Top answers, Sales, Spring 2000

Spring 2000 final exam (Law of Sales)
Top student answers

Note: These were among the best answers received under examination conditions. They are not model answers, in that they all contain extraneous material as well as omitting useful information. Some even reach incorrect conclusions. However, they all provide intelligent, organized, approaches to the questions.

Question 1: Answer #1

UCC applies.

Modification.

If Singh' s claim is true, per 2- 209 there is a modification of the original price terms. The undisputed fact that Birla increased the letter of credit to $520,000 so that vests could be exported out of India at floor prices makes Singh's claim more likely to succeed. Even if the modification fails for statute of frauds, it may operate as a waiver per 2-209(4).

Birla legal exposure:

The framework agreement with the 10 orders is an installment contract because they authorize the delivery of goods in separate lots to be separately accepted. 2-612(1).

1.Rejecting improperly sewn Calico shirts.

Per 2-612(2), to reject any non-conforming installment, Birla must prove that the non-conformity substantially impairs the value of that installment and cannot be cured.

Non-conformity. If the orders specified the sewing quality, there is breach of express warranty. Because Singh is a merchant (2-104) with respect to the clothing involved here, there is an implied warranty of merchantability, which includes the goods must pass without objection in the trade under the contract description and fit for ordinary purpose for which such goods are used. Here, Calico shirts get objections from Calico and cannot get through a washing machine cycle. So Singh breached warranty of merchantability.

Birla will also argue that the non-conformity substantially impairs the value of that installment because these shirts cannot be washed without being damaged. But Singh would argue that even if these defects substantially impair the value of the relevant installments, they can be cured by an allowance against the price, or by further delivery or resewing. Singh is likely to prevail and Birla cannot reject any installment.

2. Canceling the whole contract.

To cancel all pending orders and reject the whole contract, Birla must prove the non-conformity with respect to one or more installments substantially impairs the value of the whole contract. Here, Birla cannot persuade that the non-conformity substantially impairs value of the whole contract because Singh may cure defects and deliver conforming clothing in the future.

3. Singh has the right to decide whether Birla accepted the Calico shirts or not.

Birla took possession of certain shipping documents relating to the Calico shirts that had been forwarded to Birla under separate cover. Birla refused to return the shipping documents and made Singh unable to reclaim the rejected shirts. Per 2-602(2)(a), after rejection any exercise of ownership by buyer with respect to any commercial unit is wrongful as against seller. Here, per 2-105( 6), Calico shirts can be deemed a commercial unit because they can be treated as a single whole for purpose of sale. Per 606(c), Birla's action inconsistent with seller Signh's ownership is deemed to be acceptance of Calico shirts. But here because Birla' s possession of the Calico documents is wrongful as against seller, it is acceptance only if ratified by Singh. Birla may argue this is salvage of rightfully rejected Calico shirts per 2-604 but it may not prevail because as Birla puts it, Birla is merely holding onto the documents to facilitate resolution of any dispute: Birla is not storing the shirts for Singh's account, nor reshipping them, nor reselling for Singh's account.

4. Reinstating the contract by accepting non-conforming installments.

Though Birla notified Singh of cancellation of the whole contract in its 2/24/1999 fax, it ultimately accepted all the vests and Calico shirts (if Singh so chooses) without seasonably notifying of cancellation thereafter. Therefore, Birla may be deemed to reinstate the contract per 2-612(3).

5. Breach on letter of credit.

Assuming Birla accepted Calico shirts, Birla did not furnish letter of credit for Calico shirts and thus breached the contract with Singh per 2-325(1). If a modification of contract was found, since Birla accepted the vests, the dishonoring of the letter of credit for floor-contract difference is a breach of contract for sale per 2-325(2). Singh may on seasonable notification to Birla require payment directly
from Birla per 2-325(2).

6. Singh's remedy per 2- 703

1) Per 2- 703(a), Singh does not have to ship the Calico shirts that were ordered but never shipped.

2) 2- 703(d) Resale damages per 2- 706.

Per 2- 706(1), Singh has to prove that the resale was made in good faith and in a commercially reasonable manner. Here, Singh resold the shirts at only 10% of the contract price and thus might have a hard case to prove them. If resale is reasonable, Singh can recover $333.000 ( contract price ($370,000)- resale price ($37,000» assuming no modification of agreement. If there is modification of agreement, because Birla needs only to pay Singh $330,000 (850,000-330,000) instead of $720,000 for all Calico shirts, Birla can argue the shipped Calico shirts are 330,000 *350,000/720,000 = $160,416, and the unshipped Calico shirts are 330,000-160,416 = $169,584. Because Singh sold them in India for $37,000, Singh at most can recover 169,584 -37 ,000 =.$132.58. But if resale is not reasonable, then Singh can only recover per 2- 708 the market-contract difference.

3) 2-703(e) Price action per 2-709

Singh may recover the price of clothing accepted by Birla. Singh would argue for the balance of vests: 520,000-130,000 = $390,000 and $350,000 for Calico shirts. In total: $740,000. But this would give Singh double benefit for the Calico shirts. In fact, if there is no modification of contract, Singh can at most recover the .$?50.00Q for shipped Calico shirts and nothing for vests because Birla paid all the contract price of $130,000 for vests. If there is modification of contract, then Singh can recover $390.000 difference between $520,000 floor price and $130,000 contract price.

So assuming Birla breached the contract (whether as modified or not), if there is no modification of contract, Singh can at most recover 350,000 for price action + 333,000 for resale difference, in total: $883.000. If there is modification of agreement, Singh can at most recover 390,000 for price action + 132,584 for resale difference, in total: $522.584. So Birla should agree that there is modification of contract as Singh asserted and thus at most owe Singh $522.584.

Further, Birla can argue to deduct the price for non-conformity. Birla can recover per 2- 714(2) the difference between the value of Calico shirts accepted and the value as warranted (contract price here). It is better if Birla resale is unreasonable and Singh can only recover the market (if higher than resale price) - contract price difference.

Negotiation on original framework agreement:

Per 2-306(2), an exclusive dealing agreement imposes the buyer an obligation to use best efforts to promote sale. If Birla wants to get out of the framework agreement without breaching contract, it can either argue that because of the bad quality of the products, even its best efforts cannot promote any sales. If Birla can succeed on this, it can just stop placing orders. But Singh would argue it can improve the later products. Birla then can per 2-609 argue that because there is reasonable ground for insecurity it will demand adequate assurance of due performance and suspend placing orders or
otherwise performing till it receive the agreed return.

Question 1: Answer #2

In analyzing this dispute, the first issue is whether the framework agreement formed a contract. Since 2-204(3) allows terms to be left open and the parties clearly intended to contract, it meets the Code's basic requirements for formation. The writings between the parties omit a quantity term, but the Code explicitly authorizes such contracts through 2-306(2). Here, the contract provides that Birla is to have the exclusive right to distribute goods in the United States, so there is a duty of best efforts to promote the goods. Therefore, the $5,000,000 provision constitutes a stated estimate, so Birla's
actual requirements cannot be unreasonably disproportionate to this amount or it will violate the duty of good faith.

The Denim Vests:

The first issue arising under the contract involves the alleged modification of the price stated in the original purchase order for the Denim vests. Singh might argue that the government regulation made performance under the original terms impracticable based on 2-615. The contract would be cancelled and the subsequent shipment would be an offer with the new price plan, which we accepted by accepting the vests. The impracticability argument should not succeed, however, because the regulation only increased the cost of performance. According to comment 4, cost increases alone do not excuse performance unless the contingency is both unforeseeable and alters the essential nature of performance. Also, while the facts are unclear, the government regulation appears to have been existence prior to the contract, making it foreseeable it would apply to the vests. In fact, since the regulation was already in existence, it may be incorrect to characterize it as a contingency at all.

A stronger argument for Singh is that the contract was subsequently modified under 2-209. Singh first must show that the modification was in good faith. Here, Singh had a legitimate commercial reason, the increase in export prices, to ask for a modification. Moreover, the modification did not harm either party since the price increase would be rebated on transactions not subject to the regulations. Singh must also demonstrate that Birla assented to such a modification. A court will likely find that the amendment of the line of credit in November to permit exportation at floor prices indicates assent to the modification since it occurred before subsequent rejections made recovery of the additional price impossible. Also, it is unlikely that our credit line could be changed unilaterally by Singh without our agreement.

Since there is no evidence that the contract required a signed agreement to modify it, our best defense may be the statute of frauds. The modification falls within the scope of 2-201, so the question is whether there is writing sufficient to indicate the new contract. The Code allows several writings to be combined in order to satisfy the statute. Assuming the amendment was made in writing, the combination of the increased credit line and the invoices with the decreased prices should be sufficient to indicate an agreement to modify the price of the vests. It is not clear, however, whether Birla signed any of these writings, which is required under 2-201. If our client failed to do so, he cannot be bound. Otherwise, the writings seem sufficient to indicate that the parties agreed to a modification.

Because the evidence seems to support that we agreed to a modification of the contract, we will likely be liable for the increased price of the vests.

The Calico Shirts:

In regards to the shirts, the main issue is whether we rightfully rejected the shipment. The contract provides for deliveries in separate lots, so it falls within the scope of 2-612. Calico clearly rejected the goods within a reasonable time, so that is not at issue. We are attempting to reject not only the current installment, but subsequent installments of shirts, as well. Under 2-612(3), if the value of the goods substantially impairs the whole value of the contract, then there is a breach of the whole and we can cancel the contract. The shirts represented the largest portion of the contract's value, and clothes that can survive one wash cycle are essentially worthless. Moreover, this kind of non-conformity in a shipment is severe enough to give rise to a reasonable apprehension that the quality of Singh's goods will not improve.

Also, since Calico has cancelled our contract and it is not likely we can resell the shirts, we were deprived on the entire benefit we reasonably expected from entering into the contract. Based on this evidence, our rejection is justified.

One problem may be that the rejection did not give Singh the opportunity to cure the defect. Under 2-612(2), we have to give the seller the chance to cure even if the defect is a substantial impairment to the installment's value. While we are bringing this action under 2-612(3), part of the inquiry into whether the breach has substantially impaired the value of the contract will center of the likelihood that Singh will cure the defect. If the court determines that Singh would have cured, then the value of the contract is not likely to be substantially impaired and we will be in breach. The fact that Singh has not made any additional assurances coupled with the severity of the breach probably ensures us that the contract will be cancelled.

A additional concern, however, is that are valid rejection under the installment contract may be invalidated. Since we have taken physical possession of the goods, we are required to hold them "at the seller's disposition" under 2-602(2)(b) for a time sufficient for the buyer to remove them. Singh may argue that we failed to do this by retaining possession of shipping documents, effectively preventing him from recovering the goods. Depending upon whether he has an agent in the United States, he may also have a claim that we are required to follow his instructions for resale of the goods. We may want to notify Singh to we are willing to sell these goods for him. We should not act, however, if and until we receive instructions since selling them would be an act inconsistent with his ownership and invalidate our rejection.

The last issue concerns the potential damages on the unshipped portion of the Calico shirts. While our rejection will likely render these damages irrelevant, it is unlikely that Singh can recover the full resale difference even if he does recover under the installment contract. Pursuant to 2- 706, Singh resold those shirts on the Indian market at 10% of the contract price. Under the provision, the seller must make the resale in good faith and in a commercially reasonable manner. Singh may have difficulty locating another international market, but it is likely that he should be able to find a better cover price than what he obtained in India. The court will likely limit damages to 2- 708.

In conclusion, under the framework agreement, we could be subject to potential exposure to upwards of $5,000,000. This is unlikely because we have a sound basis for canceling the contract because of the poor quality of the shirts. Singh's claim for the vests is more likely to succeed. It might be wise to pay this price in order to avoid more substantial litigation on the agreement contract and in connection with the shirts.

Question 2: Answer #1

Applicable law

Because Bergen is a New Jersey corporation, Skandis have its principal place of business in Sweden, and both US and Sweden ratified CISG, and parties did not explicitly contract out of CISG, CISG applies to the contract between them in general. But because Sweden made article 92 declaration, the parties stipulated that formation issues are governed by US law here. Specifically, because the DIGs are goods per 2-105(1), UCC governs the formation. However, US choice of law would apply CISG in this US/Sweden transaction. Alternatively, parties' stipulation may not by itself determine the applicable law because under CISG, parol evidence can vary the contract.

Formation

The purchase order by Bergen for 92647 DIGs is an offer per 2-206(a). Per 2-207(1), Skandis accepted the offer with the invoice by referring to the purchase order even though on a different or additional term, i.e., either "92647 or 85744." Skandis' acceptance was not expressly made conditional on assent to the different or additional term. Even if there is no formation of contract through 2-207(1), the contract is formed through 2-207(3) by conduct of both parties which recognizes the existence of the contract: shipment of DIGs by Skandis and acceptance and forwarding for overhaul by Bergen.

Terms: If the "92647 or 85744" is deemed an additional term, then 2-207(2) applies. Because both Bergen and Skandis are merchants per 2-104(1), the term cannot become part of the contract because either it materially alters the original term "92647". So the contract term is "92647." If this "92647 or 85744" is deemed a different term, then per White and comment 6 to 2-207, the different terms cancel each other, and terms are those agreed upon by both parties, and UCC gap fillers. Because both agree 92647, so the term is 92647. Or per Summer view, offeree's term falls out and offeror's term controls. So again, 92647 is the contract term. I would decide that "92647" is the term under UCC.

Under CISG article 14, Bergen purchase order is an offer. Per article 19, Skandis' invoice is a rejection and counter-offer of Bergen offer because it contains additions, limitations, or other modifications and it materially alter the terms of the offer. But per article 18(a), Bergen have accepted the counter-offer by accepting and forwarding the DIGs for overhaul. Therefore the term is "92647 or 85744."

Parol evidence

Per CISG article 8( 1 ), statements made by or other conduct of a party are to be interpreted according to his intent where the other party knew or could not have been unaware what the intent was. Here, Fleisher considered himself an expert with respect toairplane parts and told Hilbert that he had experience with DIGS. On 7/30/1997 , Fleisher asked Hilbert about DIGS in general and not 92647 specifically. Hilbert faxed to Fleisher the listed information from data plates on the DIGS and stated that the DIGs were either part numbers 92647 or 85744. Fleisher then told Hilbert that "It appears that all three DIGs are what we want." From the circumstances, it can be interpreted that a reasonable person in Hilbert's position can understand Fleisher's statement to mean: "92647 or 85744, we want them." CISG article 8(2) (3). IfHilbert's statement is true in that Fleisher was going to contact Lindgen to determine the part number, Fleisher's interpretation in this way is more reasonable. This is true even if Fleisher originally asked for 92647 because it is reasonable for Hilbert to understand either that the parts are 92647 and Bergen still wants them or that the parts are 85744 and Bergen decide to want them now even if it did not want them originally. Therefore, even assuming the term was originally "92647," the parol evidence varied the term to mean "92647 or 85744" per CISG.

If parol evidence rule is deemed part of formation issues, and UCC applies here, a different result will be reached. As stated above, the parol evidence is that Bergen wants either 92647 or 85744. Because the written contract is complete, the parol evidence cannot contradict it but can only explain or interpret it. I would hold that "92647 or 85744" contradicts "92647" instead of explain or interpret it. So the parol evidence cannot come in per UCC. And the term of contract is still "92647" per UCC.

Warranty

Assuming that the term is "92647 or 85744," Bergen can still argue for Skandis's breach of warranty.

Express warranty (CISG 35(2) (a»: I would check on the DIGs advertisement Skandis placed on the international database. If Skandis only listed 92647, then there is an express warranty that Skandis only sells 92647 DIGs. Alternatively, if Flesher's statement is true in that when he asked Hilbert if the DIGs were 92647 and Hilbert said "yes," then again there is express warranty that the DIGs are 92647. Then here Skandis breached the express warranty by selling 85744 DIGs. If Skandis listed both 92647 and 85744, or there is no such conversation that Fleisher asked if the DIGs are 92647 and Hilbert responded "yes", then Skandis warranty is to sell both 92647 and 85744. Then there is no breach of express warranty .

No breach of implied warranty for merchantability here because no mention that the DIGs here are not fit for ordinary use. Article 35(2)(a).

Implied warranty of fitness (article 35(2)(b): Bergen can argue that it had made known to Skandis that it only wants 92647 DIGS all the time and that Skandis knew from the beginning of negotiations that Bergen was only interested in purchasing 92647 DIGs. But Bergen probably cannot prevail because the circumstance show that Fleisher did not rely on Skandis or Hilbert's skill and knowledge: Fleisher himself disregarded Hilbert's statement that the DIGs are either 92647 or 85744 and determined himself that the DIGs are 92647. If Fleisher did tell Hilbert that he would contact Lindgren to determine the DIGs number, then it is more reasonable to hold that Fleisher did not rely on seller Skandis' skill and judgment. So there was no implied warranty of fitness that the DIGs are 92647.

Similar results can be reached per UCC section 2-313,2-314 and 2-315.

Inspection and rejection

Per CISG article 38(1), buyer must examine goods or cause them to be examined within as short a period as is practicable. Actually here Bergen already had opportunity to examine the DIGS upon receiving the fax listing information from data plates. Had Bergen contacted Lindgren to determine the number, the contract and the whole mess could have avoided from the beginning. But Bergen did not examine in a reasonable manner and instead over relied on Fleisher's judgment.

CISG article 49(1)(a) allows buyer to avoid the contract if there is fundamental breach by seller. Here, if Skandis breached the express warranty of selling 92647 DIGs only, then it is a fundamental breach because other DIGs can not function as 92647 DIGs. But if Skandis did not breach the warranty or otherwise made fundamental breach, Bergen cannot avoid the contract and must accept the DIGs.

Decision: Unless Skandis made an express warranty that it only sells 92647 DIGs, Bergen cannot avoid the contract and must accept the DIGs.

Question 2: Answer #2

This case concerns whether the negotiations, writings, and performance of the parties actually formed a contract, and, if so, what the terms of the contract are. The Code provides some room for writings to vary from one another and still form a contract. Under 2-207, written expressions of acceptance may operate as an acceptance even though they state terms different from or in addition to the offer. The return documents, however, must operate as an acceptance to the offer before the provisions of2-207 can be applied. Here, the difference between the documents doesn't concern a boilerplate term,such as an arbitration clause or a warranty disclaimer, but the nature of the goods being sent. The type of goods is an essential term in the contract, similar to price or quantity, that is negotiated over and a divergence on such a term cannot operate as a 2-207(1) acceptance.

A contract might also have been formed under 2-204(1 ). This section provides that a contract for sale of goods may be made in any manner sufficient to show agreement, including conduct. Moreover, under the CISG, there is no statute of frauds, so the terms of contract do not need to be reduced to writing. Thus, the oral conversation between Fleisher and Hilbert may be sufficient to establish a contract. Fleisher stated that "It appears that all three DIGs are what we want." This term is ambiguous, but Article 8 of the CISG provides some interpretive guidance for the court. Some evidence suggests that Skandis knew that Bergen was only interested in purchasing 92647 DIGs. If this is so, then the Bergen's statement should be analyzed under Article 8(1), which provides that the statement should be interpreted according to Fleisher's intent. Fleisher's intent was that the contract was for 92647 DIGs, so this becomes a term of the contract. The shipment of 85744 DIGs, therefore, would be a breach of the oral contract made between Bergen and Skandis because it was non-conforming tender under Article 35(1).

It is not clear that Skandis knew that Bergen required only DIGs with part number 92647. The fax seems to suggest that Skandis was relying on Fleisher's superior knowledge of the parts to determine whether the DIGs were either of type number 92647 or 85744. This suggests that Skandis may have understood that Bergen was only interested in purchasing DIGs with part number 92647. The subsequent invoices and components forms, however, continue to describe the DIGs as either 92647 or 85744.

Skandis may have either believed that Bergen's requirements had subsequently changed or they may have never known those requirements in the first place. Either way, they cannot be charged with knowledge of the other party's intent based solely on vague representations. On balance, a reasonable interpretation of the Fleisher's offer is that it is ambiguous. Consequently, there was a basic misunderstanding in their exchange of communications and therefore Skandis did not asset to the offer.

Since the parties' writings did not establish a contract, a contract might be formed under 2-207(3). This provision provides that if the conduct of the parties "recognizes the existence of a contract," then there is one despite the failure of the writings to so establish it. The exchange of writings and the oral negotiations indicate that the parties intended to be bound to an agreement. The most convincing conduct, however, is Skandis' shipment of the DIGs. The Code allows acceptance by shipment of even non-conforming goods under 2-206(1)(b). This provision is not entirely conclusive since the comments require the shipment to be referable to the order. Where the parties have entered into negotiations over specific items, however, such a shipment, even if non-conforming, appears sufficient to show agreement.

When the parties manifest through their conduct an intent to contract, 2-207(3)states that the terms of the agreement are those upon which the writings agree, in addition to any "gap-fillers" in the Code. Here, Bergen's and Skandis' writings conflict on the type of goods the contract covers, so these provisions eliminate each other. Nevertheless, Bergen may be able to claim that the advertisements on the international database and Hilbert's alleged statements created an express warranty that the DIGs would be of this type and that these warranties entered into the contract as a gap-filling provision.

It appears that express representations made by the Skandis as to the type of the goods would influence the understanding reached by Bergen of the goods on hand. Then, when the parties contracted, the intent was for DIGs of type 92647. Under the CISG's warranty provision in Article 35(1), in order for the seller to deliver goods that conform to the contract, they must be of the "description required by the contract." Assuming that the oral representations that the DIGs were type 92647 entered into the contract as express warranty provisions, the fact that Skandis sent goods that did not conform to those specifications would constitute a breach of the contract.

I am not convinced, however, that the statements by Skandis amounted to express warranties. Assuming that the advertisement incorrectly described the goods, it may have attracted Bergen to Skandis. Subsequently, however, Bergen learned that Skandis was not sure whether the goods were in fact 92647s. Moreover, the majority of the communications between the parties did not represent the goods as the type Bergen desired. Even if they had, Bergen did not rely on those statements. Fleisher held himself out as person with knowledge about DIGs. When Skandis gave Fleisher the information concerning the goods, it was reasonable to assume that a knowledgeable buyer would be able to discern the type of DIG they were purchasing. For the same reason, it is clear that there can be no warranty that the goods were fit for Bergen's specific purpose under Article 35(2)(b). Fleisher did not rely on Skandin's skill or judgment in selecting the goods. Rather, he relied on his on interpretation of the specifications of the DIGs provided to him in the fax.

Furthermore, if Hilbert's account is correct, Fleisher intimated that he would contact the original manufacturers of the goods, ensuring that by the time of contracting he was aware of what he was buying. The fact that he failed to do so, and failed to inform Skandis of that fact should prevent him from relying on implied warranty provisions in the contract. Article 35(3) of the CISG supports this interpretation. Under that provision, if the buyer should have been aware of the lack of conformity, as is the case here, he cannot bring a warranty of merchantability claim.

Thus, there are grounds for finding a contract between the parties under 2-207(3). The conduct of both parties manifested an intent to be bound. The terms of that contract, however, doesn't include any implied warranty provisions stating that the DIGs would conform to Bergen' s particular needs. Also, Fleisher did not rely on any express warranties made by Skandis. Instead, he relied on his own knowledge of the goods, and should bear the risk of that mistake. I find that Bergen is liable to Skandis for the value of the goods.

Question 3: Answer #1

Article 2 should take a position consistent with Allied Canneries, as such a stance would be the most fair to contracting parties, consistent with the goals and policies of the UCC in general, and economically sound.

What is the policy behind damages? Two conflicting viewpoints frequently arise with regard to this subject: "expectancy" and "deterrence." The deterrence principle suggests that damages for breach exist to prevent parties from breaching. The damages are thus a "penalty" extracted from the breaching party , given to the aggrieved. The expectancy principle suggests that damages exist to "repair" the aggrieved party if breach occurs. Damages put the aggrieved party in the position he would be in had their been no breach.

The expectancy principle is consistent with the policies of the UCC. §1-106 (from article I, which supersedes article 2) states that remedies under the code are to be administered in light of the expectancy principal: to put a party in "as good a position" had there been performance. By allowing contract-market damages when they exceed expectancy damages, the aggrieved party is getting a "bonus" for being lucky enough to be on the "losing" end of the contract. This is inconsistent with §1-106. Further, §1-103 allows the common law to supplement the code. Principles such as good faith and the duty of mitigation demand that if damages can be lessened at any point as to not harm a party , they should be. Deterrence is inconsistent with the common law, as it allows a party to accumulate damages, exacting no duty to lessen them even if doing so would not harm them. Also, collecting excess damages beyond what would be sufficient under § 1-106 is a violation of good faith.

Further, deterrence-damages suggest that breaching a contract is a societal negative. This is far from true. Parties frequently engage in "efficient breach" in order to fmd cheaper means to conduct their business. If a seller of a good can find a cheaper supplier, and the profits they receive on their own sales exceed their original expected profits plus the profits the supplier expected to make, it is efficient for them to breach under the expectancy principle. The original supplier still receives their expected profits, but the seller will receive more profits than originally. Deterrence-damages prevent these beneficial breaches, as they make it so costly for the seller to switch to a cheaper alternative, that they remain with the high-priced supplier. The extra costs will most likely be shifted to the consumer, thus making goods more expensive.

If Article 2 were amended to reflect Allied Canneries, the UCC's freedom of contract philosophy would still allow parties to receive contract-market damages if they so wish, provided that they contract around the provisions of § 1-106, via § 102. For example, the following may be drafted:

REMEDIES: In case of breach by buyer, seller's damages will be limited to the calculus as described in §2-708(1). All other remedies granted by §2- 703 are hereby waived. In case of breach by seller, buyer's damages will be limited to the calculus as described in §2-713. All other remedies granted by §2- 711 are hereby waived.

If such a clause is invoked, courts will be required to use these formulas, provided that they are drafted in good faith and are not "manifestly unreasonable" under § 1-102(3). It is unlikely that a court will find such a clause unreasonable, as § 1-102 specifically grants the right not only to contract around the UCC, but to also determine the standards of reasonableness. Further, if both parties agree to a similar remedy, there is little room for opportunistic behavior.

Question 3: Answer #2

A. No matter which side it chooses, Revised Article 2 should take a position on the Allied Canneries issue of overcompensatory contract/market damages. Whatever rule a legislature adopts will presumably be a default rule that can be contracted around if parties do not want it. But in the absence of contracting around the law, the predictability of a default rule lowers transaction costs in planning.

To minimize these transaction costs, the legislature should choose rules that most parties want, and few will contract around. This approach is criticized on the grounds that it assumes that what prevents complete contracts is a failure to engage in careful drafting. Thus, Ayres and Gertner propose a "penalty default" rule, to encourage careful drafting, and force parties to disclose information, since more information makes better contracts. However, strategic contracting with "inside" information and bargaining power disparities might undermine their theory. If the party with the inside information has the bargaining power, penalty defaults work well to force the stronger party to disclose information for maximum efficiency. But if the inside information holder does not have bargaining power, such rules make less sense: the information may be necessary to the weaker party to level the playing field, and it may be economically efficient for that party to do so. So after all, notwithstanding Ayres and Gertner's criticism of the following "one-sentence" theory, the Revision should choose the rule most parties would choose themselves.

The expectation that an aggrieved party will be made whole--no more, no less-should be the primary concern of the damages section of the UCC, to avoid windfalls to one party at the expense of the other that were not part of the originally conceived bargain. Such windfalls introduce uncertainty into contracting. Uncertainty is not always bad; many valuable markets are based on it. But parties should willingly undertake uncertainty , making as precise a risk/reward calculus as possible. The current uneven judicial application of the Allied Canneries rule undermines that option.

Therefore, the Revision should limit a remedy if it would make a party more than whole. The precise language of the 1997 Draft, that a court "may" limit a remedy, would actually increase unpredictability , since it merely gives courts one more choice to exercise with discretion. The Revision should instead say not that a court "may," but "should" limit an overcompensating remedy, to avoid making a party more than whole.

B. Parties who wish to maximize chances of receiving contract/market damages are best advised to attempt, via contractual stipulation, to limit consideration of judicial damages to the current explicit statutory contract-market formula, and disclaim any alteration of remedy due to overcompensation. They can also specifically disclaim any other damage formulae, in favor of a contract/market differential. The UCC's spirit of freedom of contract embodied in §1-102(3) will probably carry such a provision past most courts, in most circumstances.

The circumstances the provision will not survive are few, but important. Freedom to contract under the UCC has its limitations. Parties cannot contract around unconscionability or good faith. If parties contract to limit damages to the contract-market formula, a court may hold the contractual stipulation unenforceable if the resultant overcompensation is unconscionable due to excessive overcompensation afforded a party with much stronger bargaining power. The case for unconscionability is firmer if the possibility of overcompensation was foreseeable to the stronger party at the time of contract formation. Thus, even the most careful contracting will not prevent a court from substituting its own inquiry into expectation damages, although such drafting will help limit the court's forays to specific grounds and extreme circumstances.