Sales Outline

WEEK 1 REVIEW
Article I is a general article – says UCC applies to all following articles unless it says otherwise
Article II – UCC applies to all transactions involving goods
Article II(a) – governs transactions involving the leasing of goods

The official comments are not law but were written by the drafters of the UCC to explain to the courts
what was intended.

Scope of Article II in §2-102 – this article applies to transactions involving goods.

Definition of Goods - §2-105 – goods are all things that are movable at the time of identification to the K
– including unborn young of animals and growing crops – excludes real property, intangibles such as
life insurance and K’s for services

In Hybrid situations where a K involving goods and non goods the court uses 2 tests to decide
if K is for goods or services
1. Predominant Purpose Test – looks to the predominant purpose of the transaction to determine if the
predominant purpose of the K is for goods or services – you cannot sever the sales portion of the
transaction from the goods portion. Either the UCC or the common law applies to the ENTIRE
transaction
• if the predominant purpose of the transaction is for goods - the UCC applies to the entire
transaction
• If the predominant purpose of the transaction is for sales - the common law applies to the entire
transaction – milos case
2. Gravamen Test – looks the portion of the transaction that went wrong and determines if the thing that
went wrong involves goods or services – if the service component went wrong, it is a K for service and is
governed by common law – if the goods parts went wrong (the thing), it is a K for goods and the UCC
applies. – ON THIS TEST YOU CAN SEVER THE GOODS PORTION, FROM THE SERVICE PORTION
ON EXAM USE BOTH TESTS

Merchants
§2-314 – Definition of Merchants
Some UCC provisions apply to a broad classification of merchants –

§2-213 – Merchants of Goods of a Particular Kind

General rule is that farmers are NOT merchants
However if farming operation has any degree of sophistication most courts will apply Art II so they are
treated as merchants.

Article 2(a) - Leasing

Here only need to be able to distinguish a true lease from a disguised sale K which falls under Art II. –
How to distinguish a true lease from a disguised sale
1. Disguised Sale - If at the end of the lease period, the lessee becomes owner of the property for little
or no consideration, this will be considered a disguised sale and not a lease
2. Walkaway Clause - if the K contains a clause that permits the lesee to end the lease at any time,
and return the leased goods (a walkaway provision), this is a true lease.
3. Junkpile Test - if there isn’t any economic life left in the goods at the end of the lease, than this is a
disguised sale.

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GOES WITH SOF HANDOUT

Statute of Frauds - §2-201(1) – SEE HANDOUT - A K for the sale of good for $500 or more, must
be in writing, the writing must contain 3 things:
1. Quantity
2. Indication that a K has been made
3. /s/ by party to be charged

Special Situation for Merchants – §2-202 – If merchant A sends a confirmatory writing to

merchant B and merchant B does not object in writing in 10 days – B cannot challenge under SOF

3 times a writing is not required - §2-203

1. partial payment or partial performance by a party up to the amount that was paid or performed
2. when a party admits in a pleading, testimony, or otherwise that a K exists. or
3. specially manufactured goods not suited for resale in the ordinary course of business (while
elephant) – goods that have a unique color, size, texture, design, etc.

WEEK 2

GOES WITH PAROL EVIDENCE RULE HANDOUT

Parol Evidence Rule – a writing that is intended by the parties to be the final written statement cannot be
contradicted by prior to or contemporaneous evidence of any type.

SEE PAROL EVIDENCE RULE HANDOUT

Integrated -

When the writing is integrated or appears to be – several tests to determine of total or partial integration
UCC test - §2-202 – only test in this class for exam - assume partial integration, unless judge determines
that the terms sought to be included would have “certainly been included in the writing,” if that is true, the
document is deemed to be total integration, if total integration, document cannot be supplements with
CATS, nor can it be contradicted.

CATS – consistent additional terms

Even though the court finds that a writing is totally integrated, is intended to be the final expression of the
parties, while that writing cannot be contradicted, it can be supplemented, by the course of dealing,
performance, usage of trade.
Course of Dealing – parties past conduct over time
Course of Performance – how the parties have conducted themselves under this K
Usage of Trade – customs and practices in that particular industry

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General Offer and Acceptance Concepts
§2-204 - Gap Filler Provisions - An agreement is sufficient to constitute a K for sale may be found
even though the precise time of the making of the K is undetermined and the agreement omits certain
details – the K will not fail for indefiniteness – this is called the gap filler provisions of the UCC – if it can
still be determined that the parties intended to make a K than a K for sale has occurred, and the gap
fillers will fill in the missing details.

§2-205 - Firm Offer Rule – an offer by a merchant to buy or sell goods and a /s/ writing which by its
terms gives assurances that it will be held open, is not revocable (consideration) during time stated and
if no time is stated it remains irrevocable for a reasonable period of time not to exceed 90 days

§2-206 - An order to buy goods, in which the goods are to be shipped, is to be construed as to be
inviting acceptance, either by a promise to ship goods or by prompt shipping of the goods. However if a
shipment of non conforming goods are sent, that will not constitute an acceptance if the seller
seasonably notifies buyer that the goods are only being shipped as an accommodation

GOES WITH §2-207 FLOW CHART

Battle of the Forms §2-207
On exam only need to about 2-207 is in the 2-207 handout MEMORIZE HANDOUT FOR EXAM

The addition of an arbitration clause between merchants is a material alternation of the document
and therefore it will not become a part of the parties K unless agreed.

What makes a material alteration?

2 prong test
1. undue hardship – prolonged and open ended liability – bayway refining case
2. surprise – a subjective view of what the party actually knew and an objective view of what the
party should have reasonably known
BOP for material alteration lies with the party opposing the terms

§2-207 comment 4 – adding language that somehow disclaims standard warranties also materially
alters the K.

Klocek v Gateway case – know for exam - There is nothing in §2-207 that requires 2 conflicting
forms in order for 2-207 to apply – can have a form and a verbal or oral alteration alteration for
addition to trigger 2-207

WARRANTIES - WEEK 3
Warranty of Title
§2-312 – Seller warrants to buyer that title to goods sold shall be a good title
Seller also warrants that he knows of no security interest or other liens that have been placed on the
goods.
When the seller has created the goods on the specification of the buyer, the buyer is liable, provided
that the seller has complied with the buyers specification – common in trademark disputes
• Is it possible to modify or exclude warranty of title by the use of very specific language
EX sheriffs sale for cars – Can exclude warranty altogether or only giving you the title that the sheriff has in the goods, there
may or may not be somebody out there with better title to the goods.
Not going to spend a lot of time on this in class – all we need to know about title warranties in this class
Puffing – exaggerated opinion
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Quality Warranties
1. Express warranty
2. Implied warranty

1. Express Warranty - §2-313 – to create an express warranty, the seller must do something
affirmative – such as make an affirmative statement or provide a description or model or sample of
the goods
The representation that is relied on by the buyer must also go to the basis of the bargain- somehow
the representation induced the buyer to make this purchase – even if not the only reason buyer
purchased it
Don’t need formal language – “I warrant” or “we guarantee”
Mere puffing does not rise to level of express warranty

2. Implied Warranty – 2 kinds

A. Merchantability - §2-314
B. Fitness for a Particular Purpose - §2-315

A. Implied Warranty of Merchantability – §2-314- unless excluded or modified, a warranty is

implied for a K for the sale of goods, that the goods shall be merchantable provided that the seller
is a merchant for goods of that particular kind – to be merchantable the goods must be fit for the
ordinary purposes for which those goods are used

B. Implied Warranty of Fitness for a Particular Purpose – §2-315 - the seller (merchant or non
merchant seller) at the time of K has reason to know of any particular purpose for which the goods
are required and the buyer is relying on the sellers skill or judgment in selecting those goods,
there is an implied warranty that the goods be fit for that particular purpose

Implied Warranties in Food – 2 tests - harmful substances in food

1. Foreign Object/ Natural Object Test – if the substance found in food is a natural substance – no
liability, if a foreign object – liability - (glass)
2. Reasonable Expectation Test – even if the substance found is a natural substance, if there is a
reasonable expectation on the part of the buyer that the substance would be removed, than there is
liability – pit in an olive

How to disclaim warranties - §2-316

1. Express – it is virtually impossible to disclaim this – once the seller makes an express warranty, the
law does not want the seller to be able to take it away – the best way to disclaim this is not to make
one in the first place because the law does not want you to be able to get out of it.

2. Implied – 2 ways to disclaim - NEED TO KNOW BOTH OF THESE FOR EXAM

A. Implied Warranty of Merchantability – §2-316(2-3)-To disclaim an implied warranty of
merchantability, the disclaiming language MUST mention the word “merchantability,” the
disclaimer does NOT have to be in writing, but if it is in writing than MUST be conspicuous
B. Implied Warranty of Fitness for a Particular Purpose – §2-316(2-3) -To disclaim an implied
warranty of fitness for a particular purpose the disclaimer must be in writing, and the disclaimer
must be conspicuous, however it does NOT have to mention the word “merchantability”

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WEEK 4
Conspicuous - Easy to notice; obvious; attracting attention by being unusual or remarkable; noticeable

Unless the circumstances indicate otherwise, all implied warranties are disclaimed or excluded by
expressions such as: “as is” or “with all faults,” etc.
Provided that otherwise the disclaiming language is conspicuous

When the buyer before entering into the K, has examined the goods or a model, or has refused the
opportunity to examine the goods or a model, there is no implied warranty, for defects that would have
been discoverable by buyer examining the goods. The Key is that the seller DEMAND that the buyer
examine the goods, not sufficient if seller just makes them available.

An implied warranty can be excluded or modified by course of dealing, course of performance or usage
of trade

Limitations on the Warranty

§2-719 - sometimes a seller is willing to give buyer a warranty but wishes to somehow limit the scope of
liability that breach of the warranty would create, for example, limiting damages to return of the goods
or repayment of the purchase price - this is permissible under the certain circumstances that follow:
1. Limitation on consequential damages for injuries to the person IS unconscionable
2. Limitation on consequential damages for property losses it is NOT on its face unconscionable

• Where the remedy fails its essential purpose will be strickened from the K,
• A remedy fails its essential purpose when it operates to deprive either party of the “substantial
value of the bargain.” - §2-719 (comment 1)
• when a remedy fails its essential purpose, the aggrieved party is entitled to any remedy
available in the code. - §2-719(2)

§2-719 does not define the term “unconscionable” – however some courts are more likely to find a
warranty is unconscionable, or the limitation of a warranty is unconscionable, when:
Factors to consider if the terms of a K are unconscionable
1. Consumer buyer rather than a commercial buyer (because of the disparity in bargaining power)
2. The disclaiming language is on a preprinted form
3. The buyer did not have the ability/opportunity to negotiate
4. The seller has acted in bad faith (Pierce v. Catalina Yachts)

Defenses the Seller Can Raise in Warranty Actions

1. FAILURE TO GIVE NOTICE – §2-607(3) – the buyer must within a in a reasonable time, after he
discovers, or should have discovered the breach, must notify the seller of the breach, the notice need
not detail every objection that the buyer has to the product, it only has to put the seller on notice that
the transaction is troublesome.
2. LACK OF PRIVITY – 2 kinds of privity
WEEK 5
1. Vertical Privity – how far back up the distribution chain a buyer can go for relief. Can the buyer
sue the manufacturer or just the retail seller? – addresses the question: who can be sued?
EX: A man buys a power saw from the local hardware store and is injured – can the buyer sue the manufacturer?
2. Horizontal Privity – who the retail seller is liable to other than the immediate purchaser – the retail
seller – addresses the question: who can sue?
EX: woman is injured by a lawnmower that her husband purchased from hardware store – can she sue the retailer?
UCC ONLY DEALS WITH HORIZIONTAL PRIVITY SO NEED TO FOCUS ON HORIZONTAL
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§2-318 –only addresses horizontal – no code § for vertical privity

Lists 3 Horizontal Privity alternatives for states
A. – a sellers warranty extends express and implied warranties to any natural person who is in the
family or household of the buyer or is a guest in the home and receives personal injuries, but only of if
its reasonable to expect that person would use, consume, or be effected by the goods, and who is
injured in person by the breach of warranty –
• MUST BE A PART OF THE HOUSEHOLD OR A GUEST OF THE HOUSEHOLD
• LIMITED TO NATURAL PERSONS – CORPORATIONS NOT COVERED HERE
• LIMITED TO PERSONAL INJURY – PROPERY LOSS NOT COVERED
Most states have adopted this section. – MI is an A state

B. - a sellers express or implied warranty extends to any natural person who may reasonably be
expected to use, consume or be affected by the goods, and is injured in person by the breach of
warranty –
• Similar to A. except under B there is no requirement that the injured person be a member of
buyer’s family, household or guest in the buyers household.

C. – a sellers express or implied warranty extends to ANY person (not necessarily a natural person) who
may be reasonably expected to use, consume, or be effected by the goods and is injured by the
breach of warranty
• Under C there is no requirement that that the injured party be a member of sellers household or
family or a guest of the home of the buyer
• Damages are NOT limited to personal injury- can get property loss here if in a alternative C state
• Not limited to natural persons – corps can sue here as well
this is all we need to know about §2-318

Warranties Under Article 2A

Article 2A relates to finance leases

3 Parties
Lessor – usually a bank or finance company – only extends credit to lessee
Lessee – usually a business
Supplier – the party who manufactures or supplies the equipment

What happens to warranties relating to leases? RULE – Lessor does not make any warranty to
Lessee. The Lessee with warranty problems looks directly to Supplier NOT the Lessor

Key Features of Finance Leases - 2A-103(1)(g)

• The Lessor must NOT be in the business of buying and selling goods AND must have
acquired the goods in connection with the lease
• The Lessee must have knowledge of what the warranties are, either by receiving a copy of the
K between the supplier and the Lessor, or by otherwise approving it.
• “Come Hell or High Water Clause” - As soon as the Lessee receives the leased goods, the Lessee
must pay the Lessor regardless of whether or not the goods work - §2A-407

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Filling in the Gaps
At common law, if the parties omitted a major term of the K, the courts will usually find no enforceable
agreement exists. NOT the case under UCC, the UCC plugs in gap fillers to fill in missing details to
make K enforceable.

For this class only need to know these 7 -

§2-305 – Reasonable Price at the Time of Delivery - parties can conclude a K, even though the price
is not settled – the price will be a “reasonable price at the time of delivery”

§2-306 – The Requirement/Output K – such actual requirement or output that may occur in good faith
- an obligation is imposed on the seller to produce the # of “widgets” required in good faith
and an obligation is imposed on the buyer to purchase the amount of widgets the seller
produces in good faith.

§2-307 – Single Delivery - unless otherwise agreed to, all goods under a K, must be tendered in a
single delivery before payment is due.

§2-308 - Place for Delivery @ Sellers Business - unless otherwise agreed, the place for delivery of
goods is the sellers place of business, if the seller does not have a place of business, the
place of delivery is the sellers home – basically buyer must pick up goods.

§2-309 – time for delivery, if not specified, is a “reasonable period of time”

§2-310 – payment for goods is due at the time and place the buyer is to receive the goods

§2-311 – an agreement for sale which is otherwise sufficiently definite to be a K, is not made invalid
because it leaves particular terms of performance to be specified by one of the parties.

WEEK 6
Perfect Tender Rule
Perfect Tender Rule – §2-601 – the goods must conform to the K in every respect, if they not, they
buyer may:
1. Accept the whole,
2. Reject the whole,
3. Accept any commercial unit and reject the rest

3 Exceptions to Perfect Tender Rule

1. seller has right to cure non conformity if time of performance has not passed - if buyer rejects and
seller reasonably believes that buyer will accept the non conforming goods, the seller gets an
additional reasonable extension of time to cure. - §2-508
2. the parties can agree not to follow the perfect tender rule – the parties can agree that the goods
do not have to be perfect
EX: banana bread example – running a bakery, want brown bananas, but if deliver brown bananas to Kroger, not good
3. Installment K’s – 2 ways for buyer to reject partial shipments
A. In an installment K, the buyer can reject any particular shipment where the nonconformity
“substantially impairs the value” of that shipment or installment only
B. where the nonconformity cannot be cured or the seller refuses to give adequate assurances of the
cure
Buyer Rejection of the Entire K - Buyer can only reject the entire K ONLY where the non conformity of
a particular installment, substantially impairs the value of the whole K. - §2-612
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Shaken Faith Doctrine – part of Perfect Tender Rule

If a reasonable person in the buyers positions would not have accepted the sellers remedy for cure
because the buyers faith in the product has been so shaken, the seller may be denied the right to cure
in this circumstance. - Wilson v. Scampoli case

The sellers right to cure normally includes the right to make minor repairs and adjustments; in those
situations where the seller can do so without subjecting the buyer to unreasonable inconvenience, risk,
or loss.

Upon the rightful rejection of goods, the buyer has the right to hold onto the goods as a type of security
interest. §2-711(3)

Rejection of Goods – §2-602

1. Buyer can reject goods for any nonconformity, but the rejection must occur in a “reasonable time”
after delivery.
2. The buyer must “timely notify” the sellers of rejection.
3. The buyer must not take any action inconsistent with the seller’s ownership of the goods.

Once the buyer has rejected the goods, the buyer must also take “reasonable care of the goods” at the
sellers expense – EX: UPS delivery lobster

The rejection of goods not in writing is deemed to have been waived.

3 ways a buyer has accepted the goods - §2-606

Acceptance occurs when:
1. After a reasonable opportunity to inspect the goods, the buyer indiciates to the seller that the goods
are acceptable
EX: buyer inspects goods and admits they are nonconforming but decides to accept anyway.
2. Buyer fails to reject the goods after inspection. – stays silent
EX: Buyer just stays silent
3. Buyer takes any action inconsistent with the sellers ownership of the goods.
EX: if a car, driving the car;

Buyers Right to Inspect Goods - §2-513

Buyer has a right to inspect the goods, before payment is due, at any reasonable place and time
BEFORE acceptance.

ONLY 3 times a Buyer can Revoke Acceptance - §2-608 – IF ACCEPTANCE VALIDLY REVOKED,
IS THE SAME AS IF BUYER REJECTED GOODS IN THE FIRST PLACE
1. The buyer may revoke his acceptance of a lot or commercial unit only where nonconformity
substantially impairs its value to that buyer – (subjective)
2. The buyer must show his revocation was based on the “reasonable assumption” that the defect
would be cured or there was difficulty in discovering the defect in the non conforming good.
3. Revocation of acceptance must occur in a “reasonable period of time” after the buyer discovers or
should have discovered the substantial impairment.

Substantial Impairment – for purpose of revocation of acceptance is a “subjective” determination - Did

THIS buyer believe that the defect has substantially impaired the value of the goods to him?

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There is a higher standard of revocation of acceptance is imposed on the buyer as opposed to an
outright rejection of the goods in the first instance.

The purpose of requiring a higher standard for revocation of acceptance is prevent the buyer from
revoking for trivial defects and to prevent the buyer from allowing the goods to depreciate then
returning them. Ramirez v. Autosport

Know the difference between “revocation of acceptance” and “outright rejection.”

WEEK 7
Risk of Loss: No Breach by Either Party
Risk of Loss: Breach by Either Buyer or Seller
HANDOUT COVERS EVERYTHING NEED TO KNOW ABOUT RISK OF LOSS FOR EXAM

Impossibility of Performance - §2-613

When K requires for its performance that the goods be identified and the goods are destroyed, due to
no fault of either party, and this occurs BEFORE Risk of Loss has passes to buyer,
If the loss is total, the K is avoided
If the loss is partial, the buyer can treat the K as voided, or the buyer can accept the K with due
allowances in K price to the seller. Saw this in PROBLEMS 65 & 66

Undue Frustration/Commercial Frustration/Impossibility of Performance– not applicable if Risk of

Loss (ROL) is foreseeable or if the party who is obligated to perform, has assumed the risk–Arabian case

As a general rule, courts are reluctant to accept rising prices as the excuse for Avoiding the K -§2-615
3 conditions must occur before performance can be excused because of rising prices
1. Contingency must occur
2. Performance must be made impracticable
3. Non performance for the contingency must be a basic assumption of which the K was made
Louisiana Power case - §2-615?

WEEK 8
REMEDIES
Sellers Remedies
The guiding principal for all K remedies is §1-106
§1-106 says: The goal of all K remedies is to put the injured party in as good a position as he would
have been in, had the other party totally performed.

The remedies that are available to a Seller for K breach, depend on whether or not the Buyer has made
a technical acceptance of the K as defined in §2-606

Sellers Remedies Where the Buyer Has Already Accepted the Goods
1. The seller? can bring an action for K Price under §2-709. If acceptance had occurred, the seller may
sue for the K price, together with any incidental damages. Think of §2-709 as being a type of Specific
Performance Clause for sellers that order the buyer to make payment.
3 Circumstances When a K for Price Action is Appropriate -§2-709 - (Buyer has already accepted goods)
1. When the buyer has made a technical acceptance
2. The risk of loss has passed to the buyer and the goods were destroyed
3. Where the buyer will not accept the goods and there is no market to resell the goods

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Sellers Remedies Where the Buyer Has Not Accepted the Goods – 3 kinds
1. Seller Resells the Goods - §2-706 - Seller can resell the goods and recover the difference between K
price and resale price together with incidental damages as long as resale is made in good faith and is
commercially reasonable.
The resale can be private or public. If it is a private than reasonable notice must be given to the buyer. If it is a public
resale there are a number of other requirements: advertising, timing, method of sale, etc.

2. A. Refuse to Resell and Sue Buyer for Damages - §2-708(1) and (2) - If the seller chooses not to
resell the goods, the seller can sue for the difference between the K price and market price
along with incidental damages under (1).
B. Lost Volume Seller - If the seller is a Lost Volume Seller, a seller who has a virtually unlimited
inventory of the good, then the seller can sue under (2) which says the seller is entitled to receive
lost profits including “reasonable overhead” that the seller would have made under the K, together
with incidental damages.
The seller has the choice of which remedy to pursue.

3. Unfinished Goods: Sell for Scrap Value or Finish and Sell Finished Product - The seller’s right to
identify the goods or to salvage unfinished goods. Where the goods to the K have not already been
identified at the time the breach occurs, upon learning of the breach, the seller can identify the goods
to the K that are in his possession, and then proceed to any of its other K remedies. Also, under this
provision, where the goods are unfinished at the time of the breach, the seller can with his reasonable
commercial judgment, can complete the manufacture of the goods and resell the goods for scrap
value or proceed in any other reasonable manner.

Buyers Remedies
The buyer’s remedies depend on whether or not the buyer has made a technical acceptance of the goods.

Buyers Remedies When the Buyer HAS Accepted the Goods

Sue for damages under §2-714 - The buyer may get the difference between what the buyer was
promised and what the buyer got. The buyer can also get incidental and consequential damages here.
Incidental damages – type of damages that the buyer incurs in trying to figure out if there has been a
breach or trying to avoid the breach.
EX: costs of inspecting the goods, storage costs, cost of transportation, etc.
Consequential Damages – damages buyer incurred because of breach, that buyer would not have
incurred if there was no breach
EX: buyer misses an opportunity to resale the goods, goods are delivered to the buyer and explode (propane tank)

3 Buyers Remedies when the Buyer has NOT ACCPETED the Goods
1. Specific Performance - Buyer can get specific performance under §2-716 when the goods are
unique or “other proper circumstances.” UCC does not define “other proper circumstances, can argue anything.
2. Cover – §2-712 – allows the buyer to purchase substitute goods and sue seller for diff between the K
price and cover price. –
If the buyer chooses to cover, the buyer must:
1. Act in good faith
2. Without unreasonable delay
3. Must make a reasonable purchase of the substitute goods
3. Buyers Damages - §2-713 - If the buyer chooses not to cover, the buyer can recover the difference
between the K price and the market price. Together with incidental and consequential damages. –
Can only get this if buyer chooses NOT to cover. - §2-713 (comment 5)
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Anticipatory Repudiation (AR) – a positive expression, either by words or conduct, of one parties intent
not to perform when performance is due. The measure of damages in AR is the difference between the
K price and the price of the goods at the end of a “reasonable period of time to cover.” - §2-713

Statute of Limitations (SOL) - §2-725 – an action for breach of K must be brought within 4 years after
the cause of action accrues.
By agreement the parties may reduce the SOL down to 1 year, but cannot extend it beyond 4 years.

A cause of action accrues when the breach occurs. A breach of warranty accrues upon the tender of
delivery EXCEPT where the warranty explicitly extends to future performance, in which case the cause
of action is said to accrue when the breach is discovered or should have been discovered.

Wk 9 Review Begin 2nd Review Here

NEGOTIABLE INSTRUMENTS
2 Types of Negotiable Instruments
Note – a promissory undertaking involving 2 parties in which 1 party called the maker –agrees to pay a
sum of money to another party the payee – a note is always a 2 party instrument –
Draft (common check)- is a 3 party instrument – is written by 1 party called the drawor – to another
party called the drawee (usually a bank) – that directs the drawee to pay money to a third party
(payee) – a draft is nothing more than a common check –
3 primary types of drafts
1. Cashiers Check – a check drawn by the bank again the seller
2. Tellers Check – a check that is drawn by one bank on another bank that is payable to the other bank
3. Certified Check – starts off as a plain old personal check that is drawn on the bank, then the bank
that it is drawn on, stamps their name on it, when they stamp their name on it, it certifies the check,
certifies that the funds are there

Negotiability as a concept
For Art III to apply, the instrument must be negotiable. Defined in §3-104
If the instrument is negotiable a couple of things happen
1. it triggers the application of ART III and all of the other possibilities stated in ART III such as Holders
in Due Course.
A holder in Due Course – a super Plaintiff –

If the instrument is NOT negotiable, than it is nothing more than an ordinary K that is being passed
around from individual to individual subject to all of the defenses that are raised in a K action – under
the rules of K law
If it is not negotiable, it is subject to the avoidance doctrine.

What are the 7 Requirements for Negotiability? - §3-104 – if don’t meet these requirements it is not a
“negotiable instrument.” It might be an instrument, but it is not negotiable.
Taylor reads §3-104(a)(1-3)
7 Super Requirements for a document to be negotiable
§3-104(a)(1-3) boils down to this:

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There are 7 requirements for negotiability.
1. Instrument must be in writing to be negotiable
2. Instrument must be /s/
3. Instrument must contain an unconditional promise or order to pay
4. Instrument must be for a fixed amount of $
5. Instrument must be a courier without luggage
6. Instrument must be payable on demand or at a definite time
7. Instrument must be payable to bearer or to order

Wk 10
There are 7 requirements for negotiability.
1. Instrument must be in writing to be negotiable -§3-104 comment 1 – a promise is a written
undertaking to pay money signed by the person undertaking to pay. An order is a written instruction to pay
money signed by the person giving the instruction. Thus, the term “negotiable instrument” is limited to a signed
writing that orders or promises payment of money.

You cannot have an ORAL negotiable instrument.

2. Instrument must be /s/- §1-201(39) -"Signed" includes using any symbol executed or adopted with by
a person with present intention to authenticate a writing. §1-401(b) - A signature may be made (i) manually or
by means of a device or machine, and (ii) by the use of any name, including a trade or assumed name, or by a
word, mark, or symbol executed or adopted by a person with present intention to authenticate a writing.

3. Instrument must contain an unconditional promise or order to pay- §3-106 - the

instrument must be a clean document that is not cluttered up by conditions or promises. You cannot have an
express conditions to payment. Its ok for the instrument to discuss the underlying transaction itself so long
as it does not incorporate by reference the terms of the underlying transaction into the instrument. It is also
permissible for an instrument to reference another writing for a statement of rights with respect to: Payment of
collateral, Prepayment of an obligation; or an acceleration clause

4. Instrument must be for a fixed amount of $- We have to be able to calculate the amount of
money that is required to be paid. - the instrument must be payable in money - What is money? §1-201(24)
Any currency that is blessed by any government on the planet as the official currency is money. - Variable
interest rates are permitted so long as they can be calculated.

5. Instrument must be a courier without luggage- §3-104 - The writing must not state any other
undertaking or instruction by the person promising or ordering payment to do any act in addition to the
payment of money
3 exceptions (when a writing can contain other instructions other than the payment of money)- §3-104(a)(3)
1. it can contain promises to give or to protect collateral
2. it can contain a confession of judgment clause (where a person avoids trial by allowing an
attorney to enter a verdict against him)
3. When the obligor who is promising to pay waives the protection of any law

6. Instrument must be payable on demand or at a definite time- §3-108 – An instrument is

payable on demand if it says that it is payable on demand, or if it says its payable at sight, or otherwise
indicates that it is payable at the will of the holder, or if it does not state any time of payment. The holder of an
instrument must be able to tell when it comes due, or the instrument is non-negotiable; however, there is
no requirement that the instrument be dated. An undated instrument that specifies no time of payment is
treated as an instrument payable on demand by the holder.

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• Predating and postdating of checks is permitted without destroying the payment on
demand or at a definite time requirement.
2 areas that are frequently litigated concerning this requirement
1. Acceleration Clauses: Speed up the time of payment. Does not hurt the holder, the holder gets paid
sooner. Therefore, acceleration clauses are always acceptable without destroying the negotiability of
the instrument.
2. Extension Clauses: Delay or postpone the time of payment. Are okay so long as the extension is
to a further definite time. - Can’t say: Payable Jan 31st, unless my crops fail then whenever I get around
to it. Not definite.

7. Instrument must be payable to bearer or to order- §3-104 - A negotiable instrument

means that the instrument is payable to bearer or to order.
Bearer paper is payable to whom holds it
Order paper is payable to person named, or to whomever that person further designates
Checks no longer required to have bearer, or order language. §3-104(c)
Notes must still be written “pay to bearer” or “to order” language

An instrument (promise or order) is made payable to bearer if it: §3-109(a)

1. says that it is payable to bearer or to the order of bearer or otherwise indicates that the person in
possession of the promise or order is entitled to payment;
2. If the instrument does not state a payee;
3. States that it is payable to cash or to the order of cash or otherwise indicates that it is not payable
to an identified person

A promise or order that is NOT payable to bearer IS payable to order if: §3-109(b)
• it is payable to the order of an identified person,
• Or it is payable to an identified person.
An instrument (promise or order) payable to bearer may become payable to an identified person if it is
specially indorsed. An instrument payable to an identified person may become payable to bearer if it is
indorsed in blank. -§3-109(c)

One more thing that the case covered and that we looked at. This assumes also that the instrument is
not your regular appearing on the case. Remember that these 7 requirements that we looked at, that
these are the gist of §3-104. Keep in mind that also in 3-104 is the requirement that the instrument is
not so irregular looking on its face as to put a person on notice that it may be fraudulent.

Transfers and Negotiations

3 stages of an Negotiable Instrument
Stage 1- Issuance
Stage 2- Transfers -Every legally significant movement of the paper between issuance and presentment
• Physical transfer of the instrument vests in the transferee whatever right the transferor
had in the instrument
• If the physical transfer is done in a way to make the transferee a holder, then the transfer
is called a negotiation
Stage 3- Presentiment

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Stage 2 Transfers CONT--How do you negotiate the paper?
In order for there to be a negotiation, you first have to be a holder as defined by §3-201
What does it take to be a holder of Order paper?
A. The instrument has to be indorsed by the proper person identified (who thereby becomes
the endorser), and
B. The instrument must be delivered to the transferee (who thereupon qualifies as a holder)
C. Note: an endorsement is a /s/ placed on an instrument by the payee or any later
transferees
What does it take to negotiate Bearer paper?
. Bearer paper needs no endorsement
. Must be in possession of the transferee (who thereupon qualifies as a holder)

Special and Blank endorsements

• Order Paper: When a payee wants to transfer order paper to another person, the drawee bank
will require the payee’s endorsement. §3-501(b)(2)(iii)
• 2 types of endorsements:
1. Blank endorsement- when the payee simply /s/ the back of the instrument. Legal
effect: It converts the paper into bearer paper.
2. Special endorsement- This occurs when the payee specifies a new payee by
writing “pay to the order of (name)” on the back of the instrument: the new payee becomes
a holder as soon as the instrument is delivered. (do not need “pay to the order of” here)
The legal effect of this is to preserve the “order” character of the instrument. The new
payee becomes a holder as soon as the instrument is delivered to him.
• Specially endorsed instruments can only be endorsed by the person identified

Miscellaneous Endorsement Issues

What if a check is made payable to two different individuals connected with the word AND or OR?
1. If an instrument is payable to 2 or more people (“X AND Y”), NOT (“X OR Y”) it is payable to all
of them and may be negotiated, discharged or enforced only if all /s/ MUST be on it. - §3-110(d)
2. If an instrument is payable to two or more persons with “OR” in it, (“X OR Y”), it is payable to any
of them and may be negotiated, discharged, or enforced by any of them individually or all of them in
possession of the instrument. Only 1 /s/ is required to negotiate this. -§3-110(d)
3. If an instrument payable to two or more persons and separated by a COMMA (“X, Y”) Only
1 /s/ is required - §3-110(d)
4. If the name on the instrument is misspelled. The payee can endorse the instrument with the
name that is on the instrument or his in his correct name, or in both names. -§3-204(d) If you want
to use an allonge, it has to be affixed to the instrument in order for a valid endorsement to occur. –
stapled -§3-204(d)

Forgery of the Payee’s Name

1. Order paper – a forgery of a payee’s name means that proper negotiation has NOT occurred. No
one can subsequently become a holder of that instrument no matter how innocent.
2. Bearer paper – forgery here does not effect holder status

Forgery of the Payees Name

Concerning Order Paper – anytime you have a forgery of the Payees name, it means that no proper
negotiation has occurred. No one who accepts the paper thereafter can become a holder no matter
how innocent.

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Week 11
Requirements for becoming a Holder in Due Course §3-302
1. Holder
2. Value
3. Good Faith and Without Notice

1. HOLDER - §3-201
What is a holder? Only a holder can become a holder in due course – someone who takes the
instrument through a series of valid negotiations.
Bearer Paper – to become a holder, all that is necessary is for the person to be in possession of the
instrument
Order Paper - only the person identified can become a holder. Provided that the person is also in
possession of the instrument.
The courts have held that the drawee bank is generally NOT considered to be a holder in due course
because the drawee bank is not taking the instrument through a series of valid negotiations but rather
is taking the instrument for presentment.

2. VALUE -§3-303
Def: The person in addition to being a holder, must pay value for the instrument. The term value is
broadly defined. Basically any kind of K1 type consideration constitutes value.
1 Exception – an unperformed promise, is not current value until the promise is at least until
performance is begun.
A depository bank has a security interest proceeds that have been deposited in the bank to the extent
that the bank has given credit for the item that has been withdrawn therefore depository bank has given
value. When credit is given by the depository bank and the customer later withdraws funds under FIFO
Rule, customer is presumed to have withdrawn his own funds first. -§4-210

FIFO – first in first out

3. GOOD FAITH AND WITHOUT NOTICE -§1-201(20) & §3-103(4)

The instrument must be accepted in good faith and without notice of any defects. Good faith and notice
are lumped together by the courts because you cant take an instrument in good faith if you have notice
of the defects. Good Faith is defined as Honest in Fact, and the observance of reasonable commercial
standards of fair dealing. The holder of a note is not under a duty to investigate possible defenses
But the closer the holder of the note it is to the underlying transaction, the lesser the need to give that
person holder in Due Course status. Furthermore, on that same point, the holder may not intentionally
close his eyes to defenses or defects in the instrument. (General Investments v. Angeleni)

Knowledge by the holder of a default, of an overdue interest payment would not disqualify a holder
from becoming a Holder in Due Course BUT knowledge of an overdue BALANCE (principle) will
disqualify a holder from becoming a Holder in Due Course. - §3-304
Checks are presumptively overdue 90 days after they are dated. This automatically puts the person on
notice of the defect. -§3-304(a)(2)

The Shelter Rule - §3-203

The transferee gets whatever right the transferor had in the instrument. If the transferor was a HIDC,
the transferee gets the rights of a HIDC. Even though the transferee does not qualify as a Holder in
Due Course on his own. If the transferee engages in fraud or illegality, he cannot inherit the rights of a

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holder in due course. If the transferee is only aware of fraud or illegality that will not effect his ability to
obtain the rights of a HIDC as long as he did not participate in the wrongdoing.

1. Real and personal defenses

2. Forgery
3. The underlying obligation
4. The makers obligation
5. the drawers liability
6. The drawee’s obligation
7. signature by agents

Week 12 review
REAL AND PERSONAL DEFENSES
§3-305 divides defenses into 2 categories
1. Real Defenses –effective against a HIDC
2. Personal Defenses – NOT effective against a HIDC

Real Defenses
Only one effective against against a holder in due course
§3-305 (a)(1) - an obligor (the person who is being sued by the HIDC), can raise ONLY the following real
defenses against a HIDC: 6 Real Defenses
1. Infancy
2. Duress
3. Lack of Legal Capacity
4. Illegality
5. Fraud in the Factum - the person must show that he had neither knowledge or a reasonable
opportunity to learn of the essential terms of the instruments
6. Insolvency (bankruptcy)

These are considered to be real defenses against a holder in due course to the extent that the
instrument would be deemed void under the Laws of that state.

If the instrument is only deemed to be VOIDABLE under the laws of that particular state, than
these will be deemed to be personal defenses

Personal Defenses - §3-305 (a)(2-3)

All other defense including claims in recoupment are ineffective against a holder in due course
3 Personal Defenses
1. Failure of Consideration – the goods didn’t work.
2. Fraud in the Inducement
3. Negligence

Forgery – §3-401
A person is not liable on an instrument unless that person has /s/ the instrument
If a persons /s/ is not authorized it is ineffective against that person, because he is not a party to that
transaction. - §3-403

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When an identified persons /s/ is required for negotiation (order paper), no one who takes the
instrument thereafter can qualify as a HIDC, no matter how innocent.
The forgery of order paper (where /s/ of the payee is required) is a REAL Defense, against a HIDC.
While the holder of bearer paper is deemed to only be a PERSONAL Defense.
A Special Rule Applies to Forgery of Travelers Checks – §3-106(c) comment 2 – if the purpose of
the /s/ on the travelers check is for ID ONLY, forgery of the /s/ is a Personal Defense that is ineffective
against a Holder in Due Course. – ON EXAM ALWAYS ASSUME /S/ IS FOR ID ONLY

The Underlying Obligation - §3-310(b)

Codifies the common law doctrine of Merger – if a note or uncertified check is taken for an obligation,
the obligation is suspended until the check or note has been dishonored or paid. What this means is
that, until this occurs, the holder of the note or check may NOT sue on the underlying obligation.
Cashiers Checks - §3-310(a)- payment by a cashiers check discharges the underlying obligation
immediately, just as if the person had paid in cash.

THE NATURE OF LIABILITY

The Makers Obligation – §3-412
The maker has primary liability on a note, which means that the payee looks first to the maker of the
note for payment on the note. If there is more than 1 maker than both co-makers have joint and several
liability with the right of contribution against each other.

The Drawors Obligation - §3-414

This applies to checks - Unlike the maker of the note, the drawor has only secondary liability on the
check. The Drawors obligation only arises after presentment, dishonor, and notice of dishonor of the
check.

Presentment - def in §3-501 – there is a demand for payment made by the person who is entitled to
enforce the instrument.

Dishonor – def in §3-502(b) – a check is dishonored when the drawee bank either fails or refuses to
pay the instrument

The drawee bank has a right under §3-501(b) to require “reasonable ID” from the payee and unless
reasonable ID is presented, presentment is not proper. In that case there has been no dishonoring of
the check. Messing v. Bank of America.

Notice of the dishonor must be given to the drawor or makor in a timely manner and such notice must
be communicated by any reasonable means. §3-503

A person can waive the right to receive notice of presentment, honor and dishonor. §3-504

Drawees Obligations - §3-409

The drawee bank is not liable on a check until the drawee bank accepts the check.
Acceptance means a /s/ agreement by the bank indicating that they are accepting the check and will
pay it. - Normally the bank stamps the check.

Signature by Agents - §3-402

A agency can avoid personal liability on an instrument ONLY if the agent indicates unambiguously that
the agent is signing in a representative capacity.

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Week 13 Review
Endorsers Obligation
Once payee /s/ the back of an instrument, the payee automatically incurs the obligation of the endorser
under §3-204. Anybody else who /s/ the instrument for the purposes of negotiating it also incurs the
obligation of an endorser
The Obligations of an Endorser - §3-415
• Endorsers promise to pay the instrument to the person entitled to enforce the
instrument
• The endorsers obligations are secondary
• Before obligation arises, must first be presentment, dishonor, and notice of
dishonor.
• An Endorser may disclaim liability by writing on the back of a check “without
recourse.” - §3-415(b)
• An endorser who is sued on the instrument may bring in his co-endorsers by
“vouching them in” so to speak -§3-119(there is a certain notice requirement that the endorser must have to
“vouch in” his co-conspirators)
Suretyship
Whether it’s intended or not, when look at the endorsers obligations discussed in §3-415
An endorser becomes an surety of all parties that /s/ the instrument prior to him
In Art III a surety is called an accommodation party
In Art III Principle is called the debtor or the accommodated party
In Art III Creditor is called the person entitled to enforce the instrument
In any surety situation always 3 K’s involved:
K1 – principle (debtor) and creditor
K2 – surety and creditor
K3 – surety and principle (debtor)

In addition to the right to seek reimbursement, a surety who is forced to pay has several other
legal remedies available to him against the principle.
1. Exoneration – compels principle to perform at maturity
2. Subrogation – once a surety pays off a creditor he steps into the shoes of the creditor, and when he
does, he takes on whatever legal rights the creditor had against the principle. (EX: leins on the property,
collateral the creditor has paid)
3. Contribution – this occurs when the surety seeks partial reimbursement from his co-surety’s.
4. Strictissimi Juris – if a creditor releases the debtor (principle) from liability or gives Principle an
extension of time to pay, the surety is also discharged unless:
1. Surety Consents
2. Creditor informs the principle of the preservation of surety’s rights against the Principle
3. The Surety who dislikes the modified agreement then has the right to ignore it and exercise his
usual rights to seek: exoneration, subrogation, etc.

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Surety Surety
Accommodated
Party

K3 K2

Creditor (holder)
Principle (debtor) Person entitled to
Accommodated enforce instrument
party K13

Under §3-605(e), if a creditor requires a borrower to give collateral, and the collateral is impaired in any
way by the creditor, than the obligations of any endorser or surety will be discharged

A couple of Different ways in which a creditor can impair collateral. - §3-605(g)

This includes the right to record collateral, the right to perfect collateral, improperly releasing the
collateral to the principle, failure to preserve the value of collateral, etc.

BANKS AND THEIR CUSTOMERS

Properly Payable Rule - §4-401
When a bank can tap into a customers account to pay an item
§4-401(a) an item is properly payable when it is authorized by the customer and is in accordance with
any agreement between the customer and bank.
Generally if a bank violates the properly payable rule, it must put the $ back into customers account.

§4-401(c) - A bank may pay a postdated check unless the customer has given special notice to the
bank not to pay the check – if that has happened (if this occurs the bank has NOT violated the properly payable
rule Unless the customer has given special notice to lookout for a particular postdated check).

Forgery of the Drawors Name under Properly Payable Rule - Forgery keeps the check from becoming
properly payable. If the drawors name is forged and the bank pays the item, the bank has violated the
properly payable rule

Checks that are more than 6 months old are considered to be stale under §4-404. Therefore those
checks are not properly payable

A bank may pay a check, an item, even if it creates an overdraft in customers account without violating
the Properly Payable Rule - §4-401(a)

Wrongful Dishonor – §4-402

Whenever a bank makes an improper payment on a customers account, causing other checks to be
dishonored, the customer may recover from the bank “all actual damages,” including any consequential
damages - §4-402(b)
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Death or Incompetency of the Customer - §4-405

• The common law rule that death or incompetency of a Principle automatically
revokes the authority of an agent to act, does NOT apply to banks and their customers
• Under §4-405 neither death nor incapacity of the customer revokes the banks
authority to act or to pay an item until such time the bank knows of the death or incapacity and has
had a reasonable opportunity to act on it.
• Even with knowledge of a death or incompetency, a bank may for 10 days
thereafter, pay checks unless ordered to stop payment by a person claiming an interest in the
account. The idea behind this provision is to stop putting routine checks through probate
unnecessarily.

Enforcement of Instruments
The primary definition of a person entitled to enforce the instrument is that of a Holder, but the law has
expanded that concept to provide holder status to other persons who do NOT technically qualify as
holders. Including these individuals:
1. Non holders who are in possession of the instrument, who have the rights of the holder.
EX: The Drawor forgets to endorse a check made payable to the Payee – that person has the rights of a holder and the
law considers that person to be a holder
2. Depository Bank where the instrument has been deposited in the bank unendorsed - §4-205
The law says there that the bank for those purposes is considered to be a holder even though the
person who deposited the check in the bank has forgotten to endorse it.
3. §3-309 – this extends holder to someone who is entitled to enforce the instrument when the
instrument has been lost or stolen.
EX: It can be established that this person is entitled to enforce the instrument but the dog ate the check.

Presentment Warranties – §4-208(a)

Once the Drawee bank pays a draft, the person obtaining payment at any previous transferor of the
bank warrants to the Drawee bank:
1. That the warrantor was the person who is entitled to enforce the draft
AND
2. Draft hasn’t been altered
AND
3. The warrantor has no knowledge that the signature of the Drawor is unauthorized

Transfer Warranties - §4-207(a)

A customer or collecting bank also gives warranty assurances to transferees and any collecting bank,
including the following warranties
1. That the warrantor is the person entitled to enforce the item
2. All /s/ on the item are authentic
3. The item has not been altered
4. The item is not subject to a defense or claim in recoupment
5. The warrantor is not aware of any insolvency proceedings commenced concerning the maker or
drawor of the instrument

Conversion Liability -§3-420

The law that is applicable to the conversion of personal property also applies to negotiable instruments.
For us that means that an instrument is converted if it is taken by transfer from a person not entitled to
enforce the instrument. - §3-420(a)

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The issuer of a check is not entitled to sue the Drawee Bank for conversion. Rather the issuer may
recover from the bank under the properly payable rule - §3-420(a)(i)

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