Chapter 12 – Performance

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Implied Duty of Good Faith Performance
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a. A party who does not breach any explicit provision of an agreement may nevertheless have breached the duty of good faith i. Courts have found bad faith to include “evasion of the spirit of the bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse of power to specify terms, and interference with or failure to cooperate in the other party’s performance.” i. Remember that “good faith” isn’t necessarily required, “bad faith” just isn’t allowed
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Example where party does not act in good faith
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ii. Example: Seller agreed to sell four houses to Buyer for 800K. Seller did not own the houses, but instead intended to purchase them at a foreclosure sale. Buyer knew this and attended the sale herself and outbid Seller of the houses, acquiring them for 780K. By entering into the contract with Seller to purchase property that Buyer knew Seller would have to purchase at the foreclosure sale, Buyer impliedly agreed that she would do nothing to prevent Seller from acquiring the property at the sale. Buyer has not acted in good faith, and Seller is entitled to damages of 20K, representing the difference between the contract price and the amount Buyer paid at the foreclosure sale, which is the amount Seller would presumptively have paid if Buyer had not outbid him
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Example where party does act in good faith
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Wilkoff promises to sell 2,600 tons of iron rail to Iron Trade Products, delivery to made on a later date. Wilkoff contemplates obtaining the rails on the open market. During the interim, Iron Trade Products buys large amounts of rails from other sources. Iron Trade Products’ large purchases drive up the market price and make it difficult for Wilkoff to obtain the 2,600 tons ordered. Iron Trade Products has not acted in bad faith, because it is reasonable to anticipate that a purchaser of standard goods will buy from various sources of supply.
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Goldberg 168-05 v. Levy
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Levy, minimum profits as threshold in maintaining contract i. F: D attempted to get out of a lease through clause of having sales under threshold by diverting business to another store. P gets a percentage of the profits in contract. ii. I: Can court enforce contract although stipulation for a way to end contract is met due to D acting in bad faith? iii. H: Yes, a purposeful diversion to get out of lease by lowering profits is an act in violation of good faith doctrine. By diverting business, D was not using reasonable efforts to bring profits into existence. iv. Note: landlord should have explicitly prohibited opening of another store nearby or prohibited advertising of new store.
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Mutual Life Insurance Co. of New York v. Tailored Woman
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i. Summary: Mutual Life Insurance Co. of New York (Mutual) (plaintiff) leased commercial space to Tailored Woman (defendant) under two leases. In accordance with the first lease, Tailored Woman occupied the basement and first through third floors of a building that Mutual owned. The lease provided that Tailored Woman would sell the same or similar merchandise that it had at its previous location, namely furs. The lease provided that Tailored Woman would pay a set rental fee and a percentage of profits from the business. The lease also provided that Tailored Woman would not divert sales from these floors. Tailored Woman then entered into a second lease with Mutual, whereby Mutual agreed to lease the fifth floor of the building to Tailored Woman. This second lease provided that Tailored Woman would pay a set rental fee, but did not require Tailored Woman to pay a percentage of profits. The second lease provided that Tailored Woman could sell women’s merchandise on the fifth floor, without limitation as to the type of merchandise. The second lease provided that the parties agreed that it would not interfere with the first lease. Without notice to Mutual, Tailored Woman moved the portion of its business selling furs to the fifth floor of the building and refused to pay a percentage of profits from those sales. Mutual brought suit seeking the percentage of sales that were due to it under the first lease. ii. Rule: A party to a contract does not break the covenant of good faith and fair dealing when exercising rights under the contract. iii. Reasoning: Every party to a contract is bound by an implied covenant of good faith and fair dealing. However, a party to a contract may exercise his rights that have been spelled out in the contract. A party that did not foresee a potential occurrence when entering into an agreement is not later allowed to claim rights and obligations when that occurrence takes place. In the current matter, Tailored Woman was merely following the terms of the agreements. In the second lease, Tailored Woman was permitted to sell women’s apparel on the fifth floor. There were no limitations on what that apparel would be, only that Tailored Woman could not sell other items there. Tailored Woman merely exercised its rights that were spelled out in the contract. Accordingly, the judgment of the appeals court is affirmed.
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Stop and Shop v. Ganem
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lot rented to be supermarket was left unused i. F: D leased to P a store for use under a flat rate and % of profits over specified amount lease. Lease did not specify what premise needed to be used for. P opened another store in nearby area and decided to close present store, continued paying flat rate lease. D wants lot to continue to be used as supermarket in order to get extra rent money from profits. ii. I: If it is not explicitly expressed, is there an implied stipulation to continue using lot as a supermarket? Did P act in bad faith in transferring business to another store? iii. R: To determine if there was an implied contract, court must look at the intent of the parties in making the contract.
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Factors to consider in determining bad/good faith (try and see this away from just store example)
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i. What are motives of party in reducing sales at store? ii. Was base rent just nominal or was there a disparity between fixed rent and rental value? iii. Did party intentionally attempt to draw customers from one store to another? iv. Why did party open up another store? Was store nearby?
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Texaco v. Penzoil
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i. R: (1) A party interfering with a contract can be held liable for causing its breach when they knew of the existence of that contract and actively caused the breach of it. (2) An enforceable contract exists even though an agreement has not been reduced to writing when one or both of the parties express an intent to be bound by the informal agreement.
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R. 205 – Duty of Good Faith and Fair Dealing
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Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.
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UCC 1-203: Obligation of Good Faith
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Every contract or duty imposes an obligation of good faith in its performance or enforcement
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UCC 2-103: Good Faith Defined
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“Good faith” in the case of a merchant means honesty in fact and the observance of reasonable standards of fair dealing in the trade
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Two types of Implied Warranty
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– Merchantability – Fitness for a particular purpose
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Implied Warranty of Merchantability
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1. Guarantees that the goods are merchantable and is automatically created when the seller is a merchant of those goods 2. Goods are merchantable when they are fit for the ordinary purposes for which such goods are used a. Example: If Sean works at an electronics store, then he’ll be considered a merchant of electronics, including cell phones. When Becky buys a cell phone from Sean, an implied warranty of merchantability will automatically be created. Under the implied warranty, the cell phone must be fit for the ordinary purposes of a cell phone, such as making phone calls.
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Step-Saver Data Systems, Inc. v. Wyse Technology
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H: Acceptance in the trade is a reliable test for determining the merchantability of the product. Step-Saver failed to provide evidence that they goods were not merchantable, While Wyse put for ample evidence that they were – such as over 1 million sold.
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Implied Warranty of Fitness for a Particular Purpose
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Elements: (1) seller must have reason to know buyer’s particular purpose, (2) seller must have reason to know that buyer is relying on seller’s skill or judgment to furnish appropriate goods, and (3) buyer must, in fact, rely upon the seller’s skill or judgment. a. Example: Becky wants a cell phone that allows her to take high-quality pictures. If she relies on Sean’s judgment to determine which cell phone to purchase to fulfill her particular purpose, then an implied warranty of fitness for a particular purpose will automatically be created, as long as Sean knows of Becky’s purpose and her reliance on his judgment
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UCC 2-314: Implied Warranty: Merchantability; Usage of Trade
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(1) Except exclusions in §2-316, implied warrant of merchantability applies to merchants (2) Goods must a. Pass without objection in trade under contract description b. In case of fungibles, are of fair average quality and c. Are fit for ordinary purposes for which good is used and d. Run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved and e. Are adequately contained, packaged, and labeled and f. Conform to the promises of fact made on container or label if any.
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UCC 2-315: Implied Warranty: Fitness for Particular Purpose
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1. (1) the seller knows the buyer’s particular purpose 2. (2) the seller have reason to know the buyer is relying upon the seller’s skill or judgment 3. (3) the buyer rely upon that skill or judgment 4. This warranty can be excluded or modified with an exclusive clause or something in the contract
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UCC 2-714 – Buyer’s Damages for breach in regard to accepted goods
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Damages = difference in value of good accepted at time and place of acceptance and value they would have had if they had been warranted
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Express Warranty
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i. Made by a seller to a buyer as a basis of the bargain, guaranteeing or affirming that the goods conform to a stated fact or condition through affirmation, promise, description, label, or model ii. Seller does not have to use any specific language or have the specific intent to create an express warranty 1. Example: Sean tells Becky that his cell phone has a battery life of 15 hours. Becky buys Sean’s cell phone, based on his statement about its battery life. Sean’s statement is an express warranty, even if Sean did not refer to his statement as a warranty or even intend to create a warranty iii. Express warranty can also be created by a description, which warrants that the goods will conform to the description, as well as a sample or model, which warrants that the goods will conform to the sample or model 1. Example: a label on a cell phone warrants that the cell phone conforms to the label, while a floor model of a cell phone warrants that the cell phone conforms to the floor model
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Exception to Express Warranty
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“mere puffery” in the form of an opinion or recommendation does not create an express warranty 1. Example: Sean merely says, “My cell phone has fantastic battery life,” or “I highly recommend this cell phone,” then he has not created an express warranty
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Royal Business Machines, Inc. v. Lorraine Corp.
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1. F: RBM sold copy machines to Lorraine. 2. R: (1) an affirmation of fact or promise (2) that relates to the goods (3) becomes a part of the basis of the bargain between the parties 3. H: Although there were some parts that were mere puffery, the part where RBM guaranteed that the machines wouldn’t catch fire was an affirmation of fact and is therefore an express warranty that was breached.
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Express Warranty Peanut and Japanese Food Hypos
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vi. Hypo: A restaurant patron asks if there are peanuts in a certain food before ordering because he has a peanut allergy. The waiter answers that there is not. It turns out there are peanuts in the food. Does the telling the restaurant patron by the waiter that there are no peanuts in the food constitute an express contract? 1. According to UCC 2-313, it creates an express warranty because it is an affirmation of fact. 2. If instead the man asked if the soup was good, the wait staff said it was, and it turned out bad; it wouldn’t create an express contract because this is a statement of opinion vii. Hypo: If you saw on display Japanese food in plastic which the restaurant was advertising in the front of the store, and based on the model you thought that it had no peanuts in it but it turned out that it did, could you argue an express contract was formed? 1. Due to UCC 2-313(c) you could because models can convey information upon which you can rely. It probably won’t hold up due to the fact that this model won’t be deemed to convey information based on the fact that you were looking for certain food (peanuts) in it. That’s like seeing if they used a certain liquid on it, you wouldn’t be able to tell.
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CBS, Inc. v. Ziff-Davis Publishing Co.
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1. F: CBS was buying some of Ziff’s companies. Ziff lied about sales in its books and CBS found out. CBS told Ziff of its findings. Due to other reasons CBS chose to go through with sale. It then sued Ziff for breach of express warranty 1. R: A buyer is not required to establish reliance upon the terms of the contract to which he now objects and may maintain his action upon a breach of an express warranty regarding those terms. 2. H: A buyer is not required to show that it reasonably relied upon a seller’s affirmations (express warranties). Express warranties are bargained-for contractual terms that become a part of the agreement. The buyer need not establish that the affirmations of fact in the warranty would be fulfilled in order to recover; the buyer only needs to establish that the warranty was breached.
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UCC 2-313 – Express Warranties by Affirmation, Promise, Description, Sample
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(1) Express warranties are created by: (a) Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the description (b) Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description (c) Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model (2) Affirmation/Description doesn’t have to say “warrant” or “guarantee” or intend to make a warranty to make one, but the seller’s opinion or commendation of the goods does not create a warranty (puffery)
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Types of Warranty Dislaimers
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– A warranty for the sale of goods may be negated or limited by the seller’s disclaimer. – Explicit disclaimers and implicit dislaimers
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How to disclaim an express warranty
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1. An express warranty may only be explicitly rather than implicitly disclaimed a. Example: Sean could limit his express warranty that his cell phone has a battery life of 15 hours, by saying, “I can only guarantee a battery life of 15 hours for the first three months of use.”
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How to disclaim implied warranty of merchantability
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1. An implied warranty of merchantability may be explicitly disclaimed by the seller’s explicit language, which may be spoken or written but must include the word “merchantability.” a. Example: Sean could negate his implied warranty of merchantability by saying, “This cell phone is not merchantable because it is unable to make phone calls.” 2. Also may be implicitly disclaimed by the language of the sale or the buyer’s examination of the goods a. First, the seller may indicate to the buyer during the sale that there is no implied warranty, using plain language such as “as is” or “with all faults.” i. Example: If Sean says to Becky, “I’m selling you this cell phone as is,” then both types of implied warranties are implicitly disclaimed. b. Second, there is no implied warranty for any defects that a buyer examination would have revealed. The buyer may have examined the goods as fully as desired, or the buyer may have refused to examine the goods at all. i. Example: If Becky examines the cell phone, or refuses to examine the cell phone, then both types of implied warranties are implicitly disclaimed for any defects that her examination should have, or would have, revealed.
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How to disclaim implied warranty of fitness for a particular purpose
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– 2 ways 1. An implied warranty of fitness for a particular purpose may be disclaimed by the seller’s written language. a. Example: Sean could negate his implied warranty of fitness for a particular purpose by adding a written term to the sales contract that says, “This cell phone does not have a camera.” b. Any written disclaimer must be conspicuous, which means it cannot be in fine print. 2. Also may be implicitly disclaimed by the language of the sale or the buyer’s examination of the goods a. First, the seller may indicate to the buyer during the sale that there is no implied warranty, using plain language such as “as is” or “with all faults.” i. Example: If Sean says to Becky, “I’m selling you this cell phone as is,” then both types of implied warranties are implicitly disclaimed. b. Second, there is no implied warranty for any defects that a buyer examination would have revealed. The buyer may have examined the goods as fully as desired, or the buyer may have refused to examine the goods at all. i. Example: If Becky examines the cell phone, or refuses to examine the cell phone, then both types of implied warranties are implicitly disclaimed for any defects that her examination should have, or would have, revealed.
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Schneider v. Miller
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1. F: Schneider bought a car from Miller. He test drove it. The parties negotiated and settled on a price. Schneider signed a bill of sale for the care acknowledging that the car was sold “as is,” with no warranty. Schneider then found out the frame was rusted making it unfit to drive and tried to return it based on a breach of implied warranty. 2. R: Both types of implied warranty can be implicitly disclaimed by the language of the sale or by the buyer’s examination of the goods 3. H: The language of the contract said it was sold “as is” with no warranty so the language rule is fulfilled to make no breach of implied warranty. Furthermore, Schneider also had an opportunity to inspect the car because he test drove it. This also gets rid of an implied contract.
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Pelc v. Simmons
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Reasons for express disclaim in implied warranty 1. R: When a contract says, “Sold as is” that’s because it means just that. This is all that needs to be said to expressly disclaim the implied warranty in a contract. 2. H: To rule otherwise would make tons of problems in law and having to go great lengths to contract around the implied warranty.
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UCC 2-316: Exclusion or Modification of Warranties
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Morris v. Mack’s Used Cars
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1. R: Consumer Protection Act (CPA) protects consumers from fraud or deceptive acts by sellers. Seller can’t use deceptive acts and then protect itself from an implied warranty by saying “as is” or allowing person to look at it if it isn’t reasonable to find out for the buyer. 2. Example: Seller didn’t tell buyer car had been in an accident and should have. Can’t escape just because adequately got rid of implied warranty under UCC. CPA protects the buyer.
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UCC 2-316 – Exclusion or Modification of Warranties
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– excluding or modifying implied warranties of merchantability must mention merchantability and if in case of writing must be conspicuous – excluding or modifying implied warranties of fitness must be in writing and conspicuous. To exclude all implied warranties of fitness it is sufficient to state “There are no warranties which extend beyond the description on the face hereof” – unless stated otherwise, all implied warranties are excluded by • expressions like “as is”, “with all faults” • waivers of inspection by buyer or actual inspection by buyer negates an implied warranty • course of dealings or course of performance or usage of trade

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