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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