated in any contract between merchants for the sale of goods unless “(a) the offer expressly limits acceptance to the terms of the offer; (b) [the terms] materially alter it; or (c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received.” In any case, Section 2-207 goes on like this: “Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act.” [2] As to international contracts, the CISG says this about an acceptance that varies from the offer (Article 19), and it’s pretty much the same as the UCC: (1) A reply to an offer which purports to be an acceptance but contains additions, limitations or other modifications is a rejection of the offer and constitutes a counter-offer. (2) However, a reply to an offer which purports to be an acceptance but contains additional or different terms which do not materially alter the terms of the offer constitutes an acceptance, unless the offeror, without undue delay, objects orally to the discrepancy or dispatches a notice to that effect. If he does not so object, the terms of the contract are the terms of the offer with the modifications contained in the acceptance. (3) Additional or different terms relating, among other things, to the price, payment, quality and quantity of the goods, place and time of delivery, extent of one party’s liability to the other or the settlement of disputes are considered to alter the terms of the offer materially. Revocation of Offer Under both common law and the UCC, an offer can be revoked at any time prior to acceptance unless the offeror has given the offeree an option (supported by consideration); under the UCC, an offer can be revoked at any time prior to acceptance unless a merchant gives a “firm offer” (for which no consideration is needed). The CISG (Article 17) provides that an offer is revocable before it is accepted unless, however, “it indicates…that it is irrevocable” or if the offeree reasonably relied on its irrevocability. Reality of Consent There is no particular difference between the common law and the UCC on issues of duress, misrepresentation, undue influence, or mistake. As for international sales contracts, the CISG provides (Article 4(a)) that it “governs only the formation of the contract of sale and the rights and obligations of the seller and the buyer arising from such a contract and is not concerned with the validity of the contract or of any of its provisions.” Consideration The UCC The UCC requires no consideration for modification of a sales contract made in good faith; at common law, consideration is required to modify a contract. [3] The UCC requires no consideration if one party wants to forgive another’s breach by written waiver or renunciation signed and delivered by the aggrieved party; under common law, consideration is required to discharge a breaching party. [4] The UCC requires no consideration for a “firm offer”—a writing signed by a merchant promising to hold an offer open for some period of time; at common law an option requires consideration. (Note, however, the person can give an option under either common law or the code.) Under the CISG (Article 29), “A contract may be modified or terminated by the mere agreement of the parties.” No consideration is needed. Form and Meaning Requirement of a Writing The common law has a Statute of Frauds, and so does the UCC. It requires a writing to enforce a contract for the sale of goods worth $500 or more, with some exceptions, as discussed in Chapter 13 "Form and Meaning". [5] The CISG provides (Article 11), “A contract of sale need not be concluded in or evidenced by writing and is not subject to any other requirement as to form. It may be proved by any means, including witnesses.” But Article 29 provides, “A contract in writing which contains a provision requiring any modification or termination by agreement to be in writing may not be otherwise modified or terminated by agreement.” Parol Evidence Section 2-202 of the UCC provides pretty much the same as the common law: if the parties have a writing intended to be their final agreement, it “may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement.” However, it may be explained by “course of dealing or usage of trade or by course of performance” and “by evidence of consistent additional terms.” The CISG provides (Article 8) the following: “In determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties.” KEY TAKEAWAY The UCC modernizes and simplifies some common-law strictures. Under the UCC, the mirror image rule is abolished: an acceptance may sometimes differ from the offer, and the UCC can “plug” open terms in many cases. No consideration is required under the UCC to modify or terminate a contract or for a merchant’s “firm offer,” which makes the offer irrevocable according to its terms. The UCC has a Statute of Frauds analogous to the common law, and its parol evidence rule is similar as well. The CISG compares fairly closely to the UCC. EXERCISES 1. Why does the UCC change the common-law mirror image rule, and how? 2. What is meant by “open terms,” and how does the UCC handle them? 3. The requirement for consideration is relaxed under the UCC compared with common law. In what circumstances is no consideration necessary under the UCC? 4. On issues so far discussed, is the CISG more aligned with the common law or with the UCC? Explain your answer. [1] Uniform Commercial Code, Section 2-305(4). [2] This section of the UCC is one of the most confusing and fiercely litigated sections; Professor Grant Gilmore once called it a “miserable, bungled, patched-up job” and “arguably the greatest statutory mess of all time.” Mark E. Roszkowski, “Symposium on Revised Article 2 of the Uniform Commercial Code—Section-by-Section Analysis,” SMU Law Review 54 (Spring 2001): 927, 932, quoting Professor Grant Gilmore to Professor Robert Summers, Cornell University School of Law, September 10, 1980, in Teaching Materials on Commercial and Consumer Law, ed. Richard E. Speidel, Robert S Summers, and James J White, 3rd ed. (St. Paul, MN: West. 1981), pp. 54–55. In 2003 the UCC revisioners presented an amendment to this section in an attempt to fix Section 2-207, but no state has adopted this section’s revision. See Commercial Law, “UCC Legislative Update,” March 2, 2010, accessed March 1, 2011,http://ucclaw.blogspot.com/2010/03/ucc-legislative-update.html. [3] Uniform Commercial Code, Section 2-209(1). [4] Uniform Commercial Code, Section 1–107. [5] Proposed amendments by UCC revisioners presented in 2003 would have raised the amount of money—to take into account inflation since the mid-fifties—to $5,000, but no state has yet adopted this amendment; Uniform Commercial Code, Section 2-201. 17.4 General Obligations under UCC Article 2 LEARNING OBJECTIVES 1. Know that the Uniform Commercial Code (UCC) imposes a general obligation to act in good faith and that it makes unconscionable contracts or parts of a contract unenforceable. 2. Recognize that though the UCC applies to all sales contracts, merchants have special obligations. 3. See that the UCC is the “default position”—that within limits, parties are free to put anything they want to in their contract. Article 2 of the UCC of course has rules governing the obligations of parties specifically as to the offer, acceptance, performance of sales contracts, and so on. But it also imposes some general obligations on the parties. Two are called out here: one deals with unfair contract terms, and the second with obligations imposed on merchants. Obligation of Good-Faith Dealings in General Under the UCC Section 1-203 of the UCC provides, “Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.” Good faith is defined at Section 2-103(j) as “honesty in fact and the observance of reasonable commercial standards of fair dealing.” This is pretty much the same as what is held by common law, which “imposes a duty of good faith and fair dealing upon the parties in performing and enforcing the contract.” [1] The UCC’s good faith in “performance or enforcement” of the contract is one thing, but what if the terms of the contract itself are unfair? Under Section 2-302(1), the courts may tinker with a contract if they determine that it is particularly unfair. The provision reads as follows: “If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.” The court thus has considerable flexibility. It may refuse to enforce the entire contract, strike a particular clause or set of clauses, or limit the application of a particular clause or set of clauses. And what does “unconscionable” mean? The UCC provides little guidance on this crucial question. According to Section 2-302(1), the test is “whether, in the light of the general commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract.…The principle is one of the prevention of oppression and unfair surprise and not of disturbance of allocation of risks because of superior bargaining power.” The definition is somewhat circular. For the most part, judges have had to develop the concept with little help from the statutory language. Unconscionability is much like US Supreme Court Justice Potter Stewart’s famous statement about obscenity: “I can’t define it, but I know it when I see it.” In the leading case, Williams v. Walker-Thomas Furniture Co. (Section 12.5.3 "Unconscionability", set out in Chapter 12 "Legality"), Judge J. Skelly Wright attempted to develop a framework for analysis. He refined the meaning of unconscionability by focusing on “absence of meaningful choice” (often referred to as procedural unconscionability) and on terms that are “unreasonably favorable” (commonly referred to as substantive unconscionability). An example of procedural unconscionability is the salesperson who says, “Don’t worry about all that little type on the back of this form.” Substantive unconscionability is the harsh term—the provision that permits the “taking of a pound of flesh” if the contract is not honored. Despite its fuzziness, the concept of unconscionability has had a dramatic impact on American law. In many cases, in fact, the traditional notion of caveat emptor (Latin for “buyer beware”) has changed to caveat venditor (“let the seller beware”). So important is this provision that courts in recent years have applied the doctrine in cases not involving the sale of goods. Under the CISG, Article 7: “Regard is to be had…to the observance of good faith in international trade.” Obligations Owed by Merchants “Merchant” Sellers Although the UCC applies to all sales of goods (even when you sell your used car to your neighbor), merchants often have special obligations or are governed by special rules. As between Merchants The UCC assumes that merchants should be held to particular standards because they are more experienced and have or should have special knowledge. Rules applicable to professionals ought not apply to the casual or inexperienced buyer or seller. For example, we noted previously that the UCC relaxes the mirror image rule and provides that as “between merchants” additional terms in an acceptance become part of the contract, and we have discussed the “ten-day-reply doctrine” that says that, again “as between merchants,” a writing signed and sent to the other binds the recipient as an exception to the Statute of Frauds. [2] There are other sections of the UCC applicable “as between merchants,” too. Article 1 of the CISG abolishes any distinction between merchants and nonmerchants: “Neither the nationality of the parties nor the civil or commercial character of the parties or of the contract is to be taken into consideration in determining the application of this Convention.” Merchant to Nonmerchant In addition to duties imposed between merchants, the UCC imposes certain duties on a merchant when she sells to a nonmerchant. A merchant who sells her merchandise makes an important implied warranty of merchantability. That is, she promises that goods sold will be fit for the purpose for which such goods are normally intended. A nonmerchant makes no such promise, nor does a merchant who is not selling merchandise—for example, a supermarket selling a display case is not a “merchant” in display cases. In Sheeskin v. Giant Foods, Inc., the problem of whether a merchant made an implied warranty of merchantability was nicely presented. Mr. Seigel, the plaintiff, was carrying a six-pack carton of Coca-Cola from a display bin to his shopping cart when one or more of the bottles exploded. He lost his footing and was injured. When he sued the supermarket and the bottler for breach of the implied warranty of fitness, the defendants denied there had been a sale: he never paid for the soda pop, thus no sale by a merchant and thus no warranty. The court said that Mr. Seigel’s act of reaching for the soda to put it in his cart was a “reasonable manner of acceptance” (quoting UCC, Section 2-206(1)). [3] Who Is a Merchant? Section 2-104(1) of the UCC defines a merchant as one “who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction.” A phrase that recurs throughout Article 2—“between merchants”—refers to any transaction in which both parties are chargeable with the knowledge or skill of merchants. [4] Not every businessperson is a merchant with respect to every possible transaction. But a person or institution normally not considered a merchant can be one under Article 2 if he employs an agent or broker who holds himself out as having such knowledge or skill. (Thus a university with a purchasing office can be a merchant with respect to transactions handled by that department.) Determining whether a particular person operating a business is a merchant under Article 2-104 is a common problem for the courts. Goldkist, Inc. v. Brownlee, Section 17.5.2 "“Merchants” under the UCC", shows that making the determination is difficult and contentious, with significant public policy implications. Obligations May Be Determined by Parties Under the UCC Under the UCC, the parties to a contract are free to put into their contract pretty much anything they want. Article 1-102 states that “the effect of provisions of this Act may be varied by agreement…except that the obligations of good faith, diligence, reasonableness and care prescribed by this Act may not be disclaimed by agreement but the parties may by agreement determine the standards by which the performance of such obligations is to be measure if such standards are not manifestly unreasonable.” Thus the UCC is the “default” position: if the parties want the contract to operate in a specific way, they can provide for that. If they don’t put anything in their agreement about some aspect of their contract’s operation, the UCC applies. For example, if they do not state where “delivery” will occur, the UCC provides that term. (Section 2-308 says it would be at the “seller’s place of business or if he has none, his residence.”) Article 6 of the CISG similarly gives the parties freedom to contract. It provides, “The parties may exclude the application of this Convention or…vary the effect of any of its provisions.” KEY TAKEAWAY The UCC imposes some general obligations on parties to a sales contract. They must act in good faith, and unconscionable contracts or terms thereof will not be enforced. The UCC applies to any sale of goods, but sometimes special obligations are imposed on merchants. While the UCC imposes various general (and more specific) obligations on the parties, they are free, within limits, to make up their own contract terms and obligations; if they do not, the UCC applies. The CISG tends to follow the basic thrust of the UCC. EXERCISES 1. What does the UCC say about the standard duty parties to a contract owe each other? 2. Why are merchants treated specially by the UCC in some circumstances? 3. Give an example of a merchant-to-merchant duty imposed by the UCC and of a merchant-tononmerchant duty. 4. What does it mean to say the UCC is the “default” contract term? [1] Restatement (Second) of Contracts, Section 205. [2] Uniform Commercial Code, Sections 2-205 and 2A–205. [3] Sheeskin v. Giant Food, Inc., 318 A.2d 874 (Md. Ct. App. 1974). [4] Uniform Commercial Code, Section 2-104(3). 17.5 Cases Mixed Goods and Services Contracts: The “Predominant Factor” Test Pittsley v. Houser 875 P.2d 232 (Idaho App. 1994) Swanstrom, J. In September of 1988, Jane Pittsley contracted with Hilton Contract Carpet Co. (Hilton) for the installation of carpet in her home. The total contract price was $4,402 [about $7,900 in 2010 dollars]. Hilton paid the installers $700 to put the carpet in Pittsley’s home. Following installation, Pittsley complained to Hilton that some seams were visible, that gaps appeared, that the carpet did not lay flat in all areas, and that it failed to reach the wall in certain locations. Although Hilton made various attempts to fix the installation, by attempting to stretch the carpet and other methods, Pittsley was not satisfied with the work. Eventually, Pittsley refused any further efforts to fix the carpet. Pittsley initially paid Hilton $3,500 on the contract, but refused to pay the remaining balance of $902. Pittsley later filed suit, seeking rescission of the contract, return of the $3,500 and incidental damages. Hilton answered and counterclaimed for the balance remaining on the contract. The matter was heard by a magistrate sitting without a jury. The magistrate found that there were defects in the installation and that the carpet had been installed in an unworkmanlike manner. The magistrate also found that there was a lack of evidence on damages. The trial was continued to allow the parties to procure evidence on the amount of damages incurred by Pittsley. Following this continuance, Pittsley did not introduce any further evidence of damages, though witnesses for Hilton estimated repair costs at $250. Although Pittsley had asked for rescission of the contract and a refund of her money, the magistrate determined that rescission, as an equitable remedy, was only available when one party committed a breach so material that it destroyed the entire purpose of the contract. Because the only estimate of damages was for $250, the magistrate ruled rescission would not be a proper remedy. Instead, the magistrate awarded Pittsley $250 damages plus $150 she expended in moving furniture prior to Hilton’s attempt to repair the carpet. On the counterclaim, the magistrate awarded Hilton the $902 remaining on the contract. Additionally, both parties had requested attorney fees in the action. The magistrate determined that both parties had prevailed and therefore awarded both parties their attorney fees. Following this decision, Pittsley appealed to the district court, claiming that the transaction involved was governed by the Idaho Uniform Commercial Code (UCC), [Citation]. Pittsley argued that if the UCC had been properly applied, a different result would have been reached. The district court agreed with Pittsley’s argument, reversing and remanding the case to the magistrate to make additional findings of fact and to apply the UCC to the transaction.… Hilton now appeals the decision of the district court. Hilton claims that Pittsley failed to allege or argue the UCC in either her pleadings or at trial. Even if application of the UCC was properly raised, Hilton argues that there were no defects in the goods that were the subject of the transaction, only in the installation, making application of the UCC inappropriate.… The single question upon which this appeal depends is whether the UCC is applicable to the subject transaction. If the underlying transaction involved the sale of “goods,” then the UCC would apply. If the transaction did not involve goods, but rather was for services, then application of the UCC would be erroneous. Idaho Code § 28–2-105(1) defines “goods” as “all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale.…” Although there is little dispute that carpets are “goods,” the transaction in this case also involved installation, a service. Such hybrid transactions, involving both goods and services, raise difficult questions about the applicability of the UCC. Two lines of authority have emerged to deal with such situations. The first line of authority, and the majority position, utilizes the “predominant factor” test. The Ninth Circuit, applying the Idaho Uniform Commercial Code to the subject transaction, restated the predominant factor test as: The test for inclusion or exclusion is not whether they are mixed, but, granting that they are mixed, whether their predominant factor, their thrust, their purpose, reasonably stated, is the rendition of service, with goods incidentally involved (e.g., contract with artist for painting) or is a transaction of sale, with labor incidentally involved (e.g., installation of a water heater in a bathroom). [Citations]. This test essentially involves consideration of the contract in its entirety, applying the UCC to the entire contract or not at all. The second line of authority, which Hilton urges u...
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