MODEL ANSWERS AND COMMENTS
COMMERCIAL TRANSACTIONS -- FINAL EXAMINATION
FALL, 1993
PROFESSOR KLEINBERGER
This memo repeats the exam questions from the fall 1993 exam,(1) provides model answers for
those questions and lists the most frequent mistakes. The model answers are aspirational. I did
not expect anyone to produce an exam that reached the level of completeness and succinctness
reflected in the model answers.
Part One
A. Refer to Appendix I (Wizard of Id cartoon). The Wizard did not pay any money for the cow.
Given that fact, does Article 2 apply to the transaction between the Wizard and the kid?
Assuming that Article 2 does apply, will the law enforce the Wizard's comment "ALL SALES
ARE FINAL!"? [Assume that the kid is old enough to have the capacity to contract.]
Model Answer: Article 2 applies to the transaction, because Article 2 "applies to transactions in
goods." 2-102. Although the Code does not define "transaction in goods," the term certainly
includes a sale of goods. Under § 2-106(1), "A `sale' [of goods] consists in the passing of title
from the seller to the buyer for a price." The cow and the magic bean are both "goods," because
they are both "things . . . movable." 2-105(1). Title to both the cow and the beans probably
passed at the moment of contracting. 2-401(3)(b) (goods identified at time of contracting;
delivery to be made without moving the goods; no documents).
The fact that the Wizard paid no money is immaterial. Section 2-304(1) provides that "[t]he price
can be made payable in money or otherwise" (emphasis added) and expressly contemplates the
price being "payable in whole in or part in goods."
The law will not enforce the Wizard's comment. That comment may be an attempt to disclaim
warranties or to limit remedies or to do both. In any event, the comment is an ineffective attempt
to modify an already formed contract. Although under 2-209(1) consideration is not necessary to
effect a modification, assent certainly is.
Common Mistakes: ignoring the "no money" issue; missing the modification issue and then
writing extensively (and unnecessarily) on warranty disclaimers and remedy limitations; missing 2-304(1) [despite the telltale caption listed in the Code's table of contents]; using consideration
rather than 2-304(1); allocating far too much time to this problem
B. Refer to Appendix II (the bookstore cartoon). The sign in the window refers to the book held
by the customer. The sign says, "It will tug at your heart." Does the customer have a breach of
warranty claim? Does it matter whether the sign was present when the customer purchased the
book? [Do not consider what remedies might be available.]
Model Answer: The only plausible warranty claim is for breach of an express warranty, and that
claim will probably fail on account of the "puffing" exception.
To establish an express warranty based on the sign, the customer will have to show (i) that the
sign constituted an affirmation of fact or a promise relating to the book, 2-313(1)(a) or a
description of the book, 2-313(1)(b), and (ii) that the affirmative, promise or description became
part of the basis of the bargain. The sign's message is both a promise and a description. As for
"basis of the bargain," the customer's comment suggests that the sign played a crucial role in his
decision to purchase. Under Comment 3, that role will be enough, since "no particular reliance
need be shown." Even in the few jurisdictions that require reliance, the customer's comment
suggests that the sign caused him to make the purchase.
The issue of puffing, however, will be quite troublesome for the customer. "It will tug at your
heart" is precisely the kind of subjective, vague, unverifiable comment that 2-312(2) condemns as
"an affirmation merely of the value of the goods."
For the customer to have any chance at his express warranty claim, the sign must
have been present at the time of purchase. Otherwise, the affirmation/description could not have
come to the customer's attention and could not have become part of the basis of the bargain.
Common Mistakes: not addressing the issue of the sign's presence [even if you came down
firmly on the side of puffing, it took only a couple of quick sentences to give a "just in case"
answer to this issue]; failing to consider the puffing issue; wasting time with lengthy explanation
of why the merchantability warranty was not relevant
C. Buyer owned a particular cargo of fuel oil that had a high moisture content. Buyer contacted
Seller, who manufactures "NO-WO," a product that removes water from fuel oil. Buyer had
twice before purchased NO-WO from Seller, and in those transactions Seller had given no
warranty as to how effective NO-WO would be in reducing moisture. This time, when Buyer first
telephoned Seller to discuss purchasing NO-WO, Buyer requested a guarantee on moisture
reduction from Seller. In that phone conversation Seller indicated that, as a matter of company
policy, Seller did not give guarantees.
Seller then inspected Buyer's cargo of fuel oil and made a written offer to sell NO-WO to Buyer
for use with that shipment. The proposal stated that "NO-WO can reduce the water content of
the fuel oil to 0.5%." Buyer accepted the offer, purchased the NO-WO and used it on the
shipment. The water content of the fuel did not drop significantly and came nowhere near 0.5%
Does Buyer have a valid claim for breach of an express warranty? [Do not consider implied
warranties.]
Model Answer: Buyer does have a claim for breach of the express warranty created by Seller's
own proposal. That proposal promised a moisture reduction to a specific, objectively verifiable
level, and the product did not conform to that promise.
There are no facts to take the promise out of the "basis of the bargain." 2-313(1). The parol
evidence rule, 2-202, will prevent the Seller from even introducing the oral "no warranty"
statement. When the Buyer accepted the Seller's proposal, that proposal became at least "final" as
to the included terms. Consequently, the parol evidence rule will bar evidence of any prior,
contradictory understandings. (Even if the evidence were admitted, words negating express
warranties must give way to words creating express warranties. 2-316(1).)
Likewise, Buyer will find no help in the parties' prior "no warranty" transactions. Even assuming
that two transactions suffice to constitute a "course of dealing," 1-205(1), course of dealing is
inadmissible to contradict a final written agreement. 2-202. Moreover, where course of dealing
conflicts with an express term, the express term governs. 1-205(4).(2)
Common Mistakes: missing the parol evidence rule; missing the course of dealing issue;
addressing course of dealing but failing to deal with 1-205(4); failing to consider 2-316(1)
D. THIS QUESTION REQUIRES YOU TO CONSIDER A STATUTE THAT WE HAVE
NOT DISCUSSED IN CLASS. DO NOT PANIC. APPLY THE PRINCIPLES OF
STATUTORY INTERPRETATION THAT WE HAVE DISCUSSED THIS SEMESTER.
Refer to Appendix III (cohabitation statute). Alice and Zena, a lesbian couple, lived for several
years in St. Paul in a committed relationship that contemplated and included sexual relations.
They lived in a house owned by Alice. The couple later split up, and Zena sued Alice claiming an
interest in Alice's house. The women had no written agreement on the subject. Zena based her
claim on the former committed relationship. Are Minn.Stat. §§ 513.075 and 513.076 relevant to
Zena's lawsuit? [This question does not ask what outcome would follow if the statutes do
apply.]
Model Answer:(3) The statutes are not relevant because their plain language indicates that they
do not apply to homosexual couples.
Section 513.075 expressly refers to "a man and a woman," thereby expressly excluding from its
ambit a couple composed of women. Moreover, § 513.075 applies to a couple living "out of
wedlock." That characterization can hardly apply to two individuals whom state law will not
allow to wed.
A similar analysis applies to § 513.076. Although that section does not refer to "a man and a
woman," it does refer to "individuals [who have] lived together . . . of wedlock." Moreover, §
513.076 is a companion statute to § 513.075. Section 513.076 expressly refers to "a contract
complying with the provisions" of § 513.075. As companion statutes, the sections should be read
together. Therefore, § 513.076's reference to "individuals" should be interpreted to mean the type
of individuals who can execute that type of contract contemplated by § 513.075 -- i.e. a
heterosexual couple.
Common Mistakes: ignoring the reference to "a man and a woman" in § 513.075; ignoring the
reference to "wedlock" in §§ 513.075 and 513.076; failing to read the statutes together; arguing
that the absence of a written contract renders the statutes inapplicable [given a sale of goods
involving a price of $600, does the absence of a signed writing render the statute of frauds
inapplicable?]; concluding that excluding homosexual couples from the statutes' coverage would
discriminate against homosexuals by restricting their access to legal remedies [to the contrary,
since the statutes are in the nature of a statute of frauds, excluding homosexuals from coverage
would give homosexual couples freer access to the courts than heterosexual couples have]
E. Agreement for the sale of goods. Terms: sight draft against bill of lading. Goods to be
shipped to railroad station in Buyersville. Seller ships goods and receives a negotiable bill of
lading to Seller's order. While the goods are in transit and before the Seller has done anything
with the bill of lading, the Buyer repudiates. Seller locates a substitute purchaser willing to take
the goods at the same destination and wishes to instruct the carrier to turn the goods over to the
substitute purchaser. Is Seller better off invoking UCC § 7-303(1) or § 7-403(1)? Based on
your answer to that question, what, if anything, must Seller do to enable the substitute purchaser
to obtain the goods from the carrier?
Model Answer: The Seller should invoke 7-403(1). Under 7-303(1)(a), the carrier "may"
follow instructions from a holder but is not required to do so. Under, 7-403(1), in contrast, the
bailee (in this instance the carrier) "must deliver the goods to the person entitled under the
document."
In order for the substitute purchaser to be that person, the substitute purchaser must be the holder
of the negotiable bill of lading. 7-403(4). For the substitute purchaser to be the holder, the Seller
must(i) endorse the billing of lading either to bearer or to the order of the substitute purchaser,
and (ii) get the endorsed bill of lading into the substitute purchaser's possession. 1-201(20).
Common Mistakes: ignoring the difference between "may" and "must"; reading § 7-403(1)(a)
through (g) as preconditions to the application of § 7-403 [they are exceptions]; applying § 2-705;
analyzing only one statute or the other [thereby failing to make the comparison sought by the
question]
Part Two
In answering this Part Two, apply Minnesota law. Assume that the Minnesota version of
UCC § 2-318 states:
A seller's warranty whether express or implied extends to any person who may reasonably
be expected to use, consume or be affected by the goods and who is injured by breach of
the warranty. A seller may not exclude or limit the operation of this section.
Assume also that Minnesota has adopted the rest of the UCC without any changes, except
that Minn.Stat. § 604.10 is in effect.
Geri operates Geri's Garage, an automotive repair and service station. On occasion she installs
replacement equipment in a customer's car. She buys spark plugs, alternators, starters, batteries
and other electrical parts from Wholesale Automotive Electric, Inc. ("Wholesale"). She has also
bought from Wholesale a sophisticated machine that tests a car's electrical system ("the tester").
Wholesale in turn buys electrical products (including testers) from Spark Manufacturing Company
("Spark"). There is no written agreement between Geri and Wholesale, and none between
Wholesale and Spark.
Wholesale and Spark have done business with each other for approximately ten years. During
that time Spark has occasionally sold Wholesale defective products. On each occasion Wholesale
has returned the defective product to Spark and has received a credit against the amount that
Wholesale then owed Spark. Spark has never given Wholesale a cash refund. Spark has never
paid Wholesale anything for any expense, inconvenience or customer dissatisfaction that
Wholesale may have suffered as a result of the defective products.
Spark packages its products in plain corrugated cardboard containers, with no printing other than
Spark's name and address, plus the model name and model number of the product. Wholesale
never opens the containers. Inside each container is a product specification sheet that includes the
following statement, printed in boldface and large type:
SPARK WARRANTS THAT THIS PRODUCT IS FREE FROM DEFECTS IN MATERIALS
AND WORKMANSHIP AT THE TIME OF SHIPMENT. IN THE EVENT OF ANY
DEFECT, SPARK WILL, AT ITS OPTION, EITHER REPAIR OR REPLACE THE
PRODUCT. THIS REPAIR/REPLACE IS BUYER'S SOLE REMEDY. THIS WARRANTY
AND LIMITATION OF REMEDY COVERS ANYONE WHO PURCHASES, INSTALLS OR
USES THIS PRODUCT.
Last month Geri used the Spark tester while working on a car belonging to Morris. The tester
was hooked up to Morris' car, and the car was left inside Geri's garage overnight. During the
night, a defect in the tester suddenly materialized and caused the battery in Morris' car to explode.
A small fire started which damaged Morris' car and ruined the tester. The fire triggered an
automatic sprinkler system, and that system prevented further fire damage. However, the water
from the sprinkler damaged other equipment owned by Geri and also the garage itself.
Can Geri make a successful claim against Spark for:
i. the $400 Geri paid Wholesale for the tester?
ii. the $2000 of damage done to Morris' car by the explosion and fire?
iii. the $3500 of water damage done to other equipment in the garage and to the garage itself
when the sprinkler system went off?
Model Answer: Geri has rights under both Article 2 and tort law. To assert her Article 2 claims
she will have to invoke 2-318. To assert her tort claims she will have to surmount the economic
loss doctrine reflected in 604.10
Article 2 Claims
Since Geri is not in privity with Spark, Geri's Article 2 claims depend on 2-318. She must show
that she is within that section's class of protected beneficiaries and that she suffered a type of harm
encompassed by that section.
She can do both. Since Spark manufactures battery testers for distribution to end-users, Geri, as
an end-user, can "reasonably be expected to use, consume or be affected by the goods." As for
the necessary harm, the Minnesota version of 2-318 requires only that the plaintiff have been
"injured." As described in more detail below, Geri suffered several different types of damages,
and each meets Minnesota's lenient standard of "injury."
Section 2-318 therefore applies and in essence "exports" to Geri the benefit of any warranties and
remedies that would be available to Wholesale (the party in privity with Spark). It is therefore
necessary to understand the contract between Spark and Wholesale.
The Spark--Wholesale contract included a warranty of merchantability. As a manufacturer and
seller of battery testers, Spark was a merchant with regard to goods of the kind. 2-104(1), 2-314.
Moreover, that warranty was breached when a defect materialized and caused damage. At
minimum, the defect and ensuing damage reveal that the tester was not "fit for the ordinary
purposes for which such goods are used." 2-314(2)(c).
There is no evidence that the Spark--Wholesale contract effectively disclaimed the merchantability
warranty. Certainly the package insert did not do so. The insert did not mention
"merchantability" and therefore could not disclaim that implied warranty. 2-316(2) (disclaimer of
implied warranties). In addition, the insert was hidden in a box that Wholesale never opened.
The insert was therefore ineffective as an implied warranty disclaimer because it was
inconspicuous. Id., 1-201(10) (definition of conspicuousness).
A course of dealing concerning defective products may have existed between Wholesale and
Spark, but that course of dealing supports rather than undercuts the merchantability warranty.
Spark's conduct in giving credit for defective goods suggests "a common basis of understanding"
that the goods were indeed subject to some warranty. 1-205(1).
Spark may assert that Wholesale's (and therefore Geri's) remedies are limited, either by the
limitation stated on the insert or by the Spark--Wholesale course of dealing. Both assertions
would fail. Under 2-719(1)(b), a limitation of remedy must be "expressly agreed." The insert was
never seen by Wholesale, and therefore could not be part of the agreement between Wholesale
and Spark. The Spark--Wholesale course of dealing cannot establish "return for credit" as an
exclusive remedy, because a course of dealing cannot establish an express agreement. Cf. 1-205(4) (express terms control course of dealing).
Spark may further assert than the remedy limitation on the insert directly binds Geri, who opened
the box and presumably saw the limitation. This assertion will fail for two reasons. First, there is
no evidence that Geri actually assented to the limitation. In contrast with the herbicide case, the
limitation appeared inside the package and did not invite the customer to return the product if
unwilling to accept the limitation. Moreover, Spark's assertion would have the effect of providing
a third party beneficiary fewer rights than were available to the party in privity. The last sentence
of 2-318 expressly bars this result. See comment 1 to 2-318.
Geri therefore has available against Spark a claim for breach of the merchantability warranty and may claim any remedies available under Article 2.
Geri should give Spark timely notice of the breach, 2-607(3)(a) and comment 5, and then should
be able to recover damages as follow:
i. the $400 Geri paid Wholesale for the tester
Geri had accepted the tester both by failing to make a timely rejection, 2-606(1)(b), and by using
the tester as her own, 2-606(1)(c) (act inconsistent with seller's ownership). Section 2-714(2)
therefore applies and entitles Geri to "the difference . . . between the value of the goods accepted
and the value they would have had if they had been as warranted." Arguably at least, a tester that
induces batteries to explode has a value of zero, while a merchantable tester would have been
worth the purchase price. Therefore, Geri is entitled to damages of $400.
ii. the $2000 of damage done to Morris' car by the explosion and fire
Assuming that Geri is liable to Morris for this damage, the amount of Geri's liability constitutes a
consequential damage. Spark had reason to know that end-users would use the tester on
customers' cars and that a defect that caused battery explosions could expose end-users to
damage claims. Geri can recover under 2-715(2)(a).
iii. the $3500 of water damage done to other equipment in the garage and to the garage itself
when the sprinkler system went off
Geri can recover under 2-715(2)(b) for this "injury to . . . property proximately resulting from any
breach of warranty." This analysis assumes that it is foreseeable for a defective battery tester to
cause a battery fire and for automotive repair stations to have sprinkler systems.
Tort Claims
Since Geri is not a consumer and did not suffer personal injury, 604.10 will bar her product
liability claims unless (i) she is not a merchant with regard to testers, and (ii) the product defect
caused damage to "other property." Both issues involve close calls.
Section 604.10(a) bars recovery for "economic loss that arises from a sale of goods between
parties who are each merchants in goods of the kind." This language creates at least two problems
of interpretation. First, 604.10 nowhere defines the concept of "merchant in goods of the kind."
Second, it is unclear how the phrase "between parties" applies to the Geri-Spark dispute. That is,
does "between" apply to Geri and Wholesale (they being parties to the contract under which Geri
obtained the product) or to Geri and Spark (they being the parties to the dispute).
The first problem seems soluble. The "merchant" language mirrors language in Article 2, so it is
probably safe to import Article 2 definitions. The second problem does not require a solution,
because the answer to the "between whom" question is immaterial. Both Spark and Wholesale
are merchants; they both deal in testers. 2-104(1). Therefore, whatever "between parties" means,
Geri's tort claims will be barred as "between merchants" unless Geri is not a merchant with regard
to testers.
Perhaps she is not. She does not deal in testers, and arguably at least her occupation (garage
owner; auto mechanic) does not hold her out "as having knowledge or skill peculiar to the . . .
goods involved in the transaction." 2-104(1). Den-Tal-Ez teaches that regular use of a device
does not necessarily make the user a merchant with regard to the device.
Can Geri also make the second necessary showing -- i.e. that she suffered damage to "other
property"? Here again the statute creates a problem by failing to provide a definition. The
statute's history can help fill the gap, however. Section 604.10 was enacted to resurrect the pre-Hapka case law rule on economic loss, and that rule involved the concept of "other property." It
is therefore reasonable to use that case law concept in applying the statute. Under the case law,
other property damage occurs only when the damage transcends "the type of damage which could
ordinarily be contemplated by the parties." Thofson.
Under this approach, the damage caused by the tester is probably not damage to "other property."
A battery tester is not a coffee pot. It is probably foreseeable for a defect in a battery tester to
cause problems to a battery which in turn cause a fire or explosion. Likewise, it is probably
foreseeable for a garage to have an automatic sprinkler system. If so, 604.10 bars Geri's product
liability claims.
If not, Geri will be able to press product liability claims for the water damage and for any loss she
suffers on account of the damage to Morris' car. In no event, however, will Geri be able to
recover in tort for the price paid for the tester. Section 604.10(c) precludes recovery for
"economic loss due to damage to the goods themselves."
Common Mistakes -- Major Conceptual Errors: making bald conclusions, i.e. asserting
positions without revealing the supporting law and relevant facts; ignoring the privity problem;
leaping into an analysis of the Spark--Wholesale relationship without explaining why that analysis
is relevant; not making clear that Geri's rights under 2-318 are merely the extension of Wholesale's
rights; analyzing whether Morris had a claim; discussing Wholesale's liability to Geri; assuming
that the package insert was part of the agreement between Spark and Wholesale or between
Spark and Geri; discussing whether the insert's remedy limitation was part of the agreement
without specifying whether the agreement at issue was between Spark and Wholesale or between
Spark and Geri; not recognizing that Morris' loss could become Geri's responsibility and therefore
Geri's loss [as in the Pinco problem, hospital's liability to the patient]; reading § 604.10 to bar
claims made under Article 2; devoting substantial space to 2-201 [the goods in question having
been accepted]; using 2-207; failing to consider tort issues
Common Mistakes -- Errors Relating to Warranty Analysis: assuming the existence of the
merchantability warranty; asserting an express warranty based on the insert without considering
how a hidden insert could become part of the basis of the bargain
Common Mistakes -- Errors Relating to Analysis of Remedy Limitations: asserting that an
insert hidden in a box could be conspicuous; doing a "fails of its essential purpose" analysis(4) that
ignored the plain language interpretation of that phrase [it was not error to reject that
interpretation, but it was necessary to recognize its existence]; equating failure of essential
purpose to unconscionability; failing to consider the impact of the insert on Geri [Geri opened the
package]
Common Mistakes -- Errors Relating to Article 2 Remedies: failing to cite specific UCC
provisions relating to damages; asserting that 2-318 bars any limitations on the remedies available
to a third party beneficiary; invoking 2-508 [Geri had accepted the goods]; asserting that Geri
could revoke without explaining how revocation would obligate Spark [Geri purchased from
Wholesale, not Spark]; omitting entirely a remedy analysis for part i; asserting baldly that 2-714
applies to part i, without explaining how that section would operate
Common Mistakes -- Errors Relating to Economic Loss: merely assuming that Geri is a merchant with regards to the tester; asserting that merchant status alone suffices to bar a tort claim [rather than merchant with regards to goods of the kind]; discussing whether Geri was a merchant with regards to automotive products generally [rather than with regard to the specific goods that gave rise to the damages]; deciding that Geri's merchant status barred recovery and not considering the "other property" issue
1. The Appendices from the exam are attached at the end of this memo.
2. It was also possible to argue that the course of dealing was admissible to explain the ambiguous phrase "can reduce." Well-articulated versions of that argument received full credit.
3. The following Model Answer is only one of several plausible interpretations. Full credit went to any answer that (i) focussed on the applicability issue; (2) addressed the difficulty posed by § 513.075's reference to "a man and a woman" and "out of wedlock," and (3) recognized that §§ 513.075 and 513.076 must be read together.
4. Some answers either assumed or argued that the insert's remedy limitation was part of the contract. These answers perforce had to consider whether Geri could escape the limitation by asserting failure of essential purpose.