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The ideas and conclusions set forth in this draft, including the proposed statutory language and any comments or reporter's notes, have not been passed upon by the National Conference of Commissioners on Uniform State Laws, the American Law Institute, or the Drafting Committee. They do not necessarily reflect the views of the Conference and its Commissioners, the Institute and its Members, and the Drafting Committee and its Members and Reporters. Proposed statutory language may not be used to ascertain the intent or meaning of any promulgated final statutory proposal.

LAWRENCE J. BUGGE, P.O. Box 1497, 150 E. Gilman Street, Madison, WI 53701, Chair

JOHN FOX ARNOLD, 714 Locust Street, St. Louis, MO 63101

BORIS AUERBACH, 332 Ardon Lane, Wyoming, OH 45215

GERALD L. BEPKO, Indiana University, 355 N. Lansing Street, Indianapolis, IN 46202

AMELIA H. BOSS, Temple University, School of Law, 1719 N. Broad Street, Philadelphia,

PA 19122, The American Law Institute Representative

BRUCE A. COGGESHALL, One Monument Square, Portland, ME 04101

PATRICIA BRUMFIELD FRY, University of North Dakota, School of Law, P.O. Box 9003,

Grand Forks, ND 58202

HENRY DEEB GABRIEL, JR., Loyola University, School of Law, 526 Pine Street,

New Orleans, LA 70118

PETER F. LANGROCK, P.O. Drawer 351, Middlebury, VT 05753

CURTIS R. REITZ, University of Pennsylvania, School of Law, 3400 Chestnut Street,

Philadelphia, PA 19104

BYRON D. SHER, State Capitol, Suite 2054, Sacramento, CA 95814

JOHN A. SPANOGLE, George Washington University, National Law Center, 2000 H Street,

N.W., Washington, DC 20052, The American Law Institute Representative

RICHARD E. SPEIDEL, Northwestern University, School of Law, 357 E. Chicago Avenue,

Chicago, IL 60611, Reporter

LINDA J. RUSCH, Hamline University School of Law, 1536 Hewitt Avenue, St. Paul,

MN 55104, Associate Reporter

BION M. GREGORY, Office of Legislative Counsel, State Capitol, Suite 3021, Sacramento, CA 95814-4996, President

NEAL OSSEN, Suite 201, 21 Oak Street, Hartford, CT 06106, Division Chair

FRED H. MILLER, University of Oklahoma, College of Law, 300 Timberdell Road,

Norman, OK 73019, Executive Director

WILLIAM J. PIERCE, 1505 Roxbury Road, Ann Arbor, MI 48104,

Executive Director Emeritus

SECTION 2-101. SHORT TITLE 1

SECTION 2-102. DEFINITIONS 1

SECTION 2-103. SCOPE 10

SECTION 2-104. TRANSACTION SUBJECT TO OTHER LAW 12

SECTION 2-105. UNCONSCIONABLE CONTRACT OR TERM 16

SECTION 2-106. INTEREST AND PART INTEREST IN GOODS 17

SECTION 2-107. GOODS TO BE SEVERED FROM REAL PROPERTY; RECORDING 18

SECTION 2-108. EFFECT OF AGREEMENT 20

SECTION 2-201. FORMAL REQUIREMENTS 22

SECTION 2-202. PAROL OR EXTRINSIC EVIDENCE 25

SECTION 2-203. FORMATION IN GENERAL 28

SECTION 2-204. FIRM OFFERS; SEALED RECORDS 30

SECTION 2-205. OFFER AND ACCEPTANCE 31

SECTION 2-206. CONSUMER CONTRACTS; RECORDS 35

SECTION 2-207. EFFECT OF VARYING TERMS IN RECORDS. 37

SECTION 2-208. COURSE OF PERFORMANCE OR PRACTICAL CONSTRUCTION 43

SECTION 2-209. MODIFICATION, RESCISSION, AND WAIVER 44

SECTION 2-210. ATTRIBUTION PROCEDURE 46

SECTION 2-211. ATTRIBUTION OF ELECTRONIC RECORD, MESSAGE, OR

PERFORMANCE 47

SECTION 2-212. AUTHENTICATION EFFECT AND PROOF; ELECTRONIC AGENT

AUTHENTICATION 49

SECTION 2-213. ELECTRONIC TRANSACTIONS AND MESSAGES: TIMING OF

CONTRACT AND EFFECTIVENESS OF MESSAGE 50

SECTION 2-214. ACKNOWLEDGMENT OF ELECTRONIC MESSAGE 51

SECTION 2-301. HOW CONTRACT PRICE PAYABLE 53

SECTION 2-302. PERFORMANCE AT SINGLE TIME 53

SECTION 2-303. OPEN-PRICE TERM 55

SECTION 2-304. OUTPUT, REQUIREMENTS, AND EXCLUSIVE DEALING 56

SECTION 2-305. ABSENCE OF SPECIFICATION OF PLACE FOR DELIVERY 58

SECTION 2-306. TIME FOR PERFORMANCE NOT SPECIFIED 59

SECTION 2-307. OPTIONS AND COOPERATION RESPECTING PERFORMANCE 60

SECTION 2-308. FAILURE TO PAY BY AGREED CREDIT 61

SECTION 2-309. SHIPMENT TERMS; SOURCE OF MEANING 62

SECTION 2-310. TERMINATION; SURVIVAL OF OBLIGATIONS AND TERMS 63

SECTION 2-311. TERMINATION; NOTIFICATION 64

SECTION 2-312. SALE BY AUCTION 66

SECTION 2-401. DEFINITIONS 70

SECTION 2-402. WARRANTY OF TITLE AND AGAINST INFRINGEMENT; BUYER'S

OBLIGATION AGAINST INFRINGEMENT 70

SECTION 2-403. EXPRESS WARRANTY TO IMMEDIATE BUYER 74

SECTION 2-404. IMPLIED WARRANTY OF MERCHANTABILITY; USAGE OF TRADE 77

SECTION 2-405. IMPLIED WARRANTY OF FITNESS FOR PARTICULAR PURPOSE 81

SECTION 2-406. DISCLAIMER OR MODIFICATION OF WARRANTY 81

SECTION 2-407. CUMULATION AND CONFLICT OF WARRANTIES 85

SECTION 2-408. EXTENSION OF EXPRESS WARRANTY TO REMOTE BUYER AND

TRANSFEREE 86

SECTION 2-409. EXTENSION OF EXPRESS OR IMPLIED WARRANTY 92

SECTION 2-501. PASSING OF TITLE; RESERVATION FOR SECURITY 96

SECTION 2-502. INSURABLE INTEREST IN GOODS; MANNER OF IDENTIFICATION

OF GOODS 98

SECTION 2-503. ASSIGNMENT OF RIGHTS; DELEGATION OF DUTIES 100

SECTION 2-504. POWER TO TRANSFER; GOOD-FAITH PURCHASE OF GOODS 103

SECTION 2-505. RIGHTS OF SELLER'S CREDITORS AGAINST GOODS SOLD 106

SECTION 2-506. SALE ON APPROVAL AND SALE OR RETURN; SPECIAL

INCIDENTS 108

SECTION 2-601. GENERAL OBLIGATIONS 111

SECTION 2-602. MANNER OF SELLER'S TENDER OF DELIVERY 112

SECTION 2-603. SHIPMENT BY SELLER 116

SECTION 2-604. SELLER'S SHIPMENT UNDER RESERVATION 118

SECTION 2-605. RIGHTS OF FINANCING AGENCY 119

SECTION 2-606. EFFECT OF SELLER'S TENDER; DELIVERY ON CONDITION 120

SECTION 2-607. TENDER OF PAYMENT BY BUYER; PAYMENT BY CHECK 121

SECTION 2-608. PAYMENT BY BUYER BEFORE INSPECTION 122

SECTION 2-609. BUYER'S RIGHT TO INSPECT GOODS 123

SECTION 2-610. WHEN DOCUMENTS DELIVERABLE ON ACCEPTANCE OR

PAYMENT 125

SECTION 2-611. OPEN TIME FOR PAYMENT OR RUNNING OF CREDIT; AUTHORITY

TO SHIP UNDER RESERVATION 126

SECTION 2-612. RISK OF LOSS 127

SECTION 2-701. BREACH OF CONTRACT GENERALLY; SUBSTANTIAL

IMPAIRMENT 134

SECTION 2-702. WAIVER OF BREACH; PARTICULARIZATION OF

NONCONFORMITY 136

SECTION 2-703. BUYER'S RIGHTS ON NONCONFORMING DELIVERY; RIGHTFUL

REJECTION 141

SECTION 2-704. EFFECT OF EFFECTIVE RIGHTFUL REJECTION AND

JUSTIFIABLE REVOCATION OF ACCEPTANCE 143

SECTION 2-705. MERCHANT BUYER'S DUTIES; BUYER'S OPTIONS AS TO

SALVAGE 145

SECTION 2-706. WHAT CONSTITUTES ACCEPTANCE OF GOODS 147

SECTION 2-707. EFFECT OF ACCEPTANCE; NOTICE OF BREACH; BURDEN OF

ESTABLISHING BREACH AFTER ACCEPTANCE; NOTICE OF

CLAIM OR LITIGATION TO PERSON ANSWERABLE OVER 149

SECTION 2-708. REVOCATION OF ACCEPTANCE 152

SECTION 2-709. CURE 154

SECTION 2-710. INSTALLMENT CONTRACT: BREACH 159

SECTION 2-711. RIGHT TO ADEQUATE ASSURANCE OF PERFORMANCE 162

SECTION 2-712. ANTICIPATORY REPUDIATION 163

SECTION 2-713. RETRACTION OF ANTICIPATORY REPUDIATION 165

SECTION 2-714. CASUALTY TO IDENTIFIED GOODS 166

SECTION 2-715. SUBSTITUTED PERFORMANCE 168

SECTION 2-716. EXCUSE BY FAILURE OF PRESUPPOSED CONDITIONS 169

SECTION 2-717. PROCEDURE ON NOTIFICATION CLAIMING EXCUSE 171

SECTION 2-718. PRESERVING EVIDENCE OF GOODS IN DISPUTE 172

SECTION 2-801. SUBJECT TO GENERAL LIMITATIONS 173

SECTION 2-802. BREACH OF CONTRACT; PROCEDURES 173

SECTION 2-803. REMEDIES IN GENERAL 174

SECTION 2-804. MEASUREMENT OF DAMAGES IN GENERAL 182

SECTION 2-805. INCIDENTAL DAMAGES 184

SECTION 2-806. CONSEQUENTIAL DAMAGES 185

SECTION 2-807. SPECIFIC PERFORMANCE 190

SECTION 2-808. CANCELLATION: EFFECT 192

SECTION 2-809. LIQUIDATION OF DAMAGES; DEPOSITS 195

SECTION 2-810. CONTRACTUAL MODIFICATION OF REMEDY 197

SECTION 2-811. REMEDIES FOR MISREPRESENTATION OR FRAUD 202

SECTION 2-812. PROOF OF MARKET PRICE 202

SECTION 2-813. LIABILITY OF THIRD PARTIES FOR INJURY TO GOODS 204

SECTION 2-814. STATUTE OF LIMITATIONS 205

SECTION 2-815. SELLER'S REMEDIES IN GENERAL 209

SECTION 2-816. SELLER'S RIGHT TO WITHHOLD DELIVERY OF GOODS OR TO

RECLAIM GOODS AFTER DELIVERY TO BUYER 211

SECTION 2-817. SELLER'S RIGHT TO IDENTIFY GOODS TO CONTRACT DESPITE

BREACH OR TO SALVAGE UNFINISHED GOODS 217

SECTION 2-818. SELLER'S REFUSAL TO DELIVER BECAUSE OF BUYER'S

INSOLVENCY; STOPPAGE IN TRANSIT OR OTHERWISE 218

SECTION 2-819. SELLER'S RESALE 221

SECTION 2-820. PERSON IN POSITION OF SELLER 225

SECTION 2-821. SELLER'S DAMAGES FOR NONACCEPTANCE, FAILURE TO PAY,

OR REPUDIATION 226

SECTION 2-822. ACTION FOR PRICE 230

SECTION 2-823. BUYER'S REMEDIES IN GENERAL; BUYER'S SECURITY

INTEREST IN REJECTED GOODS 232

SECTION 2-824. PREPAYING BUYER'S RIGHT TO GOODS; REPLEVIN 233

SECTION 2-825. COVER; BUYER'S PURCHASE OF SUBSTITUTE GOODS 236

SECTION 2-826. BUYER'S DAMAGES FOR NONDELIVERY OR REPUDIATION 237

SECTION 2-827. BUYER'S DAMAGES FOR BREACH REGARDING ACCEPTED

GOODS 240

SECTION 2-828. DEDUCTION OF DAMAGES FROM PRICE 242

SECTION 2-829. RECOVERY OF PRICE; BUYER'S SECURITY INTEREST IN

REJECTED GOODS. 243

SECTION 2-101. SHORT TITLE. This article may be cited as Uniform Commercial Code - Sales.

SECTION 2-102. DEFINITIONS.

(a) Unless the context otherwise requires, in this article:

(1) "Authenticate" means to sign, or to execute or adopt a symbol, or encrypt a record in whole or in part with present intent to identify the authenticating party, or to adopt or accept a record or term, or to establish the authenticity of a record or term that contains the authentication or to which a record containing the authentication refers. [SOURCE: Section 2B-102(a)(2) (May, 1997)]

(2) "Between merchants", with respect to a transaction, means between parties both of which are chargeable with the knowledge or skill of merchants. [SOURCE: Section 2-104(3)]

(3) "Buyer" means a person that buys or contracts to buy goods. [Section 2-103(1)(a)]

(4) "Cancellation" means an act by either party which ends a contract because of a breach by the other party. [See Section 2-106(4)]

(5) "Commercial unit" means a unit of goods which by commercial usage is a single whole for purposes of sale and whose division materially impairs its character or value in the relevant market or in use. A commercial unit may be a single article, such as a machine; a set of articles, such as a suite of furniture or a line of machinery; a quantity, such as a gross or carload; or any other unit treated in use or in the relevant market as a single whole. [Section 2A-103(1)(c). See Section 2-105(6).]

(6) "Conforming" goods or performance under a contract for sale means goods or performance that are in accordance with the obligations under the contract. [Section 2-106(2)]

(7) "Conspicuous" means so displayed or presented that a reasonable person against whom it operates ought to have noticed it or, in the case of an electronic message intended to evoke a response without the need for review by an individual, in a form that would enable a reasonably configured electronic agent to take it into account or react to it without review of the message by an individual. [Compare Section 1-210(11) (April, 1997), Section 2B-102(6). See end notes.]

(8) "Consumer" means an individual who buys or contracts to buy goods that, at the time of contracting, are intended by the individual to be used primarily for personal, family, or household use. The term does not include an individual who buys or contracts to buy goods that, at the time of contracting, are intended by the individual to be used primarily for professional or commercial purposes. [See Section 2B-102(a)(7)]

(9) "Consumer contract" means a contract for sale between a seller regularly engaged in the business of selling and a consumer.

(10) "Contract for sale" means a present sale or a contract to sell at a future date, whether or not the goods are future goods.

(11) "Delivery" means the transfer of physical possession or control of goods.

(12) "Electronic agent" means a computer program or other automated means used, selected, or programmed by a party to initiate or respond to electronic messages or performances in whole or in part without review by an individual. [Section 2B-102(a)(12)]

(13) "Electronic" means electrical, digital, magnetic, optical, electromagnetic, or any other form of wave propagation, or by any other technology that entails capabilities similar to those technologies. [Section 2B-102(a)(12)]

(14) "Electronic message" means a record that, for purposes of communication to another person, is stored, generated, or transmitted by electronic, optical, or similar means. The term includes electronic data interchange, electronic or voice mail, facsimile, telex, telecopying, scanning, and similar communications. [Section 2B-102(a)(14)]

(15) "Electronic transaction" means a transaction formed by electronic messages in which the messages of one or both parties will not be reviewed by an individual as a routine step in forming the contract. [Section 2B-102(a)(14)]

(16) "Financing agency" means a bank, finance company, or other person that, in the ordinary course of business, makes advances against goods or documents of title, or that by arrangement with either the seller or the buyer intervenes in the ordinary course of business to make or collect payment due or claimed under a contract for sale, as by purchasing or paying the seller's draft, making advances against it, or merely taking it for collection, whether or not documents of title accompany the draft. The term includes a bank or other person that similarly intervenes between persons in the position of seller and buyer with respect to the goods. [Section 2-104(2)]

(17) "Foreign exchange transaction" means a transaction in which one party agrees to deliver a quantity of a specified money or unit of account in consideration of the other party's agreement to deliver another quantity of different money or unit of account either currently or at a future date, if delivery is to be through funds transfer, book entry accounting, or other form of payment order, or other agreed means to transfer a credit balance. The term includes a transaction of this type involving multiple moneys and spot, forward, option, or other products derived from underlying moneys and any combination of these transactions. The term does not include a transaction involving multiple moneys in which one or both of the parties is obligated to make physical delivery, at the time of contracting or in the future, of banknotes, coins, or other form of legal tender or specie.

(18) "Future goods" means goods that at the time of contracting are neither existing nor identified. [Section 2-105(2)]

(19) "Good faith" means honesty in fact and the observance of reasonable commercial standards of fair dealing. [Section 2B-102(a)(16)]

(20) "Goods" means all things, including specially manufactured goods, that are movable at the time of identification to a contract for sale or, unless the context otherwise requires, future goods. The term includes the unborn young of animals, growing crops, and other identified things attached to realty in Section 2-108. The term does not include money in which the price is to be paid, the subject of foreign exchange transactions, documents, letters of credit, information, instruments, investment property, accounts, chattel paper, deposit accounts, general intangibles, and payment intangibles.

(21) "Letter of credit" means an irrevocable letter of credit as defined in Section 5-102(a)(10), issued by a financing agency of good repute and, if the shipment is overseas, of good international repute. [See Sections 2-325(3), 5-102(a)(10)]

(22) "Lot" means a parcel or single article that is the subject matter of a separate sale or delivery, whether or not it is sufficient to perform the contract. [Section 2A-103(1)(s)]

(23) "Merchant" means a person that deals in goods of the kind involved in the transaction, a person that by occupation purports to have knowledge or skill peculiar to the practices or goods involved in the transaction, or a person to which knowledge or skill may be attributed by the person's employment of an agent or broker or other intermediary that purports to have the knowledge or skill. [Sections 2-104(1), 2B-102(a)(26)]

(24) "Present sale" means a sale that is accomplished by the making of a contract. [Section 2-106(1)]

(25) "Receipt":

(A) with respect to goods, means taking delivery; and

(B) with respect to an electronic record, means when it enters an information processing system in a form capable of being processed by a system of that type and the recipient uses or has designated that system for the purpose of receiving records or information. "Receive has an analogous meaning. [Sections 2-103(1)(c), 2B-102(a)(29)]

(26) "Record" means information that is inscribed on a tangible medium, or that is stored in an electronic or other medium and is retrievable in perceivable form. [Sections 5-102(a)(14), 2B-102(a)(30)]

(27) "Sale" means the passing of title to goods from a seller to a buyer for a price. [Section 2-106(1)]

(28) "Seller" means a person that sells or contracts to sell goods. [Section 2-103(1)(d)]

(29) "Terminate" means to end a contract or a part thereof by an act by a party under a power created by agreement or law, or by operation of the terms of the agreement for a reason other than for breach by the other party. [Section 2-106(3), Conformed to Section 2A-103(1)(z). See Section 2B-102(a)(37).]

(b) Other definitions applying to this Article and the sections in which they appear are:

"Acceptance of goods." Section 2-706

"Agreed letter of credit." Section 2-308(a).

"Assignment." Section 2-503(a).

"Attribution." Sections 2-210(a), 2-211(a).

"Breach of contract." Sections 2-701(a), 2-815(a).

"Consequential damages." Section 2-806.

"Cover." Section 2-825(a).

"Delegation." Section 2-503(b).

"Entrusting." Section 2-504(c).

"Incidental damages." Section 2-805.

"Identification." Section 2-502.

"Immediate buyer." Section 2-401(a).

"Installment contract." Section 2-710(a).

"Insurable interest." Section 2-502.

"Person in position of seller." Section 2-604.

"Remote purchaser." Section 2-401(a).

"Repudiation." Section 2-712(b).

"Sale on approval." Section 2-506(a).

"Sale or return." Section 2-506(a).

"Substantial impairment." Section 2-701(c).

"Waiver." Sections 2-210, 2-702.

(c) The following definitions in other articles apply to this article:

"Check." Section 3-104(e).

"Dishonor." Section 3-502.

"Draft." Section 3-104(e).

"Information. Section 2B-102(a)(18).

"Injunction against honor." Section 5-109(b).

"Letter of Credit." Section 5-102(a)(10).

(c) In addition, Article 1 contains general definitions and principles of construction that apply throughout this article.

SOURCES: Sales (July, 1996); Licenses (May, 1997).

1. Definitional sources are stated in brackets at the end of each definition.

2. Issues relating to specific definitions.

(a) Conspicuous. The last sentence in the July, 1996 definition of "conspicuous" has been deleted on the ground that the listed circumstances should be regarded as factors to be considered rather than as conditions to establishing a safe harbor. Unlike Section 1-201(10), the definition does not state that the decision is for a court as a matter of law. Depending on the circumstances, the decision is for the trier of fact. The definition does not conform to Section 2B-102(a)(6) (May, 1997).

The policy questions are whether (1) compliance with any one of the "factors" in the last sentence should constitute a "safe harbor" and (2) the court or jury should decide the question. What ever is agreed, the definition should ultimately be in Article 1. See Section 1-201(11) (April, 1997).

(b) Court. Article 2B-102(a)(9a) defines "court" to include an "arbitrator or other dispute resolution official." A tighter definition would state an "arbitrator or other person authorized to adjudicate a dispute." As now drafted, the definition could include a mediator.

(c) Delivery. "Delivery" means the transfer of either "physical possession or control of goods." As used in this Article, "control" includes goods that are delivered to an agent of the seller or buyer or are subject to a document of title.

(d) Electronic contracting. Article 2 follows Article 2B in the definition of terms relating to electronic contracting. See Section 2-102(a)(13-16).

(e) Good faith. The definition in Section 2-102(a)(20) was adopted at the July, 1996 meeting of the Conference and conforms to Article 2B but not to Article 5-102(a)(7), which states that good faith means "honesty in fact in the conduct or transaction concerned."

(f) Goods. Section 2-102(a)(21) states what "goods" are and what they are not. For purposes of Article 2, goods include "future goods," i.e., goods that at the time of contracting are "neither existing nor identified." Section 2-102(a)(19). Excluded from the definition are the "subject of foreign exchange transactions," see Section 2-102(a)(18), and certain types of Article 9 collateral, including new collateral types proposed in revised Article 9, such "deposit accounts" and "payment intangibles."

Suppose Party A owns a deposit account in Bank and "sells" it for value to Party B. Under the current proposed revision of Article 9, this transaction is not treated as a secured transaction. See Section 9-112(a)(3). Under Section 2-102(a)(21), the interest transferred is not treated as goods. What law, then, governs this transfer?

(g) Standard forms and standard terms. The July, 1996 Draft contained four new, important definitions: Standard form, standard term, manifest assent and opportunity to review. These definitions have been deleted from the July, 1997 Draft of Article 2.

SECTION 2-103. SCOPE.

(a) This article applies to transactions in goods.

(b) If a transaction involves both information and goods, this article applies to the aspects of the transaction which involve the goods and their performance and rights in the goods other than the physical medium containing the information, its packaging, and its documentation. However, this article applies to a sale of a computer program that was not developed specifically for a particular transaction and that is embedded in goods other than a copy of the program or an information processing machine, if the program was not the subject of a separate license with the buyer. [Section 2B-103(c) and (d)(3)]

(c) Except as otherwise provided in subsection (b), to the extent that another article of this [Act] applies to a transaction in goods, this article does not apply to the part of the transaction governed by the other article. [Section 2B-103(b)]

(d) This article does not apply to a foreign exchange transaction.

1. Article 2 covers "transactions in goods." The phrase "unless the context otherwise requires" has been deleted. Normally this transaction is a contract for sale and many sections in Article 2 are expressly limited to contracts for sale. Although a "pure" service contract is not covered, the courts have applied Article 2 to mixed transactions of goods and services if the sale of goods "predominates" and, occasionally, they have applied Article 2 to disputes where the "gravaman" of the complaint involves the quality of goods furnished in a transaction where services predominate.

2. Subsection (a)(3) in the July, 1996 Draft stated that Article 2 applied to a common type of service contract where the seller, not a third person, agreed to install, service and repair goods sold at or after the time for delivery. Standards for measuring the seller's obligation in these contracts and appropriate remedies were provided in new Section 2-602. Subsection (a)(3) and Section 2-602 were deleted at the November, 1996 meeting of the Drafting Committee.

3. Although not stated in Section 2-103, courts may extend Article 2 by analogy to transactions not within its scope if the extension is relevant in principle and appropriate in the circumstances. See Barco Auto Leasing Corp. v. PSI Cosmetics, Inc., 478 N.Y.S.2d 505 (N. Y. Civ. Ct. 1984) (explores theory of extension by analogy). Also, by including "transactions in goods" in subsection (a), courts may apply Article 2 to transactions that are not sales unless the particular sections that apply are limited to contracts for sale.

4. Embedded software. Subsection (b) deals with transactions where both goods and information licensed under Article 2B are involved. See Section 2B-103 on the scope of Article 2B. Presumably, Article 2B governs all disputes over "licenses of information and software contracts" and "related" support and maintenance agreements. Section 2B-103(a). Article 2, however, may apply to transactions excluded from Article 2B under Section 2B-103(d). Thus, a "sale or lease of a copy of a computer program that was not developed specifically for a particular transaction if the program is "embedded in goods" is excluded by Section 2B-103(d)(3) and is governed by Article 2.

Further coordination with Article 2B is needed on embedded software.

5. Subsection (c), which is subject to subsection (b), delineates the line between Article 2 and other articles in the UCC, without attempting to define it. It follows Section 2B-103(b).

More precision may be required. For example, a transaction may involve both a contract for sale and an Article 9 security agreement. If the buyer, who is also a debtor, is a consumer, to what part of the transaction does Section 2-206(a) apply? Arguably, Section 2-206(a) covers terms in the record dealing with the sale but not terms relating to the security agreement. But there may be overlaps in terms, particularly those involving payment.

6. Foreign exchange contracts, defined in Section 2-102(a)(17), are excluded from Article 2. The definition and the exclusion are based upon a recommendation by the Federal Reserve Bank of New York. Except for the "multiple moneys" exclusion where the contract requires the delivery of tangible forms of money, the transaction is governed by general contract principles and Article 4A.

To illustrate:

(a) An agreement to exchange goods for a $1,000 bill is a contract for sale, but the $1,000 bill is not goods because it is "money in which the price is to be paid." Section 2-102(a)(20). However, if goods are to be exchange for a rare coin worth $1,000, the coin should be treated as goods and, in effect, there is a swap of goods for goods. Article 2 applies and both parties are a seller and a buyer of goods.

(b) An agreement to exchange $1,000 for 1,500 German marks, without more, is a swap of goods for goods. Under the definition of "foreign exchange transaction," however, Article 2 does not apply unless the transaction involves "multiple moneys in which one or both of the parties is obligated to make physical delivery, at the time of contracting or in the future, of banknotes, coins, or other form of legal tender of specie." If, however, the exchange is to be "netted out" by a transfer of credits through the banking system, Article 2 does not apply.

SOURCES: Section 2B-103 (May, 1997); Sales (October, 1995).

SECTION 2-104. TRANSACTION SUBJECT TO OTHER LAW.

(a) A transaction subject to this article is also subject to:

(1) [list any certificate of title statutes covering automobiles, trailers, mobile homes, boats, farm tractors, or the like], except as to the rights of a buyer in the ordinary course of business under Section 2-504(d) whose rights arise before a certificate of title covering the goods is effective in the name of the buyer;

(2) any applicable law which establishes a different rule for consumers; or

(3) any other law of this State to which the subject matter of this article is subject, such as laws dealing with the sale of agricultural products, the transfer of blood, blood products, human tissues and organs, the consignment or transfer by artists of works of art or fine prints, distribution agreements, franchises and other relationships through which goods are sold, liability for products which cause injury to person or property, the making and disclaimer of warranties, the misbranding or adulteration of foods products and drugs, and dealers in particular products, such as automobiles, motorized wheelchairs, agricultural equipment and hearing aids.

(b) Except for the rights of a buyer in the ordinary course of business in subsection (a)(1), in the case of a conflict between this article and a statute or decision referred to in subsection (a), the statute or decision governs.

(c) With respect to this [Act], failure to comply with the laws referred to in subsection (a) has only the effect specified therein.

SOURCES: Section 2A-104(3). See Section 2B-104.

1. Section 2-104 determines what other law of "this state" governs a contract for sale otherwise within the scope of the Article 2. It is a more particularized application of the displacement principle in Section 1-103. The extent to which the law of "another state" governs is determined by applicable choice of law principles, see Section 1-105, or an enforceable choice of law clause. See Section 2B-107. Article 2 does not deal with choice of law or choice of forum.

Article 2 takes no position on the following questions: (1) To what extent can the parties agree that Article 2 does not apply even though the transaction is a contract for sale, see CISG Article 6; (2) To what extent can the parties agree that Article 2 applies to a transaction that is not a contract for sale, see Section 2B-105; and (3) To what extent should a court extend Article 2 by analogy to a transaction that is not a sale, see Section 2A-102, Comment. Some of these questions are under consideration by the Article 1 Drafting Committee.

2. Section 2-104(a)(1) states that a transaction covered by Article two is subject to any applicable "certificate of title statute of this state." Thus, if the applicable CTA provided a different rule than Section 2-501 or 2-504 on transfer of title, the CTA would apply. Given the complexity and un-uniformity of various CTAs, the policy question is whether Article 2 should provide the uniform, preemptive rule and, if so, whether Sections 2-501 and 2-504 state the proper rule?

At the January, 1997 meeting of the Drafting Committee approved an exception for a buyer in the ordinary course of business whose rights arise before a certificate of title covering the goods is effective in his name was approved. Thus, Article 2 protects a BIOCB of a new motor vehicle from a dealer to whom a certificate or origin was issued, as well as a BIOCB of a used motor vehicle from a dealer, regardless of whether the vehicle's certificate of title is in the name of another person.

3. Subsection (a)(1) in the July, 1996 Draft provided that Article 2 was subject to any applicable "federal law to the extent it governs the rights of parties to, and third parties affected by, the transaction." This was deleted because it stated the obvious: federal law either preempts or it does not, although the preemption line is not always clear.

For example, the line between the United Nations Convention on Contracts for the International Sale of Goods, which is federal law, and Article 2, which is state law, will be clear in most cases. Under Article 1, CISG applies to "contracts of sale of goods between parties whose places of business are in different states: (a) when the States are Contracting States." Canada and the United States are contracting states. Thus, if a Canadian seller sued a United States buyer in the Southern District of New York, CISG rather than Article 2 would apply even though federal jurisdiction was based upon diversity of citizenship. See Filanto, S.p.A. v. Chilewich Intern. Corp., 789 F. Supp. 1229 (S.D.N.Y. 1992), appeal denied, 984 F.2d 58 (2d Cir. 1993). Article 2, in short, is preempted by federal law.

There are exceptions based upon CISG's more limited scope. CISG would not apply if the buyer were a consumer, Article 2(a), or the subject of the sales was an "aircraft" or "electricity." Article 2(d) and (e). Article 2, however, applies to these transactions. In addition, CISG does not apply to certain aspects of a sale otherwise covered. Thus, CISG is "not concerned with: (a) the validity of the contract or of any of its provisions or of any usage; (b) the effect which the contract may have on the property in the goods sold", Article 4, and "does not apply to the liability of the seller for death or personal injury caused by the goods to any person." Article 5. Article 2 applies to "validity" disputes involving unconscionability, Section 2-105, claims for personal injury resulting from a breach of warranty, Section 2-706(a)(2), and disputes over title. Finally, CISG applies only to disputes between the parties to a contract for sale. Lack of contractual privity is a defense in a suit under CISG. Under Article 2, however, a remote buyer may be able to sue a seller for breach of warranty. Lack of contractual privity, in these cases, is not a defense. See Sections 2-404 and 2-308(a). Since Article 2 does not define "seller" to exclude a seller under CISG, to the extent that lack of privity is not a defense a remote United States buyer of imported goods presumably can sue a Canadian seller for breach of warranty under Article 2.

4. Subsection (a)(2) was changed at the March, 1997 meeting of the Drafting Committee to state that the effect of final consumer protection laws, whether legislative, administrative or judicial, is not limited to those laws in effect when the revision is enacted.

5. Subsection (a)(3) gives a partial, illustrative list of representative statutes that regulate either the parties to a contract for sale or the subject matter. In farm states, for example, legislation may protect the farmer against a dealer, control the quality of farm products and regulate the labeling of seeds and other products. Similarly, otherwise enforceable contracts that purport to sell or transfer blood or blood products are frequently treated as contracts for services rather than sales. Some of these laws are enacted as non-uniform provisions of Article 2 and others are contained in separate legislation.

Digital signature statutes. Careful analysis is required to discover the extent to which these or other statutes either supplement or preempt the uniform text of Article 2. For example, several states have enacted digital signature laws which are broader and more complex than the definition of "authenticate" in Section 2-102(a)(1). Article 2B purports to preempt these statutes relying upon Article 2B's definition of authentication. See Section 2B-103(b)(2). Section 2-104(b), by limiting the statutes to which Article 2 is subject to those listed in Section 2-104(a)(3), can be interpreted to achieve the Article 2B preemption result. Some commentators disagree with Article 2B's preemption.

The choices for Article 2 are: (1) Follow Article 2B; (2) Add digital signature statutes to those listed in subsection (a)(3) to which Article 2 is subject; or (3) Prepare a legislative note which identifies the problem and gives each state a choice. The latter choice will probably be made.

6. Although Article 2 assumes that a court will adjudicate the dispute, the parties may select the forum by agreement or agree that the dispute will be adjudicated in arbitration. Unless otherwise stated, the use of the word "court" in Article 2 includes alternative tribunals or persons which are empowered by agreement or otherwise to adjudicate the dispute. See the broader definition of "court" in Section 2B-102(a)(9b).

SECTION 2-105. UNCONSCIONABLE CONTRACT OR TERM.

(a) If a court finds as a matter of law that a contract or a term of the contract was unconscionable at the time the contract was made or was induced by unconscionable conduct, the court may refuse to enforce the contract, enforce the remainder of the contract without the term, or so limit the application of the term to avoid an unconscionable result.

(b) Before making a finding of unconscionability under subsection (a), the court, on motion of a party or its own motion, shall afford the parties a reasonable opportunity to present evidence as to the setting, purpose, and effect of the contract or term thereof or of the conduct.

SOURCE: Sales, Section 2-302 (December, 1994).

1. Except for the language "induced by unconscionable conduct", Section 2-105 is essentially the same as Section 2-302 in the 1990 Official Text. Section 2-105 does not adopt the broader language of Section 2A-108. A proposal to conform original Section 2-302 to Section 2A-108(2) and (3) was rejected by the Drafting Committee at the October, 1993 meeting. The phrase "induced by unconscionable conduct," taken from Section 2A-108(2), was added and approved at the Annual Meeting of the Conference in July, 1996. The "induced" phrase, however, does not appear in Section 2B-109 (May, 1997). See Section 2A-108, Comments, and Uniform Consumer Credit Code 5.108, Comment 1.

What is "unconscionable conduct" that induces a contract that is otherwise appears to be conscionable? It is, in essence, unfair practices that induce the contract, such as taking advantage of a consumer's inability to protect his or her interest, or contracting with knowledge that the consumer is unable to receive a substantial benefit from the transaction, unreasonable delay and pressure in concluding the contract, or making misleading statements of opinion on which the consumer was likely to rely. See National Consumer Law Center, Unfair and Deceptive Acts and Practices 4.4 (3d ed. 1991, Supp. 1996). Put differently, they are contracts or terms that are not otherwise unconscionable "but would never have been entered into if unconscionable means had not been employed to induce the agreement to the contract." UCCC Section 5.108(1)(a), Comment 1.

2. The expanded treatment of consumer contracts in Article 2 is a particularized application of unconscionability concepts. See, e.g., Sections 2-206 and 2-316. Nevertheless, Section 2-105 may still apply to a dispute even though the requirements of those particular sections have been satisfied. Thus, a disclaimer of warranty that satisfies the requirements of Section 2-316(b) or a standard form to which a commercial party has manifested assent, Section 2-206(a), may still be unconscionable on other grounds. Those grounds, however, are limited to cases where there was little or no opportunity in the market to find needed goods with different terms and where the terms offered were unreasonably favorable to the buyer or seller. These cases are few and far between. See, e.g., Martin v. Joseph Harris Co., Inc., 767 F.2d 296 (6th Cir. 1985).

3. The Drafting Committee limited unconscionability to the time of contracting and concluded that the remedy should be avoidance or limitation of the contract or clause rather than damages. Moreover, the court or other tribunal rather than a jury determines whether a "contract or any clause thereof is unconscionable." The decision to give the decision to a court rather than the jury has been attacked as unsound and inconsistent with the fundamental right to a trial by jury.

There are very few cases in the last 10 years where the courts have found a contract or clause unconscionable under former Section 2-302. Of the fourteen cases that granted some relief, only nine involved Article 2 and most involved the enforceability of agreed limitations on warranties and remedies. These cases, however, do not include commercial cases arising under Section 2-207 where findings of unfair surprise excluded terms from the apparent agreement.

SECTION 2-106. INTEREST AND PART INTEREST IN GOODS.

(a) Goods must be both existing and identified before an interest in them may be transferred.

(b) A part interest in existing, identified goods may be sold.

(c) A purported present sale of future goods or an interest in future goods is a contract to sell future goods.

(d) An undivided share in a described bulk of fungible goods is sufficiently identified to be sold, even if the quantity of the bulk is not determined. Any proportion of the bulk or quantity agreed upon by number, weight, or other measure, to the extent of the seller's interest in the bulk, may be sold to the buyer. The buyer is an owner in common.

SOURCE: Sales, Section 2-105 (Oct. 1995).

SECTION 2-107. GOODS TO BE SEVERED FROM REAL PROPERTY; RECORDING.

(a) A contract for the sale of minerals, oil, gas, or similar things to be extracted, or a structure or its materials to be removed, from real property, is a contract for the sale of goods if they are to be severed by the seller. Until severance, a purported present sale of those things, other than a sale that is effective as a transfer of an interest in the real property, is only a contract to sell future goods.

(b) A contract for the sale, apart from an interest in real property, of growing crops, timber to be cut, or other things attached to real property and capable of severance without material harm to the real property other than the things described in subsection (a), is a contract for the sale of goods, whether the thing is to be severed by the buyer or seller and even if it forms part of the real property at the time of contracting. The parties may effect a present sale before severance by identification of the goods.

(c) The rights of a buyer and seller under this section are subject to rights of third parties under the laws relating to records of real property. A contract for sale may be executed and recorded as a document transferring an interest in real property. The recording constitutes notice to third parties of the buyer's rights under the contract for sale.

SOURCE: Sales, Section 2-107 (December, 1994).

1. Section 2-107 implements a suggestion by the California State Bar Committee that there should be consistency in terminology. Thus, the phrase "real property" is substituted for the terms "realty" and "land" on the assumption that all mean the same thing. Similarly, the undefined phrase "contract to sell" [found in the original Article 2] was replaced by the defined phrase "contract for sale," which includes a contract for the sale of future goods. The phrase "contract for the sale of future goods" is proposed to replace "contract to sell."

2. After the 1996 Annual Meeting of the Conference, subsection (a) was revised to clarify that "minerals, oil, gas, or similar things" are to be "extracted" from the real property and structures are to be "removed" from the property. In some states, underground mineral deposits may be called structures. Also, it is clear that water is a thing similar to oil and gas. Article 2 applies to the sale of water after it is extracted not to the sale of the right to extract.

3. Oil and gas. The phrase "oil and gas" was added to subsection (a) in 1972 to clarify that these things were part of the real property if to be severed by the buyer to whom a working interest in the land has been transferred by the owner. Article 2 does not apply in this case.

On the other hand, it is clear that if the seller is to extract the oil and sell it to the buyer for a price (no working interest is transferred) or if the buyer extracts the oil and then sells it to a third party, Article 2 applies. Other variations raise more complicated scope problems. For example, suppose the lessee is to extract the oil and pay the lessor a cash royalty based upon a stated value of the oil. Real estate law applies here because a working interest was transferred, the buyer was to extract and a cash royalty is paid. In cases where the lessee is to extract the oil and pay the lessor a royalty in kind or exercise an option to pay a cash royalty, however, Article 2 may apply if the lessor conveys a working interest to the lessee but reserves title to the oil until extracted. After extraction, the lessee is in possession of oil to which the lessor owns and the lessor is now in position to sell the oil to the lessee for either an in kind payment or cash. In short, the lessor still owns the oil extracted by the lessee. Since the extracted oil is now goods, the lessor is a seller subject to Article 2 of the UCC.

4. What about long-term sale and leaseback of buildings and structures? In typical cases, an owner of improved or unimproved land will convey it and then take a leaseback for a term of years. At some point in the leaseback, the lessee (formerly the owner) has a right to remove and, presumably, sell structures on the land. In general, Article 2 does not apply to this transaction even though the owner has a right to sever and sell. If, however, the owner actually sells the structures to a third person and reserves the right to sever, that transaction is covered by Section 2-107.

SECTION 2-108. EFFECT OF AGREEMENT.

(a) Except as otherwise provided in Section 1-102 and this article, the effect of any provision may be varied by agreement.

(b) The absence of a phrase such as "unless otherwise agreed" does not by itself preclude the parties from varying the provision by agreement.

(c) Whenever this article allocates a risk or imposes a burden as between the parties, an agreement may shift the allocation and apportion the risk or burden.

1. Section 2-108 retains the general principle of Section 2-109(a) of the July, 1996 Draft but deleted subsection (b), which purported to list those sections which could not be limited or varied by agreement. In the view of the Drafting Committee, subsection (b) duplicated the principle of variance in Section 1-102(3) and posed an unacceptable risk of unintended under and over inclusion in the drafting. Compare Section 2B-114.

2. Without purporting to make an exclusive statement, the Comments will identify the sections which specifically prohibit variation. See, e.g., Section 1-203 and Sections 2-102(a)(18), 2-105, 2-202(b), 2-206, 2-403, 2-404, 2-407, 2-810, 2-809. In addition, each section which cannot be varied by agreement will explicitly so state.

SECTION 2-201. FORMAL REQUIREMENTS.

(a) Except as otherwise provided in this section, a claim for breach of contract for sale in the price of $10,000 or more is not enforceable by way of action or defense against a person that denies that an agreement was made, unless there is a record authenticated by the person against which the claim is asserted as the record of that person and which is sufficient to indicate that a contract was made. A record is not insufficient merely because it omits or incorrectly states a term, including a quantity term. If the record contains a quantity term, the claim is not enforceable beyond that quantity.

(b) If an authenticated record in confirmation of a contract is sufficient against the sender and is sent within a reasonable time to the other party, the record is sufficient against the other party who is a merchant, unless the merchant sends a notice of objection to the record within 10 days after the record is received.

(c) A claim for breach of an otherwise valid contract which is barred under subsection (a) is enforceable if:

(1) the goods are to be specially manufactured or processed for the buyer, the seller substantially manufactures or processes or makes commitments for the procurement of the goods in performance of a contract believed in good faith to exist, and the seller cannot resell the goods at a reasonable price;

(2) the conduct of both parties in performing the agreement recognizes that a contract was formed;

(3) reliance by one party on representations or an agreement under law outside of this [Act] estops the other party from raising the lack of a sufficient authenticated record as a defense; or

(4) the party against whom enforcement is sought, in pleading or testimony in court or otherwise under oath, admits facts from which a contract for sale can be found.

(d) A claim for breach of contract enforceable under this section is not unenforceable on the ground that it is not capable of being performed within one year or any other applicable period after its making.

SOURCE: Sections 2-201 and 2-203 (October, 1995).

1. History. Section 2-201(a) in the July, 1996 draft abolished the statute of frauds for Article 2. This result was strongly recommended by the PEB Study Group and was approved by the Drafting Committee on March 6, 1993. A motion to restore the statute of frauds was rejected by a voice vote of the Commissioners at the 1995 and 1996 Annuals Meeting of NCCUSL.

However, at the November, 1996 meeting, the Drafting Committee decided to restore "some version" of the statute of frauds. Section 2-201 of the November, 1996 Draft, based upon the able draft by Professor W. David East, clarified the text without making it harder to satisfy the statute.

At the January, 1997 meeting of the Drafting Committee, a further revision that makes it easier to satisfy the statute was submitted by Curtis Reitz was approved in principle and appeared in the March, 1997 draft. Further revisions were made at the March and May, 1997 meetings of the Drafting Committee.

At the May, 1997 meeting of the American Law Institute, a motion to retain the statute of frauds passed by a 2 X 1 margin. A motion to delete subsection (d), however, was defeated.

2. Subsection (a) follows original Section 2-201(1), with some differences:

The diminimus amount is $10,000 rather than $500. This amount was approved at the ALI meeting in May, 1997.

The statutes of frauds defense cannot be raised under subsection (a) unless the person against whom a claim or defense is asserted denies that an agreement was made. Subsection (a) provides no procedures to test the denial.

A record is sufficient if it is authenticated.

A record is not insufficient because it omits a quantity term. Although there is no Article 2 "gap filler" for quantity, the term may be established by relevant evidence, including trade usage and course of dealing. If, however, a quantity term is included in the record the claims is not enforceable beyond the quantity stated. Note, however, that is no longer a quantity limitation where there is conduct by both parties establishing an agreement or a contract is admitted in court or under oath. See subsection (c).

3. Subsection (b) retains the confirmation principle in Section 2-201(2) with the following change:

The text states that only the recipient of the confirmation must be a merchant. The text does not say that merchant may or may not include a farmer. The conclusion that farmers can never be a merchant, however, is rejected. See Section 2-201 (1995), Comment 2, paragraph 2, which states that the merchant concept under Section 2-201(2) rests "on normal business practices which are or ought to be typical of and familiar to any person in business."

4. Subsection (c) states when a claim under an otherwise enforceable contract which is barred under subsection (a) or (b) is "nonetheless enforceable."

Subsection (c)(1) is revised for clarity. The party seeking to avoid the statute of frauds, however, must have a good faith belief in the existence of a contract.

Subsection (c)(2) expands the "part performance" exception in Section 2-201(3)(c) (1995). Conduct by both parties, including part performance, takes the case out of the statute. To illustrate, suppose S claims the repudiation of an alleged oral contract to supply the buyer's requirements over a 5 year period. After six months, the buyer requests, the seller delivers and the buyer accepts requirements for that period. Later the buyer repudiates and raises the statute of frauds defense. Assuming that the defense is proper under subsection (a), the conduct of both parties recognizes a contract and the defense is no longer available. In short, the seller's claim of a five year contract goes to the trier of fact.

Subsection (c)(3) recognizes that reliance on representations or an agreement by one party "may estop" the other from raising the statute of frauds defense. Whether estoppel exists depends upon principles of law outside of this Act. See Section 1-102(b) (April, 1997). Presumably, the court will be guided by Restatement (Second) Contracts 139, one factor of which is the extent to which the reliance "corroborates evidence of the making and terms of the promise, or the making and terms are otherwise established by clear and convincing evidence." See subsection (2)(c).

Subsection (c)(4) restores subsection 3(b) of former UCC Section 2-201, but clarifies that the admission may be in court or "otherwise under oath" and must admit facts from which a contract may be found.

5. Subsection (d), which is new, survived a motion to delete at the ALI meeting in May, 1997. See Section 2-201(a) (Nov. 1996). The phrase "any other applicable period" recognizes that some state statutes apply to periods longer than one year.

To illustrate, suppose S and B enter an oral contract on February 1, 1996 to deliver goods on March 1, 1997 for the price of $7,500. The oral agreement is not within the scope of Section 2-201(a) because the price is less than $10,000 but, since it is not performable within a year from its making, the agreement would be subject to a statute of frauds defense under the so-called "one year" clause. Subsection (d) eliminates this defense.

6. Subsection (f) in the March, 1997 Draft (former Section 2-203 on sealed records) has been moved to Section 2-204(b).

SECTION 2-202. PAROL OR EXTRINSIC EVIDENCE. Terms on which confirmatory records of the parties agree, or which are otherwise set forth in a record intended by the parties as a final expression of their agreement with respect to the included terms, may not be contradicted by evidence of a previous agreement or contemporaneous oral agreement. However, terms in a record may be explained by any relevant evidence and may be supplemented by evidence of:

(1) course of performance, usage of trade, or course of dealing; and

(2) noncontradictory additional terms unless:

(A) The terms if agreed upon by the parties would certainly have been included in the record; or

(B) The court finds that the record was intended as a complete and exclusive statement of the terms of the agreement.

SOURCE: Sales, Section 2-202 (March, 1995).

1. The operation of the so-called parol evidence rule depends upon the intention of the parties. Both parties must intend that the record be a final expression of their agreement with respect to some or all of the terms included in the record. Otherwise, all evidence relevant to the terms of the agreement is admissible under the usual evidentiary standards.

2. If the court concludes that the parties intended a partially integrated writing (some terms are final), Section 2-202 then states what terms allegedly agreed to in negotiations prior to or contemporaneously with the record or inferred from a course of dealing, course of performance or usage of trade are admissible.

In a partial integration, terms allegedly agreed to prior to or contemporaneously with the record are excluded if they contradict terms in the record. However, the terms in the record may be supplemented by evidence from any course of performance, course of dealing or usage of trade and noncontradictory additional terms, unless the additional terms if agreed to "would certainly have been included" in the record. The "would certainly" language, taken from Comment 3 to the original Section 2-202, replaces the phrase "consistent additional terms."

In a total integration, normally manifested by a merger clause, noncontradictory additional terms are not admissible. However, terms in the record may still be supplemented by evidence of course of performance, usage of trade and course of dealing unless that evidence is specifically negated or excluded in the record. The policy expressed in Comment 2 to the original Section 2-202, therefore, is followed, i.e., that the special status of this evidence (it is not directly related to pre-contract negotiations) and the assumption that the parties intended to include it unless otherwise clearly agree requires more than a general merger clause to exclude. See, e.g., Nanakuli Paving & Rock Co. v. Shell Oil Co., Inc., 664 F.2d 772 (9th Cir. 1981).

The effect of a totally integrated record is that both contradictory and non-contradictory additional terms are excluded. The best evidence of a total integration is a so-called "merger" clause. The last sentence of Section 2-202(b) in the May, 1994 Draft stated that a merger clause does not create a conclusive presumption of a total integration. Although this sentence was consistent with the case law, see, e.g., ARB, Inc. v. E-Systems, Inc., 663 F.2d 189, 198-199 (D.C. Cir. 1980), it was removed at the March, 1995 meeting of the Drafting Committee. As a practical matter, a merger clause creates a presumption that both parties intended a total integration and puts a difficult burden on one party to establish the contrary. At the September, 1996 meeting, the Drafting Committee voted to include Section 2-201(b)(2), limiting the effect of the presumption to contracts other than consumer contracts. At the March, 1997 meeting of the Drafting Committee, subsection (b) of the March, 1997 Draft was deleted. A motion to restore the second sentence of (b) was defeated by a close vote.

3. Interpretation. In the case of either a partial or a total integration, terms in the record may be "explained" by relevant evidence and by "course of dealing or usage of trade or by course of performance" Section 2-202(1). Evidence intended to explain a term in a record involves contract interpretation to which the parol evidence rule does not apply. Evidence intended to supplement a term in a record poses in different language the problem of whether additional terms are contradictory or not. But unless the record clearly excludes or contracts out of the trade usage or course of dealing or performance, both Section 1-205(3) and Section 2-202(a)(1) support admissibility to supplement even though it may also appear to vary or contradict that term.

Subsection (c) of the May, 1994 Draft, which stated that before extrinsic evidence was admissible to interpret a contract the court must find that the contract was ambiguous, was deleted at the March, 1995 meeting of the Drafting Committee. Subsection (c), which sparked controversy, was inconsistent with the policy of the 1990 Official Text, Section 2-202, Comment 1(c), the Restatement, Second of Contracts, see 200-203, and the approach of most courts. See, e.g., Pacific Gas & Electric Co. v. G. W. Thomas Drayage & Rigging Co., 442 P.2d 641 (Cal. 1968) (Traynor, Chief Justice).

At the October, 1995 meeting of the Drafting Committee, the scope of the court's power to interpret a term in an integrated writing was discussed. Concern was expressed lest the phrase "terms may be explained" in Section 2-202(a) would be limited to the sources listed in (1) and (2) and that the dreaded "plain meaning rule" might reemerge. A motion to save the phrase passed, however, [9-8, 7-0] with the expectation that the Comments would state that the sources of evidence for contract interpretation are broader than those indicated in subsection (a). See CISG Article 8(3).

4. Preliminary hearing on intention. Despite a contrary recommendation by the Coordination Committee, the Article 2 Drafting Committee voted (September, 1996) to retain subsection (b)(1) which required the court to conduct a preliminary hearing on whether the parties intended to integrate the record. The last clause, dealing with type of evidence relevant to the intention question, however, was deleted at the November, 1996 meeting. Subsection (b) of the January, 1997 Draft then excluded commercial contracts with a merger clause from the requirement of a hearing. Subsection (b) of the May, 1997 Draft simply stated: "The court shall consider all evidence relevant to the intention of the parties to integrate the record." The July, 1997 Draft deletes entirely subsection (b).

SECTION 2-203. FORMATION IN GENERAL.

(a) A contract may be made in any manner sufficient to show agreement, including by offer and acceptance or conduct of both parties which recognizes the existence of a contract.

(b) A contract may be found if the parties intend to form a contract, even if the time that the agreement was made cannot be determined, one or more terms are left open or to be agreed upon, the records of the parties do not otherwise establish a contract, or one party reserves the right to modify terms.

(c) Even if one or more terms are left open, a contract does not fail for indefiniteness if the parties intended to form a contract and there is a reasonably certain basis for an appropriate remedy.

(d) Conspicuous language in a record which expressly conditions the intention of the proposing party to contract only upon agreement by the other party to terms proposed in the record is effective to prevent contract formation.

SOURCE: Sales, Section 2-204.

1. In transactions where terms in the records of one or both parties appear to prevent agreement, the issue of contract formation is treated in Sections 2-203(b) and 2-205(a)(1) rather than former Section 2-207. One looks there to determine whether a contract has been formed. If some contract is formed, the question of what terms in a record are included in the agreement is treated in new Section 2-206 where consumer contracts are involved and revised Section 2-207.

The last clause in Section 2-203(b) deals with contract formation where the parties intend to make a contract but varying terms in their records do not otherwise establish (or might prevent the formation of) a contract. The test is taken from the first sentence of the original Section 2-207(3). Thus, if there is conduct by both parties which recognizes the existence of a contract but terms in their records do not agree, a contract is still made under Section 2-203(b).

2. Under basic contract law, either party can condition the formation of a contract upon agreement by the other party to terms proposed. See Section 2-207(1) (1995 Official Text). Subsection (d) deals with the case where either the offeror or the person purporting to accept an offer expresses that condition in a record: The condition is not effective unless conspicuous language is used, see Section 2-102(a)(7). Suppose, for example, that the seller's offer, made in a record, that notice of any breach of warranty must be given within 30 days of when the buyer "should have discovered" the breach and that the seller "will not be bound" unless the buyer agrees to the seller's terms. That language conditioning intention to be bound is not effective unless it is CONSPICUOUS. Whether it is conspicuous or not may depend upon whether the language is in standard terms or "boilerplate."

3. Section 2B-202 omits subsection (d).

4. In November, 1996, the Drafting Committee decided to eliminate all references to "standard forms" and "standard terms" in Sections 2-203, 2-205, and 2-207. This approach was reaffirmed at the January, 1997 meeting of the Drafting Committee and all bracketed references to standard terms have been deleted.

SECTION 2-204. FIRM OFFERS; SEALED RECORDS.

(a) An offer by a merchant to enter into a contract made in an authenticated record that by its terms gives assurance that the offer will be held open is not revocable for lack of consideration during the time stated. If a time is not stated, the offer is irrevocable for a reasonable time not exceeding 90 days. A term of assurance in a record supplied by the offeree to the offeror is ineffective unless the term is conspicuous.

(b) Affixing a seal to a record evidencing a contract for sale or an offer does not make the record a sealed instrument. The law with respect to sealed instruments does not apply to the contract or offer.

SOURCE: Sales, Section 2-205 (December, 1994).

1. The September 10, 1993 draft of Section 2-205 provided that if no time is stated in a written firm offer, "the offer is irrevocable for a commercially reasonable time." A motion to restore the original language of Section 2-205, imposing a three month limit, was subsequently approved. See Section 2B-203.

2. At the September, 1996 meeting, the Drafting Committee voted to replace the word "conspicuous" in the July, 1996 Draft with "manifests assent." See Section 2B-303, last sentence. It protects an offeror against surprise when the firm offer is in a record, frequently a standard form, prepared by the offeree to be used by the offeror. With the deletion of Section 2-103 and the concept of "manifests assent", the word conspicuous has been restored.

3. Former Section 2-203 on Sealed Instruments now appears in Section 2-204(b).

SECTION 2-205. OFFER AND ACCEPTANCE.

(a) Unless otherwise unambiguously indicated by the language or circumstances, the following rules apply:

(1) An offer to make a contract invites acceptance in any manner and by any medium reasonable under the circumstances. Subject to Section 2-203(d), a definite expression of acceptance in a record that also contains terms varying from the offer is an acceptance.

(2) An order or other offer to buy or acquire goods for prompt or current shipment invites acceptance by a prompt promise to ship or by a prompt or current shipment of goods. If the order or offer is construed to invite acceptance by the shipment of non-conforming goods, the non-conforming shipment is not an acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation.

(b) If the beginning of a requested performance is a reasonable mode of acceptance, an offeror that is not notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance.

SOURCE: Sales, Section 2-206.

1. Section 2-204 and Section 2-205 [formerly Section 2-206] were revised to state that, in the "battle of the forms" and other disputes over records, issues of contract formation are to be separated from questions of what terms become part of the contract. Thus, revised Section 2-203(b) provides that the parties can intend to contract even though terms in the records of the parties do not otherwise establish a contract and revised Section 2-205(a) provides that a "definite expression of acceptance" in a record accepts an offer even though it contains terms varying the terms of an offer. These principles were previously found in Section 2-207(1) and (3) of the 1990 Official Text. Compare Section 2B-204(a).

Although the statute does not say so, it is unlikely that a definite acceptance with varying terms in the same record will be found unless the varying terms are in the "boilerplate."

2. The formation test in Section 2-205(a)(1) follows that in the original Section 2-206(1). Unless the offer clearly provides otherwise, a definite acceptance creates a contract even though the acceptance contains terms in a record that vary the offer. Unlike the Restatement, Second and Article 19 of CISG, a definite acceptance containing a terms that materially vary the terms of the offer can create a contract. The offeree can avoid a contract by expressly stating in conspicuous language that no contract exists unless the offeror agrees to the offeree's standard terms. See Section 2-203(d). Presumably, if both parties state conspicuously that they will not be bound unless the other agrees to their terms, there is no contract unless there is subsequent conduct by both recognizing the existence of a contract.

Language in an offer or purported acceptance which attempts to condition contract formation upon agreement by the other to the terms proposed must be conspicuous when contained in a record. Section 2-203(d).

Here are some examples.

Example #1. After negotiations where no agreement was reached, B sent S an offer in a record to purchase 1,000 units of described goods at $500 per unit. The front of the purchase order contained blanks which Buyer filled in and the back contained several standard terms, including an arbitration clause. S sent an acknowledgment the front of which stated "we are pleased to accept your order for 1,000 units at $500 per unit." The back of the acknowledgment contained a standard term excluding all liability for consequential damages. After the acknowledgment was mailed, S changed its mind (the market price went up) and faxed a rejection to B. There is a contract under Section 2-205(a)(1), which reinforces Section 2-203(a). B clearly accepted the offer and the seller's record did not conspicuously indicate by language or otherwise that there would be no contract unless S agreed to all of the terms proposed.

The case for a definite expression of acceptance is even clearer if S also shipped the goods before attempting to revoke. There would be no contract, however, if S had said "we are pleased to accept your order at $600 per unit" or had conspicuously indicated that it did not intend to conclude a contract unless B agreed to all of S's terms, both negotiated and standard. See Section 2-203(d). Whether B's arbitration clause or S's exclusion clause are part of the contract depends upon Section 2-207.

Example #2. Suppose, in Example #1, that Seller "accepted" Buyer's order for $600 per unit and the back of the acknowledgment contained a standard term that "seller reserves the right to litigate any dispute." Nevertheless, Seller shipped the goods with the acknowledgment and Buyer accepted them without objection. There is a contract under Section 2-203(b). Since the price term was negotiated, Seller's price of $600 constituted a counteroffer which Buyer accepted by using the goods. [The usual principles of contract formation apply here.] There was no risk of unfair surprise and B assented without objection by accepting the goods. Which if any of the conflicting terms in the records prepared by the parties become part of the contract is determined by Section 2-207.

Example #3. Suppose, in Example #2, that Seller accepted Buyer's order for $500 and shipped the goods which Buyer accepted. Later, there was a dispute, Buyer demanded arbitration and Seller insisted that it had reserved the right to litigate. There is a contract under either Section 2-205(a)(1) or 2-203 despite the different standard terms on dispute resolution. Unless the Buyer's arbitration clause becomes part of the agreement under Section 2-207, the "default" rule is that the seller may litigate.

Example #4. Suppose that terms in the records of both parties conspicuously state that there will be no contract unless their terms are agreed to by the other party. See Section 2-203(d). The seller ships and the buyer accepts the goods. There is a contract under Section 2-203(a) and (b). The agreement of the parties includes the terms stated in Section 2-207.

3. Section 2-205 conforms to Section 2B-204 in that the phrase "invites acceptance" is substituted for the "must be construed as" language. The response by an "electronic agent" is treated in Section 2B-204(c). Both Section 2A-206 and Section 2B-204 omit subsection (b) of Section 2-205.

4. Recent cases and revised Article 2.

Two recent cases in the Seventh Circuit, ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996), and Hill v. Gateway 2000, Inc., ___ F.3d ___, 1997 WL 2809 (7th Cir. 1997), raise questions about the adequacy of the proposed contract formation provisions in Part 2 and the operation of the new "pass through" warranty provision in Section 2-404(a). Both were decided by Judge Easterbrook.

In ProCD the defendant, an individual, bought software with a "shrinkwrap" license from a retailer in a transaction that appears to satisfy the evolving definition of "mass market" in Section 2B-102(a)(25). When D paid and took possession of the disk he was told that there were terms on the inside. The key term was a license and D was informed, both in the standard form record and on the computer disk, that he had an option to accept the license or reject it and return the software for a refund. D used the software, violated the license and was sued by P, the producer. The court, in reversing the district court, enforced the license. Among other things, the court concluded: (1) The dispute involved a single form not a "battle of the forms" under Section 2-207; (2) Section 2-204(1), augmented by Section 2-606, supported the view that the parties intended to conclude the contract when D accepted the terms of the license by using the program, not when D paid for and took delivery of the disk. The court rejected the argument that D was bound only by terms disclosed at the time of payment and possession; and (3) Article 2, which the court applied to the license of goods, did not require that the terms in dispute be conspicuous or be presented in any particular way. Section 2-302 was not discussed. Nor was a possible analogy to Section 2-207(1) and (2), which supports the view that a contract can be formed along with a proposal to modify the contract.

In Gateway, the defendant, responding to advertising, ordered a computer directly from Gateway, the manufacturer. D paid for the computer by credit card before it was shipped and was unaware, at that time, of the terms of the contract. The computer arrived in a box with no external message that there were terms inside. The terms inside contained, inter alia, a limited express warranty, a service commitment and an agreement to arbitrate. The record also stated that the purchaser would be bound to the terms unless the computer was returned within 30 days. D did not object in time and, when warranty claims were made, Gateway demanded arbitration. The district court refused to order arbitration and, upon appeal, the decision was reversed: D had agreed in writing to arbitrate by failing to object in time. Once again, the court rejected Section 2-207 as inapplicable and affirmed the approach of ProCD to formation under Article 2. More importantly, the court rejected any claim that D was surprised by the terms and imposed the primary responsibility to discover, understand and respond to the standard terms on the purchaser: [T]he Hills knew before they ordered the computer that the carton would include some important terms, and they did not seek to discover these in advance." Even though they did not learn of the terms in advance, they inspected the documents after delivery and did not exercise their option to avoid the contract and obtain a refund.

The following questions were discussed at the May, 1997 meeting of the Drafting Committee:

1. Does Article 2 adequately support the court's conclusion that the contract is not formed and the proposed terms not included until the buyer has an option after paying for and taking possession of the goods to accept the terms or reject and return the goods for a refund. If not, what revisions should be made to respond to transactions of this type?

2. Does Article 2 adequately neutralize the risk of unfair surprise in these cases? If not, what revisions should be made?

The following solution, proposed by the Reporter, was discussed but no final action was taken.

In a contract where the buyer [remote or immediate] has taken delivery of or paid for the goods before all of the material terms of the proposed agreement are disclosed by the seller and those material terms are in a record disclosed to the buyer after payment or receipt, the terms do not become part of the agreement unless the buyer has knowledge of and agrees to them by affirmative conduct or by authenticating the record in which they are contained.

SECTION 2-206. CONSUMER CONTRACTS; RECORDS.

(a) In a consumer contract, if a consumer agrees to a record, any non-negotiated term that a reasonable consumer in a transaction of this type would not reasonably expect to be in the record is excluded from the contract, unless the consumer had knowledge of the term before agreeing to the record.

(b) Before deciding whether to exclude a term under subsection (a), the court, on motion of a party or its own motion, after affording the parties a reasonable and expeditious opportunity to present evidence on whether the term should be included or excluded from the contract, shall decide whether the contract should be interpreted to exclude the term.

(c) This section shall not operate to exclude an otherwise enforceable term disclaiming or modifying an implied warranty.

SOURCE: New.

1. The question is when a consumer who agrees to a record, usually by authentication or by conduct indicating assent to terms in the record, bound by the terms in the record? The answer in a consumer contract under Section 2-206 is that the terms is excluded when a term is not negotiated, a reasonable consumer in this type of transaction would not expect it, and the consumer had no knowledge of the term before the agreement. The ALI supported this principle by a 2 X 1 votes at the Annual Meeting in May, 1997.

2. Subsection (b) gives the parties the right to a hearing on the context issues. The court decides the question as a matter of contract interpretation. See Section 2-105(b). The usual burdens of proof apply, e.g., if the consumer seeks to exclude the term the consumer must establish the conditions for exclusion.

Subsection (b)(1) of the January, 1997 Draft identified possible sources of evidence relevant to the whether a reasonable consumer in a transaction of this type would expect the term. That text was deleted at the March, 1997 meeting of the Drafting Committee and will be relegated to the Comments.

3. Subsection (c) states that if a term excluding or modifying an implied warranty is enforceable under Section 2-407(e), the term cannot be excluded under Section 2-206(a). Section 2-105(a), however, may have some residual effect.

Not all records are standard forms but many records contain standard terms, usually preprinted. This draft does not distinguish between standard and other terms in a consumer contract. Arguably, the risk of surprise is greater when a consumer agrees to a record with standard terms than when the record deals with terms that are frequently negotiated, such as price, payment or quantity.

SECTION 2-207. EFFECT OF VARYING TERMS IN RECORDS.

(a) This section is subject to Sections 2-202 and 2-206.

(b) If a contract is formed by offer and acceptance and the acceptance is by a record containing terms varying from the offer or by conduct of the parties that recognizes the existence of a contract but the records of the parties do not otherwise establish a contract for sale, the contract includes:

(1) terms in the records of the parties to the extent that the records agree;

(2) terms not in records to which the parties have agreed;

(3) terms supplied or incorporated under any provision of this [Act]; and

(4) terms in a record supplied by a party to which the other party has expressly agreed.

(c) if a contract is formed by any manner permitted under this article and either party or both parties confirms the agreement by a record, the contract includes:

(1) terms agreed to prior to the confirmation;

(2) terms in a confirming record that do not materially vary the prior agreement and are not seasonably objected to;

(3) terms in confirming records to the extent that they agree; and

(4) terms supplied or incorporated under any provision of this [Act].

1. Drafting History. The original Section 2-207 was both an exception to the common law "duty to read" principle and a particularized application in commercial cases of the unconscionability doctrine in Section 2-302. In practice it applied to determine if there was some contract for sale when the writings of the parties were in conflict and, if so, what terms in the writings of the parties became part of the contract. One objective was to neutralize any strategic advantage gained where standard terms were used (although Section 2-207 was not limited to standard terms) and to reduce the risk of unfair surprise where one party apparently agreed (assented by conduct) to standard terms which had not been read or understood. The assumption was that even in commercial transactions the risk of unfair surprise requires special rules where standard terms are involved. More particularly, it assumed that commercial parties in unstructured transactions [i.e., no record containing all the terms of the contract] do not have a realistic opportunity to review the standard terms of the other before apparently assenting by conduct.

Initially, two versions of Section 2-207 were drafted. The first followed Section 2-207 in the 1990 Official Text and attempted to amplify and clarify it in light of apparent objectives, academic commentary, and judicial decisions. The second developed a simplified structure that focused on the unfair surprise issue. Assuming that some contract was formed under Sections 2-203 and 2-205, the sole question was whether "varying terms" became part of the contract. At the October 1-3, 1993 meeting, the Drafting Committee approved the approach of the second version of Section 2-207. A first effort to implement that objective was made in the May, 1994 draft, where the key concept, "varying terms," was defined in Section 2-207(a). Drawing on the September, 1994 Draft of the Licenses article, the December 20, 1994 Draft of Article 2 added a new section on "standard form agreements" and defined such terms as "standard form" and "standard terms" in Part 1. These sections provided a direct response to recurring questions raised in standard form contracting. Relying on new Section 2-206, covering "Standard Form Agreements," and the new definitions to deal with most unfair surprise and advantage taking, the May, 1995 Draft of Section 2-207 was limited to "conflicting" standard terms, i.e., terms which vary other terms by adding to or contradicting them.

In October, 1995 the Drafting Committee decided to limit Section 2-206 to cases where all of the agreement was contained in a standard form record. Section 2-207, therefore, was reworked to deal with the unstructured, partially negotiated transaction where standard terms are contained in the records [not standard forms] of one or both parties.

At the November, 1996 meeting of the Drafting Committee, however, the decision was made to delete any rules responding to standard forms and standard terms in commercial transactions. Thus, Section 2-206(a) was withdrawn and a redraft of Section 2-207 that used the words "records" and "terms" rather than "standard forms" and "standard terms" was approved in principle. The January, 1997 Draft, however, retained [standard terms] bracketed for testing purposes and contained a subsection (c) proposing a "clean up" rule where one party claims that standard terms in a record were incorporated by express agreement. At the January, 1997 meeting of the Drafting Committee, the Reporter was directed to delete all references to standard terms in and subsection (c) to Section 2-207.

The March, 1997 Draft of Section 2-207, dealt with two special cases where disputes over terms may arise, (1) where both parties exchange records (herein of the "battle of the records") and (2) where one party uses a record to confirm a contract previously formed, and stated what terms are included in, and by necessary implication excluded from, the contract. Thus, terms upon which the records agree in substance are included but terms upon which the records do not agree are excluded, unless they are "otherwise" agreed to or become part of a modification under Section 2-210(a). But the "otherwise agreed to" principle is subject to an exception: The court may find, after reviewing the transaction, that a term in a record to which one party apparently assented should be excluded because that party would be unfairly surprised or suffer hardship if the term were included. The "unfair surprise" exception was justified as follows:

A primary purpose of original Section 2-207 and the interpretive cases was to police against unfair surprise in commercial transactions. The risk of unfair surprise is high when one party attempts to include a standard term ("boilerplate") drafted to serve its own interest in a contract where the other party appears to agree by conduct or otherwise but did not read and was not expected to read the term. These terms are frequently excluded by the courts unless the other party assented with express awareness of or expressly agreed to them. Although the Drafting Committee, because of definitional problems, has not relied upon the presence of "standard terms" or imposed a requirement of "expressly agreed" in the statute, the process of contract formation here is still subject to the unconscionability limitation in Section 2-106, which deals with unfair surprise and hardship. It is expected that courts interpreting revised Section 2-207 will continue to find unfair surprise where the circumstances warrant and exclude terms not clearly exclude terms not clearly covered by Section 2-207 unless there is express agreement to them. The lesson from the case law is that it is much easier for a court to find unfair surprise or the presence of express agreement after the fact than it is to state those principles in the statute. Thus, Section 2-207(3) states the exclusionary principle in broad terms and relies upon the courts to apply it.

At the March, 1997 meeting, the Drafting Committee voted to delete the "unfair surprise" phrase in Section 2-207(3) and to treat the confirmation issue and the conflicting records problem in two subsections.

The July, 1997 Draft of Section 2-207 was approved at the May, 1997 meeting of the Drafting Committee.

Assume that some contract has been formed under Article 2, Part 2. What are its terms? Note that some of the terms will be agreed at the time of contract formation and other terms may be included later. Even though terms included later are modifications, Section 2-207 rather than Section 2-210(a) may provide the applicable principles for inclusion. In short, Sections 2-207 and 2-210(a) must be read together.

(a) All terms are expressed in one record.

Section 2-207 does not apply here. The single record is probably integrated and subject to Section 2-202. For consumer contracts, see Section 2-206. For commercial contracts, the usual principles of agreement apply, subject to Section 2-105.

(b) No terms are expressed in a record.

Section 2-207 does not apply here. Since the agreement is oral, the statute of frauds probably applies. See Section 2-201. If not, the usual principles of agreement apply.

(c) Some Terms in the Record of only one party.

Section 2-207(b) applies where the contract is formed by offer and acceptance.

For example, suppose the buyer makes an oral offer and the seller makes a definite acceptance in a record that contains terms that vary from the offer. A contract is formed, see Section 2-205(a)(1), and the varying terms are not part of the agreement.

Suppose, further, that the seller ships and the buyer accepts the goods. Does the buyer's conduct in accepting the goods equal agreement to the seller's varying terms? Under subsection (b)(4), the answer is no: The buyer must expressly agree to the term. As a practical matter, the courts have distinguished between negotiated and "boilerplate" terms and have required a higher quality of assent to incorporate the boilerplate.

Suppose, further, that the seller's offer is made in a record and the buyer accepts orally or by conduct and states other terms that vary from the offer. This is a highly unlikely version of the "first shot" problem and subsection (b)(4) applies. Again, terms in the seller's record are not part of the contract unless the buyer has expressly agreed to them.

(d) Both parties exchange records.

Subsection (b) applies if the contract is created by offer and acceptance and both the offer and the acceptance are in records. Both the "first" and "last" shot are neutralized and ambiguous conduct does not bring excluded terms back into the agreement. There must be express agreement.

Subsection (b) also applies if the contract is formed by conduct rather than by offer and acceptance. Again, if terms in the records are excluded because the records do not agree in substance, those excluded terms are not brought into the agreement by ambiguous conduct. Thus, if the seller seeks to include a term in its record and the buyer also has a record, the seller's term is out to the extent that the records do not agree. The would not agree unless both parties had a term on the same matter, e.g., notice time for breach of warranty, and the terms agreed in substance, e.g., 20 days vs. 18 days. This is the "knock out" rule in current Section 2-207(3) and Article 2.22 of the UNIDROIT Principles, except that the "knock out" does not depend upon standard terms. Hence, revised Section 2-207 deals with the "battle of the records." In these cases, the crucial question is how to treat the excluded terms. Can they still become part of the agreement? The answer is found in subsection (b)(4): The answer is yes if, after their initial exclusion, the parties expressly agree to them.

(e) Confirmations.

Section 2-207(c) deals specifically with records that confirm a contract previously made. Compare Section 2-202(b), dealing with confirmations for purposes of the statute of frauds.

Suppose Seller and Buyer conclude an oral contract not subject to the statute of frauds or a contract for sale through "informal" correspondence. Later, Seller sends a record confirming the agreement and containing terms that vary the contract. What is the effect of the varying terms?

Original Section 2-207(1) provided that a "written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those . . . agreed upon." Thus, the confirmation was treated as an acceptance rather than a proposal to modify the contract and the additional or different terms became part of the contract only if Section 2-207(2) was satisfied. The problem was complicated where an earlier oral agreement was unenforceable under the statute of frauds and the writing both satisfied the statute between merchants, see Section 2-202(2), and proposed additional or different terms. Furthermore, a confirmation proposing additional or different terms and expressly conditioning the contract upon agreement to them is probably a repudiation rather than an acceptance or a proposal for modification.

Under subsection (d), only terms in the confirmation that do not materially vary the contract and are not seasonably objected to become part of the contract. Terms which materially vary the contract are excluded unless there is a modification in good faith which satisfies Section 2-210(a). This analysis applies if either or both parties attempt to confirm the earlier agreement.

(f) "My way or no way."

Section 2-203(d) recognizes that a party may condition its willingness to contract upon the other party's agreement to terms proposed and states that states that conspicuous language in a record that will prevent the formation of a contract on the exchange of records with varying terms but will not prevent a contract if there is "conduct of both parties recognizing the existence of a contract." Section 2-203(a). In cases of mutual conduct, what is the effect of the "my way or no way" provision? If the drafter cannot claim there is no contract, can it claim that the contract (based upon conduct) is on the terms in its record?

The reporters believe that the default rule in Section 2-207(b) should prevail over the express condition. The "knockout" rule eliminate terms upon which the writings do not agree and the requirement of express agreement prevents terms that were excluded from being incorporated simply because the parties have performed part or all of the agreement.

How should this result be implemented in the statute? In principle a party who expressly conditions its willingness to contract on agreement to specific terms and then ships the goods or accepts the goods without first obtaining that agreement should be precluded from relying on the condition.

SECTION 2-208. COURSE OF PERFORMANCE OR PRACTICAL CONSTRUCTION.

(a) A "course of performance" is a sequence of conduct between the parties to a particular transaction that exists if:

(1) the agreement of the parties with respect to the transaction involves repeated occasions for performance by a party;

(2) that party performs on one or more occasions; and

(3) the other party, with knowledge of the nature of the performance and opportunity for objection to it, accepts the performance or acquiesces in it without objection.

(b) A course of performance between the parties is relevant to ascertaining the meaning of the parties' agreement, may give particular meaning to specific terms of the agreement, and may supplement or qualify the terms of the agreement.

(c) Except as otherwise provided in subsection (d), the express terms of an agreement and any applicable course of performance, course of dealing, or usage of trade must be construed whenever reasonable as consistent with each other. If such construction is unreasonable:

(1) express terms prevail over course of performance, course of dealing, and usage of trade;

(2) course of performance prevails over course of dealing and usage of trade; and

(3) course of dealing prevails over usage of trade.

(d) Subject to Section 2-210, course of performance is relevant to show a waiver or modification of a term inconsistent with the course of performance.

SOURCE: Sales, Section 2-208.

This section has been conformed to revised Section 1-304(a) and, ultimately, will be moved to Article 1.

SECTION 2-209. MODIFICATION, RESCISSION, AND WAIVER.

(a) An agreement made in good faith which modifies a contract under this article is binding without consideration.

(b) Except in a consumer contract, a contract that contains a term that excludes modification or rescission except by an authenticated record may not be otherwise modified or rescinded. However, a party whose language or conduct is inconsistent with the term requiring an authenticated record may not assert that term if the language or conduct induced the other party to change its position reasonably and in good faith.

(c) Subject to subsection (b), a term in a contract may be waived by the party for whose benefit it was included. Language, conduct or a course of performance between the parties may be relevant to show a waiver. The waiver of an executory portion of a contract, however, may be retracted by seasonable notification received by the other party that strict performance is required of any term waived unless the waiver induced the other party to change its position reasonably and in good faith.

SOURCE: Sales, Section 2-209.

1. There are several changes in revised Section 2-210 [formerly Section 2-209 of the 1990 Official Text].

First, the requirement that a modifying agreement must be made in good faith, previously found in a Comment, is explicitly stated in subsection (a). This follows the cases, see, e.g., Roth Steel Products v. Sharon Steel Corp., 705 F.2d 134 (6th Cir. 1983), and avoids the argument that a contract modification is neither the "performance or enforcement" of a contract under Section 1-203. This revision is rejected in Section 2B-303.

Second, subsection (b) in the May, 1997 Draft has been deleted. If the original contract satisfied the statute of frauds there is no requirement that the modification also satisfy the statute. If, however, the original agreement or the original agreement coupled with the modification are within the statute and do not satisfy it, the modified agreement is unenforceable. This deletion both protects oral modifications of agreements that comply with the statute and simplifies a problem that has puzzled the commentators and the courts. See, e.g., Costco Wholesale Corp. v. Worldwide Licensing, 898 P.2d 347 (Wash.App. 1995).

Third, except in a consumer contract the parties may agree in a contract that an authenticated record is required to modify or rescind the contract. In short, the parties create their own statute of frauds in the form of an express condition. Short of compliance, the only way to avoid this limitation is by the estoppel test stated in subsection (b). In short, the party seeking to invoke the NOM clause may be estopped if language or conduct inconsistent with the NOM clause have induced reasonable, good faith reliance by the other party on an oral modification. See Brookside Farms v. Mama Rizzo's, Inc., 873 F. Supp. 1029 (S.D. Tex. 1995). This result is consistent with the estoppel exception built into revised Section 2-201(c)(3).

2. Subsection (c) recognizes the general principle of waiver where NOM clauses are not involved. Terms for the benefit of one party may be waived by one party without agreement by the other. These terms will normally be express conditions upon an agreed or promised performance, such as a condition of notice.

There are three types of waiver. In the first, called election waiver, the party for whose benefit a condition is included elects not to insist upon the condition after the time for its occurrence has passed. The condition is excused without a need to prove reliance by the other party. Election waiver is included in the first sentence of subsection (c). In the second, called reliance waiver, the party for whose benefit a condition is included states that he will not insist upon the occurrence of a condition in the future. Here, however, the waiver may be retracted unless the other party has changed its position "reasonably and good faith." Subsection (c), last sentence. In the third, the court simply excuses the condition when its nonoccurrence would cause "disproportionate forfeiture" and the occurrence of the condition was not a "material part of the agreed exchange." Restatement, Second, Contracts 229. See Aetna Casualty and Surety Co. v. Murphy, 538 A.2d 219 (Conn. 1988) (burden on party seeking excuse to prove that condition was not a material part of exchange).

To illustrate, suppose the contract contains a NOM clause and a schedule for installment deliveries by the seller. The seller encounters production problems, misses a due date and requests an extension of delivery time from the buyer. First, suppose the buyer states that it will not insist on the NOM condition and orally agrees to a time extension. The seller does not request a written modification and proceeds to deliver under the modified schedule. Later, the seller invokes the NOM clause and sues for damages caused by late delivery. Here, the NOM clause is waived under subsection (b) by language inconsistent with the term which induced reasonable, good faith reliance and the agreed modification of the delivery schedule, if in good faith, is enforceable under subsection (a). Second, suppose the buyer states that the late delivery is excused and orally agrees to a time extension. The seller, without obtaining a written modification, proceeds under the modified schedule. Later, the buyer invokes the NOM clause and sues the seller for damages arising from late delivery. Once again, the NOM clause was waived under subsection (b).

Although a party may waive one late installment, an agreement to modify the time of future deliveries is not necessarily enforceable. It must be either a "good faith" agreement under subsection (a) or induce reasonable, good faith reliance under subsection (d). The doctrine of waiver is not available to create or modify agreed duties under the contract. Compare Sections 2-604 and 2-702.

SECTION 2-210. ATTRIBUTION PROCEDURE.

(a) An attribution procedure is a procedure established by agreement or mutually adopted by the parties for the purpose of verifying that electronic records, messages, or performances are those of the respective parties or for detecting errors in the transmission or informational content of an electronic message, record, or performance, if the procedure is commercially reasonable.

(b) The commercial reasonableness of an attribution procedure is a question of law to be determined by the court in light of the purposes of the procedure and the commercial circumstances at the time of the agreement. An attribution procedure may require the use of algorithms or other codes, identifying words or numbers, encryption, callback procedures, key escrow, or any security devices that are reasonable under the circumstances."

SOURCE: Section 2B-110 (May, 1997).

SECTION 2-211. ATTRIBUTION OF ELECTRONIC RECORD, MESSAGE, OR PERFORMANCE.

(a) As between the parties, an electronic message, record, or performance received by a party is attributable to the party indicated as the sender if:

(1) it was sent by that party, its agent, or its electronic agent;

(2) the receiving party, in good faith and in compliance with an attribution procedure concluded that it was sent by the other party; or

(3) subject to subsection (b), the message or performance:

(A) resulted from acts of a person that obtained access to access numbers, codes, computer programs, or the like from a source under the control of the alleged sender creating the appearance that it came from the alleged sender;

(B) the access occurred under circumstances constituting a failure to exercise reasonable care by the alleged sender; and

(C) the receiving party reasonably relied to its detriment on the apparent source of the message or performance.

(b) In a case governed by subsection (a)(3), the following rules apply:

(1) The receiving party has the burden of proving reasonable reliance, and the alleged sender has the burden of proving reasonable care.

(2) Reliance on an electronic record or performance that does not comply with an agreed authentication procedure is not reasonable unless authorized by an individual representing the alleged sender.

(c) If an electronic message was transmitted pursuant to an attribution procedure for the detection of error and the message contained an error the following rules apply:

(1) If the sender complied with the attribution procedure and the error would have been detected had the receiving party also complied with the attribution procedure, the sender is not bound if the error relates to a material element of the message or performance.

(2) If the sender receives a notice required by the attribution procedure of the content of the message or performance as received, the sender has a duty to in a commercially reasonable manner review the notice and report any error detected by it.

(d) Except as otherwise provided in subsection (a)(1) and (c), if a loss occurs because a party complies with a procedure for attribution that was not commercially reasonable, the party that required use of the procedure bears the loss unless it disclosed the nature of the risk to the other party or offered commercially reasonable alternatives that the party rejected. The party's liability under this section is limited to losses that could not have been prevented by the exercise of reasonable care by the other party.

SECTION 2-212. AUTHENTICATION EFFECT AND PROOF; ELECTRONIC AGENT AUTHENTICATION.

(a) An authentication is intended to establish the party's identity, its adoption and acceptance of a record or a term, and the authenticity of the record or term.

(b) Operations of an electronic agent constitute the authentication of a party if the party designed, programmed, or selected the electronic agent for the purpose of achieving results of that type.

(c) A record or message is authenticated as a matter of law if a party complied with an attribution procedure for authentication. Otherwise, authentication may be proven in any manner including by showing that a procedure existed by which a party necessarily must have executed or adopted a symbol in order to proceed further in the use or processing of the information.

SOURCE: Section 2B-114 (May, 1997).

SECTION 2-213. ELECTRONIC TRANSACTIONS AND MESSAGES: TIMING OF CONTRACT AND EFFECTIVENESS OF MESSAGE.

(a) If an electronic message initiated by a party or an electronic agent evokes an electronic response and the messages reflect an intent to be bound, a contract exists when:

(1) the response signifying acceptance is received; or

(2) if the response consists of electronically furnishing the requested information or notice of access to the information, when the information or notice is received unless the originating message prohibited that form of response.

(b) Subsection to Section 2-211, an electronic message is effective when received, even if no individual is aware of its receipt.

(c) Subject to subsection (d), operations of one or more electronic agents which confirm the existence of an agreement are effective to form an agreement even if no individual representing either party was aware of or reviewed the action or its results.

(d) In an electronic transaction, the following rules apply:

(1) An agreement is formed by the interaction of two electronic agents if the interaction results in both agents each engaging in operations that signify agreement, such as by engaging in performing the agreement, ordering or instructing performance, accepting performance, or making a record of the existence of an agreement.

(2) An agreement may be formed by the interaction of an electronic agent and an individual. An agreement is formed if an individual has reason to know that the individual is dealing with an electronic agent and performs actions the person should know will cause the agent to perform or to permit further use, or that are clearly indicated as constituting acceptance regardless of other contemporaneous expressions by the individual to which the electronic agent cannot react.

(3) The terms of the contract include terms on which the parties have previously agreed, terms which the electronic agents could take into account, and, terms provided by this article or other law.

SOURCES: Sections 2B-204, 2B-203(e) and (f) (May, 1997).

SECTION 2-214. ACKNOWLEDGMENT OF ELECTRONIC MESSAGE.

(a) If the originator of an electronic message requests or has agreed with the addressee of the message that receipt of the message must be acknowledged electronically, the following rules apply:

(1) If the originator indicated in the message or otherwise that the message was conditional on receipt of an acknowledgment, the message does not bind the originator until acknowledgment is received and [the message] lapses if acknowledgment is not received in a reasonable time.

(2) If the originator requested acknowledgment but did not state the message was conditional on acknowledgment and acknowledgment has not been received within a reasonable tune after the message was sent, on notice to the other party, the originator may either retract the message or specify a further reasonable time within which acknowledgment must be received or the message will be treated as not having binding effect. If acknowledgment is not received within that additional time, the originator may treat the message as not having binding effect.

(3) If the originator requested acknowledgment and specified a time for receipt, the originator may exercise the options in subsection (a)(2) if receipt does not occur within that time.

(b) Receipt of acknowledgment establishes that the message was received but does not in itself establish that the content sent corresponds to the content received.

SOURCE: Section 2B-205 (May, 1997).

SECTION 2-301. HOW CONTRACT PRICE PAYABLE.

(a) The contract price may be made payable in money or otherwise.

(b) If the contract price is payable in whole or in part in goods, each transferor is a seller for the purposes of this article with respect to the goods transferred.

(c) If all or part of the contract price is payable in an interest in real property, this article applies to the transfer of goods but not to the transfer of the interest in real property.

SOURCE: Sales, Section 2-304.

There are no substantive changes in former Section 2-304.

SECTION 2-302. PERFORMANCE AT SINGLE TIME.

(a) If all of a seller's performance can be rendered at one time, the performance is due at one time and the buyer's reciprocal performance is due only on tender of full performance.

(b) If circumstances give either party the right to make or demand performance in parts or over a period of time, payment, if it can be apportioned, may be demanded for each part performance.

(c) If payment cannot be apportioned or the agreement or the circumstances indicate that payment may not be demanded for part performance, payment is due on completion of full performance.

SOURCE: Sales, Section 2-307.

1. This is an elaboration of former Section 2-307 and clarifies when a party's performance is due at one time and what the other party's duties are on full performance. Subsection (a) follows Section 2B-603. Subsections (b) and (c), which state when, in the absence of an agreed installment contract, a part performance is permitted and how payment is to be apportioned, follow Section 2B-604. Except for covering the obligations of both seller and buyer, no changes of substance are intended.

2. The factors justifying delivery in more than a single lot include the type of disruptive circumstances, the alternatives reasonably available and the understanding that the parties will make up any deficiencies within a reasonable time. Thus, if the seller agreed to deliver 10 carloads and, because of a railroad strike, only three cars were available at the time of delivery and the cost of alternative transportation was high, the seller is probably obligated to tender three carloads. Assuming reasonable efforts, the balance is due as cars become available.

This section should be distinguished from Section 2-715, which deals with excuse and substitute performance when changed circumstances disrupt agreed methods of shipment, delivery or payment. Presumably, it takes less disruption to vary a "default" rule than to excuse an agreed performance.

3. The operation of Section 2-302 creates an installment contract, i.e., goods delivered "in separate lots to be separately accepted." Section 2-710(1). But it is not a credit installment contract: payment for each lot is due upon tender. This makes sense if payment for the single lot was due upon tender. But suppose the contract said nothing about the quantity to be delivered and the parties agreed upon 30 days credit. If circumstances justify delivery in lots, is payment for each lot due 30 days after delivery or must payment be made upon tender? The answer should be that the agreed credit term survives and payment is not due until all of the goods are tendered. Only the "default" rule is altered by circumstances.

4. Clearly, the installment contract created by Section 2-302 is by operation of law. It in no way interferes with the parties's power to create by agreement an installment contract where payment is due after the goods are tendered and accepted.

SECTION 2-303. OPEN-PRICE TERM.

(a) The parties, if they so intend, may form a contract for sale even if the price is:

(1) not agreed to;

(2) left to be agreed by the parties and they fail to agree; or

(3) to be fixed in terms of some agreed market or other standard as set or recorded by a third party or agency and it is not so set or recorded.

(b) If a contract formed under subsection (a), the price is a reasonable price at the time that the seller is required by the contract to make delivery.

(c) A price to be fixed by the seller or the buyer must be fixed in good faith.

(d) If a price left to be fixed otherwise than by agreement of the parties fails to be fixed through fault of one party, the other party at that party's option may treat the contract as canceled or may fix a reasonable price.

(e) If the parties intend not to be bound unless the contract price is fixed or agreed to and it is not fixed or agreed to, a contract is not formed. In that case, the buyer shall return any goods already received or, if unable to do so, pay their reasonable value at the time of transfer, and the seller shall return any portion of the contract price paid on account.

SOURCE: Sales, Section 2-305.

There are no revision of substance in former Section 2-305.

SECTION 2-304. OUTPUT, REQUIREMENTS, AND EXCLUSIVE DEALING.

(a) A contractual term that measures the quantity of goods by the output of the seller or the requirements of the buyer means the actual output or requirements that may occur in good faith. A party may not offer or demand a quantity unreasonably disproportionate to a stated estimate or, in the absence of a stated estimate, to any normal or otherwise comparable previous output or requirements unless there are no outputs or requirements in good faith.

(b) An agreement for exclusive dealing in the kind of goods concerned imposes an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.

SOURCE: Sales, Section 2-306.

1. Section 2-304(a), which conforms in substance to Section 2B-306(a), has several objectives.

First, it states the meaning of "output" and "requirements" terms when used in a contract for sale. Such terms do not cause a contract to fail for indefiniteness. See Section 2-203(c). The parties may agree upon a fixed quantity or no quantity or something in between. But unless the parties agree to measure all or part of the quantity by "output" or "requirements," Section 2-304(a) does not apply. See Lenape Resources Corp. v. Tennessee Gas Pipeline Co., 925 S.W. 2d 759 (Tex. 1996) (good faith increases in output subject to "take or pay" provision).

Second, it imposes a duty of good faith on the exercise of discretion by either party to determine the level of output or requirements. Section 2-306(a), however, does not require that there must be an exclusive dealing arrangement before an output or requirements term is enforceable. Although some states require exclusive dealing, see Essco Geometric v. Harvard Industries, 46 F.3d 718 (8th Cir. 1995) (Missouri law), this extreme position is rejected. The term should be enforceable where the seller or buyer agrees to supply or demand all or part of its output or requirements to or from the other. See Advent Systems Ltd. v. Unisys Corp., 925 F.2d 670 (3d Cir. 1991) (non-exclusive requirements term satisfies statute of frauds); Restatement (Second) Contracts 79(c) (where consideration requirement is met there is no additional requirement of mutuality of obligation). For example, a term where the buyer agrees to buy 10% of its actual requirements in good faith from the seller should be enforceable. On the other hand, the buyer would not have the additional obligation to use "best efforts" unless there was an exclusive dealing contract. Section 2-306(2). See Tigg Corp. v. Dow Corning Corp., 962 F.2d 1119 (3d Cir. 1992).

Third, it clarifies that if there are no actual output or requirements in good faith, the party has no duty to perform even though there are estimates in the contract or there were prior output or requirements. The question is whether the lack of output or requirements occurred in good faith, not whether the lack of actual output or requirements was "unreasonably disproportionate." This follows the interpretation of prior Section 2-306(1) in Empire Gas Corp. v. American Bakeries Co., 840 F.2d 1333 (7th Cir. 1988), but rejects the court's dictum that the unreasonably disproportionate limitation is not applicable to any decrease in quantity or requirements. See also, Tigg Corp. v. Dow Corning Corp., 962 F.2d 1119 (3d Cir. 1992).

Fourth, the question when a party with no actual output or requirements has acted in good faith is more difficult to answer. Some courts have drawn the line between decisions made because the contract is simply unprofitable or too costly (bad faith) and those made because an event external to the contract has adversely affected the viability of the entire enterprise (good faith). The traditional definitions of good faith, see Section 2-103(1)(b) of the 1990 Official Text, do not clearly respond to this problem. At least one court has held, however, that bad faith is established if the party claiming no actual requirements fails to offer a reason for that situation. See Empire Gas Corp., supra.

Fifth, in cases where there are some actual output or requirements in good faith, Section 2-304(a) further controls the exercise of discretion by requiring a reasonable proportion between agreed estimates or prior comparable output or requirements and the goods actually supplied or ordered. Suppose, for example, that the buyer estimated its requirements to be 50,000 units per year. Over a five year period, the buyer's orders averaged between 45,000 to 55,000 per year. In the 6th year, buyer's actual requirements in good faith were 80,000 per year. If 80,000 units were ordered, the question is whether the quantity is "unreasonably disproportionate" to the stated estimate and this question is answered more by the size of the variations and whether they were reasonably foreseeable at the time of the contract than the motives of the buyer or seller. See Orange & Rockland v. Amerada Hess Corp., 397 N.Y.S.2d 814 (N.Y.A.D. 1977).

2. Section 2-304(b) deals with an exclusive dealing agreement in a contract where the requirements of a buyer depend upon the resale market demand for them. Unless otherwise agreed, the seller must use "best efforts" to supply those requirements. On the other hand, if the buyer has X requirements in good faith, the seller can insist that the buyer use "best efforts to promote their sale." Actual requirements in good faith are not enough. Unlike Section 2B-306(c) and (d), no effort is made in this Draft to state a standard for "best efforts."

SECTION 2-305. ABSENCE OF SPECIFICATION OF PLACE FOR DELIVERY.

(a) The place for delivery of goods is the seller's place of business or, if there is none, the seller's residence.

(b) In a contract for sale of identified goods that to the knowledge of the parties at the time of contracting are in some place other than that described in subsection (a), that place is the place for their delivery.

(c) Documents of title may be delivered through customary banking channels.

SOURCE: Sales, Section 2-308.

There are no revisions of substance in former Section 2-308. See Section 2B-203(b).

SECTION 2-306. TIME FOR PERFORMANCE NOT SPECIFIED.

(a) Except as otherwise expressly provided in this article, the time for performance or any other action under an agreement in which a time for performance is not specified is a reasonable time.

(b) If an agreement provides for successive performances but is indefinite in duration, the duration of the agreement is a reasonable time. Subject to Section 2-311, either party may terminate the contract at any time.

SOURCE: Sales, Section 2-309(1) and (2).

1. Section 2-306 adopts without change the provisions for time and duration of performance found in Section 2-309(a) and (b) of the December, 1994 Draft. Termination of the contract, previously covered in Section 2-309(c), is now covered in Section 2-311. This conforms in substance to Section 2B-315.

2. The basic "gap filler" for time is a "reasonable time," defined in Section 1-204(2). Where the statute requires action to be taken within a reasonable time, however, "any time which is not manifestly unreasonable may be fixed by agreement." Section 1-204(1).

3. If the agreement is for "successive performances" but is indefinite in duration, the duration is a reasonable time. Subsection (b). The contract, however, is terminable at will by either party, subject to the notice requirement in Section 2-311(a).

SECTION 2-307. OPTIONS AND COOPERATION RESPECTING PERFORMANCE.

(a) An agreement that is otherwise sufficiently definite to be a contract is enforceable even if it leaves particulars of performance open, to be specified by one of the parties, or to be fixed by agreement.

(b) If one party is required to specify the particulars of performance, the specification must be made in good faith and within limits of commercial reasonableness.

(c) An agreement providing that the performance of the seller be to the satisfaction of the buyer without further specifying the standard of performance requires that the performance be such that a reasonable person in the position of the buyer would be satisfied.

(d) A specification relating to an assortment of goods is at the buyer's option. Except as otherwise provided in subsection (e), a specification or arrangement relating to shipment is at the seller's option.

(e) If a specification by one party would materially affect the other party's performance but is not seasonably made or one party's cooperation is necessary to the agreed performance of the other but is not seasonably forthcoming, the other party, in addition to all other remedies:

(1) is excused for any resulting delay in the party's own performance; and

(2) may proceed to perform in any reasonable manner or, after the time for a material part of the party's own performance, treat the failure to specify or cooperate as a breach of contract.

SOURCE: Sales, Section 2-311.

SECTION 2-308. FAILURE TO PAY BY AGREED CREDIT.

(a) In this section, "agreed letter of credit" means a letter of credit that carries the direct obligation of a confirmer or financing agency.

(b) Failure of a party seasonably to furnish an agreed letter of credit is a breach of a contract for sale.

(c) Delivery to a seller of an agreed letter of credit intended as the primary method of payment suspends the buyer's obligation to pay. If the letter of credit is dishonored, the seller on seasonable notification may require payment directly from the buyer.

(d) The term "confirmed letter of credit" in a contract for sale means an irrevocable letter of credit that carries the direct obligation of a confirmer in the beneficiary's financial market.

SOURCE: Sales, Section 2-325.

Section 2-308, formerly Section 2-325 of the 1990 Official Text, states the effect of supplying or failing to supply an agreed letter of credit. Letter of credit is defined with reference to Section 5-102(a)(10) of the 1995 Official Text. All other aspects of the letter of credit transaction are covered by revised Article 5.

SECTION 2-309. SHIPMENT TERMS; SOURCE OF MEANING. The effect of a party's use of shipment terms such as "FOB", "CIF", or the like, must be interpreted in light of applicable usage of trade and any course of performance or course of dealing between the parties.

SOURCE: Sales, Sections 2-319, 2-320, 2-321, 2-322, 2-324.

1. In the May, 1994 Draft, Sections 2-319 through 2-324, dealing with shipment and delivery terms, were deleted. The conclusion was that these terms were out of date with current practice.

2. Section 2-309 is a first step toward filling the gap on delivery terms. If the meaning of a stated shipment or delivery term cannot be found in the agreement or an applicable usage of trade, the meaning may be determined by reference of the Incoterms of the International Chamber of Commerce. Thus, if any applicable usage of trade, course of performance, or course of dealing is not shown, the meaning of shipment terms used in an agreement may be interpreted by reference to the Incoterms published by the International Chamber of Commerce

3. There are many new commercial terms which have come into use, especially in international transactions, since the drafting of the original Article 2. Their terms evolve over time, and a statutory definition cannot respond adequately to changes in commercial practice.

Under the original Article 2, "FOB" could be used to refer either to "FOB place of shipment" or "FOB place of destination," so that it could be used in either a shipment or a destination contract. Where it was used in a shipment contract, the norm has been for the seller to arrange transportation and insurance. It could be used with any type of carriage - land, sea, or air.

The I.C.C.'s Incoterms are often used in international transactions and have a more restricted meaning for FOB, so that it should be used only with water-borne contracts of carriage. Under Incoterms FOB commercial term, the seller is obligated to deliver the goods on board a ship arranged for and named by the buyer at a named port of shipment. Thus, the seller must bear the costs and risks of both inland transportation to the named port of shipment and loading the goods on the ship. The seller has no obligation to arrange transportation or insurance, but does have a duty to notify the buyer at the time the goods have been delivered on ship. The risk of loss transfers to the buyer at the time the goods have passed the ship's rail. The seller must provide a commercial invoice, or its equivalent electronic message, an necessary export license, and usually a transport document that will allow the buyer to take delivery - or an equivalent electronic data interchange message. For a broader treatment, see John A. Spanogle, Incoterms and UCC Article 2 - Conflicts and Confusions, 31 The International Lawyer 111(1997).

SECTION 2-310. TERMINATION; SURVIVAL OF OBLIGATIONS AND TERMS.

(a) Except as otherwise provided in subsection (b), on termination of a contract, all obligations that are still executory on both sides are discharged.

(b) The following survive termination of a contract:

(1) a right based on a previous breach or performance of the contract;

(2) a term limiting the scope, manner, method, or location of the exercise of rights in the goods;

(3) an obligation of confidentiality, nondisclosure, or noncompetition;

(4) an obligation to return or dispose of goods;

(5) a choice of law or forum ;

(6) an obligation to arbitrate or otherwise resolve disputes through alternative dispute resolution procedures;

(7) a term limiting the time for commencing an action or for providing notice;

(8) an indemnity term;

(9) a limitation of remedy or modification or disclaimer of warranty;

(10) any term limiting disclosure of information; and

(11) other rights, remedies, or limitations if in the circumstances such survival is necessary to achieve the purposes of the parties.

(c) The obligation under subsection (b)(3) must be promptly performed."

SOURCE: Licenses, Section 2B-617.

1. Section 2-310 states what obligations survive a termination. See former Section 2-106(4). "Termination" is defined as an act which ends a contract for other than breach. See Section 2-102(a)(30).

2. Section 2-310 has been conformed to Section 2B-626.

SECTION 2-311. TERMINATION; NOTIFICATION.

(a) A party may not terminate a contract, except on the happening of an agreed event, such as the expiration of the stated term, unless the other party receives notice of the termination and is given a reasonable time before the termination is effective.

(b) A term dispensing with notification is invalid if its operation is unconscionable. However, a term specifying standards for the nature and timing of notification is enforceable if the standards are not manifestly unreasonable.

SOURCE: Sales, Section 2-309(3).

1. Assuming that a party has power to terminate the contract, Section 2-311(a) states when notice is a condition precedent to termination and subsection (b) limits agreements attempting to dispense with the notice requirement. See former Section 2-309(3). In short, the power to terminate at will is conditioned upon the receipt by the other party of "notification" which gives a reasonable time before the termination is effective. "Reasonable time," in turn, "depends on the nature, purpose and circumstances of such action." Section 1-204(2).

There are three exceptions to this important default rule.

First, notice is not required if the contract provides that termination will occur on the "happening of an agreed event." For example, if the parties in a requirements contract agree that the contract is terminated if the buyer has no actual requirements in good faith, a termination notice is not required.

Second, the parties can agree on what is reasonable notification, if the agreement is not "manifestly unreasonable." Section 1-204(1). Franchise and distributorship contracts typically provide for 30, 60 or 90 days notice and the courts have generally upheld such time provisions as reasonable.

Finally, the parties can agree to dispense with notification, unless the "operation" of that agreement "is unconscionable." Compare Section 1-105, which ties unconscionability to the time of contracting.

The last two limitations relate to the other party's investment in the contract and the opportunity to salvage and reinvest after termination. Thus, if the contract investment is substantial and the reinvestment process is difficult, the more likely it is that, say, an agreed 10 day notice is unreasonable or that an agreement dispensing with notice operates in an unconscionable manner. The assumption is that except for part performance under the contract, the terminated party assumes the financial risk of a proper termination.

3. Without more, the exercise of an agreed power to terminate is also subject to the duty of good faith, Section 1-203, which cannot be disclaimed by agreement. Section 1-102(3). Many courts, however, have found good faith where the terminating party follows the terms of the agreement. Under this approach, the motive of the terminating party is irrelevant and the agreed termination is effective if a reasonable notice is given. But see Sons of Thunder, Inc. v. Borden, Inc., 690 A.2d 575 (N.J. 1997), extending the scope of the good faith duty beyond this limited approach.

SECTION 2-312. SALE BY AUCTION.

(a) In a sale by auction, if goods are put up in lots, each lot is the subject of a separate sale.

(b) A sale by auction is complete when the auctioneer so announces by the fall of the hammer or in any other customary manner. If a bid is made during the process of completing the sale but before a prior bid is accepted, the auctioneer may in its discretion reopen the bidding or declare the goods sold under the prior bid.

(c) A sale by auction is subject to the seller's power to withdraw the goods unless at the time the goods are put up or during the course of the auction it is announced in express terms that the power to withdraw the goods is not reserved. In an auction where power to withdraw the goods is reserved, the auctioneer may withdraw the goods at any time until completion of the sale is announced. In an auction where power to withdraw the goods is not reserved, after the auctioneer calls for bids on an article or lot, the article or lot may not be withdrawn unless no bid is made within a reasonable time. In either case, a bidder may retract a bid until the auctioneer's announcement of completion of the sale, but a bidder's retraction does not revive any previous bid.

(d) If an auctioneer knowingly receives a bid on a seller's behalf or the seller makes or procures a bid, and notice has not been given that authority for such bidding is reserved, the buyer at the buyer's option may avoid the sale or take the goods at the price of the last bid made in good faith before the completion of the sale. This subsection does not apply to a bid at an auction required by law.

SOURCE: Sales, Section 2-328.

No revisions of substance are proposed in former Section 2-318. There are relatively few cases and they reveal no significant problems of interpretation. For a focused analysis, see Jorge Contreras, The Art Auctioneer: Duties and Assumptions, 13 Hastings Comm./Ent. L. J. 717 (1991); Patty Gerstenblith, Picture Imperfect: Attempted Regulation of the Art Market, 29 Wm. & Mary L. Rev. 501 (1988).

1. In a "sale by auction" the auctioneer "invites price offers from successive bidders which he may accept or reject." Restatement (Second), Contracts 28(1). Although not specifically stated, an auctioneer can condition delivery upon payment for all goods sold, even if the sale is in separate lots. If each lot is a separate sale, bidders who arrive late are on constructive notice of the terms of later sales. Restatement (Second), Contracts 28(2).

2. In subsection (b), the quaint phrase "fall of the hammer" is preserved in the first sentence but not thereafter. The more inclusive phrase "during the process of completing the sale" is used rather than "while the hammer is falling."

3. Under subsection (c), the default rule is that the sale is "subject to the seller's power to withdraw the goods." Thus, the auctioneer invites bids (offers), reserves the power to accept or reject them and bidders assume the risk that the goods will be withdrawn before the sale is concluded. The contract is concluded, however, when the completion of the sale is announced. See Sly v. First Nat'l Bank of Scottsboro, 387 So.2d 198 (Ala. 1980); Restatement (Second), Contracts 26, 28, Comment b.

If it is announced in "express terms" that the auction is not subject to the seller's power to withdraw the goods, a contract is not formed until some bid is made within a reasonable time and not withdrawn by the bidder before the auctioneer announces the completion of the sale. Both parties have some discretion (the auctioneer's is more limited) after the bid is made. This supports the conclusion that the contract is formed at the place where the auctioneer accepts the bid, rather than at the point where the bid is made, whether made by mail or through EDI.

Because of different usage, the phrases "with reserve" and "without reserve" are no longer used in the text. Nevertheless, auction sales subject to the seller's power to withdraw the goods are known as sales "with reserve," while auction sales where the seller has no power to withdraw the goods are known as sales "without reserve" or "absolute" sales.

The assumption is that a seller, at a minimum, must give notice if it bids at an "unforced" auction and some auctioneer's believe that the seller should not be able to bid at all at a sale where the seller has no power to withdraw the goods.

Suppose, during the course of an auction where the seller reserves power to withdraw the goods, the auctioneer expressly announces that the seller no longer reserves power to withdraw the goods. Original Section 2-328(3) did not recognize this conversion possibility, which exists in practice. Such a conversion, in effect, announces a "reserve bid" in that the goods will not be sold below the last bid before the conversion. Presumably, a sale "without reserve" can also be converted to a sale "with reserve" during the course of the auction. For a case holding that the goods were not in "explicit terms" put up without reserve where the auctioneer stated that there was no minimum bid and the goods would be sold to the highest bidder, see Miami Aviation Serv. v. Greyhound Leasing & Financé Corp., 856 F.2d 166 (11th Cir. 1988).

Subsection (c) does not deal with the so-called conditional sale, where final approval after the sale is concluded is reserved to the seller, a secured party or a court. These conditions are enforced by the courts. Lawrence Paper Co. v. Rosen & Co., 939 F.2d 376 (6th Cir. 1991). Language dealing with the "conditional sale," a third method of sale by auction, has not been added.

4. A sale where the seller reserves power to withdraw the goods at any time should be distinguished from bids by the seller without proper notice. The latter problem, which raises questions of rigged or fraudulent bidding, is addressed in subsection (d). See Vanier v. Ponsoldt, 833 P.2d 949 (Kan. 1992) (bid rigging).

Although subsection (d) is silent, the courts have required a bidder to take action to avoid the sale or take the goods at the last good faith bid within a reasonable time after he discovered or should have discovered the operative facts.

The last sentence of Section 2-328(4) of the 1995 Official Text states that the subsection does not apply to a "forced sale." To avoid conflicts with auction sales under Article 9 and Section 2-819(c), this phrase has been replaced by "an auction required by law." Resales under Article 2 and dispositions under Article 9 are permitted, not required by law. It is assumed that creditors can bid at auctions required by statute or court order without giving notice, unless notice is required by applicable law.

Note, however, that in a public auction to implement a resale following a breach of contract, the requirements of Section 2-819(c) must be met before the seller is entitled to the remedy in Section 2-819(a).

5. Auctions, warranties and disclaimers.

In Part 4, Warranties, "Seller" is defined to include "an auctioneer or liquidator that fails to disclose that it is acting on behalf of a principal." Section 2-401(5). There is no requirement that the auctioneer disclose the name or names of any principals before or after the sale.

An auctioneer who does not disclose that it is acting on behalf of a principal may make any warranty described in Part 4, including a warranty of title. Otherwise, applicable warranties are made to the buyer by the seller, the auctioneer's principal.

Section 2-403 provides that express warranties may be made by a seller (auctioneer or principal) to an immediate buyer (the bidder), both through representations made at or just prior to the auction or in a "medium for communication to the public, including advertising." As a practical matter, implied warranties are rarely made at auctions and, in any event, it is the usual practice of the auction industry to offer goods "as is, where is" with no implied warranties made by the auctioneer. To facilitate this practice, Section 2-407(e) provides that in a consumer auction contract , disclaimers or modifications of implied warranties that satisfy subsections (b) or (c) of Section 2-407 are effective.

SECTION 2-401. DEFINITIONS. In this part:

(1) "Damage" means all loss resulting in the ordinary course from a breach of warranty, including injury to a person or property as permitted in Section 2-806.

(2) "Goods" includes a component incorporated in substantially the same condition into other goods.

(3) "Immediate buyer" means a buyer in a contractual relationship with the seller.

(4) "Remote buyer" means a buyer or lessee from a person other than the seller against which a claim for breach of warranty breach is asserted.

(5) "Representation" means a description, demonstration or depiction of the goods, an affirmation of fact relating to the goods, or a sample or model of the goods.

(6) "Seller" includes an auctioneer or liquidator that fails to disclose that it is acting on behalf of a principal.

SECTION 2-402. WARRANTY OF TITLE AND AGAINST INFRINGEMENT; BUYER'S OBLIGATION AGAINST INFRINGEMENT.

(a) A seller in a contract for sale warrants that:

(1) the title conveyed is good and its transfer is rightful and does not, because of any colorable claim to or interest in the goods, unreasonably expose the buyer to litigation; and

(2) the goods will be received free from any security interest or other lien or encumbrance of which the buyer at the time of contracting does not have knowledge.

(b) A warranty under subsection (a) may be disclaimed or modified only by express language or by circumstances giving the immediate buyer reason to know that the seller does not claim title or purports to sell only such right or title as the seller or a third party may have. In an electronic transaction that does not involve review of the record by an individual, language is sufficient if it is conspicuous and related to the warranty of title against infringement. Otherwise, language in a record is sufficient to disclaim warranties under this section if it is conspicuous and states "There is no warranty of title or against infringement in this sale" or words of similar import.

(c) A seller who is a merchant that regularly deals in goods of the kind sold warrants that the goods will be delivered free of the rightful claim of a third party by way of infringement or the like. However, a buyer that furnishes specifications to the seller holds the seller harmless against any claim of infringement or the like that arises out of compliance with the specifications.

(d) A seller's warranty under this section, made to an immediate buyer, extends to any remote buyer or transferee that may reasonably be expected to buy the goods and that suffers damage from breach of the warranty. The rights and remedies of a remote buyer or transferee against the seller for breach of warranty are determined by the terms of the contract between the seller and the immediate buyer.

(e) A right of action for breach of warranty under this section accrues under Section 2-814(b) when the buyer or transferee discovers or should have discovered the breach.

SOURCE: Sales, Section 2-312.

1. "Seller" in subsection (a) includes an "auctioneer or liquidator who fails to disclose before the auction that it is acting on behalf of a principal." Section 2-401(6). See Jones v. Ballard, 573 So.2d 783 (Miss. 1990). There is no requirement, however, that the auctioneer or liquidator reveal the name of its principal either before or at the time of the auction. An auctioneer who does not disclose its principal may, however, disclaim the warranty of title under subsection (b). See Section 2-312 on auctions.

2. A warranty that the "title conveyed is good and its transfer rightful," see Sumner v. Fel-Air, Inc., 680 P.2d 1109 (Alaska 1984), covers cases where the title is contested and protects the buyer against colorable "clouds" on an otherwise good title that affect the value of the goods. See, e.g., Frank Arnold KRS, Inc. v. L.S. Meier Auction Co., Inc., 806 F.2d 462 (3d Cir. 1986) (two law suits contest title); Jeanneret v. Vichey, 693 F.2d 259 (2d Cir. 1982) (export restrictions in country from which painting was taken affect value); Colton v. Decker, 540 N.W.2d 172 (S.D. 1995) (conflicting vehicle identification numbers). As one court put it, there "need not be an actual encumbrance of the purchaser's title or actual disturbance of possession to permit a purchaser to recover for a breach of warranty of title when he demonstrates the existence of a cloud on his title, regardless of whether it eventually develops that a third party's title is superior." The policy is that a purchaser "should not be required to engage in a contest over the validity of his ownership." Maroone Chevrolet, Inc. v. Nordstrom, 587 So.2d 514, 518 (Fla.App. 1991) (conflicting vehicle identification numbers).

As such, the language "and uncontested" in subsection (a) of the March, 1997 Draft was deleted as unnecessary.

3. Without more, the statute of limitations for breach of warranty under subsection (a) runs from when the cause of action accrues under Section 2-814(a). Cf. Foxley v. Sotheby's, Inc., 893 F. Supp. 1224 (S.D.N.Y. 1995) (suit against auctioneer claiming fraud in sale of forged art work). Under the Uniform Sales Act the statute ran from the time of delivery or when quiet possession was disturbed. See Menzel v. List, 246 N.E.2d 742 (N.Y. 1969). The question is whether in warranty of title disputes the statute should run from when the breach was or should have been discovered. Arguably, the latter time, capped by an appropriate tolling limitation, is proper. See Balog v. Center Art Gallery-Hawaii, Inc., 745 F. Supp. 1556 (D.Haw. 1990) (warranty that art work "genuine" explicitly extended to future performance). At the March, 1996 meeting, the Drafting Committee agreed upon a "discovery" statute of limitations with a four year period to bring suit after the cause of action accrues. That decision is implemented in subsection (e). Section 2-814, however, still governs all other statute of limitations issues. There is no overall time limitation, such as a provision that no action can be brought ten years after the goods were delivered to the immediate buyer regardless of when the nonconformity was discovered.

4. The Drafting Committee deleted the phrase "in writing" from an earlier draft of subsection (b). The language of disclaimer need not be in a record. If the disclaimer is in a record, however, the language, if conspicuous and following the suggested wording in the second sentence, secures a "safe harbor" for the disclaimer.

5. In March, 1995 meeting, the Drafting Committee concluded that (1) the disclaimer provisions in subsections (b) and (c) should be retained in Section 2-402 rather than moved to Section 2-406, and (2) no special protection for consumer buyers was needed in light of Section 2-206. At the September, 1996 meeting, it was argued that the word "notice" should be substituted for "knowledge" in subsection (a)(2). Since notice is a broader concept, this might narrow the scope of the warranty against liens or encumbrances. No action was taken.

6. Subsection (e) is new: Lack of privity is no defense between the seller and a remote buyer or transferee. See Section 2-408(b), where the same principle is expressed. A remote buyer's remedies against the seller, however, are limited by the contract between that seller and its immediate buyer and Article 2. In short, the remote buyer's rights are derivative. See Section 2-401 (definitions) and Section 2-408(b). Moreover, a remote buyer's claim against the seller must be brought within four years after the cause of action is should be discovered. The cases are divided on whether lack of privity is a defense in warranty of title suits. See Note, 45 Bus. Lawyer 2289 at 2300 (1995); Mitchell v. Webb, 591 S.W.2d 547 (Tex.Civ.App. 1979) (lack of privity no defense).

SECTION 2-403. EXPRESS WARRANTY TO IMMEDIATE BUYER.

(a) If a seller makes a representation or promise relating to the goods to an immediate buyer, the representation or the promise becomes part of the agreement unless a reasonable person in the position of the immediate buyer would not believe that the representation or promise became part of the agreement or would believe that the representation was merely of the value of the goods or purported to be merely the seller's opinion or commendation of the goods. An obligation may be created under this section even though the seller does not use formal words, such as "warranty" or "guarantee."

(b) A representation or a promise that becomes part of the agreement is an express warranty and the seller has an obligation to the immediate buyer that the goods will conform to the representation or, if a sample is involved, that the whole of the goods will conform to the sample, or that the promise will be performed. The obligation is breached if the goods do not conform to any representation at the time when the tender of delivery was completed or if the promise was not performed when due.

(c) A seller's obligation under this section may be created by representations and promises made in a medium for communication to the public, including advertising, if the immediate buyer had knowledge of them at the time of the agreement.

SOURCE: Sales, Section 2-313.

1. Section 2-403 deals with express warranties in a direct contractual relationship between seller and immediate buyer. The questions is whether descriptions, affirmations, demonstrations, depictions, samples, models [all representations, see Section 2-401(5)] and promises become part of or terms of the agreement between the parties. As such, Section 2-403 does not supplant other provisions dealing with contract formation and the scope of an agreement. Ultimately, there must be a contract between the parties and an express warranty made during negotiations may be excluded by a subsequent integrated writing, see Section 2-202.

2. Subsection (a) states the general principles applicable where an "immediate" buyer claims a breach of express warranty by the seller. It follows Section 2-313(1) of the 1990 Official Text, except that the phrase "becomes part of the agreement" is substituted for "becomes part of the basis of the bargain." The change clarifies that an express warranty is treated like any other term of the agreement and that the buyer need not initially prove reliance to include it in the agreement.

Subsection (a) also states when a claimed affirmation of fact, promise, description or sample becomes "part of the agreement." If the "immediate" buyer alleges and proves what the seller represented or promised to the buyer about the goods, the usual assumption is that they become part of the agreement unless the seller establishes that the buyer as a reasonable person would not believe that the representations or promises became part of the agreement or would believe that the representations were puffing. This is consistent with the Comments to Section 2-313 of the 1990 Official Text and most of the interpretive case law. This "presumption", however, is not stated in the statute.

One question is whether a reasonable person in the position of the buyer would believe that the affirmation of fact or promise became part of the agreement. Thus, even if the particular buyer knew of the affirmation and believed it, there would be no express warranty if a reasonable person in the position of the buyer would not believe the affirmation or would conclude that it was puffing.

A second question is whether what was affirmed or said about the goods was puffing. Put differently, was the language used or conduct an opinion, commendation or a general valuation rather than an affirmation of fact or promise? If so there is a probable "puffing" defense which the seller can raise in a motion for summary judgment or establish before a jury.

There are a number of factors relevant to whether a buyer is reasonable in believing that an express warranty rather than "puffing" is involved. For example, the buyer might be unreasonable if the seller's representations taken in context (1) were verbal rather than written, (2) were general rather than specific, (3) related to the consequences of buying rather than the goods themselves, (4) were "hedged" in some way, (5) related to experimental rather than standard goods, (6) concerned some aspects of the goods but not a hidden or unexpected non-conformity, (7) were phrased in terms of opinion rather than fact, or (8) were not capable of objective measurement. See Federal Signal Corp. v. Safety Factors, Inc., 886 P.2d 172 (Wash. 1994), where the court held that the trial court erred in not making findings of fact where the seller stated that a new product was "better than" an earlier, comparable model. See also, Jordan v. Paccar, Inc., 37 F.3d 1181 (6th Cir. 1994) (representations about strength of fiberglass roof which shattered and caused personal injury when the truck rolled over were "puffing" as a matter of law).

3. Subsection (c)(1) clarifies that an express warranty in a direct contractual relationship may be created by communications to the public, including advertising, if the buyer had knowledge at the time of the agreement. Compare subsection (a), where there is no explicit knowledge requirement.

Subsection (b)(2) is taken without change from the first clause in Section 2-313(2) of the 1990 Official Text.

4. A warranty, express or implied, is breached if the goods do not conform when the seller's tender of delivery is completed. See Section 2-814(c)(1). Thus, if the seller expressly warranted that the goods were new (establishing the standard to which the goods must conform) and used goods were tendered, there is a breach of warranty. To illustrate, suppose that the seller tendered by notifying the buyer that the goods were available for pick-up. The goods conformed to the contract at that time and the risk of loss did not pass to the buyer. When buyer appeared the next day to take delivery the goods had deteriorated. Since the tender was not completed until receipt, the obligation was breached.

CISG Article 36(1), however, provides that the seller is liable for any "lack of conformity which exists when the risk passes to the buyer, even though the lack of conformity becomes apparent after that time."

SECTION 2-404. IMPLIED WARRANTY OF MERCHANTABILITY; USAGE OF TRADE.

(a) Subject to Sections 2-406 and 2-407, a seller that is a merchant with respect to goods of that kind makes in a contract for sale an implied warranty that the goods are merchantable. The serving for value of food or drink to be consumed on the premises or elsewhere is a sale under this section.

(b) To be merchantable, goods, at a minimum, must:

(1) pass without objection in the trade under the agreed description;

(2) in the case of fungible goods, be of fair, average quality within the description;

(3) be fit for the ordinary purposes for which goods of that description are used;

(4) run, within the variations permitted by the agreement, of even kind, quality, and quantity within each unit and among all units involved;

(5) be adequately contained, packaged, and labeled as the agreement or circumstances may require; and

(6) conform to the promise or affirmations of fact made on the container or label.

(c) Subject to Section 2-408, implied warranties other than those described in this section may arise from course of dealing or usage of trade.

SOURCE: Sales, Section 2-314.

1. Section 2-404(b)(3) has been revised to state that merchantable goods must be fit for the ordinary purposes for which "goods of that description" are used. This is more accurate historically and gives sharper guidance to courts working with the standard. If also follows CISG Article 35(2), which states that "Except where the parties have agreed otherwise, the goods do not conform to the contract unless they: (a) are fit for the purposes for which such goods of the same description would ordinarily be used."

Note the overlaps between Section 2-404 on the implied warranty of merchantability and Sections 2-403 and 2-408 on express warranties. For example, in Section 2-404(a) the description of the goods plays an important role and "description" is within the definition of "representation" used in Section 2-403. Moreover, subsection (a)(4) and (5) refer to labels and affirmations of fact made on the contained. Again, these are within the broad definition of "description" and are important in assessing liability under Section 2-408, dealing with express warranties in other than direct contractual relationships.

2. Subsection (b)(7) in the May, 1995 Draft, dealing with the merchantability of goods to be consumer or applied to the human body, was deleted at the October, 1995 meeting of the Drafting Committee. The problems are too complex to catch in a single sentence and are best left for the courts to resolve under the more general standard of merchantability in Section 2-314(b) or the evolving law of products liability. See Restatement of the Law Torts: Products Liability 2, comment (g).

3. Privity. Under revised Article 2, an implied warranty of merchantability is made only to an immediate buyer unless three exceptions are satisfied: (1) An implied warranty made to an immediate buyer is extended to a foreseeable remote purchaser under Section 2-409(a); (2) The warranty is assigned by the immediate buyer to a third person or transferred by operation of law, see Section 2-409(b)(1); or (3) A court, relying on other state law, extends the warranty to a remote purchaser or user. See Section 2-409(b)(2). The same analysis applies to the implied warranty of fitness which arises under Section 2-405

Under this analysis, it is possible for a manufacturer-seller to make an implied warranty of merchantability to a remote purchaser. Without more, the manufacturer-seller could be liable to a remote purchaser or transferee for consequential damages, including injury to person or property. The likelihood of this is reduced in Exceptions (1) and (2) because the remote purchaser is bound by disclaimers and limitations in the contract between the seller and the immediate buyer. See Section 2-409(a). There is no such limitation if a court acts under Section 2-409(b)(2) [Exception #3].

4. Personal injury.

Without more, a seller who makes and breaches an implied warranty of merchantability can be liable for consequential damages to person or property proximately resulting from the breach, if the conditions of Section 2-806 are satisfied. See Section 2-806(3), where personal injury damages are excluded from the "disproportion" limitation. Except for Sections 2-806(3) and 2-810(c), where an exclusion of liability for consequential injury to person is prima facie unconscionable, revised Article 2 does not distinguish between economic loss and damage to person or property. The special privity rules for personal injury in former Section 2-318 have been deleted and proposed Section 2-319 in the July, 1996 Draft, which provided special rules for personal injury claims resulting from a breach of warranty, was not approved.

This stance does not resolve the tension between warranty law and tort law where goods caused damage to person or property. The primary source of that tension arises from disagreement over whether the concept of defect in tort and the concept of merchantability in Article 2 are coextensive where personal injuries are involved, i.e., if goods are merchantable under warranty law can they still be defective under tort law and if goods are not defective under tort law can they be unmerchantable under warranty law. The answer to both questions is yes if the contract standard for merchantability, e.g., reasonable expectations, and the tort standard for defect are different. Even though the outcome under different standards will be the same in most cases, i.e., unmerchantable goods are frequently defective and defective goods are frequently unmerchantable, there are a few exceptions, especially where design defects are involved.

The consensus is that the tension should be resolved in a Comment to Section 2-404 rather than in the text of Article 2. The following Comment was approved in principle by representatives of NCCUSL and the ALI before the ALI Annual Meeting in May, 1997.

When recovery is sought for injury to person or property that allegedly resulted from manufacturing or design defects in goods sold or inadequate instructions or warnings, the applicable state law of products liability determines whether the goods are merchantable under Section 2-404. Merchantability in the context of a claim to recover for injury to person or property is synonymous with the level of safety required for the goods as a matter of public policy adopted by the courts of this state or, if applicable, the Restatement of the Law (Third), Torts: Products Liability.

When, however, the claim for injury to person or property is based on an implied warranty of fitness under Section 2-405 or representations made by the seller to the buyer, such as affirmations or promises about or descriptions of the goods, this Article determines whether an implied warranty of fitness was made or breached and whether the promises, affirmations or descriptions create contractual warranties to which the goods must conform, as well as the remedies available for damage proximately resulting from any non-conformity.

At the ALI Annual Meeting in May, 1997, the membership adopted the following language by a 94-77 vote:

When recovery is sought for injury to person or property, whether goods are merchantable is to be determined by applicable state products liability law.

This language was clearly a substitute for the first sentence of the pre-ALI Comment. The effect is to preclude actions for injury to person or property under Section 2-404. There is some disagreement, however, whether the approved language was intended to displace the entire Comment, the second paragraph of which permitted actions for injury to person or property based upon the implied warranty of fitness, Section 2-405, or express warranties, Sections 2-403 and 2-408.

Whatever the intent, there clearly was no intention to preclude actions for injury to person or property under Section 2-405 or Sections 2-403 and 2-408. Moreover, the definition of "representations," see Section 2-401(5), used in the express warranty sections is broad enough to cover descriptions of or other affirmations about goods that might be extracted from Section 2-405. For clarity, however, the following paragraph should also be included with the ALI approved language:

When, however, a claim for injury to person or property is based on an implied warranty of fitness under Section 2-406 or an express warranty under Section 2-403 or 2-408, this Article determines whether an implied warranty of fitness or an express warranty was made and breached, as well as what damages are recoverable under Section 2-806.

5. Revised Section 2-405(a) does not displace or preempt any inconsistent state law, such as the so-called "blood shield" statutes enacted by many states, which immunize suppliers of blood and other body parts from implied warranty liability under Article 2 or strict liability in tort. See, e.g., Doe v. Travenol Laboratories, Inc., 698 F. Supp. 780 (D. Minn. 1988).

SECTION 2-405. IMPLIED WARRANTY OF FITNESS FOR PARTICULAR PURPOSE. Subject to Sections 2-406 and 2-407, if a seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller's skill or judgment to select or furnish suitable goods, there is an implied warranty that the goods are fit for that purpose.

SOURCE: Sales, Section 2-315.

SECTION 2-406. DISCLAIMER OR MODIFICATION OF WARRANTY.

(a) Language or conduct relevant to the creation of an express warranty and language or conduct tending to disclaim or modify an express warranty must be construed wherever reasonable as consistent with each other. Subject to Section 2-202 with regard to parol or extrinsic evidence, language or conduct disclaiming or modifying an express warranty is ineffective to the extent that this construction is unreasonable.

(b) Except as otherwise provided in Section 2-402(b) and (e), an implied warranty is disclaimed or modified by language or an expression that, under the circumstances, makes it clear that the implied warranty has been disclaimed or modified. An implied warranty may also be disclaimed or modified by course of performance, course of dealing, or usage of trade.

(c) Except as otherwise provided in subsection (e), language in a record is sufficient to disclaim or modify an implied warranty if the language is conspicuous and:

(1) in the case of the implied warranty of merchantability, mentions merchantability;

(2) in the case of the implied warranty of fitness, states that "the goods are not warranted to be fit for any particular purpose", or words of similar import;

(3) Unless the circumstances indicate otherwise, states that the goods are sold "as is" or "with all faults" or words of similar import.

(d) If, before entering into a contract, a buyer has examined the goods, sample, or model as fully as desired or has declined to examine them, there is no implied warranty with regard to conditions that an examination in the circumstances would have revealed to the buyer.

(e) Except in a sale by auction under Section 2-312, language in a consumer contract is sufficient to disclaim or modify an implied warranty only if:

(1) At the time of contracting, a seller in good faith passes through to a buyer an express warranty obligation created by another seller under Section 2-408(b) that is reasonable in scope, duration and remedies and there is conspicuous language in a record stating, for example, "You are receiving an express warranty obligation from the [manufacturer] instead of any implied warranty of merchantability or fitness from us;" or

(2) Conspicuous language in a record which language the consumer has separately authenticated states: "Unless we say otherwise in the contract, we make no promises about the quality or usefulness of what you are buying. They may not work. They may not be fit for any specific purpose that you may have in mind."

(f) Remedies for breach of warranty may be limited in accordance with this article with respect to liquidation or limitation of damages and contractual modification of remedy.

SOURCE: Sales, Section 2-316.

1. Subsection (a) preserves the policy that when language creating and language disclaiming or modifying an express warranty are inconsistent, the disclaimer is inoperative, subject to Section 2-202 (the "parol evidence rule"). Thus, if the agreement contained both an express warranty that a car's mileage was 25,000 and a disclaimer of all express warranties, the express warranty would prevail. If, however, the seller, in contract negotiations, stated that "this car has not been driven more than 25,000 and a subsequent integrated record stated "This car is sold without express warranties," evidence of the oral express warranty should be excluded under the parol evidence rule. Section 2-202(a). In consumer contracts, however, the disclaimer in a record would be excluded from the contract if a reasonable consumer under the circumstances would not expect to find it in the contract. See Section 2-206(a)

2. Subsection (b), which is subject to subsection (e), provides the general rule governing the disclaimer or modification of implied warranties in commercial contracts. After the October, 1995 meeting of the Drafting Committee, subsections (b), (c), and (d) of the October, 1995 Draft were integrated into a single, new subsection (b). At the January, 1996 meeting of the Drafting Committee, the decision was made to delete all "regulatory" and "mandatory" language in subsection (b). The key question is whether under the circumstances, the language, whether or not in a record, "makes it clear" that implied warranties have been disclaimer or modified.

The disclaimer or modification of implied warranties by course of performance, course of dealing or usage of trade is now covered in subsection (b).

3. Subsection (c), which is also subject to subsection (e), by stating what language contained in a record is sufficient to disclaim or modify an implied warranty, implements a decision of the Drafting Committee to create a "safeharbor" for commercial contracts. The Drafting Committee rejected the complex "safeharbor" in the January, 1997 Draft and requested a redraft to comply in substance with Section 2-316(c) of the 1995 Official Text.

Under subsection (c), if language of disclaimer or modification is contained in a record and that language is conspicuous, a valid disclaimer or modification is achieved when the sufficient language for the two implied warranties and for used goods is provided.

Note that a failure to satisfy the "safe harbor" of subsection (c) does not mean that the disclaimer is invalid. Rather, the seller must now meet the more open ended standard in subsection (b).

4. Subsection (d), which states the effect of a pre-contract examination of the goods, applies in both commercial and consumer contracts. A seller who attempts to disclaim or modify implied warranties in consumer contract, however, must comply with subsection (e).

5. Subsection (e) of the March, 1997 Draft stated three alternative ways for a seller to disclaim or modify implied warranties in consumer contracts. The May, 1997 Draft, however, made several major changes that are reflected in the text.

Note that the revised subsection is mandatory: In a consumer contract, one or more of the stated methods must be satisfied.

Note also that auction sales to consumers are excepted from subsection (e). A disclaimer or modification of an implied warranty at an auction is sufficient if subsections (c) is satisfied. In most auctions, the "as is" disclaimer in subsection (c)(3) will be involved.

Here is a brief comparison of the two drafts.

(a) Subsection (e)(1) of the January, 1997 draft validated disclaimers where the language complied with applicable federal law. This subsection has been deleted in the July, 1997 Draft.

(b) Subsection (e)(2) of the January, 1997 draft stated that where the seller, in good faith, made an express warranty in lieu of an implied warranty of quality, the language is sufficient if it complies with subsection (c), i.e., the language must be conspicuous, in a record and satisfy the content requirements. The July, 1997 Draft [now subsection (e)(1)] now makes it clearer that a dealer or retailer in a consumer contract may disclaim or modify an implied warranty by conspicuous language of prescribed content if, at the time of contracting, that seller has passed through a reasonable express warranty from a manufacturer or producer.

(c) Subsection (e)(3) [now e(2)] provided a safe harbor through conspicuous language in a record which language the consumer has separately authenticated. The required content of the language was stated in two alternatives.

Alternative A was taken from a Ford Motor Company consumer lease, provided by Mike Greenfield. Unfortunately, this language is rated "very hard" on three of the accepted readability scales and "average" on the fourth. According to Mike Ferry of the Legal Services of Eastern Missouri, Inc., "very hard" means that it is comprehensible at a first year college level.

Alternative B was suggested by Mike Ferry and rates "very easy" on three of the four scales and "easy" on the fourth. The first sentence says you get no promises unless they are in the contract. The second says "no merchantability", the second says "no fitness" and the third says "you assume the risk."

After extensive discussion, the Drafting Committee approved the language now contained in subsection (e)(2) of the July, 1997 Draft, subject to further tests of its comprehensibility.

SECTION 2-407. CUMULATION AND CONFLICT OF WARRANTIES. Warranties, whether express or implied, must be construed as consistent with each other and as cumulative. However, if that construction is unreasonable, the intent of the parties determines which warranty prevails. In ascertaining that intent, the following rules apply:

(1) Exact or technical specifications prevail over an inconsistent sample or model or general language of description.

(2) A sample, model or demonstration prevails over inconsistent general language of description.

(3) Except in a consumer contract, an express warranty prevails over an inconsistent implied warranty other than an implied warranty of fitness for a particular purpose.

SOURCE: Sales, Section 2-317.

1. One change was made in Section 2-409. An implied warranty of merchantability in a consumer contract that is inconsistent with an express warranty is not displaced under Section 2-409(3). Rather, the requirements of Section 2-406(b) must be satisfied.

SECTION 2-408. EXTENSION OF EXPRESS WARRANTY TO REMOTE BUYER AND TRANSFEREE.

(a) In this section, "goods" means new goods and goods that are sold as new goods.

(b) If a seller makes a representation or a promise relating to goods on or in a container, on a label, in a record, or that is packaged with or otherwise accompanies the goods and authorizes another person to deliver the container, label, or record to a remote buyer and it is so delivered, the seller has an obligation to the remote buyer and its transferee, and in the case of a remote consumer buyer, to any member of the family or household of the remote consumer buyer, that the goods will conform to the representation or that the promise will be performed, unless a reasonable person in the position of the remote buyer would not believe the representation or promise or would believe that any representation was merely of the value of the goods or purported to be merely the seller's opinion or commendation of the goods.

(c) If a seller makes a representation or a promise relating to the goods in a medium for communication to the public, including advertising, and a remote buyer with knowledge of the representation or promise buys or leases the goods from a person the seller has an obligation to the remote buyer and its transferee and, in the case of a remote consumer to buyer, to any member of the family or household of that consumer buyer, that the goods will conform to the representation, or that the promise will be performed, unless a reasonable person in the position of the remote buyer would not believe the representation or promise or would believe that the representation was merely of the value of the goods or purported to be merely the seller's opinion or commendation of the goods.

(d) An obligation may be created under this section even though the seller does not use formal words, such as "warranty" or "guaranty".

(e) An obligation arising under this section is breached when the goods are received by the remote buyer if the goods, at the time they left the seller's control, did not conform to any representation made, or if the promise is not performed when due.

(f) The following rules apply to the remedies for breach of an obligation created under this section:

(1) A seller under subsections (b) and (c) may modify or limit the remedies available to a remote buyer for breach, but a modification or limitation is not effective unless it is communicated to the remote buyer with the representation or promise.

(2) Damages may be proved in any manner that is reasonable. Unless special circumstances show proximate damages of a different amount;

(A) a measure of damages if the goods do not conform to a representation is the value of the goods as represented less the value of the goods as delivered; and

(B) a measure of damages for breach of a promise is the value of the promised performance less the value of any performance made.

(3) A seller in breach under this section is liable for incidental or consequential damages under Sections 2-805 and 2-806 but is not liable for consequential damages for a remote buyer's lost profits;

[(4) A remote consumer buyer that bought the goods on credit and is entitled to damages under subsection (f)(2) may, upon notifying the immediate seller, deduct damages from any part of the price still due.]

(5) An action for breach of an obligation under subsection (e) is timely if commenced within the time provided in Section 2-814.

(g) This section is subject to Section 2-409(b).

SOURCE: New.

Section 2-408, dealing with express warranties to remote purchasers and transferees, combines Sections 2-404 and 2-405 in the November, 1996 Draft. It is in addition to the warranties extended under Section 2-409(a) and is not intended to limit the judicial development of broader grounds for imposing liability on a seller to a remote purchaser. See Section 2-409(b)(2).

1. Section 2-408(b) "Pass through" warranties.

(a) New Section 2-408(b) deals specifically with the "pass through" warranty, including the "warranty in the box," made by a seller (usually a manufacturer) to remote purchasers and their transferees through an authorized intermediary (usually a retailer in the chain of distribution) who is not an agent of the seller.

If the intermediary is an agent of the seller, Section 2-403 applies. Other cases where Section 2-403 should apply include those where there is direct dealing between the seller and buyer through an intermediary or where the manufacturer makes an offer to the public (if you buy and use this product, the following will occur . . . .) and individuals accept the offer by purchasing the goods from a retailer.

The warranty is made to a remote purchaser, defined in Section 2-401(4), and the household and family of a remote consumer buyer and is extended to a transferee from the remote buyer, who is sheltered. The transferees rights are dependent upon the rights of the remote purchaser.

The obligation created is independent of any contract between the remote purchaser and the intermediary retailer. The terms of that contract may differ from the obligation created under subsection (b).

(b) Subsection (b) states when the seller's obligation to the remote purchaser is created. The obligation arises when the goods are delivered to the remote purchaser. Nevertheless, the alleged affirmations or promises do not create an obligation if the remote buyer, upon learning of the representation or promise, would not believe it, or a reasonable person in the position of the remote purchase would not believe it or would believe that a promise or representation was puffing. This follows the exclusionary language of Section 2-403(b).

Common situations where subsection (b) applies include warranties made on goods or in a record contained in a box (including "shrink wrapped" products), warranties made on the goods or on labels or records accompanying the product and warranties in literature delivered before, at or after delivery of the goods. Since a direct obligation is imposed upon the seller, it is irrelevant that the representations or promises were made after the remote purchaser paid for and took delivery of the goods from the retailer. The phrase "otherwise packaged with the product" signals an expansive interpretation of this subsection.

(c) The assumption underlying subsection (b) is that the seller has no other warranty (or contractual) obligation to the remote purchaser. Thus, the seller should be able to define what affirmations or promises are made with the understanding that no implied warranties are created. In short, there is no need to disclaim that which does not exist.

Suppose, however, that the representation or promise attempts to disclaim or limit the time within which claim may be asserted or to limit a remedy for breach. Should these limitations be part of the obligation created? The answer is yes under subsection (f)(1).

Should the remote purchaser be bound by the limitations simply because he elected to enforce the obligation created under subsection (a)? The answer is yes if the limitation was delivered at the time the representation or promise was made. This accord with two recent cases, Olathe Mfg. v. Browning Mfg., 915 P.2d 86 (Kan. 1996) and Hornberger v. GMC, 929 F. Supp. 884 (E.D. Pa. 1996), where the courts concluded that a buyer who received a "pass through" warranty was not bound by limitations on that warranty or remedies that were not communicated at the time of contracting.

2. Section 2-408(c). Express warranties to the public.

New Section 2-408(b) deals with warranty obligations arising from communications to the public. In essence, when a remote purchaser with knowledge of a representation or promise made by the seller to the public purchases the goods from an immediate seller or lessor in the chain of distribution, the seller making the representation or promise has an obligation to the remote buyer if the goods fail to conform unless the stated limitations are established. On the puffing question, the factors relevant to the question under Section 2-403 also apply to Section 2-408(b).

Illustrations:

1. Seller advertises its product in trade journals, on the Internet and on TV. Buyer buys the goods from the seller, directly or through an agent. Whether the advertisement is an express warranty and part of the agreement is determined under Section 2-403.

2. Seller advertises as in #1 and Buyer purchases directly from Seller, ordering by Fax and paying by credit card before the goods arrive. The goods arrive in a box which contains additional warranties and terms limiting remedies. This is not a pass through warranty under Section 2-408(b). Rather, Section 2-403 applies to the warranty issues and other provisions of Article 2 govern whether the terms in the box are part of the agreement.

3. Seller advertises as in #1 and Buyer purchasers the goods from a retailer. In the box are warranties and limitations prepared by Seller, which Retailer was authorized to deliver to B. Since there is no contractual relationship between B and S, Section 2-408(b) determines the status of the terms in the box and Section 2-408(c) determines the status of the advertising.

4. Seller advertises as in #1 and Buyer purchases from a Retailer. There are no pass through warranties. The status of the advertising is determined by Section 2-408(c). Neither Section 2-403 nor 2-408(b) apply.

5. S advertises as in #1. Aware of the advertising, which is general, B asked Retailer whether S's product will meet a required specification. When R did not know, B contacted S directly and asked. S responded in a letter that the described goods would meet the specifications and B then purchased the goods from R. If the goods fail to meet the specification, B's claim against S should be resolved under subsection (c). But (b) seems to require advertising to the public and this was a representation made directly to B. Nevertheless, the liability case is strong and the claim should be enforced under subsection (c).

3. Remedies.

Subjection (f) was drafted after the March, 1997 meeting of the Drafting Committee. The alternatives to subsection (f)(2) were presented to the Drafting Committee for decision. At the May, 1997 meeting, both Alternatives were rejected and subsection (f) was redrafted.

SECTION 2-409. EXTENSION OF EXPRESS OR IMPLIED WARRANTY.

(a) A seller's express warranty under Section 2-403 or implied warranty under Section 2-405 or 2-406 made to an immediate buyer extends to any buyer or transferee, and in the case of a consumer buyer, to any member of the family or household of the buyer, that may reasonably be expected to use or be affected by the goods and that is damaged by a breach of warranty. The rights and remedies of the buyer, members of a consumer buyer's family or household or a transferee against the seller for breach of a warranty extended under this subsection are determined by the terms of the contract between the seller and the immediate buyer. However, the seller is not liable for consequential lost profits for breach of warranty under this section.

(b) This section and Sections 2-402 and 2-408 do not:

(1) diminish the rights and remedies of a third party beneficiary or assignee under the law of contracts or of persons to which goods are transferred by operation of law;

(2) displace principles of law and equity that extend an express or implied warranty to or for the benefit of a remote buyer, transferee, or other person.

(c) The operation of this section may not be excluded, modified, or limited unless the seller has a substantial interest based on the nature of the goods in having a warranty extend only to the immediate buyer.

SOURCE: Sales, Section 2-318.

1. Overview. Section 2-409, which is based on Section 2-318(c) in the 1995 Official Text, deals with warranty claims by a remote purchaser or transferee against "the seller" with whom there is no privity of contract. It is in addition to the express warranty obligations created under Section 2-408 but is subject to the definitions in Section 2-401. The section operates as follows:

Subsection (a). Under subsection (a), the seller's warranty made to an immediate buyer is extended to a foreseeable buyer or transferee (i.e., a person who obtains title to or an insurable interest in the goods) who is damaged by the breach. Except for consumer buyers, however, the warranty is not extended to members of the family or household who might be expected to use or be affected by the goods. Thus, the warranty extension is primarily vertical, not horizontal.

At the ALI Council meeting in December, 1996, the Council supported a motion that foreseeable users or persons affected who suffer economic loss from breach of an express warranty should be restored to subsection (a). At the January, 1997 meeting, the Drafting Committee narrowly rejected a motion to extend the warranty to a "natural person who is in the family or household of the purchaser or transferee and has suffered economic loss but not loss of profits." At the March, 1997 meeting, the Drafting Committee voted for a limited horizontal extension in the case of remote consumer buyers and this was not limited to economic loss.

The protected remote person's rights against the seller are defined and limited by the terms of the contract between the seller and the immediate buyer and the terms of this Act. It is, in short, a derivative warranty and the beneficiary stands in the shoes of the immediate buyer. Express warranties under Section 2-408, however, are not so limited. They create direct obligations to the remote purchaser. Thus, limitations in the contract between the seller and the immediate buyer would not bind the remote purchaser.

Moreover, where there is no exclusion in the contract with the immediate buyer the seller is still not liable to a remote purchaser or transferee for "consequential lost profits." See Section 2-806. Thus, a remote and otherwise protected purchaser could not recover lost profits resulting from the breach but could recover other consequential damages, including injury to person or property.

Although protected persons may be called beneficiaries, the warranty extension is based more upon policy than intention of the parties. The seller should be responsible to foreseeable buyers and transferees for the quality of the goods warranted to the immediate buyer. But since the warranty is derivative, the protected purchaser or user is bound by the terms and conditions of the contract between the seller and immediate buyer. Thus, disclaimers and agreed limited remedies in that contract bind the beneficiaries as well. A motion to restore the "three alternatives" approach of former Section 2-318 was defeated at the November, 1996 meeting.

Subsection (b).

Subsection (b) states two things that are not diminished or displaced by Section 2-409.

Subsection (b)(1) clarifies that Section 2-409 supplements rights and remedies of third party beneficiaries and assignees under contract law and transferees by operation of law. For example, subsection (a) should be distinguished from cases where an immediate buyer to whom a warranty has been made by the seller assigns the warranty or rights under it to a remote purchaser under Section 2-503. In these cases, the remote purchaser's rights against the seller are based upon the assignment rather than subsection (a) and are subject to the contract and relevant defenses between the seller and the immediate buyer. They should be treated under Section 2-503 rather than Section 2-410(a). A leading case is Collins Co. v. Carbonline Co., 864 F.2d 560 (7th Cir. 1989).

Subsection (b)(2), taken from Section 2A-316, states that neither Section 2-408 nor 2-409 displace "principles of law and equity" that a court might use to extend a warranty beyond the immediate buyer. Thus, a court might conclude that a remote commercial or consumer buyer has a direct claim against the seller for damage resulting from breach of an implied warranty of merchantability, see, Hininger v. Case Corp., 23 F.3d 124 (5th Cir. 1994) (reviewing Texas law), or that there were sufficient direct dealings between the seller and the remote buyer before and after the contract to establish privity, see U.S. Roofing, Inc. v. Credit alliance Corp., 279 Cal. Rptr. 533 (Cal.App. 1991). Since Section 2-409 does not state the remote purchaser's rights and remedies, they would be those under Article 2, as modified to fit the particular case. See Section 2-408(f), which might be applied by analogy.

2. Subsection (c) states that the "operation" of this section cannot be varied by agreement, unless the seller has a "substantial interest" based on the nature of the goods in making the warranty only to the immediate buyer. See Section 2-503(b). This change was approved at the January, 1997 meeting of the Drafting Committee. Subsection (c), however, does not limit the power of the seller and immediate buyer to shape the terms of the contract. Rather, it applies after the warranty and remedy terms have been agreed.

3. The definition of "the seller" in Section 2-401 is broad enough to include a seller whose sale is governed by the Convention on the International Sale of Goods. Under CISG, the seller's liability for non-conforming goods extends only to the immediate buyer. Lack of privity is a defense. But if the CISG seller's immediate buyer resells to a buyer in a state governed by the UCC, the CISG seller could be liable to the non-CISG remote buyer under Sections 2-408 and 2-409. Complex federal preemption issues aside, a foreign seller is not insulated from warranty extensions to remote non-CISG buyers under the UCC.

4. Section 2-411 in the November, 1996 Draft, dealing with "Injury to Person or Property Resulting from Breach of Warranty," has been deleted.

SECTION 2-501. PASSING OF TITLE; RESERVATION FOR SECURITY.

(a) Except as otherwise expressly provided in this article, this article applies whether or not the seller, the buyer, or a third party has title to or possession of the goods and despite any statute or rule of law that possession or the absence of possession is fraudulent.

(b) Subject to Section 2-104(a)(1), in cases not covered by other provisions of this article, if the location of title to goods is material, the following rules apply:

(1) Title to goods does not pass under a contract for sale before their identification to the contract. Unless otherwise expressly agreed, a buyer acquires by their identification a special property interest as limited by this article.

(2) Any retention or reservation by the seller of title in goods shipped or delivered to the buyer is limited in effect to a reservation of a security interest.

(3) Subject to this subsection and Article 9, title to goods passes from the seller to the buyer in any manner and on any conditions expressly agreed to by the parties.

(4) Title passes to the buyer at the time and place at which the seller completes performance with reference to the physical delivery of the goods, despite any reservation of a security interest and even if a document of title is to be delivered at a different time or place.

(5) Despite any reservation of a security interest by the bill of lading:

(A) if the contract requires or authorizes the seller to send goods to the buyer but does not require the seller to deliver them at a particular destination, title passes to the buyer at the time and place of shipment; and

(B) if the contract requires delivery at a particular destination, title passes on tender there.

(c) If delivery is to be made without moving goods and the seller is to deliver a document of title, title to the goods passes when and where the seller delivers the document.

(d) If delivery is to be made without moving goods and the goods are already identified at the time of contracting and no document of title is to be delivered, title to the goods passes at the time and place of contracting.

(e) Title to goods revests in the seller upon the buyer's rejection or refusal to receive them, whether or not justified, or upon the buyer's justified revocation of acceptance. Revesting occurs by operation of law and is not a sale.

SOURCE: Sales, Section 2-401; Licenses, Section 2B-501.

1. No changes of substance have been made in Section 2-401 of the 1990 Official Text.

2. Although a sale occurs when title passes from seller to buyer for a price, Section 2-102(a)(26), the location of title is largely irrelevant under Article 2. The same is true under CISG. See Article 4(b) which states that CISG is not "concerned with . . . the effect which the contract may have on the property in the goods sold. Section 2-501 may be relevant to disputes over the location of title arising outside of Article 2. No effort has been made to identify those disputes or determine whether the rules of Section 2-501 are applicable to them.

3. Except as to the rights of buyers in ordinary course of business who buy out of inventory, passage of title to goods within the scope of a certificate of title is governed by the applicable Certificate of Title Act. See Section 2-104(a)(1). The CTA, however, may or may not preempt Section 2-501. See, e.g., Aetna Casualty & Surety Co. v. A.L.J.A., Inc., 905 F. Supp. 36 (D. Mass. 1995) (Massachusetts CTA does not abrogate former Section 2-401, it simply adds further requirements). But see Ladd v. Ford Consumer Finance Co.,Inc., 550 N.W.2d 826 (Mich. App. 1996) (Michigan Mobil Home Commission Act supersedes former Section 2-401).

SECTION 2-502. INSURABLE INTEREST IN GOODS; MANNER OF IDENTIFICATION OF GOODS.

(a) Identification of goods as goods to which a contract refers may be made at any time and in any manner expressly agreed to by the parties. In the absence of express agreement, identification occurs when:

(1) the contract is made, if the contract is for the sale of existing and described goods;

(2) goods are shipped, marked, or otherwise designated by the seller as goods to which the contract refers, if the contract is for the sale of future goods other than those described in paragraph (3) or (4);

(3) crops are planted or otherwise become growing crops, if the contract is for the sale of crops to be harvested within 12 months or the next normal harvest season after contracting, whichever is longer; or

(4) young are conceived, if the contract is for the sale of the unborn young of animals to be born within 12 months after contracting.

(b) A buyer obtains a special property interest and an insurable interest in existing goods identified to the contract, even if the goods are nonconforming and the buyer has an option to return or reject them.

(c) A seller has an insurable interest in identified goods as long as title to or a security interest in the goods is retained. If the identification is by the seller alone, the seller may substitute other goods for those identified until breach of contract or insolvency or notification to the buyer that the identification is final.

(d) This section does not impair an insurable interest recognized as such under any other law.

SOURCE: Sales, Section 2-501.

1. Subsection (a) is revised for a clearer focus on how and when goods are identified to the contract. See Section 2A-217, from which the form was taken. However, no change was made in the rules of "how" and "when" identification occurs in the absence of "explicit agreement."

2. What the buyer gets upon identification is stated in subsection (b). No change is made in the original Section 2-501: The buyer gets both an insurable interest and a special property interest.

3. The extent to which a seller retains an insurable interest in identified goods is stated in Section 2-502(c). No change is made. In light of Section 2-502(d), the insurable interest of both seller and buyer complements or is in addition to insurable interests recognized by other sources of law. See Section 2A-218 on "insurance and proceeds."

4. Advantages of Identification. The advantages to the buyer of identification and obtaining a "special property interest" are not stated in Section 2-502. These advantages include: (1) The acquisition of "goods oriented" remedies against the seller under Sections 2-824 and 2-807; (2) Protection against the seller's creditors under Section 2-505; (3) Earlier status, in some states, as a buyer in ordinary course of business under Section 1-201(9); (4) A right to inspect the goods under Section 2-609(a); and (5) Standing to sue third parties who cause injury to identified goods, Section 2-813.

Similarly, the advantages to the seller of identification are not stated in Section 2-502. These advantages include: (1) Shipment under reservation, Section 2-604(a); (2) Resale under Section 2-819(a); (3) Possible excuse where goods identified at the time of contracting are damaged or destroyed, Section 2-714; (4) Possible action for the price upon breach by the buyer, even though the goods have not been accepted, Section 2-822(a)(2); and (6) Standing to sue third parties who cause injury to identified goods, Section 2-813. In addition, the seller, upon breach, may make a commercially reasonable decision to identify goods to the contract and pursue appropriate remedies. See Section 2-817.

When the advantages to both parties of identification are catalogued, it is difficult, as Comment 2 states, to conclude that identification has a "limited effect" under Article 2.

5. CISGA. There is no comparable provision in CISGA. But see Article 32(1), dealing with notice requirements when goods shipped by the seller are not "clearly identified to the contract."

SECTION 2-503. ASSIGNMENT OF RIGHTS; DELEGATION OF DUTIES.

(a) All rights of a seller or buyer, including a right to damages for breach of the whole contract or a right arising out of the assignor's due performance of its entire obligation, may be assigned unless the assignment would materially change the duty of the other party, increase the burden or risk imposed on that party by the contract, or impair that party's likelihood of obtaining return performance.

(b) A party may delegate to another person its performance under a contract for sale unless the other party to the contract has a substantial interest in having the original promisor perform or directly control the performance required by the contract. A delegation of performance does not relieve the delegating party of any duty to perform or liability for breach.

(c) Acceptance of a delegation of duties by an assignee constitutes a promise by the assignee to perform those duties. The promise is enforceable by the assignor or the other party to the original contract. The other party may treat any assignment or transfer that delegates performance as creating reasonable grounds for insecurity and, without prejudice to the party's rights against the assignor, may demand assurance of due performance from the assignee.

(d) An assignment or transfer of "the contract" or "all my rights under the contract", or an assignment or transfer in similar general terms, is an assignment of rights. Unless the language or the circumstances indicate the contrary, as in an assignment for security, the assignment or transfer is a delegation of performance of the duties of the assignor.

(e) Subject to Article 9, if a contractual term prohibits the assignment of rights otherwise assignable under subsection (a), the assignment is effective. However, whether or not the contract so provides, the assignment is a breach of contract for which damages under this article are available.

(f) A contractual term prohibiting the delegation of duties otherwise delegable under subsection (c) is enforceable, and an attempted delegation is not effective. A prohibition of assignment or transfer of "the contract" must be construed as precluding only the delegation to the assignee or transferee of the assignor's duty to perform.

SOURCE: Sales, Section 2-210; Leases, Section 2A-303; Licenses, Sections 2B-502, 2B-507.

1. This section reintegrates Section 2-211 (July, 1996) with Section 2-403 (July, 1996) and revises the integration to deal more specifically with terms that prohibit assignments and delegations that are otherwise enforceable. See Section 2A-303.

2. Subsection (a) states the default rule on an assignment of rights. They are enforceable unless . . . (see the "unless" clause). Rights are broadly defined ("all"). See also, subsection (d) (rules of interpretation). Subsection (e), however, provides that a term prohibiting an otherwise permissible assignment of rights is not enforceable, i.e., the assignment is effective. The prohibited assignment is a breach of contract for which damages can be recovered under the general principles of Section 2-804. See Section 9-318(4).

3. Subsection (b) states the default rule for a delegation of duties: They are enforceable "unless" (first sentence). The second sentence of subsection (b) states the effect of a delegation of duties on the duty of the delegator to a non-consenting party and subsection (c) states the effect of the delegatee's acceptance of the duties delegated. There are no changes from Section 2-210 of the 1990 Official Text. Subsection (f) makes clear that, unlike a prohibition of assignment of rights, a term prohibiting the delegation of duties is effective and provides some rules of interpretation.

4. Because of differences in the underlying transaction, Section 2-503 is less complex than Section 2A-303. For example, there is no need for a special treatment of "residual interests" in goods, Section 2A-303(2), and a provision on terms which prohibit the creation and perfection of security interests, Section 2A-303(3), appears to be unnecessary. Moreover, Section 2-503 is consistent with the basic principles of assignment and delegation law (although not an exhaustive statement) and has survived an occasional testing in the courts. See Baxter Healthcare Corp. v. O.R. Concepts, Inc., 69 F.3d 785 (7th Cir. 1995); Sally Beauty Co. v. Nexxus Products Co., 801 F.2d 1001 (7th Cir. 1986).

5. If a contract contains warranties and the buyer either transfers the contract or assigns the rights to a third party, the third party can usually enforce the warranties against the seller. See Section 2-409(b)(1).

SECTION 2-504. POWER TO TRANSFER; GOOD-FAITH PURCHASE OF GOODS.

(a) Except as otherwise provided in this section, a purchaser of goods acquires rights and title identical to those the transferor had or had power to transfer. A purchaser of a limited interest in goods acquires rights and title only to the extent of the interest purchased.

(b) A person with voidable rights or title acquired in a purchase of goods from a seller that has relinquished possession or control has power to transfer good title to a good-faith purchaser for value of goods until the seller regains possession or control of the goods.

(c) Voidable rights or title are acquired under subsection (b) even if:

(1) the transferor was deceived as to the identity of the purchaser;

(2) the delivery was in exchange for a check later dishonored;

(3) it was agreed that the transaction was to be a cash sale; or

(4) the delivery was procured through fraud punishable under criminal law.

(d) The entrusting of possession of goods to a merchant that deals in goods of that kind gives the merchant and a buyer from that merchant power to transfer all rights and title of the entruster and to transfer the goods free of any security interest perfected by the entruster under Article 9 to a buyer in the ordinary course of business.

(e) Entrusting includes any delivery and any acquiescence in retention of possession, regardless of any condition expressed between the parties to the delivery or acquiescence or whether the procurement of the entrusting or the possessor's disposition of the goods was punishable under criminal law.

SOURCE: Sales, Section 2-403.

1. Section 2-504, formerly Section 2-403 of the 1990 Official Text, has been revised to clarify the cases where a purchaser of goods gets better rights or title than the transferor had power to transfer.

Section 2-504(a) states the nemo dat principle in a separate subsection. Without more, a buyer gets no more rights and title to goods than that of its seller.

Section 2-504(b) states the good faith purchaser exception to the nemo dat principle. The BFP's seller must obtain voidable rights or title in a purchase from the purported true owner before there is power to transfer good title. The purported true owner must give up possession and control of the goods in that transaction, but not necessarily to the BFP's seller. See Inmi-Etti v. Aluisi, 492 A.2d 917 (Ct. App. Md. 1985) ("voidable" title cannot be obtained unless there is a voluntary transfer of the goods).

The power to pass good title includes but is not limited to the four situations stated. Remaining questions about the scope of "purchase", when title or rights are voidable, and who is a good faith purchaser for value are left to the courts. See Johnson & Johnson Prod. v. Dal Intern. Trading Co., 798 F.2d 100 (3d Cir. 1986) (good faith purchaser of voidable title protected).

2. Section 2-504(d) protects a BIOCB from a merchant to whom goods have been entrusted, see Section 2-504(e): The BIOCB takes free of "all rights and title" of the entruster. See Prenger v. Baker, 542 N.W.2d 805 (Iowa 1995). The phrase "transfer the rights free of" the security interest is clearer in this context than saying that the BIOCB takes the rights under the security interest.

Normally, a BIOCB will take free of a security interest "created by his seller" under Section 9-307(1), even though the secured was not an entruster under Section 2-504(e). See Key Bank v. Maine v. Estes, 669 A.2d 162 (Maine 1995) (consumer debtor purchases boat and, without secured party's consent, purchases a business, consigns boat to himself, and sells to BIOCB). Occasionally, a secured party will gain control of goods in which it has a security interest and entrust them to a merchant who did not create the security interest, see Section 9-307(1). Under revised Section 2-504(d), the entrusting secured party will lose the security interest to a buyer in the ordinary course of business. See Sears Consumer Fin. Corp. v. Thunderbird Prods., 802 P.2d 1032 (Ariz. 1990).

3. The "shelter" principle operates, see subsection (d). Thus, if goods are entrusted to a merchant for repair and the merchant sells them to a non-merchant, the non-merchant purchaser from the merchant also has power to transfer good title to a BIOCB.

4. Except as to the rights of a buyer in the ordinary course of business who buys out of inventory, this section is subject to applicable certificate of title acts. Section 2-104(a)(1). Subject to that exception, if the CTA clearly states when title passes to covered goods, Section 2-501 does not apply. Otherwise, the certificate may be presumptive evidence of title but the ultimate question of "good title" is determined under Section 2-501.

SECTION 2-505. RIGHTS OF SELLER'S CREDITORS AGAINST GOODS SOLD.

(a) Except as otherwise provided in subsections (b) and (c), the rights of creditors of the seller with respect to goods identified to a contract for sale and retained by the seller are subject to the buyer's rights under Sections 2-807, 2-822, and 2-824(b) if the buyer's rights vest before a creditor's claim in rem attaches to the goods.

(b) A creditor of a seller which has retained possession of goods subject to a sale or identification may treat the contract as void or voidable if, as against the creditor, retention of possession by the seller is fraudulent or void or voidable under any statute or rule of law. However, it is not fraudulent for a seller, for a commercially reasonable time after the contract becomes enforceable, to retain possession in good faith and in current course of trade.

(c) Except as otherwise provided in subsection (a) or Section 2-504(d), this article does not impair rights of a creditor of the seller under Article 9 or in a case in which an identification to the contract or delivery is made other than in current course of trade but in satisfaction of or as security for a preexisting claim for money, security, or the like, and under circumstances that the transaction would constitute a fraudulent transfer or voidable preference under any statute or rule of law other than this article.

SOURCE: Sales, Section 2-402.

1. Under revised subsection (a), the rights of "creditors of the seller" not just "unsecured creditors" are now subject to the buyer's right to possession of the goods under Section 2-824 (formerly Section 2-502), Section 2-807 (formerly Section 2-716), and Section 2-822(b) (formerly Section 2-709(2)). This change expands the buyer's goods oriented remedies against creditors of the seller, including secured and lien creditors. The right to possession alone, however, does not determine priorities over those creditors in the goods or the proceeds. The language in subsection (a) (proposed by the ABA Task Force) states the priority rule: The buyer's rights must vest before the creditor's in rem claim attaches.

2. The rights of an Article 9 secured creditor of the seller against a buyer are preserved under subsection (c)(1), unless stated otherwise in Sections 2-824 and 2-807 or Section 2-504(c) is involved. Revised subsection (a), however, provides a priority rule if the buyer's right vests before the security interest attaches. If the security interest attaches first, the buyer's right to possession from the seller is preserved subject to the security interest unless the buyer is in the ordinary course of business.

A few illustrations reveal the broad operation of this provision. In all, assume that the buyer is entitled to the possession of goods retained by the seller under either Section 2-824 or 2-807.

#1. C becomes an unsecured creditor of S either before or after the contract for sale. C loses to B unless in every case unless S's retention is fraudulent under Section 2-505(b) or (c)(2) applies.

#2. LC obtains a judicial lien on the goods either before or after S retained possession. After the sale, B obtains a special property interest by virtue of identification, Section 2-502, and a right to possession of the goods under Section 2-824 (i.e., B's right vests). If LC's lien attaches before B's rights vest, B takes subject to the judicial lien. If LC's lien attaches after B's rights vest, B takes free of the lien under subsection (a).

#3. SP creates a security interest in the goods which attaches either before or after the buyer's rights vest. If before, a buyer in the ordinary course of business may take free of that security interest under Section 9-307(1) or 2-504(c). B's status as a BIOCB should arise upon identification of the goods not when possession is transferred. If after, SP may take subject to buyer's rights in the collateral, even though the buyer has not perfected a security interest.

Since December, 1995 representatives of the Article 2 and Article 9 Drafting Committees have met twice to discuss this and other overlap problems between sales and secured transactions. Moreover, the problem sparked interest at the 1996 Annual Meeting and discussion continued at the September, 1996 meeting of the Drafting Committee (where a motion to give the buyer a "super" priority under Article 2 was narrowly defeated). Although a general consensus has emerged on some issues, others remain for decision. More specifically, when does the buyer protected under Article 2 become a BIOCB? The right to possession (which protects the buyer's need for the goods) is undercut unless the BIOCB status arises when the buyer has a right to possession against the seller, not when possession is actually taken. In effect, this right arises when the buyer has a special property interest in the goods and the right to possession arises under Section 2-824 or 2-807.

SECTION 2-506. SALE ON APPROVAL AND SALE OR RETURN; SPECIAL INCIDENTS.

(a) If delivered goods conform to the contract and may be returned by the buyer, the transaction is:

(1) a sale on approval, if the goods are delivered primarily for use; or

(2) a sale or return, if the goods are delivered primarily for resale.

(b) Under a sale on approval:

(1) the risk of loss and the title to goods identified by the contract do not pass to the buyer until acceptance;

(2) use of the goods consistent with the purpose of trial is not an acceptance, but a failure seasonably to notify the seller of election to return the goods is an acceptance, and acceptance of any part of conforming goods is an acceptance of the whole; and

(3) after seasonable notification of election to return, the return is at the seller's risk and expense, but a merchant buyer shall follow any reasonable instructions.

(c) Under a sale or return:

(1) the option to return extends to the whole or any commercial unit of the goods while in substantially their original condition but must be exercised seasonably; and

(2) the return is at the buyer's risk and expense.

(d) An "or return" term of a contract for sale negates the sale aspect of a contract within the provisions of this article on parol or extrinsic evidence.

(e) Goods held on approval are not subject to claims of a buyer's creditors until acceptance. However, goods held on sale or return are subject to those claims while in the [if delivered to a merchant buyer and are in that] buyer's possession.

SOURCE: Sales, Sections 2-326, 2-327.

1. Section 2-506 has been revised to include all material on the nature and the special incidents of "sale or return" and "sale on approval" in one section. Thus, old Section 2-327 has been rolled into Section 2-506 and the material on consignments and creditor's rights, previously in Section 2-326, was contained in a new Section 2-407. Note, however, that the Drafting Committee, at the March, 1996 meeting, voted to move the rights of a consignor against creditors of a consignee from Section 2-407 to Article 9. Thus, except for Section 2-504(c) on entrusting, Article 2 has nothing to say about either a bailment or a consignment transaction, whether or not creditor's rights are involved. Is this wise?

2. New Section 2-506(e) preserves the traditional creditor's rights distinction between "approval" and "return." With the deletion of Section 2-407 in an earlier draft,[see below], Article 2 says nothing about what those creditor rights are and what the seller can do trump them. A possible solution, included in revised subsection (e), makes creditor's rights (whatever they are) depend upon whether the seller in a sale or return delivered them to a merchant buyer. It has been suggested, however, limiting protection to cases where the buyer is a merchant is unsound.

To illustrate, suppose a brewery sells beer to a retailer to be "returned" if the beer is not sold before the "freshness" expiration date. In this "sale or return" Section 2-506 deals with the rights between the parties and states that the beer, while in the buyer's possession, is subject to the rights of the buyer's creditors. Which creditors, what rights and what precautions the seller can take are not stated. If, instead, the beer is "consigned" to the retailer, Article 2 says nothing about anything. Where secured creditors are involved, Article 9 will have something to say, but exactly what is still not clear.

3. Former Section 2-326 (1990 Official Text), renumbered Section 2-407 in the July, 1995 Draft, was deleted by the Drafting Committee at the March, 1996 Meeting. The UCC will treat the consignment problem in Article 9. Under tentative proposals, revised Article 9 now: (1) Defines consignment and defines security interest to include a consignment, whether or not for security; (2) Applies to "any consignment"; (3) Requires perfection of a consignment security interest and prescribes how a consignor may file a financing statement; (4) Defines the rights of creditors of and purchasers from the consignee; and (5) Defers consideration of the duties and remedial rights of the consignor upon default by the consignee.

4. Assuming that revised Article 9 will ultimately cover most aspects of a consignment for security, there are no code provisions covering a "pure" consignment, i.e., a bailment with the bailee acting as an agent with power to find a buyer for the consigned goods and to transfer good title by a contract for sale to that buyer. Moreover, there may be a gap in coverage for consignments for security between the enactment of Article 2 and Article 9.

One observer has suggested that the essence of old Section 2-326(3) be retained a subsection (f) until the Article 9 project is completed.

SECTION 2-601. GENERAL OBLIGATIONS. Parties are obligated to perform in accordance with the contract.

SOURCE: Sales, Section 2-301.

1. Section 2-601 is derived from former Section 2-301 which provided that the seller's obligation was to transfer and deliver and the buyer's obligation was to accept and pay in accordance with the contract. Compare CISG Article 30 and Article 53. The phrasing of the parties' obligations is broader than that stated in former Section 2-301. The broader phrasing is intended to encompass all of the obligations of the parties' contract, not merely those related to delivery of and payment for the goods. "Contract" as defined in Section 1-201(11) means the total legal obligation of the parties as determined from their agreement (Section 1-201(3)), the provisions of the U.C.C. or any other applicable rule of law. This provision makes explicit what is implicit throughout Article 2, that each party has to perform its obligations as determined by the contract.

2. The July 1996 draft (Section 2-501(b)) stated that each party's obligation to perform was dependant upon the other party's substantial performance of its obligation it that other party was to perform first under the contract. This substantial performance rule was derived from general principles of contract law. See Restatement (Second) of Contracts, 237. The July 1996 draft (Section 2-501(c)) also provided that a nonmaterial breach entitled the aggrieved party to remedies but did not entitle the aggrieved party to withhold its own performance. Those two subsections have been deleted as inconsistent with the decision to retain the perfect tender rule in Section 2-703 and not necessary given the decision to not include service contracts connected with the sale of goods within the scope of Article 2. (November 1996 Drafting Committee meeting). To reflect the decision to not cover service contracts, the provisions contained in the July 1996 draft on service contracts have been deleted (Sections 2-502, 2-503, 2-504). Even though service contracts are not explicitly within the scope of Article 2, service obligations may arise as part of a limited remedy such as a promise to repair. The issues presented by that service promise is the level of the repair obligation required and the remedies of the buyer if the repair is not provided as promised. Those issues are addressed in Section 2-810 on limited remedies.

3. Section 2-505 from the July 1996 draft has been consolidated with Section 2-604 of the July draft and moved to Section 2-702 of this draft in order to deal with waiver of breach concepts all in one section.

SECTION 2-602. MANNER OF SELLER'S TENDER OF DELIVERY.

(a) Tender of delivery requires that the seller put and hold conforming goods at the buyer's disposal and give any notification reasonably necessary for the buyer to take delivery. A tender of delivery includes the performance of any agreement to install or assemble the goods. Tender must be at a reasonable hour. A tender of goods must be kept available for the period reasonably necessary to enable the buyer to take possession or control of the goods. The buyer shall furnish facilities reasonably suited to receive the goods.

(b) If the seller is required or authorized to send the goods to the buyer but the agreement does not require delivery at a particular destination, tender requires that the seller deliver conforming goods to the carrier and comply with Section 2-603.

(c) If the agreement requires the seller to deliver at a particular destination, tender requires compliance with subsection (a) and, in an appropriate case, the tender of documents [of title] pursuant to subsections (d) and (e). The seller need not deliver at a particular destination unless required by a specific agreement or by the commercial understanding of the terms used by the parties.

(d) If conforming goods of a seller are in the possession of a bailee and are to be delivered to a buyer without being moved, the following rules apply:

(1) Tender requires the seller to tender a negotiable document of title covering the goods or to procure an acknowledgment by the bailee to the buyer of the buyer's right to possession of the goods.

(2) Tender to the buyer of a nonnegotiable document of title or of a record directing the bailee to deliver is sufficient unless the buyer seasonably objects. However, risk of loss of the goods and of any failure by the bailee to honor the document [of title] or to obey the direction remains on the seller until the buyer has had a reasonable time to present the document [of title] or direction. A refusal by the bailee to honor the document [of title] or to obey the direction voids the tender. Receipt by the bailee of notification of the buyer's rights fixes those rights as against the bailee and all third parties.

(e) If an agreement requires a seller to deliver a document [of title], the following rules apply:

(1) All required documents [of title] must be tendered in correct form, except as provided in this article with respect to bills of lading in a set.

(2) Tender through customary banking channels is sufficient, and dishonor of a draft or other demand for payment accompanying the documents constitutes nonacceptance or rejection.

SOURCE: Sales, Section 2-503.

1. Section 2-602 is derived from former Section 2-503 and with three changes, continues the rules from that section. First, a test for interpreting delivery terms was added to subsection (c) as recommended in the PEB study report. Delivery to a particular destination must be required by "specific agreement" or the commercial understanding of the terms. Thus, this section continues the prior policy expressed in former Comment 5 to former Section 2-503 that the presumption is a shipment contract, not a destination contract. In addition, with the deletion of the defined shipping terms contained in former Sections 2-319 through 2-323, whether a shipping term designates a destination or a shipment contract will depend upon commercial usage. See Section 2-309. Second, the phrase "to the buyer" was added to subsection (d)(1) as recommended in the PEB study report to make clear that the bailee must acknowledge to the buyer the buyer's right to the goods. Third, a tender of delivery includes any agreed assembly or installation as part of the tender. This addition is to make clear when the tender is complete, both for purposes of the buyer's corresponding duty of payment, Section 2-607, and for purposes of the accrual of a cause of action for breach under Section 2-814.

2. The PEB study report recommended that bailee be defined. The Drafting Committee decided not to define bailee. Bailee is defined in Section 7-102(1)(a) for the purpose of Article 7 as "the person who by a warehouse receipt, bill of lading or other document of title acknowledges possession of goods and contracts to deliver them." Article 2 uses bailee in three sections, Sections 2-602(d), 2-612(b), and 2-818, but uses the term in a broader sense than bailee as defined in Section 7-102(1)(a) because it is not limited to persons who issue documents of title. Article 1 does not contain a definition of bailee. Articles 2A, 8, and 9 use the term bailee without definition. At the January, 1994 meeting, the following problem was posed. Suppose that the seller sells to the buyer a haystack located at a place other than the seller's place of business and controlled by the seller's agent (not a bailee). The buyer intends to resell the hay to a third party, who will then take delivery. The current rules appear to be adequate for this problem. The place for tender is the place where the goods are located, Section 2-305, [CISG Article 31(b) is in accord] and the adequacy of the tender of delivery is governed by Section 2-602(a). In the resale between the buyer and the resale buyer, since the goods are in the possession of a bailee (original seller's agent) and are to be delivered without being moved, tender by the buyer (now a seller) is governed by Section 2-602(d). No revisions are required.

3. Seller's tender of delivery has three important consequences. First, it satisfies a condition to the buyer's duty to accept and to pay for the goods. See Section 2-606(a). Unless otherwise agreed, the buyer is not in breach until there is a tender of delivery. Compare Section 2-607, dealing with the buyer's tender of payment.

Second, it is an essential ingredient in the passage of risk of loss under Section 2-612, in that tender either passes the risk or is an essential first step to transfer of possession of the goods. Tender of delivery in Section 2-602 is stated in terms of tendering conforming goods. Under Section 2-612, the goods need not be conforming for the risk of loss to pass to the buyer. Rather the risk of loss will pass to the buyer at the times stated in Section 2-612 even if the goods are not conforming. The requirements of Section 2-602 as to an effective tender, other than conformity of the goods, may still be relevant in some situations to the passage of the risk of loss, such as when goods are shipped by carrier or are in the hands of a bailee. This is a change from former Section 2-509 and Section 2-510(1). See notes following Section 2-612.

Third, tender of delivery is the time for testing whether goods conform to the contract for the purpose of determining the buyer's right to reject as well as breach of contract. Tender of delivery under former Section 2-503 as well as under this section, means that the seller "puts and holds" conforming goods for the buyer's disposition. This phrase implies that the goods must conform to the contract throughout the reasonable time that the seller is holding the goods for the buyer to take possession or control. Thus, the seller, not the buyer, has the risk of damage to the goods during the reasonable time necessary for the buyer to take possession or control of the goods. See Section 2-612(b). This approach is consistent with the risk of loss principles stated in Section 2-612.

In any case, the tender "rules," in the absence of contrary agreement, must be clear and adapt to variations in delivery patterns, i.e., where seller has no obligation to ship the goods, or seller is authorized or required to ship the goods, or the goods are in the possession of a bailee. Interpretation of these requirements will be more difficult, since the delivery terms in former Sections 2-319 through 2-324 have been deleted.

4. The bracketed language in subsections (c), (d), and (e) is designed to highlight a difference in the way the words "document" and "draft" are used in Article 5 that is broader than used throughout the other articles of the U.C.C. Compare Section 1-201(a)(15) defining "document of title" with Section 5-102(a)(6) defining "document" and Section 3-104(e) defining "draft" and Comment 11 to Section 5-102 stating "draft" in Article 5 is different than "draft" in Article 3.

5. It should be noted that draft Section 9-311(c) proposes a change from current Sections 9-304 and 9-305 which provide that a secured party may perfect its security interest in the goods in the hands of a bailee who has not issued a negotiable document of title for the goods by mere notification to the bailee. Draft Section 9-311(c) provides that the secured party does not perfect its security interest in goods in the hands of the bailee who has not issued a negotiable document for those goods until the bailee acknowledges in writing that it holds the goods for the secured party. Are the policy issues different in this context that mere notification should fix rights as against third parties under Section 2-602(d)(2)?

6. CISGA. Under Article 30, the seller must "deliver the goods, hand over any documents relating to them and transfer the property in the goods, as required by the contract and this Convention." Articles 31-34 then state when and how this is to be done, with Article 31 the counterpart of Section 2-602 and Article 32 the counterpart of Section 2-603.

Article 31(b) deals with the case where no carriage of the goods is involved and the "contract relates to specific goods, or unidentified goods to be drawn from a specific stock or to be manufactured or produced, and at the time of the conclusion of the contract the parties knew that the goods were at, or were to be manufactured or produced at, a particular place." Here the delivery obligation is satisfied by "placing the goods at the buyer's disposal at that place," whether it be a place controlled by the seller but not its place of business or by a bailee.

Where that place is controlled by the seller, the same result can be reached through Sections 2-305(a) and 2-602(a).

SECTION 2-603. SHIPMENT BY SELLER.

(a) If a seller is required or authorized to send the goods to the buyer and the contract does not require delivery at a particular destination, the following rules apply:

(1) The seller shall put the goods in the possession of a carrier. However, unless requested by the buyer or required by usage of trade, the seller need not make a contract for their transportation or obtain and deliver any documents of title necessary to enable the buyer to obtain possession or control of the goods.

(2) The seller shall promptly notify the buyer of the shipment if the goods are not clearly identified to the contract by markings on the goods, shipping documents, or otherwise.

(b) A seller's failure to notify the buyer of the shipment or to make a proper contract for transportation, if so required by subsection (a), is a ground for rejection only if material delay or loss results.

SOURCE: Sales, Section 2-504.

1. Section 2-603 changes former Section 2-504 by not obligating the seller to make a contract for transportation or to obtain and deliver documents unless the buyer requests the seller to do so or the seller is required to do so by usage of the trade. This change is designed to bring Article 2 more in line with commercial practice. See John A. Spanogle, Incoterms and UCC Article 2 - Conflicts and Confusions, 31 The International Lawyer 111, 129-30 (1997). In accord with international practice as reflected in CISG Article 32, the seller need notify the buyer only when the goods are not clearly identified to the contract by markings on the goods, documents or otherwise. This changes the rule from former Section 2-504 which required the seller to notify the buyer in all cases.

Section 2-603 states the rules for tender when the seller is not obligated to deliver at a particular destination. Section 2-602(b). The rules for tender in destination contracts are stated in Section 2-602(c) and assume that the seller bears the cost and risk of making an appropriate contract for shipment with the carrier.

2. CISGA. Many international contracts for sale involve "carriage of the goods." In the absence of agreed delivery terms, such as the Incoterms 1990 of the International Chamber of Commerce, Articles 31(a) and 32 determine what the seller must do to deliver the goods. In the absence of agreement to deliver at "any other particular place," delivery consists of "handing the goods over to the first carrier for transmission to the buyer." Article 31(a). If the goods are "clearly identified to the contract" the seller need not notify the buyer of the "consignment." Article 32(1). More to the point, unless the seller is "bound to arrange for carriage of the goods" it need not make any contracts for carriage. Article 32(2). Even if the seller is not bound to obtain insurance on the carriage, it must "at the buyer's request, provide . . . all available information necessary to enable [the buyer] to effect such insurance." Article 32(3).

SECTION 2-604. SELLER'S SHIPMENT UNDER RESERVATION.

(a) If a seller has identified goods to the contract by or before shipment, the following rules apply:

(1) Procurement of a negotiable bill of lading reserves in the seller a security interest in the goods. Procurement of the bill to the order of a financing agency or the buyer indicates in addition only the seller's expectation of transferring that interest to the person named.

(2) Procurement of a nonnegotiable bill of lading to the seller or its nominee reserves possession of the goods as security. However, except in a case of conditional delivery, a nonnegotiable bill of lading naming the buyer as consignee does not reserve a security interest, even if the seller retains possession of the bill of lading. [The consignee is the person named in the bill of lading to which or to whose order the bill promises delivery.]

(b) A shipment by a seller with reservation of a security interest which breaches the contract for sale constitutes an improper contract for transportation under Section 2-603. However, rights given to the buyer by shipment and identification of the goods to the contract and the seller's powers as a holder of a negotiable document of title are not thereby impaired.

SOURCE: Sales, Section 2-505.

1. There are no changes in substance from former Section 2-505. The bracketed sentence in subsection (a)(2) is derived from Section 7-102(1)(b) and is not found in former Section 2-505. It has been suggested that it should be deleted.

2. CISGA. There is no comparable provision in CISGA. Article 58(1) and (2), however, permits a seller in cases where documents are involved to make payment a condition for handing over the goods or the documents. Nevertheless, the buyer may still examine the goods before payment unless otherwise agreed. Article 58(3).

SECTION 2-605. RIGHTS OF FINANCING AGENCY.

(a) A financing agency, by paying or purchasing for value a draft or honoring a presentation under a letter of credit that relates to a shipment of goods, acquires, to the extent of the payment, purchase or honor and, in addition to its own rights under the draft and any document of title securing it, any rights of the shipper in the goods, including the right to stop delivery and the shipper's right to have the draft honored by the buyer.

(b) The right to reimbursement of a financing agency that in good faith has honored or purchased the draft or honored a presentation under a letter of credit under commitment to or authority from a buyer is not impaired by later discovery of defects in any relevant document [of title] that was apparently regular on its face.

SOURCE: Sales, Section 2-506.

There is one change in former Section 2-506. Because a presentation under a letter of credit need not be accompanied by a draft as defined in Article 3, Section 5-102 Comment 11, but the rights obtained by an honor of a presentation under a letter of credit should be comparable, the phrasing of this section has been broadened to include presentations under a letter of credit.

SECTION 2-606. EFFECT OF SELLER'S TENDER; DELIVERY ON CONDITION.

(a) Tender of delivery is a condition to a buyer's duty to accept and pay for the goods. Tender entitles the seller to acceptance of the goods and payment according to the agreement. The seller shall tender first but need not complete delivery until the buyer has tendered payment.

(b) Subject to Section 2-816, if payment is due and demanded on the delivery of goods or documents of title, a buyer's right against the seller to retain or dispose of them is conditional upon the buyer's making the payment due.

SOURCE: Sales, Section 2-507.

1. Section 2-606 makes two substantive changes from former Section 2-507. First, subsection (a) states as the default rule that the seller shall tender delivery first, but need not complete delivery unless the buyer tenders payment. This changes the rule from former Article 2 that treated the seller's obligation to tender delivery and the buyer's obligation to tender payment as concurrent conditions. This change is consistent with the PEB study report. Second, subsection (b) retains the concept of seller's right to reclaim upon a conditional delivery in a cash sale transaction but makes that right subject to the requirements found in Section 2-816 which explicitly governs cash sale reclamations as well as credit sale transactions governed by former Section 2-702. Section 2-816 is consistent with PEB Commentary No. 1 on cash sale reclamation. Although the PEB study report recommended that subsection (b) be eliminated and the cash sale reclamation right be integrated with Section 2-702, the Drafting Committee decided that it was better to retain the concept of conditional delivery in subsection (b) and make the right to reclaim in a conditional delivery subject to Section 2-816 governing both cash and credit sale reclamations.

2. CISGA. Article 58(1), in accord, provides that if the buyer is "not bound to pay the price at any other specific time, he must pay it when the seller places either the goods or documents controlling their disposition at the buyer's disposal in accordance with the contract and this Convention." If, however, the buyer must pay "on the date fixed by or determinable from the contract and this Convention," it must pay "without the need for any request or compliance with any formality on the part of the seller." Thus, if no time if fixed to pay the seller must tender first. But if a time for payment is fixed, the buyer must pay at that time whether the seller tenders or not.

SECTION 2-607. TENDER OF PAYMENT BY BUYER; PAYMENT BY CHECK.

(a) Subject to Section 2-606(a), tender of payment by a buyer is a condition to the seller's duty to complete a delivery.

(b) Tender of payment by a buyer is sufficient if made by any means or in any manner current in the ordinary course of business unless the seller demands payment in money and gives any extension of time reasonably necessary to procure it.

SOURCE: Sales, Section 2-511.

1. Section 2-607 makes only one change to former Section 2-511. Subsection (a) has been revised to be consistent with Section 2-606 which requires the seller to tender first. Thus, the buyer must tender payment as a condition to the seller's obligation to complete the delivery. This rule is consistent with Section 2-609(a) which gives the buyer the right to inspect prior to payment. If the parties do not otherwise agree, the seller will tender the goods, the buyer may inspect and tender payment, and the seller will then be obligated to complete delivery.

Subject to Section 3-310, payment by check is conditional and is voided as between the parties by dishonor of the check on due presentment. In cases like this, the seller may have a limited right to reclaim the goods from the seller. See Section 2-816(b)(2).

2. The Federal Reserve Bank of New York has identified an inconsistency between subsection (b) and Section 4A-406(b). If the seller demands money for payment and the buyer, instead, transfers payment under Article 4A, is the buyer's duty to pay discharged? The Fed concludes "yes" but worries that revised Article 2 will preserve the seller's option to demand money: "[A] demand for currency is per se commercially unreasonable with respect to a wire transfer" unless the narrow grounds where rejection of a wire transfer is commercially reasonable are satisfied. The problem is broader than just Section 2-607 and, perhaps, should be solved in Article 1.

3. CISGA. Article 53 provides that the buyer "must pay the price for the goods . . . as required by the contract and this Convention." It is frequently agreed that payment shall be by a letter of credit, a method of payment not within the scope of the Convention. In the absence of contrary agreement, questions about the time of payment are answered in Articles 58 and 59. If a time for payment has not been fixed, the duty to pay arises when the seller tenders delivery. Article 58(1) and (2). If a time for payment is fixed, the buyer must pay at the time "without the need for any request or compliance with any formality on the part of the seller."

SECTION 2-608. PAYMENT BY BUYER BEFORE INSPECTION.

(a) If a contract requires payment before inspection, nonconformity of the goods does not excuse the buyer from so making payment unless:

(1) the nonconformity appears without inspection; or

(2) despite tender of any required documents [of title], the circumstances would justify injunction against honor under Article 5.

(b) Payment pursuant to subsection (a) is not an acceptance of goods and does not impair a buyer's right to inspect or other remedies of the buyer.

SOURCE: Sales, Section 2-512.

1. There are no changes of substance in former Section 2-512. See 5-109(b) (injunction against honor).

2. CISG. Article 58(3) protects the buyer's right to examine the goods before paying the price "unless the procedures for delivery or payment agreed upon by the parties are inconsistent with his having such an opportunity." Assuming such agreement, there is no provision comparable to Section 2-608.

SECTION 2-609. BUYER'S RIGHT TO INSPECT GOODS.

(a) If goods are tendered, delivered or identified to a contract for sale, the buyer has a right before payment or acceptance to inspect them at any reasonable place and time and in any reasonable manner. If the seller is required or authorized to send the goods to the buyer, the inspection may be after their arrival.

(b) Expenses of inspection must be borne by the buyer.

(c) A buyer is not entitled to inspect the goods before payment of the price if the contract provides for:

(1) delivery "C.O.D.", "C.I.F.", or "C. & F."or delivery on terms which under applicable course of dealing, usage of trade, or course of performance are interpreted as precluding inspection before payment; or

(2) payment upon tender of required documents of title, unless payment is due only after the goods become available for inspection.

(d) A place, method, or standard of inspection fixed by the parties is presumed to be exclusive. However, unless otherwise expressly agreed, the fixing of a place, method, or standard of inspection does not postpone identification or shift the place for delivery or for passing the risk of loss. If compliance becomes impossible, inspection must be made as provided in this section unless the place, method, or standard fixed was clearly intended as an indispensable condition the failure of which avoids the contract.

SOURCE: Sales, Section 2-513.

1. Section 2-609 continues the rules from former Section 2-513 with two changes. The first change is necessary given the deletion of the shipment terms provisions from revised Article 2. Subsection (c) states a default rule for determining when the buyer does not have a right to inspect before payment. Former Section 2-319(4), Section 2-320(4), and Section 2-321(1), Article 2 stated presumptions regarding when inspection was not allowed prior to payment. Under subsection (c)(1), whether payment is required before inspection will depend upon the commercial usage of the shipping terms employed. The catch all language added to subsection (c)(1) is designed to dovetail with Section 2-309 on shipping terms. In subsection (c)(2), the phrase "payment against documents" has been changed to "payment upon tender of required documents" because of uncertainty about the meaning of "payment against documents" given that the phrase no longer appears in the Incoterms of the International Chamber of Commerce and the deletion of shipment terms from Article 2 that defined which terms required payment against documents. See Sections 2-319(4), 2-320(4), and 2-321(1). The second change is to bracket language at the end of subsection (b) to conform to the change in the definition of incidental damages in Section 2-805 which no longer confines expenses to goods rightfully rejected, but rather to expenses incurred with respect to the goods which are the subject matter of the contract.

2. CISGA. Unless otherwise agreed, the buyer has a right to examine the goods upon tender and before payment. Article 58(3). If carriage of the goods is involved, examination "may be deferred until after the goods have arrived at their destination." Article 38(2). A special rule applies when the goods are redirected or redispatched in transit. Article 38(2).

The buyer must act fast to examine the goods, Article 38(1), and may lose the right to rely upon a non-conformity if timely notice, as defined in Article 39, is not given. The buyer, however, is protected from the rigors of Articles 38 and 39 if the seller knew "or could not have been aware of" the non-conformity and did not disclose it, Article 40, and is entitled to damages if "he has a reasonable excuse for his failure to give the required notice."

SECTION 2-610. WHEN DOCUMENTS DELIVERABLE ON ACCEPTANCE OR PAYMENT. Documents of title against which a draft is drawn must be delivered to the drawee or to the issuer of a letter of credit that honors the draft on acceptance of the draft if the draft is payable more than [a reasonable time] [three days] after presentment. Otherwise, delivery of the documents [of title] is required only on payment.

SOURCE: Sales, Section 2-514.

1. Section 2-610 states a default rule for determining when the person holding documents of title must deliver those documents when presenting a draft to the buyer (drawee) or to an issuer of a letter of credit. The two possibilities are when the draft is accepted by the buyer or issuer under Section 3-409 or when the draft is paid by the buyer or issuer. Under Section 4-503, if the presenter is a bank, the presumption is that if the draft is payable more than three days after presentment, acceptance of the draft is sufficient to entitle the drawee or issuer to delivery of the documents. If the draft is payable within 3 days of presentment, then the drawee or issuer are not entitled to the documents unless the draft is paid. The 3 day time period is not a rule that determines when the draft must be honored but rather what presumption to apply to determine when documents must be delivered. Compare Section 5-108(b). Some have argued that the three day time period should be lengthened to a "reasonable time." That debate is preserved for further decision by the bracketed language at the end of the first sentence.

2. Section 2-610 continues the rule from former Section 2-514 with one change, to broaden the provisions to include an issuer who honors a letter of credit given that a letter of credit may be drawn on without presentation of a draft as defined in Article 3. See Section 5-102, Comment 11. The bracketed language at the beginning of the first sentence reflects a need to decide which definition of documents should be employed here, the Article 1 definition of "document of title", Section 1-201(15), or the Article 5 definition of "document," Section 5-102(a)(6) which is broader than the definition of "document of title."

3. There is no comparable CISGA provision.

SECTION 2-611. OPEN TIME FOR PAYMENT OR RUNNING OF CREDIT; AUTHORITY TO SHIP UNDER RESERVATION.

(a) Payment is due at the time and place the buyer is to receive the goods, even if the place of shipment is the place for tender of delivery.

(b) If a seller is authorized to send the goods, the seller may ship them under reservation and may tender the documents of title. However, the buyer may inspect the goods after their arrival before payment is due unless inspection is inconsistent with the terms of the contract.

(c) If tender of delivery is agreed to be made by way of documents of title [other than under subsection (b)], payment is due at the time when and at the place where the buyer is to receive the documents [of title], regardless of where the goods are to be received.

(d) If the seller is required or authorized to ship the goods on credit, the credit period runs from the time of shipment. However, postdating the invoice or delaying its dispatch correspondingly delays the starting of the credit period.

SOURCE: Sales, Section 2-310.

1. Section 2-611 makes no changes of substance from former Section 2-310.

SECTION 2-612. RISK OF LOSS.

(a) This section is subject to Section 2-506(b) and (c).

(b) Except as otherwise provided in subsection (c), risk of loss passes to the buyer regardless of the conformity of the goods to the contract as follows:

(1) Subject to this subsection, the risk of loss passes to a buyer upon receipt of the goods. If a buyer does not intend to take possession, risk of loss passes when the buyer receives control of the goods.

(2) If a contract requires or authorizes the seller to ship goods by carrier, the following rules apply:

(A) If the contract does not require delivery at a particular destination, the risk of loss passes to the buyer when the goods are delivered to the carrier as required by Sections 2-602 and 2-603, even if the shipment is under reservation.

(B) If the contract requires delivery at a particular destination and the goods arrive there in the possession of the carrier, the risk of loss passes to the buyer when goods are tendered in the manner required by Section 2-602.

(3) If goods are held by a bailee to be delivered without being moved, the risk of loss passes to the buyer:

(A) on the buyer's receipt of a negotiable document of title covering the goods with any required indorsement;

(B) on acknowledgment by the bailee to the buyer of the buyer's right to possession of the goods ; or

(C) after the buyer's receipt of a nonnegotiable document of title or record directing delivery, as provided in Section 2-602(d)(2).

(c) A breach of contract by either party affects risk of loss only in the following cases:

(1) If the buyer rightfully and effectively rejects the goods or revokes acceptance of the goods, the seller has the risk of loss from the time when the rejection or revocation is effective.

(2) If the seller has tendered nonconforming goods, the risk of loss has passed to the buyer, and the goods are damaged or lost before the buyer effectively rejects or revokes acceptance, the seller has the risk of loss to the extent the nonconformity of the goods caused the damage or loss.

(3) If conforming goods are identified to the contract when the buyer repudiates or is otherwise in breach and the risk of loss has not otherwise passed to the buyer, the buyer has the risk of loss for those goods for a commercially reasonable time after the breach or repudiation.

1. Former Sections 2-509 and 2-510 provided for passage of the risk of loss depending upon who had control of the goods, whether the there was a breach of contract, and whether the loss was insured rather then whether title had passed to the buyer. If no breach of contract existed, then Section 2-509 determined when the risk had passed. The PEB study report recommended that Section 2-510 be deleted as an unwise attempt to reallocate loss in the event of breach when the breach was not causally connected with the loss. In addition, the attempt to reallocate the loss based upon deficiency in insurance coverage was unclear in application. See note 5 infra. Section 2-612 accords with the PEB study report in adopting the perspective that opportunity to control the goods and prevent the loss is the primary policy to determine who has the risk of loss as a default rule. Thus, breach of contract and insurance coverage have been rejected as generally relevant to the passage of risk of loss. Subsection (c) provides three exceptions to govern three particular cases where risk of loss issues depend on whether there is a breach of contract. See note 6, infra. Of course, the parties may always agree to allocate the risk of loss in a manner different than provided in Section 2-612.

2. The PEB study report also recommended that the distinction between a merchant and a non-merchant in former Section 2-509(3) be eliminated and that risk of loss pass upon receipt of the goods. Under former Section 2-509(3), if the seller was a merchant, the risk of loss passed to the buyer upon receipt of the goods, otherwise the risk of loss passed to the buyer upon tender of delivery. Subsection (b)(1) implements this recommendation, providing that the risk of loss passes to the buyer when the buyer upon receipt or control of the goods. Receipt is defined in Section 2-102(a)(24) as taking delivery of the goods. Delivery is defined as taking physical possession of the goods. Section 2-102(a)(11). To illustrate, suppose that S contracts to sell B a haystack located in a field and controlled by S's agent, who is not an independent bailee. The goods are identified to the contract but B never expects to take possession. Rather, B expects to resell the hay to a third person, who will then take possession. In this case, when S tenders delivery under Section 2-602(a), B, although not in possession, has control of the goods and the risk of loss has passed. The fact that B may be in breach of contract after tender but before possession is taken is irrelevant. Except as provided in subsection (c), whether S has tendered conforming goods is also irrelevant to the passage of risk of loss to buyer.

3. Subsection (a) continues the rule from former Section 2-509(4) that the rules of Section 2-612 are subject to the contrary provisions of sale on approval and sale or return found in Section 2-506.

4. Subsections (b)(2) and (b)(3) restate the provisions from former Section 2-509(1) and (2) with the following changes. First, as stated above, the conformity of the goods is not relevant to passage of the risk of loss to the buyer. Thus, the principles of these subsections apply even if there is a breach by the seller. Second, consistent with the change to Section 2-602(d)(1), the acknowledgment sufficient to pass the risk of loss to the buyer is the bailee's acknowledgment "to the buyer" under Section 2-612(b)(3)(B). See Jason's Foods, Inc. v. Peter Eckrich & Sons, Inc., 774 F. 2d 214 (7th Cir. 1985). These changes are consistent with the PEB study report recommendations. The PEB study report also recommended that the meaning of a destination contract be clarified. That recommendation is implemented in Section 2-602(c). The PEB study report recommended that the meaning of "carrier" be clarified in the Comments. For risk of loss purposes, the term "carrier" in Section 2-612(b)(2) does not include transportation facilities operated or controlled by the parties to the contract. Rather, the term "carrier" refers to independent methods of transportation by ground, air or water, including private express mail, United Postal Service and the United States Postal Service. Otherwise, the risk of loss could shift to the buyer while the seller still has possession and control of the goods. Finally, the PEB study report recommended that bailee be defined. See Note 2 to Section 2-602. For risk of loss purposes, the term "bailee" usually refers to a third person (neither seller nor buyer) who is in possession of the goods sold at the time of contracting. That person may be a warehouse or a carrier who has issued a document of title, see Section 7-102(1)(a), or another person who satisfies the requirements of a bailment. It is clear that a seller, after the contract for sale, may become a bailee of the goods either before or after the buyer takes possession. For example, suppose that S sells B a horse. B pays the price, but instead of taking delivery, B contracts with S to board the horse for an agreed price. S is now a bailee. Whether B has the risk of loss, however, should not be determined by Section 2-612(b)(3). Instead, the question is whether B has the risk of loss under either Section 2-612(b)(1) or 2-612(b)(2) before S becomes a bailee. Since no shipment was contemplated and B never received the goods, risk remains on S unless S has obtained a contrary agreement.

5. Except as stated in subsection (c), risk of loss principles do not affect the parties' obligations under the contract. The seller must tender and the buyer must pay as agreed. Thus, a buyer with the risk who fails to pay as agreed may be liable for the price or for damages for breach of contract. Similarly, a seller with the risk is still obligated to deliver the goods as agreed or answer in damages for breach of contract. Former Section 2-510, dealing with the effect of breach on risk of loss, has been repealed. The assumption that a breach by either the seller or the buyer should, in cases of a deficiency in insurance coverage, reallocate the risk of loss otherwise assigned by Section 2-612 is dubious, especially where there is no causal connection between the breach and the loss itself. Absent a causal connection, the party to whom the risk has passed at the times stated in subsection (b) is still in the best position, cost considered, to avoid or insure against the loss.

Moreover, application of the "breach" standard in old Section 2-510 produced unexpected difficulties. For example, under Section 2-510(2), suppose the buyer in possession discovers a nonconformity in the goods and "rightfully" revokes acceptance before the loss occurs. Assuming that the buyer exercised ordinary care and did not owe the price, the operation of Section 2-510(2) was unclear. Suppose that the fair market value of the goods was $1,000 and the buyer was either (a) fully insured, or (b) half insured or (c) not insured at all. Since B, after revocation, must return the goods or their fair market value to the seller, the practical solution is that buyer pays seller $1,000 in (a), $500 in (b) and nothing in (c). But there is nothing in the text of or Comments to Section 2-510(2) that dictated this result.

Similarly, under Section 2-510(3), suppose the buyer breaches while the goods are in the seller's or a bailee's possession and before the risk of loss has passed. It is unlikely that the buyer owes the price of the goods. Suppose the fair market value of the goods is $1,000, the seller is not insured at all, and wants to recover that deficiency in "effective insurance coverage" from the buyer. Does Section 2-510(3) support an action against the buyer for $1,000 and, if so, on what theory? Again, neither the text nor the Comments are helpful.

Finally, Section 2-510 was an anti-subrogation provision, since insurance "deficiency" was determined without regard to subrogation rights. Once the chips have fallen in the reallocation process, the insurance company, if any, must live with the outcome. But there is little evidence that insurance companies were aware of Section 2-510, much less that they calculated premiums with the availability of subrogation in mind.

6. Subsection (c) recognizes that there are three situations where breach should influence who has the risk of loss. Subsection (c)(1) is designed to bring the risk of loss rules into conformity with the buyer's obligation to care for the goods upon rightful rejection or revocation of acceptance. Subsection (c)(2) is based upon the principle that when the nonconformity causes the loss or damage to the goods, the seller should have the risk of loss. Subsection (c)(3) is based upon the idea that a repudiation or failure to take delivery could surprise the seller who is expecting the risk of loss to pass to the buyer at a particular point and gives the seller a reasonable opportunity to decide what to do with the goods. To illustrate the application of Section 2-612, consider the following hypotheticals.

(a) S tenders nonconforming goods. Under subsection (b)(1), S has the risk of loss until B takes possession or control of the goods. If the goods are lost or damaged while in S's possession or control, S has the risk of loss. [Same as current law].

(b) S tenders nonconforming goods. B takes possession of the goods. Under subsection (b)(1), B now has the risk of loss even though B has not accepted the goods under Section 2-706. If the goods are destroyed or damaged before acceptance, B is not liable for the price under Section 2-822 but would be liable for damages for breach of contract for failing to perform its obligation under the contract. B would have a cause of action for the seller's failure to tender conforming goods. [Change from the current law, see Section 2-510(1)]. However, if the nonconformity caused the loss, then, the risk of loss is on S to the extent the nonconformity caused the loss under subsection (c)(2).

(c) S tenders nonconforming goods. B takes possession of the goods. Under subsection (b)(1), B has the risk of loss. Assume B rejects the goods or accepts the goods and then revokes acceptance. The risk of loss then returns to S from the time the rejection or revocation is effective. Subsection (c)(1). This conforms the risk of loss rule to the buyer's duty under Section 2-704 as a bailee to take reasonable care of the goods. Thus, if the goods are lost or destroyed after the rejection or revocation becomes effective, S has the risk of loss for those goods. B is only liable for the goods if B fails to exercise ordinary care for the goods under Section 2-704. Rights to insurance proceeds is governed by other law. [change from current law, Section 2-510(2)].

(d) S tenders nonconforming goods. B takes possession of the goods. Under subsection (b)(1), B has the risk of loss. B accepts the goods and does not revoke acceptance. B has the risk of loss for those goods and under Section 2-822 is liable for the price. [same as current law, Section 2-510(1)].

(e) S tenders conforming goods. B takes possession of the goods. The risk of loss is on B under subsection (b)(1). B wrongfully rejects the goods. The goods are destroyed after rejection. Under Section 2-822(a)(2), S may recover the price or may sue for breach of contract for B's wrongful rejection. If S regains possession of the goods and then the goods are destroyed, S can recover the price only if the destruction was within a reasonable time after the risk of loss passed to B. Even if S cannot recover the price because the goods are destroyed beyond the reasonable time after the risk passed to the buyer, S has a remedy for breach of contract against B for wrongfully rejecting the goods. [Same as current law, Section 2-709]

(f) S tenders conforming goods. B takes possession of the goods. The risk of loss is on B under subsection (b)(1). B accepts the goods but then attempts to wrongfully revoke acceptance. The goods are then destroyed. S may still recover the price under Section 2-822 as the wrongful revocation does not undo the acceptance. [Same as current law, Section 2-709]

(g) S identifies conforming goods to the contract. B repudiates. Risk of loss under subsection (b) would still be on seller. Subsection (c)(3) advances the principle that if the goods are destroyed within a reasonable time after B's breach, that S can treat the risk of loss as resting on B. The primary effect of that shifting of the risk of loss is to entitle S to the price under Section 2-822(a)(2). If subsection (c)(3) did not exist, S would still have its remedy for breach due to B's repudiation, but would not have the action for the price under Section 2-822. [Principle derived from Section 2-510(3) but not dependant upon "deficiency" in insurance coverage].

7. CISGA. "Passing of Risk" is treated in Articles 66-70.

Article 67(1), dealing with "carriage of the goods," is comparable to Section 2-612(b)(2). The distinction between "origin" and "destination" contracts, however, is not made. The question is whether the seller agreed to deliver to a carrier at a "particular" place. The answer may come from Incoterms used by the parties.

Article 68, dealing with goods sold in transit, has no exact counterpart in Section 2-612, the closest provision being Section 2-612(b)(2). Furthermore, there is no provision like Section 2-612(b)(3), which treats goods in the possession of a bailee.

Cases not otherwise covered are picked up in Article 69, which is CISG's equivalent to old Section 2-509(3). Even between commercial parties, the buyer, in some cases, may have the risk of loss before taking possession of the goods. See Article 69(2). Article 69 presumably covers the "haystack" hypo and bailment cases.

Breach of contract is relevant to passage of risk under CISGA. For example, if risk has passed to the buyer and the goods are lost or damaged thereafter, the obligation to pay the price is discharged if "the loss or damage is due to an act or omission of the seller." Article 66. Also, under Article 69(1) risk passes to the buyer before possession is transferred regardless of any deficiency in insurance coverage if the buyer "commits a breach of contract by failing to take delivery." But a breach by the seller apparently does not prevent or reallocate the passage of risk. Rather, risk passes if the conditions of Articles 67-69 are satisfied but the "remedies available to the buyer on account of the breach" are not impaired. Article 70.

SECTION 2-701. BREACH OF CONTRACT GENERALLY; SUBSTANTIAL IMPAIRMENT.

(a) Whether a party is in breach of contract is determined by the terms of the contract.

(b) A breach of contract occurs in the following circumstances, among others:

(1) A seller is in breach if it fails to deliver or to perform an obligation, makes a nonconforming tender of performance, or repudiates the contract.

(2) A buyer is in breach if it wrongfully rejects a tender of delivery, wrongfully revokes acceptance, repudiates the contract, or fails to make a required payment or to perform an obligation.

(c) To determine whether the value of an installment or the whole contract has been substantially impaired by a breach of contract under Section 2-708, 2-710, or 2-712, the court may consider whether:

(1) the extent to which the aggrieved party has been deprived of the benefit that it reasonably expected under the contract;

(2) cure of the breach is permitted and likely;

(3) adequate assurance of due performance has been given; and

(4) the party in breach acted in good faith.

(d) The cumulative effect of individual, insubstantial breaches of contract may substantially impair the value of the whole contract to the other party .

SOURCE: Sales, Sections 2-703, 2-711; Licenses, Section 2B-108(a).

1. Section 2-701 is a new section that is derived, in part, from former Sections 2-703 and 2-711 which defined breach as part of the index to the remedies sections. The PEB study report identified some ambiguities in both former Sections 2-703 and 2-711 which is solved by separating the types of breaches from the entitlement to remedies. Thus Section 2-815 (seller's remedies) and Section 2-823 (buyer's remedies) merely index the remedies that either the seller or buyer is entitled to exercise if there is a breach. Section 2-701(b) identifies those events that are usually breaches of contract and correspond to those breaches identified in former Section 2-703 and Section 2-711. As recommended by the PEB study report, the buyer's breach includes failure to pay after delivery as well as "payment due on or before delivery" as provided in former Section 2-703. If the failure after acceptance is a default under a security agreement, Article 9 would govern enforcement of the security interest. In addition, subsection (b) identifies that the failure to perform any obligation under the contract is a breach. Neither Section 2-703 nor 2-711 contained that definition of breach.

2. Subsection (a) is a statement of breach that corresponds to the statement of obligation found in Section 2-601. Section 2-601 states that the parties are obligated to perform in accordance with the contract. Section 2-701(a) states that breach of contract is determined by the terms of the contract. Terms of the contract is determined from the total legal obligation of the parties, Section 1-201(11), which includes the parties' agreement, Section 1-201(3), and the provisions of applicable law including the types of breach identified in subsection (b).

3. Subsection (c) is a new section based upon Restatement (Second) of Contracts 241 which defines material breach. Instead of using the material breach terminology, subsection (c) uses the terminology already in use in Article 2, whether the value of the installment or the contract is substantially impaired by a breach. Given the reaffirmance of the perfect tender rule and the decision to not explicitly cover service contracts within the scope of Article 2, the substantial impairment concept is relevant only to installment contract situation (Section 2-712), the anticipatory repudiation situation (Section 2-710) and the revocation of acceptance situation (Section 2-708). Those three sections are identified in subsection (c). The four factors listed in subsection (c) are taken from the Restatement (Second) of Contracts 241. Two factors from the Restatement which are not reflected above are (i) the extent to which the injured party can be compensated for the deprived benefit and (ii) the extent that the party to perform will suffer a forfeiture. Should those factors be listed as well?

4. Whether the conduct of the seller or the buyer is a breach depends upon whether the seller's or buyer's failure to perform is excused (Sections 2-714 through 2-717), whether the seller cures the breach as provided in Section 2-709, or whether the performance obligation is waived, Section 2-702.

SECTION 2-702. WAIVER OF BREACH; PARTICULARIZATION OF NONCONFORMITY.

(a) Except as provided in subsection (c), a party that knows that the other party's performance constitutes a breach of contract but accepts that performance and fails within a reasonable time to object is precluded from relying on the breach to cancel the contract. Except as otherwise provided in subsection (c), acceptance of that performance and failure to object do not preclude a claim for damages unless the party in breach has changed its position reasonably and in good faith in reliance on the aggrieved party's inaction.

(b) Failure to object to a nonconforming performance under subsection (a) does not foreclose objection to the same or similar breach of contract in future performances of like kind unless the party foreclosed expressly so states. A statement waiving future performance may be retracted by seasonable notification received by the other party that strict performance will be required unless the waiver has induced the other party to change its position reasonably and in good faith.

(c) A party is precluded from relying on a nonconforming performance as follows :

(1) Payment upon tender of documents [of title] made without reservation of rights waives the right to recover the payment for defects apparent on the face of the document [of title].

(2) A buyer's failure to state, in connection with a rejection under Section 2-703, a particular nonconformity that is ascertainable by reasonable inspection precludes reliance on the unstated defect to justify rejection or to establish a breach of contract if:

(A) the seller, upon a seasonable particularization, had a right to cure under Section 2-709 and [would] [could] have cured the [nonconformity] [breach]; or

(B) between merchants, the seller after rejection has made a request in a record for a full and final statement in a record of all nonconformities on which the buyer proposes to rely.

(3) A buyer's failure to state, in connection with a revocation of acceptance under Section 2-708, the nonconformity that justifies the revocation precludes the buyer from relying on the nonconformity to justify the revocation or to establish breach of contract if the seller had a right to cure the breach under Section 2-709 and [would] [could] have cured the breach.

SOURCE: Sales, Section 2-605, Licenses Section 2B-620.

1. This section has not been reviewed by the Drafting Committee. It is an attempt to collect in one place the rules regarding waivers of breach. Former Section 2-209 has been criticized as an unclear attempt to both incorporate and control waiver in the context of Article 2. The PEB study report recommended that waiver be more explicitly defined and its application be clarified. This section and Section 2-210(d) is an attempt to do so.

2. Both this section and Section 2-210(d) do not operate on a clean slate in terms of determining when there is a waiver and what the effect of a waiver is on the parties' rights and obligations. Under Section 1-103 principles of waiver as developed at common law operate to supplement Article 2 provisions. It is unrealistic to preclude completely common law principles of waiver by attempting a complete and full statement of waiver principles within Article 2. Rather the approach taken in this section and Section 2-210(d) is to clarify particular effects of application of the waiver concept without defining what is a waiver for all cases.

3. Section 2-210(d) is an attempt to clarify that a party may waive an express condition to its own performance obligation. The effect of that waiver of an express condition is that the performance obligation arises even if the condition does not come to pass. If that condition is not also a performance obligation of the party, the failure of the condition is not a breach of contract. Restatement (Second) Contracts 225. Often it is difficult to tell whether the contract term is merely a condition to performance of the other party or whether it is also a performance obligation of that first party.

For example, S agrees to sell goods to B for $5,000 with delivery on May 1. Is delivery May 1 a condition to B's duty to pay or is delivery May 1 a promise that S will deliver on May 1? If the term is a condition, then if S does not deliver on May 1, B has no duty to perform its obligation to pay. S, however, has not breached the contract. B's conduct or words, however, may have indicated that B waived the condition of delivery May 1. In that case, because the condition is waived, B's obligation to pay arises, even if delivery is not by May 1. B has no cause of action for breach against S because the condition was not a performance obligation of S.

Assume, however, that the delivery term is a promise to perform by delivering on May 1. S's promise to perform is assumed to be dependent upon B's promise to perform and vis versa, Restatement (Second) Contracts 232. If S does not deliver on May 1, S has breached the contract. B would be able to pursue its remedies for breach against S, including canceling the contract and damages for breach. If B, by B's conduct or words, waives performance of the promise to deliver on May 1, at common law, the effect of the waiver is that B could not cancel the contract, but could recover damages for S's breach by failing to deliver on May 1. See Restatement (Second) Contracts 246.

Unless it is very clear that a term is only an express condition to performance and not a performance obligation, courts should employ the presumption that terms in a contract are performance obligations and not mere conditions. See Restatement (Second) Contracts 227.

4. With that background, this section operates as follows. Subsection (a) implements the common law rule that a party may waive a performance obligation and by doing so loses the right to cancel the contract but not the right to recover damages unless the other party detrimentally relies on the failure to object. Subsection (b) addresses the effect of a waiver under subsection (a) of a previous performance obligation on future performance obligations. The last sentence of subsection (b) and the last sentence of Section 2-210(d) state the same rule. (Arguably, one of the sentences could be eliminated). Subsection (c) states three situations where failure to object does waive the right to establish breach based upon the particular nonconforming performance. Subsections (c)(1) and (c)(2) are from former Section 2-605 with no change in substance. Subsection (c)(3) is a new section included to dovetail with the expansion of the right to cure in the post revocation situation under Section 2-709. Not listed in subsection (c) is the effect of the failure to particularize in the notice of breach in the case of the accepted goods under Section 2-707(c)(1). That omission is intentional. The policy question that needs to be answered in the accepted goods case is what is the purpose of any particularization requirement that would be imposed. A particularization requirement would not facilitate a statutory cure as the seller has no right to cure under Section 2-709 when the goods are accepted and acceptance is not revoked. A deemed waiver by failure to particularize would be inconsistent with the prejudice standard in Section 2-707 where notice itself is excused unless there is prejudice by failure to notify.

To illustrate the operation of this section, assume that S agrees to sell goods to B, with delivery on May 1. S communicates to B that S can deliver the goods on May 5, but cannot make the delivery on May 1. The contract does not include a no oral modification or an anti-waiver clause. B accepts delivery on May 5 and does not object. Delivery on May 1 should be presumed to be a promise, not a mere condition to B's performance, unless the contract clearly provides otherwise. S's failure to deliver on May 1 is a breach of S's performance obligation. B's acceptance of B's performance and failure to object to S's late delivery means that B cannot cancel the contract, but may pursue B's claim for damages caused by S's late delivery, unless S has detrimentally relied on B's silence. Subsection (a).

Assume that in the contract above, S agreed to deliver goods the first of every month for 6 months. S's first delivery is late and not delivered until May 5. B accepts the delivery and does not object to its lateness. S's obligation to deliver the next month's installment on time on the first of June is intact. B's failure to object to the first late delivery is not a waiver of future timely deliveries. Subsection (b), first sentence. Assume, however, that B accepts the late delivery on May 5 and tells S that as long as the deliveries are made before the 5th of every month, B will take the deliveries. That may be a statement waiving future performance of timely deliveries. In order to retract that waiver of future performance, B would have to give seasonable notice to S before S relied on the waiver to S's detriment.

Assume that S agreed to deliver goods that conformed to an express warranty on May 1. S delivered the goods on May 1 but the goods did not conform to the warranty. B timely rejects the goods under Section 2-703. Under subsection (a), B has objected by its rejection to the nonconforming performance. Under subsection (c)(2), if the nonconformity is ascertainable by reasonable inspection and the seller had the right to cure the breach under Section 2-709 and could or would have cured, then B has to particularize the nonconformity or is barred from asserting the nonconformity to establish breach or justify the revocation. If the nonconformity is not ascertainable by reasonable inspection, B need not particularize the defect and will not suffer any adverse consequences from failing to particularize unless B knows of the defect when it accepts S's performance. In that case, subsection (a) will operate to preclude a cancellation and perhaps damages if the second sentence of subsection (a) applies.

Assume the same facts but that B did not reject, but accepted. B then timely and properly revoked acceptance under Section 2-708(a)(2). B's timely and proper revocation should satisfy the objection required under subsection (a). If S has a right to cure under Section 2-709 and would or could have cured, then B must particularize those defects justifying revocation or not be allowed to assert those defects to justify revocation or establish breach. As to nonconformities not sufficient to justify revocation that B knows about, subsection (a) would operate to determine B's rights.

5. CISG. Article 39(1) provides that the buyer "loses the right to rely on a lack of conformity of the goods if he does not give notice to the seller specifying the nature of the lack of conformity within a reasonable time after he has discovered it or ought to have discovered it." Presumably, this failure to specify bars the use of that alleged non-conformity for all remedial purposes. Other related Articles include Articles 39(2), 40, and 44.

The Drafting Committee rejected a motion to incorporate the provisions of Article 40, which provides that the seller is "not entitled to rely on the provisions of articles 38 and 39 if the lack of conformity relates to facts of which he knew or could not have been unaware and which he did not disclose to the buyer."

SECTION 2-703. BUYER'S RIGHTS ON NONCONFORMING DELIVERY; RIGHTFUL REJECTION.

(a) Subject to Sections 2-603(b), 2-710, 2-809, and 2-810, if the goods or the tender of delivery fail in any respect to conform to the contract, a buyer may:

(1) reject the whole;

(2) accept the whole; or

(3) accept any commercial units and reject the rest.

(b) A rejection under subsection (a) is not effective unless the buyer notifies the seller within a reasonable time after [tender of delivery] [the nonconformity was or should have been discovered].

SOURCE: Sales, Sections 2-601, 2-602 (December, 1994).

1. Section 2-703 carries forward the perfect tender rule from former Section 2-601. Although divided on the question, the PEB study report recommended that the perfect tender rule be retained. Subsection (a) states when a buyer may reject a non-conforming tender and subsection (b), previously found in former Section 2-602(1), requires timely notice for an effective rejection. Subsection (a) contains one new cross reference to the ability to reject for failure to notify in a shipment contract if loss or delay ensues, Section 2-603(b) (former Section 2-504), and carries forward the cross references to installment contracts, Section 2-710, liquidated remedies, Section 2-809, and limited remedies, Section 2-810, which were contained in former Section 2-601. As under current law, the buyer's ability to reject is circumscribed by the limitations on rejection in the installment contract context and by any agreed contractual limitations on the buyer's rights. Sections 2-809, 2-810.

2. Subsection (b) carries forward the notice requirement from former Section 2-602(1). The bracketed words highlight an issue of when the reasonable time for rejection should start to run. Former Section 2-602(1) provided that the reasonable time runs from the time of "tender or delivery." A concern with starting the reasonable time for rejection from the time the nonconformity should have been discovered is the uncertainty in each case of when that discovery should have been. If a discovery time is implemented, then some limits must be placed on the right to reject concerning the status of the goods similar to the limitation in Section 2-708(b) that rejection must occur before any substantial change in the goods not caused by their own defects.

3. The buyer's right to reject is determined by whether the goods or delivery fail to conform to the contract, the parties' total legal obligation, which includes the parties' bargain in fact, applicable course of performance, course of dealing and usage of trade, as well as terms incorporated from the U.C.C. and other applicable law. Section 1-201(11). The right to reject is also subject to the obligation of good faith. Section 1-203. Even if the buyer rightfully rejects, the buyer's ability to cancel the contract or pursue other remedies is tempered by the seller's right to cure in Section 2-709. If the seller has the right to cure under Section 2-709, the buyer has an obligation to allow the seller to make the cure. If the seller properly cures, the buyer's ability to force the goods back on the seller through rejection is defeated.

4. A rejection not permitted under subsection (a) is wrongful and a breach by the buyer even if the buyer gives prompt notice under subsection (b). The rejection maybe effective but wrongful. Section 2-701(b)(1). A rejection may be rightful under the standard of subsection (a) but ineffective under subsection (b). A rightful but ineffective rejection may be an acceptance under Section 2-706(a)(3).

5. CISG. Under CISG, buyer remedies are triggered when the seller "fails to perform any of his obligations under the contract," Article 45(1), and preserved when proper notice of the nonconformity is given under Article 39(1). There is no rejection remedy, however, and the buyer is required to pay the price as agreed unless the contract can be avoided for a "fundamental" breach. See Article 25. Upon finding non-conforming goods, the buyer's remedial options include requiring the seller to deliver substitute goods or repair them under Article 46, fixing an additional length of time for the seller to perform under Article 47 and avoiding the contract for "fundamental breach" under Article 49. In addition, the seller has broad power to "cure" under Article 48 unless the buyer can avoid the contract under Article 49.

Thus, although a minor non-conformity may be a breach for which rights and remedies are provided, the buyer cannot buy replacement goods (cover) under Article 75 unless the contract is avoided for fundamental breach.

SECTION 2-704. EFFECT OF EFFECTIVE RIGHTFUL REJECTION AND JUSTIFIABLE REVOCATION OF ACCEPTANCE.

(a) Subject to Sections 2-705 and 2-829(b), after an effective rightful rejection or justifiable revocation of acceptance, a buyer that takes delivery shall hold the goods with reasonable care at the seller's disposition for a sufficient time to permit the seller to remove them. However, the buyer has no further obligation with regard to the goods.

(b) If a buyer uses the goods after an effective rightful rejection or justifiable revocation of acceptance, the following rules apply:

(1) Any use by the buyer which is inconsistent with the seller's ownership or with the buyer's claim of rejection or revocation of acceptance and is unreasonable under the circumstances is an acceptance if ratified by the seller.

(2) If use of the goods is reasonable under the circumstances and is not an acceptance, the buyer, upon returning or disposing of the goods, shall pay the seller the reasonable value of the use to the buyer. The value must be deducted from the sum of the price paid to the seller, if any, and any damages to which the buyer is otherwise entitled under this article.

(c) A buyer in possession that wrongfully but effectively rejects goods is subject to subsection (b)(1) and the duty of care in subsection (a).

SOURCE: Sales, Sections 2-603 and 2-604.

1. Section 2-704 is based on former Section 2-602(2). Subsection (a) governs the buyer's duties as to the goods and provides the same rule as former Section 2-602(2)(b) and (c) and Section 2-602(3). As under current law, the buyer's obligation to care for the goods is subject to a merchant buyer's obligations under Section 2-705, former Section 2-603 and Section 2-604, and to the buyer's security interest that arises under Section 2-829(b), former Section 2-711(3). Thus a non-merchant buyer in possession of goods after a rightful effective rejection or justifiable revocation must take reasonable care of the goods. A buyer who effectively but wrongfully rejects must also take reasonable care of the goods. Subsection (c). A buyer that wrongfully revokes acceptance has not undone the acceptance and is liable for the price of the goods. Section 2-822. In that case, the goods are the buyer's to do with as it wants. Similarly, a buyer that rightfully attempts to reject but does not effect a rejection because of failure to comply with Section 2-703(b) may be treated as having accepted the goods. This treatment of the buyer's obligations follows the PEB recommendation.

2. Subsection (b)(1) is based upon former Section 2-602(2)(a) and Section 2-606(1)(c). It eliminates the dichotomy between "acts inconsistent with the seller's ownership" which may not be wrongful and was deemed an acceptance and an act that was wrongful, which could be treated as an acceptance by the seller but need not be (former Section 2-606(1)(c)). Under former Section 2-602(2)(a) an "exercise of ownership" by the buyer was deemed wrongful. The PEB study report recommended that this confusing state of affairs be clarified. Subsection (b)(1) and Section 2-706(a)(4) are now consistent with each other, providing that unreasonable acts inconsistent with the seller's ownership are an acceptance if the seller elects to treat it as an acceptance. If the seller decides to treat the act as an acceptance, the buyer is liable for the price. Section 2-822. If the seller does not treat the act as an acceptance, the seller would have a non-code remedy for conversion.

3. Subsection (b)(2) is new and is designed to deal with the situation where the buyer uses the goods after a rightful rejection or justifiable revocation without compromising the effectiveness of either the rejection or revocation. Thus there could be a situation where the buyer's use of the goods is reasonable but that use does not constitute an acceptance of the goods. Although a reasonable use is not an acceptance, the buyer must pay the seller the reasonable value to the buyer of the use. Another possible measure of value, not stated in the text, is what it would cost the buyer to obtain a comparable use from a person in the seller's position. See Restatement, (Second) Contracts 371(a). But the seller may deduct that use value from the sum of any price paid to the seller. See Section 2-823(a), which permits the buyer to recover these amounts. See also, Note, Article 2: Revocation of Acceptance . . . Should a Seller be granted a Set off for the Buyer's Use of Goods, 30 N. Eng. L. Rev. 1073 (1996).

To illustrate, suppose the buyer, after testing, discovered that machinery supplied by the seller would not perform to its warranted capacity. A rightful and effective rejection was made. The seller elected not to cure and directed the buyer to dismantle and return the machine. The buyer, however, used the machine for three months and, because cover was not available during that time, the use was reasonable under the circumstances. Assuming that the reasonable value of the three months use to the buyer was $5,000, the seller recovers nothing for the use if the sum of the buyer's part performance (down payment plus interest) and damages resulting from the breach exceeds $5,000. The buyer, of course, can recover any amount over $5,000 as damages, including provable incidental and consequential damages under Section 2-806.

4. Subsection (c) clarifies the duties of a buyer who wrongfully but effectively rejects. Such a buyer must hold the goods with reasonable care and may be deemed to have accepted the goods if acting in a manner inconsistent with the seller's ownership which is unreasonable.

5. CISG. Under Article 86, if a buyer has received and intends to reject goods, he must take reasonable steps to preserve the goods. If the goods shipped to the buyer are at the buyer's disposal at the destination, unless a seller's agent is present at the destination, the buyer must take possession if that can be done without paying the price or incurring unreasonable inconvenience or expense.

SECTION 2-705. MERCHANT BUYER'S DUTIES; BUYER'S OPTIONS AS TO SALVAGE.

(a) Subject to a buyer's security interest under Section 2-829(b), if the seller does not have an agent or place of business at the market where the goods were rejected or acceptance was revoked, a merchant buyer, after an effective [rightful] rejection or justifiable revocation of acceptance, shall follow any reasonable instructions received from the seller with respect to goods in the buyer's possession or control and in the absence of such instructions shall make a reasonable effort to sell or otherwise dispose of the goods for the seller's account if they threaten to decline speedily in value. Instructions are not reasonable if on-demand indemnity for expenses is not forthcoming.

(b) A merchant buyer that sells goods under subsection (a) is entitled to reimbursement from the seller or out of the proceeds for the reasonable expenses of caring for and selling them. If the expenses do not include a sales commission, the buyer is entitled to a commission usual in the trade or, if there is none, to a reasonable sum not exceeding 10 percent of the gross proceeds.

(c) Subject to subsection (a), unless a seller gives instructions to a merchant buyer within a reasonable time after notification of an effective [rightful] rejection or justifiable revocation of acceptance, a buyer may store the rejected goods for the seller's account, reship them to the seller, or resell them for the seller's account, with reimbursement as provided in subsection (b).

(d) In complying with this section, a buyer shall act in good faith. Conduct in good faith under this section does not constitute acceptance or conversion and may not be the basis of a claim for damages.

SOURCE: Sales, Sections 2-603 and 2-604.

1. Section 2-705 integrates former Sections 2-603 and 2-604 in one section and makes clear that these buyer's duties also arise after a justifiable revocation of acceptance. This treatment of a buyer's duties as to the goods is consistent with the PEB recommendation to expand this section to cover both rejection and revocation situations. Subsection (a) is the same as former Section 2-603(1) with the clarification of its application to a justifiable revocation. The bracketed words in subsections (a) and (c) are designed to highlight the issue of whether a buyer has these duties in any rejection no matter whether the rejection is rightful or wrongful. Compare Section 2-704(c). Former Section 2-603(1) did not distinguish between a rightful or wrongful rejection. Subsection (b) is the same as former Section 2-603(2). Subsection (d) is the same as former Section 2-603(3). Subsection (c) is the same as former Section 2-604. Just as under former law, subsections (a) and (b) apply to merchant buyers and subsections (c) and (d) apply to all buyers.

2. CISG. Article 87 allows a buyer who has taken possession of the goods under Article 86 (see note under Section 2-704) to store the goods at the expense of the other party as long as that expense is not unreasonable. Under Article 88, the buyer may sell the goods if the seller unreasonably delays in regaining possession of the goods or providing for the expense of preserving the goods. If goods will decline speedily in value or will be unreasonably expensive to preserve, the buyer must sell the goods. A party selling the goods may deduct from the proceeds the expenses of preserving and selling the goods and account to the other party for the balance.

SECTION 2-706. WHAT CONSTITUTES ACCEPTANCE OF GOODS.

(a) Goods are accepted when the buyer:

(1) states to the seller at any time that the goods are accepted;

(2) after a reasonable opportunity to inspect the goods, signifies to the seller that the goods conform or will be taken or retained in spite of their nonconformity;

(3) after a reasonable opportunity to inspect the goods, fails to make an effective rejection; or

(4) either before or after rejection or after revocation of acceptance, does any unreasonable act inconsistent with the seller's ownership or the buyer's claim of rejection or revocation of acceptance and that act is ratified by the seller as an acceptance.

(b) Acceptance of a part of a commercial unit is acceptance of the entire unit.

SOURCE: Sales, Section 2-606.

1. Section 2-706, former Section 2-606, states what constitutes acceptance of the goods. Subsection (a)(2) is the same as former Section 2-606(1)(a). Subsection (a)(3) is the same as former Section 2-606(1)(b). Subsection (a)(4) is based on former Section 2-606(1)(c) but has been revised to be consistent with Section 2-704(b). This revision is consistent with the PEB study report recommendation. See Notes 2 and 3 after Section 2-704. Subsection (a)(1) is new and covers the situation where the buyer affirmatively states that the buyer has accepted the goods even if the buyer has not taken advantage of the buyer's reasonable opportunity to inspect. Subsection (b) is the same as former Section 2-606(2).

2. Under subsection (a)(2), the buyer must first have a reasonable opportunity to inspect the goods and then objectively signify to the seller that they will be taken or retained. The buyer may or may not have discovered a nonconformity.

Under subsection (a)(3), the buyer must first have a reasonable opportunity to inspect the goods and then fail to make an effective rejection under Section 2-703(b). The classic case is where the buyer discovers a nonconformity but fails to notify the seller of rejection within a reasonable time after delivery. The rejection was rightful under Section 2-703(a) but not effective under Section 2-703(b). Conversely, it is not an acceptance where the buyer effectively rejects for reasons not permitted under Section 2-703(a). Unless the buyer does an act of unreasonable ownership or control over the goods, see subsection (a)(4), a wrongful but effective rejection is a breach under Section 2-701 but not an acceptance under Section 2-706.

Does this make sense? Why not state simply and clearly that a wrongful rejection under Section 2-703(a), even though effectively communicated under Section 2-703(b), is an acceptance. An effective but wrongful rejection gives rise to the seller's action for breach of contract damages. If an effective but wrongful rejection is treated as an acceptance, the seller would have an action for the price.

Subsection (a)(4) gives the seller an option to treat certain unreasonable acts by the buyer as an acceptance, whether they occur before or after rejection or revocation and whether the rejection was rightful or the revocation was justified. Thus, unreasonable use of goods during inspection could be an acceptance even though a subsequent rejection was otherwise proper. Similarly, an unreasonable use after a wrongful but effective rejection could also be an acceptance. This section must be read in conjunction with Section 2-704(b) which provides in effect that reasonable acts that may be inconsistent with the seller's ownership may not be an acceptance although the buyer will have to compensate the seller for the reasonable value of the buyer's use of the goods.

3. CISG. The remedies of the buyer for breach by a seller do not depend upon whether the buyer has accepted the goods.

SECTION 2-707. EFFECT OF ACCEPTANCE; NOTICE OF BREACH; BURDEN OF ESTABLISHING BREACH AFTER ACCEPTANCE; NOTICE OF CLAIM OR LITIGATION TO PERSON ANSWERABLE OVER.

(a) A buyer shall pay the price in accordance with the contract for any goods accepted.

(b) Acceptance of goods by a buyer precludes rejection of the goods accepted but does not by itself impair any other remedy provided by this article for nonconformity.

(c) If a tender has been accepted, the following rules apply:

(1) The buyer, within a reasonable time after the buyer discovers or should have discovered a breach of contract, shall notify the party claimed against of the breach. However, a failure to give notice bars the buyer from a remedy only to the extent that the party entitled to notice establishes that it was prejudiced by the failure.

(2) If a claim for infringement or the like is made against a buyer for which a seller is answerable over, the buyer shall notify the seller within a reasonable time after receiving notice of the litigation or be barred from any remedy over for liability established by the litigation.

(d) A buyer has the burden of establishing a breach of contract with respect to goods accepted.

(e) In a claim for breach of a warranty, indemnity, or other obligation against the buyer for which another party is answerable over, the following rules apply:

(1) The buyer may give notice of the litigation to the other party in a record, and the person notified may then give similar notice to any other person that is answerable over. If the notice invites the person notified to intervene in the litigation and defend and states that failure to do so will bind the person notified in any action later brought by the buyer as to any determination of fact common to the two actions, the person notified is so bound unless, after seasonable receipt of the notice, the person notified intervenes in the litigation and defends.

(2) If the claim is one for infringement or the like, the original seller may demand in a record that its buyer turn over control of the litigation, including settlement, or otherwise be barred from any remedy over. If the seller also agrees to bear all expense and to satisfy any adverse judgment, the buyer is so barred unless, after seasonable receipt of the demand, control is turned over to the seller.

(f) Subsections (c), (d), and (e) apply to an obligation of a buyer to hold the seller harmless against infringement or the like.

SOURCE: Sales, Section 2-607.

1. Section 2-707 is derived from former Section 2-607. Subsection (a) is the same in substance as former Section 2-607(1). Subsection (b) is substantively the same as former Section 2-607(2) except for the deletion of the language which duplicates the standard for revocation of acceptance in Section 2-708. Subsection (c)(2) is the same in substance as former Section 2-607(3)(b). Subsection (d) is the same in substance as former Section 2-607(4). Subsection (f) is the same in substance as former Section 2-607(6).

2. Subsection (c)(1) is based on former Section 2-607(3)(a) but makes the following two changes. First, it substitutes the language "party claimed against" for "seller" in former Section 2-607(3)(a) in order to provide for notice in the non-privity claim for breach of warranty. Second, it provides that a failure to give notice bars a remedy only if the party entitled to notice is prejudiced by the failure to give notice. Since neither cure nor the remedies of rejection and revocation are available when the third type of notice is given, the task of determining the impact on the seller of a failure to give notice is complicated. The requirement that the party claimed against establish prejudice is a middle position between an absolute bar and requiring proof of material prejudice. See Restatement (Second) Contracts 229, excusing a condition precedent where the failure is not material and implementation would result in "disproportionate forfeiture." The issue was discussed again at the October, 1995 meeting of the Drafting Committee but no changes were adopted. The PEB study report recommended that the text or the Comments indicate that the content of the notice need only indicate that problems have arisen regarding accepted goods and that either the text or Comments should reject cases that provided too stringent a standard for the content of the notice. A notice sufficient under this section is also sufficient under Section 2-702(a) to avoid waiving any remedies for breach.

3. Subsection (e) is the same in substance as former Section 2-607(5) with the following changes. First, it broadens the ability to use the vouching in procedure to explicitly cover indemnity actions. Second, subsection (e)(1) allows the notice to be given to any person who is answerable over, rather than just the seller. Third, subsection (e)(1) also explicitly allows the person who is given the notice to similarly notify others who are answerable over. The effect of the notice given under subsection (e)(1) is the same as the effect of the notice under former Section 2-607(5)(a). Subsection (e)(2) is the same in substance as former Section 2-607(5)(b). The PEB study report recommended that the Drafting Committee consider whether the vouching in procedure was constitutional and whether it was still needed in light of improvements in third party practice. The Drafting Committee rejected the suggestion that the vouching in procedure be eliminated.

4. CISG. Although the buyer is obligated to take delivery and pay the price "as required by the contract and this Convention," Article 53, the concept of acceptance is irrelevant to the obligations of either party. Thus, there is no need to state the "effect" of acceptance.

SECTION 2-708. REVOCATION OF ACCEPTANCE.

(a) A buyer may revoke acceptance of a lot or commercial unit whose nonconformity substantially impairs its value to the buyer if the lot or unit was accepted:

(1) on the reasonable assumption that its nonconformity would be cured and it has not been seasonably cured; or

(2) without discovery of its nonconformity if acceptance was reasonably induced by the difficulty of discovery before acceptance or by the seller's assurances.

(b) To be effective, a buyer's acceptance must be revoked within a reasonable time after the buyer discovers or should have discovered the ground for it and before any substantial change in condition of the goods which is not caused by their own defects. The revocation is not effective until the buyer notifies the seller of it.

(c) A buyer that justifiably revokes acceptance has the same rights and duties under Sections 2-704 and 2-705 with regard to the goods as if they had been rejected.

SOURCE: Sales, Section 2-608.

1. Section 2-708 has no changes of substance from former Section 2-608.

2. The PEB study report recommended that the Comments should clarify that a wrongful revocation of acceptance is a breach of contract but does not undo the acceptance. Thus the buyer is still liable for the price under Section 2-822 and the seller is entitled to exercise its remedies for breach of contract. Section 2-815. The PEB study report recommended that the obligations of the buyer as to the goods after a justifiable revocation of acceptance be clarified. Those rights are now clearly governed by Sections 2-704 and 2-705.

3. The buyer's ability to revoke acceptance under Section 2-708(a)(2) is subject to the seller's right to cure under Section 2-709. The PEB study report recommended that the seller's right to cure after revocation of acceptance when the time for performance had not expired be expressly provided for. See notes after Section 2-709 for explanation of the seller's right to cure. The right to revoke acceptance under Section 2-708(a)(1) is not subject to the seller's right to cure under Section 2-709 as the seller will have already had an opportunity to cure which the seller has not fulfilled. The seller should not have two opportunities to cure.

4. The PEB study report recommended that a Comment should clarify the effect of a failure of a limited agreed remedy on the buyer's right to revoke acceptance. The interrelationship between the right to revoke and failure of agreed exclusive limited remedies is addressed in Section 2-810.

5. CISG. The buyer may declare the contract avoided for a fundamental breach. Article 49. The buyer cannot declare the contract avoided unless he can make restitution of the goods in substantially the same condition as he received them unless restitution is rendered impossible not due to an act or omission of the buyer, the goods have deteriorated due to the inspection allowed by Article 38, or the goods are sold, consumed or transformed in the buyer's normal course before he discovered or should have discovered the nonconformity. Article 82.

SECTION 2-709. CURE.

(a) If a buyer effectively and rightfully rejects goods or a tender of delivery under Section 2-703 or justifiably revokes an acceptance under Section 2-708(a)(2) and the agreed time for performance has not expired, the seller, upon seasonable notice to the buyer and at its own expense, may cure any breach of contract by making a conforming tender of delivery within the agreed time and by compensating the buyer for all of the buyer's reasonable and necessary expenses caused by the nonconforming tender and subsequent cure.

(b) If a buyer effectively and rightfully rejects goods or a tender of delivery under Section 2-703 or justifiably revokes acceptance under Section 2-708(a)(2) and the agreed time for performance has expired, the seller, upon seasonable notice to the buyer and at its own expense, may cure the breach of contract by making a tender of conforming goods and by compensating the buyer for all of the buyer's reasonable and necessary expenses caused by the nonconforming tender and subsequent cure, if the cure is [appropriate and] timely under the circumstances and the buyer has no reasonable grounds to refuse the cure.

SOURCE: Sales, Section 2-508; Unidroit Principles, Article 7.1.4.

1. Section 2-709 is significantly changed from former Section 2-508 and is based in part on the Unidroit Principles, Article 7.1.4. Cure under this section means curing the breach of contract that the seller committed by making a non-conforming tender. If the seller cures under this section, there is no breach of contract. The buyer has no ability to get a remedy for breach of contract under this article without a breach of contract by the seller. If the seller does not cure the breach under this section, then the seller is in breach of contract and the buyer may resort to its remedies. If the seller has a right to cure under this section (which assumes the seller is able and willing to comply completely with the section requirements) and the buyer prevents the seller from curing, the buyer, not the seller, has breached the contract. In that scenario, the seller would be entitled to pursue remedies for breach of contract. This section can be looked at as providing the seller a checklist of the actions it must take to avoid being in breach of contract once nonconforming tender of delivery has been made. With those basic points in mind, the specific subsections work as follows.

2. Former Section 2-508(1) provided for cure after rejection when the time for contract performance had not yet expired if the breaching seller notified the buyer and then made a conforming delivery within the contract time. Like former Section 2-508(1), Section 2-709(a) applies when the agreed time for performance has not yet expired. Section 2-709(a) expands the seller's right to cure in this situation by expressly providing the seller a right to cure after the buyer revokes acceptance under Section 2-708(a)(2) (when the goods are accepted without knowledge of the defect because of the difficulty of discovery or the seller's assurances). This expansion to allow cure when the time for contract performance has not expired and when the buyer has revoked acceptance follows the PEB study report recommendation. The Drafting Committee decided to limit cure to the revocation situation covered in Section 2-708(a)(2) in order to avoid giving the seller a double opportunity to cure. Under Section 2-708(a)(1) revocation, the goods have been accepted on the assumption that the non-conformity would be cured and the cure was not forthcoming or ineffective. In that situation, to allow the seller another opportunity to cure after revocation of acceptance would have given the seller two opportunities to cure. Section 2-709(a) also circumscribes the seller's right to cure in both the rejection and revocation context by expressly requiring the seller to (i) give seasonable notice of intent to cure to the buyer, (ii) cure at the seller's own expense, (iii) compensate the buyer's reasonable expenses and (iv) make a conforming tender within the time for contract performance.

To illustrate the operation of subsection (a), consider the following example: S and B agree that S will deliver goods according to contract specifications on Jan. 15. S actually delivers the goods on Jan. 10 and the goods do not conform to contract specifications. B effectively and rightfully rejects the goods under Section 2-703. For S to cure under Section 2-709(a), the S must give seasonable notice to B, must compensate B for any of the B's reasonable expenses caused by the non-conforming tender and attempted cure, must bear S's own expenses, and must make a completely conforming tender no later than Jan. 15. The concept of seasonable notice under subsection (a) incorporates the idea of determining what is seasonable from the buyer's perspective, focusing on whether the buyer has reasonably changed position in good faith reliance on the non-conforming tender. See Hawkland, 2:508:2. Assume instead that B accepts the non-conforming goods, and then subsequently effectively and justifiably revokes acceptance under Section 2-708(a)(2). S would be able to cure the breach by making a conforming tender within the contract time if the cure satisfied all of the conditions stated above.

3. Former Section 2-508(2) allowed the seller to cure when the buyer rejected a non-conforming tender if the seller had reasonable grounds to believe the non-conforming tender was acceptable if the seller gave seasonable notice to the buyer and substituted a conforming tender within a reasonable time. The PEB study report expressed concern about the imprecision of the "reasonable grounds to believe" test and disagreement about whether cure should be allowed in the revocation of acceptance context when the time for contract performance had expired. Early on, the Drafting Committee decided that cure should be allowed in the revocation of acceptance situation covered by Section 2-708(a)(2) for the same reasons as stated above. The Drafting Committee has extensively discussed the right to cure at its meetings, focusing the bulk of its attention on what test should be employed for allowing cure when the time for performance has expired. Former Section 2-508(2) was directed towards preventing surprise rejections. Former Section 2-508, Comment 2. Under former Section 2-508(2), the cases had addressed rejection for minor defects or unknown defects as well as surprise rejections. See notes after Section 2-703 regarding the limits on the buyer's right to reject. At the March 1997 meeting, the Drafting Committee selected the test found in subsection (b) as suggested by Professor Richard Hyland and based upon the Unidroit Principles.

Under subsection (b), if the buyer effectively and rightfully rejects the nonconforming tender or revokes acceptance under Section 2-708(a)(2), the seller must give a seasonable notice to the buyer, must bear the seller's own expenses in making the cure, must tender conforming goods, the tender of conforming goods must take place within a reasonable time, the cure must be appropriate under the circumstances, the buyer must have no reasonable grounds for refusing the cure, and the seller must compensate the buyer for all of the buyer's reasonable and necessary expenses caused by the nonconforming tender and the proffered cure. Again whether the notice is given seasonably to the buyer and whether the cure has been made within a reasonable time must be judged from the buyer's perspective.

The time of the attempted cure relative to the agreed time for performance under the contract determines whether subsection (a) or subsection (b) applies. To illustrate, assume Seller agrees to tender goods according to the contract specifications on Jan. 15. Seller tenders non-conforming goods on Jan. 14. Buyer effectively and rightfully rejects on Jan. 15. If Seller's attempted cure takes place on Jan. 15, Seller's actions are judged under subsection (a) as to whether the attempted cure in fact is sufficient to cure the breach. If Seller's attempted cure takes place on Jan. 16, Seller's actions are judged under subsection (b). Assume instead that Seller tenders non-conforming goods on Jan. 16. Buyer effectively and rightfully rejects on Jan. 17. Seller's attempted cure will be judged under subsection (b).

Assume that the Seller tendered goods on Jan. 16 and the only reason for Buyer's rejection was that the tender was late. Subsection (b) would apply. In that situation, if the cure was not timely and appropriate under the circumstances and the buyer had reasonable grounds for refusing the cure, the seller could not cure. If the buyer had no reasonable grounds to refuse the cure and the cure was otherwise appropriate and timely, then the seller's tender, if still being made, and if all of the other conditions stated were satisfied, would cure the breach caused by the original late tender. Under subsection (b) part of the inquiry of appropriate under the circumstances and the buyer's reasonableness in refusing the cure would include the idea of shaken faith. The Committee expressed some concern with what "appropriate" means in the context of a cure under subsection (b). The words are bracketed to highlight that issue for further discussion. If the standard of subsection (b) is adopted, the Comments would have to give examples or explanations of "appropriate" under the circumstances.

4. The PEB study report recommended that the effect of a timely notice to cure when the seller has a right to cure under the section should suspend the buyer's ability to pursue its remedies for breach. Section 2-808 on cancellation attempts to make clear that the seller's exercise of its right to cure under Section 2-709 prevents the buyer from canceling the contract.

5. Under this approach, the following questions remain:

(a) Does the concept of conforming goods in subsection (b) pick up a cure related to quantity or other non-quality aspects of the contract requirements?

(b) Under former Section 2-508, there is some controversy about whether the goods may be made conforming by repair. The PEB study report recommended that the Drafting Committee decide in what circumstances the goods could be made conforming by repair.

6. CISG. Under CISG, the buyer has no remedy of rejection for a nonconforming tender and cannot "avoid" the contract unless the seller has committed a "fundamental breach," see Article 49(1)(a) and Article 25.

Article 37 deals with Seller's cure where nonconforming goods are delivered "before the date for delivery." Seller may cure "up to that date" if the "exercise of this right does not cause the buyer unreasonable inconvenience or unreasonable expense." Buyer retains any right to claim damages.

Article 48(1), which does not apply if the contract is avoided for fundamental breach under Article 49, gives a right to cure "even after the date for delivery." Seller may "remedy at his own expense any failure to perform his obligations, if he can do so without unreasonable delay and without causing the buyer unreasonable inconvenience or uncertainty or reimbursement by the seller of expenses advanced by the buyer." Again, Buyer retains any right to claim damages.

7. UNIDROIT PRINCIPLES. Article 7.1.4 provides:

(1) The non-performing party may, at is own expense, cure any non-performance, provided that

(a) without due delay, it gives notice indicating the proposed manner and timing of the cure;

(b) cure is appropriate in the circumstances;

(c) the aggrieved party has no legitimate interest in refusing cure; and

(d) cure is effected promptly.

(2) The right to cure is not precluded by notice of termination.

(3) Upon effective notice of cure, rights of the aggrieved party that are inconsistent with the non-performing party's performance are suspended until the time for cure has expired.

(4) The aggrieved party may withhold performance pending cure.

(5) Notwithstanding cure, the aggrieved party retains the right to claim damages for delay as well as for any harm caused or not prevented by the cure.

SECTION 2-710. INSTALLMENT CONTRACT: BREACH.

(a) In this section, "installment contract" means a contract in which the terms require or the circumstances permit the delivery of goods in lots to be separately accepted, even if the agreement requires payment other than in installments or contains a term stating "Each delivery is a separate contract" or words of similar import.

(b) A buyer may reject any nonconforming installment of delivery of goods [or documents] in an installment contract if the nonconformity substantially impairs the value of that installment to the buyer [or if the nonconformity is a defect in the required documents]. [However, if a nonconforming tender by the seller is not a breach of the whole contract under subsection (c) and the seller gives adequate assurance of its cure, the buyer shall accept that installment.]

(c) If a nonconformity with respect to one or more installments in an installment contract is a substantial impairment of the value of the whole contract, there is a breach of the whole contract and the aggrieved party may cancel the contract. However, the power to cancel the contract for breach is waived, or a canceled contract is reinstated, if the aggrieved party accepts a nonconforming installment without seasonably giving notice of cancellation, brings an action with respect to only past installments, or demands performance as to future installments.

SOURCE: Sales, Section 2-612.

1. Section 2-710 makes a few changes to former Section 2-612.

2. Section 2-710(a) makes two changes from former Section 2-612(1). First, it arguably broadens the definition of an installment contract by providing that a contract in which the "the terms require or the circumstances permit" delivery in separate lots to be separately accepted is an installment contract. Former Section 2-612(1) provided a contract that "requires or authorizes" the delivery of goods in separate lots to be separately accepted was an installment contract. Thus the definition now includes cases where "circumstances give either party the right to make or demand performance in parts or over a period of time." Section 2-302. The key, however, to the difference between a contract where circumstances permit delivery in separate deliveries that is not an installment contract and one which is an installment contract is whether each delivery is subject to separate acceptance. If not, then the contract is not an installment contract. For example, if the seller is to delivery a million tons of grain, it might not be feasible to delivery all of the tonnage at one time. Thus the circumstances would permit the delivery of the grain in separate deliveries. Those circumstances would not necessarily indicate that each delivery was to be separately accepted, the key requirement to the application of the installment contract section. The second change in the definition of installment contract is to clarify that a contract may be an installment contract even if payment is called for in other than installments. Although not a change in the statutory text, the Comments should clarify that a contract where delivery of the goods is made in one lot, but payment is made in installments is not an installment contract.

3. Section 2-710(b) makes no changes in substance from former Section 2-612(2). The bracketed language in subsection (b) is designed to raise the issue of whether a defect in documents should be tested under the substantial impairment test. Former Section 2-612(2) provided that a defect in documents was not tested under the substantial impairment test, but rather under the test of former Section 2-601 (perfect tender). See Hawkland, 2-612:04.

The PEB study report suggested that the Drafting Committee consider applying Section 2-612 evenly to buyers and sellers. The Drafting Committee rejected an attempt to provide for a seller's right to reject the buyer's non-conforming performance. Although a nonconforming installment payment is a breach, see Section 2-701(b)(2), the seller does not have power to reject it under subsection (b). The seller can, however, demand adequate assurance of due performance under Section 2-711 and withhold future deliveries under Section 2-815(a)(1). The seller can also cancel the contract under subsection (c) if the failure to pay one or more installments substantially impairs the value of the whole contract. Section 2-701(c). Unlike breach by the seller, the buyer has no statutory right to cure a breach in payment. Realistically, the seller will probably accept a late or deficient payment and reserve rights to damages or cancellation under Section 1-207. Cf. Section 2-702 regarding waiver of breach. Allowing delays or deficiencies to cumulate may result in a breach of the whole contract under Section 2-710(c).

The last sentence of subsection (b) is bracketed to highlight its interrelationship with the definition of substantial impairment in Section 2-701(c). Assume the seller delivers the first installment of goods under the installment contract. The goods do not conform to the contract. The seller has breached the contract. Section 2-710(b) precludes the buyer from rejecting that installment if the nonconformity does not substantially impair the value of that installment. To determine that substantial impairment issue as to that installment, the factors in Section 2-701(c) are consulted. Two of the four factors listed in subsection (c) are cure and adequate assurance. If the nonconformity results in substantial impairment of the value of that installment, almost by definition, cure is not likely and adequate assurance of due performance has not been given. In that situation, the buyer can reject that nonconforming installment. Conversely, if the seller gives adequate assurance of cure and cure is likely, the nonconformity does not substantially impair the value of that installment and the buyer cannot reject it. Prior to substantial impairment being defined in the Code, the last sentence of Section 2-710(b) was important to get the court to focus on the key elements of finding substantial impairment. The definition in Section 2-701 (c) of substantial impairment might make the last sentence of Section 2-710(b) unnecessary. The utility of retaining the last sentence of Section 2-710(b) is to isolate two of the substantial impairment factors in the installment context as being more important than the other factors in finding no substantial impairment has occurred.

If there is no substantial impairment of the value of the installment so that the buyer may not reject, that does not mean that the buyer may not be able to recover damages for the non-conforming installment. Sections 2-701(b), 2-823.

The PEB study report suggested that the perfect tender rule and the seller's right to cure apply to deliveries on non-conforming installments. The Drafting Committee decided to retain the current construct of substantial impairment of the value of the installment as the appropriate governing standard for rejection in an installment contract. What is left unclear is the scope of the cure required under subsection (b). Section 2-709 does not apply to the pre-rejection cure contemplated by this subsection as Section 2-709 depends first upon a rightful rejection or a justifiable revocation. Thus the Comments or the text should clarify what is required to effect a cure sufficient to preclude rejection under subsection (b).

4. Section 2-710(c) is the same in substance as former Section 2-612(3) with a clarification suggested in the PEB study report that the section state that if there is a breach of the whole, the aggrieved party may cancel the contract. Whether there is a substantial impairment of the value of the whole contract depends upon consideration of the factors in Section 2-701(c). The exercise of the aggrieved party's ability to cancel is also governed by Section 2-808. Either the buyer or seller may be the aggrieved party under subsection (c). The PEB study report also recommended that whether there is substantial impairment of the value of the whole contract be a subjective test as it is in determining substantial impairment of the value of the installment under subsection (b). The Drafting Committee decided to leave the standard in subsection (c) the same as the standard in former Section 2-612(3).

5. CISG. Article 73 governs a contract for "for delivery of goods by installments." Either party may avoid either a particular installment or the entire contract in defined cases of fundamental breach. See Article 25. The concept is consistent with Section 2-710 but the terminology is somewhat different.

SECTION 2-711. RIGHT TO ADEQUATE ASSURANCE OF PERFORMANCE.

(a) A contract imposes an obligation on each party not to impair the other's expectation of receiving due performance. If reasonable grounds for insecurity arise with respect to the performance of either party, the other party may demand in a record adequate assurance of due performance and, until that assurance is received, if commercially reasonable, may suspend any performance for which the agreed return has not already been received.

(b) Between merchants, the reasonableness of grounds for insecurity and the adequacy of any assurance offered is determined according to commercial standards.

(c) Acceptance of improper delivery or payment does not prejudice an aggrieved party's right to demand adequate assurance of future performance.

(d) After receipt of a demand under subsection (a), failure to provide within a reasonable time, not exceeding 30 days, assurance of due performance which is adequate under the circumstances of the particular case is a repudiation of the contract under Section 2-712(a).

SOURCE: Sales, Section 2-609.

1. Section 2-711 has no revisions of substance from former Section 2-609. The PEB study report did not recommend any changes to this section. Subsection (c) provides that accepting past failure to perform does not waive the party's right to obtain adequate assurance of future performance. Section 2-702(b) provides that failure to object to a past breach does not preclude objecting to future breaches. These two different sections address two different aspects of accepting non-conforming performance.

2. CISG. See Article 71(a), which recognizes a more limited principle of performance insecurity. A party suspending performance under Article 71(a) must notify the other party "immediately" and must continue with performance "if the other party provides adequate assurance of his performance." Article 71(3).

SECTION 2-712. ANTICIPATORY REPUDIATION.

(a) If either party to a contract repudiates a performance not yet due and the loss of performance will substantially impair the value of the contract to the other party, the aggrieved party may:

(1) await performance by the repudiating party for a commercially reasonable time or resort to any remedy for breach of contract, even if it has urged the repudiating party to retract the repudiation or has notified the repudiating party that it would await the agreed performance; and

(2) in either case, suspend its own performance or, if a seller, proceed in accordance with Section 2-817.

(b) Repudiation includes language that one party will not or cannot make a performance still due under the contract or voluntary affirmative conduct that reasonably appears to the other party to make a future performance impossible.

SOURCE: Sales, Section 2-610.

1. Section 2-712 makes two changes from former Section 2-610. First, a working but not exclusive definition of repudiation, taken from 250 of the Restatement, Second of Contracts, is provided in subsection (b). This is in addition to that provided in Section 2-711(d) and would include an unqualified statement that one party will not perform the contract unless the other agrees to an unjustified modification of the contract. Less clear are qualified statements, such as "I will not perform the next installment of the contract until a good faith dispute over contract interpretation is resolved." Arguably such qualified statements are repudiations which do not substantially impair the value of the contract to the other. Providing some definition of repudiation in the statute follows the PEB study report recommendation to that effect.

Second, it is now clearer that repudiation of a part performance (an installment) may constitute a substantial impairment of the whole contract to the other. Previously, the language of Section 2-610 stated that when "either party repudiates the contract with respect to a performance not yet due the loss of which will substantially impair the value of the contract to the other," the aggrieved party could take remedial action. Under the revision, repudiation of an installment "performance not yet due" can constitute a substantial impairment of the entire contract. Such a substantial impairment is a breach of the whole contract. See 2-710(c).

2. The PEB study report recommended that the section clarify the relationship between this section and the remedies of the aggrieved party, including when the aggrieved party awaits the repudiating party's performance for more than a commercially reasonable time. The remedies sections in Part 8 have clarified the relationship between anticipatory repudiation and measurement of market price. See Sections 2-821 and 2-826. In addition, the general mitigation principle in Section 2-803(b) would operate to prevent the aggrieved party from recovering damages for harm the aggrieved party should have mitigated. Presumably, harm occurring because the aggrieved party awaited more than the commercially reasonable time under Section 2-712, if the aggrieved party could have mitigated that harm, could not be compensated. The PEB study report also recommended that the right of cancellation be clarified. That has been done in Section 2-808. Finally, the PEB study report recommended that this section address when the aggrieved party's conduct might be sufficient to waive the right to cancel. Section 2-702(a) addresses the waiver issue.

3. CISG. Article 72(1) states that if "prior to the date for performance of the contract it is clear that one of the parties will commit a fundamental breach of contract, the other party may declare the contract avoided." Unless that party has "declared that he will not perform his obligations," Article 72(3), however, the other must give reasonable notice of an intention to avoid the contract in order to permit that party "to provide adequate assurance of his performance." Article 72(3). Adequate assurance presumably requires more than just a simple retraction of the repudiation.

SECTION 2-713. RETRACTION OF ANTICIPATORY REPUDIATION.

(a) A repudiating party may retract a repudiation until its next performance is due unless the aggrieved party, after the repudiation, has canceled the contract, materially changed its position, or otherwise indicated that the repudiation is considered to be final.

(b) A retraction may be by any method that clearly indicates to the aggrieved party that the repudiating party intends to perform the contract. However, a retraction must contain any assurance demanded under Section 2-711.

(c) Retraction reinstates a repudiating party's rights under the contract with due excuse and allowance to the aggrieved party for any delay caused by the repudiation.

SOURCE: Sales, Section 2-611.

1. Section 2-713 contains no revisions of substance from former Section 2-611. The PEB study report recommended no changes to this section.

2. CISG. There is no comparable provision in CISG. Under Articles 71 and 72, however, a party suspending performance for an apparent inability of the other to perform a substantial part of the contract, Article 71(3), or intending to declare the contract avoided for a repudiation, Article 72(2), must give immediate notice to the other. At that point, the other has the chance to provide adequate assurance of performance. Presumably that adequate assurance will include a retraction.

SECTION 2-714. CASUALTY TO IDENTIFIED GOODS. If the parties to a contract assume the continued existence and eventual delivery to the buyer of goods identified when the contract is made and the goods suffer casualty without the fault of either party before the risk of loss passes to the buyer and no commercially reasonable substitute is available, the following rules apply:

(1) The seller shall seasonably notify the buyer of the nature and extent of the loss.

(2) If the loss is total, the contract is avoided [terminated].

(3) If the loss is partial or the goods no longer conform to the contract, the buyer may nevertheless demand inspection and may treat the contract as avoided or accept the goods with due allowance from the price for the nonconformity but without further right against the seller.

SOURCE: Sales, Section 2-613.

1. Section 2-714 makes the following changes from former Section 2-613. First, former Section 2-613 provided that the section applied if the "contract requires for its performance goods identified when the contract is made." Section 2-714 changes that phrase to "the parties to the contract assume the continued existence and eventual delivery to the buyer of goods identified when the contract was made." Arguably assuming the continued existence and delivery of the goods is a more lenient test than the contract requiring those goods for its performance. Evidence relevant to whether the parties assumed the continued existence of identified goods should be considered. For example, even if the contract contemplates but does not expressly require the delivery of crops growing on the seller's land, a drought might still excuse the seller if both parties assumed the continued existence of those crops for performance. Support for this assumption might be derived from the capacity of the seller (i.e., a grower or a dealer), whether this farmer and others similarly situated historically have grown and sold only their own crops and any relevant prior course of dealing or usage of trade.

Second, the party claiming excuse can do so only if there is no commercially reasonable substitute available. This provision is designed to deal with the following scenario. Seller agrees to sell stock goods, those goods are identified when the contract was made and then destroyed. If the seller had other stock that was the commercially reasonable substitute for the identified goods, this section would not excuse the delivery. Third, the seller must notify the buyer of the loss. If the seller does not notify the buyer, the seller is not entitled to use this section to excuse the seller's obligation to perform. Fourth, the phrase "or in a proper case under a 'no arrival, no sale' term" is deleted pursuant to the Drafting Committee's decision to delete the shipping terms definitions from Article 2. Other than these three changes, the section is the same in substance as former Section 2-613.

2. The PEB study report recommended either that this section be revised to allow the section to apply in all cases where the goods were destroyed prior to the risk of loss being put on the buyer when the goods destroyed were necessary for performance of the contract or that this section be combined with the section on impracticability. Section 2-716. The Drafting Committee decided however to leave the section as it appears above with the three changes noted which leaves this section closer to its roots in the impossibility doctrine in contracts. Excuse for casualty to goods identified after formation is determined under Section 2-716.

3. CISG. Article 79(1) provides that a "party is not liable for a failure to perform any of his obligations if he proved that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences." Article 79(2) also provides limited excuse where a party's failure is "due to the failure by a third person." Arguably, this provision provides as much excuse from performance as does Section 2-714 (formerly Section 2-613).

SECTION 2-715. SUBSTITUTED PERFORMANCE.

(a) If, without the fault of either party, agreed berthing, loading, or unloading facilities or an agreed type of carrier becomes unavailable, or an agreed manner of delivery otherwise becomes commercially impracticable, an aggrieved party may claim excuse under Section 2-716 unless a commercially reasonable substitute is available. In that case, reasonable substitute performance must be tendered and accepted.

(b) If an agreed means or manner of payment fails because of domestic or foreign governmental regulation, the seller may withhold or stop delivery until the buyer provides a means or manner of payment which is commercially a substantial equivalent. If delivery has already been made, payment by the means or in the manner provided by the regulation discharges the buyer's obligation unless the regulation is discriminatory, oppressive, or predatory.

SOURCE: Sales, Section 2-614.

1. Section 2-715 makes only one change in former Section 2-614. It makes clear in a case covered by subsection (a) that excuse from performance is governed by Section 2-716 when no commercially reasonable substitute is available. Under former Section 2-614, the relationship between former Section 2-615 and former Section 2-614 was unclear.

2. CISG. See Article 79(1).

SECTION 2-716. EXCUSE BY FAILURE OF PRESUPPOSED CONDITIONS.

(a) Subject to Section 2-715 and subsection (b), delay in performance or nonperformance by the seller is not a breach of contract if the seller's performance as agreed has been made impracticable by:

(1) the occurrence of a contingency whose nonoccurrence was a basic assumption on which the contract was made; or

(2) compliance in good faith with any applicable foreign or domestic governmental regulation, statute, or order, whether or not it later proves to be invalid.

(b) A party claiming excuse under subsection (a) shall seasonably notify the other party that there will be delay or nonperformance. If the claimed excuse affects only a part of the seller's capacity to perform, the seller shall also allocate production and deliveries among its customers in a manner that is fair and reasonable and notify the buyer of the estimated quota made available. In allocating production and deliveries, the seller may include regular customers not then under contract as well as its own requirements for further manufacture.

SOURCE: Sales, Section 2-615.

1. Section 2-715 makes only one substantive change from former Section 2-615. Subsection (a) no longer provides "Except so far as a seller may have assumed a greater obligation." As almost all provisions of Article 2, the parties can agree to alter the default rules. Thus, the parties may allocate the risk of occurrences or non-occurrences by agreement. Deletion of this language accords with the intent of the PEB study report recommendation that the seller should be able to agree to a greater or lessor obligation than provided for in former Section 2-615.

2. Although the PEB study report recommended that provisions regarding the buyer's excuse from the obligation to accept and pay for goods be incorporated in this section, the Drafting Committee decided to leave that area to non-code law which grants excuse due to frustration of purpose in a narrow category of cases. See Restatement (Second) Contracts 265. The new Comments to Section 2-716 will summarize the interpretative case law under former Section 2-615 and the "frustration" doctrine. In sum, neither seller nor buyer can expect much sympathy when the claimed unexpected contingency was a shift in market conditions or an increase in the cost of performance. Even though performance as agreed under these conditions will be highly unprofitable, the courts tend to focus on the agreed price and quantity terms. Unless there is flexibility in those terms or other terms dealing with the changed circumstances, excuse will rarely be granted.

3. CISG. See Article 79(1), which grants excuse for an "impediment beyond his control and that he could not reasonably be expected to have taken . . . into account at the time of the conclusion of the contract or to have avoided or overcome . . ." This language is consistent with the law interpreting Force Majeure clauses. "Impediment" suggests external interference with the capacity to perform rather than changes affecting the incentive to perform. Thus, an unexpected labor dispute may impede the buyer's duty to take delivery of the goods but a severe drop in market prices would not impede the buyer's duty to pay for goods taken.

SECTION 2-717. PROCEDURE ON NOTIFICATION CLAIMING EXCUSE.

(a) A party that receives notification of a material or indefinite delay in performance or an allocation permitted under Section 2-714 or 2-716 as to any delivery concerned, or if there is a breach of the whole contract under Section 2-710(c), then as to the whole, by notification in a record, may:

(1) terminate and thereby discharge any unexecuted portion of the contract; or

(2) modify the contract by agreeing to take the available allocation in substitution under Section 2-716 [or by accepting the goods with due allowance as provided in Section 2-714].

(b) If, after receipt of notification under Section 2-714 or 2-716, a party fails to terminate or modify the contract within a reasonable time not exceeding 30 days, the contract lapses [is terminated] with respect to any performance affected.

(c) This section may be varied by agreement only to the extent that the parties have assumed a different obligation under Sections 2-714 and 2-716.

SOURCE: Sales, Section 2-616.

1. Section 2-717 changes former Section 2-616 as follows. First, the notice requirement and the buyer's rights upon such notification apply also to casualty to goods addressed in Section 2-714. The bracketed language in subsections (a)(2) and (c) are designed to complete the integration of this section with the rights provided in Section 2-714. Second, subsection (c) has been revised to accord with the deletion of the first phrase of former Section 2-615. See Note 1 to Section 2-716. If the seller agrees to a lesser obligation or a greater obligation than that provided under Section 2-716 or 2-714, the parties can also agree that the buyer will have rights different than those provided in Section 2-717. If the seller is excused under the provisions of Section 2-716 or 2-714, however, the parties can not have agreed prior to the circumstances arising that the buyer would have different rights than under Section 2-717.

2. CISG. There is no comparable provision in CISG. Article 79(4), however, requires that the party who fails to perform "must give notice to the other party of the impediment and its effect on his ability to perform." The penalty for failure to notify is damages. Also, Article 79(3) provides that the excuse or exemption provided by Article 79(1) "has effect for the period during which the impediment exists." These requirements provide a framework within which the parties can negotiate over allocations and adjustments.

SECTION 2-718. PRESERVING EVIDENCE OF GOODS IN DISPUTE. To further the adjustment of a claim or dispute, the following rules apply:

(1) Either party to a [contract] [sale], on reasonable notification to the other party, has a right to inspect, test, and sample the goods for the purpose of ascertaining the facts and preserving evidence. This right includes goods that are in the possession or control of the other party.

(2) Parties to a [contract ] [sale] may agree to an inspection or survey by a third party to determine the conformity or condition of the goods and may agree that the findings will be binding upon them in any later litigation or adjustment.

SOURCE: Sales, Section 2-515.

1. There are no changes of substance to former Section 2-515.

SECTION 2-801. SUBJECT TO GENERAL LIMITATIONS. The remedies of the seller, buyer, and other protected persons under this article are subject to the general limitations and principles stated in Sections 2-801 through 2-814.

SOURCE: New.

1. This section is new and sets out the remedial hierarchy of Part 8. Subpart A (Sections 2-801 through 2-814) contain sections that are applicable to both buyer and sellers and set forth remedial policies that control the application of the more specific remedial rules in Subpart B (seller's remedies Sections 2-815 through 2-822) and Subpart C (buyer's remedies Sections 2-823 through 2-829). Part 8 follows the organizational structure used in Article 2A, Part 5.

2. CISG. Revised Part 8 is consistent with the remedial structure in CISG. Chapter II states the obligations of the seller (Articles 30-44) and the remedies of the buyer upon breach of contract by the seller. Article 45. Buyer's remedies include the "rights" provided in Articles 46-52, which are unique to the buyer, and "damages" claimed under Articles 74-77, which are common to the buyer and the seller. Similarly, Chapter III states the obligations of the buyer (Articles 53-59) and the remedies of the seller upon breach by the buyer. Article 61. Seller's remedies include the "rights" provided in Articles 62-65, which are unique to the seller, and "damages" claimed under Articles 74-77, which are common to both parties. In general, the prefers specific performance over damages and states applicable damage principles in general terms.

SECTION 2-802. BREACH OF CONTRACT; PROCEDURES. If a party is in breach of a contract, the party seeking enforcement:

(1) has the rights and remedies in this article and, except as limited by this part, in the agreement;

(2) may reduce its claim to judgment or otherwise enforce the contract by any available administrative or judicial procedure, or the like, including arbitration if agreed to by the parties; and

(3) may enforce the rights granted by and remedies available under other law.

SOURCE: Licenses, Section 2B-701; Leases, Section 2A-501.

1. This section is new with no counterpart in former Article 2. It is modeled on Section 2A-501 and provides a summary of the aggrieved party's general remedial rights upon a breach of contract. Whether a party has breached the contract depends upon application of the principles in Part 7.

SECTION 2-803. REMEDIES IN GENERAL.

(a) In accordance with Section 1-106, the remedies provided in this article must be liberally administered with the purpose of placing the aggrieved party in as good a position as if the other party had fully performed.

(b) Unless the contract provides for liquidated damages under Section 2-809 or a limited remedy enforceable under Section 2-810, an aggrieved party may not recover that part of a loss resulting from a breach of contract that could have been avoided by reasonable measures under the circumstances. The burden of establishing a failure to take reasonable measures under the circumstances is on the party in breach.

(c) The rights granted by and remedies available under this article are cumulative, but a party may not recover more than once for the same injury. [Unless the contract provides for liquidated damages or a limited remedy enforceable under Section 2-809 or 2-810, a court may deny or limit a remedy if, under the circumstances, it would put the aggrieved party in a substantially better position than if the party in breach had fully performed.]

(d) This article does not impair a remedy for breach of any obligation or promise collateral or ancillary to a contract for sale.

SOURCE: Licenses, Section 2B-701; Sales, Section 2-701.

1. This section has no counterpart in former Article 2. The PEB study report recommended that the revised Article 2 begin with a statement of general remedial policy that (i) the expectation interest was the primary interest that the aggrieved party should be able to recover, (ii) the aggrieved party's remedy is subject to mitigation principle, and (iii) the aggrieved party's remedies are cumulative without exceeding the expectation interest or foreclosing other remedies unless fundamentally inconsistent or the breaching party's reliance on the choice of remedy. Section 2-803 addresses the PEB study report recommendations.

2. Subsection (a) contains the basic statement of the aggrieved party's expectation interest. This restates the expectation principle from Section 1-106(1) and references the other limitations found in Section 1-106 regarding punitive and consequential damages. Although it repeats the general principle of Section 1-106, it provides the starting point for application of the specific remedial measures found in Subparts B and C. The aggrieved party may recover either its reliance or restitution interest under the general damage measure of Section 2-804.

3. Subsection (b) contains a statement of the mitigation principle to apply to an aggrieved party's ability to recover damages as provided in Subparts B and C and is consistent with CISG Article 77. It supplements the mitigation principles built into particular remedy sections of Part 7, see, e.g., Sections 2-806 and 2-817, and is broad enough to include conduct by one party that prevents the other from curing a nonconforming performance. However, a party who satisfies the mitigation requirements of a particular section, such as Section 2-819(a) on resale, or enforces an agreed remedy, such as liquidated damages, is not subject to subsection (b). The relationship to liquidated damages and limited remedies is clarified in the text. The relationship to other sections of Part 8 is clarified in the proposed Comment.

A failure to mitigate means only that the aggrieved party cannot recover the preventable loss resulting from a breach. In most cases, the burden of establishing a failure to mitigate damages is on the defendant.

4. Subsection (c) reiterates the policy favoring a cumulation of remedies by the aggrieved party. Giving the aggrieved party a choice of remedies, despite possible inconsistency, is supported by variables at the time of the breach, such as the stage of performance, condition and location of the goods, market stability and availability, and the importance of protecting the value of the bargain as agreed at the time of contracting through price, quantity and duration terms.

Nevertheless, this choice of remedies must be made in good faith and be consistent with the general remedial policy of subsection (a). Accordingly, the court [including an arbitral tribunal], if requested by the defendant, may deny a particular choice when that remedy under the circumstances puts the aggrieved party in a substantially better position than full performance would have done. [Reinstated by Drafting Committee, 9/96.] In most cases, this will occur when the aggrieved party's choice of damages based upon the difference between contract and market price exceeds the profits that would have been made by full performance. At the March 1997 Drafting Committee meeting, motions to delete the word "substantially" and to delete the second sentence of subsection (c) were defeated. At the May 1997 Committee meeting, the sentence was discussed again, although no votes were taken. The decision was to bracket this sentence

The limitation would not apply to enforceable agreed remedies, such as liquidated damages or exclusive limited remedies.

5. Subsection (d) is the same in substance as former Section 2-701.

6. As requested by the Drafting Committee at the Jan. 1997 meeting, the following is a draft Comment that relates this section to the other remedies sections and explains how the principles should be applied.

Proposed Comment to Section 2-803

1. The purpose of this section is to set forth the remedial policies of this Article in order to guide the court's application of the specific remedies found in Subparts B and C of Part 8. When a contract is breached, the goal in application of the remedial provisions is to provide the aggrieved party the benefit of the bargain, that is, to place the aggrieved party in as good a position as if the breaching party had performed the contract. Subsection (a) states that general principle.

2. When a contract is breached, the aggrieved party is deprived of the breaching party's promised performance. If the seller fails to provide goods that conform to the contract, the buyer is harmed by not receiving the value of the conforming goods. If the buyer breaches, the seller is deprived of the value that seller was to receive in exchange for the goods. One way of starting to put an aggrieved party in such a position is to award the very performance promised. Thus the seller as aggrieved party could seek the price under Section 2-822 or specific performance under Section 2-807. Likewise, the buyer could seek specific performance under Section 2-807 or have a specific right to obtain the goods from the seller under Section 2-824. Specific performance is traditionally an equitable remedy and may not be available in a particular case or the aggrieved party may not seek specific performance. Similarly, an aggrieved seller may not be entitled to the price or the aggrieved buyer may not be entitled to get the goods. In those circumstances, the diminution in value to the aggrieved party must be measured. This diminution in value is usually denominated as general or direct damages.

3. General damages can be measured in several ways as provided in Subparts B and C.

If the seller breaches the contract, the buyer's general damages can be measured in one of three ways. If the buyer has accepted goods, and not revoked acceptance, the buyer is entitled to the difference in value between the value of the goods accepted and the value the goods would have had if the goods had conformed to the contract. Section 2-827. If the buyer has not accepted the goods or revoked acceptance as to the goods, the buyer has two choices as to the measurement of general damages. First, the buyer can cover, obtain substitute goods for those not provided, and recover the difference in value between the cover cost and the contract price. Section 2-825. Second, if the buyer does not cover the buyer's general damages for seller's breach of contract will be measured by the difference between the contract price and the market price for the goods. Section 2-826.

If the buyer breaches the contract, the seller's general damages can be measured in several ways. The seller could resell the goods under Section 2-819 and recover the difference between resell price and contract price. The seller could, alternatively, recover the difference between the market price and the contract price. Section 2-821(a). Finally, the seller could seek to recover the seller's lost profit and expenditures in reliance on the contract with the buyer. Section 2-821(b).

All of these general damage measurements are designed to compensate the aggrieved party for the lost value of the breaching party's promised performance. If for some reason, these general damage measures do not suffice to place the aggrieved party in that position, then Section 2-804 can be used as a general damage measurement.

4. In addition to that lost value of the promised performance, many times the aggrieved party suffers losses as a consequence of failing to receive the breaching party's performance. Compensating these consequential losses is part of placing the aggrieved party in the position it would have occupied but for the breach of contract. This recovery for consequential damages is in addition to the recovery for general damages. Traditionally the recovery of consequential damages were scrutinized to make sure that the breach in fact caused the consequential harm, the damages were reasonably certain in amount, the damages were not reasonably subject to mitigation by the aggrieved party, and the harm was a risk that was allocated to the breaching party as a foreseeable consequence of the breach. Article 2 continues that traditional view of consequential damage recovery in Section 2-806.

5. Finally, in addition to making the aggrieved party whole through recovery of general damages and consequential damages, the aggrieved party may have incurred incidental expenses in dealing with the goods after breach that do not easily fall into either of the other two categories. Section 2-805. An aggrieved party's recovery of these amounts rounds out the aggrieved party's recovery of the full performance position.

6. The subsection (a) principle is subject to Section 1-106 in order to make clear that punitive remedies are not generally provided for in breach of contract cases under this Article.

7. In many contracts, the parties will have altered the default remedies set out in this Article. One example is a liquidated damages clause, enforceable under Section 2-809. Another example is a limited remedy enforceable under Section 2-810 or an exclusion of liability for consequential or incidental damages enforceable under Section 2-810(c). If such a clause is part of a contract under Sections 2-206 and 2-207 and is enforceable under Sections 2-809 and 2-810, the principle of this section does not override those contractual agreements regarding the allocating of risk of breach. This preference for contractual agreements regarding the allocation of the risk of breach is reflected explicitly in subsections (b) and (c).

8. The ability of the aggrieved party to choose any of these various general damage remedies is limited by the general principle that a party cannot recover more than once for the same loss. Subsection (c). For example if an aggrieved buyer covers, under Section 2-825, the aggrieved buyer cannot get both cover price-contract price differential and market price-contract price differential. Similarly an aggrieved seller who resells under Section 2-819 may not get both the resell price-contract price differential and the market price-contract price differential.

9. Subsection (b) provides that an aggrieved party cannot recover for losses that could have been reasonably mitigated. Although the mitigation principle is most often associated with reduction of consequential damages, see Section 2-806, there may be instances where the general damages of the aggrieved party should have been mitigated. Under Sections 2-821 and 2-826, the aggrieved party can seek to measure their general damages by the difference between the contract price and the market price at the time of performance. If the breaching party can show that the aggrieved party could have realistically mitigated its general damages by reselling or covering as the case may be, then the aggrieved party's general damages should be reduced accordingly. However, if the aggrieved party covers or resells as the case may be and has complied with the requirements of Section 2-825 or 2-819, then the aggrieved party need not do anything else to mitigate its general damages. Similarly, if the breaching seller can demonstrate that a cure that is not sufficient to cure the breach under Section 2-709 would have minimized the aggrieved buyer's general damages, the breaching seller can seek to have the buyer's general damages reduced accordingly. An aggrieved seller who is exercising rights under Section 2-817 may take that action to mitigate the harm from the buyer's breach but may not take that action if it is designed to increase the amount of damages due to the buyer's breach.

10. Finally, subsection (c) also provides a controlling principle on remedial choice: A court may deny or limit a remedy if it provides an aggrieved party substantially more than its full performance position. How should this principle operate in practice?

(a) This principle should not be used to limit or deny the aggrieved party's cover or resale remedy. Thus if the aggrieved buyer covers under Section 2-825 and seeks the cover price-contract price difference or the aggrieved seller resells under Section 2-819 and seeks the resell price-contract price difference, the market price-contract price differential is not relevant to determine if the seller or buyer are over compensated. The requirements for cover and resale contain enough protections against overcompensation and no additional protection is afforded the aggrieved party by the principle of subsection (c). For example, assume an aggrieved buyer who covers at $20 per unit when the contract price is $15 per unit. The cover complies with all of the requirements of Section 2-825. Even if the market price is $18 per unit so that the market price measure would yield general damages of $3 per unit, the buyer is entitled to recover $5 per unit and is not overcompensated. Similarly, assume the aggrieved seller resells under Section 2-819, complying with all of its requirements, for $15 per unit when the contract price is $20 per unit. The aggrieved seller is entitled to recover the $5 per unit even if the market price per unit is $18 so that the market price measure would yield $2 per unit. The aggrieved seller is not overcompensated by its recovery of the $5 per unit.

(b) Assume, however, that the buyer covers as provided in Section 2-825 or the seller resells as provided in Section 2-819 and then seeks the market price-contract price difference as it provides for more damages than the cover price-contract price differential or the resell price-contract price differential. This is possible if the market is fluctuating to bring about disparities between the cover or resell price and the market price. Continuing the example above, the aggrieved buyer covers at $20 per unit when the contract price is $15 per unit. The market price at the relevant time for measuring market, however, is $25 per unit. The buyer is overcompensated if it attempts to collect the $10 per unit under Section 2-826 instead of the cover price-contract price differential of $5 per unit under Section 2-825. Similarly, if the aggrieved seller resells under Section 2-819 at $15 per unit when the contract price is $20 per unit, and the market price at the relevant time for measuring market is $10 per unit, the aggrieved seller is overcompensated if it attempts to recover the $10 per unit market price-contract price differential under Section 2-821 instead of the $5 per unit resale price-contract price differential under Section 2-819. In these circumstances, if the aggrieved party seeks its market price based damages, the breaching party has the ability to show that the aggrieved party really engaged in a substitute transaction such as cover or resale and that if general damages were measured by the difference between cover or resale and contract price, the aggrieved party's choice of market price based damages overcompensates the aggrieved party. Part of the breaching party's burden in this situation is to prove that the aggrieved party really engaged in a substitute transaction, that is that an aggrieved buyer really did purchase goods in substitution for those contracted for, or that the aggrieved seller really did resell the goods that were the subject matter of the breached contract.

(c) If the seller seeks to recover lost profits and reasonable expenditures made in reliance on the contract, a breaching buyer could seek to demonstrate that the seller really resold the goods and the resell price-contract price differential is less than the seller's attempted proof of lost profits and reliance expenditures. If the seller can prove that the resale does not place the seller in the position it would have been if the contract with the buyer had been performed, then the seller's choice of the lost profit and reliance expenditure as the measure of the seller's general damages should not be disturbed.

If the seller has not resold the goods and seeks recovery of lost profits and reliance expenditures under Section 2-821(b) and the market price-contract price measure of general damages is less than the lost profit and reliance expenditures, the seller is not overcompensated by its choice of the lost profit and reliance measurement of general damages. In the situations where seller seeks to prove lost profit and reliance expenditures, in all likelihood, the market price-contract price differential is under compensatory. If the seller seeks to recover the market price-contract price differential when it is more than the lost profit and reliance expenditures, the buyer may use the principle of subsection (c) to argue that the seller is overcompensated by its choice of the market price remedy.

(d) The principle of not overcompensating the aggrieved party could be used to control the buyer's ability to contend that a repair of an accepted good is the proper measurement of the loss in value because of the good's nonconformity if that amount is substantially more than the difference between the market value of the good as warranted and the value of the good accepted. This is consistent with the remedial policy of avoiding economic waste.

(e) Finally, the concept of not overcompensating the aggrieved party could be used to police the aggrieved party's use of non-expectancy measures of harm, such as the reliance or the restitution interest. See Comment following Section 2-804.

11. Because measurement of damages is not an exact science, the court should not be concerned with minor differences between the different measurements of general damages. For example, assume the aggrieved seller who has not resold proves that the market price-contract price differential is $100 per unit. The buyer submits proof that the seller's lost profit and reliance damages range from $90-105 per unit. In that situation, the seller who is awarded the market price measure of $100 per unit may be overcompensated if the buyer's proof of lower end of the lost profit range is correct and under compensated if the higher end of the range is accurate. The seller's choice of the market price measure does not substantially overcompensate the seller.

In sum, Part 8 does not favor the market damages when the seller properly resells or the buyer properly covers. These substitutional remedies are preferred, because they best approximate the position the plaintiff would be in upon full performance. Market price, at best, is a surrogate for resale or cover. Thus, in these cases, neither plaintiff nor defendant can insist on the market damages. Similarly, if there has been no qualifying resale and the aggrieved seller chooses a lost profits remedy, i.e., a remedy that measures lost profits without regard to market price, the defendant cannot object. Market price is, at best, an imprecise, artificial way of measuring the value of a particular transaction and will under compensatedin most cases. Finally, if there is no qualifying resale and the plaintiff chooses the market price remedy, the defendant may be able to show that market damages exceed the lost profits that would have been made upon full performance. In these cases, a court may be persuaded to require the plaintiff to use the lost profits remedy.

SECTION 2-804. MEASUREMENT OF DAMAGES IN GENERAL. If there is a breach of contract, the aggrieved party may recover compensation for the loss resulting in the ordinary course from the breach as determined under Sections 2-815 through 2-829 or as determined in any reasonable manner, together with incidental damages and consequential damages, less expenses and costs avoided as a result of the breach.

SOURCE: Sales, Section 2-714(a); Licenses, Section 2B-701(I).

1. Section 2-804 is a new section that is designed to state a general measurement rule for use when the specific measurement rules from Subparts B and C are insufficient to place the aggrieved party in its rightful position. It is comprehensive enough to allow recovery of the aggrieved party's reliance interest, where the party would be if the contract had not been entered into, or its restitution interest, restoration of unjust gains of the defendant to the plaintiff. For example, the buyer may wish to recover its expenditures in reliance upon the seller's performance if it is unable to prove its expectancy interest with reasonable certainty. Assume the seller has agreed to provide the buyer with specially manufactured goods and the seller then declares bankruptcy. Specific performance may not be available, the buyer may be unable to cover, and the market price may be uncertain. The buyer may use Section 2-804 to measure its harm caused by the breach in any reasonable manner. See Restatement (Second) Contracts 349.

2. Even if an aggrieved party cannot establish general or "direct" damages, an aggrieved party may still recover incidental and consequential damages under Sections 2-805 and 2-806.

3. Using the principle of Section 2-803(c), an aggrieved party should not be able to use Section 2-804 to recover damages based upon its reliance or restitutionary interests when those interests are greater than its expectancy interest. To illustrate, assume seller and buyer enter into an installment contract for 10 deliveries at $20,000 per delivery. Seller's cost of performing is actually $25,000 per delivery and the market price at time of delivery is $20,000 and Seller could resell undelivered goods for at most $20,000. Seller made a bad deal by underestimating the cost of Seller's performance. Thus on each delivery that Buyer accepts, Seller is losing $5,000. Buyer breaches. Seller's general damage recovery under either market or resell formula is $0. Under a restitution theory, Seller could argue that it should get the value of the benefit it conferred on Buyer by its part performance. If the value of the benefit conferred on Buyer is measured by the market value of the goods, the restitution recovery is identical to the expectancy recovery. If the value of the benefit conferred on Buyer is measured by the contract price Buyer agreed to pay, than as to any installments accepted, the Buyer is already liable for the price under Section 2-822, and Seller gets no benefit from asserting restitution. If the value of the benefit conferred on Buyer is measured by the cost of performance, then Seller will get the $25,000 per delivery as to the goods accepted by Buyer. See Boomer v. Muir, 24 P.2d 570 (Cal. App. 1933) (a construction contract situation where the value of the benefit conferred on the buyer was measured by the cost of performance of the builder); U.S. v. Western States Mechanical Contractors, 834 F.2d, 1533 (10th Cir. 1987) (subcontractor's contract price was $295,706, the reasonable value of work under the subcontract as determined at trial was $475,000, subcontractor wrongly fired so general contractor in breach, 40% of the work was done by subcontractor prior to firing, subcontractor received 40% of $475,000 as restitution for the value of the work performed). See also Restatement (Second) Contracts 371. The principle of Section 2-803(c) should prevent restitution or reliance recovery when the aggrieved party enters into a losing contract. See Restatement (2d) Contracts 349 comment a. If the party completely performs the contract and they are owed only money, the Restatement (Second) Contracts 373(2) provides that restitution is not allowed, thus the seller would be limited to the price.

SECTION 2-805. INCIDENTAL DAMAGES. Incidental damages resulting from breach of contract include compensation for any commercially reasonable charges, expenses, or commissions incurred with respect to:

(1) inspection, receipt, transportation, care, and custody of identified goods which are the subject of the breached contract;

(2) stopping delivery or shipment;

(3) effecting cover, return, or resale of the goods;

(4) reasonable efforts otherwise to minimize or avoid the consequences of breach; and

(5) otherwise dealing with the goods or effectuating other remedies.

SOURCE: Sales, Sections 2-715(1), 2-710.

1. Section 2-805 combines the incidental damages of seller, former Section 2-710, and buyer, former Section 2-715(1), into one section. The PEB study report did not recommend any changes to the definition of incidental damages. The only substantive change has been to not limit incidental damages for inspection of the goods when a buyer is the aggrieved party to cases of rightfully rejected goods. Compare former Section 2-513(2) and former Section 2-715(1). This limitation had received some criticism as being more restrictive than the common law and by encouraging rejection in the marginal case. See Hawkland, 2-513:03.

2. Incidental damages are reasonable expenses incurred in anticipation of or after a breach to mitigate damages, perform duties with regard to the goods and to effect other remedies. They should be distinguished from consequential damages which result from expenditures or commitments made before the breach to enable the aggrieved party to use the other party's performance. This distinction was observed in Fertico Belgium S.A. v. Phosphate Chemicals Export Association, Inc., 510 N.E.2d 334 (N.Y. 1987), where the buyer recovered "incidental" damages for arranging a "cover" after the seller's delay in delivery and was entitled to consequential damages for additional costs incurred in getting the goods to resale buyer after the time for performance had passed.

SECTION 2-806. CONSEQUENTIAL DAMAGES.

(a) Consequential damages resulting from a breach of contract include compensation for:

(1) any loss, including loss to property other than the goods sold, the party in breach at the time of contracting had reason to know would probably result from the aggrieved party's general or particular requirements and needs and which could not have been avoided by reasonable measures under the circumstances; and

(2) injury to person proximately resulting from any breach of warranty.

(b) The aggrieved party may not recover any consequential damages pursuant to subsection (a)(1) that result in disproportionate compensation to the aggrieved party. The breaching party has the burden of establishing that consequential damages under subsection (a)(1) result in disproportionate compensation.

SOURCE: Sales, Sections 2-710(b), 2-715(b) (March, 1995), Licenses Section 2B-102(a)(5).

1. Section 2-806 makes several changes to former Section 2-715(2). First, pursuant to the PEB study report recommendation, sellers may now recover consequential damages. Second, the standard of foreseeability and the mitigation principle in subsection (a)(1) apply to all consequential losses except for personal injury. Thus, consequential economic loss and loss to property other than the goods sold are now covered under subsection (a)(1). Third, the forseeability standard requires the breaching party have reason to know the loss would probably result as well as know of the aggrieved party's particular needs and requirements. Fourth, subsection (b) allows the breaching party to establish that the consequential damages the aggrieved party seeks result in disproportionate compensation to the aggrieved party. Each of these changes is explained in more depth below.

2. Seller's recovery. Sellers may now recover consequential damages under the same standards applicable to buyers. The Drafting Committee rejected the interpretation that former Section 2-710, in combination with Section 1-106(1), denied consequential damages to sellers.

The following examples illustrate the application of Section 2-806 to sellers. Assume that the foreseeability and mitigation requirements of subsection (a)(1) have been satisfied.

(a) Seller makes a special expenditure in preparation to perform which will not be reimbursed by Buyer's full performance. After breach, Seller is unable to salvage the investment. The unreimbursed expenditure is recoverable as consequential damages.

(b) Seller has a profitable business opportunity the capture of which depends upon prompt payment by Buyer of the contract price. Buyer, who knew of the opportunity at the time of contracting and that substitute financing would be difficult, fails to pay and Seller is unable, after reasonable efforts, to obtain substitute financing. The lost profits, if proven with reasonable certainty, are recoverable as consequential damages. If Seller had been able to obtain a loan at 8% interest to capture the opportunity, the interest paid would be consequential rather than incidental damages. See Restatement, Second, Contracts 351, Comment (e).

(c) Seller borrowed money at 8% interest to finance performance of the particular contract. The loan was to be repaid from the contract price. Buyer was late in payment and Seller could not obtain more favorable financing to pay off the loan. Consequential damages include the interest paid on the loan between the time when Buyer promised to pay the price and the time when it was paid if the Buyer had reason to know at the time of contracting of the aggrieved party's particular financing arrangement. If, however, the loan was obtained to finance general business operations rather than a particular contract, the interest is fixed costs or overhead rather than consequential damages. See Afram Export Corp. v. Metallurgiki Halyps, S.A., 772 F.2d 1358 (7th Cir. 1985).

3. Damage to other property. At the March 1997 meeting, the Drafting Committee voted to require that personal injury damages be recoverable as provided in former Section 2-715(2)(b) but that all other consequential losses be evaluated under the test of subsection (a)(1).

4. Disproportionate compensation. In addition to the usual limitations on the recovery of consequential damages, i.e., foreseeability, mitigation of damages, cause in fact, and proof with reasonable certainty, the November, 1996 Draft also excluded from consequential damages losses which were "unreasonably disproportionate" to risks fairly assumed under the contract by the breaching party. This limitation, which the breaching party must prove, is derived from 351 of the Restatement, Second, of Contracts.

After discussion at the January, 1996 meeting of the Drafting Committee, the limitation was placed in subsection (a) rather than in a separate subsection (b) to clarify that the test was to be applied by the finder of fact in the first instance rather than subsequently by a court in what looked like a remittitur. Thus, claimed consequential damages were either within the limitation or not under subsection (a) and there was no reason to give the court power to "limit damages by excluding or limiting recovery for loss of profits, by allowing recovery only for loss incurred in reliance, or otherwise." Section 2-806(b) (January, 1996). After discussion at the November 1996 meeting, two additional changes were made. First, the unreasonably disproportionate limitation does not apply to consequential losses which are personal injury damages. Second, the unreasonably disproportionate limitation is something that the breaching party must establish as part of an "affirmative defense" to the consequential damage case of the aggrieved party rather than requiring the aggrieved party to establish in every case that the consequential losses were not unreasonably disproportionate. At the January 1997 meeting, an issue was raised whether damage to other property should also be exempted from the unreasonably disproportionate test. No action was taken on this suggestion. At the March 1997 meeting, the Committee voted to continue applying the disproportionate concept to consequential damages other than personal injury and to rephrase the concept more closely along the lines expressed in the Restatement Second of Contracts 351 while keeping it as a fact question and allowing it in the nature of an affirmative defense rather than as part of the plaintiff's case in chief. Subsection (b) reflects that vote.

The background of the "unreasonably disproportionate" limitation should be clear, especially where the buyer is the plaintiff. Consequential damages result where the buyer is deprived of timely use of conforming goods because of repudiation, non-delivery or breach of warranty. They usually include lost business profits, but courts will occasionally award damages for loss of good will, unreimbursed reliance and various disruption losses caused to the buyer or third parties. The potential scope of consequential damages is influenced by the purpose for which the goods are purchased, the nature of the breach, and the type of loss caused. Where the purpose is to use the goods in a business or to resell them and breach is by non-delivery, the loss is profits (opportunity costs) that would have been made if delivery were timely. See Hydraform Products Corp. v. American Steel & Aluminum Corp., 498 A.2d 339 (N.H. 1985). Where the purpose is resale or the goods are intended as components for use in or with other goods sold to third parties and a breach of warranty occurs, (i.e., the goods are unmerchantable) more than the buyer's lost profits are involved. Third parties now have claims for breach of warranty against the buyer, including possible damage to person and property, which can be asserted cumulatively by the buyer against the seller as consequential damages for breach of warranty. Finally, the liability potential may be exacerbated if there is a product recall. Thus, the risk of uncertain and potentially heavy consequential damages is a matter of continuing concern to sellers. Although this limitation is intended to control this risk, its application should be limited to cases where there is an extreme disparity between the price charged by the seller and the foreseeable loss caused to the buyer (this suggests that the price was not intended to cover the risk) or there is an "informality of dealing, including the absence of a detailed written contract, which indicates that there was no careful attempt to allocate all of the risks." Restatement, Second, 351, Comment (f).

5. Buyer's Recovery. Section 2-806 states a default rule which tends to favor the buyer but which is easy to limit or exclude by agreement. In the current jargon, it is a "penalty" default rule because the buyer is penalized (no recovery) if it fails to inform the seller of particular circumstances or losses of which the seller would otherwise have no reason to know. So if the foreseeability test is not satisfied or the contract contains an excluder clause, the risk of consequential losses is on the buyer.

6. Conditions to recovery of consequential damages. Even without an excluder clause, the aggrieved party must satisfy four conditions to recover:

(a) The loss must result from (be caused by) the breach. This cause-in-fact requirement is common to all breach of contract claims, but may be more difficult to establish when the loss is remote from the breach.

(b) The loss must result from general or particular requirements of the aggrieved party of which the breaching party had notice (knowledge or reason to know) at the time of contracting. This is Article 2's version of the famous principle in Hadley v. Baxendale. In addition, Section 2-806 now requires the breaching party to have reason to know at the time of contracting that the loss "would probably result from the breach." See Restatement, Second, Contracts 351. This occupies the middle ground between losses that are "likely to result" and losses that are simply "in the cards," and is unlikely to change the operation of this section.

(c) An otherwise foreseeable loss is not recoverable if, after the breach, it could have been prevented by either the aggrieved or the breaching party through "reasonable measures under the circumstances." This limitation, which is a specific application of Section 2-803(b), works best where the buyer can cover to minimize or avoid lost profits.

Normally, the breaching party must establish that the plaintiff failed to mitigate. See Section 2-803(b). In cases where both parties could have avoided the loss by the same or similar acts and it is "equally reasonable" to expect the breaching party to minimize damages, the defendant is in no position to contend that the plaintiff failed to mitigate." See, e.g., Nezperce Storage Co. v. Zenner, 670 P.2d 871 (Id. 1983). An unresolved issue is whether the plaintiff must bear the burden of proof that it mitigated its consequential damages as part of its case to recover consequential damages or whether mitigation is in the nature of an affirmative defense that the defendant must establish that the plaintiff failed to mitigate in order to reduce the amount of consequential damages. Section 2-803(b) places the burden of proving that mitigation did not occur on the breaching party. The PEB study report assumed that the breaching party would have the burden of demonstrating that the aggrieved party did not mitigate. The Comments could make this clear.

(d) The plaintiff must prove the loss with reasonable certainty. This limitation controls loss in complex cases of remote or speculative damage, (e.g., loss of good will, new businesses) but is not an insuperable barrier in most cases.

7. The Drafting Committee rejected an alternative to subsection (a)(1), taken from Section 4A-305(d), which provided that between merchants, no consequential damages are recoverable unless they are expressly agreed to in a record.

This rejected alternative is a simple but extreme penalty default rule. Under it, the seller has no liability for consequential damages unless the buyer bargains for protection that is expressly agreed to. This default rule may work well in an Article 4A funds transfer, where the low cost of the transfer has no relationship to the dollar amount transferred or the risk that a payment order will be late, improperly executed or not executed at all and commercial parties with relatively equal bargaining power are involved. Given the varieties and complexities of contracts for the sale of goods, the appropriateness of the Article 4A model was doubted by the Drafting Committee.

8. CISG. There is no specific provision permitting the recovery of incidental damages, but both seller and buyer can recover foreseeable consequential damages. Article 74.

SECTION 2-807. SPECIFIC PERFORMANCE.

(a) A court may enter a decree for specific performance if the parties have expressly agreed to that remedy or the goods or the agreed performance of the party in breach of contract are unique or in other proper circumstances. Even if the parties expressly agree to specific performance, a court shall not enter a decree for specific performance where the breaching party's sole remaining contractual obligation is the payment of money.

(b) A decree for specific performance may contain terms and conditions as to payment of the price or damages or other relief the court considers just.

SOURCE: Licenses, Section 2B-704; Section 2A-521; Sales, Section 2-716 (December, 1994).

1. Section 2-807 makes the following changes from former Section 2-716. First, specific performance is not limited to the buyer [former Section 2-716(1) applied only to buyers]. A seller may obtain specific performance of the buyer's agreement to accept and to pay for the goods in appropriate cases. This simply affirms what some courts have always done, especially in long term supply contracts. Specific performance is an alternative to the seller's action for the price under Section 2-822. Unlike an action for the price, however, specific performance preserves the contract and acts in personam to enforce the agreement for future performance.

Second, the parties may expressly provide for the remedy of specific performance in the contract. This accords with the PEB study report recommendation. The expectation is that a court will enforce the agreed remedy even though legal remedies at the time of the breach are entirely adequate. This expectation is consistent with a growing consensus that specific performance is, in most cases, a more efficient remedy than damages. See, e.g., Alan Schwartz, The Myth That Promisees Prefer Supra Compensatory Remedies: An Analysis of Contracting For Damage Measures, 100 Yale L. J. 369 (1990).

Note that subsection (a) gives the court discretion ("may") to award specific performance if the parties have so agreed. Thus, the court might decline to make the award where the remedy is burdensome to administer. Further, the assumption is that a court will condition the specific performance decree upon full performance by the aggrieved party. Thus, a seller cannot obtain specific performance of the buyer's agreement to pay the price in the future unless the seller tenders goods that conform to the contract. See Section 2-822.

On the other hand, concern was expressed that under an agreed specific performance remedy, a buyer, particularly a consumer buyer, could be forced to take and pay for goods that it did not need or want. This result is inconsistent with the policy expressed in Section 2-822(a)(3) that unless resale is not reasonably available the seller cannot recover the price of identified goods that the buyer has not accepted. In these cases, the court "may, at its discretion," deny the remedy. At the March 1997 Drafting Committee meeting, the Committee voted to limit the ability to get an in personam remedy where a party's sole obligation was to pay money. The language at the end of subsection (a) reflects that vote. The last sentence of subsection (a) is designed to distinguish the "take and pay" contracts from contracts where the only obligation is to pay for goods already accepted. In take and pay contracts, the parties would be able to agree to specific performance and have that agreement enforced.

2. Because the buyer's right to replevin under former Section 2-716(3) was not a remedy available to both buyers and sellers it has been relocated to the buyer's remedy section, Section 2-824. See notes following that section.

3. CISG. Specific performance is the preferred remedy for sellers and buyers under the Convention. See Articles 46 and 62. See also, Steven Walt, For Specific Performance Under the United Nations Sales, 26 Tex. Int'l L. J. 211 (1991). Article 28 provides, however, that if under CISG "one party is entitled to require performance of any obligation by the other party, a court is not bound to enter a judgment for specific performance unless the court would do so under its own law in respect of similar contracts of sale not governed by this Convention."

SECTION 2-808. CANCELLATION: EFFECT.

(a) An aggrieved party may cancel a contract if there is a breach under Section 2-701, or in the case of an installment contract, a breach of the whole contract under Section 2-710(c), unless there is a waiver of the breach under Section 2-702 or a right to cure the breach under Section 2-709.

(b) Cancellation is not effective until the canceling party notifies the party in breach of the cancellation.

(c) Except as otherwise provided in subsection (d), upon cancellation, all obligations that are still executory on both sides are discharged.

(d) The obligations surviving cancellation include:

(1) a right based on a previous breach or performance of a contract;

(2) any term limiting disclosure of information;

(3) an obligation to return or dispose of goods;

(4) a choice of law forum;

(5) an obligation to arbitrate or otherwise resolve disputes through alternative dispute resolution procedures;

(6) a term limiting the time for commencing an action or for providing notice;

(7) a remedy for breach of the whole contract or any unperformed balance; and

(8) other rights, remedies, or limitations if in the circumstances such survival is necessary to achieve the purposes of the parties.

(e) Unless a contrary intention clearly appears, language of cancellation, rescission, or avoidance of the contract or similar language is not a renunciation or discharge of any claim in damages for an antecedent breach of contract.

SOURCE: Sales, Sections 2-106(3) and (4), 2-720; Licenses, Sections 2B-703 and 2B-626.

1. Former Section 2-106 contained a definition of cancellation and a cryptic rule about what rights survive on cancellation. The PEB study report recommended that the definition of cancellation be separated from the substantive effect of cancellation and, in discussing the remedies sections of Article 2, recommended that the revision clarify the rights of an aggrieved party to cancel the contract. Section 2-808 responds to those recommendations. Section 2-102(a)(4) provides the same definition of cancellation as found in former Section 2-106(4).

2. Subsection (a) provides that an aggrieved party has the right to cancel a contract for breach and makes clear that the right to cancel cannot be exercised if the breach has been waived under Section 2-702 or the seller has a right to cure the breach under Section 2-709. Subsection (a) makes explicit what was implicit in former Section 2-703 and former Section 2-711 which listed cancellation as one of the seller's or buyer's rights when the other party breached the contract but was unclear on when the remedy to cancel was precluded. Sections 2-815 and 2-823 continue to list the right to cancel for breach and reference this section for the exercise of that right.

3. Subsection (b) is a new subsection that clarifies that the cancellation is effective when the aggrieved party notifies the breaching party. Under the definition of notify in Section 1-201(26), conduct may be sufficient notification. If the buyer both rejects and cancels the contract at the same time, the buyer need not send two notices. However, the buyer cannot use cancellation as a substitute for rejection under Section 2-703. If the seller tenders nonconforming goods so that the buyer has a right to reject the goods under that section, the buyer may cancel. That cancellation, however, does not suffice as a proper rejection of the goods unless the buyer also complies with the sections on proper rejection of the goods. See Sections 2-703, 2-704, and 2-705. If the buyer rejects, and then the seller attempts to cure but the cure is not effective, to cancel the contract, the buyer must notify the seller of that cancellation unless the circumstances are such as to indicate that the buyer has canceled if the seller fails to effect a proper cure.

4. Subsection (c) states the effect of the cancellation on executory obligations found in former Section 2-106(3) and (4). This general rule is subject to the specific exceptions stated in subsection (d). Subsection (d)(1) continues the rule from former Section 2-106(3) that cancellation preserves any right based upon a previous breach. Thus an aggrieved party that cancels the contract may sue for past breaches of the contract. Subsection (d)(5) continues the rule from former Section 2-106(4) that a canceling party retains any remedy for breach of the whole contract or its unperformed balance. Thus the effect of an aggrieved party's cancellation is that neither the aggrieved party or the breaching party must render future performance of fully executory obligations but the aggrieved party retains all remedies for breach against the breaching party as to both the past and future performance of the breaching party. Because cancellation is not necessarily rescission of the contract, the performance already rendered need not be returned to the other party. For example, if seller is the breaching party and has delivered a non-conforming installment of goods and the nonconforming installment results in a breach of the whole contract, the buyer may cancel the contract. When the buyer cancels, the buyer need not return the accepted non-conforming installments to the seller, but has the right to obtain damages due to the non-conformity of those past installments. The cancellation means that the seller need not deliver any of the remaining installments but the seller is liable for breach of the whole contract. If the parties have already rendered their performance so that obligations are not executory on both sides, then cancellation is a meaningless remedy. Assume in a one shot contract that the seller has delivered non-conforming goods and the buyer has accepted those goods. The buyer cancels due to the non-conformity. The buyer is still liable for the price and has a counterclaim for damages under Section 2-827 unless buyer can revoke acceptance under Section 2-707. The buyer's cancellation does not affect the buyer's obligation to pay for the goods nor give the buyer the ability to return the goods to the seller outside of the revocation right.

Subsections (2) through (4) of subsection (d) are new and were not found in former Section 2-106. Subsection (2) is designed to allow the parties to provide in their contract the obligations that should survive cancellation. Subsection (3) recognizes the validity of non-disclosure agreements that operate after cancellation of the contract for sale. This default rule is subject to contrary agreement of the parties. In some situations, the parties may intend that the non-disclosure obligation not survive cancellation of the contract. If so, the parties can so provide in their agreement, which may include not only the language of the parties, but also applicable usage of trade, course of dealing and course of performance. Subsection (4) allows enforcement of alternative dispute resolution clauses, choice of forum clauses, choice of law clauses, clauses regarding reduction of the statute of limitations period as allowed under Section 2-814 as well as any other provision regarding dispute resolution that is enforceable under other law. Cancellation of the contract should not affect those rights. The list in subsection (d) is not exclusive and other rights may survive cancellation if the parties so intend.

5. Subsection (e) is the same in substance as former Section 2-720.

6. CISG. CISG's equivalent to "cancellation" is "avoidance" for a fundamental breach of contract. See Article 25, 49(1), and 64(1). The effects of a proper avoidance are stated in Articles 81-84. In general, it is more difficult to avoid the contract under CISG than it is to cancel under Article 2. Moreover, the seller's remedies of contract-market price damages or resale and the buyer's remedies of contract-market price damages and "cover" depend upon avoidance. Articles 75 and 76.

SECTION 2-809. LIQUIDATION OF DAMAGES; DEPOSITS.

(a) Damages for breach of contract may be liquidated [in the contract] but only in an amount that is reasonable in the light of the difficulties of proof of loss in the event of breach and either the actual loss or the then anticipated loss caused by the breach. If a term liquidating damages is unenforceable under this subsection, the aggrieved party may pursue the remedies provided in this article.

(b) If a seller justifiably withholds or stops performance because of the buyer's breach of contract or insolvency, the buyer is entitled to restitution of the amount by which the sum of payments exceeds the amount to which the seller is entitled under a term liquidating damages in accordance with subsection (a).

(c) A buyer's right to restitution under subsection (b) is subject to offset to the extent that the seller establishes a right to recover damages under the provisions of this article other than subsection (a) and the amount or value of any benefits received by the buyer directly or indirectly by reason of the contract.

(d) If a buyer has received payment in goods, their reasonable value or the proceeds of their resale are payments for the purposes of subsection (b).

SOURCE: Sales, Section 2-718. See Licenses, Section 2B-706.

1. Section 2-809 makes several changes from former Section 2-718. The PEB study report recommended that the parties' agreement on liquidated damages should be enforceable regardless of the amount of actual damages as long as the amount was a reasonable forecast at the time of contracting. Subsection (a) follows former Section 2-718(1) by allowing the parties to fix a damages amount in their agreement if it is reasonable in light of either the anticipated or actual harm and in light of difficulties of proof of loss. Language regarding the inconvenience or nonfeasibility of obtaining another remedy from former Section 2-718(1) is not retained. The PEB study report also recommended that the last sentence of former Section 2-718(1) be deleted. That sentence provided that unreasonably large liquidated damages were void as a penalty and allowed courts to not enforce liquidated damage clauses that were a reasonable forecast at the time of contracting. The last sentence of subsection (a) states what was implicit in former Section 2-718; if the liquidated damages remedy is unenforceable under the test of subsection (a), the aggrieved party may obtain other remedies as provided in Part 8.

Section 2-809 deals with the liquidation of damages not the limitation of damages by agreement. The limitation agreements are covered by Section 2-810. To illustrate, suppose commercial parties negotiated a reasonable liquidated damage amount of $5,000 under subsection (a) but the actual damages were $100,000. This agreement may be enforceable as a reasonable liquidated damages, even though damages were under liquidated. There is no need to ask whether enforcement of the under liquidated damage clause is unconscionable. On the other hand, suppose, without any effort to liquidate, the parties agreed that under no circumstance will the seller's damages for breach exceed $5,000. This is a limitation (an arbitrary fixing) rather than an attempt to fix a reasonable amount and its enforceability is governed by Section 2-810(c).

2. Subsection (b) is the same in substance as former Section 2-718(2) with one change. The former provision allowed the seller to offset from the buyer's right to restitution a statutory liquidated damages amount of the lesser of 20% of the total value of the buyer's performance or $500. The PEB study report recommended that the provision be deleted as of dubious utility. At the March 1997 meeting, the Drafting Committee voted to delete that provision.

3. Subsection (c) is the same in substance as former Section 2-718(3). Subsection (d) is the same in substance as former Section 2-718(4) except that it does not provide that the seller's right to sell goods received from the buyer as the buyer's performance obligation is subject to the provisions on an aggrieved seller's resale under Section 2-819 if the seller had notice of the buyer's breach prior to reselling the goods. Comment 2 to former Section 2-718 stated the reason for such a requirement was to make sure the seller made reasonable efforts to resell the goods for their true value. The Drafting Committee should address whether that requirement should be continued.

4. CISG. There is no provision dealing with liquidated damages. Restitution claims are permitted in certain cases of avoidance for fundamental breach. See Articles 81(2), 82 and 84.

SECTION 2-810. CONTRACTUAL MODIFICATION OF REMEDY.

(a) Subject to Section 2-809, the following rules apply:

(1) An agreement may add to, limit, or substitute for the remedies available under this article, such as by limiting or altering the measure of damages recoverable for breach of contract or limiting the buyer's remedies to return of the goods and repayment by the seller of the price or to repair and replacement of nonconforming goods or parts by the seller.

(2) An agreed remedy under paragraph (1) may not be applied to deprive the aggrieved party of a minimum adequate remedy under the circumstances.

(3) Resort to an agreed remedy under paragraph (1) is optional. However, if the parties expressly agree that the agreed remedy is exclusive, it is the sole remedy.

(b) Subject to subsection (a)(2), if, because of a breach of contract or other circumstances, an exclusive, agreed remedy fails substantially to achieve the intended purposes of the parties, the following rules apply:

(1) In a contract other than a consumer contract, the aggrieved party may pursue all remedies available under this article. However, an agreement expressly providing that incidental or consequential damages, including those resulting from the failure to provide the limited remedy, are excluded is enforceable to the extent permitted under subsection (c).

(2) In a consumer contract, an aggrieved party may reject the goods or revoke acceptance and, to the extent of the failure, may pursue all remedies available under this article including the right to recover consequential or incidental damages, despite any term purporting to exclude or limit such remedies.

(c) Subject to subsection (b), consequential damages and incidental damages may be limited or excluded by agreement unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of a consumer contract is presumed to be unconscionable.

SOURCE: Sales, Section 2-719; Licenses, Section 2B-705.

1. Section 2-810 makes the several changes to former Section 2-719. Subsection (a)(1) is the same in substance as former Section 2-719(1)(a). Subsection (a)(3) is the same in substance as former Section 2-719(1)(2). Section 2-810(a) validates agreements modifying or limiting remedies. The unstated assumption is that such agreements must be conscionable at the time of contracting, Section 2-105, and not otherwise subject to the defenses of fraud, mistake or duress. See Section 1-103. Due to the deletion of Section 2-602 on service contracts, Article 2 does not provide a standard of performance for service promises. The classic service promise is the seller promising to repair or replace nonconforming goods. The issue is what level of performance is required. If the seller has a right to cure, the cure provision specifies that the cure must result in conforming goods. Section 2-709. A repair or replacement promise as an exclusive agreed remedy for breach of a warranty of quality should also result in conforming goods. This point could be made in the Comments to this section. If the repair or replacement promise is breached and repair or replacement is the exclusive agreed remedy, that situation should be treated as a failure of the essential purpose of the agreed remedy under subsection (b).

Subsection (a)(2) responds to the PEB study report recommendation that the Drafting Committee consider placing in the statute a standard of when an agreement goes too far in limiting or altering remedies. At what point does an agreed remedy become a penalty (too much) or sink below some minimum adequate remedy (too little)? In commercial cases where exclusive, limited remedies have been agreed, the courts have given the parties wide latitude. See Canal Electric Co. v. Westinghouse Electric Corp., 973 F.2d 391 (1st Cir. 1992), upholding an allocation of risk between "highly sophisticated business entities." On the other hand, the aggrieved party, despite the agreement, should be entitled at the very least to some minimum adequate remedy, presumably not less than restitution. See McDermott, Inc. v. Iron, 979 F.2d 1068 (5th Cir. 1992). To test whether the contract provides a minimum adequate remedy, the comparison could be to the expectancy interest, to the restitution interest, or to the reliance interest of the aggrieved party. It could also be tested by deciding whether the contract was illusory because the breaching party in effect limited the remedy so that the aggrieved party had no effective recourse for the breach of contract.

After discussion at the January and March, 1996 meetings, the Drafting Committee approved the language in Section 2-810(a)(2) as a limitation on the agreed remedies permitted in Section 2-810(a)(1). What is and what is not a minimum adequate remedy depends upon the circumstances of each case. At the March 1997 meeting, the Drafting Committee discussed whether the minimum agreed remedy provision is a subset of unconscionability and whether it should be so stated in the text. A motion to that effect failed by a vote of 2-5. A phrasing of that idea could be as follows: "An agreed remedy that does not provide the aggrieved party a minimum adequate remedy is unconscionable." This statement would thus be similar to the statement in subsection (c) about the unconscionability of exclusion of consequential damages for personal injury in the consumer goods case. This statement of the principle would be in accord with Comment 1 to former Section 2-719 which stated "If the parties intend to conclude a contract for sale within this Article they must accept the legal consequence that there be at least a fair quantum of remedy for breach of the obligations or duties outlined in the contract. Thus any clause purporting to modify or limit the remedial provisions of this Article in an unconscionable manner is subject to deletion and in that event the remedies made available by this Article are applicable as if the stricken clause had never existed."

2. Subsection (b) is derived from former Section 2-719(2) which stated that if a limited remedy failed of its essential purpose, the aggrieved party could have remedies as provided in the Act. The construction of this provision has been troublesome for the courts. The PEB study report recommended that the revision clarify how this concept should be applied. In these cases, the seller, either directly or through a dealer, obtains an agreement with the buyer that may: (1) Make a limited express warranty, (2) Exclude or limit implied warranties, (3) Promise, on breach of express warranty, to repair, replace parts or otherwise cure the breach for a stated period of time, and (4) Exclude liability for consequential damages. These clauses, typically, are well drafted and are stated to be "exclusive." Problems start when a breach occurs and the seller is unable or unwilling to perform the limited, agreed remedy. Here there is one (the express warranty) and probably two (the agreement to "cure") breaches by the seller. What are the buyer's remedies? Should they differ when the buyer is a consumer? Subsection (b) answers these questions.

Beyond a breach of contract, no attempt is made to define when "circumstances" cause a failure. Clearly, the inability of the seller after reasonable efforts to comply with the agreed remedy is a prime example. This may also be a second breach of contract for which independent remedies are available. See Sections 2-103(a)(3), 2-804. Other "circumstances" are left to the courts. A failure, however, leaves the buyer facing a breach of warranty or breach of an agreement to repair by the seller and usually in possession of nonconforming goods.

Non-consumer contracts. Subsection (b)(1) provides a specific answer to the enforceability of a consequential and incidental damage excluder when the exclusive, limited agreed remedy fails of its essential purpose. This is the question that has been most troublesome for the courts. When a limited agreed remedy fails, the consequential damage excluder is still effective if enforceable under subsection (c). Thus an aggrieved party would get the remedy that substitutes for the failed remedy but would not get consequential damages if the contract excludes them. Thus this section adopts as the default rule the presumption that the agreed limited remedy and the consequential and incidental damage excluder are independent of each other in a commercial case. See International Financial Services, Inc. v. Franz, 534 N.W.2d 261 (Minn. 1995). As to the relationship between other remedies that the contract may provide for or limit, if a remedy fails of its essential purpose, the aggrieved party may resort to all remedies for breach.

Consumer Contracts. Subsection (b)(2) provides for the opposite presumption in consumer contracts as in commercial contracts. That is, in consumer contracts, the consequential and incidental damages excluder clauses would not be enforceable in the situation where the agreed remedy failed. Subsection (b)(2) thus adopts as the default rule the presumption that the consequential and incidental damage excluder clause is dependant on the provision of the limited remedy.

Subsection (b) is subject to the overriding principle in subsection (a)(2) of a minimum adequate remedy. Assume a limited, exclusive remedy was not provided and a consequential damage excluder that is enforceable under subsection (c) and subsection (b) but if the aggrieved party was precluded from recovering consequential damages, the aggrieved party in effect has no remedy. These circumstances have prompted some courts to deny enforcement to the excluder clause, presumably because either the seller was in some way at fault or the buyer had no minimum adequate remedy, such as restitution.

3. Subsection (c) is the same in substance as former Section 2-719(3) except that it explicitly recognizes exclusion of incidental as well as consequential damages. An agreement excluding recovery for consequential and incidental damages was enforced in McNally Wellman Co. v. New York State Electric & Gas Corp., 63 F.3d 1188 (2d Cir. 1995) (New York law). The Drafting Committee voted against providing a safe harbor for consequential damage excluders by stating a presumption of conscionability in a commercial case. Although the PEB study report recommended that no special provisions for personal injury damages be included in this provision, the Drafting Committee rejected that recommendation as detrimental to the enactability of a revised Article 2.

4. CISG. There is no comparable provision in the Convention. Is Section 2-810 a rule of validity within Article 4(a)? If so, should Article 2 say so?

SECTION 2-811. REMEDIES FOR MISREPRESENTATION OR FRAUD. Remedies for material misrepresentation or fraud include all remedies available under this article for nonfraudulent breach of contract. Rescission or a claim for rescission of a contract for sale and rejection or return of the goods do not bar a claim for damages or other consistent remedy.

SOURCE: Sales, Section 2-721.

Section 2-811 contains no revisions of substance from former Section 2-721. Professor Gary Monserud has suggested that the text or Comments of Section 2-811 be revised to make clear that if a contract induced by fraud is affirmed by the buyer keeping the goods followed by the aggrieved buyer suing for deceit in tort, the aggrieved buyer may recover damages based upon its expectation interest under Section 2-827 as opposed to its reliance interest. See Monserud, Measuring Damages After Buyer's Affirmation of an Article 2 Sales Contract Induced by Fraud: A Study of Code Jurisprudence in Light of Section 2-721 and Pre-Code Conflicts in Remedial Theory, 1996 Col. Bus. L. Rev. 423.

SECTION 2-812. PROOF OF MARKET PRICE.

(a) If evidence of a price prevailing at a time or place described in this article is not readily available, the following rules apply:

(1) The price prevailing within any reasonable time before or after the time described may be used.

(2) The price prevailing at any other place that in commercial judgment or usage of trade is a reasonable substitute may be used, making proper allowance for any cost of transporting the goods to or from the other place.

(3) Evidence of a relevant price prevailing at another time or place offered by one party is not admissible unless the party has given the other party notice that the court finds sufficient to prevent unfair surprise.

(b) If the prevailing price or value of goods regularly bought and sold in any established commodity market is in dispute, reports in official publications or trade journals or in newspapers, periodicals, or other means of communication in general circulation and published as the reports of that market are admissible in evidence. The circumstances of the preparation of such a report may affect the weight of the evidence but not its admissibility.

SOURCE: Sales, Sections 2-723, 2-724.

1. Section 2-812 makes only one change in former Sections 2-723 and 2-724. Subsection (1) of former Section 2-723 has been deleted. Section 2-812 (a)(1) and (a)(2) are the same as former Section 2-723(2). Subsection (a)(3) is the same as former Section 2-723(3) and subsection (b) is the same as former Section 2-724.

2. Former Section 2-723(1) provided a rule for the time of measurement of market price when an action for repudiation came to trial before the time for performance. In order to reduce uncertainty regarding proof of future prices (a sound objective), market price was determined at the time when the seller or buyer "learned of the repudiation." Former Section 2-723(1), however, created several dilemmas:

First, it appeared to be inconsistent with the provision for repudiation damages in Section 2-713(1) of the 1990 Official Text, which were measured at the time the buyer "learned of the breach." Similarly, it seemed to ignore Section 2-610(a) of the 1990 Official Text, which provided that an aggrieved party could wait for performance for a "commercially reasonable time" after the repudiation. Thus the PEB study report recommended that the revision adopt the time for measurement when the repudiation is treated as final.

Second, it stated that "any" damages based on market price were subject to the "learned of the repudiation" test, even though the time for delivery of some goods under the repudiated contract had passed at the time of trial. If the purpose of original Section 2-723(1) was to deal with uncertainty in the proof of future prices, the "any" damages language made no sense at all.

Third, the former Section 2-723(1) did not clearly provide for the special problems of repudiated long-term contracts. For example, no distinction was drawn between goods sold on the "spot" market and the market price of goods sold under long-term contracts and there was no explicit requirement that profits awarded for repudiation of long-term contracts be discounted to present value. Thus the PEB study report recommended that the revision provide that the market price should be of comparable goods under the same sort of contract conditions as the breached contract.

The provisions on measurement of market price take into account the measurement of damages in the case of anticipatory repudiation. Sections 2-821 and 2-826.

3. CISG. Article 76 states the time when and place where the current price for damages is to be determined, but makes to provision for proof of market price.

SECTION 2-813. LIABILITY OF THIRD PARTIES FOR INJURY TO GOODS. If a third party deals with goods identified to a contract for sale and causes actionable injury to the goods, the parties to the contract have the following rights and remedies:

(1) A party with title to, or a security interest, special property interest, or insurable interest in, the goods has a right of action against the third party.

(2) If the goods have been destroyed or converted, the party that had the risk of loss under the contract for sale, or since the injury has assumed that risk as against the other party, also has a right of action against the third party.

(3) If at the time of the injury the plaintiff does not have the risk of loss as against the other party to the contract for sale and there is no arrangement between them for disposition of the recovery, any recovery or settlement is subject to the plaintiff's interest as fiduciary for the other party to the contract.

(4) Either party, with the consent of the other, may maintain an action for the benefit of a concerned party.

SOURCE: Sales, Section 2-722.

Section 2-813 contains no changes of substance from former Section 2-722. This provision is merely a procedural rule that details who has standing to pursue the damages for harm to the goods. The injury to the goods is generally actionable under law other than Article 2.

SECTION 2-814. STATUTE OF LIMITATIONS.

(a) An action for breach of a contract under this article must be commenced within the later of four years after the right of action has accrued or one year after the breach was or should have been discovered, but no longer than five years after the right of action accrued. Except in a consumer contract or an action for indemnity, the original agreement may reduce the period of limitation to not less than one year.

(b) Except as otherwise provided in subsection (c) and (d) and Sections 2-402(e) and 2-404(e), a right of action for breach of contract accrues when the breach occurs, even if the aggrieved party did not have knowledge of the breach. For purposes of this section, a breach by repudiation occurs when the aggrieved party learns of the repudiation.

(c) If a breach of warranty occurs, the following rules apply:

(1) Subject to paragraph (2), a right of action for breach of warranty accrues when the seller has completed tender of delivery of the nonconforming goods.

(2) If a warranty expressly extends to performance of the goods after delivery, a right of action accrues when the buyer discovers or should have discovered the breach.

(d) A right of action for indemnity accrues when the act or omission on which the claim for indemnity is based is or should have been discovered by the indemnified party.

(e) If an action for breach of contract is commenced within the applicable time limitation is terminated but a remedy by another action for the same breach of contract is available, the other action may be commenced after the expiration of the time limitation and within six months after the termination of the first action unless the termination resulted from voluntary discontinuance or from dismissal for failure to prosecute.

(f) This section does not alter the law on tolling of a statute of limitations and does not apply to a right of action that accrued before the effective date of this article.

SOURCE: Sales, Section 2-725; Licenses Section 2B-707.

1. Section 2-814 makes several changes to former Section 2-725. Former Section 2-725(1) provided that an action for breach of contract must be brought within 4 years after the cause of action accrued. Subsection (a) extends the limitation period of four years after the right of action accrues by allowing an action for breach to be brought one year after the breach was or should have been discovered. An outside time limit of 5 years after accrual of the right of action limits the extension of the limitations period. Thus if a party discovers a breach near the end of the four year period, the aggrieved party would have one year to bring the action but not longer than 5 years after the accrual of the cause of action. This follows the approach of Section 2B-705 (May 5, 1997 draft). Subsection (a) continues the rule from former Section 2-725(1) that the original agreement may reduce the limitations period to one year but no less. However, subsection (a) does not allow that reduction of the limitation period in a consumer contract or allow that reduction to control the limitation period in an indemnity action. The limitation on the ability of parties to extend the statute of limitations period by agreement found in former Section 2-725(1) was deleted as ineffectual as parties can find other ways of in effect extending the limitations period.

2. Subsection (b) retains the rule from former Section 2-725(2) that a right of action accrues when the breach occurs regardless of knowledge of the breach. This general rule is subject to the exceptions for breach of warranty in subsection (c), for indemnity actions in subsection (d), for breach of warranty of title in Section 2-402(e) (providing a discovery rule for accrual) and for breach of a remote warranty in Section 2-404(e) (providing a discovery rule for accrual). With the exception of the breach of warranty provisions in subsection (c), the other exceptions to the accrual rule are new. Subsection (b) also clarifies when a breach by repudiation occurs for purposes of accrual of the cause of action even if the market price damages may be measured at a different time. See Sections 2-821 and 2-826.

3. Subsection (c) continues the rule from former Section 2-725(2) that the cause of action accrues in a breach of warranty action when the tender of delivery is completed (including any agreed assembly or installation under Section 2-602) unless the warranty expressly extends to performance of the goods after delivery. In that case, a discovery rule governs when the right of action accrues. Under current law, courts treat these two promises differently for statute of limitations purposes. Promise 1 is a promise that the goods will be free of defects for a period of time and that the seller will repair or replace the goods if a defect arises during that time. Promise 2 is a warranty of quality coupled with a promise to repair or replace the goods for one year if the warranty is breached. Courts treat Promise 1 as a warranty explicitly extending to future performance and the discovery accrual rule applies. Courts treat Promise 2 as not a warranty that explicitly extends to future performance, rather the goods must conform at time of tender and the promise to repair is good for a year. The cause of action for breach of warranty accrues upon tender of delivery, and the cause of action for failure to repair would accrue upon the seller's failure to do so.

The Drafting Committee rejected a discovery rule for all breach of warranty causes of action. The "discovery" test responds to the real risk that where certain types of manufactured goods are involved a buyer might not know or have reason to know of a breach of warranty until the limitation period has expired. The effect of this risk is exacerbated by the so-called "economic loss" rule, which prevents access to the "discovery" statute of limitations applicable to tort claims. This issue was raised at the December, 1996 meeting of the ALI Council and the Council, by a vote of 20-11 expressed a preference for a "discovery" rule where building materials and similar products were involved. At the March 1997 meeting of the Ad hoc ALI group, the group acknowledged the Committee preference for the tender of delivery rule.

4. Subsection (d) responds to the need to provide an accrual rule for indemnity causes of action. The language is based upon Section 2A-506. An action for indemnity will accrue when the act or omission on which indemnity is based is or should have been discovered.

5. Subsection (e) is the same in substance as former Section 2-725(3) and subsection (f) is the same in substance as former Section 2-725(4).

6. CISG. The CISG has no statute of limitations. Parties must rely upon the on the Limitation Period of the International Sale of Goods (1974), which the United States has now ratified.

SECTION 2-815. SELLER'S REMEDIES IN GENERAL. If a buyer breaches the contract under Section 2-701 or 2-710(c) becomes insolvent, the seller may:

(1) withhold delivery of the goods under Section 2-816(a) or 2-818(a);

(2) stop delivery of the goods under Section 2-818(b);

(3) proceed with respect to goods still unidentified to the contract or unfinished under Section 2-817;

(4) reclaim the goods under Section 2-816(b);

(5) obtain specific performance under Section 2-807 or recover the price under Section 2-822;

(6) resell the goods and recover damages under Section 2-819;

(7) recover damages for repudiation or nonacceptance under Section 2-821;

(8) recover incidental and consequential damages under Sections 2-805 and 2-806:

(9) cancel the contract under Section 2-808;

(10) recover liquidated damages under Section 2-809;

(11) enforce limited remedies under Section 2-810; or

(12) recover damages under Section 2-804.

SOURCE: Sales, Section 2-703.

1. Section 2-815 is based on former Section 2-703 which indexed the seller's remedies as well as indicated in some circumstances when the remedies were available. Former Section 2-703 was criticized as an incomplete statement of the seller's remedies. Pursuant to the Style Committee's recommendation, this section has been revised to be purely an index section with the aggrieved seller's right to pursue any particular remedy dependant upon the requirements of the particular section and the principles in Subpart A, most notably those principles in Section 2-803, including not being able to recover twice for the same injury and construing the remedies in light of the expectation principle. Because Section 2-801 already states that the remedies in Subparts B and C are subject to the provisions of Subpart A, it is not necessary to restate that principle in this section.

Whether the buyer has breached the contract depends upon the provisions of Part 7. Thus Section 2-815 references the generic definition of breach in Section 2-701 and of breach in an installment contract in Section 2-710(c). Whether the seller can resort to remedies under this section for repudiation, depends initially upon whether the repudiation is a breach of contract under Section 2-712. The seller may not resort to Section 2-815 unless the buyer "repudiates the contract with respect to a performance not yet due the loss of which will substantially impair the value of the contract to the other." Thus, a partial repudiation of an installment that does not substantially impair the value of the whole contract would not be actionable. It would, however, justify a demand for adequate assurance of due performance.

Because two of the seller's remedies, Section 2-816(b)(1) on reclamation and Section 2-818 on stopping delivery, become available upon buyer's insolvency, which is not necessarily a breach of the contract, the introductory phrase references insolvency.

2. Relationship to Article 9. Several of the catalogued remedies for breach are "self-help" remedies. Depending on the nature of the breach, the seller can withhold delivery, stop delivery by a carrier or bailee, identify goods to the contract or salvage unfinished goods, resell the goods or cancel the contract without judicial intervention. So long as the seller has possession or control of the goods the remedies are effective against the buyer who is in breach.

What about purchasers from or creditors of the breaching buyer? Can they take an interest superior to the seller? Until the buyer has possession or control of the goods, the answer is no. This is consistent with Section 9-113, which treated some of these remedies as security interests arising under Article 9, and the fact that what ever interest the buyer has in the goods before delivery is subject to the seller's right to withhold delivery. Although the Article 2 and Article 9 Drafting Committees agree on what the answer should be, a clear statement in the relevant sections must still be made. A different answer may be required where the seller is in breach and the buyer has the right to obtain possession as against the seller under the buyer's remedy sections even though the buyer does not yet have physical possession of the goods. See Section 2-824.

These remedies are supplemented by the power to suspend performance after a demand for adequate assurance, Section 2-711 or where the buyer is insolvent. Section 2-818(a). The exercise of self-help remedies may fully protect the seller, lead to an agreed settlement of the dispute or simply be a prelude to litigation. The unjustified exercise of a self-help remedy is a breach by the seller.

3. The seller's judicial remedies include specific performance, Section 2-807, an action for the price, Section 2-822, damages based upon the difference between the contract and market price, Section 2-821(a), and damages measured by lost profits, Section 2-821(b). Claims for incidental damages are made under Section 2-805 and claims for consequential damages, to which the seller is now entitled, are made under Section 2-806.

4. CISG. Article 61(1) provides a general guide to the Articles dealing with the seller's rights and damages on breach by the buyer. Article 61(2) states that the seller is "not deprived of any right he may have to claim damages by exercising his right to other remedies."

SECTION 2-816. SELLER'S RIGHT TO WITHHOLD DELIVERY OF GOODS OR TO RECLAIM GOODS AFTER DELIVERY TO BUYER.

(a) If a buyer is in breach of contract under Section 2-701, the seller may withhold delivery of the goods directly affected. If the breach is of the whole contract, Section 2-710(c), the seller may withhold delivery of any undelivered balance.

(b) Under this article, a seller may reclaim goods delivered to a buyer under a contract for sale only in the following circumstances:

(1) A seller that discovers that the buyer has received goods on credit while insolvent may reclaim the goods upon a demand made in a record within 10 days after receipt of the goods or, if a bankruptcy case in which the buyer is the debtor is commenced during the 10 day period, such demand must be made within 20 days after receipt of the goods. If the buyer made a material misrepresentation of a credit condition in a record to the reclaiming seller or to a credit reporting agency or the like less than 90 days before delivery, the demand is timely if made within a reasonable time after delivery.

(2) If payment is due and demanded on delivery to the buyer, the seller may reclaim the goods delivered upon a demand made within a reasonable time after the seller discovers or should have discovered that payment was not made.

(c) Reclamation is subject to the rights under this article of a buyer in ordinary course of business or other good-faith purchaser for value that arise before the seller takes possession under a timely demand for reclamation. Successful reclamation of the goods under subsection (b)(1) precludes all other remedies with respect to them.

SOURCE: Sales, Sections 2-507(2), 2-702.

1. Section 2-816 makes several changes to former Section 2-702. First, the right to withhold delivery in the case of the buyer's insolvency found in former Section 2-702(1) has been relocated to Section 2-818(a). See notes following Section 2-818. Section 2-816(a) states the right of the seller to withhold delivery for breach of contract. That right was formerly stated within former Section 2-703 without a separate section. Pursuant to the Style Committee's recommendation to make Section 2-815 a pure index section, the statement of the actual right to withhold delivery had to be stated in a separate subsection. Perhaps the right to withhold delivery for either insolvency under Section 2-818(a) or for breach under Section 2-816(a) should be combined in one subsection.

2. Second, pursuant to the PEB study report recommendation, subsection (b) sets forth two rights of reclamation; reclamation in a credit sale because of the buyer's insolvency from former Section 2-702(2) and reclamation in a cash sale recognized under former Section 2-507. Insolvency is defined in Section 1-201(23). These grounds, which are exclusive for Article 2, are in addition to the repossession right given to a secured party under Section 9-503. See also, Section 2A-525. They are, however, limited to the goods and do not extend to the proceeds of the goods. But see United States v. Westside Bank, 732 F.2d 1258 (5th Cir. 1984) (proceeds within scope of reclamation). Moreover, since public notice of the reclamation right has not been given, it is a mistake to treat this historical Article 2 lien as if it were a non-possessory security interest. Reclamation here is exceptional and limited.

Although the PEB study report recommended that reclamation in a credit sale not follow the requirements of reclamation under 11 U.S.C. 546(c) for reclamation rights recognized in a bankruptcy case, at the March 1997 meeting, the Drafting Committee voted otherwise. Thus subsection (b)(1) has been redrafted to follow the notice requirements of 546(c), including that the notice be in a record. (Section 546(c) requires the demand be in writing.) Subsection (b)(1) also expands the misrepresentations of solvency that extend the time for giving notice of reclamation to material misrepresentations made to third parties such as credit reporting agencies instead of expanding the time for giving notice of reclamation only when misrepresentations are made to the seller as under former Section 2-702(2).

Subsection (b)(2) codifies the right of a cash seller to reclaim the goods that had been recognized under former Section 2-507 and PEB Commentary No. 1. The time limit for making the reclamation demand, which need not be in a record, is a reasonable time after the seller discovered or should have discovered of the non-payment. This more flexible time period was recommended in the PEB study report as reflecting the commercial reality of when the seller would know of the problem with the payment. Subsection (a)(2) does not apply where, after delivery in a "cash" sale, the buyer discovers a nonconformity in the goods and stops payment of the check.

Section 2-816 does not contain the provision from former Section 2-702(2) that the seller has no other right to reclaim the goods based upon fraudulent or innocent misrepresentation of solvency or intent to pay. That provision is not needed because the introductory phrase of subsection (b) clearly provides these two bases of reclamation are the only bases of reclamation recognized for a seller.

3. Subsection (c) subjects the seller's right to reclaim under subsection (b) to the rights of a buyer in the ordinary course or a good faith purchaser for value. This continues the rule from former Section 2-702(3) as to the rights of a reclaiming seller in a credit sale with one change. The good faith purchaser must have given value. Under former Section 2-702(3), value was not a requirement. (See definition of purchase in Section 1-201(32) which includes gifts as a purchase.) As recommended by the PEB study report, with the integration of a reclaiming cash seller into Section 2-816, that seller's rights to the goods as against third parties are the same as the credit seller's rights.

At the March 18, 1994 meeting of the Drafting Committee, it was argued that subsection (c) gave inadequate protection to the reclaiming seller. Motions were made to delete secured parties from the list of creditors with potential priority over the seller and to expand the seller's protection to proceeds. The votes were inconclusive, so no change was made in the draft. See In re Blinn Wholesale Drug Co., Inc., 164 B.R. 440 (E.D.N.Y. 1994) ("good faith purchaser" includes secured party with after acquired security interest). At the March, 1996 meeting of the Drafting Committee, a decision to require "new value" before a good faith purchaser (with a perfected security interest) takes priority over the reclaiming seller was made. This decision was questioned at the 1996 Annual Meeting of NCCUSL and should be coordinated with Article 9. At the March 1997 Drafting Committee meeting, the Committee voted to delete the word "new" in front of value.

Subsection (c) follows the recommendation of the PEB study report to clarify when the rights of buyer in the ordinary course and good faith purchaser for value are sufficiently ripe so as to defeat a reclaiming seller by hinging the rights or a reclaiming seller to that seller taking possession of the goods. To illustrate, consider the following hypotheticals.

Case #1. Seller makes a timely demand and takes possession from the buyer before any rights of buyers or purchasers arise. Seller clearly wins.

Case #2. Seller makes a timely demand after the rights of buyers or purchases arise and they have taken possession of the goods. This is easy. Buyer or purchaser wins.

Case #3. Seller makes a timely demand after the rights of buyers or purchases arise but before they take possession. Seller then takes possession. If a first to possess test applies, Seller, as the first to take possession, wins. If a "right" to possession test applies, the purchasers should win, even if that right is conditional or possession has not been transferred. As a policy matter, a "right to possession" test should apply and that right arises, at the earliest, when the competing party becomes a buyer in the ordinary course of business or a good faith purchaser.

Case #4. Consider the following variations on Case #3.

(a) A buyer otherwise in the ordinary course of business has a special property interest in identified goods but has not taken possession when the seller's timely reclamation demand is received.

(b) A good faith buyer for value has either a special property interest or title in the goods but has not taken possession when the seller's timely reclamation demand is received.

(c) A secured party (a good faith purchaser) who has given new value has an enforceable security interest in the buyer's after-acquired property which attaches to the goods but the secured party has not repossessed them before the reclamation demand is made.

Seller should lose in each case. The status of the purchasers is clear and the right to possession has arisen, even though still conditional. The seller, on the other hand, has given up possession without public notice of its Article 2 reclamation right and has not regained possession before the rights of the others arises. To win, the seller must both give timely notice of reclamation and retake possession from the buyer before the right to possession of good faith buyers and purchasers arises.

Subsection (c) also contains the rule from former Section 2-702(3) that successful reclamation of the goods in a credit sale reclamation precludes all other remedies with respect to the goods. This provision was deleted in the May, 1994 Draft pursuant to a vote of the Drafting Committee. The issue rose again at the January, 1995 meeting of the Drafting Committee, where it was argued that the deletion was improper and would change the law. This concern was also expressed at the December, 1995 meeting of the Reporter with the Article 9 Drafting Committee. Thus, the phrase was reinstated, subject to further discussion.

In that discussion, it is helpful to distinguish between reclamations under subsection (b)(1) and reclamations under subsection (b)(2). Reclamations under subsection (b)(1) do not involve a breach of contract by the buyer. Reclamations under subsection (b)(1) are based upon a special remedy triggered solely by the buyer's insolvency not the buyer's breach. Reclamation for insolvency is based upon a presumed fraud that the buyer is perpetrating on the seller. In that situation, when a seller reclaims, in effect the seller is rescinding the contract as a remedy for that fraud. In a rescission, both sides return the performance of the other. With that justification for insolvency based reclamations, it makes sense to limit the seller to only its reclamation right and not give it other remedies against the buyer.

Reclamations under subsection (b)(2) do involve a breach of contract by the buyer. Thus it may be inappropriate in a reclamation under subsection (b)(2) to limit the seller to reclaiming the goods and not having any further remedies. Compare what happens if the buyer refuses to pay prior to delivery. The seller has the goods and all remedies under the code, including the right to damages measured either by resale or contract price. If the seller delivers and the buyer does not pay because of a bounced check, the buyer has breached the contract and the seller has the right to reclaim the goods. It is not at all clear that the seller should be limited to getting the goods back and not getting any further damages for the breach of contract. At the March 1997 meeting, the Committee voted to limit the principle of the last sentence to reclamations under subsection (b)(1).

The Committee also expressed concern about what the last sentence means when applied to reclamations under subsection (b)(1). Of principle concern was whether it precludes remedies for damages to the goods. From one perspective, until reclaimed, the goods are the buyer's goods to do with as the buyer sees fit. Thus the goods when reclaimed may not be in the same condition as they were when delivered to the buyer. The Comments should clarify that the preclusion of other remedies is not to prevent actions for damages to the goods. The preclusion could apply only to preclude remedies for fraud based upon insolvency of the buyer. Compare Section 2-811. When the buyer is insolvent, but has not otherwise breached the contract, the other remedies to preclude would be damages for fraud based upon the buyer's insolvency. To the extent the fear is double counting of harm, the principle of Section 2-803(c) that a party may not recover more than once for the same injury should suffice. If the buyer is insolvent and has otherwise breached the contract, should reclamation preclude other remedies for breach? Is the fear here a secret lien or is the fear overcompensation of the seller? If the fear is overcompensation of the seller, the principle of Section 2-803(c) provides the controlling principle and reclamation should not preclude other remedies designed to place the seller in its full performance position when the buyer has also breached the contract. If the fear is a secret lien, it is unclear how precluding the seller's other remedies for breach make the lien any less secret.

4. After considerable discussion, a decision not to grant the reclaiming seller the remedy of "self help" was made at the March, 1996 meeting of the Drafting Committee. At the March 1997 meeting, the Committee voted to not clarify in the text or in the Comments whether the reclamation right extended to proceeds. Currently courts have come to conflicting conclusions on this issue. Thus the law would stay as it is, confused and conflicting on the proceeds issue. The PEB study report concluded that the right to reclaim should not extend to proceeds of the goods.

5. CISG. Under the Convention, a seller who avoids a contract for fundamental breach can reclaim delivered goods from the buyer. Although goods delivered either for cash or on credit can be reclaimed, there are no express limitations on the time or method of reclamation. See Articles 64(1), 81(2), and 84(2).

SECTION 2-817. SELLER'S RIGHT TO IDENTIFY GOODS TO CONTRACT DESPITE BREACH OR TO SALVAGE UNFINISHED GOODS.

(a) An aggrieved seller may:

(1) identify to the contract conforming goods not already identified if they are in the seller's possession or control at the time the seller learned of the breach of contract; and

(2) resell goods that are shown to have been intended for the particular contract, even if they are unfinished.

(b) If goods are unfinished at the time of breach of contract, an aggrieved seller, in the exercise of reasonable commercial judgment to minimize loss and for the purpose of effective realization, may complete the manufacture and wholly identify the goods to the contract, cease manufacture and resell for scrap or salvage value, or proceed in any other reasonable manner.

SOURCE: Sales, Section 2-704.

1. No changes of substance have been made in former Section 2-704. The PEB study report did not recommend any changes to this section.

2. Section 2-817 gives an aggrieved seller several choices if goods are conforming but not identified or identified but unfinished at the time of breach.

Subsection (a)(1) permits the seller to identify conforming goods to the contract, Section 2-502, and pursue appropriate remedies. Subsection (a)(2) permits the seller to resell identified but unfinished goods, a remedy that already exists under Section 2-819(b). Neither option explicitly requires the exercise of "reasonable commercial judgment" but both are subject to the general mitigation requirement in Section 2-803.

Subsection (b) assumes that goods to be manufactured by the seller are unfinished at the time of breach and gives the seller a choice to either complete the manufacturing process (and resell) or stop manufacturing and salvage. The choice must be made in the exercise of "reasonable commercial judgment" To illustrate, suppose the contract price is $1,000 and the buyer repudiates when the manufacturing process is 50% completed. It would cost $600 to finish the goods and the resale price of the completed goods is estimated to be $100. On the other hand, if the seller stopped manufacturing and salvaged, the estimated damages under Section 2-821(b) would be $400. All things being equal, Section 2-817(b) requires the seller to stop and salvage. The post-breach decision to invest $600 to realize $100 on resale of the completed goods, or the full contract price if resale is not possible, enhances the seller's damages and is not commercially reasonable.

3. CISG. The Convention does not have a comparable provision.

SECTION 2-818. SELLER'S REFUSAL TO DELIVER BECAUSE OF BUYER'S INSOLVENCY; STOPPAGE IN TRANSIT OR OTHERWISE.

(a) A seller that discovers that the buyer is insolvent may refuse to make delivery except for cash, including payment for all goods previously delivered under the contract.

(b) Subject to subsection (d), a seller may stop delivery of goods in the possession of a carrier or other bailee if the buyer is insolvent or repudiates or fails to make a payment due before delivery or if, for any other reason, the seller has a right to withhold or reclaim the goods.

(c) As against a buyer under subsection (b), the seller may stop delivery until:

(1) receipt of the goods by the buyer;

(2) acknowledgment to the buyer by any bailee of the goods, other than a carrier, or by a carrier by reshipment or as warehouseman, that the bailee holds the goods for the buyer; or

(3) negotiation to the buyer of any negotiable document of title covering the goods.

(d) If notice to stop delivery has been given, the following rules apply:

(1) The notice must afford the carrier or bailee a reasonable opportunity to prevent delivery of the goods.

(2) After notification, the carrier or bailee shall hold and deliver the goods according to the directions of the seller. The seller is liable to the bailee or carrier for any resulting charges or damages. A carrier or bailee need not stop delivery if the seller does not provide indemnity for charges or damages upon the carrier's or bailee's demand.

(3) If a negotiable document of title has been issued for goods, the carrier or bailee need not obey a notification to stop until surrender of the document.

(4) A carrier or bailee that has issued a nonnegotiable document need not obey a notification to stop received from a person other than the person named in the document as the person from which the goods have been received for shipment or storage.

SOURCE: Sales, Sections 2-702(1) and 2-705.

1. Section 2-818 makes several changes in former Section 2-705. As recommended by the PEB study report, the seller's right to stop delivery on credit and demand cash as well as payment for past deliveries upon discovery of the buyer's insolvency found in former Section 2-702(1) has been relocated to subsection (a).

2. Subsection (b) is the same in substance as former Section 2-705(1) except that the limitation that the seller may only stop delivery of a "carload, truckload, planeload or larger shipments of express or freight" when the buyer has breached the contract has been deleted. The Drafting Committee concluded that the "carload, truckload or planeload" limitation was unrealistic in light of changing shipping methods and practices. For example, why should a seller not be able to stop delivery of a packet of goods shipped by, say, Federal Express, upon breach by the buyer, especially since the location of the goods can quickly be determined by computer? In most cases, the carrier or bailee's interest is protected by subsection (d)(1), which provides that the carrier must, after receiving notice from the seller, have a "reasonable opportunity to prevent delivery" and by subsection (d)(2) which makes the seller liable for damages caused by stopping delivery and a right to indemnity prior to stopping delivery. This flexible standard takes into account the type of goods, their location and the carrier's ability to find them and promptly stop delivery at the time notice is received.

3. Subsection (c) is the same in substance as former Section 2-705(2). As under current law, the seller's ability to stop delivery under subsection (b) is too late if any of the events listed in subsection (c) have occurred.

4. Subsection (d) makes two changes to former Section 2-705(3). First, it clarifies that the provision applies to both bailees and carriers whereas former Section 2-705(3) seemed to limit some of its application to only bailees or only carriers. Second, it provides that the carrier or bailee may demand indemnity for charges or damages. Given the deletion of the limitation of carload, truckload, or planeload, the carrier or bailee could be under the obligation to stop and incur damages to third parties for delay while the one package is dug out of the conveyance. A right to indemnity after the fact is merely the right to sue the seller for damages. This sentence gives the carrier or bailee the right to get indemnity up front before the harm is caused to anyone else and is modeled on the buyer's right under Section 2-705 to demand indemnity for expenses in caring for rejected goods.

5. Note that creditors of or purchasers from the buyer are subject to the seller's right to stop under this section. See In re Morrison Industries, L.P., 175 B.R. 5 (W.D.N.Y. 1994) (right to stop effective against buyer in bankruptcy).

6. CISG. Article 71(1) states when a party may suspend performance of obligations and Article 71(2) carries that right over to cases where the goods have been "dispatched." These provisions have little detail. Article 71(2) provides that delivery can be suspended even if the buyer has a document entitling the buyer to obtain the goods. The Article 2 rule in subsection (c)(3) is to the contrary. Article 71(3), however, requires the party suspending performance to give immediate notice of suspension to the other and to continue performance if the other provides adequate assurance of his performance. These latter requirements are not found in Article 2. Should seller be obligated to give notice of stoppage to the buyer?

SECTION 2-819. SELLER'S RESALE.

(a) If a buyer has breached a contract and the goods concerned are in the seller's possession or control, the seller may resell them or the undelivered balance. If the resale is made in good faith, within a commercially reasonable time, and in a commercially reasonable manner, the seller may recover the contract price less the resale price together with any consequential and incidental damages, less expenses avoided as a result of the breach.

(b) A resale:

(1) may be at a public auction or private sale including sale by one or more contracts to sell or by identification to an existing contract of the seller;

(2) may be as a unit or in parcels and at any time and place and on any terms, but every aspect of the sale, including the method, manner, time, place, and terms, must be commercially reasonable; and

(3) must be reasonably identified as referring to the breached contract, but the goods need not be in existence or have been identified to the contract before the breach.

(c) If the resale is at a public auction, the following rules apply:

(1) Only identified goods may be sold unless there is a recognized market for the public sale of futures in goods of the kind.

(2) The resale must be made at a usual place or market for public sale if one is reasonably available. Except in the case of goods that are perishable or which threaten to decline in value speedily, the seller shall give the buyer reasonable notice of the time and place of the resale.

(3) If the goods are not to be within the view of persons attending the sale, the notification of sale must state the place where the goods are located and provide for their reasonable inspection by prospective bidders.

(4) The seller may buy the goods.

(d) A good-faith purchaser at a resale takes the goods free of any rights of the original buyer, even if the seller fails to comply with this section.

(e) A seller is not accountable to the buyer for any profit made on a resale. However, a person in the position of a seller or a buyer which has rightfully rejected or justifiably revoked acceptance shall account for any excess over the amount of the claim secured by the security interest as provided in Section 2-823(b).

SOURCE: Sales, Section 2-706.

1. Section 2-819 provides for seller's recovery of damages after resale of the goods when the buyer breaches and makes a few changes from former Section 2-706. Subsection (a) states the basic ability of the seller to resell the goods and recover damages based upon the difference between the resale price and the contract price when the buyer has breached the contract. Subsection (a) is the same as former Section 2-706(1) except that it (i) makes explicit the requirement that the seller be in possession or control of the goods, a requirement implicit in the seller's ability to resell the goods, (ii) makes clear that the sale must be not only be in a commercially reasonable manner but must take place within a commercially reasonable time, and (iii) references not only the seller's right to incidental damages but also to consequential damages. If an action for the price is not available, Section 2-822(a), the seller may prefer to resell the "goods concerned or the undelivered balance." The buyer, of course, must be in breach and the resale process is subject to the general remedial policies in Article 1 and Section 2-803 as well as the particular requirements of Section 2-819. The goods "concerned" can include those which at the time of the breach are: (1) existing and identified; (2) existing and not identified but identified thereafter; (3) unfinished but finished and identified thereafter, Section 2-817(b); and (4) not existing and not completed until after the resale contract.

2. Subsection (b) is the same in substance as former Section 2-706(2) except that it substitutes the phrase "public auction" for "public sale." The consensus of the Drafting Committee was that a public sale was a public auction.

3. Subsection (c) is the same in substance as former Section 2-706(4). Subsection (d) is the same in substance as former Section 2-706(5). Subsection (e) is the same in substance as former Section 2-706(6).

4. The requirement in former Section 2-706(3) that a reselling seller give the buyer notice of intent to resell in a private sale has been deleted. Previously, notice was treated as a condition precedent to a proper resale just as it was required in a disposition by public or private sale to enforce a security interest under Section 9-504(3). Since a seller in possession may have a security interest arising under Article 2, Section 9-113, and the resale remedy is similar to the rights of a secured party, Section 9-113, Comment 1, a common notice requirement seemed to make sense, especially when the interest of the buyer or debtor was considered.

The Drafting Committee, however, decided to limit the notice requirement to sales made to enforce a security interest created by agreement or clearly imposed by statute. See Section 2-829(b). Notice in the latter cases is more important because the debtor has an interest in the goods sold (title) and owes a fixed amount of money. In the typical resale under Section 2-819, the buyer is normally not a debtor (the price is not yet due) and has no interest in the goods, although the buyer could have an interest if the goods are identified to the contract for sale prior to the buyer's breach. Section 2-502. In the view of the Drafting Committee, therefore, the deletion of former subsection (3) is not likely to harm the buyer and would avoid undermining an otherwise commercially reasonable resale and creating uncertainty about follow up remedies if the resale were not proper. In short, if the private resale is in good faith and is commercially reasonable under subsection (a), the seller is entitled to resale damages even though the buyer was not notified. If the seller fails to give notice to the buyer in a public sale as required by Section 2-819(c)(2), should that preclude the seller from getting damages under this section if the sale was conducted in good faith, commercially reasonable and in a commercially reasonable manner? Or should the buyer merely have a claim for damages caused by the failure to give notice?

5. The relationship between Sections 2-819 and 2-821 is important. Consider these variations where the goods are in fact resold:

(a) Resale in good faith and in a commercially reasonable manner. Section 2-819(a) is probably the preferred remedy. Section 2-821(b), however, is available in a lost volume situation. Section 2-821(a) might be available, but only if those damages do not put the seller in a better position than if the buyer had fully performed. See Section 2-803(c). Thus, the fact that the seller has complied with Section 2-819(a) should not automatically foreclose the choice of market damages under Section 2-821(a). The question is, considering the resale, whether that choice of market price damages puts the seller in a substantially better position than full performance would have. If the buyer can prove the resale was in fact a substitute transaction for the contract that was breached and that measurement under Section 2-821(a) would place the seller in a better position than full performance, buyer can seek to limit the seller's choice of the market price remedy under the principle of Section 2-803(c).

(b) Resale in good faith but not in a commercially reasonable manner. Although Section 2-819(a) is not available, Section 2-821(a) may be used and, in a case of lost volume, damages under Section 2-821(b) are available.

(c) Resale in bad faith. Although not stated in the text, damages under Section 2-821(a) should be available only if they are the substantial equivalent of damages that would have been available if the seller complied with Section 2-819(a). Should this principle be placed in the text or the Comments?

6. CISG. Article 75 permits the seller to resell the goods after the contract has been avoided for fundamental breach, but contains none of the detail in Section 2-819. If the seller resells, damages are measured by the "difference between the contract price and the price in the substitute transaction." Furthermore, if the seller resells, damages measured by the difference between the contract price and the market price are not available. Article 76.

SECTION 2-820. PERSON IN POSITION OF SELLER.

(a) In this section, a person in the position of a seller includes, as against a principal, an agent that has paid or become responsible for the price of goods on behalf of the principal or any person that otherwise holds a security interest or other right in goods similar to that of a seller.

(b) A person in the position of a seller has the same remedies as a seller under this article.

SOURCE: Sales, Section 2-707.

There are no changes of substance in former Section 2-70 except that former subsection (2) has been reworded to make clear that a person in the position of the seller has all of the remedies of the seller and not just those few remedies listed in former Section 2-707.

SECTION 2-821. SELLER'S DAMAGES FOR NONACCEPTANCE, FAILURE TO PAY, OR REPUDIATION.

(a) If a buyer breaches a contract, the seller may recover damages based upon market price, together with any incidental and consequential damages, less expenses avoided as a result of the breach, as follows:

(1) Except as provided in subsection (2), the measure of damages is the contract price less the market price of comparable goods at the time and place for tender.

(2) In the case of a repudiation governed by Section 2-712, the measure of damages is the contract price less the market price of comparable goods at the place for tender and at the time when a commercially reasonable period after the seller learned of the repudiation has expired. The commercially reasonable time includes the time for awaiting a retraction under Section 2-712 and the time needed to obtain substitute performance.

(b) A seller may recover damages measured by other than the market price, together with incidental and consequential damages, including:

(1) lost profits, including reasonable overhead, resulting from the breach of contract determined in any reasonable manner; and

(2) reasonable expenditures made in preparing for or performing the contract if, after the breach, the seller is unable to obtain reimbursement by salvage, resale, or other reasonable measures.

SOURCE: Sales, Section 2-708.

1. Section 2-821 makes several changes from former Section 2-708. Subsection (a) provides a measure of damages based upon the market price of the goods and makes the following changes to former subsection (1).

2. First, it provides two different times for measuring market price depending upon whether the breaching party has repudiated the contract or not. Under former Section 2-708(1) and former Section 2-723(1), the market price in a repudiation case was determined at the time the aggrieved party learned of the breach if the case came to trial before the time for performance as to all or some of the goods. Under Section 2-821(a), the market price in a repudiation case will be measured at a commercially reasonable time after the seller learned of the repudiation. The judgment is that this is a reasonable time to forecast what future market prices will be for goods of that kind and that the seller should not be permitted to speculate on uncertain markets after that period--the time when the seller should have resold or otherwise mitigated damages--has expired. An issue left open is what should the time for measuring market be if the contract is repudiated just prior to the time of tender. Will the reasonable time for measuring market price in that case be a market price after the tender date? Assume the buyer repudiates on Sept. 30 and the tender date is Oct. 1. If the buyer had not repudiated, market price is measured on Oct. 1. If the buyer repudiates, market price is measured at the end of the time the seller reasonably awaited performance (presumably not later than Oct. 1) and the time necessary for the seller to have engaged in a substitute transaction that the seller never did engage in (presumably sometime after Oct. 1). If the seller had actually resold, its damages would be measured by the resale section, not the market price section.

Another way to implement this principle without stating two different times for measurement of the market price is to provide that market price is measured as of the time of tender and to let the mitigation principle of Section 2-803(b) control when the market price should be measured in an anticipatory repudiation case. This has the advantage of stating one time for measuring market price that cannot be manipulated by the buyer as illustrated above. It also addresses the need for mitigation so that if the seller could have reduced its damages by acting before the tender date, it must do so, or be unable to recover those damages that could have been reduced. Under this approach, subsection (a)(2) would be eliminated and the market price would be measured at the latest as of the time stated in (a)(1). Measurement of the market price prior to that time would depend upon application of the mitigation principle.

3. Second, the word "unpaid" prior to contract price in former Section 2-708(1) has been deleted. Whether a breaching buyer can recover all or part of any contract price paid to the seller is determined under Section 2-810(b). Third, given that the seller may now recover consequential damages, consequential damages as well as incidental damages are referenced in subsection (a). Fourth, the phrase "comparable goods," which was not contained in former Section 2-708(1), includes both the goods themselves and the type of contract under which they are sold. Thus, the market price for the same type of goods sold on the "spot" market and those sold under a long-term contract would not be comparable. See Manchester Pipeline Co. v. Peoples Natural Gas Co., 862 F.2d 1439 (10th Cir. 1988). Other concerns about measuring damages for breach of a long-term supply contract remain. For example, suppose there is no market for goods sold under long-term contracts at the relevant time. Should the court then use a "spot market" price and, if so, wouldn't that price tend to over or under compensated Fifth, the subsection (a) awards damages based upon the "contract price less the market price of comparable goods." The "difference between" language in former Section 2-708(1) has been deleted.

4. The time for determining the contract price is not the same as the time for measuring market price. The "contract price" is not tied to when a commercially reasonably time after the seller learned of the repudiation has expired. Unless the contract price is a fixed price, the parties should have the benefit of any escalation or flexibility to which they have agreed.

5. Subsection (a) is subject to Section 2-803. Thus, a seller cannot choose subsection (a) if market damages puts it in a substantially better position than full performance by the buyer would have done. To illustrate, suppose the seller resells identified goods under Section 2-819(a) at or above the contract price or actually recovers the price under Section 2-822. Section 2-821(a) is not available because any recovery would put the seller in a better position than full performance would have done. Similarly, if the difference between the contract price and the resale price under Section 2-819(a) was $1,000 and the difference between the contract price and the market price under Section 2-821(a) was $1,200, the $1,000 amount will control. Finally, if damages under Section 2-821(a) substantially exceed the profits that the seller would have made by full performance under subsection (b), subsection (b) controls.

Note that the seller's choice of Section 2-821(a) controls unless the buyer proves from actual figures that the market price recovery puts the seller in a better position than full performance. Hypothetical figures will not do. In all probability, market damages should be limited to the case where the seller has identified goods on hand and does not resell them. Here market damages serve as a surrogate for resale damages.

6. Subsection (b) provides for the seller's recovery of lost profit and reliance expenses that the seller is unable to recoup from resale, salvage or other reasonable measures. The seller's choice of subsection (b) is limited by Section 2-803(c), not the nature of the buyer's breach. Thus, the seller can choose subsection (b) where the buyer breaches unless the buyer establishes that the choice puts the seller in a substantially better position than full performance. This will be highly unlikely in three cases: (1) The seller does not have completed goods on hand; (2) Upon repudiation, the seller stops work and salvages under Section 2-817(b); and (3) The seller is a "lost volume" seller. See the proposed Comment after Section 2-803 for the relationship between the lost profit measure and market price damages. The seller who seeks lost profits is also subject to the mitigation principle of Section 2-803. There is a consensus among the Drafting Committee that any recovery for future profits should be reduced to present value. See Section 2A-102(1)(u).

The buyer may require a seller who has selected subsection (a) to use subsection (b) when the contract price less market price substantially exceeds the profits that would have been made by full performance. As a practical matter, this will be limited to a seller, such as a jobber or middleman, who does not have completed goods on hand but has hedged bets by making forward contracts for them. The cases have concluded that a seller who does not take the risk of market fluctuations is overcompensated when market damages under subsection (a) exceed the profits that would have been made under subsection (b). See, e.g., Nobs Chemical, U.S.A., Inc. v. Koppers Co., Inc., 616 F.2d 212 (5th Cir. 1980); Union Carbide Corp. v. Consumers Power Co., 636 F. Supp. 1498 (E.D. Mich. 1986).

7. Damages under subsection (b) include lost profits and, in appropriate cases, unreimbursed reasonable expenditures in preparation or part performance. In most cases, lost profits, including reasonable overhead, are determined by subtracting the seller's total variable cost to perform, whether actual or estimated, from the contract price. The result should adequately compensate most lost volume sellers and sellers who have no completed goods on hand. While not defining the appropriate way to measure lost profits, the separation of lost profit recovery from reliance expenditures not recouped from resale or other reasonable measures is consistent with the PEB study report recommendation.

A seller who stops work and salvages under Section 2-817(b), may have both lost profits and unreimbursed reliance expenditures. Subsection (b)(2) allows recovery of those expenditures as well, provided that the seller has made reasonable efforts to mitigate losses. Thus, in this case, the amount needed to put the seller in as good a position as full performance includes both lost net profits, reasonable overhead and unreimbursed reliance.

No effort is made to state when a seller has lost volume because of the buyer's breach or to provide a measurement standard for that complex situation. Recovery for lost volume, however, is still possible under the flexible standards of subsection (b). As before, the problems of definition and measurement are left to the courts. See R.E. Davis Chemical Corp. v. Diasonics, Inc., 826 F.2d 678 (7th Cir. 1987), on appeal from remand, 924 F.2d 709 (7th Cir. 1991). See also, John M. Breen, The Lost Volume Seller and Lost Profits Under UCC 2-708(2): A Conceptual, Linguistic Critique, 50 U. Miami L. Rev. 779 (1996).

8. CISG. If the contract is avoided and the aggrieved seller has not resold the goods under Article 75, Article 76 allows for contract damages to be measured by the difference between the contract price and the current price.

SECTION 2-822. ACTION FOR PRICE.

(a) If a buyer fails to pay the price as it becomes due, the seller may recover, together with any incidental and consequential damages, the price of:

(1) goods accepted;

(2) conforming goods lost or damaged after risk of their loss has passed to the buyer, but, if the seller has retained or regained control of the goods, the loss or damage must occur within a commercially reasonable time after the risk of loss has passed to the buyer; and

(3) goods identified to the contract, if the seller is unable after a reasonable effort to resell them at a reasonable price or the circumstances reasonably indicate that this effort would be unavailing.

(b) A seller that remains in control of the goods and sues for the price shall hold for the buyer any goods identified to the contract. If the seller is entitled to the price and resale becomes possible, the seller may resell the goods under Section 2-819 at any time before the collection of the judgment. The net proceeds of the resale must be credited to the buyer. Payment of the judgment entitles the buyer to any goods not resold.

(c) If a buyer has breached the contract, a seller that has sued for but is held not entitled to the price under this section may still be awarded damages for nonacceptance under Section 2-821.

SOURCE: Sales, Section 2-709.

1. Section 2-822 makes a few changes from former Section 2-709. Subsection (a) is the same as former Section 2-709(1) with two changes. First, consistent with the seller's ability to recover consequential damages, subsection (a) allows the seller to recover consequential damages as well as incidental damages. Second, subsection (a)(2) provides that the commercially reasonable time limit on recovering the price only applies when the seller has retained or regained possession of the goods. As under former Section 2-709, Comment 1, a wrongful revocation of acceptance is insufficient to relieve the buyer of the obligation to pay the price under subsection (a)(1). Subsection (b) is the same in substance as former Section 2-709(2) except that it makes clear that the seller's resale is subject to Section 2-819. Subsection (c) is derived from former Section 2-709(3) which provided that if the buyer "wrongfully rejected or revoked acceptance of the goods or has failed to pay when due or has repudiated" the seller who could not get the price could still sue for damages under former Section 2-708. That phrasing has been reduced to "if the buyer has breached the contract."

2. The seller may now claim specific performance under Section 2-807(a). If justified by the circumstances, the buyer may be ordered to accept and pay for the goods in exchange for the seller's conforming performance. Are there circumstances where this would be improper? For example, suppose the agreement for specific performance is in a standard form? Presumably, Section 2-206 deals with this problem. Or, suppose that there is an agreement for specific performance and the goods could easily be resold to a third person. Arguably specific performance is inefficient in this situation and the court could be persuaded to exercise its discretion and not enforce the agreement. To resolve these concerns, Section 2-807(a) has been revised to provide that if the parties agree to specific performance as a remedy, a decree for specific performance may not be ordered if the breaching party's only obligation is to pay money.

3. CISG. Under Article 62, the seller may "require the buyer to pay the price, take delivery or perform his other obligations, unless the seller has resorted to a remedy which is inconsistent with this requirement." There are no conditions, such as those found in Section 2-822, and there is no specific provision permitting recovery of the price.

SECTION 2-823. BUYER'S REMEDIES IN GENERAL; BUYER'S SECURITY INTEREST IN REJECTED GOODS. If a seller is in breach of the contract under Section 2-701, or in breach of the whole contract under Section 2-710(c), the aggrieved buyer may:

(1) recover the price paid under Section 2-829(a) or deduct damages from price unpaid under Section 2-828;

(2) cancel the contract under Section 2-808;

(3) cover and obtain damages under Section 2-825;

(4) recover damages for nondelivery or repudiation under Section 2-826;

(5) recover damages for breach with regard to accepted goods under Section 2-827.

(6) recover identified goods under Section 2-824;

(7) obtain specific performance under Section 2-807;

(8) enforce a security interest under Section 2-829(b);

(9) recover incidental and consequential damages under Sections 2-805 and 2-806;

(10) recover liquidated damages under Section 2-809;

(11) enforce limited remedies under Section 2-810; or

(12) recover damages under Section 2-804.

SOURCE: Sales, Section 2-711.

1. Consistent with the revisions to seller's index of remedies, the buyer's index of remedies formerly found in Section 2-711(1) and (2) has been revised to be an index only with no substantive limitations contained in this section other than there be a breach of contract as defined in Part 7. To make Section 2-823 an index section necessitated creation of a new section, Section 2-829.

2. All of the buyer's remedies in Subpart C are subject to the principles stated in Subpart A, particularly Section 2-803. A remedy from the list is available as provided in the referenced section and subject to the remedial principles of Subpart A.

SECTION 2-824. PREPAYING BUYER'S RIGHT TO GOODS; REPLEVIN.

(a) A buyer that pays all or a part of the price of goods identified to the contract, whether or not they have been shipped, on making and keeping good a tender of full performance, has a right to recover them from the seller if the seller repudiates or fails to deliver as required by the contract.

(b) A buyer may recover from the seller by replevin, detinue, sequestration, claim and delivery, or the like, goods identified to a contract if, after reasonable efforts, the buyer is unable to effect cover for the goods or the circumstances indicate that an effort to obtain cover would be unavailing or if the goods have been shipped under reservation and satisfaction of the security interest in them has been made or tendered.

(c) If the requirements of subsection (a) or (b) are satisfied, the buyer's right vests upon identification of the goods to the contract for sale even if the seller has not then repudiated the contract or failed to deliver as required by the contract.

SOURCE: Sales, Sections 2-502 and 2-716(3).

1. Section 2-824 combines the remanent of former Section 2-502 and former Section 2-716(3) to collect in one section the buyer's right to obtain goods from the possession of the seller.

2. Subsection (a), based upon former Section 2-502, expands the prepaying buyer's ability to recover the goods from the seller. Previously, a pre-paying buyer could recover identified, conforming goods from a seller who became insolvent within 10 days after receipt of the first payment. Under revised Section 2-824(a), a pre-paying buyer can recover identified goods, whether or not conforming, from a seller, whether or not insolvent, who repudiates or fails to delivery "upon making and keeping a tender of full performance."

Revision history. Both the PEB Study Group and the ABA Task Force favored the repeal of former Section 2-502 because tying the buyer's right to the goods to the seller's insolvency created an unacceptable risk of invalidation in bankruptcy. See 16 Del. J. of Corp. Law 981 at 1128-1129. If Section 2-502 were repealed, however, a pre-paying or financing buyer would have no right to the goods under Article 2 unless a right to specific performance or replevin under Section 2-807 were established. See Section 2-505(a). Beyond that, protection would depend upon compliance with Article 9, which, in practice, may be difficult to do.

The Drafting Committee concluded, however, that pre-paying buyers, especially consumer buyers, should have some protection under Article 2. An early revision of Section 2-824 broadened protection by substituting "repudiation or fails to deliver" for "insolvency" as the trigger for recovery and eliminating the 10 day time limitation. It also deleted Section 2-502(2) of the 1990 Official Text and limited the scope of buyer's right to "conforming," identified goods, regardless of which party identified them. See Section 2A-522(2), in accord. Under this version, therefore, identified but nonconforming goods were not covered by Section 2-502.

At the January, 1994 meeting, the Drafting Committee expanded the scope of Section 2-824 by eliminating the requirement that the identified goods be conforming and conditioning the right to recover upon tender by the buyer of "full performance" rather than tender of any "unpaid portion of the price."

At the March 1997 meeting of the Article 9 Drafting Committee, that Committee agreed in principle to the rights of the pre-paying buyer under subsection (a). In addition, the Article 9 Committee agreed in principle that the pre-paying buyer under this section may be a buyer in the ordinary course prior to obtaining possession of the goods.

The difference between a pre-paying and a financing buyer is that the former usually pays part of the price before receiving goods that are identified and conforming to the contract and the latter pays to finance the manufacture or processing of goods that are likely to be unfinished at the time of identification. Revised Section 2-824, by applying to both situations, requires the buyer to tender the full contract price before identified but unfinished goods can be recovered. The extent to which a financing buyer can perfect a purchase money security interest in non-conforming goods in process is determined under Article 9. See Report, PEB Study Group, Uniform Commercial Code, Article 9 194-198 (1992).

3. Subsection (b) is the same in substance as former Section 2-716(3). This provision has been placed in this section as a buyer's remedy as opposed to a remedy available to either party under Section 2-807. The right to replevin has been stated more broadly as stated in Section 2A-521 in order to cover variations in state law legal remedies for possession of personal property. Although the PEB study report recommended that this provision be deleted as unnecessary in light of the buyer's right to specific performance (Section 2-807), the right to replevin the goods is a legal remedy that is not subject to the equitable limits on granting specific performance and thus may be available to the buyer in a case in which the court would not order specific performance.

4. Subsection (c) is a new provision to clarify when the rights of the buyer under either subsection (a) or (b) are sufficiently vested to determine priority of claims to the goods as against third parties who may attach in rem claims to the goods. Subsection (c) states that the buyer's rights vest upon identification, even though the seller is not in breach. Put differently, the rights vest conditionally but, if there is a breach, relate to the time of identification.

What about creditors of the seller? Revised Section 2-505(a) (Nov. 1996) states that the rights of creditors of the seller with respect to goods identified to the contract and retained and subject to the buyer's rights under Section 2-824 if those rights vest prior to the time when a creditor's in rem claim (judgment lien or security interest) attaches to the goods. Thus, if the buyer's rights vest (upon identification) before the creditor's claims attach, buyer gets possession from the seller free of creditor claims. If, however, the rights vest after attachment, the buyer is subject to the attached interests unless it qualifies as a buyer in the ordinary course of business under Article 9.

5. CISG. CISG has no provision dealing with a buyer's right to goods on the seller's insolvency and, in general, does not deal with the claims of the seller's creditors to those goods. But see Articles 41-43. Article 46(1), however, states that the "buyer may require performance by the seller of his obligations" without regard to whether the buyer has prepaid the price. Revised Section 2-824 is now closer to Article 46(1) in granting the buyer what amounts to specific performance. See CISG Article 28, which states that a court is not "bound" to specifically enforce a contract under CISG "unless the court would do so under its own law in respect of similar contracts of sale not governed by this Convention."

SECTION 2-825. COVER; BUYER'S PURCHASE OF SUBSTITUTE GOODS.

(a) If a seller breaches a contract, the buyer may cover by making in good faith and without unreasonable delay any reasonable purchase of, contract to purchase, or arrangement to procure comparable goods to substitute for those due from the seller.

(b) A buyer that covers in the manner required by subsection (a) may recover damages measured by the cost of covering less the contract price, together with any incidental or consequential damages, less expenses avoided as a result of the seller's breach.

(c) A buyer that fails to cover in a manner required under subsection (a) is not barred from any other available remedy.

SOURCE: Sales, Section 2-712.

1. Section 2-825 makes no changes in substance from former Section 2-712.

2. If, after a breach, specific performance is not available and the buyer still needs the goods, "cover" is the preferred remedy. Subsection (a) authorizes "cover" and promotes flexibility in the sources and nature of that action. Thus, a buyer may cover in good faith by making the goods itself, purchasing from the breaching party or purchasing from third parties if those transactions are reasonable. Similarly what is "reasonable" may vary with whether the aggrieved party is a commercial or a consumer buyer. Finally, the phrase "comparable goods" suggests that the goods obtained by "cover" need not conform exactly to those promised under the breached contract.

3. Subsection (b) conditions the "cover" measure of damages upon satisfying subsection (a). "Cover" damages would not be available if the buyer acted in bad faith, delayed unreasonably or made an unreasonable purchase or arrangement. Presumably, the burden is on the buyer to prove that it is entitled to damages under subsection (b). As recommended by the PEB study report, if a buyer covers under subsection (a), the buyer should not be able to recover market price damages under the principle of Section 2-803(c) without stating the principle in this section. See proposed Comment to Section 2-803.

4. As in Section 2-819, a buyer who covers in bad faith may be limited to the damages that would have been recovered by a good faith cover under Section 2-825(b). See Section 2-803.

5. CISG. Under Article 75, if the contract is avoided and the buyer has "bought goods in replacement," damages are measured by the "difference between the contract price and the price in the substitute transaction" as well as any further damages under article 74. If the buyer has made a purchase under Article 75, damages under Article 76 are not available.

SECTION 2-826. BUYER'S DAMAGES FOR NONDELIVERY OR REPUDIATION.

(a) If a seller breaches a contract, the buyer may recover damages based on market price, together with any incidental and consequential damages, less expenses avoided in consequence of the seller's breach, as follows:

(1) Except as provided in subsection (2), the measure of damages is the market price for comparable goods at the time of the breach or when the buyer learned of the breach, whichever is later, less the contract price.

(2) In the case of a repudiation governed by Section 2-712, the measure of damages is the market price of comparable goods at the time when a commercially reasonable period after the buyer learned of the breach has expired less the contract price. The commercially reasonable time includes the time for awaiting a retraction under Section 2-712 and the time needed to obtain substitute performance.

(b) Market price is determined at the place for tender. However, in cases of rejection after arrival or revocation of acceptance, it is determined at the place of arrival.

SOURCE: Sales, Section 2-713.

1. Section 2-826 makes several changes to former Section 2-713. This provision is parallel to the seller's right to recover damages based upon the market price under Section 2-821. Subsection (a) changes the measurement of market price to the later of the time of the breach or when the buyer learned of the breach whichever is later. Former Section 2-713(1) measured the market price when the buyer learned of the breach. Thus, if the seller failed to ship as agreed on October 1 but the buyer did not learn of that failure until October 4, market price is determined on October 4.

2. If there is a repudiation, market price is measured at the end of the commercially reasonable time after repudiation. Thus, market price is measured at the time when the buyer should have covered. See Cosden Oil v. Karl O. Helm Aktiengesellschaft, 736 F.2d 1064, rehearing denied, 750 F.2d 69 (5th Cir. 1984). Under this approach, whether the buyer had a valid reason for not covering is irrelevant. See also, Trinidad Bean & Elevator Co. v. Frosh, 494 N.W.2d 347 (Neb.App. 1992), holding that the time for determining market price is the time the buyer learned of the repudiation if it was commercially reasonable to cover on that date. Under former Section 2-713 and Section 2-723(1), if the case came to trial before the time for performance, the market price was measured when the buyer learned of the breach. This was criticized as being inconsistent with the anticipatory repudiation sections which allowed an aggrieved buyer to await the seller's performance for a commercially reasonable time. As under Section 2-821, when the case comes to trial is not relevant to when the market price is measured under Section 2-826.

If the seller repudiated on September 15 and the contract performance date is Oct. 1, under subsection (a)(2), the market price would be measured at the end of the time the buyer awaited retraction (presumably not later than Oct. 1) and the end of the time needed for cover (sometime after Oct. 1). If the buyer actually covered, however, its damages would be measured under Section 2-825. If the seller just didn't deliver on Oct 1, as opposed to repudiating on Sept. 15, the market price would be measured either on the date of the breach (Oct 1.) or when buyer learned of the breach if thereafter.

As stated in the notes after Section 2-821, this leaves the time for measuring market price open to manipulation by the breaching party. Any repudiation would extend the time for measuring market price beyond the date of breach. As pointed out in those notes, stating one time for measuring market price, subject to the mitigation principle of Section 2-803(b), is a cleaner way of measuring market price damages and much less subject to manipulation by the breaching party. Under this approach, subsection (a)(2) would be eliminated and market price would be measured at the latest in any case as stated in subsection (a)(1). Measurement of the market price before the time stated in subsection (a)(1) would depend upon the mitigation principle.

3. Section 2-826 does not freeze the contract price to the same time as measurement of market price. Thus, if the agreed price contains escalation provisions, the court must attempt to interpret and apply those clauses in light of the principle of putting the party in the position it would have been if the contract had been performed. Section 2-803.

4. Section 2-826, like Section 2-821 for the seller, is the buyer's "fall back" remedy. It is a surrogate for "cover," in that damages are measured by the difference between the contract price and the market price of comparable goods at a time when "cover" could have or should have been made. Like Section 2-821(a), choice by the buyer of Section 2-826(a) is limited by the remedial policy in Section 2-803(c): It must not put the buyer in a substantially better position than full performance would have. This approach rejects cases like Tongish v. Thomas, 840 P.2d 471 (Kan. 1992), holding that the specific terms of Section 2-713(1) of the 1990 Official Text control the general remedial limitations in Section 1-106(1). The mitigation principle in Section 2-803 also serves to control the buyer's remedial choices. On the other hand, a buyer who properly covers under Section 2-825(a) is precluded from seeking damages under Section 2-826(a).

5. Subsection (b) is the same in substance as former Section 2-713(2).

6. CISG. Under Article 76, if the contract has been avoided and there has been no "purchase" under Article 75, the buyer may recover the difference between the contract price and "current price at the time of avoidance as well as any further damages recoverable under article 74."

SECTION 2-827. BUYER'S DAMAGES FOR BREACH REGARDING ACCEPTED GOODS.

(a) A buyer that has accepted goods and not justifiably revoked acceptance and has given notice pursuant to Section 2-707(c)(1) may recover as damages for any nonconforming tender the loss resulting in the ordinary course of events from the seller's breach as determined in any reasonable manner.

(b) A measure of damages for breach of a warranty of quality is the value of the goods as warranted less the value of the goods accepted at the time and place of acceptance [unless special circumstances show proximate damages of a different amount].

(c) A buyer may recover incidental and consequential damages.

SOURCE: Sales, Section 2-714.

1. There are no changes of substance in former Section 2-714. Subsection (b), however, is stated as "a" measure of damages rather than "the" measure of damages and is limited to breaches of a warranty of quality. Thus, damages for breach of a warranty of title are measured under subsection (a) rather than subsection (b). When phrased as "a" rather than "the", the unless clause does not make as much sense. Should it be eliminated?

2. Section 2-827 applies when the buyer has accepted the goods, Section 2-706, and has not justifiably revoked acceptance under Section 2-708. Subsection (a) states the general damage rule, see Section 2-804, and subsection (b) states one measure of damages for breach of a warranty of quality, unless "special circumstances" justify a different amount. Subsection (c) states simply that incidental and consequential damages under Sections 2-805 and 2-806 are recoverable in addition to damages under Section 2-827.

3. Subsection (b) has been frequently litigated, with sometimes puzzling results. The key measure for breach of a warranty of quality, i.e., Sections 2-403, 2-406, and 2-407, is the difference between the market value (not the contract price, although that may be prima facie evidence of market value) of the goods as warranted and the market value of the goods delivered at the time of acceptance rather than the time of tender. Damages have been determined in at least three ways: (a) If the goods are non-conforming but usable without repairs, the court simply determines the relevant differences in the market value at the time of acceptance; (b) If the goods are not usable without repairs, the court determines the market value as delivered plus the reasonable cost of repairs, which constitutes the market value of the goods as warranted; (c) If the goods are not usable under any circumstances, the court determines the difference in market value of the goods as scrap and the cost to purchase (market value) goods as warranted. See Schroeder v. Barth, Inc., 969 F.2d 421 (7th Cir. 1992).

4. It is not always clear what "special circumstances" show damages of a different amount and what the different amount should be. For example: (1) Suppose a seller warrants to a farmer that seeds are X when in fact they are Y, but the contract excludes liability for consequential damages. As a result of the breach of warranty, the farmer loses the crop because Y won't grow on the land. The market value of X and Y at the time of acceptance are the same. Some courts have found "special circumstances" on these facts and awarded the farmer the value of the lost crop. The lost crop, however, is really consequential damages liability for which was excluded by the contract. (2) Suppose that the seller warranted that a specific computer system would satisfy the buyer's particular purposes. The specific system, however, failed to meet those purposes and another, more expensive system was required. Again, special circumstances suggest that damages should be measured by the difference in the market value of the system delivered and the market value of a hypothetical or replacement system that would satisfy the particular purposes rather than the specific system promised. See Hospital Computer Systems, Inc. v. Staten Island Hospital, 788 F. Supp. 1351 (D. N.J. 1992). (3) Another category where special circumstances frequently exist is damages for breach of warranty of title. See First Valley Leasing, Inc. v. Goushy, 795 F.2d 693 (D. N.J. 1992). These damages are now to be measured under subsection (a).

5. CISG. Under the Convention, a buyer has more power to "require" the seller to perform and the seller has more power to "cure" non-conformities than under Article 2. After delivery where the seller has failed to cure, however, Article 50 provides that if the goods "do not conform with the contract and whether or not the price has already been paid, the buyer may reduce the price in the same proportion as the value that the goods actually delivered had at the time of delivery bears to the value that conforming goods would have had at that time." Thus, Article 50 combines the measurement standard in 2-827(b) with the buyer's power to reduce the price granted in Section 2-828.

SECTION 2-828. DEDUCTION OF DAMAGES FROM PRICE. A buyer, on so notifying a seller, may deduct all or any part of the damages resulting from any breach from any part of the contract price still owed under the same contract.

SOURCE: Sales, Section 2-717.

1. There are no changes of substance in former Section 2-717 of the 1990 Official Text, compare CISG Article 50.

2. At the March 1997 meeting, there was some discussion of whether this is too limited a remedy in that the ability to deduct from the unpaid price might be appropriate in other situations. After the meeting, the following draft was proposed for discussion and decision:

If the buyer is a consumer and a remote buyer as defined in Section 2-401(4), that buyer, or a transferee for value from that buyer, on so notifying the immediate seller of that buyer, may deduct all or any part of damages resulting from any breach of warranty under Section 2-404 that is related to the sale from any part of the contract price still owed under the related contract of sale to the immediate seller, or to any transferee of that seller. If the entire contract price has been paid, a consumer buyer who is a remote buyer as defined in Section 2-401(4) is entitled to a refund, up to the amount of the contract price paid, from the immediate seller, or its transferee, for all or any part of the damages resulting from a breach of warranty under Section 2-404 related to the sale.

This could be added as subsection (b) and would allow a consumer remote buyer who suffers harm from a breach of the obligation under Section 2-404 to deduct its damages from the price still owed to the immediate seller. Presumably, the immediate seller would recover from the remote seller the amount so deducted. If the price is paid already, the buyer would have a right of refund for the amount of damages resulting from the breach of the remote obligation. The buyer would obtain that refund from the immediate seller or its transferee.

This is not a set off in the traditional sense as the parties are not mutual. The immediate seller or its transferee is not an assignee of the remote seller's rights and obligations to the buyer. Thus this provision could not be justified as consistent with either traditional set off rights or rights of a contract assignee. This provision would create a remedy for breach of the remote seller's obligation against the immediate seller who has not breached its own obligation to the buyer.

SECTION 2-829. RECOVERY OF PRICE; BUYER'S SECURITY INTEREST IN REJECTED GOODS.

(a) If the seller has breached the contract, the buyer may recover any payments made on the price of goods that are not accepted.

(b) On rightful rejection or justifiable revocation of acceptance, a buyer has a security interest in goods in the buyer's possession or control for any payments made on their price and any expenses reasonably incurred in their inspection, receipt, transportation, care, and custody. The buyer may hold the goods and resell them in the manner provided for an aggrieved seller under Section 2-819, except that the buyer shall give the seller reasonable notice of the intended resale and must account to the seller for any excess of the proceeds of resale over the amount of the security interest created in this subsection.

SOURCE: Sales, Section 2-711.

1. Pursuant to the revision of Section 2-823 to be a pure index of remedies and that should contain no substantive rights, the buyer's right to return of the price from former Section 2-711(1) had to be separately stated. Subsection (a) does so.

2. Subsection (b) is the same in substance as former Section 2-711(3) and former Section 2-706(6). Subsection (b) creates a statutory security interest on behalf of the buyer in limited circumstances and for a limited amount. In a short compass, the subsection deals with when the security interest arises, what it secures, how long it lasts, the tension between the buyer's rights as a secured party and its duties as a bailee, and the right of resale. Compare Section 9-504. Given that the buyer is exercising a security interest in the goods, should the buyer's resale be subject to the Article 9 resale provisions or should current law be continued and make the buyer comply with the seller's resale provisions in Section 2-819? Note that the buyer resells under Section 2-819 to protect a security interest in goods in which the seller has the ownership interest. The buyer must account to the seller for any excess over the claims secured and must give reasonable notice of the intended resale to the seller. The buyer's obligation under Section 2-704 or 2-705 is subject to the buyer's rights under this subsection.