Gap Fillers and Ambiguity

Question 1

What are the UCC default provisions used for?

Answer 1

• Used to fill in the gaps when K doesn’t address the matter, but parties are free to set default rules aside by contracting otherwise.

Question 2

What are the six gap filler provisions in the UCC?

Answer 2

• Implied warranty of title
• Implied warranty of merchantability
• Implied warranty of fitness for a particular purpose
• Express warranties
• Gap fillers for missing terms
• Obligation of good faith and fair dealing

Question 3

What is the warranty of title?

Answer 3

• For the sale of all goods, there is an implied warranty of:
  o good title to the goods;
  o rightful transfer of the goods; and
  o no liens or security interests are attached to the goods.

Question 4

How could the warranty of title be excluded?

Answer 4

• Can only be excluded or modified by:
  o specific language; OR
  o circumstances which give buyer reason to suspect seller does not claim unencumbered title.

Question 5

What is the warranty of merchantability?

Answer 5

• Goods fit for ordinary purposes for which those goods would be used.
• ONLY applies if seller is a merchant.

Question 6

How could the warranty of merchantability be displaced?

Answer 6

• specific use of the word “merchantability” and conspicuousness if in writing; OR
• any other language or circumstances that would be reasonably understood by a buyer to exclude the warranty (“as is” or patent defects).

Question 7

What is the warranty of fitness for a particular purpose?

Answer 7

• Implied warranty that goods being sold are fit for the particular purpose buyer intends to use them for.

Question 8

When would the implied warranty of fitness for a particular purpose apply?

Answer 8

• ONLY applies when, at time of contracting, seller has reason to know:
  o the particular purpose for which the goods are required; AND
  o the buyer is relying on seller’s expertise to select reasonable goods.

Question 9

How could the warranty of fitness for a particular purpose be negated?

Answer 9

• disclaimer is written, clear, and conspicuous; OR
• goods have patent defects which were easily detectable.

Question 10

What are express warranties?

Answer 10

• Goods will conform to some standard, arises whenever seller expressly makes them as part of the basis of the bargain in the following ways:
  o any affirmation of promise or fact;
  o any description of the goods; or
  o any sample or model.

Question 11

Must an express warranty use the words “warrant” or “guarantee”?

Answer 11

• Need not use words “warrant” or “guarantee” to create.
• However, vague or “sales talk” statements are considered “puffing,” not warranty.

Question 12

How does the UCC address missing terms?

Answer 12

• Under the UCC, where there are pertinent missing terms, the following default rules will fill in those missing terms:
  o Price term = Reasonable price at time established by the K for delivery.
  o Time term = Reasonable time.
  o Place of delivery term = Seller’s place of business (i.e., FOB seller).

Question 13

How does the common law address a missing price term?

Answer 13

f one party performs services at the request of another, but no price is discussed in advance, then CL default rule applies (reasonable value for services rendered).

Question 14

What constitutes good faith and fair dealing?

Answer 14

• Good faith = honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.

Question 15

When does the obligation of good faith and fair dealing take effect?

Answer 15

• Good faith obligation where terms of K leave critical term, such as price, satisfaction, or quantity open to the determination of one party.
• This rule is found both in the UCC and common law

Question 16

What must a party do if a contract leaves the price term open?

Answer 16

• If K leaves price to be fixed by one of the parties, then that party must fix the price in good faith.

Question 17

What must a party do if the contract contains a satisfaction clause?

Answer 17

• If K contains a satisfaction clause or similar term, then the determination as to whether a party’s performance obligation must be exercised in good faith.
  o EXAMPLE: A commercial developer and the seller of a piece of land enter into a contract. The developer places a condition on his purchase of the land that the seller first acquires “satisfactory leases” for the future occupancy of the land. The developer must determine in good faith whether or not the future leases are “satisfactory.”

Question 18

What are two types of open quantity terms?

Answer 18

• Output contracts
• Requirements contracts

Question 19

What are output contracts?

Answer 19

• Buyer agrees to purchase all or a percentage of a seller’s output for a particular good.

Question 20

What are requirements contracts?

Answer 20

• Seller agrees to supply the buyer with all or a percentage of the buyer’s requirements for a particular good.

Question 21

How must parties determine quantity under open quantity contracts?

Answer 21

• Under the UCC, the party entitled to determine the particular quantity of goods to be sold - either the buyer demanding delivery of his requirements or the seller demanding purchase of her output - must make that determination in good faith.
• UCC also prohibits any unreasonably disproportionate demand or tender if there was either:
  o a stated estimate; OR
  o a past course of dealing.
• EXAMPLE: Seller and Buyer are parties to a three-year contract obligating Seller to supply Buyer with the latter’s upsidasium bearing requirements for Buyer’s turbojet engine manufacturing plant. The market price for upsidasium suddenly skyrockets, and Buyer greatly increases its demand for bearings with the intention of selling them at great profit to third parties. Seller is not obligated to fill the order because Buyer’s requirements demand was made in bad faith.
• EXAMPLE: The upsidasium market remains stable, but because of a decline in the commercial aviation industry, the demand for Buyer’s engines declines precipitously and accordingly Buyer reduces its monthly demand for bearings by 90% in comparison with the previous 24 months. Although Buyer’s reduced demand was made in good faith, it is unreasonably disproportionate to its prior requirements and accordingly violates Section 2-306.

Question 22

How must a court interpret ambiguous language in a contract?

Answer 22

• Objective Meaning Trumps Subjective Meaning
  o EXAMPLE: Contractor and Homeowner enter a contract for renovations to Homeowner’s home. The contract incorporates by reference “the specifications dated 1/11/07,” which had been prepared by Homeowner and were attached to the contract before signing. Contractor mistakenly thinks that the specifications referenced were an earlier version prepared by Contractor, and he signs the contract on that understanding. The specifications prepared by Homeowner and referenced in the contract are binding on both parties.

Question 23

Under what exception would subjective meaning resolve an ambiguity?

Answer 23

• When one party has reason to know of other party’s subjective understanding, the first party is bound by that meaning.
  o EXAMPLE: The facts being otherwise as stated in the previous example, just before the parties sign the contract, Homeowner overhears Contractor tell his business partner that he was glad Homeowner had agreed to Contractor’s version of the specifications. Because Homeowner knew of Contractor’s understanding of the contractual terms, that understanding controls.

Question 24

What is the doctrine of contra proferentem?

Answer 24

• If ambiguous term is included in K, then in case of doubt it is construed against the drafter. All Ks drafted by one of the parties is subject to this rule, whether an adhesion K or one between parties of equal bargaining power.

Question 25

What kinds of extrinsic evidence can be used to fill gaps and resolve ambiguities?

Answer 25

• Usage of trade
• Course of dealing
• Course of performance

Question 26

What is usage of trade evidence?

Answer 26

• Usage of trade is any practice or method of dealing having such regularity of observance in a place or trade as to justify an expectation that it will be observed with respect to the transaction in question [what all members of the trade do].

Question 27

What is course of dealing evidence?

Answer 27

• Course of dealing is a pattern of conduct concerning previous transactions between the parties that is fairly to be regarded as establishing a common basis of understanding for interpreting their subsequent expressions and other conduct [what the parties did in their previous contracts].

Question 28

What is course of performance evidence?

Answer 28

• Course of performance is present when a particular contract involves repeated occasions for performance by a party and the other party, with knowledge of the nature of the performance and opportunity for objection to it, accepts the performance or acquiesces in it without objection [how the parties have acted under their current contract].

Question 29

When may extrinsic evidence be admissible in contracts cases?

Answer 29

• To fill in gaps (supplement terms) + resolve ambiguities (explain terms).

Question 30

When is extrinsic evidence inadmissible in contracts cases?

Answer 30

• To contradict express terms of K.

Question 31

What happens if there is a conflict between course of performance and course of dealing or usage of trade?

Answer 31

• If conflict, course of performance prevails over course of dealing and usage of trade, and course of dealing prevails over usage of trade.
• So course of performance > course of dealing > usage of trade
  o EXAMPLE: Trade Usage Can Fill in a Gap in the Terms of the Contract: A is one of many suppliers of upsidasium, and B is one of A’s long-standing customers. A fills an order by B and demands immediate payment; B refuses. It is standard practice in the upsidasium industry for purchasers to pay invoices upon delivery, and therefore B’s refusal to do so is in violation of the parties’ contract.
  o EXAMPLE: Course of Dealing Trumps Trade Usage: Same facts as the previous example except that in the past, A has regularly given B 30 days to pay for deliveries. Because this course of dealing between the parties trumps the payment-upon-delivery usage of trade, B has 30 days within which to make the required payment.
  o EXAMPLE: Express Terms of the Contract Trump Both Course of Dealing and Trade Usage: Same facts as the previous example except that, the parties’ contract contains a provision requiring payment within seven days of delivery. Because the express terms of a contract override both course of dealing and usage of trade, B has seven days within which to make payment despite the past practice of paying in 30 days and the industry practice of immediate payment.