Nebraska Uniform Commercial Code

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9-513A. Unauthorized financing statement filings; procedures; remedies.

(a) An individual personally, or as a representative of an organization, may file in the filing office a notarized affidavit, signed under penalty of perjury, that identifies a filed financing statement and states that:

(1) the individual or organization is identified as a debtor in the financing statement;

(2) the financing statement was not filed by a financial institution or a representative of a financial institution or by an agricultural input supplier or a representative of an agricultural input supplier; and

(3) the financing statement was filed by a person not entitled to do so under section 9-509, 9-708, or 9-808.

(b) An affidavit filed under subsection (a) shall include any pertinent information that the office of the Secretary of State may reasonably require.

(c) An affidavit may not be filed under subsection (a) with respect to a financing statement filed by a financial institution or a representative of a financial institution or by an agricultural input supplier or a representative of an agricultural input supplier.

(d) If an affidavit is filed under subsection (a), the filing office may file a termination statement with respect to the financing statement identified in the affidavit. The termination statement must indicate that it was filed pursuant to this section. Except as provided in subsections (g) and (h), a termination statement filed under this subsection shall take effect thirty days after it is filed.

(e) On the same day that the filing office files a termination statement under subsection (d), it shall send to each secured party of record identified in the financing statement a notice advising the secured party of record that the termination statement has been filed. The notice shall be sent by certified mail, return receipt requested, to the mailing address provided for the secured party of record.

(f) A secured party of record identified in a financing statement as to which a termination statement has been filed under subsection (d) may bring an action within twenty business days after the termination statement is filed against the individual who filed the affidavit under subsection (a) seeking a determination as to whether the financing statement was filed by a person entitled to do so under section 9-509, 9-708, or 9-808. An action under this subsection shall have priority on the court's calendar and shall proceed by expedited hearing. The action shall be brought in the district court of the county where the filing office in which the financing statement was filed is located.

(g) In an action brought pursuant to subsection (f), a court may, in appropriate circumstances, order preliminary relief, including, but not limited to, an order precluding the termination statement from taking effect or directing a party to take action to prevent the termination statement from taking effect. If the court issues such an order and the filing office receives a certified copy of the order before the termination statement takes effect, the termination statement shall not take effect and the filing office shall promptly file an amendment to the financing statement that indicates that an order has prevented the termination statement from taking effect. If such an order ceases to be effective by reason of a subsequent order or a final judgment of the court or by an order issued by another court and the filing office receives a certified copy of the subsequent judgment or order, the termination statement shall become immediately effective upon receipt of the certified copy and the filing office shall promptly file an amendment to the financing statement indicating that the termination statement is effective.

(h) If a court determines in an action brought pursuant to subsection (f) that the financing statement was filed by a person entitled to do so under section 9-509, 9-708, or 9-808 and the filing office receives a certified copy of the court's final judgment or order before the termination statement takes effect, the termination statement shall not take effect and the filing office shall remove the termination statement and any amendments filed under subsection (g) from the files. If the filing office receives the certified copy after the termination statement takes effect and within thirty days after the final judgment or order was entered, the filing office shall promptly file an amendment to the financing statement that indicates that the financing statement has been reinstated.

(i) Except as provided in subsection (j), upon the filing of an amendment reinstating a financing statement under subsection (h) the effectiveness of the financing statement is retroactively reinstated and the financing statement shall be considered never to have been ineffective against all persons and for all purposes.

(j) A financing statement whose effectiveness was terminated under subsection (d) and has been reinstated under subsection (h) shall not be effective as against a person that purchased the collateral in good faith between the time the termination statement was filed and the time of the filing of the amendment reinstating the financing statement, to the extent that the person gave new value in reliance on the termination statement.

(k) The filing office shall not charge a fee for the filing of an affidavit or a termination statement under this section. The filing office shall not return any fee paid for filing the financing statement identified in the affidavit, whether or not the financing statement is subsequently reinstated.

(l) Neither the filing office nor any of its employees shall be subject to liability for the termination or amendment of a financing statement in the lawful performance of the duties of the filing office under this section.

(m) The Secretary of State shall adopt and make available a form of affidavit for use under this section.

(n) For purposes of this section:

(1) Agricultural input supplier means a person regularly in the business of extending credit to agricultural producers; and

(2) Financial institution means a person that is in the business of extending credit or servicing loans, including acquiring, purchasing, selling, brokering, or other extensions of credit and where applicable, holds whatever license, charter, or registration that is required to engage in such business. The term includes banks, savings associations, building and loan associations, consumer and commercial finance companies, industrial banks, industrial loan companies, insurance companies, investment companies, installment sellers, mortgage servicers, sales finance companies, and leasing companies.



1-101. Short titles.

(a) Sections 1-101 to 10-103 may be cited as the Uniform Commercial Code.

(b) This article may be cited as Uniform Commercial Code— Provisions.



Annotations
    COMMENT

    Source: Former section 1-101.

    Changes from former law: Subsection (b) is new. It is added in order to make the structure of article 1 parallel with that of the other articles of the Uniform Commercial Code.

    1. Each other article of the Uniform Commercial Code (except articles 10 and 11) may also be cited by its own short title. See sections 2-101, 2A-101, 3-101, 4-101, 4A-101, 5-101, 6-101, 7-101, 8-101, and 9-101.


1-102. Scope of article.

This article applies to a transaction to the extent that it is governed by another article of the Uniform Commercial Code.



Annotations
    COMMENT

    Source: New.

    1. This section is intended to resolve confusion that has occasionally arisen as to the applicability of the substantive rules in this article. This section makes clear what has always been the case— rules in article 1 apply to transactions to the extent that those transactions are governed by one of the other articles of the Uniform Commercial Code. See comment 1 to section 1-301.


1-103. Construction of Uniform Commercial Code to promote its purposes and policies; applicability of supplemental principles of law.

(a) The Uniform Commercial Code must be liberally construed and applied to promote its underlying purposes and policies, which are:

(1) to simplify, clarify, and modernize the law governing commercial transactions;

(2) to permit the continued expansion of commercial practices through custom, usage, and agreement of the parties; and

(3) to make uniform the law among the various jurisdictions.

(b) Unless displaced by the particular provisions of the Uniform Commercial Code, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, or other validating or invalidating cause supplement its provisions.



Annotations
    Common-law claims are displaced when the Uniform Commercial Code applies. Mandolfo v. Mandolfo, 281 Neb. 443, 796 N.W.2d 603 (2011).

    COMMENT

    Source: Former section 1-102(1)-(2); former section 1-103.

    Changes from former law: This section is derived from subsections (1) and (2) of former section 1-102 and from former section 1-103. Subsection (a) of this section combines subsections (1) and (2) of former section 1-102. Except for changing the form of reference to the Uniform Commercial Code and minor stylistic changes, its language is the same as subsections (1) and (2) of former section 1-102. Except for changing the form of reference to the Uniform Commercial Code and minor stylistic changes, subsection (b) of this section is identical to former section 1-103. The provisions have been combined in this section to reflect the interrelationship between them.

    1. The Uniform Commercial Code is drawn to provide flexibility so that, since it is intended to be a semi-permanent and infrequently amended piece of legislation, it will provide its own machinery for expansion of commercial practices. It is intended to make it possible for the law embodied in the Uniform Commercial Code to be applied by the courts in the light of unforeseen and new circumstances and practices. The proper construction of the Uniform Commercial Code requires, of course, that its interpretation and application be limited to its reason.

    Even prior to the enactment of the Uniform Commercial Code, courts were careful to keep broad acts from being hampered in their effects by later acts of limited scope. See Pacific Wool Growers v. Draper & Co., 158 Or. 1, 73 P.2d 1391 (1937), and compare section 1-104. The courts have often recognized that the policies embodied in an act are applicable in reason to subject matter that was not expressly included in the language of the act, Commercial Nat. Bank of New Orleans v. Canal-Louisiana Bank & Trust Co., 239 U.S. 520, 36 S.Ct. 194, 60 L.Ed. 417 (1916) (bona fide purchase policy of Uniform Warehouse Receipts Act extended to case not covered but of equivalent nature), and did the same where reason and policy so required, even where the subject matter had been intentionally excluded from the act in general. Agar v. Orda, 264 N.Y. 248, 190 N.E. 479 (1934) (Uniform Sales Act change in seller's remedies applied to contract for sale of choses in action even though the general coverage of that act was intentionally limited to goods "other than things in action".) They implemented a statutory policy with liberal and useful remedies not provided in the statutory text. They disregarded a statutory limitation of remedy where the reason of the limitation did not apply. Fiterman v. J. N. Johnson & Co., 156 Minn. 201, 194 N.W. 399 (1923) (requirement of return of the goods as a condition to rescission for breach of warranty; also, partial rescission allowed). Nothing in the Uniform Commercial Code stands in the way of the continuance of such action by the courts.

    The Uniform Commercial Code should be construed in accordance with its underlying purposes and policies. The text of each section should be read in the light of the purpose and policy of the rule or principle in question, as also of the Uniform Commercial Code as a whole, and the application of the language should be construed narrowly or broadly, as the case may be, in conformity with the purposes and policies involved.

    2. Applicability of supplemental principles of law. Subsection (b) states the basic relationship of the Uniform Commercial Code to supplemental bodies of law. The Uniform Commercial Code was drafted against the backdrop of existing bodies of law, including the common law and equity, and relies on those bodies of law to supplement its provisions in many important ways. At the same time, the Uniform Commercial Code is the primary source of commercial law rules in areas that it governs, and its rules represent choices made by its drafters and the enacting legislatures about the appropriate policies to be furthered in the transactions it covers. Therefor, while principles of common law and equity may supplement provisions of the Uniform Commercial Code, they may not be used to supplant its provisions, or the purposes and policies those provisions reflect, unless a specific provision of the code provides otherwise. In the absence of such a provision, the Uniform Commercial Code preempts principles of common law and equity that are inconsistent with either its provisions or its purposes and policies.

    The language of subsection (b) is intended to reflect both the concept of supplementation and the concept of preemption. Some courts, however, had difficulty in applying the identical language of former section 1-103 to determine when other law appropriately may be applied to supplement the Uniform Commercial Code, and when that law has been displaced by the code. Some decisions applied other law in situations in which that application, while not inconsistent with the text of any particular provision of the code, clearly was inconsistent with the underlying purposes and policies reflected in the relevant provisions of the code. See, e.g., Sheerbonnet, Ltd. v. American Express Bank, Ltd., 951 F. Supp. 403 (S.D.N.Y. 1995). In part, this difficulty arose from comment 1 to former section 1-103, which stated that "this section indicates the continued applicability to commercial contracts of all supplemental bodies of law except insofar as they are explicitly displaced by this act". The "explicitly displaced" language of that comment did not accurately reflect the proper scope of Uniform Commercial Code preemption, which extends to displacement of other law that is inconsistent with the purposes and policies of the Uniform Commercial Code, as well as with its text.

    3. Application of subsection (b) to statutes. The primary focus of section 1-103 is on the relationship between the Uniform Commercial Code and principles of common law and equity as developed by the courts. State law, however, increasingly is statutory. Not only are there a growing number of state statutes addressing specific issues that come within the scope of the Uniform Commercial Code, but in some states many general principles of common law and equity have been codified. When the other law relating to a matter within the scope of the Uniform Commercial Code is a statute, the principles of subsection (b) remain relevant to the court's analysis of the relationship between that statute and the Uniform Commercial Code, but other principles of statutory interpretation that specifically address the interrelationship between statutes will be relevant as well. In some situations, the principles of subsection (b) still will be determinative. For example, the mere fact that an equitable principle is stated in statutory form rather than in judicial decisions should not change the court's analysis of whether the principle can be used to supplement the Uniform Commercial Code— subsection (b), equitable principles may supplement provisions of the Uniform Commercial Code only if they are consistent with the purposes and policies of the Uniform Commercial Code as well as its text. In other situations, however, other interpretive principles addressing the interrelationship between statutes may lead the court to conclude that the other statute is controlling, even though it conflicts with the Uniform Commercial Code. This, for example, would be the result in a situation where the other statute was specifically intended to provide additional protection to a class of individuals engaging in transactions covered by the Uniform Commercial Code.

    4. Listing not exclusive. The list of sources of supplemental law in subsection (b) is intended to be merely illustrative of the other law that may supplement the Uniform Commercial Code, and is not exclusive. No listing could be exhaustive. Further, the fact that a particular section of the Uniform Commercial Code makes express reference to other law is not intended to suggest the negation of the general application of the principles of subsection (b). Note also that the word "bankruptcy" in subsection (b), continuing the use of that word from former section 1-103, should be understood not as a specific reference to federal bankruptcy law but, rather as a reference to general principles of insolvency, whether under federal or state law.


1-104. Construction against implied repeal.

The Uniform Commercial Code being a general act intended as a unified coverage of its subject matter, no part of it shall be deemed to be impliedly repealed by subsequent legislation if such construction can reasonably be avoided.



Annotations
    COMMENT

    Source: Former section 1-104.

    Changes from former law: Except for changing the form of reference to the Uniform Commercial Code, this section is identical to former section 1-104.

    1. This section embodies the policy that an act that bears evidence of carefully considered permanent regulative intention should not lightly be regarded as impliedly repealed by subsequent legislation. The Uniform Commercial Code, carefully integrated and intended as a uniform codification of permanent character covering an entire "field" of law, is to be regarded as particularly resistant to implied repeal.


1-105. Severability.

If any provision or clause of the Uniform Commercial Code or its application to any person or circumstance is held invalid, the invalidity does not affect other provisions or applications of the code which can be given effect without the invalid provision or application, and to this end the provisions of the code are severable.



Annotations
    COMMENT

    Source: Former section 1-108.

    Changes from former law: Except for changing the form of reference to the Uniform Commercial Code, this section is identical to former section 1-108.

    1. This is the model severability section recommended by the National Conference of Commissioners on Uniform State Laws for inclusion in all acts of extensive scope.


1-106. Use of singular and plural; gender.

In the Uniform Commercial Code, unless the statutory context otherwise requires:

(1) words in the singular number include the plural, and those in the plural include the singular; and

(2) words of any gender also refer to any other gender.



Annotations
    COMMENT

    Source: Former section 1-102(5). See also 1 U.S.C. section 1.

    Changes from former law: Other than minor stylistic changes, this section is identical to former section 1-102(5).

    1. This section makes it clear that the use of singular or plural in the text of the Uniform Commercial Code is generally only a matter of drafting style— words may be applied in the plural, and plural words may be applied in the singular. Only when it is clear from the statutory context that the use of the singular or plural does not include the other is this rule inapplicable. See, e.g., section 9-322.


1-107. Section captions.

Section captions are part of the Uniform Commercial Code.



Annotations
    COMMENT

    Source: Former section 1-109.

    Changes from former law: None.

    1. Section captions are a part of the text of the Uniform Commercial Code, and not mere surplusage. This is not the case, however, with respect to subsection headings appearing in article 9. See comment 3 to section 9-101 ("subsection headings are not a part of the official text itself and have not been approved by the sponsors").


1-108. Relation to Electronic Signatures in Global and National Commerce Act.

This article modifies, limits, and supersedes the federal Electronic Signatures in Global and National Commerce Act, 15 U.S.C. section 7001 et seq., except that nothing in this article modifies, limits, or supersedes section 7001(c) of that act or authorizes electronic delivery of any of the notices described in section 7003(b) of that act.



Annotations
    COMMENT

    Source: New.

    1. The federal Electronic Signatures in Global and National Commerce Act, 15 U.S.C. section 7001 et seq. became effective in 2000. Section 102(a) of that act provides that a state statute may modify, limit, or supersede the provisions of section 101 of that act with respect to state law if such statute, inter alia, specifies the alternative procedures or requirements for the use or acceptance (or both) of electronic records or electronic signatures to establish the legal effect, validity, or enforceability of contracts or other records, and (i) such alternative procedures or requirements are consistent with Titles I and II of that act, (ii) such alternative procedures or requirements do not require, or accord greater legal status or effect to, the implementation or application of a specific technology or technical specification for performing the functions of creating, storing, generating, receiving, communicating, or authenticating electronic records or electronic signatures, and (iii) if enacted or adopted after the date of the enactment of that act, makes specific reference to that act. Article 1 fulfills the first two of those three criteria; this section fulfills the third criterion listed above.

    2. As stated in this section, however, article 1 does not modify, limit, or supersede section 101(c) of the Electronic Signatures in Global and National Commerce Act (requiring affirmative consent from a consumer to electronic delivery of transactional disclosures that are required by state law to be in writing); nor does it authorize electronic delivery of any of the notices described in section 103(b) of that act.


1-109. Repealed. Laws 2005, LB 570, § 116.

1-110. Repealed. Laws 2005, LB 570, § 116.

1-111. Repealed. Laws 1999, LB 550, § 217.

1-201. General definitions.

(a) Unless the context otherwise requires, words or phrases defined in this section, or in the additional definitions contained in other articles of the Uniform Commercial Code that apply to particular articles or parts thereof, have the meanings stated.

(b) Subject to definitions contained in other articles of the code that apply to particular articles or parts thereof:

(1) "Action", in the sense of a judicial proceeding, includes recoupment, counterclaim, setoff, suit in equity, and any other proceeding in which rights are determined.

(2) "Aggrieved party" means a party entitled to pursue a remedy.

(3) "Agreement", as distinguished from "contract", means the bargain of the parties in fact, as found in their language or inferred from other circumstances, including course of performance, course of dealing, or usage of trade as provided in section 1-303.

(4) "Bank" means a person engaged in the business of banking and includes a savings bank, savings and loan association, credit union, and trust company.

(5) "Bearer" means a person in control of a negotiable electronic document of title or a person in possession of a negotiable instrument, negotiable tangible document of title, or certificated security that is payable to bearer or indorsed in blank.

(6) "Bill of lading" means a document of title evidencing the receipt of goods for shipment issued by a person engaged in the business of directly or indirectly transporting or forwarding goods. The term does not include a warehouse receipt.

(7) "Branch" includes a separately incorporated foreign branch of a bank.

(8) "Burden of establishing" a fact means the burden of persuading the trier of fact that the existence of the fact is more probable than its nonexistence.

(9) "Buyer in ordinary course of business" means a person that buys goods in good faith, without knowledge that the sale violates the rights of another person in the goods, and in the ordinary course from a person, other than a pawnbroker, in the business of selling goods of that kind. A person buys goods in the ordinary course if the sale to the person comports with the usual or customary practices in the kind of business in which the seller is engaged or with the seller's own usual or customary practices. A person that sells oil, gas, or other minerals at the wellhead or minehead is a person in the business of selling goods of that kind. A buyer in ordinary course of business may buy for cash, by exchange of other property, or on secured or unsecured credit, and may acquire goods or documents of title under a preexisting contract for sale. Only a buyer that takes possession of the goods or has a right to recover the goods from the seller under article 2 may be a buyer in ordinary course of business. "Buyer in ordinary course of business" does not include a person that acquires goods in a transfer in bulk or as security for or in total or partial satisfaction of a money debt.

(10) "Conspicuous", with reference to a term, means so written, displayed, or presented that a reasonable person against which it is to operate ought to have noticed it. Whether a term is "conspicuous" or not is a decision for the court. Conspicuous terms include the following:

(A) a heading in capitals equal to or greater in size than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same or lesser size; and

(B) language in the body of a record or display in larger type than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same size, or set off from surrounding text of the same size by symbols or other marks that call attention to the language.

(11) "Consumer" means an individual who enters into a transaction primarily for personal, family, or household purposes.

(12) "Contract", as distinguished from "agreement", means the total legal obligation that results from the parties' agreement as determined by the Uniform Commercial Code as supplemented by any other applicable laws.

(13) "Creditor" includes a general creditor, a secured creditor, a lien creditor, and any representative of creditors, including an assignee for the benefit of creditors, a trustee in bankruptcy, a receiver in equity, and a personal representative, an executor, or an administrator of an insolvent debtor's or assignor's estate.

(14) "Defendant" includes a person in the position of defendant in a counterclaim, cross-claim, or third-party claim.

(15) "Delivery" with respect to an electronic document of title means voluntary transfer of control and with respect to an instrument, a tangible document of title, or chattel paper means voluntary transfer of possession.

(16) "Document of title" means a record (i) that in the regular course of business or financing is treated as adequately evidencing that the person in possession or control of the record is entitled to receive, control, hold, and dispose of the record and the goods the record covers and (ii) that purports to be issued by or addressed to a bailee and to cover goods in the bailee's possession which are either identified or are fungible portions of an identified mass. The term includes a bill of lading, transport document, dock warrant, dock receipt, warehouse receipt, and order for delivery of goods. An electronic document of title means a document of title evidenced by a record consisting of information stored in an electronic medium. A tangible document of title means a document of title evidenced by a record consisting of information that is inscribed on a tangible medium.

(17) "Fault" means a default, breach, or wrongful act or omission.

(18) "Fungible goods" means:

(A) goods of which any unit, by nature or usage of trade, is the equivalent of any other like unit; or

(B) goods that by agreement are treated as equivalent.

(19) "Genuine" means free of forgery or counterfeiting.

(20) "Good faith" means honesty in fact in the conduct or transaction concerned.

(21) "Holder" means:

(A) the person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession;

(B) the person in possession of a negotiable tangible document of title if the goods are deliverable either to bearer or to the order of the person in possession; or

(C) the person in control of a negotiable electronic document of title.

(22) "Insolvency proceeding" includes an assignment for the benefit of creditors or other proceeding intended to liquidate or rehabilitate the estate of the person involved.

(23) "Insolvent" means:

(A) having generally ceased to pay debts in the ordinary course of business other than as a result of bona fide dispute;

(B) being unable to pay debts as they become due; or

(C) being insolvent within the meaning of federal bankruptcy law.

(24) "Money" means a medium of exchange currently authorized or adopted by a domestic or foreign government. The term includes a monetary unit of account established by an intergovernmental organization or by agreement between two or more countries.

(25) "Organization" means a person other than an individual.

(26) "Party", as distinguished from "third party", means a person that has engaged in a transaction or made an agreement subject to the Uniform Commercial Code.

(27) "Person" means an individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, government, governmental subdivision, agency, or instrumentality, public corporation, or any other legal or commercial entity.

(28) "Present value" means the amount as of a date certain of one or more sums payable in the future, discounted to the date certain by use of either an interest rate specified by the parties if that rate is not manifestly unreasonable at the time the transaction is entered into or, if an interest rate is not so specified, a commercially reasonable rate that takes into account the facts and circumstances at the time the transaction is entered into.

(29) "Purchase" means taking by sale, lease, discount, negotiation, mortgage, pledge, lien, security interest, issue or reissue, gift, or any other voluntary transaction creating an interest in property.

(30) "Purchaser" means a person that takes by purchase.

(31) "Record" means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.

(32) "Remedy" means any remedial right to which an aggrieved party is entitled with or without resort to a tribunal.

(33) "Representative" means a person empowered to act for another, including an agent, an officer of a corporation or association, and a trustee, a personal representative, an executor, or an administrator of an estate.

(34) "Right" includes remedy.

(35) "Security interest" means an interest in personal property or fixtures which secures payment or performance of an obligation. "Security interest" includes any interest of a consignor and a buyer of accounts, chattel paper, a payment intangible, or a promissory note in a transaction that is subject to article 9. "Security interest" does not include the special property interest of a buyer of goods on identification of those goods to a contract for sale under section 2-401, but a buyer may also acquire a "security interest" by complying with article 9. Except as otherwise provided in section 2-505, the right of a seller or lessor of goods under article 2 or 2A to retain or acquire possession of the goods is not a "security interest", but a seller or lessor may also acquire a "security interest" by complying with article 9. The retention or reservation of title by a seller of goods notwithstanding shipment or delivery to the buyer under section 2-401 is limited in effect to a reservation of a "security interest". Whether a transaction in the form of a lease creates a "security interest" is determined pursuant to section 1-203. "Security interest" does not include a consumer rental purchase agreement as defined in the Consumer Rental Purchase Agreement Act.

(36) "Send" in connection with a writing, record, or notice means:

(A) to deposit in the mail or deliver for transmission by any other usual means of communication with postage or cost of transmission provided for and properly addressed and, in the case of an instrument, to an address specified thereon or otherwise agreed, or if there be none to any address reasonable under the circumstances; or

(B) in any other way to cause to be received any record or notice within the time it would have arrived if properly sent.

(37) "Signed" includes using any symbol executed or adopted with present intention to adopt or accept a writing.

(38) "State" means a state of the United States, the District of Columbia, Puerto Rico, the United States Virgin Islands, or any territory or insular possession subject to the jurisdiction of the United States.

(39) "Surety" includes a guarantor or other secondary obligor.

(40) "Term" means a portion of an agreement that relates to a particular matter.

(41) "Unauthorized signature" means a signature made without actual, implied, or apparent authority. The term includes a forgery.

(42) "Warehouse receipt" means a receipt issued by a person engaged in the business of storing goods for hire.

(43) "Writing" includes printing, typewriting, or any other intentional reduction to tangible form. "Written" has a corresponding meaning.



Cross References
    Consumer Rental Purchase Agreement Act, see section 69-2101.

Annotations
    COMMENT

    Source: Former section 1-201.

    Changes from former law: In order to make it clear that all definitions in the Uniform Commercial Code (not just those appearing in article 1, as stated in former section 1-201, but also those appearing in other articles) do not apply if the context otherwise requires, a new subsection (a) to that effect has been added, and the definitions now appear in subsection (b). The reference in subsection (a) to the "context" is intended to refer to the context in which the defined term is used in the Uniform Commercial Code. In other words, the definition applies whenever the defined term is used unless the context in which the defined term is used in the statute indicates that the term was not used in its defined sense. Consider, for example, sections 3-103(a)(9) (defining "promise", in relevant part, as "a written undertaking to pay money signed by the person undertaking to pay") and section 3-303(a)(1) (indicating that an instrument is issued or transferred for value if "the instrument is issued or transferred for a promise of performance, to the extent that the promise has been performed"). It is clear from the statutory context of the use of the word "promise" in section 3-303(a)(1) that the term was not used in the sense of its definition in section 3-103(a)(9). Thus, the section 3-103(a)(9) definition should not be used to give meaning to the word "promise" in section 3-303(a).

    Some definitions in former section 1-201 have been reformulated as substantive provisions and have been moved to other sections. See sections 1-202 (explicating concepts of notice and knowledge formerly addressed in sections 1-201(25)-(27)), 1-204 (determining when a person gives value for rights, replacing the definition of "value" in former section 1-201(44)), and 1-206 (addressing the meaning of presumptions, replacing the definitions of "presumption" and "presumed" in former section 1-201(31)). Similarly, the portion of the definition of "security interest" in former section 1-201(37) which explained the difference between a security interest and a lease has been relocated to section 1-203.

    Two definitions in former section 1-201 have been deleted. The definition of "honor" in former section 1-201(21) has been moved to section 2-103(1)(b), inasmuch as the definition only applies to the use of the word in article 2. The definition of "telegram" in former section 1-201(41) has been deleted because that word no longer appears in the definition of "conspicuous".

    Other than minor stylistic changes and renumbering, the remaining definitions in this section are as in former article 1 except as noted below.

    1. "Action". Unchanged from former section 1-201, which was derived from similar definitions in section 191, Uniform Negotiable Instruments Law; section 76, Uniform Sales Act; section 58, Uniform Warehouse Receipts Act; section 53, Uniform Bills of Lading Act.

    2. "Aggrieved party". Unchanged from former section 1-201.

    3. "Agreement". Derived from former section 1-201. As used in the Uniform Commercial Code the word is intended to include full recognition of usage of trade, course of dealing, course of performance and the surrounding circumstances as effective parts thereof, and of any agreement permitted under the provisions of the Uniform Commercial Code to displace a stated rule of law. Whether an agreement has legal consequences is determined by applicable provisions of the Uniform Commercial Code and, to the extent provided in section 1-103, by the law of contracts.

    4. "Bank". Derived from section 4A-104.

    5. "Bearer". Unchanged from former section 1-201, which was derived from section 191, Uniform Negotiable Instruments Law.

    6. "Bill of Lading". Derived from former section 1-201. The reference to, and definition of, an "airbill" has been deleted as no longer necessary.

    7. "Branch". Unchanged from former section 1-201.

    8. "Burden of establishing a fact". Unchanged from former section 1-201.

    9. "Buyer in ordinary course of business". Except for minor stylistic changes, identical to former section 1-201 (as amended in conjunction with the 1999 revisions to article 9). The major significance of the phrase lies in section 2-403 and in the Article on Secured Transactions (article 9).

    The first sentence of paragraph (9) makes clear that a buyer from a pawnbroker cannot be a buyer in ordinary course of business. The second sentence explains what it means to buy "in the ordinary course". The penultimate sentence prevents a buyer that does not have the right to possess as against the seller from being a buyer in ordinary course of business. Concerning when a buyer obtains possessory rights, see sections 2-502 and 2-716. However, the penultimate sentence is not intended to affect a buyer's status as a buyer in ordinary course of business in cases (such as a "drop shipment") involving delivery by the seller to a person buying from the buyer or a donee from the buyer. The requirement relates to whether as against the seller the buyer or one taking through the buyer has possessory rights.

    10. "Conspicuous". Derived from former section 1-201(10). This definition states the general standard that to be conspicuous a term ought to be noticed by a reasonable person. Whether a term is conspicuous is an issue for the court. Subparagraphs (A) and (B) set out several methods for making a term conspicuous. Requiring that a term be conspicuous blends a notice function (the term ought to be noticed) and a planning function (giving guidance to the party relying on the term regarding how that result can be achieved). Although these paragraphs indicate some of the methods for making a term attention-calling, the test is whether attention can reasonably be expected to be called to it. The statutory language should not be construed to permit a result that is inconsistent with that test.

    11. "Consumer". Derived from section 9-102(a)(25).

    12. "Contract". Except for minor stylistic changes, identical to former section 1-201.

    13. "Creditor". Unchanged from former section 1-201.

    14. "Defendant". Except for minor stylistic changes, identical to former section 1-201, which was derived from section 76, Uniform Sales Act.

    15. "Delivery". Derived from former section 1-201. The reference to certificated securities has been deleted in light of the more specific treatment of the matter in section 8-301.

    16. "Document of title". Unchanged from former section 1-201, which was derived from section 76, Uniform Sales Act. By making it explicit that the obligation or designation of a third party as "bailee" is essential to a document of title, this definition clearly rejects any such result as obtained in Hixson v. Ward, 254 Ill.App. 505 (1929), which treated a conditional sales contract as a document of title. Also the definition is left open so that new types of documents may be included. It is unforeseeable what documents may one day serve the essential purpose now filled by warehouse receipts and bills of lading. Truck transport has already opened up problems which do not fit the patterns of practice resting upon the assumption that a draft can move through banking channels faster than the goods themselves can reach their destination. There lie ahead air transport and such probabilities as teletype transmission of what may some day be regarded commercially as "Documents of Title". The definition is stated in terms of the function of the documents with the intention that any document which gains commercial recognition as accomplishing the desired result shall be included within its scope. Fungible goods are adequately identified within the language of the definition by identification of the mass of which they are a part.

    Dock warrants were within the Sales Act definition of document of title apparently for the purpose of recognizing a valid tender by means of such paper. In current commercial practice a dock warrant or receipt is a kind of interim certificate issued by steamship companies upon delivery of the goods at the dock, entitling a designated person to have issued to him or her at the company's office a bill of lading. The receipt itself is invariably nonnegotiable in form although it may indicate that a negotiable bill is to be forthcoming. Such a document is not within the general compass of the definition, although trade usage may in some cases entitle such paper to be treated as a document of title. If the dock receipt actually represents a storage obligation undertaken by the shipping company, then it is a warehouse receipt within this section regardless of the name given to the instrument.

    The goods must be "described", but the description may be by marks or labels and may be qualified in such a way as to disclaim personal knowledge of the issuer regarding contents or condition. However, baggage and parcel checks and similar "tokens" of storage which identify stored goods only as those received in exchange for the token are not covered by this article.

    The definition is broad enough to include an airway bill.

    17. "Fault". Derived from former section 1-201. "Default" has been added to the list of events constituting fault.

    18. "Fungible goods". Derived from former section 1-201. References to securities have been deleted because article 8 no longer uses the term "fungible" to describe securities. Accordingly, this provision now defines the concept only in the context of goods.

    19. "Genuine". Unchanged from former section 1-201.

    20. "Good faith". Former section 1-201(19) defined "good faith" simply as honesty in fact; the definition contained no element of commercial reasonableness. Initially, that definition applied throughout the code with only one exception. Former section 2-103(1)(b) provided that, in that article, "'good faith' in the case of a merchant means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade". This alternative definition was limited in applicability, though, because it applied only to transactions within the scope of article 2 and it applied only to merchants.

    Over time, however, amendments to the Uniform Commercial Code brought the article 2 merchant concept of good faith (subjective honesty and objective commercial reasonableness) into other articles. First, article 2A explicitly incorporated the article 2 standard. See section 2A-103(7). Then, other articles broadened the applicability of that standard by adopting it for all parties rather than just for merchants. See, e.g., sections 3-103(a)(4), 4A-105(a)(6), 7-102(a)(6), 8-102(a)(10), and 9-102(a)(43). Finally, articles 2 and 2A were amended so as to apply the standard to nonmerchants as well as merchants. See sections 2-103(1)(j) and 2A-103(1)(m). All of these definitions are comprised of two elements— in fact and the observance of reasonable commercial standards of fair dealing. Only revised article 5 defines "good faith" solely in terms of subjective honesty, and only article 6 (in the few states that have not chosen to delete the article) is without a definition of good faith. (It should be noted that, while revised article 6 did not define good faith, comment 2 to revised section 6-102 states that "this article adopts the definition of 'good faith' in article 1 in all cases, even when the buyer is a merchant".)

    Thus, the definition of "good faith" in this section merely confirms what has been the case for a number of years as articles of the Uniform Commercial Code have been amended or revised— obligation of "good faith", applicable in each article, is to be interpreted in the context of all articles except for article 5 as including both the subjective element of honesty in fact and the objective element of the observance of reasonable commercial standards of fair dealing. As a result, both the subjective and objective elements are part of the standard of "good faith", whether that obligation is specifically referenced in another article of the code (other than article 5) or is provided by this article.

    Of course, as noted in the statutory text, the definition of "good faith" in this section does not apply when the narrower definition of "good faith" in revised article 5 is applicable.

    As noted above, the definition of "good faith" in this section requires not only honesty in fact but also "observance of reasonable commercial standards of fair dealing". Although "fair dealing" is a broad term that must be defined in context, it is clear that it is concerned with the fairness of conduct rather than the care with which an act is performed. This is an entirely different concept than whether a party exercised ordinary care in conducting a transaction. Both concepts are to be determined in the light of reasonable commercial standards, but those standards in each case are directed to different aspects of commercial conduct. See e.g., sections 3-103(a)(9) and 4-104(c) and comment 4 to section 3-103.

    21. "Holder". Derived from former section 1-201. The definition has been reorganized for clarity.

    22. "Insolvency proceedings". Unchanged from former section 1-201.

    23. "Insolvent". Derived from former section 1-201. The three tests of insolvency— ceased to pay debts in the ordinary course of business other than as a result of a bona fide dispute as to them", "unable to pay debts as they become due", and "insolvent within the meaning of the federal bankruptcy law"— expressly set up as alternative tests and must be approached from a commercial standpoint.

    24. "Money". Substantively identical to former section 1-201. The test is that of sanction of government, whether by authorization before issue or adoption afterward, which recognizes the circulating medium as a part of the official currency of that government. The narrow view that money is limited to legal tender is rejected.

    25. "Organization". The former definition of this word has been replaced with the standard definition used in acts prepared by the National Conference of Commissioners on Uniform State Laws.

    26. "Party". Substantively identical to former section 1-201. Mention of a party includes, of course, a person acting through an agent. However, where an agent comes into opposition or contrast to the principal, particular account is taken of that situation.

    27. "Person". The former definition of this word has been replaced with the standard definition used in acts prepared by the National Conference of Commissioners on Uniform State Laws.

    28. "Present value". This definition was formerly contained within the definition of "security interest" in former section 1-201(37).

    29. "Purchase". Derived from former section 1-201. The form of definition has been changed from "includes" to "means".

    30. "Purchaser". Unchanged from former section 1-201.

    31. "Record". Derived from section 9-102(a)(69).

    32. "Remedy". Unchanged from former section 1-201. The purpose is to make it clear that both remedy and right (as defined) include those remedial rights of "self help" which are among the most important bodies of rights under the Uniform Commercial Code, remedial rights being those to which an aggrieved party may resort on its own.

    33. "Representative". Derived from former section 1-201. Reorganized, and form changed from "includes" to "means".

    34. "Right". Except for minor stylistic changes, identical to former section 1-201.

    35. "Security interest". The definition is the first paragraph of the definition of "security interest" in former section 1-201, with minor stylistic changes. The remaining portion of that definition has been moved to section 1-203. Note that, because of the scope of article 9, the term includes the interest of certain outright buyers of certain kinds of property.

    36. "Send". Derived from former section 1-201. Compare "notifies".

    37. "Signed". Derived from former section 1-201. Former section 1-201 referred to "intention to authenticate"; because other articles now use the term "authenticate", the language has been changed to "intention to adopt or accept". The latter formulation is derived from the definition of "authenticate" in section 9-102(a)(7). This provision refers only to writings, because the term "signed", as used in some articles, refers only to writings. This provision also makes it clear that, as the term "signed" is used in the Uniform Commercial Code, a complete signature is not necessary. The symbol may be printed, stamped, or written; it may be by initials or by thumbprint. It may be on any part of the document and in appropriate cases may be found in a billhead or letterhead. No catalog of possible situations can be complete and the court must use common sense and commercial experience in passing upon these matters. The question always is whether the symbol was executed or adopted by the party with present intention to adopt or accept the writing.

    38. "State". This is the standard definition of the term used in acts prepared by the National Conference of Commissioners on Uniform State Laws.

    39. "Surety". This definition makes it clear that "surety" includes all secondary obligors, not just those whose obligation refers to the person obligated as a surety. As to the nature of secondary obligations generally, see Restatement (Third), Suretyship and Guaranty, section 1 (1996).

    40. "Term". Unchanged from former section 1-201.

    41. "Unauthorized signature". Unchanged from former section 1-201.

    42. "Warehouse receipt". Unchanged from former section 1-201, which was derived from section 76(1), Uniform Sales Act; section 1, Uniform Warehouse Receipts Act. Receipts issued by a field warehouse are included, provided the warehouseman and the depositor of the goods are different persons.

    43. "Written" or "writing". Unchanged from former section 1-201.


1-202. Notice; knowledge.

(a) Subject to subsection (f), a person has "notice" of a fact if the person:

(1) has actual knowledge of it;

(2) has received a notice or notification of it; or

(3) from all the facts and circumstances known to the person at the time in question, has reason to know that it exists.

(b) "Knowledge" means actual knowledge. "Knows" has a corresponding meaning.

(c) "Discover", "learn", or words of similar import refer to knowledge rather than to reason to know.

(d) A person "notifies" or "gives" a notice or notification to another person by taking such steps as may be reasonably required to inform the other person in ordinary course, whether or not the other person actually comes to know of it.

(e) Subject to subsection (f), a person "receives" a notice or notification when:

(1) it comes to that person's attention; or

(2) it is duly delivered in a form reasonable under the circumstances at the place of business through which the contract was made or at another location held out by that person as the place for receipt of such communications.

(f) Notice, knowledge, or a notice or notification received by an organization is effective for a particular transaction from the time it is brought to the attention of the individual conducting that transaction and, in any event, from the time it would have been brought to the individual's attention if the organization had exercised due diligence. An organization exercises due diligence if it maintains reasonable routines for communicating significant information to the person conducting the transaction and there is reasonable compliance with the routines. Due diligence does not require an individual acting for the organization to communicate information unless the communication is part of the individual's regular duties or the individual has reason to know of the transaction and that the transaction would be materially affected by the information.



Annotations
    COMMENT

    Source: Derived from former section 1-201(25)-(27).

    Changes from former law: These provisions are substantive rather than purely definitional. Accordingly, they have been relocated from section 1-201 to this section. The reference to the "forgotten notice" doctrine has been deleted.

    1. Under subsection (a), a person has notice of a fact when, inter alia, the person has received a notification of the fact in question.

    2. As provided in subsection (d), the word "notifies" is used when the essential fact is the proper dispatch of the notice, not its receipt. Compare "Send". When the essential fact is the other party's receipt of the notice, that is stated. Subsection (e) states when a notification is received.

    3. Subsection (f) makes clear that notice, knowledge, or a notification, although "received", for instance, by a clerk in Department A of an organization, is effective for a transaction conducted in Department B only from the time when it was or should have been communicated to the individual conducting that transaction.


1-203. Lease distinguished from security interest.

(a) Whether a transaction in the form of a lease creates a lease or security interest is determined by the facts of each case.

(b) A transaction in the form of a lease creates a security interest if the consideration that the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease and is not subject to termination by the lessee, and:

(1) the original term of the lease is equal to or greater than the remaining economic life of the goods;

(2) the lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the goods;

(3) the lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement; or

(4) the lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement.

(c) A transaction in the form of a lease does not create a security interest merely because:

(1) the present value of the consideration the lessee is obligated to pay the lessor for the right to possession and use of the goods is substantially equal to or is greater than the fair market value of the goods at the time the lease is entered into;

(2) the lessee assumes risk of loss of the goods;

(3) the lessee agrees to pay, with respect to the goods, taxes, insurance, filing, recording, or registration fees, or service or maintenance costs;

(4) the lessee has an option to renew the lease or to become the owner of the goods;

(5) the lessee has an option to renew the lease for a fixed rent that is equal to or greater than the reasonably predictable fair market rent for the use of the goods for the term of the renewal at the time the option is to be performed; or

(6) the lessee has an option to become the owner of the goods for a fixed price that is equal to or greater than the reasonably predictable fair market value of the goods at the time the option is to be performed.

(d) Additional consideration is nominal if it is less than the lessee's reasonably predictable cost of performing under the lease agreement if the option is not exercised. Additional consideration is not nominal if:

(1) when the option to renew the lease is granted to the lessee, the rent is stated to be the fair market rent for the use of the goods for the term of the renewal determined at the time the option is to be performed; or

(2) when the option to become the owner of the goods is granted to the lessee, the price is stated to be the fair market value of the goods determined at the time the option is to be performed.

(e) The "remaining economic life of the goods" and "reasonably predictable" fair market rent, fair market value, or cost of performing under the lease agreement must be determined with reference to the facts and circumstances at the time the transaction is entered into.



Annotations
    COMMENT

    Source: Former section 1-201(37).

    Changes from former law: This section is substantively identical to those portions of former section 1-201(37) that distinguished "true" leases from security interests, except that the definition of "present value" formerly embedded in section 1-201(37) has been placed in section 1-201(28).

    1. An interest in personal property or fixtures which secures payment or performance of an obligation is a "security interest". See section 1-201(37). Security interests are sometimes created by transactions in the form of leases. Because it can be difficult to distinguish leases that create security interests from those that do not, this section provides rules that govern the determination of whether a transaction in the form of a lease creates a security interest.

    2. One of the reasons it was decided to codify the law with respect to leases was to resolve an issue that created considerable confusion in the courts: What is a lease? The confusion existed, in part, due to the last two sentences of the definition of security interest in the 1978 official text of the act, section 1-201(37). The confusion was compounded by the rather considerable change in the federal, state, and local tax laws and accounting rules as they relate to leases of goods. The answer is important because the definition of lease determines not only the rights and remedies of the parties to the lease but also those of third parties. If a transaction creates a lease and not a security interest, the lessee's interest in the goods is limited to its leasehold estate; the residual interest in the goods belongs to the lessor. This has significant implications to the lessee's creditors. "On common-law theory, the lessor, since he or she has not parted with title, is entitled to full protection against the lessee's creditors and trustee in bankruptcy . . . ." 1 G. Gilmore, Security Interests in Personal Property, section 3.6, at 76 (1965).

    Under pre-Uniform Commercial Code chattel security law there was generally no requirement that the lessor file the lease, a financing statement, or the like, to enforce the lease agreement against the lessee or any third party; the Article on Secured Transactions (Article 9) did not change the common law in that respect. Coogan, Leasing and the Uniform Commercial Code, in Equipment Leasing— Leasing 681, 700 n.25, 729 n.80 (2d ed.1980). The Article on Leases (Article 2A) did not change the law in that respect, except for leases of fixtures. Section 2A-309. An examination of the common law will not provide an adequate answer to the question of what is a lease. The definition of security interest in section 1-201(37) of the 1978 official text of the act provided that the Article on Secured Transactions (Article 9) governs security interests disguised as leases, i.e., leases intended as security; however, the definition became vague and outmoded.

    Lease is defined in article 2A as a transfer of the right to possession and use of goods for a term, in return for consideration. Section 2A-103(1)(j). The definition continues by stating that the retention or creation of a security interest is not a lease. Thus, the task of sharpening the line between true leases and security interests disguised as leases continues to be a function of this article.

    This section begins where section 1-201(35) leaves off. It draws a sharper line between leases and security interests disguised as leases to create greater certainty in commercial transactions.

    Prior to enactment of the rules now codified in this section, the 1978 official text of section 1-201(37) provided that whether a lease was intended as security (i.e., a security interest disguised as a lease) was to be determined from the facts of each case; however, (a) the inclusion of an option to purchase did not itself make the lease one intended for security, and (b) an agreement that upon compliance with the terms of the lease the lessee would become, or had the option to become, the owner of the property for no additional consideration, or for a nominal consideration, did make the lease one intended for security.

    Reference to the intent of the parties to create a lease or security interest led to unfortunate results. In discovering intent, courts relied upon factors that were thought to be more consistent with sales or loans than leases. Most of these criteria, however, were as applicable to true leases as to security interests. Examples include the typical net lease provisions, a purported lessor's lack of storage facilities or its character as a financing party rather than a dealer in goods. Accordingly, this section contains no reference to the parties' intent.

    Subsections (a) and (b) were originally taken from section 1(2) of the Uniform Conditional Sales Act (act withdrawn 1943), modified to reflect current leasing practice. Thus, reference to the case law prior to the incorporation of those concepts in this article will provide a useful source of precedent. Gilmore, Security Law, Formalism and Article 9, 47 Neb.L.Rev. 659, 671 (1968). Whether a transaction creates a lease or a security interest continues to be determined by the facts of each case. Subsection (b) further provides that a transaction creates a security interest if the lessee has an obligation to continue paying consideration for the term of the lease, if the obligation is not terminable by the lessee (thus correcting early statutory gloss, e.g., In re Royer's Bakery, Inc., 1 U.C.C. Rep.Serv. (Callaghan) 342 (Bankr.E.D.Pa.1963)) and if one of four additional tests is met. The first of these four tests, subparagraph (1), is that the original lease term is equal to or greater than the remaining economic life of the goods. The second of these tests, subparagraph (2), is that the lessee is either bound to renew the lease for the remaining economic life of the goods or to become the owner of the goods. In re Gehrke Enters., 1 Bankr. 647, 651-52 (Bankr.W.D.Wis.1979). The third of these tests, subparagraph (3), is whether the lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or for nominal additional consideration, which is defined later in this section. In re Celeryvale Transp., 44 Bankr. 1007, 1014-15 (Bankr.E.D.Tenn.1984). The fourth of these tests, subparagraph (4), is whether the lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration. All of these tests focus on economics, not the intent of the parties. In re Berge, 32 Bankr. 370, 371-73 (Bankr.W.D.Wis.1983).

    The focus on economics is reinforced by subsection (c). It states that a transaction does not create a security interest merely because the transaction has certain characteristics listed therein. Subparagraph (1) has no statutory derivative; it states that a full payout lease does not per se create a security interest. Rushton v. Shea, 419 F.Supp. 1349, 1365 (D.Del.1976). Subparagraphs (2) and (3) provides the same regarding the provisions of the typical net lease. Compare All-States Leasing Co. v. Ochs, 42 Or.App. 319, 600 P.2d 899 (Ct.App.1979), with In re Tillery, 571 F.2d 1361 (5th Cir.1978). Subparagraph (4) restates and expands the provisions of the 1978 official text of section 1-201(37) to make clear that the option can be to buy or renew. Subparagraphs (5) and (6) treat fixed price options and provide that fair market value must be determined at the time the transaction is entered into. Compare Arnold Mach. Co. v. Balls, 624 P.2d 678 (Utah 1981), with Aoki v. Shepherd Mach. Co., 665 F.2d 941 (9th Cir.1982).

    The relationship of subsection (b) to subsection (c) deserves to be explored. The fixed price purchase option provides a useful example. A fixed price purchase option in a lease does not of itself create a security interest. This is particularly true if the fixed price is equal to or greater than the reasonably predictable fair market value of the goods at the time the option is to be performed. A security interest is created only if the option price is nominal and the conditions stated in the introduction to the second paragraph of this subsection are met. There is a set of purchase options whose fixed price is less than fair market value but greater than nominal that must be determined on the facts of each case to ascertain whether the transaction in which the option is included creates a lease or a security interest.

    It was possible to provide for various other permutations and combinations with respect to options to purchase and renew. For example, this section could have stated a rule to govern the facts of In re Marhoefer Packing Co., 674 F.2d 1139 (7th Cir.1982). This was not done because it would unnecessarily complicate the definition. Further development of this rule is left to the courts.

    Subsections (d) and (e) provide definitions and rules of construction.


1-204. Value.

Except as otherwise provided in articles 3, 4, and 5, a person gives value for rights if the person acquires them:

(1) in return for a binding commitment to extend credit or for the extension of immediately available credit, whether or not drawn upon and whether or not a charge back is provided for in the event of difficulties in collection;

(2) as security for, or in total or partial satisfaction of, a preexisting claim;

(3) by accepting delivery under a preexisting contract for purchase; or

(4) in return for any consideration sufficient to support a simple contract.



Annotations
    COMMENT

    Source: Former section 1-201(44).

    Changes from former law: Unchanged from former section 1-201, which was derived from sections 25, 26, 27, and 191, Uniform Negotiable Instruments Law; section 76, Uniform Sales Act; section 53, Uniform Bills of Lading Act; section 58, Uniform Warehouse Receipts Act; section 22(1), Uniform Stock Transfer Act; and section 1, Uniform Trust Receipts Act. These provisions are substantive rather than purely definitional. Accordingly, they have been relocated from former section 1-201 to this section.

    1. All the uniform acts in the commercial law field (except the Uniform Conditional Sales Act) have carried definitions of "value". All those definitions provided that value was any consideration sufficient to support a simple contract, including the taking of property in satisfaction of or as security for a preexisting claim. Subsections (1), (2), and (4) in substance continue the definitions of "value" in the earlier acts. Subsection (3) makes explicit that "value" is also given in a third situation: Where a buyer by taking delivery under a preexisting contract converts a contingent into a fixed obligation.

    This definition is not applicable to articles 3 and 4, but the express inclusion of immediately available credit as value follows the separate definitions in those articles. See sections 3-303, 4-208, and 4-209. A bank or other financing agency which in good faith makes advances against property held as collateral becomes a bona fide purchaser of that property even though provision may be made for charge back in case of trouble. Checking credit is "immediately available" within the meaning of this section if the bank would be subject to an action for slander of credit in case checks drawn against the credit were dishonored, and when a chargeback is not discretionary with the bank, but may only be made when difficulties in collection arise in connection with the specific transaction involved.


1-205. Reasonable time; seasonableness.

(a) Whether a time for taking an action required by the Uniform Commercial Code is reasonable depends on the nature, purpose, and circumstances of the action.

(b) An action is taken seasonably if it is taken at or within the time agreed or, if no time is agreed, at or within a reasonable time.



Annotations
    COMMENT

    Source: Former section 1-204(2)-(3).

    Changes from former law: This section is derived from subsections (2) and (3) of former section 1-204. Subsection (1) of that section is now incorporated in section 1-302(b).

    1. Subsection (a) makes it clear that requirements that actions be taken within a "reasonable" time are to be applied in the transactional context of the particular action.

    2. Under subsection (b), the agreement that fixes the time need not be part of the main agreement, but may occur separately. Notice also that under the definition of "agreement" (section 1-201) the circumstances of the transaction, including course of dealing or usages of trade or course of performance may be material. On the question what is a reasonable time these matters will often be important.


1-206. Presumptions.

Whenever the Uniform Commercial Code creates a "presumption" with respect to a fact, or provides that a fact is "presumed", the trier of fact must find the existence of the fact unless and until evidence is introduced that supports a finding of its nonexistence.



Annotations
    COMMENT

    Source: Former section 1-201(31).

    Changes from former law: None, other than stylistic changes.

    1. Several sections of the Uniform Commercial Code state that there is a "presumption" as to a certain fact, or that the fact is "presumed". This section, derived from the definition appearing in former section 1-201(31), indicates the effect of those provisions on the proof process.


1-301. Territorial applicability; parties' power to choose applicable law.

(a) Except as otherwise provided in this section, when a transaction bears a reasonable relation to this state and also to another state or nation the parties may agree that the law either of this state or of such other state or nation shall govern their rights and duties.

(b) In the absence of an agreement effective under subsection (a), and except as provided in subsection (c), the Uniform Commercial Code applies to transactions bearing an appropriate relation to this state.

(c) If one of the following provisions of the Uniform Commercial Code specifies the applicable law, that provision governs and a contrary agreement is effective only to the extent permitted by the law so specified:

(1) Section 2-402;

(2) Sections 2A-105 and 2A-106;

(3) Section 4-102;

(4) Section 4A-507;

(5) Section 5-116;

(6) Section 8-110;

(7) Sections 9-301 through 9-307.



Annotations
    COMMENT

    Source: Former section 1-105.

    Changes from former law: This section is substantively identical to former section 1-105. Changes in language are stylistic only.

    This section is subject to section 1-102, which states the scope of article 1. As that section indicates, the rules of article 1, including this section, apply to a transaction to the extent that transaction is governed by one of the other articles of the Uniform Commercial Code.


1-302. Variation by agreement.

(a) Except as otherwise provided in subsection (b) or elsewhere in the Uniform Commercial Code, the effect of provisions of the code may be varied by agreement.

(b) The obligations of good faith, diligence, reasonableness, and care prescribed by the code may not be disclaimed by agreement. The parties, by agreement, may determine the standards by which the performance of those obligations is to be measured if those standards are not manifestly unreasonable. Whenever the code requires an action to be taken within a reasonable time, a time that is not manifestly unreasonable may be fixed by agreement.

(c) The presence in certain provisions of the code of the phrase "unless otherwise agreed", or words of similar import, does not imply that the effect of other provisions may not be varied by agreement under this section.



Annotations
    COMMENT

    Source: Former sections 1-102(3)-(4) and 1-204(1).

    Changes: This section combines the rules from subsections (3) and (4) of former section 1-102 and subsection (1) of former section 1-204. No substantive changes are made.

    1. Subsection (a) states affirmatively at the outset that freedom of contract is a principle of the Uniform Commercial Code: "The effect" of its provisions may be varied by "agreement". The meaning of the statute itself must be found in its text, including its definitions, and in appropriate extrinsic aids; it cannot be varied by agreement. But the Uniform Commercial Code seeks to avoid the type of interference with evolutionary growth found in precode cases such as Manhattan Co. v. Morgan, 242 N.Y. 38, 150 N.E. 594 (1926). Thus, private parties cannot make an instrument negotiable within the meaning of article 3 except as provided in section 3-104; nor can they change the meaning of such terms as "bona fide purchaser", "holder in due course", or "due negotiation", as used in the Uniform Commercial Code. But an agreement can change the legal consequences that would otherwise flow from the provisions of the Uniform Commercial Code. "Agreement" here includes the effect given to course of dealing, usage of trade, and course of performance by sections 1-201 and 1-303; the effect of an agreement on the rights of third parties is left to specific provisions of the Uniform Commercial Code and to supplementary principles applicable under section 1-103. The rights of third parties under section 9-317 when a security interest is unperfected, for example, cannot be destroyed by a clause in the security agreement.

    This principle of freedom of contract is subject to specific exceptions found elsewhere in the Uniform Commercial Code and to the general exception stated here. The specific exceptions vary in explicitness: The statute of frauds found in section 2-201, for example, does not explicitly preclude oral waiver of the requirement of a writing, but a fair reading denies enforcement to such a waiver as part of the "contract" made unenforceable; section 9-602, on the other hand, is a quite explicit limitation on freedom of contract. Under the exception for "the obligations of good faith, diligence, reasonableness, and care prescribed by the Uniform Commercial Code", provisions of the Uniform Commercial Code prescribing such obligations are not to be disclaimed. However, the section also recognizes the prevailing practice of having agreements set forth standards by which due diligence is measured and explicitly provides that, in the absence of a showing that the standards manifestly are unreasonable, the agreement controls. In this connection, section 1-303 incorporating into the agreement prior course of dealing and usages of trade is of particular importance.

    Subsection (b) also recognizes that nothing is stronger evidence of a reasonable time than the fixing of such time by a fair agreement between the parties. However, provision is made for disregarding a clause which whether by inadvertence or overreaching fixes a time so unreasonable that it amounts to eliminating all remedy under the contract. The parties are not required to fix the most reasonable time but may fix any time which is not obviously unfair as judged by the time of contracting.

    2. An agreement that varies the effect of provisions of the Uniform Commercial Code may do so by stating the rules that will govern in lieu of the provisions varied. Alternatively, the parties may vary the effect of such provisions by stating that their relationship will be governed by recognized bodies of rules or principles applicable to commercial transactions. Such bodies of rules or principles may include, for example, those that are promulgated by intergovernmental authorities such as UNCITRAL or UNIDROIT (see, e.g., UNIDROIT Principles of International Commercial Contracts), or nonlegal codes such as trade codes.

    3. Subsection (c) is intended to make it clear that, as a matter of drafting, phrases such as "unless otherwise agreed" have been used to avoid controversy as to whether the subject matter of a particular section does or does not fall within the exceptions to subsection (b), but absence of such words contains no negative implication since under subsection (b) the general and residual rule is that the effect of all provisions of the Uniform Commercial Code may be varied by agreement.


1-303. Course of performance, course of dealing, and usage of trade.

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

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

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

(b) A "course of dealing" is a sequence of conduct concerning previous transactions between the parties to a particular transaction that is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.

(c) A "usage of trade" is any practice or method of dealing having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question. The existence and scope of such a usage must be proved as facts. If it is established that such a usage is embodied in a trade code or similar record, the interpretation of the record is a question of law.

(d) A course of performance or course of dealing between the parties or usage of trade in the vocation or trade in which they are engaged or of which they are or should be aware is relevant in ascertaining the meaning of the parties' agreement, may give particular meaning to specific terms of the agreement, and may supplement or qualify the terms of the agreement. A usage of trade applicable in the place in which part of the performance under the agreement is to occur may be so utilized as to that part of the performance.

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

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

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

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

(f) Subject to section 2-209, a course of performance is relevant to show a waiver or modification of any term inconsistent with the course of performance.

(g) Evidence of a relevant usage of trade offered by one party is not admissible unless that party has given the other party notice that the court finds sufficient to prevent unfair surprise to the other party.



Annotations
    COMMENT

    Source: Former sections 1-205, 2-208, and 2A-207.

    Changes from former law: This section integrates the "course of performance" concept from articles 2 and 2A into the principles of former section 1-205, which deals with course of dealing and usage of trade. In so doing, the section slightly modifies the articulation of the course of performance rules to fit more comfortably with the approach and structure of former section 1-205. There are also slight modifications to be more consistent with the definition of "agreement" in former section 1-201(3). It should be noted that a course of performance that might otherwise establish a defense to the obligation of a party to a negotiable instrument is not available as a defense against a holder in due course who took the instrument without notice of that course of performance.

    1. The Uniform Commercial Code rejects both the "lay-dictionary" and the "conveyancer's" reading of a commercial agreement. Instead the meaning of the agreement of the parties is to be determined by the language used by them and by their action, read and interpreted in the light of commercial practices and other surrounding circumstances. The measure and background for interpretation are set by the commercial context, which may explain and supplement even the language of a formal or final writing.

    2. "Course of dealing", as defined in subsection (b), is restricted, literally, to a sequence of conduct between the parties previous to the agreement. A sequence of conduct after or under the agreement, however, is a "course of performance". "Course of dealing" may enter the agreement either by explicit provisions of the agreement or by tacit recognition.

    3. The Uniform Commercial Code deals with "usage of trade" as a factor in reaching the commercial meaning of the agreement that the parties have made. The language used is to be interpreted as meaning what it may fairly be expected to mean to parties involved in the particular commercial transaction in a given locality or in a given vocation or trade. By adopting in this context the term "usage of trade", the Uniform Commercial Code expresses its intent to reject those cases which see evidence of "custom" as representing an effort to displace or negate "established rules of law". A distinction is to be drawn between mandatory rules of law such as the Statute of Frauds provisions of Article 2 on Sales whose very office is to control and restrict the actions of the parties, and which cannot be abrogated by agreement, or by a usage of trade, and those rules of law (such as those in part 3 of Article 2 on Sales) which fill in points which the parties have not considered and in fact agreed upon. The latter rules hold "unless otherwise agreed" but yield to the contrary agreement of the parties. Part of the agreement of the parties to which such rules yield is to be sought for in the usages of trade which furnish the background and give particular meaning to the language used, and are the framework of common understanding controlling any general rules of law which hold only when there is no such understanding.

    4. A usage of trade under subsection (c) must have the "regularity of observance" specified. The ancient English tests for "custom" are abandoned in this connection. Therefor, it is not required that a usage of trade be "ancient or immemorial", "universal", or the like. Under the requirement of subsection (c) full recognition is thus available for new usages and for usages currently observed by the great majority of decent dealers, even though dissidents ready to cut corners do not agree. There is room also for proper recognition of usage agreed upon by merchants in trade codes.

    5. The policies of the Uniform Commercial Code controlling explicit unconscionable contracts and clauses (sections 1-304 and 2-302) apply to implicit clauses that rest on usage of trade and carry forward the policy underlying the ancient requirement that a custom or usage must be "reasonable". However, the emphasis is shifted. The very fact of commercial acceptance makes out a prima facie case that the usage is reasonable, and the burden is no longer on the usage to establish itself as being reasonable. But the anciently established policing of usage by the courts is continued to the extent necessary to cope with the situation arising if an unconscionable or dishonest practice should become standard.

    6. Subsection (d), giving the prescribed effect to usages of which the parties "are or should be aware", reinforces the provision of subsection (c) requiring not universality but only the described "regularity of observance" of the practice or method. This subsection also reinforces the point of subsection (c) that such usages may be either general to trade or particular to a special branch of trade.

    7. Although the definition of "agreement" in section 1-201 includes the elements of course of performance, course of dealing, and usage of trade, the fact that express reference is made in some sections to those elements is not to be construed as carrying a contrary intent or implication elsewhere. Compare section 1-302(c).

    8. In cases of a well established line of usage varying from the general rules of the Uniform Commercial Code where the precise amount of the variation has not been worked out into a single standard, the party relying on the usage is entitled, in any event, to the minimum variation demonstrated. The whole is not to be disregarded because no particular line of detail has been established. In case a dominant pattern has been fairly evidenced, the party relying on the usage is entitled under this section to go to the trier of fact on the question of whether such dominant pattern has been incorporated into the agreement.

    9. Subsection (g) is intended to insure that this code's liberal recognition of the needs of commerce in regard to usage of trade shall not be made into an instrument of abuse.


1-304. Obligation of good faith.

Every contract or duty within the Uniform Commercial Code imposes an obligation of good faith in its performance and enforcement.



Annotations
    COMMENT

    Source: Former section 1-203.

    Changes from former law: Except for changing the form of reference to the Uniform Commercial Code, this section is identical to former section 1-203.

    1. This section sets forth a basic principle running throughout the Uniform Commercial Code. The principle is that in commercial transactions good faith is required in the performance and enforcement of all agreements or duties. While this duty is explicitly stated in some provisions of the Uniform Commercial Code, the applicability of the duty is broader than merely these situations and applies generally, as stated in this section, to the performance or enforcement of every contract or duty within this code. It is further implemented by section 1-303 on course of dealing, course of performance, and usage of trade. This section does not support an independent cause of action for failure to perform or enforce in good faith. Rather, this section means that a failure to perform or enforce, in good faith, a specific duty or obligation under the contract, constitutes a breach of that contract or makes unavailable, under the particular circumstances, a remedial right or power. This distinction makes it clear that the doctrine of good faith merely directs a court towards interpreting contracts within the commercial context in which they are created, performed, and enforced, and does not create a separate duty of fairness and reasonableness which can be independently breached.

    2. "Performance and enforcement" of contracts and duties within the Uniform Commercial Code include the exercise of rights created by the Uniform Commercial Code.


1-305. Remedies to be liberally administered.

(a) The remedies provided by the Uniform Commercial Code must be liberally administered to the end that the aggrieved party may be put in as good a position as if the other party had fully performed but neither consequential or special damages nor penal damages may be had except as specifically provided in the code or by other rule of law.

(b) Any right or obligation declared by the code is enforceable by action unless the provision declaring it specifies a different and limited effect.



Annotations
    COMMENT

    Source: Former section 1-106.

    Changes from former law: Other than changes in the form of reference to the Uniform Commercial Code, this section is identical to former section 1-106.

    1. Subsection (a) is intended to effect three propositions. The first is to negate the possibility of unduly narrow or technical interpretation of remedial provisions by providing that the remedies in the Uniform Commercial Code are to be liberally administered to the end stated in this section. The second is to make it clear that compensatory damages are limited to compensation. They do not include consequential or special damages, or penal damages; and the Uniform Commercial Code elsewhere makes it clear that damages must be minimized. Cf. sections 1-304, 2-706(1), and 2-712(2). The third purpose of subsection (a) is to reject any doctrine that damages must be calculable with mathematical accuracy. Compensatory damages are often at best approximate: They have to be proved with whatever definiteness and accuracy the facts permit, but no more. Cf. section 2-204(3).

    2. Under subsection (b), any right or obligation described in the Uniform Commercial Code is enforceable by action, even though no remedy may be expressly provided, unless a particular provision specifies a different and limited effect. Whether specific performance or other equitable relief is available is determined not by this section but by specific provisions and by supplementary principles. Cf. sections 1-103 and 2-716.

    3. "Consequential" or "special" damages and "penal" damages are not defined in the Uniform Commercial Code; rather, these terms are used in the sense in which they are used outside the Uniform Commercial Code.


1-306. Waiver or renunciation of claim or right after breach.

A claim or right arising out of an alleged breach may be discharged in whole or in part without consideration by agreement of the aggrieved party in an authenticated record.



Annotations
    COMMENT

    Source: Former section 1-107.

    Changes from former law: This section changes former law in two respects. First, former section 1-107, requiring the "delivery" of a "written waiver or renunciation" merges the separate concepts of the aggrieved party's agreement to forego rights and the manifestation of that agreement. This section separates those concepts, and explicitly requires agreement of the aggrieved party. Second, the revised section reflects developments in electronic commerce by providing for memorialization in an authenticated record. In this context, a party may "authenticate" a record by (i) signing a record that is a writing or (ii) attaching to or logically associating with a record that is not a writing an electronic sound, symbol, or process with the present intent to adopt or accept the record. See sections 1-201(b)(37) and 9-102(a)(7).

    1. This section makes consideration unnecessary to the effective renunciation or waiver of rights or claims arising out of an alleged breach of a commercial contract where the agreement effecting such renunciation is memorialized in a record authenticated by the aggrieved party. Its provisions, however, must be read in conjunction with the section imposing an obligation of good faith (section 1-304).


1-307. Prima facie evidence by third-party documents.

A document in due form purporting to be a bill of lading, policy or certificate of insurance, official weigher's or inspector's certificate, consular invoice, or any other document authorized or required by the contract to be issued by a third party is prima facie evidence of its own authenticity and genuineness and of the facts stated in the document by the third party.



Annotations
    COMMENT

    Source: Former section 1-202.

    Changes from former law: Except for minor stylistic changes, this section is identical to former section 1-202.

    1. This section supplies judicial recognition for documents that are relied upon as trustworthy by commercial parties.

    2. This section is concerned only with documents that have been given a preferred status by the parties themselves who have required their procurement in the agreement, and for this reason the applicability of the section is limited to actions arising out of the contract that authorized or required the document. The list of documents is intended to be illustrative and not exclusive.

    3. The provisions of this section go no further than establishing the documents in question as prima facie evidence and leave to the court the ultimate determination of the facts where the accuracy or authenticity of the documents is questioned. In this connection the section calls for a commercially reasonable interpretation.

    4. Documents governed by this section need not be writings if records in another medium are generally relied upon in the context.


1-308. Performance or acceptance under reservation of rights.

(a) A party that with explicit reservation of rights performs or promises performance or assents to performance in a manner demanded or offered by the other party does not thereby prejudice the rights reserved. Such words as "without prejudice", "under protest", or the like are sufficient.

(b) Subsection (a) does not apply to an accord and satisfaction.



Annotations
    COMMENT

    Source: Former section 1-207.

    Changes from former law: This section is identical to former section 1-207.

    1. This section provides machinery for the continuation of performance along the lines contemplated by the contract despite a pending dispute, by adopting the mercantile device of going ahead with delivery, acceptance, or payment "without prejudice", "under protest", "under reserve", "with reservation of all our rights", and the like. All of these phrases completely reserve all rights within the meaning of this section. The section therefor contemplates that limited as well as general reservations and acceptance by a party may be made "subject to satisfaction of our purchaser", "subject to acceptance by our customers", or the like.

    2. This section does not add any new requirement of language of reservation where not already required by law, but merely provides a specific measure on which a party can rely as that party makes or concurs in any interim adjustment in the course of performance. It does not affect or impair the provisions of this code such as those under which the buyer's remedies for defect survive acceptance without being expressly claimed if notice of the defects is given within a reasonable time. Nor does it disturb the policy of those cases which restrict the effect of a waiver of a defect to reasonable limits under the circumstances, even though no such reservation is expressed.

    The section is not addressed to the creation or loss of remedies in the ordinary course of performance but rather to a method of procedure where one party is claiming as of right something which the other believes to be unwarranted.

    3. Subsection (b) states that this section does not apply to an accord and satisfaction. Section 3-311 governs if an accord and satisfaction is attempted by tender of a negotiable instrument as stated in that section. If section 3-311 does not apply, the issue of whether an accord and satisfaction has been effected is determined by the law of contract. Whether or not section 3-311 applies, this section has no application to an accord and satisfaction.


1-309. Option to accelerate at will.

A term providing that one party or that party's successor in interest may accelerate payment or performance or require collateral or additional collateral "at will" or when the party "deems itself insecure", or words of similar import, means that the party has power to do so only if that party in good faith believes that the prospect of payment or performance is impaired. The burden of establishing lack of good faith is on the party against which the power has been exercised.



Annotations
    COMMENT

    Source: Former section 1-208.

    Changes from former law: Except for minor stylistic changes, this section is identical to former section 1-208.

    1. The common use of acceleration clauses in many transactions governed by the Uniform Commercial Code, including sales of goods on credit, notes payable at a definite time, and secured transactions, raises an issue as to the effect to be given to a clause that seemingly grants the power to accelerate at the whim and caprice of one party. This section is intended to make clear that despite language that might be so construed and which further might be held to make the agreement void as against public policy or to make the contract illusory or too indefinite for enforcement, the option is to be exercised only in the good faith belief that the prospect of payment or performance is impaired.

    Obviously this section has no application to demand instruments or obligations whose very nature permits call at any time with or without reason. This section applies only to an obligation of payment or performance which in the first instance is due at a future date.


1-310. Subordinated obligations.

An obligation may be issued as subordinated to performance of another obligation of the person obligated, or a creditor may subordinate its right to performance of an obligation by agreement with either the person obligated or another creditor of the person obligated. Subordination does not create a security interest as against either the common debtor or a subordinated creditor.



Annotations
    COMMENT

    Source: Former section 1-209.

    Changes from former law: This section is substantively identical to former section 1-209. The language in that section stating that it "shall be construed as declaring the law as it existed prior to the enactment of this section and not as modifying it" has been deleted.

    1. Billions of dollars of subordinated debt are held by the public and by institutional investors. Commonly, the subordinated debt is subordinated on issue or acquisition and is evidenced by an investment security or by a negotiable or nonnegotiable note. Debt is also sometimes subordinated after it arises, either by agreement between the subordinating creditor and the debtor, by agreement between two creditors of the same debtor, or by agreement of all three parties. The subordinated creditor may be a stockholder or other "insider" interested in the common debtor; the subordinated debt may consist of accounts or other rights to payment not evidenced by any instrument. All such cases are included in the terms "subordinated obligation", "subordination", and "subordinated creditor".

    2. Subordination agreements are enforceable between the parties as contracts; and in the bankruptcy of the common debtor dividends otherwise payable to the subordinated creditor are turned over to the superior creditor. This "turn-over" practice has on occasion been explained in terms of "equitable lien", "equitable assignment", or "constructive trust", but whatever the label the practice is essentially an equitable remedy and does not mean that there is a transaction "that creates a security interest in personal property . . . by contract" or a "sale of accounts, chattel paper, payment intangibles, or promissory notes" within the meaning of section 9-109. On the other hand, nothing in this section prevents one creditor from assigning his or her rights to another creditor of the same debtor in such a way as to create a security interest within article 9, where the parties so intend.

    3. The enforcement of subordination agreements is largely left to supplementary principles under section 1-103. If the subordinated debt is evidenced by a certificated security, section 8-202(a) authorizes enforcement against purchasers on terms stated or referred to on the security certificate. If the fact of subordination is noted on a negotiable instrument, a holder under sections 3-302 and 3-306 is subject to the term because notice precludes him or her from taking free of the subordination. Sections 3-302(3)(a), 3-306, and 8-317 severely limit the rights of levying creditors of a subordinated creditor in such cases.


2-101. Short Title.

This article shall be known and may be cited as Uniform Commercial Code - Sales.

Source:Laws 1963, c. 544, Art. II, § 2-101, p. 1706.


Annotations
    COMMENT

    This article is a complete revision and modernization of the Uniform Sales Act which was promulgated by the National Conference of Commissioners on Uniform State Laws in 1906 and has been adopted in 36 states and the District of Columbia.

    The coverage of the present article is much more extensive than that of the old Sales Act and extends to the various bodies of case law which have been developed both outside of and under the latter.

    The arrangement of the present article is in terms of contract for sale and the various steps of its performance. The legal consequences are stated as following directly from the contract and action taken under it without resorting to the idea of when property or title passed or was to pass as being the determining factor. The purpose is to avoid making practical issues between practical persons turn upon the location of an intangible something, the passing of which no person can prove by evidence and to substitute for such abstractions proof of words and actions of a tangible character.


2-102. Scope; certain security and other transactions excluded from this article.

Unless the context otherwise requires, this article applies to transactions in goods; it does not apply to any transaction which although in the form of an unconditional contract to sell or present sale is intended to operate only as a security transaction nor does this article impair or repeal any statute regulating sales to consumers, farmers or other specified classes of buyers.

Source:Laws 1963, c. 544, Art. II, § 2-102, p. 1706.


Annotations
    If a contract involves both the sale of goods and services, and the parties have presented the case to the trial court and the Supreme Court on the theory that the sales article of the U.C.C. applies, this court will dispose of the case on appeal on that theory. Nebraska Builders Prod. Co. v. Industrial Erectors, 239 Neb. 744, 478 N.W.2d 257 (1992).

    Transaction to construct building had predominant purpose of rendering service with goods incidentally involved, and thus fell outside scope of the Uniform Commercial Code. Herman v. Bonanza Bldgs., Inc., 223 Neb. 474, 390 N.W.2d 536 (1986).

    The sales article of the U.C.C. does not apply to a contract for membership in an organization for the purchase of food or other goods. Guaranteed Foods v. Rison, 207 Neb. 400, 299 N.W.2d 507 (1980).

    Valves to be used in nuclear submarines are goods and Uniform Commercial Code— applies to transactions involving them. Crane Co. v. Roberts Supply Co., 196 Neb. 67, 241 N.W.2d 516 (1976).

    The Uniform Commercial Code did not apply to a contract for the sale of an ongoing grain business, including both goods and nongoods, because the principal purpose of the transaction was the sale of nongoods. MBH, Inc. v. John Otte Oil & Propane, 15 Neb. App. 341, 727 N.W.2d 238 (2007).

    Whether the Uniform Commercial Code applies to a contract for the sale of both goods and nongoods is a question of law. MBH, Inc. v. John Otte Oil & Propane, 15 Neb. App. 341, 727 N.W.2d 238 (2007).

    COMMENT

    Prior Uniform Statutory Provision: Section 75, Uniform Sales Act.

    Changes: Section 75 has been rephrased.

    Purposes of Changes and New Matter:

    To make it clear that:

    The article leaves substantially unaffected the law relating to purchase money security such as conditional sale or chattel mortgage though it regulates the general sales aspects of such transactions. "Security transaction" is used in the same sense as in the Article on Secured Transactions (Article 9).

    Cross Reference:

    Article 9.

    Definitional Cross References:

    "Contract". Section 1-201.

    "Contract for sale". Section 2-106.

    "Present sale". Section 2-106.

    "Sale". Section 2-106.


2-103. Definitions and index of definitions.

(1) In this article unless the context otherwise requires

(a) "Buyer" means a person who buys or contracts to buy goods.

(b) "Good faith" in the case of a merchant means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.

(c) "Receipt" of goods means taking physical possession of them.

(d) "Seller" means a person who sells or contracts to sell goods.

(2) Other definitions applying to this article or to specified parts thereof, and the sections in which they appear are:

"Acceptance". Section 2-606.
"Banker's credit". Section 2-325.
"Between merchants". Section 2-104.
"Cancellation". Section 2-106(4).
"Commercial unit". Section 2-105.
"Confirmed credit". Section 2-325.
"Conforming to contract". Section 2-106.
"Contract for sale". Section 2-106.
"Cover". Section 2-712.
"Entrusting". Section 2-403.
"Financing agency". Section 2-104.
"Future goods". Section 2-105.
"Goods". Section 2-105.
"Identification". Section 2-501.
"Installment contract". Section 2-612.
"Letter of credit". Section 2-325.
"Lot". Section 2-105.
"Merchant". Section 2-104.
"Overseas". Section 2-323.
"Person in position of seller". Section 2-707.
"Present sale". Section 2-106.
"Sale". Section 2-106.
"Sale on approval". Section 2-326.
"Sale or return". Section 2-326.
"Termination". Section 2-106.

(3) "Control" as provided in section 7-106 and the following definitions in other articles apply to this article:

"Check". Section 3-104.
"Consignee". Section 7-102.
"Consignor". Section 7-102.
"Consumer goods". Section 9-102.
"Dishonor". Section 3-502.
"Draft". Section 3-104.

(4) In addition article 1 contains general definitions and principles of construction and interpretation applicable throughout this article.

Source:Laws 1963, c. 544, Art. II, § 2-103, p. 1706; Laws 1991, LB 161, § 3; Laws 1999, LB 550, § 54;    Laws 2005, LB 570, § 30.    


Annotations
    Purchase money priority is exception to basic rule of priority to first filed financing statement and should be applied only in strict compliance with all limitations in Uniform Commercial Code. North Platte State Bank v. Production Credit Assn., 189 Neb. 45, 200 N.W.2d 1 (1972).

    COMMENT

    Prior Uniform Statutory Provision: Subsection (1): Section 76, Uniform Sales Act.

    Changes: The definitions of "buyer" and "seller" have been slightly rephrased, the reference in section 76 of the prior act to "any legal successor in interest of such person" being omitted. The definition of "receipt" is new.

    Purposes of Changes and New Matter:

    1. The phrase "any legal successor in interest of such person" has been eliminated since section 2-210 of this article, which limits some types of delegation of performance on assignment of a sales contract, makes it clear that not every such successor can be safely included in the definition. In every ordinary case, however, such successors are as of course included.

    2. "Receipt" must be distinguished from delivery particularly in regard to the problems arising out of shipment of goods, whether or not the contract calls for making delivery by way of documents of title, since the seller may frequently fulfill his or her obligations to "deliver" even though the buyer may never "receive" the goods. Delivery with respect to documents of title is defined in article 1 and requires transfer of physical delivery of a tangible document of title and transfer of control of an electronic document of title. Otherwise the many divergent incidents of delivery are handled incident by incident.

    Cross References:

    Point 1: See section 2-210 and comment thereon.

    Point 2: Section 1-201.

    Definitional Cross References:

    "Person". Section 1-201.


2-104. Definitions; merchant; between merchants; financing agency.

(1) "Merchant" means a person who deals in goods of the kind or otherwise by his or her occupation holds himself or herself out as having knowledge or skill peculiar to the practices or goods involved in the transaction or to whom such knowledge or skill may be attributed by his or her employment of an agent or broker or other intermediary who by his or her occupation holds himself or herself out as having such knowledge or skill.

(2) "Financing agency" means a bank, finance company, or other person who in the ordinary course of business makes advances against goods or documents of title or who by arrangement with either the seller or the buyer intervenes in ordinary course to make or collect payment due or claimed under the contract for sale, as by purchasing or paying the seller's draft or making advances against it or by merely taking it for collection whether or not documents of title accompany or are associated with the draft. "Financing agency" includes also a bank or other person who similarly intervenes between persons who are in the position of seller and buyer in respect to the goods (section 2-707).

(3) "Between merchants" means in any transaction with respect to which both parties are chargeable with the knowledge or skill of merchants.

Source:Laws 1963, c. 544, Art. II, § 2-104, p. 1708; Laws 2005, LB 570, § 31.    


Annotations
    Under subsection (1) of this section, one who engages in the business of purchasing and selling corn is a merchant. Laird v. Scribner Coop, 237 Neb. 532, 466 N.W.2d 798 (1991).

    Experienced grain farmers who regularly grow and market grain on the open market as the principal means of providing for their livelihood and by reason of such occupation have acquired and possess knowledge or skill peculiar to the practices and operations of grain marketing are merchants within the meaning of section 2-201 and this section. Agrex, Inc. v. Schrant, 221 Neb. 604, 379 N.W.2d 751 (1986).

    COMMENT

    Prior Uniform Statutory Provision: None. But see sections 15(2), (5), 16(c), 45(2), and 71, Uniform Sales Act, and sections 35 and 37, Uniform Bills of Lading Act for examples of the policy expressly provided for in this article.

    Purposes:

    1. This article assumes that transactions between professionals in a given field require special and clear rules which may not apply to a casual or inexperienced seller or buyer. It thus adopts a policy of expressly stating rules applicable "between merchants" and "as against a merchant" wherever they are needed instead of making them depend upon the circumstances of each case as in the statutes cited above. This section lays the foundation of this policy by defining those who are to be regarded as professionals or "merchants" and by stating when a transaction is deemed to be "between merchants".

    2. The term "merchant" as defined here roots in the "law merchant" concept of a professional in business. The professional status under the definition may be based upon specialized knowledge as to the goods, specialized knowledge as to business practices, or specialized knowledge as to both and which kind of specialized knowledge may be sufficient to establish the merchant status is indicated by the nature of the provisions.

    The special provisions as to merchants appear only in this article and they are of three kinds. Sections 2-201(2), 2-205, 2-207, and 2-209 dealing with the statute of frauds, firm offers, confirmatory memoranda, and modification rest on normal business practices which are or ought to be typical of and familiar to any person in business. For purposes of these sections almost every person in business would, therefor, be deemed to be a "merchant" under the language "who ... by his occupation holds himself out as having knowledge or skill peculiar to the practices ... involved in the transaction ..." since the practices involved in the transaction are nonspecialized business practices such as answering mail. In this type of provision, banks or even universities, for example, well may be "merchants". But even these sections only apply to a merchant in his or her mercantile capacity; a lawyer or bank president buying fishing tackle for his or her own use is not a merchant.

    On the other hand, in section 2-314 on the warranty of merchantability, such warranty is implied only "if the seller is a merchant with respect to goods of that kind". Obviously this qualification restricts the implied warranty to a much smaller group than everyone who is engaged in business and requires a professional status as to particular kinds of goods. The exception in section 2-402(2) for retention of possession by a merchant seller falls in the same class; as does section 2-403(2) on entrusting of possession to a merchant "who deals in goods of that kind".

    A third group of sections includes 2-103(1)(b), which provides that in the case of a merchant "good faith" includes observance of reasonable commercial standards of fair dealing in the trade; 2-327(1)(c), 2-603, and 2-605, dealing with responsibilities of merchant buyers to follow seller's instructions, etc.; 2-509 on risk of loss, and 2-609 on adequate assurance of performance. This group of sections applies to persons who are merchants under either the "practices" or the "goods" aspect of the definition of merchant.

    3. The "or to whom such knowledge or skill may be attributed by his employment of an agent or broker ..." clause of the definition of merchant means that even persons such as universities, for example, can come within the definition of merchant if they have regular purchasing departments or business personnel who are familiar with business practices and who are equipped to take any action required.

    Cross References:

    Point 1: See sections 1-102 and 1-203.

    Point 2: See sections 2-314, 2-315, and 2-320 to 2-325 of this article and article 9.

    Definitional Cross References:

    "Bank". Section 1-201.

    "Buyer". Section 2-103.

    "Contract for sale". Section 2-106.

    "Document of title". Section 1-201.

    "Draft". Section 3-104.

    "Goods". Section 2-105.

    "Person". Section 1-201.

    "Purchase". Section 1-201.

    "Seller". Section 2-103.


2-105. Definitions; transferability; goods; future goods; lot; commercial unit.

(1) "Goods" means all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities (article 8) and things in action. "Goods" also includes the unborn young of animals and growing crops and other identified things attached to realty as described in the section on goods to be severed from realty (section 2-107).

(2) Goods must be both existing and identified before any interest in them can pass. Goods which are not both existing and identified are "future" goods. A purported present sale of future goods or of any interest therein operates as a contract to sell.

(3) There may be a sale of a part interest in existing identified goods.

(4) An undivided share in an identified bulk of fungible goods is sufficiently identified to be sold although the quantity of the bulk is not determined. Any agreed proportion of such a bulk or any quantity thereof agreed upon by number, weight or other measure may to the extent of the seller's interest in the bulk be sold to the buyer who then becomes an owner in common.

(5) "Lot" means a parcel or a single article which is the subject matter of a separate sale or delivery, whether or not it is sufficient to perform the contract.

(6) "Commercial unit" means such a unit of goods as by commercial usage is a single whole for purposes of sale and division of which materially impairs its character or value on the market or in use. A commercial unit may be a single article (as a machine) or a set of articles (as a suite of furniture or an assortment of sizes) or a quantity (as a bale, gross, or carload) or any other unit treated in use or in the relevant market as a single whole.

Source:Laws 1963, c. 544, Art. II, § 2-105, p. 1708.


Annotations
    Under subsection (1) of this section, corn is a commodity within the Uniform Commercial Code's definition of goods. Laird v. Scribner Coop, 237 Neb. 532, 466 N.W.2d 798 (1991).

    The provisions of Neb. U.C.C., art. 2, governing sales are applicable to the sale of a motor vehicle. Dugdale of Nebraska v. First State Bank, 227 Neb. 729, 420 N.W.2d 273 (1988).

    "Crops" are included within the definition of goods. Kimball County Grain Coop. v. Yung, 200 Neb. 233, 263 N.W.2d 818 (1978).

    Valves to be used in nuclear submarines are goods and Uniform Commercial Code— applies to transactions involving them. Crane Co. v. Robert Supply Co., 196 Neb. 67, 241 N.W.2d 516 (1976).

    A mobile home is a good, and therefore its sale is governed by the Uniform Commercial Code. Thomas v. Countryside of Hastings, 2 Neb. App. 590, 512 N.W.2d 660 (1994).

    COMMENT

    Prior Uniform Statutory Provision: Subsections (1), (2), (3), and (4) — sections 5, 6, and 76, Uniform Sales Act; subsections (5) and (6) — none.

    Changes: Rewritten.

    Purposes of Changes and New Matter:

    1. Subsection (1) on "goods": The phraseology of the prior uniform statutory provision has been changed so that:

    The definition of goods is based on the concept of movability and the term "chattels personal" is not used. It is not intended to deal with things which are not fairly identifiable as movables before the contract is performed.

    Growing crops are included within the definition of goods since they are frequently intended for sale. The concept of "industrial" growing crops has been abandoned, for under modern practices fruit, perennial hay, nursery stock, and the like must be brought within the scope of this article. The young of animals are also included expressly in this definition since they, too, are frequently intended for sale and may be contracted for before birth. The period of gestation of domestic animals is such that the provisions of the section on identification can apply as in the case of crops to be planted. The reason of this definition also leads to the inclusion of a wool crop or the like as "goods" subject to identification under this article.

    The exclusion of "money in which the price is to be paid" from the definition of goods does not mean that foreign currency which is included in the definition of money may not be the subject matter of a sales transaction. Goods is intended to cover the sale of money when money is being treated as a commodity but not to include it when money is the medium of payment.

    As to contracts to sell timber, minerals, or structures to be removed from the land section 2-107(1) (Goods to be severed from realty: recording) controls.

    The use of the word "fixtures" is avoided in view of the diversity of definitions of that term. This article in including within its scope "things attached to realty" adds the further test that they must be capable of severance without material harm thereto. As between the parties any identified things which fall within that definition become "goods" upon the making of the contract for sale.

    "Investment securities" are expressly excluded from the coverage of this article. It is not intended by this exclusion, however, to prevent the application of a particular section of this article by analogy to securities (as was done with the Original Sales Act in Agar v. Orda, 264 N.Y. 248, 190 N.E. 479, 99 A.L.R. 269 (1934)) when the reason of that section makes such application sensible and the situation involved is not covered by the article of this code dealing specifically with such securities (article 8).

    2. References to the fact that a contract for sale can extend to future or contingent goods and that ownership in common follows the sale of a part interest have been omitted here as obvious without need for expression; hence no inference to negate these principles should be drawn from their omission.

    3. Subsection (4) does not touch the question of how far an appropriation of a bulk of fungible goods may or may not satisfy the contract for sale.

    4. Subsections (5) and (6) on "lot" and "commercial unit" are introduced to aid in the phrasing of later sections.

    5. The question of when an identification of goods takes place is determined by the provisions of section 2-501 and all that this section says is what kinds of goods may be the subject of a sale.

    Cross References:

    Point 1: Sections 2-107, 2-201, and 2-501 and article 8.

    Point 5: Section 2-501.

    See also section 1-201.

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Contract". Section 1-201.

    "Contract for sale". Section 2-106.

    "Fungible". Section 1-201.

    "Money". Section 1-201.

    "Present sale". Section 2-106.

    "Sale". Section 2-106.

    "Seller". Section 2-103.


2-106. Definitions; contract; agreement; contract for sale; sale; present sale; conforming to contract; termination; cancellation.

(1) In this article unless the context otherwise requires "contract" and "agreement" are limited to those relating to the present or future sale of goods. "Contract for sale" includes both a present sale of goods and a contract to sell goods at a future time. A "sale" consists in the passing of title from the seller to the buyer for a price (section 2-401). A "present sale" means a sale which is accomplished by the making of the contract.

(2) Goods or conduct including any part of a performance are "conforming" or conform to the contract when they are in accordance with the obligations under the contract.

(3) "Termination" occurs when either party pursuant to a power created by agreement or law puts an end to the contract otherwise than for its breach. On "termination" all obligations which are still executory on both sides are discharged but any right based on prior breach or performance survives.

(4) "Cancellation" occurs when either party puts an end to the contract for breach by the other and its effect is the same as that of "termination" except that the canceling party also retains any remedy for breach of the whole contract or any unperformed balance.

Source:Laws 1963, c. 544, Art. II, § 2-106, p. 1709.


Annotations
    The initial step in determining whether a buyer may revoke his or her acceptance of goods or conduct is to assess whether there exists a nonconformity in the contract. Richardson v. Mast, 252 Neb. 114, 560 N.W.2d. 488 (1997).

    COMMENT

    Prior Uniform Statutory Provision: Subsection (1) — section 1(1) and (2), Uniform Sales Act; subsection (2) — none, but subsection generally continues policy of sections 11, 44, and 69, Uniform Sales Act; subsections (3) and (4) — none.

    Changes: Completely rewritten.

    Purposes of Changes and New Matter:

    1. Subsection (1): "Contract for sale" is used as a general concept throughout this article, but the rights of the parties do not vary according to whether the transaction is a present sale or a contract to sell unless the article expressly so provides.

    2. Subsection (2): It is in general intended to continue the policy of requiring exact performance by the seller of his or her obligations as a condition to his or her right to require acceptance. However, the seller is in part safeguarded against surprise as a result of sudden technicality on the buyer's part by the provisions of section 2-508 on seller's cure of improper tender or delivery. Moreover usage of trade frequently permits commercial leeways in performance and the language of the agreement itself must be read in the light of such custom or usage and also, prior course of dealing, and in a long-term contract, the course of performance.

    3. Subsections (3) and (4): These subsections are intended to make clear the distinction carried forward throughout this article between termination and cancellation.

    Cross References:

    Point 2: Sections 1-203, 1-205, 2-208, and 2-508.

    Definitional Cross References:

    "Agreement". Section 1-201.

    "Buyer". Section 2-103.

    "Contract". Section 1-201.

    "Goods". Section 2-105.

    "Party". Section 1-201.

    "Remedy". Section 1-201.

    "Rights". Section 1-201.

    "Seller". Section 2-103.


2-107. Goods to be severed from realty; recording.

(1) A contract for the sale of minerals or the like (including oil and gas) or a structure or its materials to be removed from realty is a contract for the sale of goods within this article if they are to be severed by the seller but until severance a purported present sale thereof which is not effective as a transfer of an interest in land is effective only as a contract to sell.

(2) A contract for the sale apart from the land of growing crops or other things attached to realty and capable of severance without material harm thereto but not described in subsection (1) or of timber to be cut is a contract for the sale of goods within this article whether the subject matter is to be severed by the buyer or by the seller even though it forms part of the realty at the time of contracting, and the parties can by identification effect a present sale before severance.

(3) The provisions of this section are subject to any third-party rights provided by the law relating to realty records, and the contract for sale may be executed and recorded as a document transferring an interest in land and shall then constitute notice to third parties of the buyer's rights under the contract for sale.

Source:Laws 1963, c. 544, Art. II, § 2-107, p. 1710; Laws 1980, LB 621, § 3.


Annotations
    The sale of growing sod is a sale of goods under this section. Jessen v. Ashland Recreation Assn., 204 Neb. 19, 281 N.W.2d 210 (1979).

    COMMENT

    Prior Uniform Statutory Provision: See section 76, Uniform Sales Act on prior policy; section 7, Uniform Conditional Sales Act.

    Purposes:

    1. Subsection (1). Notice that this subsection applies only if the minerals or structures "are to be severed by the seller". If the buyer is to sever, such transactions are considered contracts affecting land and all problems of the statute of frauds and of the recording of land rights apply to them. Therefor, the statute of frauds section of this article does not apply to such contracts though they must conform to the statute of frauds affecting the transfer of interests in land.

    2. Subsection (2). "Things attached" to the realty which can be severed without material harm are goods within this article regardless of who is to effect the severance. The word "fixtures" has been avoided because of the diverse definitions of this term, the test of "severance without material harm" being substituted.

    The provision in subsection (3) for recording such contracts is within the purview of this article since it is a means of preserving the buyer's rights under the contract of sale.

    3. The security phases of things attached to or to become attached to realty are dealt with in the Article on Secured Transactions (Article 9) and it is to be noted that the definition of goods in that article differs from the definition of goods in this article.

    However, both articles treat as goods growing crops and also timber to be cut under a contract of severance.

    Cross References:

    Point 1: Section 2-201.

    Point 2: Section 2-105.

    Point 3: Article 9 and section 9-105.

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Contract". Section 1-201.

    "Contract for sale". Section 2-106.

    "Goods". Section 2-105.

    "Party". Section 1-201.

    "Present sale". Section 2-106.

    "Rights". Section 1-201.

    "Seller". Section 2-103.


2-201. Formal requirements; statute of frauds.

(1) Except as otherwise provided in this section a contract for the sale of goods for the price of five hundred dollars or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his or her authorized agent or broker. A writing is not insufficient because it omits or incorrectly states a term agreed upon but the contract is not enforceable under this paragraph beyond the quantity of goods shown in such writing.

(2)(a) Between merchants if within a reasonable time a writing in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know its contents, it satisfies the requirements of subsection (1) against such party unless written notice of objection to its contents is given within ten days after it is received.

(b) Between a merchant and a buyer or seller of grain not a merchant, if (i) the contract is an oral contract for the sale of grain, (ii) within a reasonable time a writing in confirmation of the contract and sufficient against the sender is received, (iii) the party receiving it has reason to know its contents, (iv) it contains a statement of the kind of grain, quantity of grain, per unit price, date of contract, and delivery date of the grain, and (v) notice appears on the face of the written confirmation stating that the contract will be enforceable according to the terms contained in the confirmation unless written notice of objection is given within ten days, the writing satisfies the requirements of subsection (1) of this section against the party receiving it unless written notice of objection to its contents is given within ten days after it is received.

(3) A contract which does not satisfy the requirements of subsection (1) but which is valid in other respects is enforceable

(a) if the goods are to be specially manufactured for the buyer and are not suitable for sale to others in the ordinary course of the seller's business and the seller, before notice of repudiation is received and under circumstances which reasonably indicate that the goods are for the buyer, has made either a substantial beginning of their manufacture or commitments for their procurement; or

(b) if the party against whom enforcement is sought admits in his or her pleading, testimony or otherwise in court that a contract for sale was made, but the contract is not enforceable under this provision beyond the quantity of goods admitted; or

(c) with respect to goods for which payment has been made and accepted or which have been received and accepted (section 2-606).

Source:Laws 1963, c. 544, Art. II, § 2-201, p. 1711; Laws 1983, LB 188, § 1.


Annotations
    1. Applicability of section

    2. Sufficiency of writing

    3. Part performance

    4. Sale between merchants

    1. Applicability of section

    This statute does not apply to agreements for the performance of a service. Professional Recruiters v. Oliver, 226 Neb. 16, 409 N.W.2d 304 (1987).

    A distributorship agreement for the sale of newspapers for a price greater than five hundred dollars was within the statute of frauds. Omaha World-Herald Co. v. Nielsen, 220 Neb. 294, 369 N.W.2d 631 (1985).

    Promissory estoppel will not prevail against defense of statute of frauds in oral contract for sale of grain unless alleged promise relates to abandonment or waiver of legal right belonging to promissor. Schott Grain Co. v. Rasmussen, 197 Neb. 267, 248 N.W.2d 42 (1976).

    Motion of defendants for summary judgment was properly sustained where claimed contract for sale of grain was for much more than five hundred dollars, it was not in writing, there was no written confirmation, and none of the exceptions enumerated in the statute applied. Farmland Service Coop, Inc. v. Klein, 196 Neb. 538, 244 N.W.2d 86 (1976).

    Agreement is bargain of parties as found in their language or by implication from other circumstances including course of dealing or usage of trade. Crane Co. v. Roberts Supply Co., 196 Neb. 67, 241 N.W.2d 516 (1976).

    Under this section, seller was not equitably estopped from asserting statute of frauds as defense to breach of contract action by buyer, which alleged that seller's counterclaim for feed sold and delivered on open account constituted a clear admission that an oral contract existed within meaning of Nebraska statute of frauds, which provides that an oral contract is enforceable if party against whom enforcement is sought admits in his pleading, testimony, or otherwise in court that contract for sale was made. Golden Plains Feedlot, Inc. v. Great Western Sugar Co., 588 F.Supp. 985 (D.S.D. 1984).

    2. Sufficiency of writing

    An agreement for the purchase of a truck for more than $500 that is not signed by the party against whom enforcement is sought is unenforceable unless one of the limited exceptions set forth in this section is present. Woodhouse Ford v. Laflan, 268 Neb. 722, 687 N.W.2d 672 (2004).

    The fact that there was no evidence of any oral or written agreement to purchase a truck that had a purchase price of more than $500 is sufficient to establish the absence of a purchase agreement that conforms to this section. Woodhouse Ford v. Laflan, 268 Neb. 722, 687 N.W.2d 672 (2004).

    Several writings can be pieced together to satisfy the writing requirement of the Statute of Frauds, even though the writings taken alone would not have been sufficient. An admission within the meaning of this section can be made when the party denying the existence of the contract and relying on the statute takes the stand and, without admitting explicitly that a contract was made, testifies to facts which as a matter of law establish that a contract was formed. A compelled or involuntary admission of the existence of an oral contract, obtained during cross-examination at trial, may be relied upon to satisfy this section. The statutory requirement can be satisfied by way of pleadings, bills of particulars, depositions, affidavits, admissions pursuant to notices to admit, and oral testimony, including admissions made on cross-examination. An admission is not necessarily made whenever a party utters the magic words contract or agreement. If a party denying the existence of a contract uses contractual terminology, the court should look at the other evidence presented. An admission can be established through verbal admission and conduct. Nebraska Builders Prod. Co. v. Industrial Erectors, 239 Neb. 744, 478 N.W.2d 257 (1992).

    A writing is not insufficient because it omits or incorrectly states a term agreed upon, but the contract is not enforceable beyond the quantity of goods shown in such writing. In re Estate of Nelsen, 209 Neb. 730, 311 N.W.2d 508 (1981).

    Where written confirmation of an oral contract was received more than six months after the oral contract was made, receipt was not made within a reasonable time and the oral contract is not enforceable. Kimball County Grain Coop. v. Yung, 200 Neb. 233, 263 N.W.2d 818 (1978).

    3. Part performance

    Part performance of an oral contract for the sale of goods that is capable of apportionment is enforceable only as to that portion that has been either fully or partially performed. In re Estate of Nelsen, 209 Neb. 730, 311 N.W.2d 508 (1981).

    Under statute of frauds as embodied in U.C.C., buyer by making a part payment and seller by accepting that part payment, make an enforceable contract only as to that portion of goods that could have been purchased by that part payment. In re Augustin Bros. Co., 460 F.2d 376 (8th Cir. 1972).

    4. Sale between merchants

    Experienced grain farmers who regularly grow and market grain on the open market as the principal means of providing for their livelihood and by reason of such occupation have acquired and possess knowledge or skill peculiar to the practices and operations of grain marketing are merchants within the meaning of section 2-104 and this section. Agrex, Inc. v. Schrant, 221 Neb. 604, 379 N.W.2d 751 (1986).

    COMMENT

    Prior Uniform Statutory Provision: Section 4, Uniform Sales Act (which was based on section 17 of the Statute of 29 Charles II).

    Changes: Completely rephrased; restricted to sale of goods. See also sections 1-206, 8-319, and 9-203.

    Purposes of Changes:

    The changed phraseology of this section is intended to make it clear that:

    1. The required writing need not contain all the material terms of the contract and such material terms as are stated need not be precisely stated. All that is required is that the writing afford a basis for believing that the offered oral evidence rests on a real transaction. It may be written in lead pencil on a scratch pad. It need not indicate which party is the buyer and which the seller. The only term which must appear is the quantity term which need not be accurately stated but recovery is limited to the amount stated. The price, time and place of payment or delivery, the general quality of the goods, or any particular warranties may all be omitted.

    Special emphasis must be placed on the permissibility of omitting the price term in view of the insistence of some courts on the express inclusion of this term even where the parties have contracted on the basis of a published price list. In many valid contracts for sale the parties do not mention the price in express terms, the buyer being bound to pay and the seller to accept a reasonable price which the trier of fact may well be trusted to determine. Again, frequently the price is not mentioned since the parties have based their agreement on a price list or catalogue known to both of them and this list serves as an efficient safeguard against perjury. Finally, "market" prices and valuations that are current in the vicinity constitute a similar check. Thus if the price is not stated in the memorandum it can normally be supplied without danger of fraud. Of course if the "price" consists of goods rather than money the quantity of goods must be stated.

    Only three definite and invariable requirements as to the memorandum are made by this subsection. First, it must evidence a contract for the sale of goods; second, it must be "signed", a word which includes any authentication which identifies the party to be charged; and third, it must specify a quantity.

    2. "Partial performance" as a substitute for the required memorandum can validate the contract only for the goods which have been accepted or for which payment has been made and accepted.

    Receipt and acceptance either of goods or of the price constitutes an unambiguous overt admission by both parties that a contract actually exists. If the court can make a just apportionment, therefor, the agreed price of any goods actually delivered can be recovered without a writing or, if the price has been paid, the seller can be forced to deliver an apportionable part of the goods. The overt actions of the parties make admissible evidence of the other terms of the contract necessary to a just apportionment. This is true even though the actions of the parties are not in themselves inconsistent with a different transaction such as a consignment for resale or a mere loan of money.

    Part performance by the buyer requires the delivery of something by him or her that is accepted by the seller as such performance. Thus, part payment may be made by money or check, accepted by the seller. If the agreed price consists of goods or services, then they must also have been delivered and accepted.

    3. Between merchants, failure to answer a written confirmation of a contract within ten days of receipt is tantamount to a writing under subsection (2) and is sufficient against both parties under subsection (1). The only effect, however, is to take away from the party who fails to answer the defense of the statute of frauds; the burden of persuading the trier of fact that a contract was in fact made orally prior to the written confirmation is unaffected. Compare the effect of a failure to reply under section 2-207.

    4. Failure to satisfy the requirements of this section does not render the contract void for all purposes, but merely prevents it from being judicially enforced in favor of a party to the contract. For example, a buyer who takes possession of goods as provided in an oral contract which the seller has not meanwhile repudiated, is not a trespasser. Nor would the statute of frauds provisions of this section be a defense to a third person who wrongfully induces a party to refuse to perform an oral contract, even though the injured party cannot maintain an action for damages against the party so refusing to perform.

    5. The requirement of "signing" is discussed in the comment to section 1-201.

    6. It is not necessary that the writing be delivered to anybody. It need not be signed or authenticated by both parties but it is, of course, not sufficient against one who has not signed it. Prior to a dispute no one can determine which party's signing of the memorandum may be necessary but from the time of contracting each party should be aware that to him or her it is signing by the other which is important.

    7. If the making of a contract is admitted in court, either in a written pleading, by stipulation or by oral statement before the court, no additional writing is necessary for protection against fraud. Under this section it is no longer possible to admit the contract in court and still treat the statute as a defense. However, the contract is not thus conclusively established. The admission so made by a party is itself evidential against him or her of the truth of the facts so admitted and of nothing more; as against the other party, it is not evidential at all.

    Cross References:

    See sections 1-201, 2-202, 2-207, 2-209, and 2-304.

    Definitional Cross References:

    "Action". Section 1-201.

    "Between merchants". Section 2-104.

    "Buyer". Section 2-103.

    "Contract". Section 1-201.

    "Contract for sale". Section 2-106.

    "Goods". Section 2-105.

    "Notice". Section 1-201.

    "Party". Section 1-201.

    "Reasonable time". Section 1-204.

    "Sale". Section 2-106.

    "Seller". Section 2-103.


2-202. Final written expression; parol or extrinsic evidence.

Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented

(a) by course of performance, course of dealing, or usage of trade (section 1-303); and

(b) by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.

Source:Laws 1963, c. 544, Art. II, § 2-202, p. 1712; Laws 2005, LB 570, § 32.    


Annotations
    COMMENT

    Prior Uniform Statutory Provision: None.

    Purposes:

    1. This section definitely rejects:

    (a) Any assumption that because a writing has been worked out which is final on some matters, it is to be taken as including all the matters agreed upon;

    (b) The premise that the language used has the meaning attributable to such language by rules of construction existing in the law rather than the meaning which arises out of the commercial context in which it was used; and

    (c) The requirement that a condition precedent to the admissibility of the type of evidence specified in paragraph (a) is an original determination by the court that the language used is ambiguous.

    2. Paragraph (a) makes admissible evidence of course of dealing, usage of trade, and course of performance to explain or supplement the terms of any writing stating the agreement of the parties in order that the true understanding of the parties as to the agreement may be reached. Such writings are to be read on the assumption that the course of prior dealings between the parties and the usages of trade were taken for granted when the document was phrased. Unless carefully negated they have become an element of the meaning of the words used. Similarly, the course of actual performance by the parties is considered the best indication of what they intended the writing to mean.

    3. Under paragraph (b) consistent additional terms, not reduced to writing, may be proved unless the court finds that the writing was intended by both parties as a complete and exclusive statement of all the terms. If the additional terms are such that, if agreed upon, they would certainly have been included in the document in the view of the court, then evidence of their alleged making must be kept from the trier of fact.

    Cross References:

    Point 3: Sections 1-303, 2-207, 2-302, and 2-316.

    Definitional Cross References:

    "Agreed" and "agreement". Section 1-201.

    "Course of dealing". Section 1-303.

    "Course of performance". Section 1-303.

    "Party". Section 1-201.

    "Term". Section 1-201.

    "Usage of trade". Section 1-303.

    "Written" and "writing". Section 1-201.


2-203. Seals inoperative.

The affixing of a seal to a writing evidencing a contract for sale or an offer to buy or sell goods does not constitute the writing a sealed instrument and the law with respect to sealed instruments does not apply to such a contract or offer.

Source:Laws 1963, c. 544, Art. II, § 2-203, p. 1712.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: Section 3, Uniform Sales Act.

    Changes: Portion pertaining to "seals" rewritten.

    Purposes of Changes:

    1. This section makes it clear that every effect of the seal which relates to "sealed instruments" as such is wiped out insofar as contracts for sale are concerned. However, the substantial effects of a seal, except extension of the period of limitations, may be had by appropriate drafting as in the case of firm offers (see section 2-205).

    2. This section leaves untouched any aspects of a seal which relate merely to signatures or to authentication of execution and the like. Thus, a statute providing that a purported signature gives prima facie evidence of its own authenticity or that a signature gives prima facie evidence of consideration is still applicable to sales transactions even though a seal may be held to be a signature within the meaning of such a statute. Similarly, the authorized affixing of a corporate seal bearing the corporate name to a contractual writing purporting to be made by the corporation may have effect as a signature without any reference to the law of sealed instruments.

    Cross Reference:

    Point 1: Section 2-205.

    Definitional Cross References:

    "Contract for sale". Section 2-106.

    "Goods". Section 2-105.

    "Writing". Section 1-201.


2-204. Formation in general.

(1) A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.

(2) An agreement sufficient to constitute a contract for sale may be found even though the moment of its making is undetermined.

(3) Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.

Source:Laws 1963, c. 544, Art. II, § 2-204, p. 1713.


Annotations
    The parties' conduct indicated that a contract existed when the offeror made an oral offer which was later confirmed in a written proposal, submitted information and shop drawings to the offeree, corresponded several times with the offeree about variance approval, and visited the offeree's office almost 5 months after the alleged agreement was made. A contract does not fail for indefiniteness if the parties' conduct indicated that the parties intended to make a contract and the offer letter satisfied the quantity requirement of the U.C.C. Nebraska Builders Prod. Co. v. Industrial Erectors, 239 Neb. 744, 478 N.W.2d 257 (1992).

    A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct of parties which recognizes its existence. Crane Co. v. Roberts Supply Co., 196 Neb. 67, 241 N.W.2d 516 (1976).

    COMMENT

    Prior Uniform Statutory Provision: Sections 1 and 3, Uniform Sales Act.

    Changes: Completely rewritten by this and other sections of this article.

    Purposes of Changes:

    Subsection (1) continues without change the basic policy of recognizing any manner of expression of agreement, oral, written or otherwise. The legal effect of such an agreement is, of course, qualified by other provisions of this article.

    Under subsection (1) appropriate conduct by the parties may be sufficient to establish an agreement. Subsection (2) is directed primarily to the situation where the interchanged correspondence does not disclose the exact point at which the deal was closed, but the actions of the parties indicate that a binding obligation has been undertaken.

    Subsection (3) states the principle as to "open terms" underlying later sections of the article. If the parties intend to enter into a binding agreement, this subsection recognizes that agreement as valid in law, despite missing terms, if there is any reasonably certain basis for granting a remedy. The test is not certainty as to what the parties were to do nor as to the exact amount of damages due the plaintiff. Nor is the fact that one or more terms are left to be agreed upon enough of itself to defeat an otherwise adequate agreement. Rather, commercial standards on the point of "indefiniteness" are intended to be applied, the code making provision elsewhere for missing terms needed for performance, open price, remedies, and the like.

    The more terms the parties leave open, the less likely it is that they have intended to conclude a binding agreement, but their actions may be frequently conclusive on the matter despite the omissions.

    Cross References:

    Subsection (1): Sections 1-103, 2-201, and 2-302.

    Subsection (2): Sections 2-205 through 2-209.

    Subsection (3): See part 3.

    Definitional Cross References:

    "Agreement". Section 1-201.

    "Contract". Section 1-201.

    "Contract for sale". Section 2-106.

    "Goods". Section 2-105.

    "Party". Section 1-201.

    "Remedy". Section 1-201.

    "Term". Section 1-201.


2-205. Firm offers.

An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months; but any such term of assurance on a form supplied by the offeree must be separately signed by the offeror.

Source:Laws 1963, c. 544, Art. II, § 2-205, p. 1713.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: Sections 1 and 3, Uniform Sales Act.

    Changes: Completely rewritten by this and other sections of this article.

    Purposes of Changes:

    1. This section is intended to modify the former rule which required that "firm offers" be sustained by consideration in order to bind, and to require instead that they must merely be characterized as such and expressed in signed writings.

    2. The primary purpose of this section is to give effect to the deliberate intention of a merchant to make a current firm offer binding. The deliberation is shown in the case of an individualized document by the merchant's signature to the offer, and in the case of an offer included on a form supplied by the other party to the transaction by the separate signing of the particular clause which contains the offer. "Signed" here also includes authentication but the reasonableness of the authentication herein allowed must be determined in the light of the purpose of the section. The circumstances surrounding the signing may justify something less than a formal signature or initialing but typically the kind of authentication involved here would consist of a minimum of initialing of the clause involved. A handwritten memorandum on the writer's letterhead purporting in its terms to "confirm" a firm offer already made would be enough to satisfy this section, although not subscribed, since under the circumstances it could not be considered a memorandum of mere negotiation and it would adequately show its own authenticity. Similarly, an authorized telegram will suffice, and this is true even though the original draft contained only a typewritten signature. However, despite settled courses of dealing or usages of the trade whereby firm offers are made by oral communication and relied upon without more evidence, such offers remain revocable under this article since authentication by a writing is the essence of this section.

    3. This section is intended to apply to current "firm" offers and not to long-term options, and an outside time limit of three months during which such offers remain irrevocable has been set. The three-month period during which firm offers remain irrevocable under this section need not be stated by days or by date. If the offer states that it is "guaranteed" or "firm" until the happening of a contingency which will occur within the three-month period, it will remain irrevocable until that event. A promise made for a longer period will operate under this section to bind the offeror only for the first three months of the period but may of course be renewed. If supported by consideration it may continue for as long as the parties specify. This section deals only with the offer which is not supported by consideration.

    4. Protection is afforded against the inadvertent signing of a firm offer when contained in a form prepared by the offeree by requiring that such a clause be separately authenticated. If the offer clause is called to the offeror's attention and he or she separately authenticates it, he or she will be bound; section 2-302 may operate, however, to prevent an unconscionable result which otherwise would flow from other terms appearing in the form.

    5. Safeguards are provided to offer relief in the case of material mistake by virtue of the requirement of good faith and the general law of mistake.

    Cross References:

    Point 1: Section 1-102.

    Point 2: Section 1-102.

    Point 3: Section 2-201.

    Point 5: Section 2-302.

    Definitional Cross References:

    "Goods". Section 2-105.

    "Merchant". Section 2-104.

    "Signed". Section 1-201.

    "Writing". Section 1-201.


2-206. Offer and acceptance in formation of contract.

(1) Unless otherwise unambiguously indicated by the language or circumstances

(a) an offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances;

(b) an order or other offer to buy goods for prompt or current shipment shall be construed as inviting acceptance either by a prompt promise to ship or by the prompt or current shipment of conforming or nonconforming goods, but such a shipment of nonconforming goods does not constitute an acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer.

(2) Where the beginning of a requested performance is a reasonable mode of acceptance an offeror who is not notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance.

Source:Laws 1963, c. 544, Art. II, § 2-206, p. 1713.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: Sections 1 and 3, Uniform Sales Act.

    Changes: Completely rewritten in this and other sections of this article.

    Purposes of Changes:

    To make it clear that:

    1. Any reasonable manner of acceptance is intended to be regarded as available unless the offeror has made quite clear that it will not be acceptable. Former technical rules as to acceptance, such as requiring that telegraphic offers be accepted by telegraphed acceptance, etc., are rejected and a criterion that the acceptance be "in any manner and by any medium reasonable under the circumstances", is substituted. This section is intended to remain flexible and its applicability to be enlarged as new media of communication develop or as the more time-saving present-day media come into general use.

    2. Either shipment or a prompt promise to ship is made a proper means of acceptance of an offer looking to current shipment. In accordance with ordinary commercial understanding the section interprets an order looking to current shipment as allowing acceptance either by actual shipment or by a prompt promise to ship and rejects the artificial theory that only a single mode of acceptance is normally envisaged by an offer. This is true even though the language of the offer happens to be "ship at once" or the like. "Shipment" is here used in the same sense as in section 2-504; it does not include the beginning of delivery by the seller's own truck or by messenger. But loading on the seller's own truck might be a beginning of performance under subsection (2).

    3. The beginning of performance by an offeree can be effective as acceptance so as to bind the offeror only if followed within a reasonable time by notice to the offeror. Such a beginning of performance must unambiguously express the offeree's intention to engage himself or herself. For the protection of both parties it is essential that notice follow in due course to constitute acceptance. Nothing in this section however bars the possibility that under the common law performance begun may have an intermediate effect of temporarily barring revocation of the offer, or at the offeror's option, final effect in constituting acceptance.

    4. Subsection (1)(b) deals with the situation where a shipment made following an order is shown by a notification of shipment to be referable to that order but has a defect. Such a nonconforming shipment is normally to be understood as intended to close the bargain, even though it proves to have been at the same time a breach. However, the seller by stating that the shipment is nonconforming and is offered only as an accommodation to the buyer keeps the shipment or notification from operating as an acceptance.

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Conforming". Section 2-106.

    "Contract". Section 1-201.

    "Goods". Section 2-105.

    "Notifies". Section 1-201.

    "Reasonable time". Section 1-204.


2-207. Additional terms in acceptance or confirmation.

(1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.

(2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:

(a) the offer expressly limits acceptance to the terms of the offer;

(b) they materially alter it; or

(c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received.

(3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of the Uniform Commercial Code.

Source:Laws 1963, c. 544, Art. II, § 2-207, p. 1714; Laws 1992, LB 861, § 10.


Annotations
    It appears F.O.B. designation is without importance under the long arm statute under facts in this case since it was not shown acceptance of orders was made conditional on assent to the additional or different terms. General Leisure Products Corp. v. Gleason Corp., 331 F.Supp. 278 (D. Neb. 1971).

    COMMENT

    Prior Uniform Statutory Provision: Sections 1 and 3, Uniform Sales Act.

    Changes: Completely rewritten by this and other sections of this article.

    Purposes of Changes:

    1. This section is intended to deal with two typical situations. The one is the written confirmation, where an agreement has been reached either orally or by informal correspondence between the parties and is followed by one or both of the parties sending formal memoranda embodying the terms so far as agreed upon and adding terms not discussed. The other situation is offer and acceptance, in which a wire or letter expressed and intended as an acceptance or the closing of an agreement adds further minor suggestions or proposals such as "ship by Tuesday", "rush", "ship draft against bill of lading inspection allowed", or the like. A frequent example of the second situation is the exchange of printed purchase order and acceptance (sometimes called "acknowledgement") forms. Because the forms are oriented to the thinking of the respective drafting parties, the terms contained in them often do not correspond. Often the seller's form contains terms different from or additional to those set forth in the buyer's form. Nevertheless, the parties proceed with the transaction.

    2. Under this article a proposed deal which in commercial understanding has in fact been closed is recognized as a contract. Therefor, any additional matter contained in the confirmation or in the acceptance falls within subsection (2) and must be regarded as a proposal for an added term unless the acceptance is made conditional on the acceptance of the additional or different terms.

    3. Whether or not additional or different terms will become part of the agreement depends upon the provisions of subsection (2). If they are such as materially to alter the original bargain, they will not be included unless expressly agreed to by the other party. If, however, they are terms which would not so change the bargain they will be incorporated unless notice of objection to them has already been given or is given within a reasonable time.

    4. Examples of typical clauses which would normally "materially alter" the contract and so result in surprise or hardship if incorporated without express awareness by the other party are: A clause negating such standard warranties as that of merchantability or fitness for a particular purpose in circumstances in which either warranty normally attaches; a clause requiring a guaranty of 90 percent or 100 percent deliveries in a case such as a contract by cannery, where the usage of the trade allows greater quantity leeways; a clause reserving to the seller the power to cancel upon the buyer's failure to meet any invoice when due; a clause requiring that complaints be made in a time materially shorter than customary or reasonable.

    5. Examples of clauses which involve no element of unreasonable surprise and which therefor are to be incorporated in the contract unless notice of objection is seasonably given are: A clause setting forth and perhaps enlarging slightly upon the seller's exemption due to supervening causes beyond his or her control, similar to those covered by the provision of this article on merchant's excuse by failure of presupposed conditions or a clause fixing in advance any reasonable formula of proration under such circumstances; a clause fixing a reasonable time for complaints within customary limits, or in the case of a purchase for subsale, providing for inspection by the subpurchaser; a clause providing for interest on overdue invoices or fixing the seller's standard credit terms where they are within the range of trade practice and do not limit any credit bargained for; a clause limiting the right of rejection for defects which fall within the customary trade tolerances for acceptance "with adjustment" or otherwise limiting remedy in a reasonable manner (see sections 2-718 and 2-719).

    6. If no answer is received within a reasonable time after additional terms are proposed, it is both fair and commercially sound to assume that their inclusion has been assented to. Where clauses on confirming forms sent by both parties conflict each party must be assumed to object to a clause of the other conflicting with one on the confirmation sent by himself or herself. As a result the requirement that there be notice of objection which is found in subsection (2) is satisfied and the conflicting terms do not become a part of the contract. The contract then consists of the terms originally expressly agreed to, terms on which the confirmations agree, and terms supplied by the code, including subsection (2). The written confirmation is also subject to section 2-201. Under that section a failure to respond permits enforcement of a prior oral agreement; under this section a failure to respond permits additional terms to become part of the agreement.

    7. In many cases, as where goods are shipped, accepted, and paid for before any dispute arises, there is no question whether a contract has been made. In such cases, where the writings of the parties do not establish a contract, it is not necessary to determine which act or document constituted the offer and which the acceptance. See section 2-204. The only question is what terms are included in the contract, and subsection (3) furnishes the governing rule.

    Cross References:

    See generally section 2-302.

    Point 5: Sections 2-513, 2-602, 2-607, 2-609, 2-612, 2-614, 2-615, 2-616, 2-718, and 2-719.

    Point 6: Sections 1-102 and 2-104.

    Definitional Cross References:

    "Between merchants". Section 2-104.

    "Contract". Section 1-201.

    "Notification". Section 1-201.

    "Reasonable time". Section 1-204.

    "Seasonably". Section 1-204.

    "Send". Section 1-201.

    "Term". Section 1-201.

    "Written". Section 1-201.


2-208. Repealed. Laws 2005, LB 570, § 116.

2-209. Modification, rescission and waiver.

(1) An agreement modifying a contract within this article needs no consideration to be binding.

(2) A signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded, but except as between merchants such a requirement on a form supplied by the merchant must be separately signed by the other party.

(3) The requirements of the statute of frauds section of this article (section 2-201) must be satisfied if the contract as modified is within its provisions.

(4) Although an attempt at modification or rescission does not satisfy the requirements of subsection (2) or (3) it can operate as a waiver.

(5) A party who has made a waiver affecting an executory portion of the contract may retract the waiver by reasonable notification received by the other party that strict performance will be required of any term waived, unless the retraction would be unjust in view of a material change of position in reliance on the waiver.

Source:Laws 1963, c. 544, Art. II, § 2-209, p. 1715.


Annotations
    A distributorship agreement for the sale of newspapers for a price greater than five hundred dollars was within the statute of frauds. Omaha World-Herald Co. v. Nielsen, 220 Neb. 294, 369 N.W.2d 631 (1985).

    Modification of a sales contract may be made without consideration. Farmland Service Coop., Inc. v. Jack, 196 Neb. 263, 242 N.W.2d 624 (1976).

    COMMENT

    Prior Uniform Statutory Provision: Subsection (1) — Compare section 1, Uniform Written Obligations Act; subsections (2) to (5) — none.

    Purposes of Changes and New Matter:

    1. This section seeks to protect and make effective all necessary and desirable modifications of sales contracts without regard to the technicalities which at present hamper such adjustments.

    2. Subsection (1) provides that an agreement modifying a sales contract needs no consideration to be binding.

    However, modifications made thereunder must meet the test of good faith imposed by the code. The effective use of bad faith to escape performance on the original contract terms is barred, and the extortion of a "modification" without legitimate commercial reason is ineffective as a violation of the duty of good faith. Nor can a mere technical consideration support a modification made in bad faith.

    The test of "good faith" between merchants or as against merchants includes "observance of reasonable commercial standards of fair dealing in the trade" (section 2-103), and may in some situations require an objectively demonstrable reason for seeking a modification. But such matters as a market shift which makes performance come to involve a loss may provide such a reason even though there is no such unforeseen difficulty as would make out a legal excuse from performance under sections 2-615 and 2-616.

    3. Subsections (2) and (3) are intended to protect against false allegations of oral modifications. "Modification or rescission" includes abandonment or other change by mutual consent, contrary to the decision in Green v. Doniger, 300 N.Y. 238, 90 N.E.2d 56 (1949); it does not include unilateral "termination" or "cancellation" as defined in section 2-106.

    The statute of frauds provisions of this article are expressly applied to modifications by subsection (3). Under those provisions the "delivery and acceptance" test is limited to the goods which have been accepted, that is, to the past. "Modification" for the future cannot therefor be conjured up by oral testimony if the price involved is $500.00 or more since such modification must be shown at least by an authenticated memo. And since a memo is limited in its effect to the quantity of goods set forth in it there is safeguard against oral evidence.

    Subsection (2) permits the parties in effect to make their own statute of frauds as regards any future modification of the contract by giving effect to a clause in a signed agreement which expressly requires any modification to be by signed writing. But note that if a consumer is to be held to such a clause on a form supplied by a merchant it must be separately signed.

    4. Subsection (4) is intended, despite the provisions of subsections (2) and (3), to prevent contractual provisions excluding modification except by a signed writing from limiting in other respects the legal effect of the parties' actual later conduct. The effect of such conduct as a waiver is further regulated in subsection (5).

    Cross References:

    Point 1: Section 1-203.

    Point 2: Sections 1-201, 1-203, 2-615, and 2-616.

    Point 3: Sections 2-106, 2-201, and 2-202.

    Point 4: Sections 2-202 and 2-208.

    Definitional Cross References:

    "Agreement". Section 1-201.

    "Between merchants". Section 2-104.

    "Contract". Section 1-201.

    "Notification". Section 1-201.

    "Signed". Section 1-201.

    "Term". Section 1-201.

    "Writing". Section 1-201.


2-210. Delegation of performance; assignment of rights.

(1) A party may perform his or her duty through a delegate unless otherwise agreed or unless the other party has a substantial interest in having his or her original promisor perform or control the acts required by the contract. No delegation of performance relieves the party delegating of any duty to perform or any liability for breach.

(2) Except as otherwise provided in section 9-406, unless otherwise agreed all rights of either seller or buyer can be assigned except where the assignment would materially change the duty of the other party, or increase materially the burden or risk imposed on him or her by his or her contract, or impair materially his or her chance of obtaining return performance. A right to damages for breach of the whole contract or a right arising out of the assignor's due performance of his or her entire obligation can be assigned despite agreement otherwise.

(3) The creation, attachment, perfection, or enforcement of a security interest in the seller's interest under a contract is not a transfer that materially changes the duty of or increases materially the burden or risk imposed on the buyer or impairs materially the buyer's chance of obtaining return performance within the purview of subsection (2) unless, and then only to the extent that, enforcement actually results in a delegation of material performance of the seller. Even in that event, the creation, attachment, perfection, and enforcement of the security interest remain effective, but (i) the seller is liable to the buyer for damages caused by the delegation to the extent that the damages could not reasonably be prevented by the buyer, and (ii) a court having jurisdiction may grant other appropriate relief, including cancellation of the contract for sale or an injunction against enforcement of the security interest or consummation of the enforcement.

(4) Unless the circumstances indicate the contrary a prohibition of assignment of "the contract" is to be construed as barring only the delegation to the assignee of the assignor's performance.

(5) An assignment of "the contract" or of "all my rights under the contract" or an assignment in similar general terms is an assignment of rights and unless the language or the circumstances (as in an assignment for security) indicate the contrary, it is a delegation of performance of the duties of the assignor and its acceptance by the assignee constitutes a promise by him or her to perform those duties. This promise is enforceable by either the assignor or the other party to the original contract.

(6) The other party may treat any assignment which delegates performance as creating reasonable grounds for insecurity and may without prejudice to his or her rights against the assignor demand assurances from the assignee (section 2-609).

Source:Laws 1963, c. 544, Art. II, § 2-210, p. 1716; Laws 1999, LB 550, § 55.    


Annotations
    COMMENT

    Prior Uniform Statutory Provision: None.

    Purposes:

    1. Generally, this section recognizes both delegation of performance and assignability as normal and permissible incidents of a contract for the sale of goods.

    2. Delegation of performance, either in conjunction with an assignment or otherwise, is provided for by subsection (1) where no substantial reason can be shown as to why the delegated performance will not be as satisfactory as personal performance.

    3. Under subsection (2) rights which are no longer executory such as a right to damages for breach may be assigned although the agreement prohibits assignment. In such cases no question of delegation of any performance is involved. Subsection (2) is subject to section 9-406, which makes rights to payment for goods sold ("accounts"), whether or not earned, freely alienable notwithstanding a contrary agreement or rule of law.

    4. The nature of the contract or the circumstances of the case, however, may bar assignment of the contract even where delegation of performance is not involved. This article and this section are intended to clarify this problem, particularly in cases dealing with output requirement, and exclusive dealing contracts. In the first place the section on requirements and exclusive dealing removes from the construction of the original contract most of the "personal discretion" element by substituting the reasonably objective standard of good faith operation of the plant or business to be supplied. Secondly, the section on insecurity and assurances, which is specifically referred to in subsection (5) of this section, frees the other party from the doubts and uncertainty which may afflict him or her under an assignment of the character in question by permitting him or her to demand adequate assurance of due performance without which he or she may suspend his or her own performance. Subsection (5) is not in any way intended to limit the effect of the section on insecurity and assurances and the word "performance" includes the giving of orders under a requirements contract. Of course, in any case where a material personal discretion is sought to be transferred, effective assignment is barred by subsection (2).

    5. Subsection (4) lays down a general rule of construction distinguishing between a normal commercial assignment, which substitutes the assignee for the assignor both as to rights and duties, and a financing assignment in which only the assignor's rights are transferred.

    This article takes no position on the possibility of extending some recognition or power to the original parties to work out normal commercial readjustments of the contract in the case of financing assignments even after the original obligor has been notified of the assignment. This question is dealt with in the Article on Secured Transactions (Article 9).

    6. Subsection (5) recognizes that the nonassigning original party has a stake in the reliability of the person with whom he or she has closed the original contract, and is, therefor, entitled to due assurance that any delegated performance will be properly forthcoming.

    7. This section is not intended as a complete statement of the law of delegation and assignment but is limited to clarifying a few points doubtful under the case law. Particularly, neither this section nor this article touches directly on such questions as the need or effect of notice of the assignment, the rights of successive assignees, or any question of the form of an assignment, either as between the parties or as against any third parties. Some of these questions are dealt with in article 9.

    Cross References:

    Point 3: Articles 5 and 9.

    Point 4: Sections 2-306 and 2-609.

    Point 5: Article 9 and sections 9-317 and 9-318.

    Point 7: Article 9.

    Definitional Cross References:

    "Agreement". Section 1-201.

    "Buyer". Section 2-103.

    "Contract". Section 1-201.

    "Party". Section 1-201.

    "Rights". Section 1-201.

    "Seller". Section 2-103.

    "Term". Section 1-201.


2-301. General obligations of parties.

The obligation of the seller is to transfer and deliver and that of the buyer is to accept and pay in accordance with the contract.

Source:Laws 1963, c. 544, Art. II, § 2-301, p. 1717.


Annotations
    The obligation of the seller of goods is to transfer and deliver in accordance with the contract. Goosic Constr. Co. v. City Nat. Bank of Crete, 196 Neb. 86, 241 N.W.2d 521 (1976).

    COMMENT

    Prior Uniform Statutory Provision: Sections 11 and 41, Uniform Sales Act.

    Changes: Rewritten.

    Purposes of Changes:

    This section uses the term "obligation" in contrast to the term "duty" in order to provide for the "condition" aspects of delivery and payment insofar as they are not modified by other sections of this article such as those on cure of tender. It thus replaces not only the general provisions of the Uniform Sales Act on the parties' duties, but also the general provisions of that act on the effect of conditions. In order to determine what is "in accordance with the contract" under this article usage of trade, course of dealing and performance, and the general background of circumstances must be given due consideration in conjunction with the lay meaning of the words used to define the scope of the conditions and duties.

    Cross References:

    Section 1-106. See also sections 1-205, 2-208, 2-209, 2-508, and 2-612.

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Contract". Section 1-201.

    "Party". Section 1-201.

    "Seller". Section 2-103.


2-302. Unconscionable contract or clause.

(1) If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.

(2) When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making the determination.

Source:Laws 1963, c. 544, Art. II, § 2-302, p. 1717.


Annotations
    Summary judgment was proper where liability was admitted, there is no issue of bad faith, and agreement is not unconscionable. Grantham v. General Tel. Co., 191 Neb. 21, 213 N.W.2d 439 (1973).

    Discussed in opinion holding Uniform Commercial Code applicable rather than strict tort liability in case involving damage to all property. Hawkins Constr. Co. v. Matthews Co., Inc., 190 Neb. 546, 209 N.W.2d 643 (1973).

    The issue of whether a provision of express warranty is unconscionable presents a question of law for the court. Melcher v. Boesch Motor Co., 188 Neb. 522, 198 N.W.2d 57 (1972).

    A disclaimer clause in a family settlement agreement will not necessarily bar recovery for fraud. Abbott v. Abbott, 188 Neb. 61, 195 N.W.2d 204 (1972).

    So long as sufficient evidence has been adduced concerning the commercial setting, purpose, and effect of a clause or contract, subsection (2) of this section does not require that a special hearing be held to determine whether a limitation of remedies is unconscionable. The issue may be raised at any time in the proceeding. Adams v. American Cyanamid Co., 1 Neb. App. 337, 498 N.W.2d 577 (1992).

    COMMENT

    Prior Uniform Statutory Provision: None.

    Purposes:

    1. This section is intended to make it possible for the courts to police explicitly against the contracts or clauses which they find to be unconscionable. In the past such policing has been accomplished by adverse construction of language, by manipulation of the rules of offer and acceptance, or by determinations that the clause is contrary to public policy or to the dominant purpose of the contract. This section is intended to allow the court to pass directly on the unconscionability of the contract or particular clause therein and to make a conclusion of law as to its unconscionability. The basic test is whether, in the light of the general commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract. Subsection (2) makes it clear that it is proper for the court to hear evidence upon these questions. The principle is one of the prevention of oppression and unfair surprise (cf. Campbell Soup Co. v. Wentz, 172 F.2d 80, 3d Cir. 1948) and not of disturbance of allocation of risks because of superior bargaining power. The underlying basis of this section is illustrated by the results in cases such as the following:

    Kansas City Wholesale Grocery Co. v. Weber Packing Corporation, 93 Utah 414, 73 P.2d 1272 (1937), where a clause limiting time for complaints was held inapplicable to latent defects in a shipment of catsup which could be discovered only by microscopic analysis; Hardy v. General Motors Acceptance Corporation, 38 Ga.App. 463, 144 S.E. 327 (1928), holding that a disclaimer of warranty clause applied only to express warranties, thus letting in a fair implied warranty; Andrews Bros. v. Singer & Co. (1934 CA) 1 K.B. 17, holding that where a car with substantial mileage was delivered instead of a "new" car, a disclaimer of warranties, including those "implied", left unaffected an "express obligation" on the description, even though the Sale of Goods Act called such an implied warranty; New Prague Flouring Mill Co. v. G. A. Spears, 194 Iowa 417, 189 N.W. 815 (1922), holding that a clause permitting the seller, upon the buyer's failure to supply shipping instructions, to cancel, ship, or allow delivery date to be indefinitely postponed 30 days at a time by the inaction, does not indefinitely postpone the date of measuring damages for the buyer's breach, to the seller's advantage; and Kansas Flour Mills Co. v. Dirks, 100 Kan. 376, 164 P. 273 (1917), where under a similar clause in a rising market the court permitted the buyer to measure his damages for nondelivery at the end of only one 30-day postponement; Green v. Arcos, Ltd. (1931 CA) 47 T.L.R. 336, where a blanket clause prohibiting rejection of shipments by the buyer was restricted to apply to shipments where discrepancies represented merely mercantile variations; Meyer v. Packard Cleveland Motor Co., 106 Ohio St. 328, 140 N.E. 118 (1922), in which the court held that a "waiver" of all agreements not specified did not preclude implied warranty of fitness of a rebuilt dump truck for ordinary use as a dump truck; Austin Co. v. J. H. Tillman Co., 104 Or. 541, 209 P. 131 (1922), where a clause limiting the buyer's remedy to return was held to be applicable only if the seller had delivered a machine needed for a construction job which reasonably met the contract description; Bekkevold v. Potts, 173 Minn. 87, 216 N.W. 790, 59 A.L.R. 1164 (1927), refusing to allow warranty of fitness for purpose imposed by law to be negated by clause excluding all warranties "made" by the seller; Robert A. Munroe & Co. v. Meyer (1930) 2 K.B. 312, holding that the warranty of description overrides a clause reading "with all faults and defects" where adulterated meat not up to the contract description was delivered.

    2. Under this section the court, in its discretion, may refuse to enforce the contract as a whole if it is permeated by the unconscionability, or it may strike any single clause or group of clauses which are so tainted or which are contrary to the essential purpose of the agreement, or it may simply limit unconscionable clauses so as to avoid unconscionable results.

    3. The present section is addressed to the court, and the decision is to be made by it. The commercial evidence referred to in subsection (2) is for the court's consideration, not the jury's. Only the agreement which results from the court's action on these matters is to be submitted to the general trier of fact.

    Definitional Cross Reference:

    "Contract". Section 1-201.


2-303. Allocation or division of risks.

Where this article allocates a risk or a burden as between the parties "unless otherwise agreed", the agreement may not only shift the allocation but may also divide the risk or burden.

Source:Laws 1963, c. 544, Art. II, § 2-303, p. 1717.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: None.

    Purposes:

    1. This section is intended to make it clear that the parties may modify or allocate "unless otherwise agreed" risks or burdens imposed by this article as they desire, always subject, of course, to the provisions on unconscionability.

    Compare section 1-102(4).

    2. The risk or burden may be divided by the express terms of the agreement or by the attending circumstances, since under the definition of "agreement" in this code the circumstances surrounding the transaction as well as the express language used by the parties enter into the meaning and substance of the agreement.

    Cross References:

    Point 1: Sections 1-102 and 2-302.

    Point 2: Section 1-201.

    Definitional Cross References:

    "Agreement". Section 1-201.

    "Party". Section 1-201.


2-304. Price payable in money, goods, realty, or otherwise.

(1) The price can be made payable in money or otherwise. If it is payable in whole or in part in goods each party is a seller of the goods which he is to transfer.

(2) Even though all or part of the price is payable in an interest in realty the transfer of the goods and the seller's obligations with reference to them are subject to this article, but not the transfer of the interest in realty or the transferor's obligations in connection therewith.

Source:Laws 1963, c. 544, Art. II, § 2-304, p. 1717.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: Subsections (2) and (3) of section 9, Uniform Sales Act.

    Changes: Rewritten.

    Purposes of Changes:

    1. This section corrects the phrasing of the Uniform Sales Act so as to avoid misconstruction and produce greater accuracy in commercial result. While it continues the essential intent and purpose of the Uniform Sales Act it rejects any purely verbalistic construction in disregard of the underlying reason of the provisions.

    2. Under subsection (1) the provisions of this article are applicable to transactions where the "price" of goods is payable in something other than money. This does not mean, however, that this whole article applies automatically and in its entirety simply because an agreed transfer of title to goods is not a gift. The basic purposes and reasons of the article must always be considered in determining the applicability of any of its provisions.

    3. Subsection (2) lays down the general principle that when goods are to be exchanged for realty, the provisions of this article apply only to those aspects of the transaction which concern the transfer of title to goods but do not affect the transfer of the realty since the detailed regulation of various particular contracts which fall outside the scope of this article is left to the courts and other legislation. However, the complexities of these situations may be such that each must be analyzed in the light of the underlying reasons in order to determine the applicable principles. Local statutes dealing with realty are not to be lightly disregarded or altered by language of this article. In contrast, this article declares definite policies in regard to certain matters legitimately within its scope though concerned with real property situations, and in those instances the provisions of this article control.

    Cross References:

    Point 1: Section 1-102.

    Point 3: Sections 1-102, 1-103, 1-104, and 2-107.

    Definitional Cross References:

    "Goods". Section 2-105.

    "Money". Section 1-201.

    "Party". Section 1-201.

    "Seller". Section 2-103.


2-305. Open price term.

(1) The parties if they so intend can conclude a contract for sale even though the price is not settled. In such a case the price is a reasonable price at the time for delivery if

(a) nothing is said as to price; or

(b) the price is left to be agreed by the parties and they fail to agree; or

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

(2) A price to be fixed by the seller or by the buyer means a price for him to fix in good faith.

(3) When a price left to be fixed otherwise than by agreement of the parties fails to be fixed through fault of one party the other may at his option treat the contract as canceled or himself fix a reasonable price.

(4) Where, however, the parties intend not to be bound unless the price be fixed or agreed and it is not fixed or agreed there is no contract. In such a case the buyer must return any goods already received or if unable so to do must pay their reasonable value at the time of delivery and the seller must return any portion of the price paid on account.

Source:Laws 1963, c. 544, Art. II, § 2-305, p. 1718.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: Sections 9 and 10, Uniform Sales Act.

    Changes: Completely rewritten.

    Purposes of Changes:

    1. This section applies when the price term is left open on the making of an agreement which is nevertheless intended by the parties to be a binding agreement. This article rejects in these instances the formula that "an agreement to agree is unenforceable" if the case falls within subsection (1) of this section, and rejects also defeating such agreements on the ground of "indefiniteness". Instead this article recognizes the dominant intention of the parties to have the deal continue to be binding upon both. As to future performance, since this article recognizes remedies such as cover (section 2-712), resale (section 2-706), and specific performance (section 2-716) which go beyond any mere arithmetic as between contract price and market price, there is usually a "reasonably certain basis for granting an appropriate remedy for breach" so that the contract need not fail for indefiniteness.

    2. Under some circumstances the postponement of agreement on price will mean that no deal has really been concluded, and this is made express in the preamble of subsection (1) ("The parties if they so intend") and in subsection (4). Whether or not this is so is, in most cases, a question to be determined by the trier of fact.

    3. Subsection (2), dealing with the situation where the price is to be fixed by one party rejects the uncommercial idea that an agreement that the seller may fix the price means that he or she may fix any price he or she may wish by the express qualification that the price so fixed must be fixed in good faith. Good faith includes observance of reasonable commercial standards of fair dealing in the trade if the party is a merchant. (Section 2-103). But in the normal case a "posted price" or a future seller's or buyer's "given price", "price in effect", "market price", or the like satisfies the good faith requirement.

    4. The section recognizes that there may be cases in which a particular person's judgment is not chosen merely as a barometer or index of a fair price but is an essential condition to the parties' intent to make any contract at all. For example, the case where a known and trusted expert is to "value" a particular painting for which there is no market standard differs sharply from the situation where a named expert is to determine the grade of cotton, and the difference would support a finding that in the one the parties did not intend to make a binding agreement if that expert were unavailable whereas in the other they did so intend. Other circumstances would of course affect the validity of such a finding.

    5. Under subsection (3), wrongful interference by one party with any agreed machinery for price fixing in the contract may be treated by the other party as a repudiation justifying cancellation, or merely as a failure to take cooperative action thus shifting to the aggrieved party the reasonable leeway in fixing the price.

    6. Throughout the entire section, the purpose is to give effect to the agreement which has been made. That effect, however, is always conditioned by the requirement of good faith action which is made an inherent part of all contracts within the code. (Section 1-203).

    Cross References:

    Point 1: Sections 2-204(3), 2-706, 2-712, and 2-716.

    Point 3: Section 2-103.

    Point 5: Sections 2-311 and 2-610.

    Point 6: Section 1-203.

    Definitional Cross References:

    "Agreement". Section 1-201.

    "Burden of establishing". Section 1-201.

    "Buyer". Section 2-103.

    "Cancellation". Section 2-106.

    "Contract". Section 1-201.

    "Contract for sale". Section 2-106.

    "Fault". Section 1-201.

    "Goods". Section 2-105.

    "Party". Section 1-201.

    "Receipt of goods". Section 2-103.

    "Seller". Section 2-103.

    "Term". Section 1-201.


2-306. Output, requirements and exclusive dealings.

(1) A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded.

(2) A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.

Source:Laws 1963, c. 544, Art. II, § 2-306, p. 1718.


Annotations
    A contract to purchase a crop on a certain number of acres and to pasture the stalks for a fixed price is not an output contract. Meyer v. Sandhills Beef, Inc., 211 Neb. 388, 318 N.W.2d 863 (1982).

    COMMENT

    Prior Uniform Statutory Provision: None.

    Purposes:

    1. Subsection (1) of this section, in regard to output and requirements, applies to this specific problem the general approach of the code which requires the reading of commercial background and intent into the language of any agreement and demands good faith in the performance of that agreement. It applies to such contracts of nonproducing establishments such as dealers or distributors as well as to manufacturing concerns.

    2. Under this article, a contract for output or requirements is not too indefinite since it is held to mean the actual good faith output or requirements of the particular party. Nor does such a contract lack mutuality of obligation since, under this section, the party who will determine quantity is required to operate his or her plant or conduct his or her business in good faith and according to commercial standards of fair dealing in the trade so that his or her output or requirements will approximate a reasonably foreseeable figure. Reasonable elasticity in the requirements is expressly envisaged by this section and good faith variations from prior requirements are permitted even when the variation may be such as to result in discontinuance. A shutdown by a requirements buyer for lack of orders might be permissible when a shutdown merely to curtail losses would not. The essential test is whether the party is acting in good faith. Similarly, a sudden expansion of the plant by which requirements are to be measured would not be included within the scope of the contract as made but normal expansion undertaken in good faith would be within the scope of this section. One of the factors in an expansion situation would be whether the market price had risen greatly in a case in which the requirements contract contained a fixed price. Reasonable variation of an extreme sort is exemplified in Southwest Natural Gas Co. v. Oklahoma Portland Cement Co., 102 F.2d 630 (C.C.A. 10, 1939). This article takes no position as to whether a requirements contract is a provable claim in bankruptcy.

    3. If an estimate of output or requirements is included in the agreement, no quantity unreasonably disproportionate to it may be tendered or demanded. Any minimum or maximum set by the agreement shows a clear limit on the intended elasticity. In similar fashion, the agreed estimate is to be regarded as a center around which the parties intend the variation to occur.

    4. When an enterprise is sold, the question may arise whether the buyer is bound by an existing output or requirements contract. That question is outside the scope of this article, and is to be determined on other principles of law. Assuming that the contract continues, the output or requirements in the hands of the new owner continue to be measured by the actual good faith output or requirements under the normal operation of the enterprise prior to sale. The sale itself is not grounds for sudden expansion or decrease.

    5. Subsection (2), on exclusive dealing, makes explicit the commercial rule embodied in the code under which the parties to such contracts are held to have impliedly, even when not expressly, bound themselves to use reasonable diligence as well as good faith in their performance of the contract. Under such contracts the exclusive agent is required, although no express commitment has been made, to use reasonable effort and due diligence in the expansion of the market or the promotion of the product, as the case may be. The principal is expected under such a contract to refrain from supplying any other dealer or agent within the exclusive territory. An exclusive dealing agreement brings into play all of the good faith aspects of the output and requirement problems of subsection (1). It also raises questions of insecurity and right to adequate assurance under this article.

    Cross References:

    Point 4: Section 2-210.

    Point 5: Sections 1-203 and 2-609.

    Definitional Cross References:

    "Agreement". Section 1-201.

    "Buyer". Section 2-103.

    "Contract for sale". Section 2-106.

    "Good faith". Section 1-201.

    "Goods". Section 2-105.

    "Party". Section 1-201.

    "Seller". Section 2-103.

    "Term". Section 1-201.


2-307. Delivery in single lot or several lots.

Unless otherwise agreed all goods called for by a contract for sale must be tendered in a single delivery and payment is due only on such tender but where the circumstances give either party the right to make or demand delivery in lots the price if it can be apportioned may be demanded for each lot.

Source:Laws 1963, c. 544, Art. II, § 2-307, p. 1719.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: Section 45(1), Uniform Sales Act.

    Changes: Rewritten and expanded.

    Purposes of Changes:

    1. This section applies where the parties have not specifically agreed whether delivery and payment are to be by lots and generally continues the essential intent of original act, section 45(1) by assuming that the parties intended delivery to be in a single lot.

    2. Where the actual agreement or the circumstances do not indicate otherwise, delivery in lots is not permitted under this section and the buyer is properly entitled to reject for a deficiency in the tender, subject to any privilege in the seller to cure the tender.

    3. The "but" clause of this section goes to the case in which it is not commercially feasible to deliver or to receive the goods in a single lot as for example, where a contract calls for the shipment of ten carloads of coal and only three cars are available at a given time. Similarly, in a contract involving brick necessary to build a building the buyer's storage space may be limited so that it would be impossible to receive the entire amount of brick at once, or it may be necessary to assemble the goods as in the case of cattle on the range, or to mine them.

    In such cases, a partial delivery is not subject to rejection for the defect in quantity alone, if the circumstances do not indicate a repudiation or default by the seller as to the expected balance or do not give the buyer ground for suspending his or her performance because of insecurity under the provisions of section 2-609. However, in such cases the undelivered balance of goods under the contract must be forthcoming within a reasonable time and in a reasonable manner according to the policy of section 2-503 on manner of tender of delivery. This is reinforced by the express provisions of section 2-608 that if a lot has been accepted on the reasonable assumption that its nonconformity will be cured, the acceptance may be revoked if the cure does not seasonably occur. The section rejects the rule of Kelly Construction Co. v. Hackensack Brick Co., 91 N.J.L. 585, 103 A. 417 (1918) and approves the result in Lynn M. Ranger, Inc. v. Gildersleeve, 106 Conn. 372, 138 A. 142 (1927) in which a contract was made for six carloads of coal then rolling from the mines and consigned to the seller but the seller agreed to divert the carloads to the buyer as soon as the car numbers became known to him. He arranged a diversion of two cars and then notified the buyer who then repudiated the contract. The seller was held to be entitled to his full remedy for the two cars diverted because simultaneous delivery of all of the cars was not contemplated by either party.

    4. Where the circumstances indicate that a party has a right to delivery in lots, the price may be demanded for each lot if it is apportionable.

    Cross References:

    Point 1: Section 1-201.

    Point 2: Sections 2-508 and 2-601.

    Point 3: Sections 2-503, 2-608, and 2-609.

    Definitional Cross References:

    "Contract for sale". Section 2-106.

    "Goods". Section 2-105.

    "Lot". Section 2-105.

    "Party". Section 1-201.

    "Rights". Section 1-201.


2-308. Absence of specified place for delivery.

Unless otherwise agreed

(a) the place for delivery of goods is the seller's place of business or if he has none his residence; but

(b) in a contract for sale of identified goods which to the knowledge of the parties at the time of contracting are in some other place, that place is the place for their delivery; and

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

Source:Laws 1963, c. 544, Art. II, § 2-308, p. 1719.


Annotations
    If both parties know buyer is to pick up goods at place of storage, that is place for delivery. Goosic Constr. Co. v. City Nat. Bank of Crete, 196 Neb. 86, 241 N.W.2d 521 (1976).

    COMMENT

    Prior Uniform Statutory Provision: Paragraphs (a) and (b) — section 43(1), Uniform Sales Act; paragraph (c) — none.

    Changes: Slight modification in language.

    Purposes of Changes and New Matter:

    1. Paragraphs (a) and (b) provide for those noncommercial sales and for those occasional commercial sales where no place or means of delivery has been agreed upon by the parties. Where delivery by carrier is "required or authorized by the agreement", the seller's duties as to delivery of the goods are governed not by this section but by section 2-504.

    2. Under paragraph (b) when the identified goods contracted for are known to both parties to be in some location other than the seller's place of business or residence, the parties are presumed to have intended that place to be the place of delivery. This paragraph also applies (unless, as would be normal, the circumstances show that delivery by way of documents is intended) to a bulk of goods in the possession of a bailee. In such a case, however, the seller has the additional obligation to procure the acknowledgement by the bailee of the buyer's right to possession.

    3. Where "customary banking channels" call only for due notification by the banker that the documents are available, leaving the buyer himself or herself to see to the physical receipt of the goods, tender at the buyer's address is not required under paragraph (c). But that paragraph merely eliminates the possibility of a default by the seller if "customary banking channels" have been properly used in giving notice to the buyer. Where the bank has purchased a draft accompanied by or associated with documents or has undertaken its collection on behalf of the seller, part 5 of article 4 spells out its duties and relations to its customer. Where the documents move forward under a letter of credit the Article on Letters of Credit spells out the duties and relations between the bank, the seller, and the buyer. Delivery in relationship to either tangible or electronic documents of title is defined in article 1, section 1-201.

    4. The rules of this section apply only "unless otherwise agreed". The surrounding circumstances, usage of trade, course of dealing, and course of performance, as well as the express language of the parties, may constitute an "otherwise agreement".

    Cross References:

    Point 1: Sections 2-504 and 2-505.

    Point 2: Section 2-503.

    Point 3: Section 2-512, article 4, part 5, and article 5.

    Definitional Cross References:

    "Contract for sale". Section 2-106.

    "Delivery". Section 1-201.

    "Document of title". Section 1-201.

    "Goods". Section 2-105.

    "Party". Section 1-201.

    "Seller". Section 2-103.


2-309. Absence of specific time provision; notice of termination.

(1) The time for shipment or delivery or any other action under a contract if not provided in this article or agreed upon shall be a reasonable time.

(2) Where the contract provides for successive performances but is indefinite in duration it is valid for a reasonable time but unless otherwise agreed may be terminated at any time by either party.

(3) Termination of a contact by one party except on the happening of an agreed event requires that reasonable notification be received by the other party and an agreement dispensing with notification is invalid if its operation would be unconscionable.

Source:Laws 1963, c. 544, Art. II, § 2-309, p. 1719.


Annotations
    District court's implicit determination that plaintiff had not breached contract by failing to deliver goods at time proposed by defendant, but not agreed to by plaintiff, was supported by evidence of the negotiations between the parties. Crane Co. v. Roberts Supply Co., 196 Neb. 67, 241 N.W.2d 516 (1976).

    COMMENT

    Prior Uniform Statutory Provision: Subsection (1) — see sections 43(2), 45(2), 47(1), and 48, Uniform Sales Act, for policy continued under this article; subsection (2) — none; subsection (3) — none.

    Changes: Completely different in scope.

    Purposes of Changes and New Matter:

    1. Subsection (1) requires that all actions taken under a sales contract must be taken within a reasonable time where no time has been agreed upon. The reasonable time under this provision turns on the criteria as to "reasonable time" and on good faith and commercial standards set forth in sections 1-203, 1-204, and 2-103. It thus depends upon what constitutes acceptable commercial conduct in view of the nature, purpose, and circumstances of the action to be taken. Agreement as to a definite time, however, may be found in a term implied from the contractual circumstances, usage of trade, or course of dealing or performance as well as in an express term. Such cases fall outside of this subsection since in them the time for action is "agreed" by usage.

    2. The time for payment, where not agreed upon, is related to the time for delivery; the particular problems which arise in connection with determining the appropriate time of payment and the time for any inspection before payment which is both allowed by law and demanded by the buyer are covered in section 2-513.

    3. The facts in regard to shipment and delivery differ so widely as to make detailed provision for them in the text of this article impracticable. The applicable principles, however, make it clear that surprise is to be avoided, good faith judgment is to be protected, and notice or negotiation to reduce the uncertainty to certainty is to be favored.

    4. When the time for delivery is left open, unreasonably early offers of or demands for delivery are intended to be read under this article as expressions of desire or intention, requesting the assent or acquiescence of the other party, not as final positions which may amount without more to breach or to create breach by the other side. See sections 2-207 and 2-609.

    5. The obligation of good faith under the code requires reasonable notification before a contract may be treated as breached because a reasonable time for delivery or demand has expired. This operates both in the case of a contract originally indefinite as to time and of one subsequently made indefinite by waiver.

    When both parties let an originally reasonable time go by in silence, the course of conduct under the contract may be viewed as enlarging the reasonable time for tender or demand of performance. The contract may be terminated by abandonment.

    6. Parties to a contract are not required in giving reasonable notification to fix, at peril of breach, a time which is in fact reasonable in the unforeseeable judgment of a later trier of fact. Effective communication of a proposed time limit calls for a response, so that failure to reply will make out acquiescence. Where objection is made, however, or if the demand is merely for information as to when goods will be delivered or will be ordered out, demand for assurances on the ground of insecurity may be made under this article pending further negotiations. Only when a party insists on undue delay or on rejection of the other party's reasonable proposal is there a question of flat breach under the present section.

    7. Subsection (2) applies a commercially reasonable view to resolve the conflict which has arisen in the cases as to contracts of indefinite duration. The "reasonable time" of duration appropriate to a given arrangement is limited by the circumstances. When the arrangement has been carried on by the parties over the years, the "reasonable time" can continue indefinitely and the contract will not terminate until notice.

    8. Subsection (3) recognizes that the application of principles of good faith and sound commercial practice normally call for such notification of the termination of a going contract relationship as will give the other party reasonable time to seek a substitute arrangement. An agreement dispensing with notification or limiting the time for the seeking of a substitute arrangement is, of course, valid under this subsection unless the results of putting it into operation would be the creation of an unconscionable state of affairs.

    9. Justifiable cancellation for breach is a remedy for breach and is not the kind of termination covered by the present subsection.

    10. The requirement of notification is dispensed with where the contract provides for termination on the happening of an "agreed event". "Event" is a term chosen here to contrast with "option" or the like.

    Cross References:

    Point 1: Sections 1-203, 1-204, and 2-103.

    Point 2: Sections 2-320, 2-321, 2-504, and 2-511 through 2-514.

    Point 5: Section 1-203.

    Point 6: Section 2-609.

    Point 7: Section 2-204.

    Point 9: Sections 2-106, 2-318, 2-610, and 2-703.

    Definitional Cross References:

    "Agreement". Section 1-201.

    "Contract". Section 1-201.

    "Notification". Section 1-201.

    "Party". Section 1-201.

    "Reasonable time". Section 1-204.

    "Termination". Section 2-106.


2-310. Open time for payment or running of credit; authority to ship under reservation.

Unless otherwise agreed

(a) payment is due at the time and place at which the buyer is to receive the goods even though the place of shipment is the place of delivery; and

(b) if the seller is authorized to send the goods he or she may ship them under reservation, and may tender the documents of title, but the buyer may inspect the goods after their arrival before payment is due unless such inspection is inconsistent with the terms of the contract (section 2-513); and

(c) if delivery is authorized and made by way of documents of title otherwise than by subsection (b) then payment is due regardless of where the goods are to be received (i) at the time and place at which the buyer is to receive delivery of the tangible documents or (ii) at the time the buyer is to receive delivery of the electronic documents and at the seller's place of business or if none, the seller's residence; and

(d) where the seller is required or authorized to ship the goods on credit the credit period runs from the time of shipment but postdating the invoice or delaying its dispatch will correspondingly delay the starting of the credit period.

Source:Laws 1963, c. 544, Art. II, § 2-310, p. 1720; Laws 2005, LB 570, § 33.    


Annotations
    COMMENT

    Prior Uniform Statutory Provision: Sections 42 and 47(2), Uniform Sales Act.

    Changes: Completely rewritten in this and other sections.

    Purposes of Changes:

    This section is drawn to reflect modern business methods of dealing at a distance rather than face to face. Thus:

    1. Paragraph (a) provides that payment is due at the time and place "the buyer is to receive the goods" rather than at the point of delivery except in documentary shipment cases (paragraph (c)). This grants an opportunity for the exercise by the buyer of his or her preliminary right to inspection before paying even though under the delivery term the risk of loss may have previously passed to him or her or the running of the credit period has already started.

    2. Paragraph (b) while providing for inspection by the buyer before he or she pays, protects the seller. He or she is not required to give up possession of the goods until he or she has received payment, where no credit has been contemplated by the parties. The seller may collect through a bank by a sight draft against an order bill of lading "hold until arrival; inspection allowed". The obligations of the bank under such a provision are set forth in part 5 of article 4. Under subsection (c), in the absence of a credit term, the seller is permitted to ship under reservation and if he or she does payment is then due where and when the buyer is to receive delivery of the tangible documents of title. In the case of an electronic document of title, payment is due when the buyer is to receive delivery of the electronic document and at the seller's place of business, or if none, the seller's residence. Delivery as to documents of title is stated in article 1, section 1-201.

    3. Unless otherwise agreed, the place for the delivery of the documents and payment is the buyer's city but the time for payment is only after arrival of the goods, since under paragraph (b) and sections 2-512 and 2-513 the buyer is under no duty to pay prior to inspection. Tender of a document of title requires that the seller be ready, willing, and able to transfer possession of a tangible document of title or control of an electronic document of title to the buyer.

    4. Where the mode of shipment is such that goods must be unloaded immediately upon arrival, too rapidly to permit adequate inspection before receipt, the seller must be guided by the provisions of this article on inspection which provide that if the seller wishes to demand payment before inspection, he or she must put an appropriate term into the contract. Even requiring payment against documents will not of itself have this desired result if the documents are to be held until the arrival of the goods. But under (b) and (c) if the terms are C.I.F., C.O.D., or cash against documents payment may be due before inspection.

    5. Paragraph (d) states the common commercial understanding that an agreed credit period runs from the time of shipment or from that dating of the invoice which is commonly recognized as a representation of the time of shipment. The provision concerning any delay in sending forth the invoice is included because such conduct results in depriving the buyer of his or her full notice and warning as to when he or she must be prepared to pay.

    Cross References:

    Generally: Part 5.

    Point 1: Section 2-509.

    Point 2: Sections 2-505, 2-511, 2-512, and 2-513 and article 4.

    Point 3: Sections 2-308(b), 2-512, and 2-513.

    Point 4: Section 2-513(3)(b).

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Delivery". Section 1-201.

    "Document of title". Section 1-201.

    "Goods". Section 2-105.

    "Receipt of goods". Section 2-103.

    "Seller". Section 2-103.

    "Send". Section 1-201.

    "Term". Section 1-201.


2-311. Options and cooperation respecting performance.

(1) An agreement for sale which is otherwise sufficiently definite (subsection (3) of section 2-204) to be a contract is not made invalid by the fact that it leaves particulars of performance to be specified by one of the parties. Any such specification must be made in good faith and within limits set by commercial reasonableness.

(2) Unless otherwise agreed specifications relating to assortment of the goods are at the buyer's option and except as otherwise provided in subsections (1)(c) and (3) of section 2-319 specifications or arrangements relating to shipment are at the seller's option.

(3) Where such specification would materially affect the other party's performance but is not seasonably made or where one party's cooperation is necessary to the agreed performance of the other but is not seasonably forthcoming, the other party in addition to all other remedies

(a) is excused for any resulting delay in his own performance; and

(b) may also either proceed to perform in any reasonable manner or after the time for a material part of his own performance treat the failure to specify or to cooperate as a breach by failure to deliver or accept the goods.

Source:Laws 1963, c. 544, Art. II, § 2-311, p. 1720.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: None.

    Purposes:

    1. Subsection (1) permits the parties to leave certain detailed particulars of performance to be filled in by either of them without running the risk of having the contract invalidated for indefiniteness. The party to whom the agreement gives power to specify the missing details is required to exercise good faith and to act in accordance with commercial standards so that there is no surprise and the range of permissible variation is limited by what is commercially reasonable. The "agreement" which permits one party so to specify may be found as well in a course of dealing, usage of trade, or implication from circumstances as in explicit language used by the parties.

    2. Options as to assortment of goods or shipping arrangements are specifically reserved to the buyer and seller respectively under subsection (2) where no other arrangement has been made. This section rejects the test which mechanically and without regard to usage or the purpose of the option gave the option to the party "first under a duty to move" and applies instead a standard commercial interpretation to these circumstances. The "unless otherwise agreed" provision of this subsection covers not only express terms but the background and circumstances which enter into the agreement.

    3. Subsection (3) applies when the exercise of an option or cooperation by one party is necessary to or materially affects the other party's performance, but it is not seasonably forthcoming; the subsection relieves the other party from the necessity for performance or excuses his or her delay in performance as the case may be. The contract-keeping party may at his or her option under this subsection proceed to perform in any commercially reasonable manner rather than wait. In addition to the special remedies provided, this subsection also reserves "all other remedies". The remedy of particular importance in this connection is that provided for insecurity. Request may also be made pursuant to the obligation of good faith for a reasonable indication of the time and manner of performance for which a party is to hold himself or herself ready.

    4. The remedy provided in subsection (3) is one which does not operate in the situation which falls within the scope of section 2-614 on substituted performance. Where the failure to cooperate results from circumstances set forth in that section, the other party is under a duty to proffer or demand (as the case may be) substitute performance as a condition to claiming rights against the noncooperating party.

    Cross References:

    Point 1: Sections 1-201, 1-203, and 2-204.

    Point 3: Sections 1-203 and 2-609.

    Point 4: Section 2-614.

    Definitional Cross References:

    "Agreement". Section 1-201.

    "Buyer". Section 2-103.

    "Contract for sale". Section 2-106.

    "Goods". Section 2-105.

    "Party". Section 1-201.

    "Remedy". Section 1-201.

    "Seasonably". Section 1-204.

    "Seller". Section 2-103.


2-312. Warranty of title and against infringement; buyer's obligation against infringement.

(1) Subject to subsection (2) there is in a contract for sale a warranty by the seller that

(a) the title conveyed shall be good, and its transfer rightful; and

(b) the goods shall be delivered free from any security interest or other lien or encumbrance of which the buyer at the time of contracting has no knowledge.

(2) A warranty under subsection (1) will be excluded or modified only by specific language or by circumstances which give the buyer reason to know that the person selling does not claim title in himself or that he is purporting to sell only such right or title as he or a third person may have.

(3) Unless otherwise agreed a seller who is a merchant regularly dealing in goods of the kind warrants that the goods shall be delivered free of the rightful claim of any third person by way of infringement or the like but a buyer who furnishes specifications to the seller must hold the seller harmless against any such claim which arises out of compliance with the specifications.

Source:Laws 1963, c. 544, Art. II, § 2-312, p. 1721.


Annotations
    The seller breaches the warranty of title under this section by delivering a defective certificate of title to the buyer of a motor vehicle. McCoolidge v. Oyvetsky, 292 Neb. 955, 874 N.W.2d 892 (2016).

    The seller breaches the warranty of title under this section if there is a substantial cloud or shadow over the title, even if no third party has come forward with a superior claim. McCoolidge v. Oyvetsky, 292 Neb. 955, 874 N.W.2d 892 (2016).

    Since contract did not waive warranty by contractor seller that title conveyed to pollution control corporation would be good, contractor seller was liable to it for breach of warranty against liens and encumbrances. Omaha Pollution Control Corp. v. Carver-Greenfield Corp., 413 F.Supp. 1069 (D. Neb. 1976).

    COMMENT

    Prior Uniform Statutory Provision: Section 13, Uniform Sales Act.

    Changes: Completely rewritten, the provisions concerning infringement being new.

    Purposes of Changes:

    1. Subsection (1) makes provision for a buyer's basic needs in respect to a title which he or she in good faith expects to acquire by his or her purchase, namely, that he or she receive a good, clean title transferred to him or her also in a rightful manner so that he or she will not be exposed to a lawsuit in order to protect it.

    The warranty extends to a buyer whether or not the seller was in possession of the goods at the time the sale or contract to sell was made.

    The warranty of quiet possession is abolished. Disturbance of quiet possession, although not mentioned specifically, is one way, among many, in which the breach of the warranty of title may be established.

    The "knowledge" referred to in subsection (1)(b) is actual knowledge as distinct from notice.

    2. The provisions of this article requiring notification to the seller within a reasonable time after the buyer's discovery of a breach apply to notice of a breach of the warranty of title, where the seller's breach was innocent. However, if the seller's breach was in bad faith he or she cannot be permitted to claim that he or she has been misled or prejudiced by the delay in giving notice. In such case the "reasonable" time for notice should receive a very liberal interpretation. Whether the breach by the seller is in good or bad faith section 2-725 provides that the cause of action accrues when the breach occurs. Under the provisions of that section the breach of the warranty of good title occurs when tender of delivery is made since the warranty is not one which extends to "future performance of the goods".

    3. When the goods are part of the seller's normal stock and are sold in his or her normal course of business, it is his or her duty to see that no claim of infringement of a patent or trademark by a third party will mar the buyer's title. A sale by a person other than a dealer, however, raises no implication in its circumstances of such a warranty. Nor is there such an implication when the buyer orders goods to be assembled, prepared, or manufactured on his or her own specifications. If, in such a case, the resulting product infringes a patent or trademark, the liability will run from buyer to seller. There is, under such circumstances, a tacit representation on the part of the buyer that the seller will be safe in manufacturing according to the specifications, and the buyer is under an obligation in good faith to indemnify him or her for any loss suffered.

    4. This section rejects the cases which recognize the principle that infringements violate the warranty of title but deny the buyer a remedy unless he or she has been expressly prevented from using the goods. Under this article "eviction" is not a necessary condition to the buyer's remedy since the buyer's remedy arises immediately upon receipt of notice of infringement; it is merely one way of establishing the fact of breach.

    5. Subsection (2) recognizes that sales by sheriffs, executors, certain foreclosing lienors, and persons similarly situated may be so out of the ordinary commercial course that their peculiar character is immediately apparent to the buyer and therefor no personal obligation is imposed upon the seller who is purporting to sell only an unknown or limited right. This subsection does not touch upon and leaves open all questions of restitution arising in such cases, when a unique article so sold is reclaimed by a third party as the rightful owner.

    Foreclosure sales under article 9 are another matter. Section 9-610 provides that a disposition of collateral under that section includes warranties such as those imposed by this section on a voluntary disposition of property of the kind involved. Consequently, unless properly excluded under subsection (2) or under the special provisions for exclusion in section 9-610, a disposition under section 9-610 of collateral consisting of goods includes the warranties imposed by subsection (1) and, if applicable, subsection (3).

    6. The warranty of subsection (1) is not designated as an "implied" warranty, and hence is not subject to section 2-316(3). Disclaimer of the warranty of title is governed instead by subsection (2), which requires either specific language or the described circumstances.

    Cross References:

    Point 1: Section 2-403.

    Point 2: Sections 2-607 and 2-725.

    Point 3: Section 1-203.

    Point 4: Sections 2-609 and 2-725.

    Point 6: Section 2-316.

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Contract for sale". Section 2-106.

    "Goods". Section 2-105.

    "Person". Section 1-201.

    "Right". Section 1-201.

    "Seller". Section 2-103.


2-313. Express warranties by affirmation, promise, description, sample.

(1) Express warranties by the seller are created as follows:

(a) Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.

(b) Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.

(c) Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model.

(2) It is not necessary to the creation of an express warranty that the seller use formal words such as "warrant" or "guarantee" or that he have a specific intention to make a warranty, but an affirmation merely of the value of the goods or a statement purporting to be merely the seller's opinion or commendation of the goods does not create a warranty.

Source:Laws 1963, c. 544, Art. II, § 2-313, p. 1722.


Annotations
    1. Express warranty

    2. Implied warranty

    3. Breach of warranty

    1. Express warranty

    Pursuant to this section, in order to create an express warranty, the seller must make an affirmation of fact or promise to the buyer which relates to the goods and becomes part of the basis of the bargain. Freeman v. Hoffman-La Roche, Inc., 260 Neb. 552, 618 N.W.2d 827 (2000).

    The existence and scope of an express warranty under the UCC are ordinarily questions to be determined by the trier of fact. Since an express warranty must have been made part of the basis of the bargain, it is essential that the plaintiff prove reliance upon the warranty. The breach of an express warranty is established by showing that the goods to which it applies do not conform to the terms of the warranty. Hillcrest Country Club v. N.D. Judds Co., 236 Neb. 233, 461 N.W.2d 55 (1990).

    An express warranty must have been made a part of the basis of the bargain. In order to recover for breach of an express warranty, a buyer must prove there was reliance upon the warranty. Wendt v. Beardmore Suburban Chevrolet, 219 Neb. 775, 366 N.W.2d 424 (1985).

    A warranty is express under this section when the seller makes an affirmation with respect to the article to be sold, pending the agreement of sale, upon which it is intended that the buyer shall rely in making the purchase. Mennonite Deaconess Home & Hosp. v. Gates Eng'g Co., 219 Neb. 303, 363 N.W.2d 155 (1985).

    The test for whether an express warranty is created is whether the seller assumes to assert a fact of which the buyer is ignorant, or whether he merely states an opinion or expresses a judgment about a thing as to which they may each be expected to have an opinion and exercise judgment. Peterson v. North American Plant Breeders, 218 Neb. 258, 354 N.W.2d 625 (1984).

    A description of goods which, according to the contemplation of the parties, contains certain representations, and which becomes a part of the basis of the bargain, creates an express warranty that the goods shall conform to the description and therefor also to the representations contemplated. Moore v. Puget Sound Plywood, 214 Neb. 14, 332 N.W.2d 212 (1983).

    It is the general rule of law that a warranty is express when the seller makes an affirmation with respect to the article to be sold, pending the agreement of sale, upon which it is intended that the buyer shall rely in making the purchase. England v. Leithoff, 212 Neb. 462, 323 N.W.2d 98 (1982).

    Manufacturer and lessor of defective scaffold held liable on basis of warranties made in advertising by manufacturer and adopted by lessor, which under facts in this case became basis of the bargain as a matter of law. Hawkins Constr. Co. v. Matthews Co., Inc., 190 Neb. 546, 209 N.W.2d 643 (1973).

    Where they become a part of the basis of the bargain, any affirmation of fact or promise made by seller to buyer which relates to the goods creates an express warranty that the goods shall conform to the affirmation or promise, and any description of the goods or any sample or model creates an express warranty that the goods shall conform to the description, sample or model. Larutan Corp. v. Magnolia Homes Manuf. Co., 190 Neb. 425, 209 N.W.2d 177 (1973).

    Express warranties may be created by affirmation, promise, description, or sample. Representations in a brochure can create an express warranty. Neville Const. Co. v. Cook Paint and Varnish Co., 671 F.2d 1107 (8th Cir. 1982).

    Under facts in this case, applicability of this section was jury question. Gillette Dairy, Inc. v. Hydrotex Industries, Inc., 440 F.2d 969 (8th Cir. 1971).

    A manufacturer or seller may be held liable under an advertising warranty even though he is not in privity with the purchaser. Omaha Pollution Control Corp. v. Carver-Greenfield Corp., 413 F.Supp. 1069 (D. Neb. 1976).

    2. Implied warranty

    Where a contract for the bailment of a chattel occurs, the contract may give rise to an implied warranty of fitness for the purpose for which the chattel was bailed. Herman v. Midland Ag Service, Inc., 200 Neb. 356, 264 N.W.2d 161 (1978).

    3. Breach of warranty

    Revocation of acceptance is not a prerequisite to a suit for breach of an express warranty. Evidence that an automobile described by a dealer-seller was in fact only the skeleton of the car with a variety of assorted parts was sufficient to sustain the trial court's finding of breach of an express warranty. Warner v. Reagan Buick, 240 Neb. 668, 483 N.W.2d 764 (1992).

    Seller's warranties that goods were free from encumbrances, and it would defend against claims of others, were breached where holder claimed storage lien which seller failed to get released. Goosic Constr. Co. v. City Nat. Bank of Crete, 196 Neb. 86, 241 N.W.2d 521 (1976).

    Breach of warranty issue supported by evidence of representation that milk production would be increased by feeding seller's feed supplement in amounts as instructed, and proof of loss in production thereby, but directed verdict for defendant affirmed because purchaser failed to prove extent of damages therefrom. Shotkoski v. Standard Chemical Manuf. Co., 195 Neb. 22, 237 N.W.2d 92 (1975).

    COMMENT

    Prior Uniform Statutory Provision: Sections 12, 14, and 16, Uniform Sales Act.

    Changes: Rewritten.

    Purposes of Changes:

    To consolidate and systematize basic principles with the result that:

    1. "Express" warranties rest on "dickered" aspects of the individual bargain, and go so clearly to the essence of that bargain that words of disclaimer in a form are repugnant to the basic dickered terms. "Implied" warranties rest so clearly on a common factual situation or set of conditions that no particular language or action is necessary to evidence them and they will arise in such a situation unless unmistakably negated.

    This section reverts to the older case law insofar as the warranties of description and sample are designated "express" rather than "implied".

    2. Although this section is limited in its scope and direct purpose to warranties made by the seller to the buyer as part of a contract for sale, the warranty sections of this article are not designed in any way to disturb those lines of case law growth which have recognized that warranties need not be confined either to sales contracts or to the direct parties to such a contract. They may arise in other appropriate circumstances such as in the case of bailments for hire, whether such bailment is itself the main contract or is merely a supplying of containers under a contract for the sale of their contents. The provisions of section 2-318 on third-party beneficiaries expressly recognize this case law development within one particular area. Beyond that, the matter is left to the case law with the intention that the policies of the Uniform Commercial Code may offer useful guidance in dealing with further cases as they arise.

    3. The present section deals with affirmations of fact by the seller, descriptions of the goods, or exhibitions of samples, exactly as any other part of a negotiation which ends in a contract is dealt with. No specific intention to make a warranty is necessary if any of these factors is made part of the basis of the bargain. In actual practice affirmations of fact made by the seller about the goods during a bargain are regarded as part of the description of those goods; hence no particular reliance on such statements need be shown in order to weave them into the fabric of the agreement. Rather, any fact which is to take such affirmations, once made, out of the agreement requires clear affirmative proof. The issue normally is one of fact.

    4. In view of the principle that the whole purpose of the law of warranty is to determine what it is that the seller has in essence agreed to sell, the policy is adopted of those cases which refuse except in unusual circumstances to recognize a material deletion of the seller's obligation. Thus, a contract is normally a contract for a sale of something describable and described. A clause generally disclaiming "all warranties, express or implied" cannot reduce the seller's obligation with respect to such description and therefor cannot be given literal effect under section 2-316.

    This is not intended to mean that the parties, if they consciously desire, cannot make their own bargain as they wish. But in determining what they have agreed upon good faith is a factor and consideration should be given to the fact that the probability is small that a real price is intended to be exchanged for a pseudo-obligation.

    5. Paragraph (1)(b) makes specific some of the principles set forth above when a description of the goods is given by the seller.

    A description need not be by words. Technical specifications, blueprints, and the like can afford more exact description than mere language and if made part of the basis of the bargain goods must conform with them. Past deliveries may set the description of quality, either expressly or impliedly by course of dealing. Of course, all descriptions by merchants must be read against the applicable trade usages with the general rules as to merchantability resolving any doubts.

    6. The basic situation as to statements affecting the true essence of the bargain is no different when a sample or model is involved in the transaction. This section includes both a "sample" actually drawn from the bulk of goods which is the subject matter of the sale, and a "model" which is offered for inspection when the subject matter is not at hand and which has not been drawn from the bulk of the goods.

    Although the underlying principles are unchanged, the facts are often ambiguous when something is shown as illustrative, rather than as a straight sample. In general, the presumption is that any sample or model just as any affirmation of fact is intended to become a basis of the bargain. But there is no escape from the question of fact. When the seller exhibits a sample purporting to be drawn from an existing bulk, good faith of course requires that the sample be fairly drawn. But in mercantile experience the mere exhibition of a "sample" does not of itself show whether it is merely intended to "suggest" or to "be" the character of the subject matter of the contract. The question is whether the seller has so acted with reference to the sample as to make him or her responsible that the whole shall have at least the values shown by it. The circumstances aid in answering this question. If the sample has been drawn from an existing bulk, it must be regarded as describing values of the goods contracted for unless it is accompanied by an unmistakable denial of such responsibility. If, on the other hand, a model of merchandise not on hand is offered, the mercantile presumption that it has become a literal description of the subject matter is not so strong, and particularly so if modification on the buyer's initiative impairs any feature of the model.

    7. The precise time when words of description or affirmation are made or samples are shown is not material. The sole question is whether the language or samples or models are fairly to be regarded as part of the contract. If language is used after the closing of the deal (as when the buyer when taking delivery asks and receives an additional assurance), the warranty becomes a modification, and need not be supported by consideration if it is otherwise reasonable and in order (section 2-209).

    8. Concerning affirmations of value or a seller's opinion or commendation under subsection (2), the basic question remains the same: What statements of the seller have in the circumstances and in objective judgment become part of the basis of the bargain? As indicated above, all of the statements of the seller do so unless good reason is shown to the contrary. The provisions of subsection (2) are included, however, since common experience discloses that some statements or predictions cannot fairly be viewed as entering into the bargain. Even as to false statements of value, however, the possibility is left open that a remedy may be provided by the law relating to fraud or misrepresentation.

    Cross References:

    Point 1: Section 2-316.

    Point 2: Sections 1-102(3) and 2-318.

    Point 3: Section 2-316(2)(b).

    Point 4: Section 2-316.

    Point 5: Sections 1-205(4) and 2-314.

    Point 6: Section 2-316.

    Point 7: Section 2-209.

    Point 8: Section 1-103.

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Conforming". Section 2-106.

    "Goods". Section 2-105.

    "Seller". Section 2-103.


2-314. Implied warranty; merchantability; usage of trade.

(1) Unless excluded or modified (section 2-316), a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind. Under this section the serving for value of food or drink to be consumed either on the premises or elsewhere is a sale.

(2) Goods to be merchantable must be at least such as

(a) pass without objection in the trade under the contract description; and

(b) in the case of fungible goods, are of fair average quality within the description; and

(c) are fit for the ordinary purposes for which such goods are used; and

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

(e) are adequately contained, packaged, and labeled as the agreement may require; and

(f) conform to the promises or affirmations of fact made on the container or label if any.

(3) Unless excluded or modified (section 2-316) other implied warranties may arise from course of dealing or usage of trade.

Source:Laws 1963, c. 544, Art. II, § 2-314, p. 1723.


Annotations
    An express, obvious requirement of this section is that the goods in question are the subject of a contract for sale. Cobb v. Sure Crop Chem. Co., 255 Neb. 625, 587 N.W.2d 355 (1998).

    When evidence of the condition of the goods delivered supports the finding that they were not merchantable, the fact finder's decision will not be overturned unless clearly wrong. Label Concepts v. Westendorf Plastics, 247 Neb. 560, 528 N.W.2d 335 (1995).

    Under subsection (2) of this section, in order to prove that goods are unmerchantable, the buyer must generally first establish the standard of merchantability in the trade. However, when a defect in merchantability is obvious to a layperson, it may not be necessary for the buyer to provide expert testimony as to the standard of performance of a product. Laird v. Scribner Coop, 237 Neb. 532, 466 N.W.2d 798 (1991).

    To establish a breach of implied warranty of merchantability, there must be proof that there was a deviation from the standard of merchantability at the time of sale and that such deviation caused the plaintiff's injury. In order for the goods to be merchantable under this section, they must be at least such as are fit for the ordinary purposes for which such goods are used. Mennonite Deaconess Home & Hosp. v. Gates Eng'g Co., 219 Neb. 303, 363 N.W.2d 155 (1985).

    When a producer of seed places sealed bags of hybrid seed corn in its chain of distribution, it carries with it, unless effectively excluded or modified, an implied warranty of merchantability that protects the ultimate buyer-user in that chain. Peterson v. North American Plant Breeders, 218 Neb. 258, 354 N.W.2d 625 (1984).

    A haystacking machine which will only stack hay for a half day before consuming itself in flames is not suitable for the ordinary purposes for which haystacking machines are sold. Nerud v. Haybuster Mfg., 215 Neb. 604, 340 N.W.2d 369 (1983).

    Under the provisions of this section, a plaintiff must prove that a merchant sold him goods, which were "not merchantable" at the time of the sale and the injury or damages to the plaintiff or his property was caused proximately and in fact by the defective nature of the goods and notice was given to the seller of the injury. Gieger v. Sweeney, 201 Neb. 175, 266 N.W.2d 895 (1978).

    Proof of leaking fertilizer tank confirms a breach of implied warranty of merchantability. Christensen v. Eastern Nebraska Equipment Co., Inc., 199 Neb. 741, 261 N.W.2d 367 (1978).

    Pleading that trade usage excluded implied warranty of fitness of bull for breeding purposes was sufficient to include exclusion of implied warranty of merchantability. Torstenson v. Melcher, 195 Neb. 764, 241 N.W.2d 103 (1976).

    Under facts in this case, applicability of this section was jury question. Gillette Dairy, Inc. v. Hydrotex Industries, Inc., 440 F.2d 969 (8th Cir. 1971).

    Sewage processing plant constructed for sale to city's pollution control corporation by private company was subject to implied warranty of merchantability and of fitness for particular purpose for which it was to be used, and city could recover for breach. Omaha Pollution Control Corp. v. Carver-Greenfield Corp., 413 F.Supp. 1069 (D. Neb. 1976).

    COMMENT

    Prior Uniform Statutory Provision: Section 15(2), Uniform Sales Act.

    Changes: Completely rewritten.

    Purposes of Changes:

    This section, drawn in view of the steadily developing case law on the subject, is intended to make it clear that:

    1. The seller's obligation applies to present sales as well as to contracts to sell subject to the effects of any examination of specific goods. (Subsection (2) of section 2-316). Also, the warranty of merchantability applies to sales for use as well as to sales for resale.

    2. The question when the warranty is imposed turns basically on the meaning of the terms of the agreement as recognized in the trade. Goods delivered under an agreement made by a merchant in a given line of trade must be of a quality comparable to that generally acceptable in that line of trade under the description or other designation of the goods used in the agreement. The responsibility imposed rests on any merchant-seller, and the absence of the words "grower or manufacturer or not" which appeared in section 15(2) of the Uniform Sales Act does not restrict the applicability of this section.

    3. A specific designation of goods by the buyer does not exclude the seller's obligation that they be fit for the general purposes appropriate to such goods. A contract for the sale of second-hand goods, however, involves only such obligation as is appropriate to such goods for that is their contract description. A person making an isolated sale of goods is not a "merchant" within the meaning of the full scope of this section and, thus, no warranty of merchantability would apply. His or her knowledge of any defects not apparent on inspection would, however, without need for express agreement and in keeping with the underlying reason of the present section and the provisions on good faith, impose an obligation that known material but hidden defects be fully disclosed.

    4. Although a seller may not be a "merchant" as to the goods in question, if he or she states generally that they are "guaranteed" the provisions of this section may furnish a guide to the content of the resulting express warranty. This has particular significance in the case of second-hand sales, and has further significance in limiting the effect of fine-print disclaimer clauses where their effect would be inconsistent with large-print assertions of "guarantee".

    5. The second sentence of subsection (1) covers the warranty with respect to food and drink. Serving food or drink for value is a sale, whether to be consumed on the premises or elsewhere. Cases to the contrary are rejected. The principal warranty is that stated in subsections (1) and (2)(c) of this section.

    6. Subsection (2) does not purport to exhaust the meaning of "merchantable" nor to negate any of its attributes not specifically mentioned in the text of the statute, but arising by usage of trade or through case law. The language used is "must be at least such as ...", and the intention is to leave open other possible attributes of merchantability.

    7. Paragraphs (a) and (b) of subsection (2) are to be read together. Both refer, as indicated above, to the standards of that line of the trade which fits the transaction and the seller's business. "Fair average" is a term directly appropriate to agricultural bulk products and means goods centering around the middle belt of quality, not the least or the worst that can be understood in the particular trade by the designation, but such as can pass "without objection". Of course a fair percentage of the least is permissible but the goods are not "fair average" if they are all of the least or worst quality possible under the description. In cases of doubt as to what quality is intended, the price at which a merchant closes a contract is an excellent index of the nature and scope of his or her obligation under the present section.

    8. Fitness for the ordinary purposes for which goods of the type are used is a fundamental concept of the present section and is covered in paragraph (c). As stated above, merchantability is also a part of the obligation owing to the purchaser for use. Correspondingly, protection, under this aspect of the warranty, of the person buying for resale to the ultimate consumer is equally necessary, and merchantable goods must therefor be "honestly" resalable in the normal course of business because they are what they purport to be.

    9. Paragraph (d) on evenness of kind, quality, and quantity follows case law. But precautionary language has been added as a reminder of the frequent usages of trade which permit substantial variations both with and without an allowance or an obligation to replace the varying units.

    10. Paragraph (e) applies only where the nature of the goods and of the transaction require a certain type of container, package, or label. Paragraph (f) applies, on the other hand, wherever there is a label or container on which representations are made, even though the original contract, either by express terms or usage of trade, may not have required either the labeling or the representation. This follows from the general obligation of good faith which requires that a buyer should not be placed in the position of reselling or using goods delivered under false representations appearing on the package or container. No problem of extra consideration arises in this connection since, under this article, an obligation is imposed by the original contract not to deliver mislabeled articles, and the obligation is imposed where mercantile good faith so requires and without reference to the doctrine of consideration.

    11. Exclusion or modification of the warranty of merchantability, or of any part of it, is dealt with in the section to which the text of the present section makes explicit precautionary references. That section must be read with particular reference to its subsection (4) on limitation of remedies. The warranty of merchantability, wherever it is normal, is so commonly taken for granted that its exclusion from the contract is a matter threatening surprise and therefor requiring special precaution.

    12. Subsection (3) is to make explicit that usage of trade and course of dealing can create warranties and that they are implied rather than express warranties and thus subject to exclusion or modification under section 2-316. A typical instance would be the obligation to provide pedigree papers to evidence conformity of the animal to the contract in the case of a pedigreed dog or blooded bull.

    13. In an action based on breach of warranty, it is of course necessary to show not only the existence of the warranty but the fact that the warranty was broken and that the breach of the warranty was the proximate cause of the loss sustained. In such an action an affirmative showing by the seller that the loss resulted from some action or event following his or her own delivery of the goods can operate as a defense. Equally, evidence indicating that the seller exercised care in the manufacture, processing, or selection of the goods is relevant to the issue of whether the warranty was in fact broken. Action by the buyer following an examination of the goods which ought to have indicated the defect complained of can be shown as matter bearing on whether the breach itself was the cause of the injury.

    Cross References:

    Point 1: Section 2-316.

    Point 3: Sections 1-203 and 2-104.

    Point 5: Section 2-315.

    Point 11: Section 2-316.

    Point 12: Sections 1-201, 1-205, and 2-316.

    Definitional Cross References:

    "Agreement". Section 1-201.

    "Contract". Section 1-201.

    "Contract for sale". Section 2-106.

    "Goods". Section 2-105.

    "Merchant". Section 2-104.

    "Seller". Section 2-103.


2-315. Implied warranty; fitness for particular purpose.

Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller's skill or judgment to select or furnish suitable goods, there is unless excluded or modified under the next section an implied warranty that the goods shall be fit for such purpose.

Source:Laws 1963, c. 544, Art. II, § 2-315, p. 1723.


Annotations
    1. Recovery by buyer

    2. Applicability of section

    1. Recovery by buyer

    In order to recover under a warranty of fitness for a particular purpose, a buyer must show that (1) the seller had reason to know of the buyer's particular purpose in buying the goods, (2) the seller had reason to know that the buyer was relying on the seller's skill or judgment to furnish appropriate goods, and (3) the buyer, in fact, relied upon the seller's skill or judgment. Laird v. Scribner Coop, 237 Neb. 532, 466 N.W.2d 798 (1991).

    In order for one to recover for a breach of an implied warranty of fitness under this section, the purchaser must prove that (1) the seller had reason to know of the buyer's particular purpose, (2) the seller had reason to know that the buyer was relying on the seller's skill or judgment to furnish appropriate goods, and (3) the buyer, in fact, relied upon the seller's skill or judgment. Mennonite Deaconess Home & Hosp. v. Gates Eng'g Co., 219 Neb. 303, 363 N.W.2d 155 (1985).

    In order to recover on a claim of breach of an implied warranty of fitness for a particular purpose, it must be shown, among other things, that the buyer in fact relied upon the seller's skill or judgment. O'Keefe Elevator v. Second Ave. Properties, 216 Neb. 170, 343 N.W.2d 54 (1984).

    One who relies upon a special custom must allege it and that other party had knowledge of it and contracted with reference thereto. Timmerman v. Hertz, 195 Neb. 237, 238 N.W.2d 220 (1976).

    Sewage processing plant constructed for sale to city's pollution control corporation by private company was subject to implied warranty of merchantability and of fitness for particular purpose for which it was to be used, and city could recover for breach. Omaha Pollution Control Corp. v. Carver-Greenfield Corp., 413 F.Supp. 1069 (D. Neb. 1976).

    2. Applicability of section

    The implied warranty of fitness for a particular purpose is imposed upon goods when and only when they become the subject of a contract for their sale. A seller cannot impliedly warrant a product's fitness for a particular purpose when that product is not a part of the sales contract. Cobb v. Sure Crop Chem. Co., 255 Neb. 625, 587 N.W.2d 355 (1998).

    Liability under this section exists only when goods do not fulfill the specific need for which they were purchased, and not when the goods in question are defective per se or fail to meet their ordinary purpose. Stones v. Sears, Roebuck & Co., 251 Neb. 560, 558 N.W.2d 540 (1997).

    Where a contract for the bailment of a chattel occurs, the contract may give rise to an implied warranty of fitness for the purpose for which the chattel was bailed but this is not a warranty based on an extension of section 2-315, U.C.C., but rather a common law warranty of bailment. Herman v. Midland Ag Service, Inc., 200 Neb. 356, 264 N.W.2d 161 (1978).

    Buyer's reliance on representations was a jury question. El Fredo Pizza, Inc. v. Roto-Flex Oven Co., 199 Neb. 697, 261 N.W.2d 358 (1978).

    Instruction allowing jury to find an exclusion of implied warranty of fitness of bull for breeding by trade usage held proper. Torstenson v. Melcher, 195 Neb. 764, 241 N.W.2d 103 (1976).

    Where seller had reason to know particular purpose for which goods were required and that buyer was relying on seller's skill to furnish suitable goods, there was an implied warranty unless excluded or modified under section 2-316, U.C.C. Shotkoski v. Standard Chemical Manuf. Co., 195 Neb. 22, 237 N.W.2d 92 (1975).

    Where there is an implied warranty of fitness for a particular purpose hereunder, the old rule that there is no implied warranty of soundness in sale of animals is no longer in effect. Ruskamp v. Hog Builders, Inc., 192 Neb. 168, 219 N.W.2d 750 (1974).

    Where seller at time of contracting has reason to know particular purpose for which goods are required and that buyer is relying on seller's skill or judgment to select or furnish suitable goods there is, unless excluded or modified, an implied warranty that the goods shall be fit for such purpose. Larutan Corp. v. Magnolia Homes Manuf. Co., 190 Neb. 425, 209 N.W.2d 177 (1973).

    Under facts in this case, applicability of this section was jury question. Gillette Dairy, Inc. v. Hydrotex Industries, Inc., 440 F.2d 969 (8th Cir. 1971).

    COMMENT

    Prior Uniform Statutory Provision: Section 15(1), (4), (5), Uniform Sales Act.

    Changes: Rewritten.

    Purposes of Changes:

    1. Whether or not this warranty arises in any individual case is basically a question of fact to be determined by the circumstances of the contracting. Under this section the buyer need not bring home to the seller actual knowledge of the particular purpose for which the goods are intended or of his or her reliance on the seller's skill and judgment, if the circumstances are such that the seller has reason to realize the purpose intended or that the reliance exists. The buyer, of course, must actually be relying on the seller.

    2. A "particular purpose" differs from the ordinary purpose for which the goods are used in that it envisages a specific use by the buyer which is peculiar to the nature of his or her business whereas the ordinary purposes for which goods are used are those envisaged in the concept of merchantability and go to uses which are customarily made of the goods in question. For example, shoes are generally used for the purpose of walking upon ordinary ground, but a seller may know that a particular pair was selected to be used for climbing mountains.

    A contract may of course include both a warranty of merchantability and one of fitness for a particular purpose.

    The provisions of this article on the cumulation and conflict of express and implied warranties must be considered on the question of inconsistency between or among warranties. In such a case any question of fact as to which warranty was intended by the parties to apply must be resolved in favor of the warranty of fitness for particular purpose as against all other warranties except where the buyer has taken upon himself or herself the responsibility of furnishing the technical specifications.

    3. In connection with the warranty of fitness for a particular purpose the provisions of this article on the allocation or division of risks are particularly applicable in any transaction in which the purpose for which the goods are to be used combines requirements both as to the quality of the goods themselves and compliance with certain laws or regulations. How the risks are divided is a question of fact to be determined, where not expressly contained in the agreement, from the circumstances of contracting, usage of trade, course of performance, and the like, matters which may constitute the "otherwise agreement" of the parties by which they may divide the risk or burden.

    4. The absence from this section of the language used in the Uniform Sales Act in referring to the seller, "whether he be the grower or manufacturer or not", is not intended to impose any requirement that the seller be a grower or manufacturer. Although normally the warranty will arise only where the seller is a merchant with the appropriate "skill or judgment", it can arise as to nonmerchants where this is justified by the particular circumstances.

    5. The elimination of the "patent or other trade name" exception constitutes the major extension of the warranty of fitness which has been made by the cases and continued in this article. Under the present section the existence of a patent or other trade name and the designation of the article by that name, or indeed in any other definite manner, is only one of the facts to be considered on the question of whether the buyer actually relied on the seller, but it is not of itself decisive of the issue. If the buyer himself or herself is insisting on a particular brand he or she is not relying on the seller's skill and judgment and so no warranty results. But the mere fact that the article purchased has a particular patent or trade name is not sufficient to indicate nonreliance if the article has been recommended by the seller as adequate for the buyer's purposes.

    6. The specific reference forward in the present section to the following section on exclusion or modification of warranties is to call attention to the possibility of eliminating the warranty in any given case. However it must be noted that under the following section the warranty of fitness for a particular purpose must be excluded or modified by a conspicuous writing.

    Cross References:

    Point 2: Sections 2-314 and 2-317.

    Point 3: Section 2-303.

    Point 6: Section 2-316.

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Goods". Section 2-105.

    "Seller". Section 2-103.


2-316. Exclusion or modification of warranties.

(1) Words or conduct relevant to the creation of an express warranty and words or conduct tending to negate or limit warranty shall be construed wherever reasonable as consistent with each other; but subject to the provisions of this article on parol or extrinsic evidence (section 2-202) negation or limitation is inoperative to the extent that such construction is unreasonable.

(2) Subject to subsection (3), to exclude or modify the implied warranty of merchantability or any part of it the language must mention merchantability and in case of a writing must be conspicuous, and to exclude or modify any implied warranty of fitness the exclusion must be by a writing and conspicuous. Language to exclude all implied warranties of fitness is sufficient if it states, for example, that "There are no warranties which extend beyond the description on the face hereof."

(3) Notwithstanding subsection (2)

(a) unless the circumstances indicate otherwise, all implied warranties are excluded by expressions like "as is", "with all faults" or other language which in common understanding calls the buyer's attention to the exclusion of warranties and makes plain that there is no implied warranty; and

(b) when the buyer before entering into the contract has examined the goods or the sample or model as fully as he desired or has refused to examine the goods there is no implied warranty with regard to defects which an examination ought in the circumstances to have revealed to him; and

(c) an implied warranty can also be excluded or modified by course of dealing or course of performance or usage of trade; and

(d) with respect to the sale of cattle, hogs, and sheep, there shall be no implied warranty that the cattle, hogs, and sheep are free from disease.

(4) Remedies for breach of warranty can be limited in accordance with the provisions of this article on liquidation or limitation of damages and on contractual modification of remedy (sections 2-718 and 2-719).

Source:Laws 1963, c. 544, Art. II, § 2-316, p. 1724; Laws 1976, LB 536, § 1.


Annotations
    1. Exclusion of warranty

    2. Applicability of section

    3. Implied warranty

    4. Miscellaneous

    1. Exclusion of warranty

    The use of an "as is" clause to exclude the implied warranty of merchantability cannot be against the public policy of this state when it mirrors the statutory requirements specifically allowing for such exclusion. Wilke v. Woodhouse Ford, 278 Neb. 800, 774 N.W.2d 370 (2009).

    Under Neb. U.C.C. section 2-316(3), all implied warranties are excluded by expressions like "as is", "with all faults", or other language which in common understanding calls the buyer's attention to the exclusion of warranties and makes plain that there is no implied warranty. Koperski v. Husker Dodge, Inc., 208 Neb. 29, 302 N.W.2d 655 (1981).

    Disclaimers of warranty made at or after delivery of the goods by means of an invoice, receipt, or similar document are ineffective unless the buyer assents or is charged with knowledge as to the transaction. Pfizer Genetics, Inc. v. Williams Management Co., 204 Neb. 151, 281 N.W.2d 536 (1979).

    This statute restricts the effect of language attempting to limit or negate an express warranty. Neville Const. Co. v. Cook Paint and Varnish Co., 671 F.2d 1107 (8th Cir. 1982).

    2. Applicability of section

    Discussed in opinion holding Uniform Commercial Code applicable rather than strict tort liability in case involving damage to all property. Hawkins Constr. Co. v. Matthews Co., Inc., 190 Neb. 546, 209 N.W.2d 643 (1973).

    3. Implied warranty

    Where seller had reason to know particular purpose for which goods were required and that buyer was relying on seller's skill to furnish suitable goods, there was an implied warranty unless excluded or modified under this section. Shotkoski v. Standard Chemical Manuf. Co., 195 Neb. 22, 237 N.W.2d 92 (1975).

    Where seller at time of contracting has reason to know a particular purpose for which goods are required, and that buyer is relying on seller's skill or judgment to select or furish suitable goods, there is, unless excluded or modified under this section, an implied warranty that the goods shall be fit for such purpose. Ruskamp v. Hog Builders, Inc., 192 Neb. 168, 219 N.W.2d 750 (1974).

    Where seller at time of contracting has reason to know particular purpose for which goods are required and that buyer is relying on seller's skill or judgment to select or furnish suitable goods there is, unless excluded or modified, an implied warranty that the goods shall be fit for such purpose. Larutan Corp. v. Magnolia Homes Manuf. Co., 190 Neb. 425, 209 N.W.2d 177 (1973).

    Sewage processing plant constructed for sale to city's pollution control corporation by private company was subject to implied warranty of merchantability and of fitness for particular purpose for which it was to be used, and city could recover for breach. Omaha Pollution Control Corp. v. Carver-Greenfield Corp., 413 F.Supp. 1069 (D. Neb. 1976).

    4. Miscellaneous

    The party formulating a contract will not be permitted to so fashion it as to mislead the other party by setting forth a clearly apparent promise or representation in order to induce acceptance and then designedly burying elsewhere in the document, in fine print, provisions which purport to limit or take away the promise or preclude recovery for the failure to fulfill it. Hillcrest Country Club v. N.D. Judds Co., 236 Neb. 233, 461 N.W.2d 55 (1990).

    Instruction allowing jury to find an exclusion of implied warranty of fitness of bull for breeding by trade usage held proper. Torstenson v. Melcher, 195 Neb. 764, 241 N.W.2d 103 (1976).

    COMMENT

    Prior Uniform Statutory Provision: None. See sections 15 and 71, Uniform Sales Act.

    Purposes:

    1. This section is designed principally to deal with those frequent clauses in sales contracts which seek to exclude "all warranties, express or implied". It seeks to protect a buyer from unexpected and unbargained language of disclaimer by denying effect to such language when inconsistent with language of express warranty and permitting the exclusion of implied warranties only by conspicuous language or other circumstances which protect the buyer from surprise.

    2. The seller is protected under this article against false allegations of oral warranties by its provisions on parol and extrinsic evidence and against unauthorized representations by the customary "lack of authority" clauses. This article treats the limitation or avoidance of consequential damages as a matter of limiting remedies for breach, separate from the matter of creation of liability under a warranty. If no warranty exists, there is of course no problem of limiting remedies for breach of warranty. Under subsection (4) the question of limitation of remedy is governed by the sections referred to rather than by this section.

    3. Disclaimer of the implied warranty of merchantability is permitted under subsection (2), but with the safeguard that such disclaimers must mention merchantability and in case of a writing must be conspicuous.

    4. Unlike the implied warranty of merchantability, implied warranties of fitness for a particular purpose may be excluded by general language, but only if it is in writing and conspicuous.

    5. Subsection (2) presupposes that the implied warranty in question exists unless excluded or modified. Whether or not language of disclaimer satisfies the requirements of this section, such language may be relevant under other sections to the question whether the warranty was ever in fact created. Thus, unless the provisions of this article on parol and extrinsic evidence prevent, oral language of disclaimer may raise issues of fact as to whether reliance by the buyer occurred and whether the seller had "reason to know" under the section on implied warranty of fitness for a particular purpose.

    6. The exceptions to the general rule set forth in paragraphs (a), (b), and (c) of subsection (3) are common factual situations in which the circumstances surrounding the transaction are in themselves sufficient to call the buyer's attention to the fact that no implied warranties are made or that a certain implied warranty is being excluded.

    7. Paragraph (a) of subsection (3) deals with general terms such as "as is", "as they stand", "with all faults", and the like. Such terms in ordinary commercial usage are understood to mean that the buyer takes the entire risk as to the quality of the goods involved. The terms covered by paragraph (a) are in fact merely a particularization of paragraph (c) which provides for exclusion or modification of implied warranties by usage of trade.

    8. Under paragraph (b) of subsection (3) warranties may be excluded or modified by the circumstances where the buyer examines the goods or a sample or model of them before entering into the contract. "Examination" as used in this paragraph is not synonymous with inspection before acceptance or at any other time after the contract has been made. It goes rather to the nature of the responsibility assumed by the seller at the time of the making of the contract. Of course if the buyer discovers the defect and uses the goods anyway, or if he or she unreasonably fails to examine the goods before he or she uses them, resulting injuries may be found to result from his or her own action rather than proximately from a breach of warranty. See sections 2-314 and 2-715 and comments thereto.

    In order to bring the transaction within the scope of "refused to examine" in paragraph (b), it is not sufficient that the goods are available for inspection. There must in addition be a demand by the seller that the buyer examine the goods fully. The seller by the demand puts the buyer on notice that he or she is assuming the risk of defects which the examination ought to reveal. The language "refused to examine" in this paragraph is intended to make clear the necessity for such demand.

    Application of the doctrine of "caveat emptor" in all cases where the buyer examines the goods regardless of statements made by the seller is, however, rejected by this article. Thus, if the offer of examination is accompanied by words as to their merchantability or specific attributes and the buyer indicates clearly that he or she is relying on those words rather than on his or her examination, they give rise to an "express" warranty. In such cases the question is one of fact as to whether a warranty of merchantability has been expressly incorporated in the agreement. Disclaimer of such an express warranty is governed by subsection (1) of the present section.

    The particular buyer's skill and the normal method of examining goods in the circumstances determine what defects are excluded by the examination. A failure to notice defects which are obvious cannot excuse the buyer. However, an examination under circumstances which do not permit chemical or other testing of the goods would not exclude defects which could be ascertained only by such testing. Nor can latent defects be excluded by a simple examination. A professional buyer examining a product in his or her field will be held to have assumed the risk as to all defects which a professional in the field ought to observe, while a nonprofessional buyer will be held to have assumed the risk only for such defects as a layperson might be expected to observe.

    9. The situation in which the buyer gives precise and complete specifications to the seller is not explicitly covered in this section, but this is a frequent circumstance by which the implied warranties may be excluded. The warranty of fitness for a particular purpose would not normally arise since in such a situation there is usually no reliance on the seller by the buyer. The warranty of merchantability in such a transaction, however, must be considered in connection with the next section on the cumulation and conflict of warranties. Under paragraph (c) of that section in case of such an inconsistency the implied warranty of merchantability is displaced by the express warranty that the goods will comply with the specifications. Thus, where the buyer gives detailed specifications as to the goods, neither of the implied warranties as to quality will normally apply to the transaction unless consistent with the specifications.

    Cross References:

    Point 2: Sections 2-202, 2-718, and 2-719.

    Point 7: Sections 1-205 and 2-208.

    Definitional Cross References:

    "Agreement". Section 1-201.

    "Buyer". Section 2-103.

    "Contract". Section 1-201.

    "Course of dealing". Section 1-205.

    "Goods". Section 2-105.

    "Remedy". Section 1-201.

    "Seller". Section 2-103.

    "Usage of trade". Section 1-205.


2-317. Cumulation and conflict of warranties express or implied.

Warranties whether express or implied shall be construed as consistent with each other and as cumulative, but if such construction is unreasonable the intention of the parties shall determine which warranty is dominant. In ascertaining that intention the following rules apply:

(a) Exact or technical specifications displace an inconsistent sample or model or general language of description.

(b) A sample from an existing bulk displaces inconsistent general language of description.

(c) Express warranties displace inconsistent implied warranties other than an implied warranty of fitness for a particular purpose.

Source:Laws 1963, c. 544, Art. II, § 2-317, p. 1725.


Annotations
    Warranties, whether express or implied, shall be construed as consistent with each other and as cumulative wherever such construction is reasonable. Express warranties displace inconsistent implied warranties, other than implied warranty of fitness for a particular purpose. Ruskamp v. Hog Builders, Inc., 192 Neb. 168, 219 N.W.2d 750 (1974).

    COMMENT

    Prior Uniform Statutory Provision: On cumulation of warranties see sections 14, 15, and 16, Uniform Sales Act.

    Changes: Completely rewritten into one section.

    Purposes of Changes:

    1. The present section rests on the basic policy of this article that no warranty is created except by some conduct (either affirmative action or failure to disclose) on the part of the seller. Therefor, all warranties are made cumulative unless this construction of the contract is impossible or unreasonable.

    This article thus follows the general policy of the Uniform Sales Act except that in case of the sale of an article by its patent or trade name the elimination of the warranty of fitness depends solely on whether the buyer has relied on the seller's skill and judgment; the use of the patent or trade name is but one factor in making this determination.

    2. The rules of this section are designed to aid in determining the intention of the parties as to which of inconsistent warranties which have arisen from the circumstances of their transaction shall prevail. These rules of intention are to be applied only where factors making for an equitable estoppel of the seller do not exist and where he or she has in perfect good faith made warranties which later turn out to be inconsistent. To the extent that the seller has led the buyer to believe that all of the warranties can be performed, he or she is estopped from setting up any essential inconsistency as a defense.

    3. The rules in subsections (a), (b), and (c) are designed to ascertain the intention of the parties by reference to the factor which probably claimed the attention of the parties in the first instance. These rules are not absolute but may be changed by evidence showing that the conditions which existed at the time of contracting make the construction called for by the section inconsistent or unreasonable.

    Cross Reference:

    Point 1: Section 2-315.

    Definitional Cross Reference:

    "Party". Section 1-201.


2-318. Third-party beneficiaries of warranties express or implied.

A seller's warranty whether express or implied extends to any natural person who is in the family or household of his buyer or who is a guest in his home if it is reasonable to expect that such person may use, consume or be affected by the goods and who is injured in person by breach of the warranty. A seller may not exclude or limit the operation of this section.

Source:Laws 1963, c. 544, Art. II, § 2-318, p. 1725.


Annotations
    Where plaintiff city asserted common law theories of recovery, federal district court's summary judgment for defendant on basis Uniform Commercial Code precluded city's reliance on third-party-beneficiary theory was improper. Omaha Pollution Control Corp. v. Carver-Greenfield Corp., 516 F.2d 881 (8th Cir. 1975).

    Sewage processing plant constructed for sale to city's pollution control corporation by private company was subject to implied warranty of merchantability and of fitness for particular purpose for which it was to be used, and city could recover for breach. Omaha Pollution Control Corp. v. Carver-Greenfield Corp., 413 F.Supp. 1069 (D. Neb. 1976).

    COMMENT

    Prior Uniform Statutory Provision: None.

    Purposes:

    1. The last sentence of this section does not mean that a seller is precluded from excluding or disclaiming a warranty which might otherwise arise in connection with the sale provided such exclusion or modification is permitted by section 2-316. Nor does that sentence preclude the seller from limiting the remedies of his or her own buyer and of any beneficiaries, in any manner provided in section 2-718 or 2-719. To the extent that the contract of sale contains provisions under which warranties are excluded or modified, or remedies for breach are limited, such provisions are equally operative against beneficiaries of warranties under this section. What this last sentence forbids is exclusion of liability by the seller to the persons to whom the warranties which he or she has made to his or her buyer would extend under this section.

    2. The purpose of this section is to give certain beneficiaries the benefit of the same warranty which the buyer received in the contract of sale, thereby freeing any such beneficiaries from any technical rules as to "privity". It seeks to accomplish this purpose without any derogation of any right or remedy resting on negligence. It rests primarily upon the merchant-seller's warranty under this article that the goods sold are merchantable and fit for the ordinary purposes for which such goods are used rather than the warranty of fitness for a particular purpose. Implicit in the section is that any beneficiary of a warranty may bring a direct action for breach of warranty against the seller whose warranty extends to him or her.

    3. This section expressly includes as beneficiaries within its provisions the family, household, and guests of the purchaser. Beyond this, the section is neutral and is not intended to enlarge or restrict the developing case law on whether the seller's warranties, given to his or her buyer who resells, extend to other persons in the distributive chain.

    Cross References:

    Point 1: Sections 2-316, 2-718, and 2-719.

    Point 2: Section 2-314.

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Goods". Section 2-105.

    "Seller". Section 2-103.


2-319. F.O.B. and F.A.S. terms.

(1) Unless otherwise agreed the term F.O.B. (which means "free on board") at a named place, even though used only in connection with the stated price, is a delivery term under which

(a) when the term is F.O.B. the place of shipment, the seller must at that place ship the goods in the manner provided in this article (section 2-504) and bear the expense and risk of putting them into the possession of the carrier; or

(b) when the term is F.O.B. the place of destination, the seller must at his own expense and risk transport the goods to that place and there tender delivery of them in the manner provided in this article (section 2-503);

(c) when under either (a) or (b) the term is also F.O.B. vessel, car or other vehicle, the seller must in addition at his own expense and risk load the goods on board. If the term is F.O.B. vessel the buyer must name the vessel and in an appropriate case the seller must comply with the provisions of this article on the form of bill of lading (section 2-323).

(2) Unless otherwise agreed the term F.A.S. vessel (which means "free alongside") at a named port, even though used only in connection with the stated price, is a delivery term under which the seller must

(a) at his own expense and risk deliver the goods alongside the vessel in the manner usual in that port or on a dock designated and provided by the buyer; and

(b) obtain and tender a receipt for the goods in exchange for which the carrier is under a duty to issue a bill of lading.

(3) Unless otherwise agreed in any case falling within subsection (1)(a) or (c) or subsection (2) the buyer must seasonably give any needed instructions for making delivery, including when the term is F.A.S. or F.O.B. the loading berth of the vessel and in an appropriate case its name and sailing date. The seller may treat the failure of needed instructions as a failure of cooperation under this article (section 2-311). He may also at his option move the goods in any reasonable manner preparatory to delivery or shipment.

(4) Under the term F.O.B. vessel or F.A.S. unless otherwise agreed the buyer must make payment against tender of the required documents and the seller may not tender nor the buyer demand delivery of the goods in substitution for the documents.

Source:Laws 1963, c. 544, Art. II, § 2-319, p. 1725.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: None.

    Purposes:

    1. This section is intended to negate the uncommercial line of decision which treats an "F.O.B." term as "merely a price term". The distinctions taken in subsection (1) handle most of the issues which have on occasion led to the unfortunate judicial language just referred to. Other matters which have led to sound results being based on unhappy language in regard to F.O.B. clauses are dealt with in this code by section 2-311(2) (seller's option re arrangements relating to shipment) and sections 2-614 and 2-615 (substituted performance and seller's excuse).

    2. Subsection (1)(c) not only specifies the duties of a seller who engages to deliver "F.O.B. vessel", or the like, but ought to make clear that no agreement is soundly drawn when it looks to reshipment from San Francisco or New York, but speaks merely of "F.O.B." the place.

    3. The buyer's obligations stated in subsection (1)(c) and subsection (3) are, as shown in the text, obligations of cooperation. The last sentence of subsection (3) expressly, though perhaps unnecessarily, authorizes the seller, pending instructions, to go ahead with such preparatory moves as shipment from the interior to the named point of delivery. The sentence presupposes the usual case in which instructions "fail"; a prior repudiation by the buyer, giving notice that breach was intended, would remove the reason for the sentence, and would normally bring into play, instead, the second sentence of section 2-704, which duly calls for lessening damages.

    4. The treatment of "F.O.B. vessel" in conjunction with F.A.S. fits, in regard to the need for payment against documents, with standard practice and caselaw; but "F.O.B. vessel" is a term which by its very language makes express the need for an "on board" document. In this respect, that term is stricter than the ordinary overseas "shipment" contract (C.I.F., etc., section 2-320).

    Cross References:

    Sections 2-311(3), 2-323, 2-503, and 2-504.

    Definitional Cross References:

    "Agreed". Section 1-201.

    "Bill of lading". Section 1-201.

    "Buyer". Section 2-103.

    "Goods". Section 2-105.

    "Seasonably". Section 1-204.

    "Seller". Section 2-103.

    "Term". Section 1-201.


2-320. C.I.F. and C. & F. terms.

(1) The term C.I.F. means that the price includes in a lump sum the cost of the goods and the insurance and freight to the named destination. The term C. & F. or C.F. means that the price so includes cost and freight to the named destination.

(2) Unless otherwise agreed and even though used only in connection with the stated price and destination, the term C.I.F. destination or its equivalent requires the seller at his own expense and risk to

(a) put the goods into the possession of a carrier at the port for shipment and obtain a negotiable bill or bills of lading covering the entire transportation to the named destination; and

(b) load the goods and obtain a receipt from the carrier (which may be contained in the bill of lading) showing that the freight has been paid or provided for; and

(c) obtain a policy or certificate of insurance, including any war risk insurance, of a kind and on terms then current at the port of shipment in the usual amount, in the currency of the contract, shown to cover the same goods covered by the bill of lading and providing for payment of loss to the order of the buyer or for the account of whom it may concern; but the seller may add to the price the amount of the premium for any such war risk insurance; and

(d) prepare an invoice of the goods and procure any other documents required to effect shipment or to comply with the contract; and

(e) forward and tender with commercial promptness all the documents in due form and with any indorsement necessary to perfect the buyer's rights.

(3) Unless otherwise agreed the term C. & F. or its equivalent has the same effect and imposes upon the seller the same obligations and risks as a C.I.F. term except the obligation as to insurance.

(4) Under the term C.I.F. or C. & F. unless otherwise agreed the buyer must make payment against tender of the required documents and the seller may not tender nor the buyer demand delivery of the goods in substitution for the documents.

Source:Laws 1963, c. 544, Art. II, § 2-320, p. 1727.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: None.

    Purposes:

    To make it clear that:

    1. The C.I.F. contract is not a destination but a shipment contract with risk of subsequent loss or damage to the goods passing to the buyer upon shipment if the seller has properly performed all his or her obligations with respect to the goods. Delivery to the carrier is delivery to the buyer for purposes of risk and "title". Delivery of possession of the goods is accomplished by delivery of the bill of lading, and upon tender of the required documents the buyer must pay the agreed price without awaiting the arrival of the goods and if they have been lost or damaged after proper shipment he or she must seek his or her remedy against the carrier or insurer. The buyer has no right of inspection prior to payment or acceptance of the documents.

    2. The seller's obligations remain the same even though the C.I.F. term is "used only in connection with the stated price and destination".

    3. The insurance stipulated by the C.I.F. term is for the buyer's benefit, to protect him or her against the risk of loss or damage to the goods in transit. A clause in a C.I.F. contract "insurance — for the account of sellers" should be viewed in its ordinary mercantile meaning that the sellers must pay for the insurance and not that it is intended to run to the seller's benefit.

    4. A bill of lading covering the entire transportation from the port of shipment is explicitly required but the provision on this point must be read in the light of its reason to assure the buyer of as full protection as the conditions of shipment reasonably permit, remembering always that this type of contract is designed to move the goods in the channels commercially available. To enable the buyer to deal with the goods while they are afloat the bill of lading must be one that covers only the quantity of goods called for by the contract. The buyer is not required to accept his or her part of the goods without a bill of lading because the latter covers a larger quantity, nor is he or she required to accept a bill of lading for the whole quantity under a stipulation to hold the excess for the owner. Although the buyer is not compelled to accept either goods or documents under such circumstances he or she may of course claim his or her rights in any goods which have been identified to his or her contract.

    5. The seller is given the option of paying or providing for the payment of freight. He or she has no option to ship "freight collect" unless the agreement so provides. The rule of the common law that the buyer need not pay the freight if the goods do not arrive is preserved.

    Unless the shipment has been sent "freight collect" the buyer is entitled to receive documentary evidence that he or she is not obligated to pay the freight; the seller is therefor required to obtain a receipt "showing that the freight has been paid or provided for". The usual notation on the bill of lading that the freight has been prepaid is a sufficient receipt, as at common law. The phrase "provided for" is intended to cover the frequent situation in which the carrier extends credit to a shipper for the freight on successive shipments and receives periodical payments of the accrued freight charges from him or her.

    6. The requirement that unless otherwise agreed the seller must procure insurance "of a kind and on terms then current at the port for shipment in the usual amount, in the currency of the contract, sufficiently shown to cover the same goods covered by the bill of lading", applies to both marine and war risk insurance. As applied to marine insurance, it means such insurance as is usual or customary at the port for shipment with reference to the particular kind of goods involved, the character and equipment of the vessel, the route of the voyage, the port of destination, and any other considerations that affect the risk. It is the substantial equivalent of the ordinary insurance in the particular trade and on the particular voyage and is subject to agreed specifications of type or extent of coverage. The language does not mean that the insurance must be adequate to cover all risks to which the goods may be subject in transit. There are some types of loss or damage that are not covered by the usual marine insurance and are excepted in bills of lading or in applicable statutes from the causes of loss or damage for which the carrier or the vessel is liable. Such risks must be borne by the buyer under this article.

    Insurance secured in compliance with a C.I.F. term must cover the entire transportation of the goods to the named destination.

    7. An additional obligation is imposed upon the seller in requiring him or her to procure customary war risk insurance at the buyer's expense. This changes the common law on the point. The seller is not required to assume the risk of including in the C.I.F. price the cost of such insurance, since it often fluctuates rapidly, but is required to treat it simply as a necessary for the buyer's account. What war risk insurance is "current" or usual turns on the standard forms of policy or rider in common use.

    8. The C.I.F. contract calls for insurance covering the value of the goods at the time and place of shipment and does not include any increase in market value during transit or any anticipated profit to the buyer on a sale by him or her.

    The contract contemplates that before the goods arrive at their destination they may be sold again and again on C.I.F. terms and that the original policy of insurance and bill of lading will run with the interest in the goods by being transferred to each successive buyer. A buyer who becomes the seller in such an intermediate contract for sale does not thereby, if his or her subbuyer knows the circumstances, undertake to insure the goods again at an increased price fixed in the new contract or to cover the increase in price by additional insurance, and his or her buyer may not reject the documents on the ground that the original policy does not cover such higher price. If such a subbuyer desires additional insurance he or she must procure it for himself or herself.

    Where the seller exercises an option to ship "freight collect" and to credit the buyer with the freight against the C.I.F. price, the insurance need not cover the freight since the freight is not at the buyer's risk. On the other hand, where the seller prepays the freight upon shipping under a bill of lading requiring prepayment and providing that the freight shall be deemed earned and shall be retained by the carrier "ship and/or cargo lost or not lost", or using words of similar import, he or she must procure insurance that will cover the freight, because notwithstanding that the goods are lost in transit the buyer is bound to pay the freight as part of the C.I.F. price and will be unable to recover it back from the carrier.

    9. Insurance "for the account of whom it may concern" is usual and sufficient. However, for a valid tender the policy of insurance must be one which can be disposed of together with the bill of lading and so must be "sufficiently shown to cover the same goods covered by the bill of lading". It must cover separately the quantity of goods called for by the buyer's contract and not merely insure his or her goods as part of a larger quantity in which others are interested, a case provided for in American mercantile practice by the use of negotiable certificates of insurance which are expressly authorized by this section. By usage these certificates are treated as the equivalent of separate policies and are good tender under C.I.F. contracts. The term "certificate of insurance", however, does not of itself include certificates or "cover notes" issued by the insurance broker and stating that the goods are covered by a policy. Their sufficiency as substitutes for policies will depend upon proof of an established usage or course of dealing. The present section rejects the English rule that not only brokers' certificates and "cover notes" but also certain forms of American insurance certificates are not the equivalent of policies and are not good tender under a C.I.F. contract.

    The seller's failure to tender a proper insurance document is waived if the buyer refuses to make payment on other and untenable grounds at a time when proper insurance could have been obtained and tendered by the seller if timely objection had been made. Even a failure to insure on shipment may be cured by seasonable tender of a policy retroactive in effect; e.g., one insuring the goods "lost or not lost". The provisions of this article on cure of improper tender and on waiver of buyer's objections by silence are applicable to insurance tenders under a C.I.F. term. Where there is no waiver by the buyer as described above, however, the fact that the goods arrive safely does not cure the seller's breach of his or her obligations to insure them and tender to the buyer a proper insurance document.

    10. The seller's invoice of the goods shipped under a C.I.F. contract is regarded as a usual and necessary document upon which reliance may properly be placed. It is the document which evidences points of description, quality, and the like which do not readily appear in other documents. This article rejects those statements to the effect that the invoice is a usual but not a necessary document under a C.I.F. term.

    11. The buyer needs all of the documents required under a C.I.F. contract, in due form and, if a tangible document of title, with necessary endorsements, so that before the goods arrive he or she may deal with them by negotiating the documents or may obtain prompt possession of the goods after their arrival. If the goods are lost or damaged in transit the documents are necessary to enable him or her promptly to assert his or her remedy against the carrier or insurer. The seller is therefor obligated to do what is mercantilely reasonable in the circumstances and should make every reasonable exertion to send forward the documents as soon as possible after the shipment. The requirement that the documents be forwarded with "commercial promptness" expresses a more urgent need for action than that suggested by the phrase "reasonable time".

    12. Under a C.I.F. contract the buyer, as under the common law, must pay the price upon tender of the required documents without first inspecting the goods, but his or her payment in these circumstances does not constitute an acceptance of the goods nor does it impair his or her right of subsequent inspection or his or her options and remedies in the case of improper delivery. All remedies and rights for the seller's breach are reserved to him or her. The buyer must pay before inspection and assert his or her remedy against the seller afterward unless the nonconformity of the goods amounts to a real failure of consideration, since the purpose of choosing this form of contract is to give the seller protection against the buyer's unjustifiable rejection of the goods at a distant port of destination which would necessitate taking possession of the goods and suing the buyer there.

    13. A valid C.I.F. contract may be made which requires part of the transportation to be made on land and part on the sea, as where the goods are to be brought by rail from an inland point to a seaport and thence transported by vessel to the named destination under a "through" or combination bill of lading issued by the railroad company. In such a case shipment by rail from the inland point within the contract period is a timely shipment notwithstanding that the loading of the goods on the vessel is delayed by causes beyond the seller's control.

    14. Although subsection (2) stating the legal effects of the C.I.F. term is an "unless otherwise agreed" provision, the express language used in an agreement is frequently a precautionary, fuller statement of the normal C.I.F. terms and hence not intended as a departure or variation from them. Moreover, the dominant outlines of the C.I.F. term are so well understood commercially that any variation should, whenever reasonably possible, be read as falling within those dominant outlines rather than as destroying the whole meaning of a term which essentially indicates a contract for proper shipment rather than one for delivery at destination. Particularly careful consideration is necessary before a printed form or clause is construed to mean agreement otherwise and where a C.I.F. contract is prepared on a printed form designed for some other type of contract, the C.I.F. terms must prevail over printed clauses repugnant to them.

    15. Under subsection (4) the fact that the seller knows at the time of the tender of the documents that the goods have been lost in transit does not affect his or her rights if he or she has performed his or her contractual obligations. Similarly, the seller cannot perform under a C.I.F. term by purchasing and tendering landed goods.

    16. Under the C. & F. term, as under the C.I.F. term, title and risk of loss are intended to pass to the buyer on shipment. A stipulation in a C. & F. contract that the seller shall effect insurance on the goods and charge the buyer with the premium (in effect that he or she shall act as the buyer's agent for that purpose) is entirely in keeping with the pattern. On the other hand, it often happens that the buyer is in a more advantageous position than the seller to effect insurance on the goods or that he or she has in force an "open" or "floating" policy covering all shipments made by or to him or her, in either of which events the C. & F. term is adequate without mention of insurance.

    17. It is to be remembered that in a French contract the term "C.A.F." does not mean "Cost and Freight" but has exactly the same meaning as the term "C.I.F." since it is merely the French equivalent of that term. The "A" does not stand for "and" but for "assurance" which means insurance.

    Cross References:

    Point 4: Section 2-323.

    Point 6: Section 2-509(1)(a).

    Point 9: Sections 2-508 and 2-605(1)(a).

    Point 12: Sections 2-321(3), 2-512, and 2-513(3) and article 5.

    Definitional Cross References:

    "Bill of lading". Section 1-201.

    "Buyer". Section 2-103.

    "Contract". Section 1-201.

    "Goods". Section 2-105.

    "Rights". Section 1-201.

    "Seller". Section 2-103.

    "Term". Section 1-201.


2-321. C.I.F. or C. & F.; net landed weights; payment on arrival; warranty of condition on arrival.

Under a contract containing a term C.I.F. or C. & F.

(1) Where the price is based on or is to be adjusted according to "net landed weights", "delivered weights", "out turn" quantity or quality or the like, unless otherwise agreed the seller must reasonably estimate the price. The payment due on tender of the documents called for by the contract is the amount so estimated, but after final adjustment of the price a settlement must be made with commercial promptness.

(2) An agreement described in subsection (1) or any warranty of quality or condition of the goods on arrival places upon the seller the risk of ordinary deterioration, shrinkage and the like in transportation but has no effect on the place or time of identification to the contract for sale or delivery or on the passing of the risk of loss.

(3) Unless otherwise agreed where the contract provides for payment on or after arrival of the goods the seller must before payment allow such preliminary inspection as is feasible; but if the goods are lost delivery of the documents and payment are due when the goods should have arrived.

Source:Laws 1963, c. 544, Art. II, § 2-321, p. 1728.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: None.

    Purposes:

    This section deals with two variations of the C.I.F. contract which have evolved in mercantile practice but are entirely consistent with the basic C.I.F. pattern. Subsections (1) and (2), which provide for a shift to the seller of the risk of quality and weight deterioration during shipment, are designed to conform the law to the best mercantile practice and usage without changing the legal consequences of the C.I.F. or C. & F. term as to the passing of marine risks to the buyer at the point of shipment. Subsection (3) provides that where under the contract documents are to be presented for payment after arrival of the goods, this amounts merely to a postponement of the payment under the C.I.F. contract and is not to be confused with the "no arrival, no sale" contract. If the goods are lost, delivery of the documents and payment against them are due when the goods should have arrived. The clause for payment on or after arrival is not to be construed as such a condition precedent to payment that if the goods are lost in transit the buyer need never pay and the seller must bear the loss.

    Cross Reference:

    Section 2-324.

    Definitional Cross References:

    "Agreement". Section 1-201.

    "Contract". Section 1-201.

    "Delivery". Section 1-201.

    "Goods". Section 2-105.

    "Seller". Section 2-103.

    "Term". Section 1-201.


2-322. Delivery ex-ship.

(1) Unless otherwise agreed a term for delivery of goods "ex-ship" (which means from the carrying vessel) or in equivalent language is not restricted to a particular ship and requires delivery from a ship which has reached a place at the named port of destination where goods of the kind are usually discharged.

(2) Under such a term unless otherwise agreed

(a) the seller must discharge all liens arising out of the carriage and furnish the buyer with a direction which puts the carrier under a duty to deliver the goods; and

(b) the risk of loss does not pass to the buyer until the goods leave the ship's tackle or are otherwise properly unloaded.

Source:Laws 1963, c. 544, Art. II, § 2-322, p. 1729.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: None.

    Purposes:

    1. The delivery term, "ex-ship", as between seller and buyer, is the reverse of the F.A.S. term covered.

    2. Delivery need not be made from any particular vessel under a clause calling for delivery "ex-ship", even though a vessel on which shipment is to be made originally is named in the contract, unless the agreement by appropriate language, restricts the clause to delivery from a named vessel.

    3. The appropriate place and manner of unloading at the port of destination depend upon the nature of the goods and the facilities and usages of the port.

    4. A contract fixing a price "ex-ship" with payment "cash against documents" calls only for such documents as are appropriate to the contract. Tender of a delivery order and of a receipt for the freight after the arrival of the carrying vessel is adequate. The seller is not required to tender a bill of lading as a document of title nor is he or she required to insure the goods for the buyer's benefit, as the goods are not at the buyer's risk during the voyage.

    Cross Reference:

    Point 1: Section 2-319(2).

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Goods". Section 2-105.

    "Seller". Section 2-103.

    "Term". Section 1-201.


2-323. Form of bill of lading required in overseas shipment; overseas.

(1) Where the contract contemplates overseas shipment and contains a term C.I.F. or C. & F. or F.O.B. vessel, the seller unless otherwise agreed must obtain a negotiable bill of lading stating that the goods have been loaded on board or, in the case of a term C.I.F. or C. & F., received for shipment.

(2) Where in a case within subsection (1) a tangible bill of lading has been issued in a set of parts, unless otherwise agreed if the documents are not to be sent from abroad the buyer may demand tender of the full set; otherwise only one part of the bill of lading need be tendered. Even if the agreement expressly requires a full set

(a) due tender of a single part is acceptable within the provisions of this article on cure of improper delivery (subsection (1) of section 2-508); and

(b) even though the full set is demanded, if the documents are sent from abroad the person tendering an incomplete set may nevertheless require payment upon furnishing an indemnity which the buyer in good faith deems adequate.

(3) A shipment by water or by air or a contract contemplating such shipment is "overseas" insofar as by usage of trade or agreement it is subject to the commercial, financing, or shipping practices characteristic of international deep water commerce.

Source:Laws 1963, c. 544, Art. II, § 2-323, p. 1729; Laws 2005, LB 570, § 34.    


Annotations
    COMMENT

    Prior Uniform Statutory Provision: None.

    Purposes:

    1. Subsection (1) follows the "American" rule that a regular bill of lading indicating delivery of the goods at the dock for shipment is sufficient, except under a term "F.O.B. vessel". See section 2-319 and comment thereto.

    2. Subsection (2) deals with the problem of bills of lading covering deep-water shipments, issued not as a single bill of lading but in a set of parts, each part referring to the other parts and the entire set constituting in commercial practice and at law a single bill of lading. Commercial practice in international commerce is to accept and pay against presentation of the first part of a set if the part is sent from overseas even though the contract of the buyer requires presentation of a full set of bills of lading provided adequate indemnity for the missing parts is forthcoming. In accord with the amendment to section 7-304, bills of lading in a set are limited to tangible bills.

    This subsection codifies that practice as between buyer and seller. Article 5 (section 5-113) authorizes banks presenting drafts under letters of credit to give indemnities against the missing parts, and this subsection means that the buyer must accept and act on such indemnities if he or she in good faith deems them adequate. But neither this subsection nor article 5 decides whether a bank which has issued a letter of credit is similarly bound. The issuing bank's obligation under a letter of credit is independent and depends on its own terms. See article 5.

    Cross References:

    Sections 2-508(2) and 5-113.

    Definitional Cross References:

    "Bill of lading". Section 1-201.

    "Buyer". Section 2-103.

    "Contract". Section 1-201.

    "Delivery". Section 1-201.

    "Financing agency". Section 2-104.

    "Person". Section 1-201.

    "Seller". Section 2-103.

    "Send". Section 1-201.

    "Term". Section 1-201.


2-324. No arrival, no sale term.

Under a term "no arrival, no sale" or terms of like meaning, unless otherwise agreed,

(a) the seller must properly ship conforming goods and if they arrive by any means he must tender them on arrival but he assumes no obligation that the goods will arrive unless he has caused the nonarrival; and

(b) where without fault of the seller the goods are in part lost or have so deteriorated as no longer to conform to the contract or arrive after the contract time, the buyer may proceed as if there had been casualty to identified goods (section 2-613).

Source:Laws 1963, c. 544, Art. II, § 2-324, p. 1730.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: None.

    Purposes:

    1. The "no arrival, no sale" term in a "destination" overseas contract leaves risk of loss on the seller but gives him or her an exemption from liability for nondelivery. Both the nature of the case and the duty of good faith require that the seller must not interfere with the arrival of the goods in any way. If the circumstances impose upon him or her the responsibility for making or arranging the shipment, he or she must have a shipment made despite the exemption clause. Further, the shipment made must be a conforming one, for the exemption under a "no arrival, no sale" term applies only to the hazards of transportation and the goods must be proper in all other respects.

    The reason of this section is that where the seller is reselling goods bought by him or her as shipped by another and this fact is known to the buyer, so that the seller is not under any obligation to make the shipment himself or herself, the seller is entitled under the "no arrival, no sale" clause to exemption from payment of damages for nondelivery if the goods do not arrive or if the goods which actually arrive are nonconforming. This does not extend to sellers who arrange shipment by their own agents, in which case the clause is limited to casualty due to marine hazards. But sellers who make known that they are contracting only with respect to what will be delivered to them by parties over whom they assume no control are entitled to the full quantum of the exemption.

    2. The provisions of this article on identification must be read together with the present section in order to bring the exemption into application. Until there is some designation of the goods in a particular shipment or on a particular ship as being those to which the contract refers there can be no application of an exemption for their nonarrival.

    3. The seller's duty to tender the agreed or declared goods if they do arrive is not impaired because of their delay in arrival or by their arrival after trans-shipment.

    4. The phrase "to arrive" is often employed in the same sense as "no arrival, no sale" and may then be given the same effect. But a "to arrive" term, added to a C.I.F. or C. & F. contract, does not have the full meaning given by this section to "no arrival, no sale". Such a "to arrive" term is usually intended to operate only to the extent that the risks are not covered by the agreed insurance and the loss or casualty is due to such uncovered hazards. In some instances the "to arrive" term may be regarded as a time of payment term, or, in the case of the reselling seller discussed in point 1 above, as negating responsibility for conformity of the goods, if they arrive, to any description which was based on his or her good faith belief of the quality. Whether this is the intention of the parties is a question of fact based on all the circumstances surrounding the resale and in case of ambiguity the rules of sections 2-316 and 2-317 apply to preclude dishonor.

    5. Paragraph (b) applies where goods arrive impaired by damage or partial loss during transportation and makes the policy of this article on casualty to identified goods applicable to such a situation. For the term cannot be regarded as intending to give the seller an unforeseen profit through casualty; it is intended only to protect him or her from loss due to causes beyond his or her control.

    Cross References:

    Point 1: Section 1-203.

    Point 2: Section 2-501(a) and (c).

    Point 5: Section 2-613.

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Conforming". Section 2-106.

    "Contract". Section 1-201.

    "Fault". Section 1-201.

    "Goods". Section 2-105.

    "Sale". Section 2-106.

    "Seller". Section 2-103.

    "Term". Section 1-201.


2-325. Letter of credit term; confirmed credit.

(1) Failure of the buyer seasonably to furnish an agreed letter of credit is a breach of the contract for sale.

(2) The delivery to seller of a proper letter of credit suspends the buyer's obligation to pay. If the letter of credit is dishonored, the seller may on seasonable notification to the buyer require payment directly from him.

(3) Unless otherwise agreed the term "letter of credit" or "banker's credit" in a contract for sale means an irrevocable credit issued by a financing agency of good repute and, where the shipment is overseas, of good international repute. The term "confirmed credit" means that the credit must also carry the direct obligation of such an agency which does business in the seller's financial market.

Source:Laws 1963, c. 544, Art. II, § 2-325, p. 1730.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: None.

    Purposes:

    To express the established commercial and banking understanding as to the meaning and effects of terms calling for "letters of credit" or "confirmed credit":

    1. Subsection (2) follows the general policy of this article and article 3 (section 3-310) on conditional payment, under which payment by check or other short-term instrument is not ordinarily final as between the parties if the recipient duly presents the instrument and honor is refused. Thus the furnishing of a letter of credit does not substitute the financing agency's obligation for the buyer's, but the seller must first give the buyer reasonable notice of his or her intention to demand direct payment from him or her.

    2. Subsection (3) requires that the credit be irrevocable and be a prime credit as determined by the standing of the issuer. It is not necessary, unless otherwise agreed, that the credit be a negotiation credit; the seller can finance himself or herself by an assignment of the proceeds under section 5-116(2).

    3. The definition of "confirmed credit" is drawn on the supposition that the credit is issued by a bank which is not doing direct business in the seller's financial market; there is no intention to require the obligation of two banks both local to the seller.

    Cross References:

    Sections 2-403, 2-511(3), and 3-310 and article 5.

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Contract for sale". Section 2-106.

    "Draft". Section 3-104.

    "Financing agency". Section 2-104.

    "Notifies". Section 1-201.

    "Overseas". Section 2-323.

    "Purchaser". Section 1-201.

    "Seasonably". Section 1-204.

    "Seller". Section 2-103.

    "Term". Section 1-201.


2-326. Sale on approval and sale or return; rights of creditors.

(1) Unless otherwise agreed, if delivered goods may be returned by the buyer even though they conform to the contract, the transaction is

(a) a "sale on approval" if the goods are delivered primarily for use, and

(b) a "sale or return" if the goods are delivered primarily for resale.

(2) Goods held on approval are not subject to the claims of the buyer's creditors until acceptance; goods held on sale or return are subject to such claims while in the buyer's possession.

(3) Any "or return" term of a contract for sale is to be treated as a separate contract for sale within the statute of frauds section of this article (section 2-201) and as contradicting the sale aspect of the contract within the provisions of this article on parol or extrinsic evidence (section 2-202).

Source:Laws 1963, c. 544, Art. II, § 2-326, p. 1731; Laws 1999, LB 550, § 56.    


Annotations
    COMMENT

    Prior Uniform Statutory Provision: Section 19(3), Uniform Sales Act.

    Changes: Completely rewritten in this and the succeeding section.

    Purposes of Changes:

    To make it clear that:

    1. Both a "sale on approval" and a "sale or return" should be distinguished from other types of transactions with which they frequently have been confused. A "sale on approval", sometimes also called a sale "on trial" or "on satisfaction", deals with a contract under which the seller undertakes a risk in order to satisfy its prospective buyer with the appearance or performance of the goods that are sold. The goods are delivered to the proposed purchaser but they remain the property of the seller until the buyer accepts them. The price has already been agreed. The buyer's willingness to receive and test the goods is the consideration for the seller's engagement to deliver and sell. A "sale or return", on the other hand, typically is a sale to a merchant whose unwillingness to buy is overcome by the seller's engagement to take back the goods (or any commercial unit of goods) in lieu of payment if they fail to be resold. A sale or return is a present sale of goods which may be undone at the buyer's option. Accordingly, subsection (2) provides that goods delivered on approval are not subject to the prospective buyer's creditors until acceptance, and goods delivered in a sale or return are subject to the buyer's creditors while in the buyer's possession.

    These two transactions are so strongly delineated in practice and in general understanding that every presumption runs against a delivery to a consumer being a "sale or return" and against a delivery to a merchant for resale being a "sale on approval".

    2. The right to return goods for failure to conform to the contract of sale does not make the transaction a "sale on approval" or "sale or return" and has nothing to do with this section or section 2-327. This section is not concerned with remedies for breach of contract. It deals instead with a power given by the contract to turn back the goods even though they are wholly as warranted. This section nevertheless presupposes that a contract for sale is contemplated by the parties, although that contract may be of the particular character that this section addresses (i.e., a sale on approval or a sale or return).

    If a buyer's obligation as a buyer is conditioned not on his or her personal approval but on the article's passing a described objective test, the risk of loss by casualty pending the test is properly the seller's and proper return is at his or her expense. On the point of "satisfaction" as meaning "reasonable satisfaction" when an industrial machine is involved, this article takes no position.

    3. Subsection (3) resolves a conflict in the pre-UCC case law by recognizing that an "or return" provision is so definitely at odds with any ordinary contract for sale of goods that if a written agreement is involved the "or return" term must be contained in a written memorandum. The "or return" aspect of a sales contract must be treated as a separate contract under the statute of frauds section and as contradicting the sale insofar as questions of parol or extrinsic evidence are concerned.

    4. Certain true consignment transactions were dealt with in former sections 2-326(3) and 9-114. These provisions have been deleted and have been replaced by new provisions in article 9. See, e.g., sections 9-103(d), 9-109(a)(4), and 9-319.

    Cross References:

    Point 2: Article 9.

    Point 3: Sections 2-201 and 2-202.

    Definitional Cross References:

    "Between merchants". Section 2-104.

    "Buyer". Section 2-103.

    "Conform". Section 2-106.

    "Contract for sale". Section 2-106.

    "Creditor". Section 1-201.

    "Goods". Section 2-105.

    "Sale". Section 2-106.

    "Seller". Section 2-103.


2-327. Special incidents of sale on approval and sale or return.

(1) Under a sale on approval unless otherwise agreed

(a) although the goods are identified to the contract the risk of loss and the title do not pass to the buyer until acceptance; and

(b) use of the goods consistent with the purpose of trial is not acceptance but failure seasonably to notify the seller of election to return the goods is acceptance, and if the goods conform to the contract acceptance of any part is acceptance of the whole; and

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

(2) Under a sale or return unless otherwise agreed

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

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

Source:Laws 1963, c. 544, Art. II, § 2-327, p. 1732.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: Section 19(3), Uniform Sales Act.

    Changes: Completely rewritten in preceding and this section.

    Purposes of Changes:

    To make it clear that:

    1. In the case of a sale on approval:

    If all of the goods involved conform to the contract, the buyer's acceptance of part of the goods constitutes acceptance of the whole. Acceptance of part falls outside the normal intent of the parties in the "on approval" situation and the policy of this article allowing partial acceptance of a defective delivery has no application here. A case where a buyer takes home two dresses to select one commonly involves two distinct contracts; if not, it is covered by the words "unless otherwise agreed".

    2. In the case of a sale or return, the return of any unsold unit merely because it is unsold is the normal intent of the "sale or return" provision, and therefor the right to return for this reason alone is independent of any other action under the contract which would turn on wholly different considerations. On the other hand, where the return of goods is for breach, including return of items resold by the buyer and returned by the ultimate purchasers because of defects, the return procedure is governed not by the present section but by the provisions on the effects and revocation of acceptance.

    3. In the case of a sale on approval the risk rests on the seller until acceptance of the goods by the buyer, while in a sale or return the risk remains throughout on the buyer.

    4. Notice of election to return given by the buyer in a sale on approval is sufficient to relieve him or her of any further liability. Actual return by the buyer to the seller is required in the case of a sale or return contract. What constitutes due "giving" of notice, as required in "on approval" sales, is governed by the provisions on good faith and notice. "Seasonably" is used here as defined in section 1-204. Nevertheless, the provisions of both this article and of the contract on this point must be read with commercial reason and with full attention to good faith.

    Cross References:

    Point 1: Sections 2-501, 2-601, and 2-603.

    Point 2: Sections 2-607 and 2-608.

    Point 4: Sections 1-201 and 1-204.

    Definitional Cross References:

    "Agreed". Section 1-201.

    "Buyer". Section 2-103.

    "Commercial unit". Section 2-105.

    "Conform". Section 2-106.

    "Contract". Section 1-201.

    "Goods". Section 2-105.

    "Merchant". Section 2-104.

    "Notification". Section 1-201.

    "Notifies". Section 1-201.

    "Sale on approval". Section 2-326.

    "Sale or return". Section 2-326.

    "Seasonably". Section 1-204.

    "Seller". Section 2-103.


2-328. Sale by auction.

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

(2) A sale by auction is complete when the auctioneer so announces by the fall of the hammer or in other customary manner. Where a bid is made while the hammer is falling in acceptance of a prior bid the auctioneer may in his discretion reopen the bidding or declare the goods sold under the bid on which the hammer was falling.

(3) Such a sale is with reserve unless the goods are in explicit terms put up without reserve. In an auction with reserve the auctioneer may withdraw the goods at any time until he announces completion of the sale. In an auction without reserve, after the auctioneer calls for bids on an article or lot, that article or lot cannot be withdrawn unless no bid is made within a reasonable time. In either case a bidder may retract his bid until the auctioneer's announcement of completion of the sale, but a bidder's retraction does not revive any previous bid.

(4) If the auctioneer knowingly receives a bid on the seller's behalf or the seller makes or procures such a bid, and notice has not been given that liberty for such bidding is reserved, the buyer may at his option avoid the sale or take the goods at the price of the last good faith bid prior to the completion of the sale. This subsection shall not apply to any bid at a forced sale.

Source:Laws 1963, c. 544, Art. II, § 2-328, p. 1732.


Annotations
    Subsections (2) and (3) of this section do not apply to judicial sales. Commercial Fed. Sav. & Loan v. ABA Corp., 230 Neb. 317, 431 N.W.2d 613 (1988).

    Sales of goods at public auction with and without reserve are governed by this statute. Benson v. Ruggles and Burtch v. Benson, 208 Neb. 330, 303 N.W.2d 496 (1981).

    COMMENT

    Prior Uniform Statutory Provision: Section 21, Uniform Sales Act.

    Changes: Completely rewritten.

    Purposes of Changes:

    To make it clear that:

    1. The auctioneer may in his or her discretion either reopen the bidding or close the sale on the bid on which the hammer was falling when a bid is made at that moment. The recognition of a bid of this kind by the auctioneer in his or her discretion does not mean a closing in favor of such a bidder, but only that the bid has been accepted as a continuation of the bidding. If recognized, such a bid discharges the bid on which the hammer was falling when it was made.

    2. An auction "with reserve" is the normal procedure. The crucial point, however, for determining the nature of an auction is the "putting up" of the goods. This article accepts the view that the goods may be withdrawn before they are actually "put up", regardless of whether the auction is advertised as one without reserve, without liability on the part of the auction announcer to persons who are present. This is subject to any peculiar facts which might bring the case within the "firm offer" principle of this article, but an offer to persons generally would require unmistakable language in order to fall within that section. The prior announcement of the nature of the auction either as with reserve or without reserve will, however, enter as an "explicit term" in the "putting up" of the goods and conduct thereafter must be governed accordingly. The present section continues the prior rule permitting withdrawal of bids in auctions both with and without reserve; and the rule is made explicit that the retraction of a bid does not revive a prior bid.

    Cross Reference:

    Point 2: Section 2-205.

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Good faith". Section 1-201.

    "Goods". Section 2-105.

    "Lot". Section 2-105.

    "Notice". Section 1-201.

    "Sale". Section 2-106.

    "Seller". Section 2-103.


2-401. Passing of title; reservation for security; limited application of this section.

Each provision of this article with regard to the rights, obligations, and remedies of the seller, the buyer, purchasers, or other third parties applies irrespective of title to the goods except where the provision refers to such title. Insofar as situations are not covered by the other provisions of this article and matters concerning title become material the following rules apply:

(1) Title to goods cannot pass under a contract for sale prior to their identification to the contract (section 2-501), and unless otherwise explicitly agreed the buyer acquires by their identification a special property as limited by the Uniform Commercial Code. Any retention or reservation by the seller of the title (property) in goods shipped or delivered to the buyer is limited in effect to a reservation of a security interest. Subject to these provisions and to the provisions of the Article on Secured Transactions (Article 9), title to goods passes from the seller to the buyer in any manner and on any conditions explicitly agreed on by the parties.

(2) Unless otherwise explicitly agreed title passes to the buyer at the time and place at which the seller completes performance with reference to the physical delivery of the goods, despite any reservation of a security interest and even though a document of title is to be delivered at a different time or place; and in particular and despite any reservation of a security interest by the bill of lading

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

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

(3) Unless otherwise explicitly agreed where delivery is to be made without moving the goods,

(a) if the seller is to deliver a tangible document of title, title passes at the time when and the place where he or she delivers such documents and if the seller is to deliver an electronic document of title, title passes when the seller delivers the document; or

(b) if the goods are at the time of contracting already identified and no documents of title are to be delivered, title passes at the time and place of contracting.

(4) A rejection or other refusal by the buyer to receive or retain the goods, whether or not justified, or a justified revocation of acceptance revests title to the goods in the seller. Such revesting occurs by operation of law and is not a "sale".

Source:Laws 1963, c. 544, Art. II, § 2-401, p. 1733; Laws 1992, LB 861, § 11; Laws 2005, LB 570, § 35.    


Annotations
    This section does not provide for a revesting of title for nonpayment of purchase price alone, unless the contract of sale so provides. The effect of a reservation of title under this section is the retention of a security interest. Maryott v. Oconto Cattle Co., 259 Neb. 41, 607 N.W.2d 820 (2000).

    A security interest which attaches upon delivery has fully attached and is valid even though the goods are thereafter, even immediately, installed in such a way as to become fixtures of realty, and even though such goods were contemplated throughout the transaction to become fixtures. First National Bank v. Rose, 213 Neb. 611, 330 N.W.2d 894 (1983).

    If a contract does not contemplate the delivery of any document of title, title passes under the provisions of this section at the time of contracting. Southwest Bank of Omaha v. Moritz, 203 Neb. 45, 277 N.W.2d 430 (1979).

    Where contract for sale of goods did not specifically refer to passage of title, held, title passed upon delivery. Huskinson v. Vanderheiden, 197 Neb. 739, 251 N.W.2d 144 (1977).

    This section does not apply where situation involved is covered elsewhere in article. Goosic Constr. Co. v. City Nat. Bank of Crete, 196 Neb. 86, 241 N.W.2d 521 (1976).

    If there was an explicit agreement for title to pass upon completion of the necessary paperwork which had not occurred, seller still had insurable interest. Bowman v. American Home Assur. Co., 190 Neb. 810, 213 N.W.2d 446 (1973).

    Purchase money priority is exception to basic rule of priority to first filed financing statement and should be applied only in strict compliance with all limitations in Uniform Commercial Code. North Platte State Bank v. Production Credit Assn., 189 Neb. 45, 200 N.W.2d 1 (1972).

    For title to revest in seller, evidence must show rejection or other refusal by the buyer to receive or retain the goods, or a justified revocation of acceptance. Jordan v. Butler, 182 Neb. 626, 156 N.W.2d 778 (1968).

    Title to the one hundred forty-five head of cattle passed to H & O Farms at the time the plaintiff delivered them and, therefor, any interest the plaintiff retained was no more than a security interest provided there was no agreement between the parties, either expressly or in course of conduct, that altered the result. Myers v. Columbus Sales Pavilion, Inc., 575 F.Supp. 805 (D. Neb. 1983).

    COMMENT

    Prior Uniform Statutory Provision: See generally, sections 17, 18, 19, and 20, Uniform Sales Act.

    Purposes:

    To make it clear that:

    1. This article deals with the issues between seller and buyer in terms of step-by-step performance or nonperformance under the contract for sale and not in terms of whether or not "title" to the goods has passed. That the rules of this section in no way alter the rights of either the buyer, seller, or third parties declared elsewhere in the article is made clear by the preamble of this section. This section, however, in no way intends to indicate which line of interpretation should be followed in cases where the applicability of "public" regulation depends upon a "sale" or upon location of "title" without further definition. The basic policy of this article that known purpose and reason should govern interpretation cannot extend beyond the scope of its own provisions. It is therefor necessary to state what a "sale" is and when title passes under this article in case the courts deem any public regulation to incorporate the defined term of the "private" law.

    2. "Future" goods cannot be the subject of a present sale. Before title can pass the goods must be identified in the manner set forth in section 2-501. The parties, however, have full liberty to arrange by specific terms for the passing of title to goods which are existing.

    3. The "special property" of the buyer in goods identified to the contract is excluded from the definition of "security interest"; its incidents are defined in provisions of this article such as those on the rights of the seller's creditors, on good faith purchase, on the buyer's right to goods on the seller's insolvency, and on the buyer's right to specific performance or replevin.

    4. The factual situations in subsections (2) and (3) upon which passage of title turn actually base the test upon the time when the seller has finally committed himself or herself in regard to specific goods. Thus in a "shipment" contract he or she commits himself or herself by the act of making the shipment. If shipment is not contemplated subsection (3) turns on the seller's final commitment, i.e., the delivery of documents or the making of the contract. As to delivery of an electronic document of title, see definition of delivery in article 1, section 1-201. This article does not state a rule as to the place of title passage as to goods covered by an electronic document of title.

    Cross References:

    Point 2: Sections 2-102, 2-501, and 2-502.

    Point 3: Sections 1-201, 2-402, 2-403, 2-502, and 2-716.

    Definitional Cross References:

    "Agreement". Section 1-201.

    "Bill of lading". Section 1-201.

    "Buyer". Section 2-103.

    "Contract". Section 1-201.

    "Contract for sale". Section 2-106.

    "Delivery". Section 1-201.

    "Document of title". Section 1-201.

    "Good faith". Section 2-103.

    "Goods". Section 2-105.

    "Party". Section 1-201.

    "Purchaser". Section 1-201.

    "Receipt" of goods. Section 2-103.

    "Remedy". Section 1-201.

    "Rights". Section 1-201.

    "Sale". Section 2-106.

    "Security interest". Section 1-201.

    "Seller". Section 2-103.

    "Send". Section 1-201.


2-402. Rights of seller's creditors against sold goods.

(1) Except as provided in subsections (2) and (3), rights of unsecured creditors of the seller with respect to goods which have been identified to a contract for sale are subject to the buyer's rights to recover the goods under this article (sections 2-502 and 2-716).

(2) A creditor of the seller may treat a sale or an identification of goods to a contract for sale as void if as against him a retention of possession by the seller is fraudulent under any rule of law of the state where the goods are situated, except that retention of possession in good faith and current course of trade by a merchant seller for a commercially reasonable time after a sale or identification is not fraudulent.

(3) Nothing in this article shall be deemed to impair the rights of creditors of the seller

(a) under the provisions of the Article on Secured Transactions (Article 9); or

(b) where identification to the contract or delivery is made not in current course of trade but in satisfaction of or as security for a preexisting claim for money, security or the like and is made under circumstances which under any rule of law of the state where the goods are situated would apart from this article constitute the transaction a fraudulent transfer or voidable preference.

Source:Laws 1963, c. 544, Art. II, § 2-402, p. 1735.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: Subsection (2) — section 26, Uniform Sales Act; subsections (1) and (3) — none.

    Changes: Rephrased.

    Purposes of Changes and New Matter:

    To avoid confusion on ordinary issues between current sellers and buyers and issues in the field of preference and hindrance by making it clear that:

    1. Local law on questions of hindrance of creditors by the seller's retention of possession of the goods are outside the scope of this article, but retention of possession in the current course of trade is legitimate. Transactions which fall within the law's policy against improper preferences are reserved from the protection of this article.

    2. The retention of possession of the goods by a merchant seller for a commercially reasonable time after a sale or identification in current course is exempted from attack as fraudulent. Similarly, the provisions of subsection (3) have no application to identification or delivery made in the current course of trade, as measured against general commercial understanding of what a "current" transaction is.

    Definitional Cross References:

    "Contract for sale". Section 2-106.

    "Creditor". Section 1-201.

    "Good faith". Section 2-103.

    "Goods". Section 2-105.

    "Merchant". Section 2-104.

    "Money". Section 1-201.

    "Reasonable time". Section 1-204.

    "Rights". Section 1-201.

    "Sale". Section 2-106.

    "Seller". Section 2-103.


2-403. Power to transfer; good faith purchase of goods; entrusting.

(1) A purchaser of goods acquires all title which his or her transferor had or had power to transfer except that a purchaser of a limited interest acquires rights only to the extent of the interest purchased. A person with voidable title has power to transfer a good title to a good faith purchaser for value. When goods have been delivered under a transaction of purchase the purchaser has such power even though

(a) the transferor was deceived as to the identity of the purchaser, or

(b) the delivery was in exchange for a check which is later dishonored, or

(c) it was agreed that the transaction was to be a "cash sale", or

(d) the delivery was procured through fraud punishable as larcenous under the criminal law.

(2) Any entrusting of possession of goods to a merchant for purposes of sale who deals in goods of that kind gives him or her power to transfer all rights of the entruster to a buyer in ordinary course of business.

(3) "Entrusting" includes any delivery and any acquiescence in retention of possession regardless of any condition expressed between the parties to the delivery or acquiescence and regardless of whether the procurement of the entrusting or the possessor's disposition of the goods have been such as to be larcenous under the criminal law.

(4) The rights of other purchasers of goods and of lien creditors are governed by the Articles on Secured Transactions (Article 9) and Documents of Title (Article 7).

Source:Laws 1963, c. 544, Art. II, § 2-403, p. 1735; Laws 1967, c. 632, § 1, p. 2111; Laws 1991, LB 162, § 3.


Annotations
    In a situation where a cash seller delivers goods to a buyer and is paid with a dishonored check, this section allows the buyer to pass greater title to a good faith purchaser than the buyer could claim. Maryott v. Oconto Cattle Co., 259 Neb. 41, 607 N.W.2d 820 (2000).

    The definition of good faith purchaser does not expressly or impliedly include lack of knowledge of third-party claims as an element. Maryott v. Oconto Cattle Co., 259 Neb. 41, 607 N.W.2d 820 (2000).

    A dealer having the authority to expose vehicles for sale in the ordinary course of business, pursuant to this section, binds his financier to deliver title to any vehicle so sold, whether or not dealer remits the proceeds to his financier. Dugdale of Nebraska v. First State Bank of Gothenburg, 227 Neb. 729, 420 N.W.2d 273 (1988).

    A party whose title in goods is voidable as being conditioned upon payment for the goods can transfer title to a good-faith purchaser. Mid-South Order Buyers, Inc. v. Platte Valley Livestock, Inc., 210 Neb. 382, 315 N.W.2d 229 (1982).

    Financial institution lending money on cattle held to qualify as a good faith purchaser for value from a purported owner holding voidable title when financial institution relied on contract to sell and bill of sale of prior owner, inspected the cattle, and had no notice of any defect in title. Jordan v. Butler, 182 Neb. 626, 156 N.W.2d 778 (1968).

    COMMENT

    Prior Uniform Statutory Provision: Sections 20(4), 23, 24, and 25, Uniform Sales Act; section 9, especially 9(2), Uniform Trust Receipts Act; section 9, Uniform Conditional Sales Act.

    Changes: Consolidated and rewritten.

    Purposes of Changes:

    To gather together a series of prior uniform statutory provisions and the case law thereunder and to state a unified and simplified policy on good faith purchase of goods.

    1. The basic policy of our law allowing transfer of such title as the transferor has is generally continued and expanded under subsection (1). In this respect the provisions of the section are applicable to a person taking by any form of "purchase" as defined by the code. Moreover the policy of the code expressly providing for the application of supplementary general principles of law to sales transactions wherever appropriate joins with the present section to continue unimpaired all rights acquired under the law of agency or of apparent agency or ownership or other estoppel, whether based on statutory provisions or on case law principles. The section also leaves unimpaired the powers given to selling factors under the earlier Factors Acts. In addition subsection (1) provides specifically for the protection of the good faith purchaser for value in a number of specific situations which have been troublesome under prior law.

    On the other hand, the contract of purchase is of course limited by its own terms as in a case of pledge for a limited amount or of sale of a fractional interest in goods.

    2. The many particular situations in which a buyer in ordinary course of business from a dealer has been protected against reservation of property or other hidden interest are gathered by subsections (2) through (4) into a single principle protecting persons who buy in ordinary course out of inventory. Consignors have no reason to complain, nor have lenders who hold a security interest in the inventory, since the very purpose of goods in inventory is to be turned into cash by sale.

    The principle is extended in subsection (3) to fit with the abolition of the old law of "cash sale" by subsection (1)(c). It is also freed from any technicalities depending on the extended law of larceny; such extension of the concept of theft to include trick, particular types of fraud, and the like is for the purpose of helping conviction of the offender; it has no proper application to the long-standing policy of civil protection of buyers from persons guilty of such trick or fraud. Finally, the policy is extended, in the interest of simplicity and sense, to any entrusting by a bailor; this is in consonance with the explicit provisions of section 7-205 on the powers of a warehouse who is also in the business of buying and selling fungible goods of the kind he or she stores. As to entrusting by a secured party, subsection (2) is limited by the more specific provisions of section 9-320, which deny protection to a person buying farm products from a person engaged in farming operations.

    3. The definition of "buyer in ordinary course of business" (section 1-201) is effective here and preserves the essence of the healthy limitations engrafted by the case law on the older statutes. The older loose concept of good faith and wide definition of value combined to create apparent good faith purchasers in many situations in which the result outraged common sense; the court's solution was to protect the original title especially by use of "cash sale" or of overtechnical construction of the enabling clauses of the statutes. But such rulings then turned into limitations on the proper protection of buyers in the ordinary market. Section 1-201(9) cuts down the category of buyer in ordinary course in such fashion as to take care of the results of the cases, but with no price either in confusion or in injustice to proper dealings in the normal market.

    4. Except as provided in subsection (1), the rights of purchasers other than buyers in ordinary course are left to the Articles on Secured Transactions and Documents of Title.

    Cross References:

    Point 1: Sections 1-103 and 1-201.

    Point 2: Sections 1-201, 2-402, 7-205, and 9-307(1).

    Points 3 and 4: Sections 1-102, 1-201, 2-104, and 2-707 and articles 7 and 9.

    Definitional Cross References:

    "Buyer in ordinary course of business". Section 1-201.

    "Good faith". Sections 1-201 and 2-103.

    "Goods". Section 2-105.

    "Person". Section 1-201.

    "Purchaser". Section 1-201.

    "Signed". Section 1-201.

    "Term". Section 1-201.

    "Value". Section 1-201.


2-501. Insurable interest in goods; manner of identification of goods.

(1) The buyer obtains a special property and an insurable interest in goods by identification of existing goods as goods to which the contract refers even though the goods so identified are nonconforming and he has an option to return or reject them. Such identification can be made at any time and in any manner explicitly agreed to by the parties. In the absence of explicit agreement identification occurs

(a) when the contract is made if it is for the sale of goods already existing and identified;

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

(c) when the crops are planted or otherwise become growing crops or the young are conceived if the contract is for the sale of unborn young to be born within twelve months after contracting or for the sale of crops to be harvested within twelve months or the next normal harvest season after contracting whichever is longer.

(2) The seller retains an insurable interest in goods so long as title to or any security interest in the goods remains in him and where the identification is by the seller alone he may until default or insolvency or notification to the buyer that the identification is final substitute other goods for those identified.

(3) Nothing in this section impairs any insurable interest recognized under any other statute or rule of law.

Source:Laws 1963, c. 544, Art. II, § 2-501, p. 1736


Annotations
    The seller retains an insurable interest so long as title to or any security interest in the goods remains in him. Bowman v. American Home Assur. Co., 190 Neb. 810, 213 N.W.2d 446 (1973).

    COMMENT

    Prior Uniform Statutory Provision: see sections 17 and 19, Uniform Sales Act.

    Purposes:

    1. The present section deals with the manner of identifying goods to the contract so that an insurable interest in the buyer and the rights set forth in the next section will accrue. Generally speaking, identification may be made in any manner "explicitly agreed to" by the parties. The rules of paragraphs (a), (b), and (c) apply only in the absence of such "explicit agreement".

    2. In the ordinary case identification of particular existing goods as goods to which the contract refers is unambiguous and may occur in one of many ways. It is possible, however, for the identification to be tentative or contingent. In view of the limited effect given to identification by this article, the general policy is to resolve all doubts in favor of identification.

    3. The provision of this section as to "explicit agreement" clarifies the present confusion in the law of sales which has arisen from the fact that under prior uniform legislation all rules of presumption with reference to the passing of title or to appropriation (which in turn depended upon identification) were regarded as subject to the contrary intention of the parties or of the party appropriating. Such uncertainty is reduced to a minimum under this section by requiring "explicit agreement" of the parties before the rules of paragraphs (a), (b), and (c) are displaced — as they would be by a term giving the buyer power to select the goods. An "explicit" agreement, however, need not necessarily be found in the terms used in the particular transaction. Thus, where a usage of the trade has previously been made explicit by reduction to a standard set of "rules and regulations" currently incorporated by reference into the contracts of the parties, a relevant provision of those "rules and regulations" is "explicit" within the meaning of this section.

    4. In view of the limited function of identification there is no requirement in this section that the goods be in deliverable state or that all of the seller's duties with respect to the processing of the goods be completed in order that identification occur. For example, despite identification the risk of loss remains on the seller under the risk of loss provisions until completion of his or her duties as to the goods and all of the seller's remedies remain dependent upon his or her not defaulting under the contract.

    5. Undivided shares in an identified fungible bulk, such as grain in an elevator or oil in a storage tank, can be sold. The mere making of the contract with reference to an undivided share in an identified fungible bulk is enough under subsection (a) to effect an identification if there is no explicit agreement otherwise. The seller's duty, however, to segregate and deliver according to the contract is not affected by such an identification but is controlled by other provisions of this article.

    6. Identification of crops under paragraph (c) is made upon planting only if they are to be harvested within the year or within the next normal harvest season. The phrase "next normal harvest season" fairly includes nursery stock raised for normally quick "harvest", but plainly excludes a "timber" crop to which the concept of a harvest "season" is inapplicable.

    Paragraph (c) is also applicable to a crop of wool or the young of animals to be born within twelve months after contracting. The product of a lumbering, mining, or fishing operation, though seasonal, is not within the concept of "growing". Identification under a contract for all or part of the output of such an operation can be effected early in the operation.

    Cross References:

    Point 1: Section 2-502.

    Point 4: Sections 2-509, 2-510, and 2-703.

    Point 5: Sections 2-105, 2-308, 2-503, and 2-509.

    Point 6: Sections 2-105(1), 2-107(1), and 2-402.

    Definitional Cross References:

    "Agreement". Section 1-201.

    "Contract". Section 1-201.

    "Contract for sale". Section 2-106.

    "Future goods". Section 2-105.

    "Goods". Section 2-105.

    "Notification". Section 1-201.

    "Party". Section 1-201.

    "Sale". Section 2-106.

    "Security interest". Section 1-201.

    "Seller". Section 2-103.


2-502. Buyer's right to goods on seller's repudiation, failure to deliver, or insolvency.

(1) Subject to subsections (2) and (3) and even though the goods have not been shipped a buyer who has paid a part or all of the price of goods in which he or she has a special property under the provisions of the immediately preceding section may on making and keeping good a tender of any unpaid portion of their price recover them from the seller if:

(a) in the case of goods bought for personal, family, or household purposes, the seller repudiates or fails to deliver as required by the contract; or

(b) in all cases, the seller becomes insolvent within ten days after receipt of the first installment on their price.

(2) The buyer's right to recover the goods under subdivision (1)(a) vests upon acquisition of a special property, even if the seller had not then repudiated or failed to deliver.

(3) If the identification creating his or her special property has been made by the buyer he or she acquires the right to recover the goods only if they conform to the contract for sale.

Source:Laws 1963, c. 544, Art. II, § 2-502, p. 1737; Laws 1999, LB 550, § 57.    


Annotations
    COMMENT

    Prior Uniform Statutory Provision: Compare sections 17, 18, and 19, Uniform Sales Act.

    Purposes:

    1. This section gives an additional right to the buyer as a result of identification of the goods to the contract in the manner provided in section 2-501. The buyer is given a right to recover the goods, conditioned upon making and keeping good a tender of any unpaid portion of the price, in two limited circumstances. First, the buyer may recover goods bought for personal, family, or household purposes if the seller repudiates the contract or fails to deliver the goods. Second, in any case, the buyer may recover the goods if the seller becomes insolvent within 10 days after the seller receives the first installment on their price. The buyer's right to recover the goods under this section is an exception to the usual rule, under which the disappointed buyer must resort to an action to recover damages.

    2. The question of whether the buyer also acquires a security interest in identified goods and has rights to the goods when insolvency takes place after the ten-day period provided in this section depends upon compliance with the provisions of the Article on Secured Transactions (Article 9).

    3. Under subsection (2), the buyer's right to recover consumer goods under subsection (1)(a) vests upon acquisition of a special property, which occurs upon identification of the goods to the contract. See section 2-501. Inasmuch as a secured party normally acquires no greater rights in its collateral than its debtor had or had power to convey, see section 2-403(1) (first sentence), a buyer who acquires a right to recover under this section will take free of a security interest created by the seller if it attaches to the goods after the goods have been identified to the contract. The buyer will take free, even if the buyer does not buy in ordinary course and even if the security interest is perfected. Of course, to the extent that the buyer pays the price after the security interest attaches, the payments will constitute proceeds of the security interest.

    4. Subsection (3) is included to preclude the possibility of unjust enrichment, which would exist if the buyer were permitted to recover goods even though they were greatly superior in quality or quantity to that called for by the contract for sale.

    Cross References:

    Point 1: Sections 1-201 and 2-702.

    Point 2: Article 9.

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Conform". Section 2-106.

    "Contract for sale". Section 2-106.

    "Goods". Section 2-105.

    "Insolvent". Section 1-201.

    "Right". Section 1-201.

    "Seller". Section 2-103.


2-503. Manner of seller's tender of delivery.

(1) Tender of delivery requires that the seller put and hold conforming goods at the buyer's disposition and give the buyer any notification reasonably necessary to enable him or her to take delivery. The manner, time, and place for tender are determined by the agreement and this article, and in particular

(a) tender must be at a reasonable hour, and if it is of goods they must be kept available for the period reasonably necessary to enable the buyer to take possession; but

(b) unless otherwise agreed the buyer must furnish facilities reasonably suited to the receipt of the goods.

(2) Where the case is within the next section respecting shipment tender requires that the seller comply with its provisions.

(3) Where the seller is required to deliver at a particular destination tender requires that he or she comply with subsection (1) and also in any appropriate case tender documents as described in subsections (4) and (5) of this section.

(4) Where goods are in the possession of a bailee and are to be delivered without being moved

(a) tender requires that the seller either tender a negotiable document of title covering such goods or procure acknowledgment by the bailee of the buyer's right to possession of the goods; but

(b) tender to the buyer of a nonnegotiable document of title or of a record directing the bailee to deliver is sufficient tender unless the buyer seasonably objects, and except as otherwise provided in article 9 receipt by the bailee of notification of the buyer's rights fixes those rights as against the bailee and all third persons; but risk of loss of the goods and of any failure by the bailee to honor the nonnegotiable document of title or to obey the direction remains on the seller until the buyer has had a reasonable time to present the document or direction, and a refusal by the bailee to honor the document or to obey the direction defeats the tender.

(5) Where the contract requires the seller to deliver documents

(a) he or she must tender all such documents in correct form, except as provided in this article with respect to bills of lading in a set (subsection (2) of section 2-323); and

(b) tender through customary banking channels is sufficient and dishonor of a draft accompanying or associated with the documents constitutes nonacceptance or rejection.

Source:Laws 1963, c. 544, Art. II, § 2-503, p. 1738; Laws 2005, LB 570, § 36.    


Annotations
    Actual delivery, not mere present ability to fulfill all the conditions imposed on a tendering party, is necessary to constitute "tender" under this section. Crowder v. Aurora Co-op Elev. Co., 223 Neb. 704, 393 N.W.2d 250 (1986).

    "Tender of delivery" requires the seller to put and hold conforming goods at buyer's disposition. Goosic Constr. Co. v. City Nat. Bank of Crete, 196 Neb. 86, 241 N.W.2d 521 (1976).

    Purchase money priority is exception to basic rule of priority to first filed financing statement and should be applied only in strict compliance with all limitations in Uniform Commercial Code. North Platte State Bank v. Production Credit Assn., 189 Neb. 45, 200 N.W.2d 1 (1972).

    COMMENT

    Prior Uniform Statutory Provision: See sections 11, 19, 20, 43(3) and (4), 46, and 51, Uniform Sales Act.

    Changes: The general policy of the above sections is continued and supplemented but subsection (3) changes the rule of prior section 19(5) as to what constitutes a "destination" contract and subsection (4) incorporates a minor correction as to tender of delivery of goods in the possession of a bailee.

    Purposes of Changes:

    1. The major general rules governing the manner of proper or due tender of delivery are gathered in this section. The term "tender" is used in this article in two different senses. In one sense it refers to "due tender" which contemplates an offer coupled with a present ability to fulfill all the conditions resting on the tendering party and must be followed by actual performance if the other party shows himself or herself ready to proceed. Unless the context unmistakably indicates otherwise this is the meaning of "tender" in this article and the occasional addition of the word "due" is only for clarity and emphasis. At other times it is used to refer to an offer of goods or documents under a contract as if in fulfillment of its conditions even though there is a defect when measured against the contract obligation. Used in either sense, however, "tender" connotes such performance by the tendering party as puts the other party in default if he or she fails to proceed in some manner. These concepts of tender would apply to tender of either tangible or electronic documents of title.

    2. The seller's general duty to tender and deliver is laid down in section 2-301 and more particularly in section 2-507. The seller's right to a receipt if he or she demands one and receipts are customary is governed by section 1-205. Subsection (1) of the present section proceeds to set forth two primary requirements of tender: First, that the seller "put and hold conforming goods at the buyer's disposition" and, second, that he or she "give the buyer any notice reasonably necessary to enable him or her to take delivery".

    In cases in which payment is due and demanded upon delivery the "buyer's disposition" is qualified by the seller's right to retain control of the goods until payment by the provision of this article on delivery on condition. However, where the seller is demanding payment on delivery he or she must first allow the buyer to inspect the goods in order to avoid impairing his or her tender unless the contract for sale is on C.I.F., C.O.D., cash against documents, or similar terms negating the privilege of inspection before payment.

    In the case of contracts involving documents the seller can "put and hold conforming goods at the buyer's disposition" under subsection (1) by tendering documents which give the buyer complete control of the goods under the provisions of article 7 on due negotiation.

    3. Under paragraph (a) of subsection (1) usage of the trade and the circumstances of the particular case determine what is a reasonable hour for tender and what constitutes a reasonable period of holding the goods available.

    4. The buyer must furnish reasonable facilities for the receipt of the goods tendered by the seller under subsection (1), paragraph (b). This obligation of the buyer is no part of the seller's tender.

    5. For the purposes of subsections (2) and (3) there is omitted from this article the rule under prior uniform legislation that a term requiring the seller to pay the freight or cost of transportation to the buyer is equivalent to an agreement by the seller to deliver to the buyer or at an agreed destination. This omission is with the specific intention of negating the rule, for under this article the "shipment" contract is regarded as the normal one and the "destination" contract as the variant type. The seller is not obligated to deliver at a named destination and bear the concurrent risk of loss until arrival, unless he or she has specifically agreed so to deliver or the commercial understanding of the terms used by the parties contemplates such delivery.

    6. Paragraph (a) of subsection (4) continues the rule of the prior uniform legislation as to acknowledgement by the bailee. Paragraph (b) of subsection (4) adopts the rule that between the buyer and the seller the risk of loss remains on the seller during a period reasonable for securing acknowledgement of the transfer from the bailee, while as against all other parties the buyer's rights are fixed as of the time the bailee receives notice of the transfer.

    7. Under subsection (5) documents are never "required" except where there is an express contract term or it is plainly implicit in the peculiar circumstances of the case or in a usage of trade. Documents may, of course, be "authorized" although not required, but such cases are not within the scope of this subsection. When documents are required, there are three main requirements of this subsection: (1) "All": Each required document is essential to a proper tender; (2) "Such": The documents must be the ones actually required by the contract in terms of source and substance; (3) "Correct form": All documents must be in correct form. These requirements apply to both tangible and electronic documents of title. When tender is made through customary banking channels, a draft may accompany or be associated with a document of title. The language has been broadened to allow for drafts to be associated with an electronic document of title. Compare section 2-104(2) definition of financing agency.

    When a prescribed document cannot be procured, a question of fact arises under the provision of this article on substituted performance as to whether the agreed manner of delivery is actually commercially impracticable and whether the substitute is commercially reasonable.

    Cross References:

    Point 2: Sections 1-205, 2-301, 2-310, 2-507, and 2-513 and article 7.

    Point 5: Sections 2-308, 2-310, and 2-509.

    Point 7: Section 2-614(1).

    Specific matters involving tender are covered in many additional sections of this article. See sections 1-205, 2-301, 2-306 to 2-319, 2-321(3), 2-504, 2-507(1), 2-511(1), 2-513, 2-612, and 2-614.

    Definitional Cross References:

    "Agreement". Section 1-201.

    "Bill of lading". Section 1-201.

    "Buyer". Section 2-103.

    "Conforming". Section 2-106.

    "Contract". Section 1-201.

    "Delivery". Section 1-201.

    "Dishonor". Section 3-502.

    "Document of title". Section 1-201.

    "Draft". Section 3-104.

    "Goods". Section 2-105.

    "Notification". Section 1-201.

    "Reasonable time". Section 1-204.

    "Receipt" of goods. Section 2-103.

    "Rights". Section 1-201.

    "Seasonably". Section 1-204.

    "Seller". Section 2-103.

    "Written". Section 1-201.


2-504. Shipment by seller.

Where the seller is required or authorized to send the goods to the buyer and the contract does not require him to deliver them at a particular destination, then unless otherwise agreed he must

(a) put the goods in the possession of such a carrier and make such a contract for their transportation as may be reasonable having regard to the nature of the goods and other circumstances of the case; and

(b) obtain and promptly deliver or tender in due form any document necessary to enable the buyer to obtain possession of the goods or otherwise required by the agreement or by usage of trade; and

(c) promptly notify the buyer of the shipment.

Failure to notify the buyer under paragraph (c) or to make a proper contract under paragraph (a) is a ground for rejection only if material delay or loss ensues.

Source:Laws 1963, c. 544, Art. II, § 2-504, p. 1739.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: Section 46, Uniform Sales Act.

    Changes: Rewritten.

    Purposes of Changes:

    To continue the general policy of the prior uniform statutory provision while incorporating certain modifications with respect to the requirement that the contract with the carrier be made expressly on behalf of the buyer and as to the necessity of giving notice of the shipment to the buyer, so that:

    1. The section is limited to "shipment" contracts as contrasted with "destination" contracts or contracts for delivery at the place where the goods are located. The general principles embodied in this section cover the special cases of F.O.B. point of shipment contracts and C.I.F. and C. & F. contracts. Under the preceding section on manner of tender of delivery, due tender by the seller requires that he or she comply with the requirements of this section in appropriate cases.

    2. The contract to be made with the carrier under paragraph (a) must conform to all express terms of the agreement, subject to any substitution necessary because of failure of agreed facilities as provided in the later provision on substituted performance. However, under the policies of this article on good faith and commercial standards and on buyer's rights on improper delivery, the requirements of explicit provisions must be read in terms of their commercial and not their literal meaning. This policy is made express with respect to bills of lading in a set in the provision of this article on form of bills of lading required in overseas shipment.

    3. In the absence of agreement, the provision of this article on options and cooperation respecting performance gives the seller the choice of any reasonable carrier, routing, and other arrangements. Whether or not the shipment is at the buyer's expense the seller must see to any arrangements, reasonable in the circumstances, such as refrigeration, watering of livestock, protection against cold, the sending along of any necessary help, selection of specialized cars, and the like for paragraph (a) is intended to cover all necessary arrangements whether made by contract with the carrier or otherwise. There is, however, a proper relaxation of such requirements if the buyer is himself or herself in a position to make the appropriate arrangements and the seller gives him or her reasonable notice of the need to do so. It is an improper contract under paragraph (a) for the seller to agree with the carrier to a limited valuation below the true value and thus cut off the buyer's opportunity to recover from the carrier in the event of loss, when the risk of shipment is placed on the buyer by his or her contract with the seller.

    4. Both the language of paragraph (b) and the nature of the situation it concerns indicate that the requirement that the seller must obtain and deliver promptly to the buyer in due form any document necessary to enable him or her to obtain possession of the goods is intended to cumulate with the other duties of the seller such as those covered in paragraph (a).

    In this connection, in the case of pool car shipments a delivery order furnished by the seller on the pool car consignee, or on the carrier for delivery out of a larger quantity, satisfies the requirements of paragraph (b) unless the contract requires some other form of document.

    5. This article, unlike the prior uniform statutory provision, makes it the seller's duty to notify the buyer of shipment in all cases. The consequences of his or her failure to do so, however, are limited in that the buyer may reject on this ground only where material delay or loss ensues.

    A standard and acceptable manner of notification in open credit shipments is the sending of an invoice and in the case of documentary contracts is the prompt forwarding of the documents as under paragraph (b) of this section. It is also usual to send on a straight bill of lading but this is not necessary to the required notification. However, should such a document prove necessary or convenient to the buyer, as in the case of loss and claim against the carrier, good faith would require the seller to send it on request.

    Frequently the agreement expressly requires prompt notification as by wire or cable. Such a term may be of the essence and the final clause of paragraph (c) does not prevent the parties from making this a particular ground for rejection. To have this vital and irreparable effect upon the seller's duties, such a term should be part of the "dickered" terms written in any "form", or should otherwise be called seasonably and sharply to the seller's attention.

    6. Generally, under the final sentence of the section, rejection by the buyer is justified only when the seller's dereliction as to any of the requirements of this section in fact is followed by material delay or damage. It rests on the seller, so far as concerns matters not within the peculiar knowledge of the buyer, to establish that his or her error has not been followed by events which justify rejection.

    Cross References:

    Point 1: Sections 2-319, 2-320, and 2-503(2).

    Point 2: Sections 1-203, 2-323(2), 2-601, and 2-614(1).

    Point 3: Section 2-311(2).

    Point 5: Section 1-203.

    Definitional Cross References:

    "Agreement". Section 1-201.

    "Buyer". Section 2-103.

    "Contract". Section 1-201.

    "Delivery". Section 1-201.

    "Goods". Section 2-105.

    "Notifies". Section 1-201.

    "Seller". Section 2-103.

    "Send". Section 1-201.

    "Usage of trade". Section 1-205.


2-505. Seller's shipment under reservation.

(1) Where the seller has identified goods to the contract by or before shipment:

(a) his or her procurement of a negotiable bill of lading to his or her own order or otherwise reserves in him or her a security interest in the goods. His or her procurement of the bill to the order of a financing agency or of the buyer indicates in addition only the seller's expectation of transferring that interest to the person named.

(b) a nonnegotiable bill of lading to himself or herself or his or her nominee reserves possession of the goods as security but except in a case of conditional delivery (subsection (2) of section 2-507) a nonnegotiable bill of lading naming the buyer as consignee reserves no security interest even though the seller retains possession or control of the bill of lading.

(2) When shipment by the seller with reservation of a security interest is in violation of the contract for sale it constitutes an improper contract for transportation within the preceding section but impairs neither the rights given to the buyer by shipment and identification of the goods to the contract nor the seller's powers as a holder of a negotiable document of title.

Source:Laws 1963, c. 544, Art. II, § 2-505, p. 1740; Laws 2005, LB 570, § 37.    


Annotations
    COMMENT

    Prior Uniform Statutory Provision: Section 20(2), (3), and (4), Uniform Sales Act.

    Changes: Completely rephrased, the "powers" of the parties in cases of reservation being emphasized primarily rather than the "rightfulness" of reservation.

    Purposes of Changes:

    To continue in general the policy of the prior uniform statutory provision with certain modifications of emphasis and language, so that:

    1. The security interest reserved to the seller under subsection (1) is restricted to securing payment or performance by the buyer and the seller is strictly limited in his or her disposition and control of the goods as against the buyer and third parties. Under this article, the provision as to the passing of interest expressly applies "despite any reservation of security title" and also provides that the "rights, obligations and remedies" of the parties are not altered by the incidence of title generally. The security interest, therefor, must be regarded as a means given to the seller to enforce his or her rights against the buyer which is unaffected by and in turn does not affect the location of title generally. The rules set forth in subsection (1) are not to be altered by any apparent "contrary intent" of the parties as to passing of title, since the rights and remedies of the parties to the contract of sale, as defined in this article, rest on the contract and its performance or breach and not on stereotyped presumptions as to the location of title.

    This article does not attempt to regulate local procedure in regard to the effective maintenance of the seller's security interest when the action is in replevin by the buyer against the carrier.

    2. Every shipment of identified goods under a negotiable bill of lading reserves a security interest in the seller under subsection (1) paragraph (a).

    It is frequently convenient for the seller to make the bill of lading to the order of a nominee such as his or her agent at destination, the financing agency to which he or she expects to negotiate the document, or the bank issuing a credit to him or her. In many instances, also, the buyer is made the order party. This article does not deal directly with the question as to whether a bill of lading made out by the seller to the order of a nominee gives the carrier notice of any rights which the nominee may have so as to limit its freedom or obligation to honor the bill of lading in the hands of the seller as the original shipper if the expected negotiation fails. This is dealt with in the Article on Documents of Title (Article 7).

    3. A nonnegotiable bill of lading taken to a party other than the buyer under subsection (1) paragraph (b) reserves possession of the goods as security in the seller but if he or she seeks to withhold the goods improperly the buyer can tender payment and recover them.

    4. In the case of a shipment by nonnegotiable bill of lading taken to a buyer, the seller, under subsection (1) retains no security interest or possession as against the buyer and by the shipment he or she de facto loses control as against the carrier except where he or she rightfully and effectively stops delivery in transit. In cases in which the contract gives the seller the right to payment against delivery, the seller, by making an immediate demand for payment, can show that his or her delivery is conditional, but this does not prevent the buyer's power to transfer full title to a sub-buyer in ordinary course or other purchaser under section 2-403.

    5. Under subsection (2) an improper reservation by the seller which would constitute a breach in no way impairs such of the buyer's rights as result from identification of the goods. The security title reserved by the seller under subsection (1) does not protect his or her retaining possession or control of the document or the goods for the purpose of exacting more than is due him or her under the contract.

    Cross References:

    Point 1: Section 1-201.

    Point 2: Article 7.

    Point 3: Sections 2-501(2) and 2-504.

    Point 4: Sections 2-403, 2-507(2), and 2-705.

    Point 5: Sections 2-310, 2-319(4), 2-320(4), 2-501, and 2-502 and article 7.

    Definitional Cross References:

    "Bill of lading". Section 1-201.

    "Buyer". Section 2-103.

    "Consignee". Section 7-102.

    "Contract". Section 1-201.

    "Contract for sale". Section 2-106.

    "Delivery". Section 1-201.

    "Financing agency". Section 2-104.

    "Goods". Section 2-105.

    "Holder". Section 1-201.

    "Person". Section 1-201.

    "Security interest". Section 1-201.

    "Seller". Section 2-103.


2-506. Rights of financing agency.

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

(2) The right to reimbursement of a financing agency which has in good faith honored or purchased the draft under commitment to or authority from the buyer is not impaired by subsequent discovery of defects with reference to any relevant document which was apparently regular.

Source:Laws 1963, c. 544, Art. II, § 2-506, p. 1740; Laws 2005, LB 570, § 38.    


Annotations
    COMMENT

    Prior Uniform Statutory Provision: None.

    Purposes:

    1. "Financing agency" is broadly defined in this article to cover every normal instance in which a party aids or intervenes in the financing of a sales transaction. The term as used in subsection (1) is not in any sense intended as a limitation and covers any other appropriate situation which may arise outside the scope of the definition.

    2. "Paying" as used in subsection (1) is typified by the letter of credit, or "authority to pay" situation in which a banker, by arrangement with the buyer or other consignee, pays on his or her behalf a draft for the price of the goods. It is immaterial whether the draft is formally drawn on the party paying or his or her principal, whether it is a sight draft paid in cash or a time draft "paid" in the first instance by acceptance, or whether the payment is viewed as absolute or conditional. All of these cases constitute "payment" under this subsection. Similarly, "purchasing for value" is used to indicate the whole area of financing by the seller's banker, and the principle of subsection (1) is applicable without any niceties of distinction between "purchase", "discount", "advance against collection", or the like. But it is important to notice that the only right to have the draft honored that is acquired is that against the buyer; if any right against anyone else is claimed it will have to be under some separate obligation of that other person. A letter of credit does not necessarily protect purchasers of drafts. See article 5. And for the relations of the parties to documentary drafts see part 5 of article 4.

    3. Subsection (1) is made applicable to payments or advances against a draft which "relates to" a shipment of goods and this has been chosen as a term of maximum breadth. In particular the term is intended to cover the case of a draft against an invoice or against a delivery order. Further, it is unnecessary that there be an explicit assignment of the invoice attached to the draft to bring the transaction within the reason of this subsection.

    4. After shipment, "the rights of the shipper in the goods" are merely security rights and are subject to the buyer's right to force delivery upon tender of the price. The rights acquired by the financing agency are similarly limited and, moreover, if the agency fails to procure any outstanding negotiable document of title, it may find its exercise of these rights hampered or even defeated by the seller's disposition of the document to a third party. This section does not attempt to create any new rights in the financing agency against the carrier which would force the latter to honor a stop order from the agency, a stranger to the shipment, or any new rights against a holder to whom a document of title has been duly negotiated under article 7.

    5. The deletion of the language "on its face" from subsection (2) is designed to accommodate electronic documents of title without changing the requirement of regularity of the document.

    Cross References:

    Point 1: Section 2-104(2) and article 4.

    Point 2: Part 5 of article 4 and article 5.

    Point 4: Sections 2-501 and 2-502(1) and article 7.

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Document of title". Section 1-201.

    "Draft". Section 3-104.

    "Financing agency". Section 2-104.

    "Good faith". Section 2-103.

    "Goods". Section 2-105.

    "Honor". Section 1-201.

    "Purchase". Section 1-201.

    "Rights". Section 1-201.

    "Value". Section 1-201.


2-507. Effect of seller's tender; delivery on condition.

(1) Tender of delivery is a condition to the buyer's duty to accept the goods and, unless otherwise agreed, to his duty to pay for them. Tender entitles the seller to acceptance of the goods and to payment according to the contract.

(2) Where payment is due and demanded on the delivery to the buyer of goods or documents of title, his right as against the seller to retain or dispose of them is conditional upon his making the payment due.

Source:Laws 1963, c. 544, Art. II, § 2-507, p. 1741.


Annotations
    Where a seller of cattle reserved title in the invoice until payment was made, the buyer's right as against the seller is conditioned upon payment. Mid-South Order Buyers, Inc. v. Platte Valley Livestock, Inc., 210 Neb. 382, 315 N.W.2d 229 (1982).

    COMMENT

    Prior Uniform Statutory Provision: See sections 11, 41, 42, and 69, Uniform Sales Act.

    Purposes:

    1. Subsection (1) continues the policies of the prior uniform statutory provisions with respect to tender and delivery by the seller. Under this article the same rules in these matters are applied to present sales and to contracts for sale. But the provisions of this subsection must be read within the framework of the other sections of this article which bear upon the question of delivery and payment.

    2. The "unless otherwise agreed" provision of subsection (1) is directed primarily to cases in which payment in advance has been promised or a letter of credit term has been included. Payment "according to the contract" contemplates immediate payment, payment at the end of an agreed credit term, payment by a time acceptance, or the like. Under the code, "contract" means the total obligation in law which results from the parties' agreement including the effect of this article. In this context, therefor, there must be considered the effect in law of such provisions as those on means and manner of payment and on failure of agreed means and manner of payment.

    3. Subsection (2) deals with the effect of a conditional delivery by the seller and in such a situation makes the buyer's "right as against the seller" conditional upon payment. These words are used as words of limitation to conform with the policy set forth in the bona fide purchase sections of this article. Should the seller after making such a conditional delivery fail to follow up his or her rights, the condition is waived. This subsection (2) codifies the cash seller's right of reclamation which is in the nature of a lien. There is no specific time limit for a cash seller to exercise the right of reclamation. However, the right will be defeated by delay causing prejudice to the buyer, waiver, estoppel, or ratification of the buyer's right to retain possession. Common law rules and precedents governing such principles are applicable (section 1-103). If third parties are involved, section 2-403(1) protects good faith purchasers.

    Cross References:

    Point 1: Sections 2-310, 2-503, 2-511, 2-601, and 2-711 to 2-713.

    Point 2: Sections 1-201, 2-511, and 2-614.

    Point 3: Sections 2-401, 2-403, and 2-702(1)(b).

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Contract". Section 1-201.

    "Delivery". Section 1-201.

    "Document of title". Section 1-201.

    "Goods". Section 2-105.

    "Rights". Section 1-201.

    "Seller". Section 2-103.


2-508. Cure by seller of improper tender or delivery; replacement.

(1) Where any tender or delivery by the seller is rejected because nonconforming and the time for performance has not yet expired, the seller may seasonably notify the buyer of his intention to cure and may then within the contract time make a conforming delivery.

(2) Where the buyer rejects a nonconforming tender which the seller had reasonable grounds to believe would be acceptable with or without money allowance the seller may if he seasonably notifies the buyer have a further reasonable time to substitute a conforming tender.

Source:Laws 1963, c. 544, Art. II, § 2-508, p. 1741.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: None.

    Purposes:

    1. Subsection (1) permits a seller who has made a nonconforming tender in any case to make a conforming delivery within the contract time upon seasonable notification to the buyer. It applies even where the seller has taken back the nonconforming goods and refunded the purchase price. He or she may still make a good tender within the contract period. The closer, however, it is to the contract date, the greater is the necessity for extreme promptness on the seller's part in notifying of his or her intention to cure, if such notification is to be "seasonable" under this subsection.

    The rule of this subsection, moreover, is qualified by its underlying reasons. Thus if, after contracting for June delivery, a buyer later makes known to the seller his or her need for shipment early in the month and the seller ships accordingly, the "contract time" has been cut down by the supervening modification and the time for cure of tender must be referred to this modified time term.

    2. Subsection (2) seeks to avoid injustice to the seller by reason of a surprise rejection by the buyer. However, the seller is not protected unless he or she had "reasonable grounds to believe" that the tender would be acceptable. Such reasonable grounds can lie in prior course of dealing, course of performance, or usage of trade as well as in the particular circumstances surrounding the making of the contract. The seller is charged with commercial knowledge of any factors in a particular sales situation which require him or her to comply strictly with his or her obligations under the contract as, for example, strict conformity of documents in an overseas shipment or the sale of precision parts or chemicals for use in manufacture. Further, if the buyer gives notice either implicitly, as by a prior course of dealing involving rigorous inspections, or expressly, as by the deliberate inclusion of a "no replacement" clause in the contract, the seller is to be held to rigid compliance. If the clause appears in a "form" contract evidence that it is out of line with trade usage or the prior course of dealing and was not called to the seller's attention may be sufficient to show that the seller had reasonable grounds to believe that the tender would be acceptable.

    3. The words "a further reasonable time to substitute a conforming tender" are intended as words of limitation to protect the buyer. What is a "reasonable time" depends upon the attending circumstances. Compare section 2-511 on the comparable case of a seller's surprise demand for legal tender.

    4. Existing trade usages permitting variations without rejection but with price allowance enter into the agreement itself as contractual limitations of remedy and are not covered by this section.

    Cross References:

    Point 2: Section 2-302.

    Point 3: Section 2-511.

    Point 4: Sections 1-205 and 2-721.

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Conforming". Section 2-106.

    "Contract". Section 1-201.

    "Money". Section 1-201.

    "Notifies". Section 1-201.

    "Reasonable time". Section 1-204.

    "Seasonably". Section 1-204.

    "Seller". Section 2-103.


2-509. Risk of loss in the absence of breach.

(1) Where the contract requires or authorizes the seller to ship the goods by carrier

(a) if it does not require him or her to deliver them at a particular destination, the risk of loss passes to the buyer when the goods are duly delivered to the carrier even though the shipment is under reservation (section 2-505); but

(b) if it does require him or her to deliver them at a particular destination and the goods are there duly tendered while in the possession of the carrier, the risk of loss passes to the buyer when the goods are there duly so tendered as to enable the buyer to take delivery.

(2) Where the goods are held by a bailee to be delivered without being moved, the risk of loss passes to the buyer

(a) on his or her receipt of possession or control of a negotiable document of title covering the goods; or

(b) on acknowledgment by the bailee of the buyer's right to possession of the goods; or

(c) after his or her receipt of possession or control of a nonnegotiable document of title or other direction to deliver in a record, as provided in subsection (4)(b) of section 2-503.

(3) In any case not within subsection (1) or (2), the risk of loss passes to the buyer on his or her receipt of the goods if the seller is a merchant; otherwise the risk passes to the buyer on tender of delivery.

(4) The provisions of this section are subject to contrary agreement of the parties and to the provisions of this article on sale on approval (section 2-327) and on effect of breach on risk of loss (section 2-510).

Source:Laws 1963, c. 544, Art. II, § 2-509, p. 1741; Laws 2005, LB 570, § 39.    


Annotations
    This section applies to those cases only where there has been no breach by the seller. Goosic Constr. Co. v. City Nat. Bank of Crete, 196 Neb. 86, 241 N.W.2d 521 (1976).

    COMMENT

    Prior Uniform Statutory Provision: Section 22, Uniform Sales Act.

    Changes: Rewritten, subsection (3) of this section modifying prior law.

    Purposes of Changes:

    To make it clear that:

    1. The underlying theory of these sections on risk of loss is the adoption of the contractual approach rather than an arbitrary shifting of the risk with the "property" in the goods. The scope of the present section, therefor, is limited strictly to those cases where there has been no breach by the seller. Where for any reason his or her delivery or tender fails to conform to the contract, the present section does not apply and the situation is governed by the provisions on effect of breach on risk of loss.

    2. The provisions of subsection (1) apply where the contract "requires or authorizes" shipment of the goods. This language is intended to be construed parallel to comparable language in the section on shipment by seller. In order that the goods be "duly delivered to the carrier" under paragraph (a) a contract must be entered into with the carrier which will satisfy the requirements of the section on shipment by the seller and the delivery must be made under circumstances which will enable the seller to take any further steps necessary to a due tender. The underlying reason of this subsection does not require that the shipment be made after contracting, but where, for example, the seller buys the goods afloat and later diverts the shipment to the buyer, he or she must identify the goods to the contract before the risk of loss can pass. To transfer the risk it is enough that a proper shipment and a proper identification come to apply to the same goods although, aside from special agreement, the risk will not pass retroactively to the time of shipment in such a case.

    3. Whether the contract involves delivery at the seller's place of business or at the situs of the goods, a merchant seller cannot transfer risk of loss and it remains upon him or her until actual receipt by the buyer, even though full payment has been made and the buyer has been notified that the goods are at his or her disposal. Protection is afforded him or her, in the event of breach by the buyer, under the next section.

    The underlying theory of this rule is that a merchant who is to make physical delivery at his or her own place continues meanwhile to control the goods and can be expected to insure his or her interest in them. The buyer, on the other hand, has no control of the goods and it is extremely unlikely that he or she will carry insurance on goods not yet in his or her possession.

    4. Where the agreement provides for delivery of the goods as between the buyer and seller without removal from the physical possession of a bailee, the provisions on manner of tender of delivery apply on the point of transfer of risk. Due delivery of a negotiable document of title covering the goods or acknowledgement by the bailee that he or she holds for the buyer completes the "delivery" and passes the risk. See definition of delivery in article 1, section 1-201, and the definition of control in article 7, section 7-106.

    5. The provisions of this section are made subject by subsection (4) to the "contrary agreement" of the parties. This language is intended as the equivalent of the phrase "unless otherwise agreed" used more frequently throughout the code. "Contrary" is in no way used as a word of limitation and the buyer and seller are left free to readjust their rights and risks as declared by this section in any manner agreeable to them. Contrary agreement can also be found in the circumstances of the case, a trade usage or practice, or a course of dealing or performance.

    Cross References:

    Point 1: Section 2-510(1).

    Point 2: Sections 2-503 and 2-504.

    Point 3: Sections 2-104, 2-503, and 2-510.

    Point 4: Section 2-503(4).

    Point 5: Section 1-201.

    Definitional Cross References:

    "Agreement". Section 1-201.

    "Buyer". Section 2-103.

    "Contract". Section 1-201.

    "Delivery". Section 1-201.

    "Document of title". Section 1-201.

    "Goods". Section 2-105.

    "Merchant". Section 2-104.

    "Party". Section 1-201.

    "Receipt" of goods. Section 2-103.

    "Sale on approval". Section 2-326.

    "Seller". Section 2-103.


2-510. Effect of breach on risk of loss.

(1) Where a tender or delivery of goods so fails to conform to the contract as to give a right of rejection the risk of their loss remains on the seller until cure or acceptance.

(2) Where the buyer rightfully revokes acceptance he may to the extent of any deficiency in his effective insurance coverage treat the risk of loss as having rested on the seller from the beginning.

(3) Where the buyer as to conforming goods already identified to the contract for sale repudiates or is otherwise in breach before risk of their loss has passed to him, the seller may to the extent of any deficiency in his effective insurance coverage treat the risk of loss as resting on the buyer for a commercially reasonable time.

Source:Laws 1963, c. 544, Art. II, § 2-510, p. 1742.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: None.

    Purposes:

    To make clear that:

    1. Under subsection (1) the seller by his or her individual action cannot shift the risk of loss to the buyer unless his or her action conforms with all the conditions resting on him or her under the contract.

    2. The "cure" of defective tenders contemplated by subsection (1) applies only to those situations in which the seller makes changes in goods already tendered, such as repair, partial substitution, sorting out from an improper mixture, and the like since "cure" by repossession and new tender has no effect on the risk of loss of the goods originally tendered. The seller's privilege of cure does not shift the risk, however, until the cure is completed.

    Where defective documents are involved a cure of the defect by the seller or a waiver of the defects by the buyer will operate to shift the risk under this section. However, if the goods have been destroyed prior to the cure or the buyer is unaware of their destruction at the time he or she waives the defect in the documents, the risk of the loss must still be borne by the seller, for the risk shifts only at the time of cure, waiver of documentary defects, or acceptance of the goods.

    3. In cases where there has been a breach of the contract, if the one in control of the goods is the aggrieved party, whatever loss or damage may prove to be uncovered by his or her insurance falls upon the contract breaker under subsections (2) and (3) rather than upon him or her. The word "effective" as applied to insurance coverage in those subsections is used to meet the case of supervening insolvency of the insurer. The "deficiency" referred to in the text means such deficiency in the insurance coverage as exists without subrogation. This section merely distributes the risk of loss as stated and is not intended to be disturbed by any subrogation of an insurer.

    Cross Reference:

    Section 2-509.

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Conform". Section 2-106.

    "Contract for sale". Section 2-106.

    "Goods". Section 2-105.

    "Seller". Section 2-103.


2-511. Tender of payment by buyer; payment by check.

(1) Unless otherwise agreed tender of payment is a condition to the seller's duty to tender and complete any delivery.

(2) Tender of payment is sufficient when made by any means or in any manner current in the ordinary course of business unless the seller demands payment in legal tender and gives any extension of time reasonably necessary to procure it.

(3) Subject to the provisions of the Uniform Commercial Code on the effect of an instrument on an obligation, payment by check is conditional and is defeated as between the parties by dishonor of the check on due presentment.

Source:Laws 1963, c. 544, Art. II, § 2-511, p. 1743; Laws 1991, LB 161, § 4.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: Section 42, Uniform Sales Act.

    Changes: Rewritten by this section and section 2-507.

    Purposes of Changes:

    1. The requirement of payment against delivery in subsection (1) is applicable to noncommercial sales generally and to ordinary sales at retail although it has no application to the great body of commercial contracts which carry credit terms. Subsection (1) applies also to documentary contracts in general and to contracts which look to shipment by the seller but contain no term on time and manner of payment, in which situations the payment may, in proper case, be demanded against delivery of appropriate documents.

    In the case of specific transactions such as C.O.D. sales or agreements providing for payment against documents, the provisions of this subsection must be considered in conjunction with the special sections of the article dealing with such terms. The provision that tender of payment is a condition to the seller's duty to tender and complete "any delivery" integrates this section with the language and policy of the section on delivery in several lots which call for separate payment. Finally, attention should be directed to the provision on right to adequate assurance of performance which recognizes, even before the time for tender, an obligation on the buyer not to impair the seller's expectation of receiving payment in due course.

    2. Unless there is agreement otherwise the concurrence of the conditions as to tender of payment and tender of delivery requires their performance at a single place or time. This article determines that place and time by determining in various other sections the place and time for tender of delivery under various circumstances and in particular types of transactions. The sections dealing with time and place of delivery together with the section on right to inspection of goods answer the subsidiary question as to when payment may be demanded before inspection by the buyer.

    3. The essence of the principle involved in subsection (2) is avoidance of commercial surprise at the time of performance. The section on substituted performance covers the peculiar case in which legal tender is not available to the commercial community.

    4. Subsection (3) is concerned with the rights and obligations as between the parties to a sales transaction when payment is made by check. This article recognizes that the taking of a seemingly solvent party's check is commercially normal and proper and, if due diligence is exercised in collection, is not to be penalized in any way. The conditional character of the payment under this section refers only to the effect of the transaction "as between the parties" thereto and does not purport to cut into the law of "absolute" and "conditional" payment as applied to such other problems as the discharge of sureties or the responsibilities of a drawee bank which is at the same time an agent for collection.

    The phrase "by check" includes not only the buyer's own but any check which does not effect a discharge under article 3 (section 3-310). Similarly the reason of this subsection should apply and the same result should be reached where the buyer "pays" by sight draft on a commercial firm which is financing him or her.

    5. Under subsection (3) payment by check is defeated if it is not honored upon due presentment. This corresponds to the provisions of the Article on Negotiable Instruments. (Section 3-310). But if the seller procures certification of the check instead of cashing it, the buyer is discharged. (Sections 3-409, 3-414, and 3-415).

    6. Where the instrument offered by the buyer is not a payment but a credit instrument such as a note or a check postdated by even one day, the seller's acceptance of the instrument insofar as third parties are concerned, amounts to a delivery on credit and his or her remedies are set forth in the section on buyer's insolvency. As between the buyer and the seller, however, the matter turns on the present subsection and the section on conditional delivery and subsequent dishonor of the instrument gives the seller rights on it as well as for breach of the contract for sale.

    Cross References:

    Point 1: Sections 2-307, 2-310, 2-320, 2-325, 2-503, 2-513, and 2-609.

    Point 2: Sections 2-307, 2-310, 2-319, 2-322, 2-503, 2-504, and 2-513.

    Point 3: Section 2-614.

    Point 5: Article 3, especially sections 3-310, 3-409, 3-414, and 3-415.

    Point 6: Sections 2-507 and 2-702 and article 3.

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Check". Section 3-104.

    "Dishonor". Section 3-502.

    "Party". Section 1-201.

    "Reasonable time". Section 1-204.

    "Seller". Section 2-103.


2-512. Payment by buyer before inspection.

(1) Where the contract requires payment before inspection nonconformity of the goods does not excuse the buyer from so making payment unless

(a) the nonconformity appears without inspection; or

(b) despite tender of the required documents the circumstances would justify injunction against honor under the Uniform Commercial Code (section 5-109(b)).

(2) Payment pursuant to subsection (1) does not constitute an acceptance of goods or impair the buyer's right to inspect or any of his or her remedies.

Source:Laws 1963, c. 544, Art. II, § 2-512, p. 1743; Laws 1992, LB 861, § 12; Laws 1996, LB 1028, § 2.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: None, but see sections 47 and 49, Uniform Sales Act.

    Purposes:

    1. Subsection (1) of the present section recognizes that the essence of a contract providing for payment before inspection is the intention of the parties to shift to the buyer the risks which would usually rest upon the seller. The basic nature of the transaction is thus preserved and the buyer is in most cases required to pay first and litigate as to any defects later.

    2. "Inspection" under this section is an inspection in a manner reasonable for detecting defects in goods whose surface appearance is satisfactory.

    3. Clause (a) of this subsection states an exception to the general rule based on common sense and normal commercial practice. The apparent nonconformity referred to is one which is evident in the mere process of taking delivery.

    4. Clause (b) is concerned with contracts for payment against documents and incorporates the general clarification and modification of the case law contained in the section on excuse of a financing agency. Section 5-114.

    5. Subsection (2) makes explicit the general policy of the Uniform Sales Act that the payment required before inspection in no way impairs the buyer's remedies or rights in the event of a default by the seller. The remedies preserved to the buyer are all of his or her remedies, which include as a matter of reason the remedy for total nondelivery after payment in advance.

    The provision on performance or acceptance under reservation of rights does not apply to the situations contemplated here in which payment is made in due course under the contract and the buyer need not pay "under protest" or the like in order to preserve his or her rights as to defects discovered upon inspection.

    6. This section applies to cases in which the contract requires payment before inspection either by the express agreement of the parties or by reason of the effect in law of that contract. The present section must therefor be considered in conjunction with the provision on right to inspection of goods which sets forth the instances in which the buyer is not entitled to inspection before payment.

    Cross References:

    Point 4: Article 5.

    Point 5: Section 1-207.

    Point 6: Section 2-513(3).

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Conform". Section 2-106.

    "Contract". Section 1-201.

    "Financing agency". Section 2-104.

    "Goods". Section 2-105.

    "Remedy". Section 1-201.

    "Rights". Section 1-201.


2-513. Buyer's right to inspection of goods.

(1) Unless otherwise agreed and subject to subsection (3), where goods are tendered or delivered or identified to the contract for sale, the buyer has a right before payment or acceptance to inspect them at any reasonable place and time and in any reasonable manner. When the seller is required or authorized to send the goods to the buyer, the inspection may be after their arrival.

(2) Expenses of inspection must be borne by the buyer but may be recovered from the seller if the goods do not conform and are rejected.

(3) Unless otherwise agreed and subject to the provisions of this article on C.I.F. contracts (subsection (3) of section 2-321), the buyer is not entitled to inspect the goods before payment of the price when the contract provides

(a) for delivery "C.O.D." or on other like terms; or

(b) for payment against documents of title, except where such payment is due only after the goods are to become available for inspection.

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

Source:Laws 1963, c. 544, Art. II, § 2-513, p. 1744.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: Section 47(2) and (3), Uniform Sales Act.

    Changes: Rewritten, subsections (2) and (3) being new.

    Purposes of Changes and New Matter:

    To correspond in substance with the prior uniform statutory provision and to incorporate in addition some of the results of the better case law so that:

    1. The buyer is entitled to inspect goods as provided in subsection (1) unless it has been otherwise agreed by the parties. The phrase "unless otherwise agreed" is intended principally to cover such situations as those outlined in subsections (3) and (4) and those in which the agreement of the parties negates inspection before tender of delivery. However, no agreement by the parties can displace the entire right of inspection except where the contract is simply for the sale of "this thing". Even in a sale of boxed goods "as is" inspection is a right of the buyer, since if the boxes prove to contain some other merchandise altogether the price can be recovered back; nor do the limitations of the provision on effect of acceptance apply in such a case.

    2. The buyer's right of inspection is available to him or her upon tender, delivery, or appropriation of the goods with notice to him or her. Since inspection is available to him or her on tender, where payment is due against delivery he or she may, unless otherwise agreed, make his or her inspection before payment of the price. It is also available to him or her after receipt of the goods and so may be postponed after receipt for a reasonable time. Failure to inspect before payment does not impair the right to inspect after receipt of the goods unless the case falls within subsection (4) on agreed and exclusive inspection provisions. The right to inspect goods which have been appropriated with notice to the buyer holds whether or not the sale was by sample.

    3. The buyer may exercise his or her right of inspection at any reasonable time or place and in any reasonable manner. It is not necessary that he or she select the most appropriate time, place, or manner to inspect or that his or her selection be the customary one in the trade or locality. Any reasonable time, place, or manner is available to him or her and the reasonableness will be determined by trade usages, past practices between the parties, and the other circumstances of the case.

    The last sentence of subsection (1) makes it clear that the place of arrival of shipped goods is a reasonable place for their inspection.

    4. Expenses of an inspection made to satisfy the buyer of the seller's performance must be assumed by the buyer in the first instance. Since the rule provides merely for an allocation of expense there is no policy to prevent the parties from providing otherwise in the agreement. Where the buyer would normally bear the expenses of the inspection but the goods are rightly rejected because of what the inspection reveals, demonstrable and reasonable costs of the inspection are part of his or her incidental damage caused by the seller's breach.

    5. In the case of payment against documents, subsection (3) requires payment before inspection, since shipping documents against which payment is to be made will commonly be tendered while the goods are still in transit. This article recognizes no exception in any peculiar case in which the goods happen to arrive before the documents are tendered. However, where by the agreement payment is to await the arrival of the goods, inspection before payment becomes proper since the goods are then "available for inspection".

    Where by the agreement the documents are to be tendered after arrival of the goods, the buyer is entitled to inspect before payment since the goods are then "available for inspection". Proof of usage is not necessary to establish this right, but if inspection before payment is disputed the contrary must be established by usage or by an explicit contract term to that effect.

    For the same reason, that the goods are available for inspection, a term calling for payment against storage documents or a delivery order does not normally bar the buyer's right to inspection before payment under subsection (3)(b). This result is reinforced by the buyer's right under subsection (1) to inspect goods which have been appropriated with notice to him or her.

    6. Under subsection (4) an agreed place or method of inspection is generally held to be intended as exclusive. However, where compliance with such an agreed inspection term becomes impossible, the question is basically one of intention. If the parties clearly intend that the method of inspection named is to be a necessary condition without which the entire deal is to fail, the contract is at an end if that method becomes impossible. On the other hand, if the parties merely seek to indicate a convenient and reliable method but do not intend to give up the deal in the event of its failure, any reasonable method of inspection may be substituted under this article.

    Since the purpose of an agreed place of inspection is only to make sure at that point whether or not the goods will be thrown back, the "exclusive" feature of the named place is satisfied under this article if the buyer's failure to inspect there is held to be an acceptance with the knowledge of such defects as inspection would have revealed within the section on waiver of buyer's objections by failure to particularize. Revocation of the acceptance is limited to the situations stated in the section pertaining to that subject. The reasonable time within which to give notice of defects within the section on notice of breach begins to run from the point of the "acceptance".

    7. Clauses on time of inspection are commonly clauses which limit the time in which the buyer must inspect and give notice of defects. Such clauses are therefor governed by the section of this article which requires that such a time limitation must be reasonable.

    8. Inspection under this article is not to be regarded as a "condition precedent to the passing of title" so that risk until inspection remains on the seller. Under subsection (4) such an approach cannot be sustained. Issues between the buyer and seller are settled in this article almost wholly by special provisions and not by the technical determination of the locus of the title. Thus "inspection as a condition to the passing of title" becomes a concept almost without meaning. However, in peculiar circumstances inspection may still have some of the consequences hitherto sought and obtained under that concept.

    9. "Inspection" under this section has to do with the buyer's checkup on whether the seller's performance is in accordance with a contract previously made and is not to be confused with the "examination" of the goods or of a sample or model of them at the time of contracting which may affect the warranties involved in the contract.

    Cross References:

    Generally: Sections 2-310(b), 2-321(3), and 2-606(1)(b).

    Point 1: Section 2-607.

    Point 2: Sections 2-501 and 2-502.

    Point 4: Section 2-715.

    Point 5: Section 2-321(3).

    Point 6: Sections 2-606 to 2-608.

    Point 7: Section 1-204.

    Point 8: Comment to section 2-401.

    Point 9: Section 2-316(3)(b).

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Conform". Section 2-106.

    "Contract". Section 1-201.

    "Contract for sale". Section 2-106.

    "Document of title". Section 1-201.

    "Goods". Section 2-105.

    "Party". Section 1-201.

    "Presumed". Section 1-201.

    "Reasonable time". Section 1-204.

    "Rights". Section 1-201.

    "Seller". Section 2-103.

    "Send". Section 1-201.

    "Term". Section 1-201.


2-514. When documents deliverable on acceptance; when on payment.

Unless otherwise agreed documents against which a draft is drawn are to be delivered to the drawee on acceptance of the draft if it is payable more than three days after presentment; otherwise, only on payment.

Source:Laws 1963, c. 544, Art. II, § 2-514, p. 1744.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: Section 41, Uniform Bills of Lading Act.

    Changes: Rewritten.

    Purposes of Changes:

    To make the provision one of general application so that:

    1. It covers any document against which a draft may be drawn, whatever may be the form of the document, and applies to interpret the action of a seller or consignor insofar as it may affect the rights and duties of any buyer, consignee, or financing agency concerned with the paper. Supplementary or corresponding provisions are found in sections 4-503 and 5-112.

    2. An "arrival" draft is a sight draft within the purpose of this section.

    Cross References:

    Point 1: See sections 2-502, 2-505(2), 2-507(2), 2-512, 2-513, 2-607 concerning protection of rights of buyer and seller, and 4-503 and 5-112 on delivery of documents.

    Definitional Cross References:

    "Delivery". Section 1-201.

    "Draft". Section 3-104.


2-515. Preserving evidence of goods in dispute.

In furtherance of the adjustment of any claim or dispute

(a) either party on reasonable notification to the other and for the purpose of ascertaining the facts and preserving evidence has the right to inspect, test and sample the goods including such of them as may be in the possession or control of the other; and

(b) the parties may agree to a third-party inspection or survey to determine the conformity or condition of the goods and may agree that the findings shall be binding upon them in any subsequent litigation or adjustment.

Source:Laws 1963, c. 544, Art. II, § 2-515, p. 1745.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: None.

    Purposes:

    1. To meet certain serious problems which arise when there is a dispute as to the quality of the goods and thereby perhaps to aid the parties in reaching a settlement, and to further the use of devices which will promote certainty as to the condition of the goods, or at least aid in preserving evidence of their condition.

    2. Under paragraph (a), to afford either party an opportunity for preserving evidence, whether or not agreement has been reached, and thereby to reduce uncertainty in any litigation and, in turn perhaps, to promote agreement.

    Paragraph (a) does not conflict with the provisions on the seller's right to resell rejected goods or the buyer's similar right. Apparent conflict between these provisions which will be suggested in certain circumstances is to be resolved by requiring prompt action by the parties. Nor does paragraph (a) impair the effect of a term for payment before inspection. Short of such defects as amount to fraud or substantial failure of consideration, nonconformity is neither an excuse nor a defense to an action for nonacceptance of documents. Normally, therefor, until the buyer has made payment, inspected, and rejected the goods, there is no occasion or use for the rights under paragraph (a).

    3. Under paragraph (b), to provide for third-party inspection upon the agreement of the parties, thereby opening the door to amicable adjustments based upon the findings of such third parties.

    The use of the phrase "conformity or condition" makes it clear that the parties' agreement may range from a complete settlement of all aspects of the dispute by a third party to the use of a third party merely to determine and record the condition of the goods so that they can be resold or used to reduce the stake in controversy. "Conformity", at one end of the scale of possible issues, includes the whole question of interpretation of the agreement and its legal effect, the state of the goods in regard to quality and condition, whether any defects are due to factors which operate at the risk of the buyer, and the degree of nonconformity where that may be material. "Condition", at the other end of the scale, includes nothing but the degree of damage or deterioration which the goods show. Paragraph (b) is intended to reach any point in the gamut which the parties may agree upon.

    The principle of the section on reservation of rights reinforces this paragraph in simplifying such adjustments as the parties wish to make in partial settlement while reserving their rights as to any further points. Paragraph (b) also suggests the use of arbitration, where desired, of any points left open, but nothing in this section is intended to repeal or amend any statute governing arbitration. Where any question arises as to the extent of the parties' agreement under the paragraph, the presumption should be that it was meant to extend only to the relation between the contract description and the goods as delivered, since that is what a craftsperson in the trade would normally be expected to report upon. Finally, a written and authenticated report of inspection or tests by a third party, whether or not sampling has been practicable, is entitled to be admitted as evidence under the code, for it is a third-party document.

    Cross References:

    Point 2: Sections 2-513(3), 2-706, and 2-711(2) and article 5.

    Point 3: Sections 1-202 and 1-207.

    Definitional Cross References:

    "Conform". Section 2-106.

    "Goods". Section 2-105.

    "Notification". Section 1-201.

    "Party". Section 1-201.


2-601. Buyer's rights on improper delivery.

Subject to the provisions of this article on breach in installment contracts (section 2-612) and unless otherwise agreed under the sections on contractual limitations of remedy (sections 2-718 and 2-719), if the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may

(a) reject the whole; or

(b) accept the whole; or

(c) accept any commercial unit or units and reject the rest.

Source:Laws 1963, c. 544, Art. II, § 2-601, p. 1745.


Annotations
    Under this section, a buyer may reject the whole if the goods fail in any respect to conform to the contract of purchase. Maas v. Scoboda, 188 Neb. 189, 195 N.W.2d 491 (1972).

    COMMENT

    Prior Uniform Statutory Provision: No one general equivalent provision but numerous provisions, dealing with situations of nonconformity where buyer may accept or reject, including sections 11, 44, and 69(1), Uniform Sales Act.

    Changes: Partial acceptance in good faith is recognized and the buyer's remedies on the contract for breach of warranty and the like, where the buyer has returned the goods after transfer of title, are no longer barred.

    Purposes of Changes:

    To make it clear that:

    1. A buyer accepting a nonconforming tender is not penalized by the loss of any remedy otherwise open to him or her. This policy extends to cover and regulate the acceptance of a part of any lot improperly tendered in any case where the price can reasonably be apportioned. Partial acceptance is permitted whether the part of the goods accepted conforms or not. The only limitation on partial acceptance is that good faith and commercial reasonableness must be used to avoid undue impairment of the value of the remaining portion of the goods. This is the reason for the insistence on the "commercial unit" in paragraph (c). In this respect, the test is not only what unit has been the basis of contract, but whether the partial acceptance produces so materially adverse an effect on the remainder as to constitute bad faith.

    2. Acceptance made with the knowledge of the other party is final. An original refusal to accept may be withdrawn by a later acceptance if the seller has indicated that he or she is holding the tender open. However, if the buyer attempts to accept, either in whole or in part, after his or her original rejection has caused the seller to arrange for other disposition of the goods, the buyer must answer for any ensuing damage since the next section provides that any exercise of ownership after rejection is wrongful as against the seller. Further, he or she is liable even though the seller may choose to treat his or her action as acceptance rather than conversion, since the damage flows from the misleading notice. Such arrangements for resale or other disposition of the goods by the seller must be viewed as within the normal contemplation of a buyer who has given notice of rejection. However, the buyer's attempts in good faith to dispose of defective goods where the seller has failed to give instructions within a reasonable time are not to be regarded as an acceptance.

    Cross References:

    Sections 2-602(2)(a), 2-612, 2-718, and 2-719.

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Commercial unit". Section 2-105.

    "Conform". Section 2-106.

    "Contract". Section 1-201.

    "Goods". Section 2-105.

    "Installment contract". Section 2-612.

    "Rights". Section 1-201.


2-602. Manner and effect of rightful rejection.

(1) Rejection of goods must be within a reasonable time after their delivery or tender. It is ineffective unless the buyer seasonably notifies the seller.

(2) Subject to the provisions of the two following sections on rejected goods (sections 2-603 and 2-604),

(a) after rejection any exercise of ownership by the buyer with respect to any commercial unit is wrongful as against the seller; and

(b) if the buyer has before rejection taken physical possession of goods in which he does not have a security interest under the provisions of this article (subsection (3) of section 2-711), he is under a duty after rejection to hold them with reasonable care at the seller's disposition for a time sufficient to permit the seller to remove them; but

(c) the buyer has no further obligations with regard to goods rightfully rejected.

(3) The seller's rights with respect to goods wrongfully rejected are governed by the provisions of this article on seller's remedies in general (section 2-703).

Source:Laws 1963, c. 544, Art. II, § 2-602, p. 1745.


Annotations
    What is a reasonable amount of time to reject goods is a question of fact and is dependent upon the circumstances surrounding the action. Smith v. Paoli Popcorn Co., 255 Neb. 910, 587 N.W.2d 660 (1999).

    A buyer who elects to exercise his right to revoke acceptance has a duty not to exercise ownership over the goods. Wendt v. Beardmore Suburban Chevrolet, 219 Neb. 775, 366 N.W.2d 424 (1985).

    Under this section of the Code, rejection of goods must be within a reasonable time after their delivery or tender. The rejection is ineffective unless the buyer seasonably notifies the seller. Fabricators, Inc. v. Farmers Elevator, Inc., 203 Neb. 150, 277 N.W.2d 676 (1979).

    A buyer's decision to reject property purchased because of its failure to conform to contract must be made with entire good faith, and not captiously or capriciously. Maas v. Scoboda, 188 Neb. 189, 195 N.W.2d 491 (1972).

    COMMENT

    Prior Uniform Statutory Provision: Section 50, Uniform Sales Act.

    Changes: Rewritten.

    Purposes of Changes:

    To make it clear that:

    1. A tender or delivery of goods made pursuant to a contract of sale, even though wholly nonconforming, requires affirmative action by the buyer to avoid acceptance. Under subsection (1), therefor, the buyer is given a reasonable time to notify the seller of his or her rejection, but without such seasonable notification his or her rejection is ineffective. The sections of this article dealing with inspection of goods must be read in connection with the buyer's reasonable time for action under this subsection. Contract provisions limiting the time for rejection fall within the rule of the section on "time" and are effective if the time set gives the buyer a reasonable time for discovery of defects. What constitutes a due "notifying" of rejection by the buyer to the seller is defined in section 1-201.

    2. Subsection (2) lays down the normal duties of the buyer upon rejection, which flow from the relationship of the parties. Beyond his or her duty to hold the goods with reasonable care for the buyer's disposition, this section continues the policy of prior uniform legislation in generally relieving the buyer from any duties with respect to them, except when the circumstances impose the limited obligation of salvage upon him or her under the next section.

    3. The present section applies only to rightful rejection by the buyer. If the seller has made a tender which in all respects conforms to the contract, the buyer has a positive duty to accept and his or her failure to do so constitutes a "wrongful rejection" which gives the seller immediate remedies for breach. Subsection (3) is included here to emphasize the sharp distinction between the rejection of an improper tender and the nonacceptance which is a breach by the buyer.

    4. The provisions of this section are to be appropriately limited or modified when a negotiation is in process.

    Cross References:

    Point 1: Sections 1-201, 1-204(1) and (3), 2-512(2), 2-513(1), and 2-606(1)(b).

    Point 2: Section 2-603(1).

    Point 3: Section 2-703.

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Commercial unit". Section 2-105.

    "Goods". Section 2-105.

    "Merchant". Section 2-104.

    "Notifies". Section 1-201.

    "Reasonable time". Section 1-204.

    "Remedy". Section 1-201.

    "Rights". Section 1-201.

    "Seasonably". Section 1-204.

    "Security interest". Section 1-201.

    "Seller". Section 2-103.


2-603. Merchant buyer's duties as to rightfully rejected goods.

(1) Subject to any security interest in the buyer (subsection (3) of section 2-711), when the seller has no agent or place of business at the market of rejection a merchant buyer is under a duty after rejection of goods in his possession or control to follow any reasonable instructions received from the seller with respect to the goods and in the absence of such instructions to make reasonable efforts to sell them for the seller's account if they are perishable or threaten to decline in value speedily. Instructions are not reasonable if on demand indemnity for expenses is not forthcoming.

(2) When the buyer sells goods under subsection (1), he is entitled to reimbursement from the seller or out of the proceeds for reasonable expenses of caring for and selling them, and if the expenses include no selling commission then to such commission as is usual in the trade or if there is none to a reasonable sum not exceeding ten percent on the gross proceeds.

(3) In complying with this section the buyer is held only to good faith and good faith conduct hereunder is neither acceptance nor conversion nor the basis of an action for damages.

Source:Laws 1963, c. 544, Art. II, § 2-603, p. 1746.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: None.

    Purposes:

    1. This section recognizes the duty imposed upon the merchant buyer by good faith and commercial practice to follow any reasonable instructions of the seller as to reshipping, storing, delivery to a third party, reselling, or the like. Subsection (1) goes further and extends the duty to include the making of reasonable efforts to effect a salvage sale where the value of the goods is threatened and the seller's instructions do not arrive in time to prevent serious loss.

    2. The limitations on the buyer's duty to resell under subsection (1) are to be liberally construed. The buyer's duty to resell under this section arises from commercial necessity and thus is present only when the seller has "no agent or place of business at the market of rejection". A financing agency which is acting in behalf of the seller in handling the documents rejected by the buyer is sufficiently the seller's agent to lift the burden of salvage resale from the buyer. (See provisions of sections 4-503 and 5-112 on bank's duties with respect to rejected documents). The buyer's duty to resell is extended only to goods in his or her "possession or control", but these are intended as words of wide, rather than narrow, import. In effect, the measure of the buyer's "control" is whether he or she can practicably effect control without undue commercial burden.

    3. The explicit provisions for reimbursement and compensation to the buyer in subsection (2) are applicable and necessary only where he or she is not acting under instructions from the seller. As provided in subsection (1) the seller's instructions to be "reasonable" must on demand of the buyer include indemnity for expenses.

    4. Since this section makes the resale of perishable goods an affirmative duty in contrast to a mere right to sell as under the case law, subsection (3) makes it clear that the buyer is liable only for the exercise of good faith in determining whether the value of the goods is sufficiently threatened to justify a quick resale or whether he or she has waited a sufficient length of time for instructions, or what a reasonable means and place of resale is.

    5. A buyer who fails to make a salvage sale when his or her duty to do so under this section has arisen is subject to damages pursuant to the section on liberal administration of remedies.

    Cross References:

    Point 2: Sections 4-503 and 5-112.

    Point 5: Section 1-106. Compare generally section 2-706.

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Good faith". Section 1-201.

    "Goods". Section 2-105.

    "Merchant". Section 2-104.

    "Security interest". Section 1-201.

    "Seller". Section 2-103.


2-604. Buyer's options as to salvage of rightfully rejected goods.

Subject to the provisions of the immediately preceding section on perishables if the seller gives no instructions within a reasonable time after notification of rejection the buyer may store the rejected goods for the seller's account or reship them to him or resell them for the seller's account with reimbursement as provided in the preceding section. Such action is not acceptance or conversion.

Source:Laws 1963, c. 544, Art. II, § 2-604, p. 1747.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: None.

    Purposes:

    The basic purpose of this section is twofold: On the one hand it aims at reducing the stake in dispute and on the other at avoiding the pinning of a technical "acceptance" on a buyer who has taken steps towards realization on or preservation of the goods in good faith. This section is essentially a salvage section and the buyer's right to act under it is conditioned upon (1) nonconformity of the goods, (2) due notification of rejection to the seller under the section on manner of rejection, and (3) the absence of any instructions from the seller which the merchant buyer has a duty to follow under the preceding section.

    This section is designed to accord all reasonable leeway to a rightfully rejecting buyer acting in good faith. The listing of what the buyer may do in the absence of instructions from the seller is intended to be not exhaustive but merely illustrative. This is not a "merchant's" section and the options are pure options given to merchant and nonmerchant buyers alike. The merchant buyer, however, may in some instances be under a duty rather than an option to resell under the provisions of the preceding section.

    Cross References:

    Sections 2-602(1), 2-603(1), and 2-706.

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Notification". Section 1-201.

    "Reasonable time". Section 1-204.

    "Seller". Section 2-103.


2-605. Waiver of buyer's objections by failure to particularize.

(1) The buyer's failure to state in connection with rejection a particular defect which is ascertainable by reasonable inspection precludes him or her from relying on the unstated defect to justify rejection or to establish breach

(a) where the seller could have cured it if stated seasonably; or

(b) between merchants when the seller has after rejection made a request in writing for a full and final written statement of all defects on which the buyer proposes to rely.

(2) Payment against documents made without reservation of rights precludes recovery of the payment for defects apparent in the documents.

Source:Laws 1963, c. 544, Art. II, § 2-605, p. 1747; Laws 2005, LB 570, § 40.    


Annotations
    COMMENT

    Prior Uniform Statutory Provision: None.

    Purposes:

    1. The present section rests upon a policy of permitting the buyer to give a quick and informal notice of defects in a tender without penalizing him or her for omissions in his or her statement, while at the same time protecting a seller who is reasonably misled by the buyer's failure to state curable defects.

    2. Where the defect in a tender is one which could have been cured by the seller, a buyer who merely rejects the delivery without stating his or her objections to it is probably acting in commercial bad faith and seeking to get out of a deal which has become unprofitable. Subsection (1)(a), following the general policy of this article which looks to preserving the deal wherever possible, therefor insists that the seller's right to correct his or her tender in such circumstances be protected.

    3. When the time for cure is past, subsection (1)(b) makes it plain that a seller is entitled upon request to a final statement of objections upon which he or she can rely. What is needed is that he or she make clear to the buyer exactly what is being sought. A formal demand under paragraph (b) will be sufficient in the case of a merchant buyer.

    4. Subsection (2) applies to the particular case of documents the same principle which the section on effects of acceptance applies to the case of goods. The matter is dealt with in this section in terms of "waiver" of objections rather than of right to revoke acceptance, partly to avoid any confusion with the problems of acceptance of goods and partly because defects in documents which are not taken as grounds for rejection are generally minor ones. The only defects concerned in the present subsection are defects in the documents which are apparent. This rule applies to both tangible and electronic documents of title. Where payment is required against the documents they must be inspected before payment, and the payment then constitutes acceptance of the documents. Under the section dealing with this problem, such acceptance of the documents does not constitute an acceptance of the goods or impair any options or remedies of the buyer for their improper delivery. Where the documents are delivered without requiring such contemporary action as payment from the buyer, the reason of the next section on what constitutes acceptance of goods, applies. Their acceptance by nonobjection is therefor postponed until after a reasonable time for their inspection. In either situation, however, the buyer "waives" only the defects apparent in the documents.

    Cross References:

    Point 2: Section 2-508.

    Point 4: Sections 2-512(2), 2-606(1)(b), and 2-607(2).

    Definitional Cross References:

    "Between merchants". Section 2-104.

    "Buyer". Section 2-103.

    "Seasonably". Section 1-204.

    "Seller". Section 2-103.

    "Writing" and "written". Section 1-201.


2-606. What constitutes acceptance of goods.

(1) Acceptance of goods occurs when the buyer

(a) after a reasonable opportunity to inspect the goods signifies to the seller that the goods are conforming or that he will take or retain them in spite of their nonconformity; or

(b) fails to make an effective rejection (subsection (1) of section 2-602), but such acceptance does not occur until the buyer has had a reasonable opportunity to inspect them; or

(c) does any act inconsistent with the seller's ownership; but if such act is wrongful as against the seller it is an acceptance only if ratified by him.

(2) Acceptance of a part of any commercial unit is acceptance of that entire unit.

Source:Laws 1963, c. 544, Art. II, § 2-606, p. 1747.


Annotations
    Evidence that someone tried to return a truck that was in their possession for the purpose of a test drive is sufficient to show that the truck was not accepted within the meaning of this section. Woodhouse Ford v. Laflan, 268 Neb. 722, 687 N.W.2d 672 (2004).

    The commingling by a buyer of one farmer's grain with that of other farmers is an act inconsistent with the buyer's ownership and may constitute acceptance under this section. Johnson v. Holdrege Coop. Equity Exchange, 206 Neb. 568, 293 N.W.2d 863 (1980).

    Acceptance under this section of the Code occurs when the buyer fails to make an effective rejection, if the buyer has had a reasonable opportunity to inspect the goods. Fabricators, Inc. v. Farmers Elevator, Inc., 203 Neb. 150, 277 N.W.2d 676 (1979).

    Buyer of defective machine failed to make effective rejection, and by his actions accepted nonconforming goods. Alliance Tractor & Implement Co. v. Lukens Tool & Die Co., 199 Neb. 489, 260 N.W.2d 193 (1977).

    City, by accepting sewage processing plant when it denied access to the plant to personnel of the contractor, which was also to operate the plant, became obligated to pay contract rate, less any damages alloted to it. Omaha Pollution Control Corp. v. Carver-Greenfield Corp., 413 F.Supp. 1069 (D. Neb. 1976).

    COMMENT

    Prior Uniform Statutory Provision: Section 48, Uniform Sales Act.

    Changes: Rewritten, the qualification in paragraph (c) and subsection (2) being new; otherwise the general policy of the prior legislation is continued.

    Purposes of Changes and New Matter:

    To make it clear that:

    1. Under this article "acceptance" as applied to goods means that the buyer, pursuant to the contract, takes particular goods which have been appropriated to the contract as his or her own, whether or not he or she is obligated to do so, and whether he or she does so by words, action, or silence when it is time to speak. If the goods conform to the contract, acceptance amounts only to the performance by the buyer of one part of his or her legal obligation.

    2. Under this article acceptance of goods is always acceptance of identified goods which have been appropriated to the contract or are appropriated by the contract. There is no provision for "acceptance of title" apart from acceptance in general, since acceptance of title is not material under this article to the detailed rights and duties of the parties. (See section 2-401). The refinements of the older law between acceptance of goods and of title become unnecessary in view of the provisions of the sections on effect and revocation of acceptance, on effects of identification, and on risk of loss, and those sections which free the seller's and buyer's remedies from the complications and confusions caused by the question of whether title has or has not passed to the buyer before breach.

    3. Under paragraph (a), payment made after tender is always one circumstance tending to signify acceptance of the goods but in itself it can never be more than one circumstance and is not conclusive. Also, a conditional communication of acceptance always remains subject to its expressed conditions.

    4. Under paragraph (c), any action taken by the buyer, which is inconsistent with his or her claim that he or she has rejected the goods, constitutes an acceptance. However, the provisions of paragraph (c) are subject to the sections dealing with rejection by the buyer which permit the buyer to take certain actions with respect to the goods pursuant to his or her options and duties imposed by those sections, without effecting an acceptance of the goods. The second clause of paragraph (c) modifies some of the prior case law and makes it clear that "acceptance" in law based on the wrongful act of the acceptor is acceptance only as against the wrongdoer and then only at the option of the party wronged.

    In the same manner in which a buyer can bind himself or herself, despite his or her insistence that he or she is rejecting or has rejected the goods, by an act inconsistent with the seller's ownership under paragraph (c), he or she can obligate himself or herself by a communication of acceptance despite a prior rejection under paragraph (a). However, the sections on buyer's rights on improper delivery and on the effect of rightful rejection, make it clear that after he or she once rejects a tender, paragraph (a) does not operate in favor of the buyer unless the seller has retendered the goods or has taken affirmative action indicating that he or she is holding the tender open. See also comment 2 to section 2-601.

    5. Subsection (2) supplements the policy of the section on buyer's rights on improper delivery, recognizing the validity of a partial acceptance but insisting that the buyer exercise this right only as to whole commercial units.

    Cross References:

    Point 2: Sections 2-401, 2-509, 2-510, 2-607, and 2-608, and part 7.

    Point 4: Sections 2-601 through 2-604.

    Point 5: Section 2-601.

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Commercial unit". Section 2-105.

    "Goods". Section 2-105.

    "Seller". Section 2-103.


2-607. Effect of acceptance; notice of breach; burden of establishing breach after acceptance; notice of claim or litigation to person answerable over.

(1) The buyer must pay at the contract rate for any goods accepted.

(2) Acceptance of goods by the buyer precludes rejection of the goods accepted and if made with knowledge of a nonconformity cannot be revoked because of it unless the acceptance was on the reasonable assumption that the nonconformity would be seasonably cured but acceptance does not of itself impair any other remedy provided by this article for nonconformity.

(3) Where a tender has been accepted

(a) the buyer must within a reasonable time after he discovers or should have discovered any breach notify the seller of breach or be barred from any remedy; and

(b) if the claim is one for infringement or the like (subsection (3) of section 2-312) and the buyer is sued as a result of such a breach he must so notify the seller within a reasonable time after he receives notice of the litigation or be barred from any remedy over for liability established by the litigation.

(4) The burden is on the buyer to establish any breach with respect to the goods accepted.

(5) Where the buyer is sued for breach of a warranty or other obligation for which his seller is answerable over

(a) he may give his seller written notice of the litigation. If the notice states that the seller may come in and defend and that if the seller does not do so he will be bound in any action against him by his buyer by any determination of fact common to the two litigations, then unless the seller after seasonable receipt of the notice does come in and defend he is so bound.

(b) if the claim is one for infringement or the like (subsection (3) of section 2-312) the original seller may demand in writing that his buyer turn over to him control of the litigation including settlement or else be barred from any remedy over and if he also agrees to bear all expense and to satisfy any adverse judgment, then unless the buyer after seasonable receipt of the demand does turn over control the buyer is so barred.

(6) The provisions of subsections (3), (4) and (5) apply to any obligation of a buyer to hold the seller harmless against infringement or the like (subsection (3) of section 2-312).

Source:Laws 1963, c. 544, Art. II, § 2-607, p. 1748.


Annotations
    Pursuant to subsection (3)(a) of this section, whether the notice given is satisfactory and whether it is given within a reasonable time are generally questions of fact to be measured by all the circumstances of the case. Fitl v. Strek, 269 Neb. 51, 690 N.W.2d 605 (2005).

    Pursuant to subsection (4) of this section, the burden is on the buyer to show a breach with respect to the goods accepted. Fitl v. Strek, 269 Neb. 51, 690 N.W.2d 605 (2005).

    The notice requirement set forth in subsection (3)(a) of this section serves three purposes. It provides the seller with an opportunity to correct any defect, to prepare for negotiation and litigation, and to protect itself against stale claims asserted after it is too late for the seller to investigate them. Fitl v. Strek, 269 Neb. 51, 690 N.W.2d 605 (2005).

    In regard to the notice contemplated by the section, in the case of the principal-agency relationship, the apparent authority of an agent may exist beyond termination of the principal-agency relationship when notice of the termination has not been given; this is particularly the case if the principal affirmatively, intentionally, or by lack of ordinary care causes third persons to act upon the apparent agency. Moore v. Puget Sound Plywood, 214 Neb. 14, 332 N.W.2d 212 (1983).

    This section, including its notice provisions, does not apply to sales of real estate. Fink v. Denbeck, 206 Neb. 462, 293 N.W.2d 398 (1980).

    Buyer of defective machine failed to make effective rejection, and by his actions accepted nonconforming goods. Alliance Tractor & Implement Co. v. Lukens Tool & Die Co., 199 Neb. 489, 260 N.W.2d 193 (1977).

    Purchaser who relies on breach of warranty must plead that he gave timely notice of the breach. Timmerman v. Hertz, 195 Neb. 237, 238 N.W.2d 220 (1976).

    Discussed in opinion holding Uniform Commercial Code applicable rather than strict tort liability in case involving damage to all property. Hawkins Constr. Co. v. Matthews Co., Inc., 190 Neb. 546, 209 N.W.2d 643 (1973).

    Rejection of a proffered breach of warranty instruction in personal injury case, where rejection was based on view that warranty action was barred by failure to meet notice requirement, held not prejudicial, without reaching notice issue, because negligence and strict liability instructions sufficiently placed same factual issues before jury. Brassette v. Burlington Northern Inc., 687 F.2d 153 (8th Cir. 1982).

    City, by accepting sewage processing plant when it denied access to the plant to personnel of the contractor, which was also to operate the plant, became obligated to pay contract rate, less any damages allotted to it. Omaha Pollution Control Corp. v. Carver-Greenfield Corp., 413 F.Supp. 1069 (D. Neb. 1976).

    COMMENT

    Prior Uniform Statutory Provision: Subsection (1) — section 41, Uniform Sales Act; subsections (2) and (3) — sections 49 and 69, Uniform Sales Act.

    Changes: Rewritten.

    Purposes of Changes:

    To continue the prior basic policies with respect to acceptance of goods while making a number of minor though material changes in the interest of simplicity and commercial convenience so that:

    1. Under subsection (1), once the buyer accepts a tender the seller acquires a right to its price on the contract terms. In cases of partial acceptance, the price of any part accepted is, if possible, to be reasonably apportioned, using the type of apportionment familiar to the courts in quantum valebat cases, to be determined in terms of "the contract rate", which is the rate determined from the bargain in fact (the agreement) after the rules and policies of this article have been brought to bear.

    2. Under subsection (2) acceptance of goods precludes their subsequent rejection. Any return of the goods thereafter must be by way of revocation of acceptance under the next section. Revocation is unavailable for a nonconformity known to the buyer at the time of acceptance, except where the buyer has accepted on the reasonable assumption that the nonconformity would be seasonably cured.

    3. All other remedies of the buyer remain unimpaired under subsection (2). This is intended to include the buyer's full rights with respect to future installments despite his or her acceptance of any earlier nonconforming installment.

    4. The time of notification is to be determined by applying commercial standards to a merchant buyer. "A reasonable time" for notification from a retail consumer is to be judged by different standards so that in his or her case it will be extended, for the rule of requiring notification is designed to defeat commercial bad faith, not to deprive a good faith consumer of his or her remedy.

    The content of the notification need merely be sufficient to let the seller know that the transaction is still troublesome and must be watched. There is no reason to require that the notification which saves the buyer's rights under this section must include a clear statement of all the objections that will be relied on by the buyer, as under the section covering statements of defects upon rejection (section 2-605). Nor is there reason for requiring the notification to be a claim for damages or of any threatened litigation or other resort to a remedy. The notification which saves the buyer's rights under this article need only be such as informs the seller that the transaction is claimed to involve a breach, and thus opens the way for normal settlement through negotiation.

    5. Under this article various beneficiaries are given rights for injuries sustained by them because of the seller's breach of warranty. Such a beneficiary does not fall within the reason of the present section in regard to discovery of defects and the giving of notice within a reasonable time after acceptance, since he or she has nothing to do with acceptance. However, the reason of this section does extend to requiring the beneficiary to notify the seller that an injury has occurred. What is said above, with regard to the extended time for reasonable notification from the lay consumer after the injury is also applicable here; but even a beneficiary can be properly held to the use of good faith in notifying, once he or she has had time to become aware of the legal situation.

    6. Subsection (4) unambiguously places the burden of proof to establish breach on the buyer after acceptance. However, this rule becomes one purely of procedure when the tender accepted was nonconforming and the buyer has given the seller notice of breach under subsection (3). For subsection (2) makes it clear that acceptance leaves unimpaired the buyer's right to be made whole, and that right can be exercised by the buyer not only by way of cross-claim for damages, but also by way of recoupment in diminution or extinction of the price.

    7. Subsections (3)(b) and (5)(b) give a warrantor against infringement an opportunity to defend or compromise third-party claims or be relieved of his or her liability. Subsection (5)(a) codifies for all warranties the practice of voucher to defend. Compare section 3-119. Subsection (6) makes these provisions applicable to the buyer's liability for infringement under section 2-312.

    8. All of the provisions of the present section are subject to any explicit reservation of rights.

    Cross References:

    Point 1: Section 1-201.

    Point 2: Section 2-608.

    Point 4: Sections 1-204 and 2-605.

    Point 5: Section 2-318.

    Point 6: Section 2-717.

    Point 7: Sections 2-312 and 3-119.

    Point 8: Section 1-207.

    Definitional Cross References:

    "Burden of establishing". Section 1-201.

    "Buyer". Section 2-103.

    "Conform". Section 2-106.

    "Contract". Section 1-201.

    "Goods". Section 2-105.

    "Notifies". Section 1-201.

    "Reasonable time". Section 1-204.

    "Remedy". Section 1-201.

    "Seasonably". Section 1-204.


2-608. Revocation of acceptance in whole or in part.

(1) The buyer may revoke his acceptance of a lot or commercial unit whose nonconformity substantially impairs its value to him if he has accepted it

(a) on the reasonable assumption that its nonconformity would be cured and it has not been seasonably cured; or

(b) without discovery of such nonconformity if his acceptance was reasonably induced either by the difficulty of discovery before acceptance or by the seller's assurances.

(2) Revocation of acceptance must occur within a reasonable time after the buyer discovers or should have discovered the ground for it and before any substantial change in condition of the goods which is not caused by their own defects. It is not effective until the buyer notifies the seller of it.

(3) A buyer who so revokes has the same rights and duties with regard to the goods involved as if he had rejected them.

Source:Laws 1963, c. 544, Art. II, § 2-608, p. 1749.


Annotations
    The initial step in determining whether a buyer may revoke his or her acceptance of goods or conduct is to assess whether there exists a nonconformity in the contract. Richardson v. Mast, 252 Neb. 114, 560 N.W.2d. 488 (1997).

    Revocation of acceptance was timely where buyer had allowed seller's representative to install computer plotter to ascertain extent of damage. Design Data Corp. v. Maryland Cas. Co., 243 Neb. 945, 503 N.W.2d 552 (1993).

    A buyer who elects to exercise his right to revoke acceptance has a duty not to exercise ownership over the goods. Wendt v. Beardmore Suburban Chevrolet, 219 Neb. 775, 366 N.W.2d 424 (1985).

    A buyer may revoke acceptance of a lot of commercial goods only if there is some defect or nonconformity in the article that substantially impairs its value. Havelock Bank v. Western Surety Co., 217 Neb. 560, 352 N.W.2d 855 (1984).

    COMMENT

    Prior Uniform Statutory Provision: Section 69(1)(d), (3), (4), and (5), Uniform Sales Act.

    Changes: Rewritten.

    Purposes of Changes:

    To make it clear that:

    1. Although the prior basic policy is continued, the buyer is no longer required to elect between revocation of acceptance and recovery of damages for breach. Both are now available to him or her. The non-alternative character of the two remedies is stressed by the terms used in the present section. The section no longer speaks of "rescission", a term capable of ambiguous application either to transfer of title to the goods or to the contract of sale and susceptible also of confusion with cancellation for cause of an executed or executory portion of the contract. The remedy under this section is instead referred to simply as "revocation of acceptance" of goods tendered under a contract for sale and involves no suggestion of "election" of any sort.

    2. Revocation of acceptance is possible only where the nonconformity substantially impairs the value of the goods to the buyer. For this purpose the test is not what the seller had reason to know at the time of contracting; the question is whether the nonconformity is such as will in fact cause a substantial impairment of value to the buyer though the seller had no advance knowledge as to the buyer's particular circumstances.

    3. "Assurances" by the seller under paragraph (b) of subsection (1) can rest as well in the circumstances or in the contract as in explicit language used at the time of delivery. The reason for recognizing such assurances is that they induce the buyer to delay discovery. These are the only assurances involved in paragraph (b). Explicit assurances may be made either in good faith or bad faith. In either case any remedy accorded by this article is available to the buyer under the section on remedies for fraud.

    4. Subsection (2) requires notification of revocation of acceptance within a reasonable time after discovery of the grounds for such revocation. Since this remedy will be generally resorted to only after attempts at adjustment have failed, the reasonable time period should extend in most cases beyond the time in which notification of breach must be given, beyond the time for discovery of nonconformity after acceptance, and beyond the time for rejection after tender. The parties may by their agreement limit the time for notification under this section, but the same sanctions and considerations apply to such agreements as are discussed in the comment on manner and effect of rightful rejection.

    5. The content of the notice under subsection (2) is to be determined in this case as in others by considerations of good faith, prevention of surprise, and reasonable adjustment. More will generally be necessary than the mere notification of breach required under the preceding section. On the other hand the requirements of the section on waiver of buyer's objections do not apply here. The fact that quick notification of trouble is desirable affords good ground for being slow to bind a buyer by his or her first statement. Following the general policy of this article, the requirements of the content of notification are less stringent in the case of a nonmerchant buyer.

    6. Under subsection (2) the prior policy is continued of seeking substantial justice in regard to the condition of goods restored to the seller. Thus the buyer may not revoke his or her acceptance if the goods have materially deteriorated except by reason of their own defects. Worthless goods, however, need not be offered back and minor defects in the articles re-offered are to be disregarded.

    7. The policy of the section allowing partial acceptance is carried over into the present section and the buyer may revoke his or her acceptance, in appropriate cases, as to the entire lot or any commercial unit thereof.

    Cross References:

    Point 3: Section 2-721.

    Point 4: Sections 1-204, 2-602, and 2-607.

    Point 5: Sections 2-605 and 2-607.

    Point 7: Section 2-601.

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Commercial unit". Section 2-105.

    "Conform". Section 2-106.

    "Goods". Section 2-105.

    "Lot". Section 2-105.

    "Notifies". Section 1-201.

    "Reasonable time". Section 1-204.

    "Rights". Section 1-201.

    "Seasonably". Section 1-204.

    "Seller". Section 2-103.


2-609. Right to adequate assurance of performance.

(1) A contract for sale imposes an obligation on each party that the other's expectation of receiving due performance will not be impaired. When reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance and until he receives such assurance may if commercially reasonable suspend any performance for which he has not already received the agreed return.

(2) Between merchants the reasonableness of grounds for insecurity and the adequacy of any assurance offered shall be determined according to commercial standards.

(3) Acceptance of any improper delivery or payment does not prejudice the aggrieved party's right to demand adequate assurance of future performance.

(4) After receipt of a justified demand failure to provide within a reasonable time not exceeding thirty days such assurance of due performance as is adequate under the circumstances of the particular case is a repudiation of the contract.

Source:Laws 1963, c. 544, Art. II, § 2-609, p. 1750.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: See sections 53, 54(1)(b), 55, and 63(2), Uniform Sales Act.

    Purposes:

    1. The section rests on the recognition of the fact that the essential purpose of a contract between commercial persons is actual performance and they do not bargain merely for a promise, or for a promise plus the right to win a lawsuit and that a continuing sense of reliance and security that the promised performance will be forthcoming when due, is an important feature of the bargain. If either the willingness or the ability of a party to perform declines materially between the time of contracting and the time for performance, the other party is threatened with the loss of a substantial part of what he or she has bargained for. A seller needs protection not merely against having to deliver on credit to a shaky buyer, but also against having to procure and manufacture the goods, perhaps turning down other customers. Once he or she has been given reason to believe that the buyer's performance has become uncertain, it is an undue hardship to force him or her to continue his or her own performance. Similarly, a buyer who believes that the seller's deliveries have become uncertain cannot safely wait for the due date of performance when he or she has been buying to assure himself or herself of materials for his or her current manufacturing or to replenish his or her stock of merchandise.

    2. Three measures have been adopted to meet the needs of commercial persons in such situations. First, the aggrieved party is permitted to suspend his or her own performance and any preparation therefor, with excuse for any resulting necessary delay, until the situation has been clarified. "Suspend performance" under this section means to hold up performance pending the outcome of the demand, and includes also the holding up of any preparatory action. This is the same principle which governs the ancient law of stoppage and seller's lien, and also of excuse of a buyer from prepayment if the seller's actions manifest that he or she cannot or will not perform. (Original act, section 63(2)).

    Secondly, the aggrieved party is given the right to require adequate assurance that the other party's performance will be duly forthcoming. This principle is reflected in the familiar clauses permitting the seller to curtail deliveries if the buyer's credit becomes impaired, which when held within the limits of reasonableness and good faith actually express no more than the fair business meaning of any commercial contract.

    Third, and finally, this section provides the means by which the aggrieved party may treat the contract as broken if his or her reasonable grounds for insecurity are not cleared up within a reasonable time. This is the principle underlying the law of anticipatory breach, whether by way of defective part performance or by repudiation. The present section merges these three principles of law and commercial practice into a single theory of general application to all sales agreements looking to future performance.

    3. Subsection (2) of the present section requires that "reasonable" grounds and "adequate" assurance as used in subsection (1) be defined by commercial rather than legal standards. The express reference to commercial standards carries no connotation that the obligation of good faith is not equally applicable here.

    Under commercial standards and in accord with commercial practice, a ground for insecurity need not arise from or be directly related to the contract in question. The law as to "dependence" or "independence" of promises within a single contract does not control the application of the present section.

    Thus a buyer who falls behind in "his or her account" with the seller, even though the items involved have to do with separate and legally distinct contracts, impairs the seller's expectation of due performance. Again, under the same test, a buyer who requires precision parts which he or she intends to use immediately upon delivery, may have reasonable grounds for insecurity if he or she discovers that his or her seller is making defective deliveries of such parts to other buyers with similar needs. Thus, too, in a situation such as arose in Jay Dreher Corporation v. Delco Appliance Corporation, 93 F.2d 275 (C.C.A.2, 1937), where a manufacturer gave a dealer an exclusive franchise for the sale of his product but on two or three occasions breached the exclusive-dealing clause, although there was no default in orders, deliveries, or payments under the separate sales contract between the parties, the aggrieved dealer would be entitled to suspend his or her performance of the contract for sale under the present section and to demand assurance that the exclusive dealing contract would be lived up to. There is no need for an explicit clause tying the exclusive franchise into the contract for the sale of goods since the situation itself ties the agreements together.

    The nature of the sales contract enters also into the question of reasonableness. For example, a report from an apparently trustworthy source that the seller had shipped defective goods or was planning to ship them would normally give the buyer reasonable grounds for insecurity. But when the buyer has assumed the risk of payment before inspection of the goods, as in a sales contract on C.I.F. or similar cash against documents terms, that risk is not to be evaded by a demand for assurance. Therefor no ground for insecurity would exist under this section unless the report went to a ground which would excuse payment by the buyer.

    4. What constitutes "adequate" assurance of due performance is subject to the same test of factual conditions. For example, where the buyer can make use of a defective delivery, a mere promise by a seller of good repute that he or she is giving the matter his or her attention and that the defect will not be repeated, is normally sufficient. Under the same circumstances, however, a similar statement by a known corner-cutter might well be considered insufficient without the posting of a guaranty or, if so demanded by the buyer, a speedy replacement of the delivery involved. By the same token where a delivery has defects, even though easily curable, which interfere with easy use by the buyer, no verbal assurance can be deemed adequate which is not accompanied by replacement, repair, money-allowance, or other commercially reasonable cure.

    A fact situation such as arose in Corn Products Refining Co. v. Fasola, 94 N.J.L. 181, 109 A. 505 (1920), offers illustration both of reasonable grounds for insecurity and "adequate" assurance. In that case a contract for the sale of oils on 30 days' credit, 2 percent off for payment within 10 days, provided that credit was to be extended to the buyer only if his financial responsibility was satisfactory to the seller. The buyer had been in the habit of taking advantage of the discount but at the same time that he failed to make his customary 10-day payment, the seller heard rumors, in fact false, that the buyer's financial condition was shaky. Thereupon, the seller demanded cash before shipment or security satisfactory to him. The buyer sent a good credit report from his banker, expressed willingness to make payments when due on the 30-day terms, and insisted on further deliveries under the contract. Under this article the rumors, although false, were enough to make the buyer's financial condition "unsatisfactory" to the seller under the contract clause. Moreover, the buyer's practice of taking the cash discounts is enough, apart from the contract clause, to lay a commercial foundation for suspicion when the practice is suddenly stopped. These matters, however, go only to the justification of the seller's demand for security, or his or her "reasonable grounds for insecurity".

    The adequacy of the assurance given is not measured as in the type of "satisfaction" situation affected with intangibles, such as in personal service cases, cases involving a third party's judgment as final, or cases in which the whole contract is dependent on one party's satisfaction, as in a sale on approval. Here, the seller must exercise good faith and observe commercial standards. This article thus approves the statement of the court in James B. Berry's Sons Co. of Illinois v. Monark Gasoline & Oil Co., Inc., 32 F.2d 74 (C.C.A.8, 1929), that the seller's satisfaction under such a clause must be based upon reason and must not be arbitrary or capricious; and rejects the purely personal "good faith" test of the Corn Products Refining Co. case, which held that in the seller's sole judgment, if for any reason he was dissatisfied, he was entitled to revoke the credit. In the absence of the buyer's failure to take the 2 percent discount as was his custom, the banker's report given in that case would have been "adequate" assurance under the code, regardless of the language of the "satisfaction" clause. However, the seller is reasonably entitled to feel insecure at a sudden expansion of the buyer's use of a credit term, and should be entitled either to security or to a satisfactory explanation.

    The entire foregoing discussion as to adequacy of assurance by way of explanation is subject to qualification when repeated occasions for the application of this section arise. The code recognizes that repeated delinquencies must be viewed as cumulative. On the other hand, commercial sense also requires that if repeated claims for assurance are made under this section, the basis for these claims must be increasingly obvious.

    5. A failure to provide adequate assurance of performance and thereby to reestablish the security of expectation, results in a breach only "by repudiation" under subsection (4). Therefor, the possibility is continued of retraction of the repudiation under the section dealing with that problem, unless the aggrieved party has acted on the breach in some manner.

    The thirty-day limit on the time to provide assurance is laid down to free the question of reasonable time from uncertainty in later litigation.

    6. Clauses seeking to give the protected party exceedingly wide powers to cancel or readjust the contract when ground for insecurity arises must be read against the fact that good faith is a part of the obligation of the contract and not subject to modification by agreement and includes, in the case of a merchant, the reasonable observance of commercial standards of fair dealing in the trade. Such clauses can thus be effective to enlarge the protection given by the present section to a certain extent, to fix the reasonable time within which requested assurance must be given, or to define adequacy of the assurance in any commercially reasonable fashion. But any clause seeking to set up arbitrary standards for action is ineffective under this article. Acceleration clauses are treated similarly in the Articles on Negotiable Instruments and Secured Transactions.

    Cross References:

    Point 3: Section 1-203.

    Point 5: Section 2-611.

    Point 6: Sections 1-203 and 1-208 and articles 3 and 9.

    Definitional Cross References:

    "Aggrieved party". Section 1-201.

    "Between merchants". Section 2-104.

    "Contract". Section 1-201.

    "Contract for sale". Section 2-106.

    "Party". Section 1-201.

    "Reasonable time". Section 1-204.

    "Rights". Section 1-201.

    "Writing". Section 1-201.


2-610. Anticipatory repudiation.

When either party repudiates the contract with respect to a performance not yet due the loss of which will substantially impair the value of the contract to the other, the aggrieved party may

(a) for a commercially reasonable time await performance by the repudiating party; or

(b) resort to any remedy for breach (section 2-703 or section 2-711), even though he has notified the repudiating party that he would await the latter's performance and has urged retraction; and

(c) in either case suspend his own performance or proceed in accordance with the provisions of this article on the seller's right to identify goods to the contract notwithstanding breach or to salvage unfinished goods (section 2-704).

Source:Laws 1963, c. 544, Art. II, § 2-610, p. 1751.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: See sections 63(2) and 65, Uniform Sales Act.

    Purposes:

    To make it clear that:

    1. With the problem of insecurity taken care of by the preceding section and with provision being made in this article as to the effect of a defective delivery under an installment contract, anticipatory repudiation centers upon an overt communication of intention or an action which renders performance impossible or demonstrates a clear determination not to continue with performance.

    Under the present section when such a repudiation substantially impairs the value of the contract, the aggrieved party may at any time resort to his or her remedies for breach, or he or she may suspend his or her own performance while he or she negotiates with, or awaits performance by, the other party. But if he or she awaits performance beyond a commercially reasonable time he or she cannot recover resulting damages which he or she should have avoided.

    2. It is not necessary for repudiation that performance be made literally and utterly impossible. Repudiation can result from action which reasonably indicates a rejection of the continuing obligation. And, a repudiation automatically results under the preceding section on insecurity when a party fails to provide adequate assurance of due future performance within thirty days after a justifiable demand therefor has been made. Under the language of this section, a demand by one or both parties for more than the contract calls for in the way of counterperformance is not in itself a repudiation nor does it invalidate a plain expression of desire for future performance. However, when under a fair reading it amounts to a statement of intention not to perform except on conditions which go beyond the contract, it becomes a repudiation.

    3. The test chosen to justify an aggrieved party's action under this section is the same as that in the section on breach in installment contracts — namely the substantial value of the contract. The most useful test of substantial value is to determine whether material inconvenience or injustice will result if the aggrieved party is forced to wait and receive an ultimate tender minus the part or aspect repudiated.

    4. After repudiation, the aggrieved party may immediately resort to any remedy he or she chooses provided he or she moves in good faith (see section 1-203). Inaction and silence by the aggrieved party may leave the matter open but it cannot be regarded as misleading the repudiating party. Therefor the aggrieved party is left free to proceed at any time with his or her options under this section, unless he or she has taken some positive action which in good faith requires notification to the other party before the remedy is pursued.

    Cross References:

    Point 1: Sections 2-609 and 2-612.

    Point 2: Section 2-609.

    Point 3: Section 2-612.

    Point 4: Section 1-203.

    Definitional Cross References:

    "Aggrieved party". Section 1-201.

    "Contract". Section 1-201.

    "Party". Section 1-201.

    "Remedy". Section 1-201.


2-611. Retraction of anticipatory repudiation.

(1) Until the repudiating party's next performance is due he can retract his repudiation unless the aggrieved party has since the repudiation canceled or materially changed his position or otherwise indicated that he considers the repudiation final.

(2) Retraction may be by any method which clearly indicates to the aggrieved party that the repudiating party intends to perform, but must include any assurance justifiably demanded under the provisions of this article (section 2-609).

(3) Retraction reinstates the repudiating party's rights under the contract with due excuse and allowance to the aggrieved party for any delay occasioned by the repudiation.

Source:Laws 1963, c. 544, Art. II, § 2-611, p. 1751.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: None.

    Purposes:

    To make it clear that:

    1. The repudiating party's right to reinstate the contract is entirely dependent upon the action taken by the aggrieved party. If the latter has canceled the contract or materially changed his or her position at any time after the repudiation, there can be no retraction under this section.

    2. Under subsection (2) an effective retraction must be accompanied by any assurances demanded under the section dealing with right to adequate assurance. A repudiation is of course sufficient to give reasonable ground for insecurity and to warrant a request for assurance as an essential condition of the retraction. However, after a timely and unambiguous expression of retraction, a reasonable time for the assurance to be worked out should be allowed by the aggrieved party before cancellation.

    Cross Reference:

    Point 2: Section 2-609.

    Definitional Cross References:

    "Aggrieved party". Section 1-201.

    "Cancellation". Section 2-106.

    "Contract". Section 1-201.

    "Party". Section 1-201.

    "Rights". Section 1-201.


2-612. Installment contract; breach.

(1) An "installment contract" is one which requires or authorizes the delivery of goods in separate lots to be separately accepted, even though the contract contains a clause "each delivery is a separate contract" or its equivalent.

(2) The buyer may reject any installment which is nonconforming if the nonconformity substantially impairs the value of that installment and cannot be cured or if the nonconformity is a defect in the required documents; but if the nonconformity does not fall within subsection (3) and the seller gives adequate assurance of its cure the buyer must accept that installment.

(3) Whenever nonconformity or default with respect to one or more installments substantially impairs the value of the whole contract there is a breach of the whole. But the aggrieved party reinstates the contract if he accepts a nonconforming installment without seasonably notifying of cancellation or if he brings an action with respect only to past installments or demands performance as to future installments.

Source:Laws 1963, c. 544, Art. II, § 2-612, p. 1751.


Annotations
    Order for specified number of cassettes at specific price with certain number deliverable per month was installment contract, and to cancel, buyer had to prove noncompliance which substantially impaired value of whole contract, and where concern of buyer was development of acceptable cassette and delays were liberally tolerated from start there was no basis for cancellation. Holiday Manuf. Co. v. B.A.S.F. Systems, Inc., 380 F.Supp. 1096 (D. Neb. 1974).

    COMMENT

    Prior Uniform Statutory Provision: Section 45(2), Uniform Sales Act.

    Changes: Rewritten.

    Purposes of Changes:

    To continue prior law but to make explicit the more mercantile interpretation of many of the rules involved, so that:

    1. The definition of an installment contract is phrased more broadly in this article so as to cover installment deliveries tacitly authorized by the circumstances or by the option of either party.

    2. In regard to the apportionment of the price for separate payment this article applies the more liberal test of what can be apportioned rather than the test of what is clearly apportioned by the agreement. This article also recognizes approximate calculation or apportionment of price subject to subsequent adjustment. A provision for separate payment for each lot delivered ordinarily means that the price is at least roughly calculable by units of quantity, but such a provision is not essential to an "installment contract". If separate acceptance of separate deliveries is contemplated, no generalized contrast between wholly "entire" and wholly "divisible" contracts has any standing under this article.

    3. This article rejects any approach which gives clauses such as "each delivery is a separate contract" their legalistically literal effect. Such contracts nonetheless call for installment deliveries. Even where a clause speaks of "a separate contract for all purposes", a commercial reading of the language under the section on good faith and commercial standards requires that the singleness of the document and the negotiation, together with the sense of the situation, prevail over any uncommercial and legalistic interpretation.

    4. One of the requirements for rejection under subsection (2) is nonconformity substantially impairing the value of the installment in question. However, an installment agreement may require accurate conformity in quality as a condition to the right to acceptance if the need for such conformity is made clear either by express provision or by the circumstances. In such a case the effect of the agreement is to define explicitly what amounts to substantial impairment of value impossible to cure. A clause requiring accurate compliance as a condition to the right to acceptance must, however, have some basis in reason, must avoid imposing hardship by surprise, and is subject to waiver or to displacement by practical construction.

    Substantial impairment of the value of an installment can turn not only on the quality of the goods but also on such factors as time, quantity, assortment, and the like. It must be judged in terms of the normal or specifically known purposes of the contract. The defect in required documents refers to such matters as the absence of insurance documents under a C.I.F. contract, falsity of a bill of lading, or one failing to show shipment within the contract period or to the contract destination. Even in such cases, however, the provisions on cure of tender apply if appropriate documents are readily procurable.

    5. Under subsection (2) an installment delivery must be accepted if the nonconformity is curable and the seller gives adequate assurance of cure. Cure of nonconformity of an installment in the first instance can usually be afforded by an allowance against the price, or in the case of reasonable discrepancies in quantity either by a further delivery or a partial rejection. This article requires reasonable action by a buyer in regard to discrepant delivery and good faith requires that the buyer make any reasonable minor outlay of time or money necessary to cure an overshipment by severing out an acceptable percentage thereof. The seller must take over a cure which involves any material burden; the buyer's obligation reaches only to cooperation. Adequate assurance for purposes of subsection (2) is measured by the same standards as under the section on right to adequate assurance of performance.

    6. Subsection (3) is designed to further the continuance of the contract in the absence of an overt cancellation. The question arising when an action is brought as to a single installment only is resolved by making such action waive the right of cancellation. This involves merely a defect in one or more installments, as contrasted with the situation where there is a true repudiation within the section on anticipatory repudiation. Whether the nonconformity in any given installment justifies cancellation as to the future depends, not on whether such nonconformity indicates an intent or likelihood that the future deliveries will also be defective, but whether the nonconformity substantially impairs the value of the whole contract. If only the seller's security in regard to future installments is impaired, he or she has the right to demand adequate assurances of proper future performance but has not an immediate right to cancel the entire contract. It is clear under this article, however, that defects in prior installments are cumulative in effect, so that acceptance does not wash out the defect "waived". Prior policy is continued, putting the rule as to buyer's default on the same footing as that in regard to seller's default.

    7. Under the requirement of seasonable notification of cancellation under subsection (3), a buyer who accepts a nonconforming installment which substantially impairs the value of the entire contract should properly be permitted to withhold his or her decision as to whether or not to cancel pending a response from the seller as to his or her claim for cure or adjustment. Similarly, a seller may withhold a delivery pending payment for prior ones, at the same time delaying his or her decision as to cancellation. A reasonable time for notifying of cancellation, judged by commercial standards under the section on good faith, extends of course to include the time covered by any reasonable negotiation in good faith. However, during this period the defaulting party is entitled, on request, to know whether the contract is still in effect, before he or she can be required to perform further.

    Cross References:

    Point 2: Sections 2-307 and 2-607.

    Point 3: Section 1-203.

    Point 5: Sections 2-208 and 2-609.

    Point 6: Section 2-610.

    Definitional Cross References:

    "Action". Section 1-201.

    "Aggrieved party". Section 1-201.

    "Buyer". Section 2-103.

    "Cancellation". Section 2-106.

    "Conform". Section 2-106.

    "Contract". Section 1-201.

    "Lot". Section 2-105.

    "Notifies". Section 1-201.

    "Seasonably". Section 1-204.

    "Seller". Section 2-103.


2-613. Casualty to identified goods.

Where the contract requires for its performance goods identified when the contract is made, and the goods suffer casualty without fault of either party before the risk of loss passes to the buyer, or in a proper case under a "no arrival, no sale" term (section 2-324) then

(a) if the loss is total the contract is avoided; and

(b) if the loss is partial or the goods have so deteriorated as no longer to conform to the contract the buyer may nevertheless demand inspection and at his option either treat the contract as avoided or accept the goods with due allowance from the contract price for the deterioration or the deficiency in quantity but without further right against the seller.

Source:Laws 1963, c. 544, Art. II, § 2-613, p. 1752.


Annotations
    The impact of the provisions of this section that the casualty must occur without fault of either buyer or seller is that if the buyer is at fault, he will remain obligated to purchase, but if seller is at fault, he will remain obligated to deliver and be liable for appropriate damages if he does not. Carlson v. Nelson, 204 Neb. 765, 285 N.W.2d 505 (1979).

    COMMENT

    Prior Uniform Statutory Provision: Sections 7 and 8, Uniform Sales Act.

    Changes: Rewritten, the basic policy being continued but the test of a "divisible" or "indivisible" sale or contract being abandoned in favor of adjustment in business terms.

    Purposes of Changes:

    1. Where goods whose continued existence is presupposed by the agreement are destroyed without fault of either party, the buyer is relieved from his or her obligation but may at his or her option take the surviving goods at a fair adjustment. "Fault" is intended to include negligence and not merely willful wrong. The buyer is expressly given the right to inspect the goods in order to determine whether he or she wishes to avoid the contract entirely or to take the goods with a price adjustment.

    2. The section applies whether the goods were already destroyed at the time of contracting without the knowledge of either party or whether they are destroyed subsequently but before the risk of loss passes to the buyer. Where under the agreement, including of course usage of trade, the risk has passed to the buyer before the casualty, the section has no application. Beyond this, the essential question in determining whether the rules of this section are to be applied is whether the seller has or has not undertaken the responsibility for the continued existence of the goods in proper condition through the time of agreed or expected delivery.

    3. The section on the term "no arrival, no sale" makes clear that delay in arrival, quite as much as physical change in the goods, gives the buyer the options set forth in this section.

    Cross Reference:

    Point 3: Section 2-324.

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Conform". Section 2-106.

    "Contract". Section 1-201.

    "Fault". Section 1-201.

    "Goods". Section 2-105.

    "Party". Section 1-201.

    "Rights". Section 1-201.

    "Seller". Section 2-103.


2-614. Substituted performance.

(1) Where without fault of either party the agreed berthing, loading, or unloading facilities fail or an agreed type of carrier becomes unavailable or the agreed manner of delivery otherwise becomes commercially impracticable but a commercially reasonable substitute is available, such substitute performance must be tendered and accepted.

(2) If the agreed means or manner of payment fails because of domestic or foreign governmental regulation, the seller may withhold or stop delivery unless the buyer provides a means or manner of payment which is commercially a substantial equivalent. If delivery has already been taken, payment by the means or in the manner provided by the regulation discharges the buyer's obligation unless the regulation is discriminatory, oppressive or predatory.

Source:Laws 1963, c. 544, Art. II, § 2-614, p. 1752.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: None.

    Purposes:

    1. Subsection (1) requires the tender of a commercially reasonable substituted performance where agreed-to facilities have failed or become commercially impracticable. Under this article, in the absence of specific agreement, the normal or usual facilities enter into the agreement either through the circumstances, usage of trade, or prior course of dealing.

    This section appears between section 2-613 on casualty to identified goods and the next section on excuse by failure of presupposed conditions, both of which deal with excuse and complete avoidance of the contract where the occurrence or nonoccurrence of a contingency which was a basic assumption of the contract makes the expected performance impossible. The distinction between the present section and those sections lies in whether the failure or impossibility of performance arises in connection with an incidental matter or goes to the very heart of the agreement. The differing lines of solution are contrasted in a comparison of International Paper Co. v. Rockefeller, 161 App. Div. 180, 146 N.Y.S. 371 (1914) and Meyer v. Sullivan, 40 Cal. App. 723, 181 P. 847 (1919). In the former case a contract for the sale of spruce to be cut from a particular tract of land was involved. When a fire destroyed the trees growing on that tract the seller was held excused since performance was impossible. In the latter case the contract called for delivery of wheat "f.o.b. Kosmos Steamer at Seattle". The war led to cancellation of that line's sailing schedule after space had been duly engaged and the buyer was held entitled to demand substituted delivery at the warehouse on the line's loading dock. Under this article, of course, the seller would also be entitled, had the market gone the other way, to make a substituted tender in that manner.

    There must, however, be a true commercial impracticability to excuse the agreed-to performance and justify a substituted performance. When this is the case a reasonable substituted performance tendered by either party should excuse him or her from strict compliance with contract terms which do not go to the essence of the agreement.

    2. The substitution provided in this section as between buyer and seller does not carry over into the obligation of a financing agency under a letter of credit, since such an agency is entitled to performance which is plainly adequate on its face and without need to look into commercial evidence outside of the documents. See article 5, especially sections 5-102, 5-103, 5-109, 5-110, and 5-114.

    3. Under subsection (2) where the contract is still executory on both sides, the seller is permitted to withdraw unless the buyer can provide him or her with a commercially equivalent return despite the governmental regulation. Where, however, only the debt for the price remains, a larger leeway is permitted. The buyer may pay in the manner provided by the regulation even though this may not be commercially equivalent provided that the regulation is not "discriminatory, oppressive, or predatory".

    Cross Reference:

    Point 2: Article 5.

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Fault". Section 1-201.

    "Party". Section 1-201.

    "Seller". Section 2-103.


2-615. Excuse by failure of presupposed conditions.

Except so far as a seller may have assumed a greater obligation and subject to the preceding section on substituted performance:

(a) Delay in delivery or nondelivery in whole or in part by a seller who complies with paragraphs (b) and (c) is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the nonoccurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.

(b) Where the causes mentioned in paragraph (a) affect only a part of the seller's capacity to perform, he must allocate production and deliveries among his customers but may at his option include regular customers not then under contract as well as his own requirements for further manufacture. He may so allocate in any manner which is fair and reasonable.

(c) The seller must notify the buyer seasonably that there will be delay or nondelivery and, when allocation is required under paragraph (b), of the estimated quota thus made available for the buyer.

Source:Laws 1963, c. 544, Art. II, § 2-615, p. 1753.


Annotations
    There are four requirements which must be established before a seller's performance may be excused under this section: (1) A contingency has occurred which has made performance impracticable; (2) the nonoccurrence of that contingency was a basic assumption on which the contract was made; (3) the seller has not assumed a greater obligation; and (4) the seller has seasonably notified the buyer that there will be a delay or nondelivery. Lambert v. City of Columbus, 242 Neb. 778, 496 N.W.2d 540 (1993).

    COMMENT

    Prior Uniform Statutory Provision: None.

    Purposes:

    1. This section excuses a seller from timely delivery of goods contracted for, where his or her performance has become commercially impracticable because of unforeseen supervening circumstances not within the contemplation of the parties at the time of contracting. The destruction of specific goods and the problem of the use of substituted performance on points other than delay or quantity, treated elsewhere in this article, must be distinguished from the matter covered by this section.

    2. The present section deliberately refrains from any effort at an exhaustive expression of contingencies and is to be interpreted in all cases sought to be brought within its scope in terms of its underlying reason and purpose.

    3. The first test for excuse under this article in terms of basic assumption is a familiar one. The additional test of commercial impracticability (as contrasted with "impossibility", "frustration of performance", or "frustration of the venture") has been adopted in order to call attention to the commercial character of the criterion chosen by this article.

    4. Increased cost alone does not excuse performance unless the rise in cost is due to some unforeseen contingency which alters the essential nature of the performance. Neither is a rise or a collapse in the market in itself a justification, for that is exactly the type of business risk which business contracts made at fixed prices are intended to cover. But a severe shortage of raw materials or of supplies due to a contingency such as war, embargo, local crop failure, unforeseen shutdown of major sources of supply, or the like, which either causes a marked increase in cost or altogether prevents the seller from securing supplies necessary to his or her performance is within the contemplation of this section. (See Ford & Sons, Ltd., v. Henry Leetham & Sons, Ltd., 21 Com. Cas. 55 (1915, K.B.D.)).

    5. Where a particular source of supply is exclusive under the agreement and fails through casualty, the present section applies rather than the provision on destruction or deterioration of specific goods. The same holds true where a particular source of supply is shown by the circumstances to have been contemplated or assumed by the parties at the time of contracting. (See Davis Co. v. Hoffman-LaRoche Chemical Works, 178 App. Div. 855, 166 N.Y.S. 179 (1917) and International Paper Co. v. Rockefeller, 161 App. Div. 180, 146 N.Y.S. 371 (1914)). There is no excuse under this section, however, unless the seller has employed all due measures to assure himself or herself that his or her source will not fail. (See Canadian Industrial Alcohol Co., Ltd., v. Dunbar Molasses Co., 258 N.Y. 194, 179 N.E. 383, 80 A.L.R. 1173 (1932) and Washington Mfg. Co. v. Midland Lumber Co., 113 Wash. 593, 194 P. 777 (1921)).

    In the case of failure of production by an agreed source for causes beyond the seller's control, the seller should, if possible, be excused since production by an agreed source is without more a basic assumption of the contract. Such excuse should not result in relieving the defaulting supplier from liability nor in dropping into the seller's lap an unearned bonus of damages over. The flexible adjustment machinery of this article provides the solution under the provision on the obligation of good faith. A condition to his or her making good the claim of excuse is the turning over to the buyer of his or her rights against the defaulting source of supply to the extent of the buyer's contract in relation to which excuse is being claimed.

    6. In situations in which neither sense nor justice is served by either answer when the issue is posed in flat terms of "excuse" or "no excuse", adjustment under the various provisions of this article is necessary, especially the sections on good faith, on insecurity and assurance, and on the reading of all provisions in the light of their purposes, and the general policy of the code to use equitable principles in furtherance of commercial standards and good faith.

    7. The failure of conditions which go to convenience or collateral values rather than to the commercial practicability of the main performance does not amount to a complete excuse. However, good faith and the reason of the present section and of the preceding one may properly be held to justify and even to require any needed delay involved in a good faith inquiry seeking a readjustment of the contract terms to meet the new conditions.

    8. The provisions of this section are made subject to assumption of greater liability by agreement and such agreement is to be found not only in the expressed terms of the contract but in the circumstances surrounding the contracting, in trade usage, and the like. Thus the exemptions of this section do not apply when the contingency in question is sufficiently foreshadowed at the time of contracting to be included among the business risks which are fairly to be regarded as part of the dickered terms, either consciously or as a matter of reasonable, commercial interpretation from the circumstances. (See Madeirense Do Brasil, S.A. v. Stulman-Emrick Lumber Co., 147 F.2d 399 (C.C.A., 2 Cir., 1945)). The exemption otherwise present through usage of trade under the present section may also be expressly negated by the language of the agreement. Generally, express agreements as to exemptions designed to enlarge upon or supplant the provisions of this section are to be read in the light of mercantile sense and reason, for this section itself sets up the commercial standard for normal and reasonable interpretation and provides a minimum beyond which agreement may not go.

    Agreement can also be made in regard to the consequences of exemption as laid down in paragraphs (b) and (c) and the next section on procedure on notice claiming excuse.

    9. The case of a farmer who has contracted to sell crops to be grown on designated land may be regarded as falling either within the section on casualty to identified goods or this section, and he or she may be excused, when there is a failure of the specific crop, either on the basis of the destruction of identified goods or because of the failure of a basic assumption of the contract.

    Exemption of the buyer in the case of a "requirements" contract is covered by the "Output and Requirements" section both as to assumption and allocation of the relevant risks. But when a contract by a manufacturer to buy fuel or raw material makes no specific reference to a particular venture and no such reference may be drawn from the circumstances, commercial understanding views it as a general deal in the general market and not conditioned on any assumption of the continuing operation of the buyer's plant. Even when notice is given by the buyer that the supplies are needed to fill a specific contract of a normal commercial kind, commercial understanding does not see such a supply contract as conditioned on the continuance of the buyer's further contract for outlet. On the other hand, where the buyer's contract is in reasonable commercial understanding conditioned on a definite and specific venture or assumption as, for instance, a war procurement subcontract known to be based on a prime contract which is subject to termination, or a supply contract for a particular construction venture, the reason of the present section may well apply and entitle the buyer to the exemption.

    10. Following its basic policy of using commercial practicability as a test for excuse, this section recognizes as of equal significance either a foreign or domestic regulation and disregards any technical distinctions between "law", "regulation", "order", and the like. Nor does it make the present action of the seller depend upon the eventual judicial determination of the legality of the particular governmental action. The seller's good faith belief in the validity of the regulation is the test under this article and the best evidence of his or her good faith is the general commercial acceptance of the regulation. However, governmental interference cannot excuse unless it truly "supervenes" in such a manner as to be beyond the seller's assumption of risk. And any action by the party claiming excuse which causes or colludes in inducing the governmental action preventing his or her performance would be in breach of good faith and would destroy his or her exemption.

    11. An excused seller must fulfill his or her contract to the extent which the supervening contingency permits, and if the situation is such that his or her customers are generally affected he or she must take account of all in supplying one. Subsections (a) and (b), therefor, explicitly permit in any proration a fair and reasonable attention to the needs of regular customers who are probably relying on spot orders for supplies. Customers at different stages of the manufacturing process may be fairly treated by including the seller's manufacturing requirements. A fortiori, the seller may also take account of contracts later in date than the one in question. The fact that such spot orders may be closed at an advanced price causes no difficulty, since any allocation which exceeds normal past requirements will not be reasonable. However, good faith requires, when prices have advanced, that the seller exercise real care in making his or her allocations, and in case of doubt his or her contract customers should be favored and supplies prorated evenly among them regardless of price. Save for the extra care thus required by changes in the market, this section seeks to leave every reasonable business leeway to the seller.

    Cross References:

    Point 1: Sections 2-613 and 2-614.

    Point 2: Section 1-102.

    Point 5: Sections 1-203 and 2-613.

    Point 6: Sections 1-102, 1-203, and 2-609.

    Point 7: Section 2-614.

    Point 8: Sections 1-201, 2-302, and 2-616.

    Point 9: Sections 1-102, 2-306, and 2-613.

    Definitional Cross References:

    "Between merchants". Section 2-104.

    "Buyer". Section 2-103.

    "Contract". Section 1-201.

    "Contract for sale". Section 2-106.

    "Good faith". Section 1-201.

    "Merchant". Section 2-104.

    "Notifies". Section 1-201.

    "Seasonably". Section 1-204.

    "Seller". Section 2-103.


2-616. Procedure on notice claiming excuse.

(1) Where the buyer receives notification of a material or indefinite delay or an allocation justified under the preceding section he may by written notification to the seller as to any delivery concerned, and where the prospective deficiency substantially impairs the value of the whole contract under the provisions of this article relating to breach of installment contracts (section 2-612), then also as to the whole,

(a) terminate and thereby discharge any unexecuted portion of the contract; or

(b) modify the contract by agreeing to take his available quota in substitution.

(2) If after receipt of such notification from the seller the buyer fails so to modify the contract within a reasonable time not exceeding thirty days the contract lapses with respect to any deliveries affected.

(3) The provisions of this section may not be negated by agreement except insofar as the seller has assumed a greater obligation under the preceding section.

Source:Laws 1963, c. 544, Art. II, § 2-616, p. 1754.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: None.

    Purposes:

    This section seeks to establish simple and workable machinery for providing certainty as to when a supervening and excusing contingency "excuses" the delay, "discharges" the contract, or may result in a waiver of the delay by the buyer. When the seller notifies, in accordance with the preceding section, claiming excuse, the buyer may acquiesce, in which case the contract is so modified. No consideration is necessary in a case of this kind to support such a modification. If the buyer does not elect so to modify the contract, he or she may terminate it and under subsection (2) his or her silence after receiving the seller's claim of excuse operates as such a termination. Subsection (3) denies effect to any contract clause made in advance of trouble which would require the buyer to stand ready to take delivery whenever the seller is excused from delivery by unforeseen circumstances.

    Cross References:

    Point 1: Sections 2-209 and 2-615.

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Contract". Section 1-201.

    "Installment contract". Section 2-612.

    "Notification". Section 1-201.

    "Reasonable time". Section 1-204.

    "Seller". Section 2-103.

    "Termination". Section 2-106.

    "Written". Section 1-201.


2-701. Remedies for breach of collateral contracts not impaired.

Remedies for breach of any obligation or promise collateral or ancillary to a contract for sale are not impaired by the provisions of this article.

Source:Laws 1963, c. 544, Art. II, § 2-701, p. 1754.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: None.

    Purposes:

    Whether a claim for breach of an obligation collateral to the contract for sale requires separate trial to avoid confusion of issues is beyond the scope of this article; but contractual arrangements which as a business matter enter vitally into the contract should be considered a part thereof insofar as cross-claims or defenses are concerned.

    Definitional Cross References:

    "Contract for sale". Section 2-106.

    "Remedy". Section 1-201.


2-702. Seller's remedies on discovery of buyer's insolvency.

(1) Where the seller discovers the buyer to be insolvent he may refuse delivery except for cash including payment for all goods theretofore delivered under the contract, and stop delivery under this article (section 2-705).

(2) Where the seller discovers that the buyer has received goods on credit while insolvent he may reclaim the goods upon demand made within ten days after the receipt, but if misrepresentation of solvency has been made to the particular seller in writing within three months before delivery the ten-day limitation does not apply. Except as provided in this subsection the seller may not base a right to reclaim goods on the buyer's fraudulent or innocent misrepresentation of solvency or of intent to pay.

(3) The seller's right to reclaim under subsection (2) is subject to the rights of a buyer in ordinary course or other good faith purchaser or lien creditor under this article (section 2-403). Successful reclamation of goods excludes all other remedies with respect to them.

Source:Laws 1963, c. 544, Art. II, § 2-702, p. 1755.


Annotations
    Purchase money priority is exception to basic rule of priority to first filed financing statement and should be applied only in strict compliance with all limitations in Uniform Commercial Code. North Platte State Bank v. Production Credit Assn., 189 Neb. 45, 200 N.W.2d 1 (1972).

    COMMENT

    Prior Uniform Statutory Provision: Subsection (1) — sections 53(1)(b), 54(1)(c), and 57, Uniform Sales Act; subsection (2) — none; subsection (3) — section 76(3), Uniform Sales Act.

    Changes: Rewritten, the protection given to a seller who has sold on credit and has delivered goods to the buyer immediately preceding his or her insolvency being extended.

    Purposes of Changes and New Matter:

    To make it clear that:

    1. The seller's right to withhold the goods or to stop delivery except for cash when he or she discovers the buyer's insolvency is made explicit in subsection (1) regardless of the passage of title, and the concept of stoppage has been extended to include goods in the possession of any bailee who has not yet attorned to the buyer.

    2. Subsection (2) takes as its baseline the proposition that any receipt of goods on credit by an insolvent buyer amounts to a tacit business misrepresentation of solvency and therefor is fraudulent as against the particular seller. This article makes discovery of the buyer's insolvency and demand within a ten-day period a condition of the right to reclaim goods on this ground. The ten-day limitation period operates from the time of receipt of the goods.

    An exception to this time limitation is made when a written misrepresentation of solvency has been made to the particular seller within three months prior to the delivery. To fall within the exception the statement of solvency must be in writing, addressed to the particular seller, and dated within three months of the delivery.

    3. Because the right of the seller to reclaim goods under this section constitutes preferential treatment as against the buyer's other creditors, subsection (3) provides that such reclamation bars all his or her other remedies as to the goods involved.

    Cross References:

    Point 1: Sections 2-401 and 2-705.

    Compare section 2-502.

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Buyer in ordinary course of business". Section 1-201.

    "Contract". Section 1-201.

    "Good faith". Section 1-201.

    "Goods". Section 2-105.

    "Insolvent". Section 1-201.

    "Person". Section 1-201.

    "Purchaser". Section 1-201.

    "Receipt" of goods. Section 2-103.

    "Remedy". Section 1-201.

    "Rights". Section 1-201.

    "Seller". Section 2-103.

    "Writing". Section 1-201.


2-703. Seller's remedies in general.

Where the buyer wrongfully rejects or revokes acceptance of goods or fails to make a payment due on or before delivery or repudiates with respect to a part or the whole, then with respect to any goods directly affected and, if the breach is of the whole contract (section 2-612), then also with respect to the whole undelivered balance, the aggrieved seller may

(a) withhold delivery of such goods;

(b) stop delivery by any bailee as hereafter provided (section 2-705);

(c) proceed under the next section respecting goods still unidentified to the contract;

(d) resell and recover damages as hereafter provided (section 2-706);

(e) recover damages for nonacceptance (section 2-708) or in a proper case the price (section 2-709);

(f) cancel.

Source:Laws 1963, c. 544, Art. II, § 2-703, p. 1755.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: No comparable index section. See section 53, Uniform Sales Act.

    Purposes:

    1. This section is an index section which gathers together in one convenient place all of the various remedies open to a seller for any breach by the buyer. This article rejects any doctrine of election of remedy as a fundamental policy and thus the remedies are essentially cumulative in nature and include all of the available remedies for breach. Whether the pursuit of one remedy bars another depends entirely on the facts of the individual case.

    2. The buyer's breach which occasions the use of the remedies under this section may involve only one lot or delivery of goods, or may involve all of the goods which are the subject matter of the particular contract. The right of the seller to pursue a remedy as to all the goods when the breach is as to only one or more lots is covered by the section on breach in installment contracts. The present section deals only with the remedies available after the goods involved in the breach have been determined by that section.

    3. In addition to the typical case of refusal to pay or default in payment, the language in the preamble, "fails to make a payment due", is intended to cover the dishonor of a check on due presentment, or the nonacceptance of a draft, and the failure to furnish an agreed letter of credit.

    4. It should also be noted that the code requires its remedies to be liberally administered and provides that any right or obligation which it declares is enforceable by action unless a different effect is specifically prescribed (section 1-106).

    Cross References:

    Point 2: Section 2-612.

    Point 3: Section 2-325.

    Point 4: Section 1-106.

    Definitional Cross References:

    "Aggrieved party". Section 1-201.

    "Buyer". Section 2-103.

    "Cancellation". Section 2-106.

    "Contract". Section 1-201.

    "Goods". Section 2-105.

    "Remedy". Section 1-201.

    "Seller". Section 2-103.


2-704. Seller's right to identify goods to the contract notwithstanding breach or to salvage unfinished goods.

(1) An aggrieved seller under the preceding section may

(a) identify to the contract conforming goods not already identified if at the time he learned of the breach they are in his possession or control;

(b) treat as the subject of resale goods which have demonstrably been intended for the particular contract even though those goods are unfinished.

(2) Where the goods are unfinished an aggrieved seller may in the exercise of reasonable commercial judgment for the purposes of avoiding loss and of effective realization either complete the manufacture and wholly identify the goods to the contract or cease manufacture and resell for scrap or salvage value or proceed in any other reasonable manner.

Source:Laws 1963, c. 544, Art. II, § 2-704, p. 1756.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: Sections 63(3) and 64(4), Uniform Sales Act.

    Changes: Rewritten, the seller's rights being broadened.

    Purposes of Changes:

    1. This section gives an aggrieved seller the right at the time of breach to identify to the contract any conforming finished goods, regardless of their resalability, and to use reasonable judgment as to completing unfinished goods. It thus makes the goods available for resale under the resale section, the seller's primary remedy, and in the special case in which resale is not practicable, allows the action for the price which would then be necessary to give the seller the value of his or her contract.

    2. Under this article the seller is given express power to complete manufacture or procurement of goods for the contract unless the exercise of reasonable commercial judgment as to the facts as they appear at the time he or she learns of the breach makes it clear that such action will result in a material increase in damages. The burden is on the buyer to show the commercially unreasonable nature of the seller's action in completing manufacture.

    Cross References:

    Sections 2-703 and 2-706.

    Definitional Cross References:

    "Aggrieved party". Section 1-201.

    "Conforming". Section 2-106.

    "Contract". Section 1-201.

    "Goods". Section 2-105.

    "Rights". Section 1-201.

    "Seller". Section 2-103.


2-705. Seller's stoppage of delivery in transit or otherwise.

(1) The seller may stop delivery of goods in the possession of a carrier or other bailee when he or she discovers the buyer to be insolvent (section 2-702) and may stop delivery of carload, truckload, planeload, or larger shipments of express or freight when the buyer repudiates or fails to make a payment due before delivery or if for any other reason the seller has a right to withhold or reclaim the goods.

(2) As against such buyer the seller may stop delivery until

(a) receipt of the goods by the buyer; or

(b) acknowledgment to the buyer by any bailee of the goods except a carrier that the bailee holds the goods for the buyer; or

(c) such acknowledgment to the buyer by a carrier by reshipment or as a warehouse; or

(d) negotiation to the buyer of any negotiable document of title covering the goods.

(3)(a) To stop delivery the seller must so notify as to enable the bailee by reasonable diligence to prevent delivery of the goods.

(b) After such notification the bailee must hold and deliver the goods according to the directions of the seller but the seller is liable to the bailee for any ensuing charges or damages.

(c) If a negotiable document of title has been issued for goods the bailee is not obliged to obey a notification to stop until surrender of possession or control of the document.

(d) A carrier who has issued a nonnegotiable bill of lading is not obliged to obey a notification to stop received from a person other than the consignor.

Source:Laws 1963, c. 544, Art. II, § 2-705, p. 1756; Laws 2005, LB 570, § 41.    


Annotations
    COMMENT

    Prior Uniform Statutory Provision: Sections 57-59, Uniform Sales Act; see also sections 12, 14, and 42, Uniform Bills of Lading Act and sections 9, 11, and 49, Uniform Warehouse Receipts Act.

    Changes: This section continues and develops the above sections of the Uniform Sales Act in the light of the other uniform statutory provisions noted.

    Purposes:

    To make it clear that:

    1. Subsection (1) applies the stoppage principle to other bailees as well as carriers.

    It also expands the remedy to cover the situations, in addition to buyer's insolvency, specified in the subsection. But since stoppage is a burden in any case to carriers, and might be a very heavy burden to them if it covered all small shipments in all these situations, the right to stop for reasons other than insolvency is limited to carload, truckload, planeload, or larger shipments. The seller shipping to a buyer of doubtful credit can protect himself or herself by shipping C.O.D.

    Where stoppage occurs for insecurity it is merely a suspension of performance, and if assurances are duly forthcoming from the buyer the seller is not entitled to resell or divert.

    Improper stoppage is a breach by the seller if it effectively interferes with the buyer's right to due tender under the section on manner of tender of delivery. However, if the bailee obeys an unjustified order to stop he or she may also be liable to the buyer. The measure of his or her obligation is dependent on the provisions of the Documents of Title Article (section 7-303). Subsection (3)(b) therefor gives him or her a right of indemnity as against the seller in such a case.

    2. "Receipt by the buyer" includes receipt by the buyer's designated representative, the subpurchaser, when shipment is made direct to him or her and the buyer himself or herself never receives the goods. It is entirely proper under this article that the seller, by making such direct shipment to the subpurchaser, be regarded as acquiescing in the latter's purchase and as thus barred from stoppage of the goods as against him or her.

    As between the buyer and the seller, the latter's right to stop the goods at any time until they reach the place of final delivery is recognized by this section.

    Under subsections (3)(c) and (d), the carrier is under no duty to recognize the stop order of a person who is a stranger to the carrier's contract. But the seller's right as against the buyer to stop delivery remains, whether or not the carrier is obligated to recognize the stop order. If the carrier does obey it, the buyer cannot complain merely because of that circumstance; and the seller becomes obligated under subsection (3)(b) to pay the carrier any ensuing damages or charges.

    3. A diversion of a shipment is not a "reshipment" under subsection (2)(c) when it is merely an incident to the original contract of transportation. Nor is the procurement of "exchange bills" of lading which change only the name of the consignee to that of the buyer's local agent but do not alter the destination of a reshipment.

    Acknowledgment by the carrier as a "warehouse" within the meaning of this article requires a contract of a truly different character from the original shipment, a contract not in extension of transit but as a warehouse.

    4. Subsection (3)(c) makes the bailee's obedience of a notification to stop conditional upon the surrender of possession or control of any outstanding negotiable document.

    5. Any charges or losses incurred by the carrier in following the seller's orders, whether or not he or she was obligated to do so, fall to the seller's charge.

    6. After an effective stoppage under this section the seller's rights in the goods are the same as if he or she had never made a delivery.

    Cross References:

    Sections 2-702 and 2-703.

    Point 1: Sections 2-503 and 2-609 and article 7.

    Point 2: Section 2-103 and article 7.

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Contract for sale". Section 2-106.

    "Document of title". Section 1-201.

    "Goods". Section 2-105.

    "Insolvent". Section 1-201.

    "Notification". Section 1-201.

    "Receipt" of goods. Section 2-103.

    "Rights". Section 1-201.

    "Seller". Section 2-103.


2-706. Seller's resale including contract for resale.

(1) Under the conditions stated in section 2-703 on seller's remedies, the seller may resell the goods concerned or the undelivered balance thereof. Where the resale is made in good faith and in a commercially reasonable manner the seller may recover the difference between the resale price and the contract price together with any incidental damages allowed under the provisions of this article (section 2-710), but less expenses saved in consequence of the buyer's breach.

(2) Except as otherwise provided in subsection (3) or unless otherwise agreed resale may be at public or private sale including sale by way of one or more contracts to sell or of identification to an existing contract of the seller. Sale may be as a unit or in parcels and at any time and place and on any terms but every aspect of the sale including the method, manner, time, place and terms must be commercially reasonable. The resale must be reasonably identified as referring to the broken contract, but it is not necessary that the goods be in existence or that any or all of them have been identified to the contract before the breach.

(3) Where the resale is at private sale the seller must give the buyer reasonable notification of his intention to resell.

(4) Where the resale is at public sale

(a) only identified goods can be sold except where there is a recognized market for a public sale of futures in goods of the kind; and

(b) it must be made at a usual place or market for public sale if one is reasonably available and except in the case of goods which are perishable or threaten to decline in value speedily the seller must give the buyer reasonable notice of the time and place of the resale; and

(c) if the goods are not to be within the view of those attending the sale the notification of sale must state the place where the goods are located and provide for their reasonable inspection by prospective bidders; and

(d) the seller may buy.

(5) A purchaser who buys in good faith at a resale takes the goods free of any rights of the original buyer even though the seller fails to comply with one or more of the requirements of this section.

(6) The seller is not accountable to the buyer for any profit made on any resale. A person in the position of a seller (section 2-707) or a buyer who has rightfully rejected or justifiably revoked acceptance must account for any excess over the amount of his security interest, as hereinafter defined (subsection (3) of section 2-711).

Source:Laws 1963, c. 544, Art. II, § 2-706, p. 1757.


Annotations
    Damages recoverable from wrongfully canceling buyer included contract price for cassettes less amount received on resale of cassettes, plus profit if contract had been completed, less amount paid on contract. Holiday Manuf. Co. v. B.A.S.F. Systems, Inc., 380 F.Supp. 1096 (D. Neb. 1974).

    COMMENT

    Prior Uniform Statutory Provision: Section 60, Uniform Sales Act.

    Changes: Rewritten.

    Purposes of Changes:

    To simplify the prior statutory provision and to make it clear that:

    1. The only condition precedent to the seller's right of resale under subsection (1) is a breach by the buyer within the section on the seller's remedies in general or insolvency. Other meticulous conditions and restrictions of the prior uniform statutory provision are disapproved by this article and are replaced by standards of commercial reasonableness. Under this section the seller may resell the goods after any breach by the buyer. Thus, an anticipatory repudiation by the buyer gives rise to any of the seller's remedies for breach, and to the right of resale. This principle is supplemented by subsection (2) which authorizes a resale of goods which are not in existence or were not identified to the contract before the breach.

    2. In order to recover the damages prescribed in subsection (1) the seller must act "in good faith and in a commercially reasonable manner" in making the resale. This standard is intended to be more comprehensive than that of "reasonable care and judgment" established by the prior uniform statutory provision. Failure to act properly under this section deprives the seller of the measure of damages here provided and relegates him or her to that provided in section 2-708.

    Under this article the seller resells by authority of law, in his or her own behalf, for his or her own benefit and for the purpose of fixing his or her damages. The theory of a seller's agency is thus rejected.

    3. If the seller complies with the prescribed standard of duty in making the resale, he or she may recover from the buyer the damages provided for in subsection (1). Evidence of market or current prices at any particular time or place is relevant only on the question of whether the seller acted in a commercially reasonable manner in making the resale.

    The distinction drawn by some courts between cases where the title had not passed to the buyer and the seller had resold as owner, and cases where the title had passed and the seller had resold by virtue of his or her lien on the goods, is rejected.

    4. Subsection (2) frees the remedy of resale from legalistic restrictions and enables the seller to resell in accordance with reasonable commercial practices so as to realize as high a price as possible in the circumstances. By "public" sale is meant a sale by auction. A "private" sale may be effected by solicitation and negotiation conducted either directly or through a broker. In choosing between a public and private sale the character of the goods must be considered and relevant trade practices and usages must be observed.

    5. Subsection (2) merely clarifies the common-law rule that the time for resale is a reasonable time after the buyer's breach, by using the language "commercially reasonable". What is such a reasonable time depends upon the nature of the goods, the condition of the market, and the other circumstances of the case; its length cannot be measured by any legal yardstick or divided into degrees. Where a seller contemplating resale receives a demand from the buyer for inspection under the section of preserving evidence of goods in dispute, the time for resale may be appropriately lengthened.

    On the question of the place for resale, subsection (2) goes to the ultimate test, the commercial reasonableness of the seller's choice as to the place for an advantageous resale. This article rejects the theory that the seller is required to resell at the agreed place for delivery and that a resale elsewhere can be permitted only in exceptional cases.

    6. The purpose of subsection (2) being to enable the seller to dispose of the goods to the best advantage, he or she is permitted in making the resale to depart from the terms and conditions of the original contract for sale to any extent "commercially reasonable" in the circumstances.

    7. The provision of subsection (2) that the goods need not be in existence to be resold applies when the buyer is guilty of anticipatory repudiation of a contract for future goods, before the goods or some of them have come into existence. In such a case the seller may exercise the right of resale and fix his or her damages by "one or more contracts to sell" the quantity of conforming future goods affected by the repudiation. The companion provision of subsection (2) that resale may be made although the goods were not identified to the contract prior to the buyer's breach, likewise contemplates an anticipatory repudiation by the buyer but occurring after the goods are in existence. If the goods so identified conform to the contract, their resale will fix the seller's damages quite as satisfactorily as if they had been identified before the breach.

    8. Where the resale is to be by private sale, subsection (3) requires that reasonable notification of the seller's intention to resell must be given to the buyer. The length of notification of a private sale depends upon the urgency of the matter. Notification of the time and place of this type of sale is not required.

    Subsection (4)(b) requires that the seller give the buyer reasonable notice of the time and place of a public resale so that he or she may have an opportunity to bid or to secure the attendance of other bidders. An exception is made in the case of goods "which are perishable or threaten to decline speedily in value".

    9. Since there would be no reasonable prospect of competitive bidding elsewhere, subsection (4) requires that a public resale "must be made at a usual place or market for public sale if one is reasonably available"; i.e., a place or market which prospective bidders may reasonably be expected to attend. Such a market may still be "reasonably available" under this subsection, though at a considerable distance from the place where the goods are located. In such a case the expense of transporting the goods for resale is recoverable from the buyer as part of the seller's incidental damages under subsection (1). However, the question of availability is one of commercial reasonableness in the circumstances and if such "usual" place or market is not reasonably available, a duly advertised public resale may be held at another place if it is one which prospective bidders may reasonably be expected to attend, as distinguished from a place where there is no demand whatsoever for goods of the kind.

    Paragraph (a) of subsection (4) qualifies the last sentence of subsection (2) with respect to resales of unidentified and future goods at public sale. If conforming goods are in existence the seller may identify them to the contract after the buyer's breach and then resell them at public sale. If the goods have not been identified, however, he or she may resell them at public sale only as "future" goods and only where there is a recognized market for public sale of futures in goods of the kind.

    The provisions of paragraph (c) of subsection (4) are intended to permit intelligent bidding.

    The provision of paragraph (d) of subsection (4) permitting the seller to bid and, of course, to become the purchaser, benefits the original buyer by tending to increase the resale price and thus decreasing the damages he or she will have to pay.

    10. This article departs in subsection (5) from the prior uniform statutory provision in permitting a good faith purchaser at resale to take a good title as against the buyer even though the seller fails to comply with the requirements of this section.

    11. Under subsection (6), the seller retains profit, if any, without distinction based on whether or not he or she had a lien since this article divorces the question of passage of title to the buyer from the seller's right of resale or the consequences of its exercise. On the other hand, where "a person in the position of a seller" or a buyer acting under the section on buyer's remedies, exercises his or her right of resale under the present section he or she does so only for the limited purpose of obtaining cash for his or her "security interest" in the goods. Once that purpose has been accomplished any excess in the resale price belongs to the seller to whom an accounting must be made as provided in the last sentence of subsection (6).

    Cross References:

    Point 1: Sections 2-610, 2-702, and 2-703.

    Point 2: Section 1-201.

    Point 3: Sections 2-708 and 2-710.

    Point 4: Section 2-328.

    Point 8: Section 2-104.

    Point 9: Section 2-710.

    Point 11: Sections 2-401, 2-707, and 2-711(3).

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Contract". Section 1-201.

    "Contract for sale". Section 2-106.

    "Good faith". Section 2-103.

    "Goods". Section 2-105.

    "Merchant". Section 2-104.

    "Notification". Section 1-201.

    "Person in position of seller". Section 2-707.

    "Purchase". Section 1-201.

    "Rights". Section 1-201.

    "Sale". Section 2-106.

    "Security interest". Section 1-201.

    "Seller". Section 2-103.


2-707. Person in the position of a seller.

(1) A "person in the position of a seller" includes as against a principal an agent who has paid or become responsible for the price of goods on behalf of his principal or anyone who otherwise holds a security interest or other right in goods similar to that of a seller.

(2) A person in the position of a seller may as provided in this article withhold or stop delivery (section 2-705) and resell (section 2-706) and recover incidental damages (section 2-710).

Source:Laws 1963, c. 544, Art. II, § 2-707, p. 1759.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: Section 52(2), Uniform Sales Act.

    Changes: Rewritten.

    Purposes of Changes:

    To make it clear that:

    In addition to following in general the prior uniform statutory provision, the case of a financing agency which has acquired documents by honoring a letter of credit for the buyer or by discounting a draft for the seller has been included in the term "a person in the position of a seller".

    Cross References:

    Article 5 and section 2-506.

    Definitional Cross References:

    "Consignee". Section 7-102.

    "Consignor". Section 7-102.

    "Goods". Section 2-105.

    "Security interest". Section 1-201.

    "Seller". Section 2-103.


2-708. Seller's damages for nonacceptance or repudiation.

(1) Subject to subsection (2) and to the provisions of this article with respect to proof of market price (section 2-723), the measure of damages for nonacceptance or repudiation by the buyer is the difference between the market price at the time and place for tender and the unpaid contract price together with any incidental damages provided in this article (section 2-710), but less expenses saved in consequence of the buyer's breach.

(2) If the measure of damages provided in subsection (1) is inadequate to put the seller in as good a position as performance would have done then the measure of damages is the profit (including reasonable overhead) which the seller would have made from full performance by the buyer, together with any incidental damages provided in this article (section 2-710), due allowance for costs reasonably incurred and due credit for payments or proceeds of resale.

Source:Laws 1963, c. 544, Art. II, § 2-708, p. 1759.


Annotations
    Where seller salvages returned goods which are not resalable, measure of damages controlled by this section and is recovery of lost profits plus expense or cost incurred in salvaging. Chicago Roller Skate Mfg. Co. v. Sokol Manuf. Co., 185 Neb. 515, 177 N.W.2d 25 (1970).

    Under statute of frauds as embodied in U.C.C., buyer by making a part payment and seller by accepting that part payment, make an enforceable contract only as to that portion of goods that could have been purchased by that part payment. In re Augustin Bros. Co., 460 F.2d 376 (8th Cir. 1972).

    Damages recoverable from wrongfully canceling buyer included contract price for cassettes less amount received on resale of cassettes, plus profit if contract had been completed, less amount paid on contract. Holiday Manuf. Co. v. B.A.S.F. Systems, Inc., 380 F.Supp. 1096 (D. Neb. 1974).

    COMMENT

    Prior Uniform Statutory Provision: Section 64, Uniform Sales Act.

    Changes: Rewritten.

    Purposes of Changes:

    To make it clear that:

    1. The prior uniform statutory provision is followed generally in setting the current market price at the time and place for tender as the standard by which damages for nonacceptance are to be determined. The time and place of tender is determined by reference to the section on manner of tender of delivery, and to the sections on the effect of such terms as F.O.B., F.A.S., C.I.F., C. & F., Ex Ship, and No Arrival, No Sale.

    In the event that there is no evidence available of the current market price at the time and place of tender, proof of a substitute market may be made under the section on determination and proof of market price. Furthermore, the section on the admissibility of market quotations is intended to ease materially the problem of providing competent evidence.

    2. The provision of this section permitting recovery of expected profit including reasonable overhead where the standard measure of damages is inadequate, together with the new requirement that price actions may be sustained only where resale is impractical, are designed to eliminate the unfair and economically wasteful results arising under the older law when fixed price articles were involved. This section permits the recovery of lost profits in all appropriate cases, which would include all standard priced goods. The normal measure there would be list price less cost to the dealer or list price less manufacturing cost to the manufacturer. It is not necessary to a recovery of "profit" to show a history of earnings, especially if a new venture is involved.

    3. In all cases the seller may recover incidental damages.

    Cross References:

    Point 1: Sections 2-319 through 2-324, 2-503, and 2-723.

    Point 2: Section 2-709.

    Point 3: Section 2-710.

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Contract". Section 1-201.

    "Seller". Section 2-103.


2-709. Action for the price.

(1) When the buyer fails to pay the price as it becomes due the seller may recover, together with any incidental damages under the next section, the price

(a) of goods accepted or of conforming goods lost or damaged within a commercially reasonable time after risk of their loss has passed to the buyer; and

(b) of goods identified to the contract if the seller is unable after reasonable effort to resell them at a reasonable price or the circumstances reasonably indicate that such effort will be unavailing.

(2) Where the seller sues for the price he must hold for the buyer any goods which have been identified to the contract and are still in his control except that if resale becomes possible he may resell them at any time prior to the collection of the judgment. The net proceeds of any such resale must be credited to the buyer and payment of the judgment entitles him to any goods not resold.

(3) After the buyer has wrongfully rejected or revoked acceptance of the goods or has failed to make a payment due or has repudiated (section 2-610), a seller who is held not entitled to the price under this section shall nevertheless be awarded damages for nonacceptance under the preceding section.

Source:Laws 1963, c. 544, Art. II, § 2-709, p. 1759.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: Section 63, Uniform Sales Act.

    Changes: Rewritten, important commercially needed changes being incorporated.

    Purposes of Changes:

    To make it clear that:

    1. Neither the passing of title to the goods nor the appointment of a day certain for payment is now material to a price action.

    2. The action for the price is now generally limited to those cases where resale of the goods is impracticable except where the buyer has accepted the goods or where they have been destroyed after risk of loss has passed to the buyer.

    3. This section substitutes an objective test by action for the former "not readily resalable" standard. An action for the price under subsection (1)(b) can be sustained only after a "reasonable effort to resell" the goods "at reasonable price" has actually been made or where the circumstances "reasonably indicate" that such an effort will be unavailing.

    4. If a buyer is in default not with respect to the price, but on an obligation to make an advance, the seller should recover not under this section for the price as such, but for the default in the collateral (though coincident) obligation to finance the seller. If the agreement between the parties contemplates that the buyer will acquire, on making the advance, a security interest in the goods, the buyer on making the advance has such an interest as soon as the seller has rights in the agreed collateral. See section 9-204.

    5. "Goods accepted" by the buyer under subsection (1)(a) include only goods as to which there has been no justified revocation of acceptance, for such a revocation means that there has been a default by the seller which bars his or her rights under this section. "Goods lost or damaged" are covered by the section on risk of loss. "Goods identified to the contract" under subsection (1)(b) are covered by the section on identification and the section on identification notwithstanding breach.

    6. This section is intended to be exhaustive in its enumeration of cases where an action for the price lies.

    7. If the action for the price fails, the seller may nonetheless have proved a case entitling him or her to damages for nonacceptance. In such a situation, subsection (3) permits recovery of those damages in the same action.

    Cross References:

    Point 4: Section 1-106.

    Point 5: Sections 2-501, 2-509, 2-510, and 2-704.

    Point 7: Section 2-708.

    Definitional Cross References:

    "Action". Section 1-201.

    "Buyer". Section 2-103.

    "Conforming". Section 2-106.

    "Contract". Section 1-201.

    "Goods". Section 2-105.

    "Seller". Section 2-103.


2-710. Seller's incidental damages.

Incidental damages to an aggrieved seller include any commercially reasonable charges, expenses or commissions incurred in stopping delivery, in the transportation, care and custody of goods after the buyer's breach, in connection with return or resale of the goods or otherwise resulting from the breach.

Source:Laws 1963, c. 544, Art. II, § 2-710, p. 1760.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: See sections 64 and 70, Uniform Sales Act.

    Purposes:

    To authorize reimbursement of the seller for expenses reasonably incurred by him or her as a result of the buyer's breach. The section sets forth the principal normal and necessary additional elements of damage flowing from the breach but intends to allow all commercially reasonable expenditures made by the seller.

    Definitional Cross References:

    "Aggrieved party". Section 1-201.

    "Buyer". Section 2-103.

    "Goods". Section 2-105.

    "Seller". Section 2-103.


2-711. Buyer's remedies in general; buyer's security interest in rejected goods.

(1) Where the seller fails to make delivery or repudiates or the buyer rightfully rejects or justifiably revokes acceptance then with respect to any goods involved, and with respect to the whole if the breach goes to the whole contract (section 2-612), the buyer may cancel and whether or not he has done so may in addition to recovering so much of the price as has been paid

(a) "cover" and have damages under the next section as to all the goods affected whether or not they have been identified to the contract; or

(b) recover damages for nondelivery as provided in this article (section 2-713).

(2) Where the seller fails to deliver or repudiates the buyer may also

(a) if the goods have been identified recover them as provided in this article (section 2-502); or

(b) in a proper case obtain specific performance or replevy the goods as provided in this article (section 2-716).

(3) On rightful rejection or justifiable revocation of acceptance a buyer has a security interest in goods in his possession or control for any payments made on their price and any expenses reasonably incurred in their inspection, receipt, transportation, care and custody and may hold such goods and resell them in like manner as an aggrieved seller (section 2-706).

Source:Laws 1963, c. 544, Art. II, § 2-711, p. 1760.


Annotations
    Where seller fails to deliver, buyer may cancel, recover payments made, and "cover" and have damages for purchase of substitute goods. Farmer's Union Co-op Co. of Mead v. Flamme Brothers, 196 Neb. 699, 245 N.W.2d 464 (1976).

    COMMENT

    Prior Uniform Statutory Provision: No comparable index section; subsection (3) — section 69(5), Uniform Sales Act.

    Changes: The prior uniform statutory provision is generally continued and expanded in subsection (3).

    Purposes of Changes and New Matter:

    1. To index in this section the buyer's remedies, subsection (1) covering those remedies permitting the recovery of money damages, and subsection (2) covering those which permit reaching the goods themselves. The remedies listed here are those available to a buyer who has not accepted the goods or who has justifiably revoked his or her acceptance. The remedies available to a buyer with regard to goods finally accepted appear in the section dealing with breach in regard to accepted goods. The buyer's right to proceed as to all goods when the breach is as to only some of the goods is determined by the section on breach in installment contracts and by the section on partial acceptance.

    Despite the seller's breach, proper retender of delivery under the section on cure of improper tender or replacement can effectively preclude the buyer's remedies under this section, except for any delay involved.

    2. To make it clear in subsection (3) that the buyer may hold and resell rejected goods if he or she has paid a part of the price or incurred expenses of the type specified. "Paid" as used here includes acceptance of a draft or other time negotiable instrument or the signing of a negotiable note. His or her freedom of resale is coextensive with that of a seller under this article except that the buyer may not keep any profit resulting from the resale and is limited to retaining only the amount of the price paid and the costs involved in the inspection and handling of the goods. The buyer's security interest in the goods is intended to be limited to the items listed in subsection (3), and the buyer is not permitted to retain such funds as he or she might believe adequate for his or her damages. The buyer's right to cover, or to have damages for nondelivery, is not impaired by his or her exercise of his or her right of resale.

    3. It should also be noted that the code requires its remedies to be liberally administered and provides that any right or obligation which it declares is enforceable by action unless a different effect is specifically prescribed (section 1-106).

    Cross References:

    Point 1: Sections 2-508, 2-601(c), 2-608, 2-612, and 2-714.

    Point 2: Section 2-706.

    Point 3: Section 1-106.

    Definitional Cross References:

    "Aggrieved party". Section 1-201.

    "Buyer". Section 2-103.

    "Cancellation". Section 2-106.

    "Contract". Section 1-201.

    "Cover". Section 2-712.

    "Goods". Section 2-105.

    "Notifies". Section 1-201.

    "Receipt" of goods. Section 2-103.

    "Remedy". Section 1-201.

    "Security interest". Section 1-201.

    "Seller". Section 2-103.


2-712. Cover; buyer's procurement of substitute goods.

(1) After a breach within the preceding section the buyer may "cover" by making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller.

(2) The buyer may recover from the seller as damages the difference between the cost of cover and the contract price together with any incidental or consequential damages as hereinafter defined (section 2-715), but less expenses saved in consequence of the seller's breach.

(3) Failure of the buyer to effect cover within this section does not bar him from any other remedy.

Source:Laws 1963, c. 544, Art. II, § 2-712, p. 1761.


Annotations
    Where seller fails to deliver, buyer may cancel, recover payments made, and "cover" and have damages for purchase of substitute goods. Farmer's Union Co-op Co. of Mead v. Flamme Brothers, 196 Neb. 699, 245 N.W.2d 464 (1976).

    Consequential damages from seller's breach include any loss resulting from general or particular requirements or needs of which seller had reason to know at time of contracting, and which could not reasonably be prevented by cover or otherwise. National Farmers Organization, Inc. v. McCook Feed & Supply Co., 196 Neb. 424, 243 N.W.2d 335 (1976).

    COMMENT

    Prior Uniform Statutory Provision: None.

    Purposes:

    1. This section provides the buyer with a remedy aimed at enabling him or her to obtain the goods he or she needs thus meeting his or her essential need. This remedy is the buyer's equivalent of the seller's right to resell.

    2. The definition of "cover" under subsection (1) envisages a series of contracts or sales, as well as a single contract or sale; goods not identical with those involved but commercially usable as reasonable substitutes under the circumstances of the particular case; and contracts on credit or delivery terms differing from the contract in breach, but again reasonable under the circumstances. The test of proper cover is whether at the time and place the buyer acted in good faith and in a reasonable manner, and it is immaterial that hindsight may later prove that the method of cover used was not the cheapest or most effective.

    The requirement that the buyer must cover "without unreasonable delay" is not intended to limit the time necessary for him or her to look around and decide as to how he or she may best effect cover. The test here is similar to that generally used in this article as to reasonable time and seasonable action.

    3. Subsection (3) expresses the policy that cover is not a mandatory remedy for the buyer. The buyer is always free to choose between cover and damages for nondelivery under the next section.

    However, this subsection must be read in conjunction with the section which limits the recovery of consequential damages to such as could not have been obviated by cover. Moreover, the operation of the section on specific performance of contracts for "unique" goods must be considered in this connection for availability of the goods to the particular buyer for his or her particular needs is the test for that remedy and inability to cover is made an express condition to the right of the buyer to replevy the goods.

    4. This section does not limit cover to merchants, in the first instance. It is the vital and important remedy for the consumer buyer as well. Both are free to use cover: The domestic or nonmerchant consumer is required only to act in normal good faith while the merchant buyer must also observe all reasonable commercial standards of fair dealing in the trade, since this falls within the definition of good faith on his or her part.

    Cross References:

    Point 1: Section 2-706.

    Point 2: Section 1-204.

    Point 3: Sections 2-713, 2-715, and 2-716.

    Point 4: Section 1-203.

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Contract". Section 1-201.

    "Good faith". Section 2-103.

    "Goods". Section 2-105.

    "Purchase". Section 1-201.

    "Remedy". Section 1-201.

    "Seller". Section 2-103.


2-713. Buyer's damages for nondelivery or repudiation.

(1) Subject to the provisions of this article with respect to proof of market price (section 2-723), the measure of damages for nondelivery or repudiation by the seller is the difference between the market price at the time when the buyer learned of the breach and the contract price together with any incidental and consequential damages provided in this article (section 2-715), but less expenses saved in consequence of the seller's breach.

(2) Market price is to be determined as of the place for tender or, in cases of rejection after arrival or revocation of acceptance, as of the place of arrival.

Source:Laws 1963, c. 544, Art. II, § 2-713, p. 1762.


Annotations
    Measure of damages for nondelivery or repudiation by seller is the difference between market price and contract price at the place of tender at the time the buyer learns of the breach. Burgess v. Curly Olney's, Inc., 198 Neb. 153, 251 N.W.2d 888 (1977).

    Consequential damages from seller's breach include any loss resulting from general or particular requirements or needs of which seller had reason to know at time of contracting, and which could not reasonably be prevented by cover or otherwise. National Farmers Organization, Inc. v. McCook Feed & Supply Co., 196 Neb. 424, 243 N.W.2d 335 (1976).

    The measure of damages for a buyer upon anticipatory repudiation by the seller under subsection (1) of this section is the difference between the contract price and the price of the goods on the date of repudiation, so long as it would be commercially reasonable for the buyer to cover on the date of repudiation. Trinidad Bean & Elev. Co. v. Frosh, 1 Neb. App. 281, 494 N.W.2d 347 (1992).

    COMMENT

    Prior Uniform Statutory Provision: Section 67(3), Uniform Sales Act.

    Changes: Rewritten.

    Purposes of Changes:

    To clarify the former rule so that:

    1. The general baseline adopted in this section uses as a yardstick the market in which the buyer would have obtained cover had he or she sought that relief. So the place for measuring damages is the place of tender (or the place of arrival if the goods are rejected or their acceptance is revoked after reaching their destination) and the crucial time is the time at which the buyer learns of the breach.

    2. The market or current price to be used in comparison with the contract price under this section is the price for goods of the same kind and in the same branch of trade.

    3. When the current market price under this section is difficult to prove the section on determination and proof of market price is available to permit a showing of a comparable market price or, where no market price is available, evidence of spot sale prices is proper. Where the unavailability of a market price is caused by a scarcity of goods of the type involved, a good case is normally made for specific performance under this article. Such scarcity conditions, moreover, indicate that the price has risen and under the section providing for liberal administration of remedies, opinion evidence as to the value of the goods would be admissible in the absence of a market price and a liberal construction of allowable consequential damages should also result.

    4. This section carries forward the standard rule that the buyer must deduct from his or her damages any expenses saved as a result of the breach.

    5. The present section provides a remedy which is completely alternative to cover under the preceding section and applies only when and to the extent that the buyer has not covered.

    Cross References:

    Point 3: Sections 1-106, 2-716, and 2-723.

    Point 5: Section 2-712.

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Contract". Section 1-201.

    "Seller". Section 2-103.


2-714. Buyer's damages for breach in regard to accepted goods.

(1) Where the buyer has accepted goods and given notification (subsection (3) of section 2-607) he may recover as damages for any nonconformity of tender the loss resulting in the ordinary course of events from the seller's breach as determined in any manner which is reasonable.

(2) The measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount.

(3) In a proper case any incidental and consequential damages under the next section may also be recovered.

Source:Laws 1963, c. 544, Art. II, § 2-714, p. 1762.


Annotations
    If the buyer accepts defective goods, damages are measured under this section. McCoolidge v. Oyvetsky, 292 Neb. 955, 874 N.W.2d 892 (2016).

    The existence of "special circumstances" under this section is not a precondition to a buyer's recovery of incidental and consequential damages under section 2-715. McCoolidge v. Oyvetsky, 292 Neb. 955, 874 N.W.2d 892 (2016).

    In a warranty action against the manufacturer of an automatic collator, failure of plaintiff to present even a scintilla of evidence as to the value of the collator in the condition accepted or the reasonable expenditures necessary to make the collator conform to the warranty entitled defendant to a directed verdict. Settell's Inc. v. Pitney Bowes, Inc., 209 Neb. 26, 305 N.W.2d 896 (1981).

    Damages for breach of warranty are determined on the date of acceptance of nonconforming goods. Alliance Tractor & Implement Co. v. Lukens Tool & Die Co., 199 Neb. 489, 260 N.W.2d 193 (1977).

    Breach of warranty issue supported by evidence of representation that milk production would be increased by feeding seller's feed supplement in amounts as instructed, and proof of loss in production thereby, but directed verdict for defendant affirmed because purchaser failed to prove extent of damages therefrom. Shotkoski v. Standard Chemical Manuf. Co., 195 Neb. 22, 237 N.W.2d 92 (1975).

    Statute is equivalent of the diminished value rule, which under some circumstances requires consideration of the cost of replacement or repair. T.O. Haas Tire Co. v. Futura Coatings, Inc., 2 Neb. App. 1, 507 N.W.2d 297 (1993).

    Typical measure of damages for goods is the difference in the market price between goods as warranted and goods received, measured at the time and place of acceptance. Lackawanna Leather Co. v. Martin & Stewart, Ltd., 730 F.2d 1197 (8th Cir. 1984).

    Rejection of breach of warranty instruction as regards manufacturer was not error where alleged failure to warn of danger was not proximate cause of injury. While a manufacturer who follows specifications of another, if such specifications are not obviously dangerous, may not be liable to the user of the product in negligence or strict tort liability, that does not preclude liability based on breach of implied warranty. Brassette v. Burlington Northern Inc., 687 F.2d 153 (8th Cir. 1982).

    Once city notified contractor seller of sewage treatment plant of contractor seller's breach of contract, although city had accepted plant, city was entitled to recover damages for seller's breach and for incidental and consequential damages. Omaha Pollution Control Corp. v. Carver-Greenfield Corp., 413 F.Supp. 1069 (D. Neb. 1976).

    COMMENT

    Prior Uniform Statutory Provision: Section 69(6) and (7), Uniform Sales Act.

    Changes: Rewritten.

    Purposes of Changes:

    1. This section deals with the remedies available to the buyer after the goods have been accepted and the time for revocation of acceptance has gone by. In general this section adopts the rule of the prior uniform statutory provision for measuring damages where there has been a breach of warranty as to goods accepted, but goes further to lay down an explicit provision as to the time and place for determining the loss.

    The section on deduction of damages from price provides an additional remedy for a buyer who still owes part of the purchase price, and frequently the two remedies will be available concurrently. The buyer's failure to notify of his or her claim under the section on effects of acceptance, however, operates to bar his or her remedies under either that section or the present section.

    2. The "nonconformity" referred to in subsection (1) includes not only breaches of warranties but also any failure of the seller to perform according to his or her obligations under the contract. In the case of such nonconformity, the buyer is permitted to recover for his or her loss "in any manner which is reasonable".

    3. Subsection (2) describes the usual, standard, and reasonable method of ascertaining damages in the case of breach of warranty but it is not intended as an exclusive measure. It departs from the measure of damages for nondelivery in utilizing the place of acceptance rather than the place of tender. In some cases the two may coincide, as where the buyer signifies his or her acceptance upon the tender. If, however, the nonconformity is such as would justify revocation of acceptance, the time and place of acceptance under this section is determined as of the buyer's decision not to revoke.

    4. The incidental and consequential damages referred to in subsection (3), which will usually accompany an action brought under this section, are discussed in detail in the comment on the next section.

    Cross References:

    Point 1: Compare section 2-711; sections 2-607 and 2-717.

    Point 2: Section 2-106.

    Point 3: Sections 2-608 and 2-713.

    Point 4: Section 2-715.

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Conform". Section 2-106.

    "Goods". Section 2-105.

    "Notification". Section 1-201.

    "Seller". Section 2-103.


2-715. Buyer's incidental and consequential damages.

(1) Incidental damages resulting from the seller's breach include expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay or other breach.

(2) Consequential damages resulting from the seller's breach include

(a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and

(b) injury to person or property proximately resulting from any breach of warranty.

Source:Laws 1963, c. 544, Art. II, § 2-715, p. 1762.


Annotations
    1. Nature of incidental and consequential damages

    2. Miscellaneous

    1. Nature of incidental and consequential damages

    Consequential damages under this section include the buyer's loss of use of the goods. McCoolidge v. Oyvetsky, 292 Neb. 955, 874 N.W.2d 892 (2016).

    Incidental damages under this section include the cost of storing defective goods. McCoolidge v. Oyvetsky, 292 Neb. 955, 874 N.W.2d 892 (2016).

    Lost profits resulting from increased labor costs and decreased revenues discussed and distinguished. El Fredo Pizza, Inc. v. Roto-Flex Oven Co., 199 Neb. 697, 261 N.W.2d 358 (1978).

    Consequential damages resulting from the seller's breach of contract include any loss resulting from general or particular requirements and needs of which the seller, when contracting, knew and which could not be reasonably prevented. Burgess v. Curly Olney's, Inc., 198 Neb. 153, 251 N.W.2d 888 (1977).

    Consequential damages from seller's breach include any loss resulting from general or particular requirements or needs of which seller had reason to know at time of contracting, and which could not reasonably be prevented by cover or otherwise. National Farmers Organization, Inc. v. McCook Feed & Supply Co., 196 Neb. 424, 243 N.W.2d 335 (1976).

    Consequential damages, as defined in subsection (2) of this section, occur as a consequence of special circumstances known or reasonably supposed to have been contemplated by the parties when the contract was made. Adams v. American Cyanamid Co., 1 Neb. App. 337, 498 N.W.2d 577 (1992).

    2. Miscellaneous

    The existence of "special circumstances" under section 2-714 is not a precondition to a buyer's recovery of incidental and consequential damages under this section. McCoolidge v. Oyvetsky, 292 Neb. 955, 874 N.W.2d 892 (2016).

    In a warranty action against the manufacturer of an automatic collator, plaintiff's failure to prove what further profits would have been made had the collator functioned as warranted entitled defendant to a directed verdict as to consequential damages. Plaintiff's failure to prove the cost of the job if the collator had been used prevented the determination of the increase in costs of manual collation, thereby entitling defendant to a directed verdict as to consequential damages. Settell's, Inc. v. Pitney Bowes, Inc., 209 Neb. 26, 305 N.W.2d 896 (1981).

    Breach of warranty issue supported by evidence of representation that milk production would be increased by feeding seller's feed supplement in amounts as instructed, and proof of loss in production thereby, but directed verdict for defendant affirmed because purchaser failed to prove extent of damages therefrom. Shotkoski v. Standard Chemical Manuf. Co., 195 Neb. 22, 237 N.W.2d 92 (1975).

    Once city notified contractor seller of sewage treatment plant of contractor seller's breach of contract, although city had accepted plant, city was entitled to recover damages for seller's breach and for incidental and consequential damages. Omaha Pollution Control Corp. v. Carver-Greenfield Corp., 413 F.Supp. 1069 (D. Neb. 1976).

    COMMENT

    Prior Uniform Statutory Provisions: Subsection (2)(b) — sections 69(7) and 70, Uniform Sales Act.

    Changes: Rewritten.

    Purposes of Changes and New Matter:

    1. Subsection (1) is intended to provide reimbursement for the buyer who incurs reasonable expenses in connection with the handling of rightfully rejected goods or goods whose acceptance may be justifiably revoked, or in connection with effecting cover where the breach of the contract lies in nonconformity or nondelivery of the goods. The incidental damages listed are not intended to be exhaustive but are merely illustrative of the typical kinds of incidental damage.

    2. Subsection (2) operates to allow the buyer, in an appropriate case, any consequential damages which are the result of the seller's breach. The "tacit agreement" test for the recovery of consequential damages is rejected. Although the older rule at common law which made the seller liable for all consequential damages of which he or she had "reason to know" in advance is followed, the liberality of that rule is modified by refusing to permit recovery unless the buyer could not reasonably have prevented the loss by cover or otherwise. Subparagraph (2) carries forward the provisions of the prior uniform statutory provision as to consequential damages resulting from breach of warranty, but modifies the rule by requiring first that the buyer attempt to minimize his or her damages in good faith, either by cover or otherwise.

    3. In the absence of excuse under the section on merchant's excuse by failure of presupposed conditions, the seller is liable for consequential damages in all cases where he or she had reason to know of the buyer's general or particular requirements at the time of contracting. It is not necessary that there be a conscious acceptance of an insurer's liability on the seller's part, nor is his or her obligation for consequential damages limited to cases in which he or she fails to use due effort in good faith.

    Particular needs of the buyer must generally be made known to the seller while general needs must rarely be made known to charge the seller with knowledge.

    Any seller who does not wish to take the risk of consequential damages has available the section on contractual limitation of remedy.

    4. The burden of proving the extent of loss incurred by way of consequential damage is on the buyer, but the section on liberal administration of remedies rejects any doctrine of certainty which requires almost mathematical precision in the proof of loss. Loss may be determined in any manner which is reasonable under the circumstances.

    5. Subsection (2)(b) states the usual rule as to breach of warranty, allowing recovery for injuries "proximately" resulting from the breach. Where the injury involved follows the use of goods without discovery of the defect causing the damage, the question of "proximate" cause turns on whether it was reasonable for the buyer to use the goods without such inspection as would have revealed the defects. If it was not reasonable for him or her to do so, or if he or she did in fact discover the defect prior to his or her use, the injury would not proximately result from the breach of warranty.

    6. In the case of sale of wares to one in the business of reselling them, resale is one of the requirements of which the seller has reason to know within the meaning of subsection (2)(a).

    Cross References:

    Point 1: Section 2-608.

    Point 3: Sections 1-203, 2-615, and 2-719.

    Point 4: Section 1-106.

    Definitional Cross References:

    "Cover". Section 2-712.

    "Goods". Section 2-105.

    "Person". Section 1-201.

    "Receipt" of goods. Section 2-103.

    "Seller". Section 2-103.


2-716. Buyer's right to specific performance or replevin.

(1) Specific performance may be decreed where the goods are unique or in other proper circumstances.

(2) The decree for specific performance may include such terms and conditions as to payment of the price, damages, or other relief as the court may deem just.

(3) The buyer has a right of replevin for goods identified to the contract if after reasonable effort he or she is unable to effect cover for such goods or the circumstances reasonably indicate that such effort will be unavailing or if the goods have been shipped under reservation and satisfaction of the security interest in them has been made or tendered. In the case of goods bought for personal, family, or household purposes, the buyer's right of replevin vests upon acquisition of a special property, even if the seller had not then repudiated or failed to deliver.

Source:Laws 1963, c. 544, Art. II, § 2-716, p. 1763; Laws 1999, LB 550, § 58.    


Annotations
    Replevin is not available to a buyer of goods that have not been identified to the contract. Putnam Ranches, Inc. v. Corkle, 189 Neb. 533, 203 N.W.2d 502 (1973).

    COMMENT

    Prior Uniform Statutory Provision: Section 68, Uniform Sales Act.

    Changes: Rephrased.

    Purposes of Changes:

    To make it clear that:

    1. The present section continues in general prior policy as to specific performance and injunction against breach. However, without intending to impair in any way the exercise of the court's sound discretion in the matter, this article seeks to further a more liberal attitude than some courts have shown in connection with the specific performance of contracts of sale.

    2. In view of this article's emphasis on the commercial feasibility of replacement, a new concept of what are "unique" goods is introduced under this section. Specific performance is no longer limited to goods which are already specific or ascertained at the time of contracting. The test of uniqueness under this section must be made in terms of the total situation which characterizes the contract. Output and requirements contracts involving a particular or peculiarly available source or market present today the typical commercial specific performance situation, as contrasted with contracts for the sale of heirlooms or priceless works of art which were usually involved in the older cases. However, uniqueness is not the sole basis of the remedy under this section for the relief may also be granted "in other proper circumstances" and inability to cover is strong evidence of "other proper circumstances".

    3. The legal remedy of replevin is given to the buyer in cases in which cover is reasonably unavailable and goods have been identified to the contract. This is in addition to the buyer's right to recover identified goods under section 2-502. For consumer goods, the buyer's right to replevin vests upon the buyer's acquisition of a special property, which occurs upon identification of the goods to the contract. See section 2-501. Inasmuch as a secured party normally acquires no greater rights in its collateral than its debtor had or had power to convey, see section 2-403(1) (first sentence), a buyer who acquires a right of replevin under subsection (3) will take free of a security interest created by the seller if it attaches to the goods after the goods have been identified to the contract. The buyer will take free, even if the buyer does not buy in ordinary course and even if the security interest is perfected. Of course, to the extent that the buyer pays the price after the security interest attaches, the payments will constitute proceeds of the security interest.

    4. This section is intended to give the buyer rights to the goods comparable to the seller's rights to the price.

    5. If a negotiable document of title is outstanding, the buyer's right of replevin relates of course to the document not directly to the goods. See article 7, especially section 7-602.

    Cross References:

    Point 3: Section 2-502.

    Point 4: Section 2-709.

    Point 5: Article 7.

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Goods". Section 2-105.

    "Rights". Section 1-201.


2-717. Deduction of damages from the price.

The buyer on notifying the seller of his intention to do so may deduct all or any part of the damages resulting from any breach of the contract from any part of the price still due under the same contract.

Source:Laws 1963, c. 544, Art. II, § 2-717, p. 1763.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: See section 69(1)(a), Uniform Sales Act.

    Purposes:

    1. This section permits the buyer to deduct from the price damages resulting from any breach by the seller and does not limit the relief to cases of breach of warranty as did the prior uniform statutory provision. To bring this provision into application the breach involved must be of the same contract under which the price in question is claimed to have been earned.

    2. The buyer, however, must give notice of his or her intention to withhold all or part of the price if he or she wishes to avoid a default within the meaning of the section on insecurity and right to assurances. In conformity with the general policies of this article, no formality of notice is required and any language which reasonably indicates the buyer's reason for holding up his or her payment is sufficient.

    Cross Reference:

    Point 2: Section 2-609.

    Definitional Cross References:

    "Buyer". Section 2-103.

    "Notifies". Section 1-201.


2-718. Liquidation or limitation of damages; deposits.

(1) Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty.

(2) Where the seller justifiably withholds delivery of goods because of the buyer's breach, the buyer is entitled to restitution of any amount by which the sum of his payments exceeds

(a) the amount to which the seller is entitled by virtue of terms liquidating the seller's damages in accordance with subsection (1), or

(b) in the absence of such terms, twenty percent of the value of the total performance for which the buyer is obligated under the contract or five hundred dollars, whichever is smaller.

(3) The buyer's right to restitution under subsection (2) is subject to offset to the extent that the seller establishes

(a) a right to recover damages under the provisions of this article other than subsection (1), and

(b) the amount or value of any benefits received by the buyer directly or indirectly by reason of the contract.

(4) Where a seller has received payment in goods their reasonable value or the proceeds of their resale shall be treated as payments for the purposes of subsection (2); but if the seller has notice of the buyer's breach before reselling goods received in part performance, his resale is subject to the conditions laid down in this article on resale by an aggrieved seller (section 2-706).

Source:Laws 1963, c. 544, Art. II, § 2-718, p. 1763.


Annotations
    Section requires that seller paid in goods credits buyer with reasonable value of goods. Chicago Roller Skate Mfg. Co. v. Sokol Manuf. Co., 185 Neb. 515, 177 N.W.2d 25 (1970).

    COMMENT

    Prior Uniform Statutory Provision: None.

    Purposes:

    1. Under subsection (1) liquidated damage clauses are allowed where the amount involved is reasonable in the light of the circumstances of the case. The subsection sets forth explicitly the elements to be considered in determining the reasonableness of a liquidated damage clause. A term fixing unreasonably large liquidated damages is expressly made void as a penalty. An unreasonably small amount would be subject to similar criticism and might be stricken under the section on unconscionable contracts or clauses.

    2. Subsection (2) refuses to recognize a forfeiture unless the amount of the payment so forfeited represents a reasonable liquidation of damages as determined under subsection (1). A special exception is made in the case of small amounts (20 percent of the price or $500, whichever is smaller) deposited as security. No distinction is made between cases in which the payment is to be applied on the price and those in which it is intended as security for performance. Subsection (2) is applicable to any deposit or downpayment or part payment. In the case of a deposit or turn-in of goods resold before the breach, the amount actually received on the resale is to be viewed as the deposit rather than the amount allowed the buyer for the trade-in. However, if the seller knows of the breach prior to the resale of the goods turned in, he or she must make reasonable efforts to realize their true value, and this is assured by requiring him or her to comply with the conditions laid down in the section on resale by an aggrieved seller.

    Cross References:

    Point 1: Section 2-302.

    Point 2: Section 2-706.

    Definitional Cross References:

    "Aggrieved party". Section 1-201.

    "Agreement". Section 1-201.

    "Buyer". Section 2-103.

    "Goods". Section 2-105.

    "Notice". Section 1-201.

    "Party". Section 1-201.

    "Remedy". Section 1-201.

    "Seller". Section 2-103.

    "Term". Section 1-201.


2-719. Contractual modification or limitation of remedy.

(1) Subject to the provisions of subsections (2) and (3) of this section and of the preceding section on liquidation and limitation of damages,

(a) the agreement may provide for remedies in addition to or in substitution for those provided in this article and may limit or alter the measure of damages recoverable under this article, as by limiting the buyer's remedies to return of the goods and repayment of the price or to repair and replacement of nonconforming goods or parts; and

(b) resort to a remedy as provided is optional unless the remedy is expressly agreed to be exclusive, in which case it is the sole remedy.

(2) Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in the Uniform Commercial Code.

(3) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.

Source:Laws 1963, c. 544, Art. II, § 2-719, p. 1764; Laws 1992, LB 861, § 13.


Annotations
    Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, the buyer may invoke any remedies available under the Uniform Commercial Code, including breach of warranties of merchantability or fitness for a particular purpose. The same is true regarding provable consequential damages, even though specifically excluded by the written warranty. John Deere Co. v. Hand, 211 Neb. 549, 319 N.W.2d 434 (1982).

    Discussed in opinion holding Uniform Commercial Code applicable rather than strict tort liability in case involving damage to all property. Hawkins Constr. Co. v. Matthews Co., Inc., 190 Neb. 546, 209 N.W.2d 643 (1973).

    COMMENT

    Prior Uniform Statutory Provision: None.

    Purposes:

    1. Under this section parties are left free to shape their remedies to their particular requirements and reasonable agreements limiting or modifying remedies are to be given effect.

    However, it is of the very essence of a sales contract that at least minimum adequate remedies be available. If the parties intend to conclude a contract for sale within this article they must accept the legal consequence that there be at least a fair quantum of remedy for breach of the obligations or duties outlined in the contract. Thus any clause purporting to modify or limit the remedial provisions of this article in an unconscionable manner is subject to deletion and in that event the remedies made available by this article are applicable as if the stricken clause had never existed. Similarly, under subsection (2), where an apparently fair and reasonable clause because of circumstances fails in its purpose or operates to deprive either party of the substantial value of the bargain, it must give way to the general remedy provisions of this article.

    2. Subsection (1)(b) creates a presumption that clauses prescribing remedies are cumulative rather than exclusive. If the parties intend the term to describe the sole remedy under the contract, this must be clearly expressed.

    3. Subsection (3) recognizes the validity of clauses limiting or excluding consequential damages but makes it clear that they may not operate in an unconscionable manner. Actually such terms are merely an allocation of unknown or undeterminable risks. The seller in all cases is free to disclaim warranties in the manner provided in section 2-316.

    Cross References:

    Point 1: Section 2-302.

    Point 3: Section 2-316.

    Definitional Cross References:

    "Agreement". Section 1-201.

    "Buyer". Section 2-103.

    "Conforming". Section 2-106.

    "Contract". Section 1-201.

    "Goods". Section 2-105.

    "Remedy". Section 1-201.

    "Seller". Section 2-103.


2-720. Effect of cancellation or rescission on claims for antecedent breach.

Unless the contrary intention clearly appears, expressions of "cancellation" or "rescission" of the contract or the like shall not be construed as a renunciation or discharge of any claim in damages for an antecedent breach.

Source:Laws 1963, c. 544, Art. II, § 2-720, p. 1765.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: None.

    Purpose:

    This section is designed to safeguard a person holding a right of action from any unintentional loss of rights by the ill-advised use of such terms as "cancellation", "rescission", or the like. Once a party's rights have accrued they are not to be lightly impaired by concessions made in business decency and without intention to forego them. Therefor, unless the cancellation of a contract expressly declares that it is "without reservation of rights", or the like, it cannot be considered to be a renunciation under this section.

    Cross Reference:

    Section 1-107.

    Definitional Cross References:

    "Cancellation". Section 2-106.

    "Contract". Section 1-201.


2-721. Remedies for fraud.

Remedies for material misrepresentation or fraud include all remedies available under this article for nonfraudulent breach. Neither rescission or a claim for rescission of the contract for sale nor rejection or return of the goods shall bar or be deemed inconsistent with a claim for damages or other remedy.

Source:Laws 1963, c. 544, Art. II, § 2-721, p. 1765.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: None.

    Purposes:

    To correct the situation by which remedies for fraud have been more circumscribed than the more modern and mercantile remedies for breach of warranty. Thus the remedies for fraud are extended by this section to coincide in scope with those for nonfraudulent breach. This section thus makes it clear that neither rescission of the contract for fraud nor rejection of the goods bars other remedies unless the circumstances of the case make the remedies incompatible.

    Definitional Cross References:

    "Contract for sale". Section 2-106.

    "Goods". Section 2-105.

    "Remedy". Section 1-201.


2-722. Who can sue third parties for injury to goods.

Where a third party so deals with goods which have been identified to a contract for sale as to cause actionable injury to a party to that contract

(a) a right of action against the third party is in either party to the contract for sale who has title to or a security interest or a special property or an insurable interest in the goods; and if the goods have been destroyed or converted a right of action is also in the party who either bore the risk of loss under the contract for sale or has since the injury assumed that risk as against the other;

(b) if at the time of the injury the party plaintiff did not bear the risk of loss as against the other party to the contract for sale and there is no arrangement between them for disposition of the recovery, his suit or settlement is, subject to his own interest, as a fiduciary for the other party to the contract;

(c) either party may with the consent of the other sue for the benefit of whom it may concern.

Source:Laws 1963, c. 544, Art. II, § 2-722, p. 1765.


Annotations
    COMMENT

    Prior Uniform Statutory Provision: None.

    Purposes:

    To adopt and extend somewhat the principle of the statutes which provide for suit by the real party in interest. The provisions of this section apply only after identification of the goods. Prior to that time only the seller has a right of action. During the period between identification and final acceptance (except in the case of revocation of acceptance) it is possible for both parties to have the right of action. Even after final acceptance both parties may have the right of action if the seller retains possession or otherwise retains an interest.

    Definitional Cross References:

    "Action". Section 1-201.

    "Buyer". Section 2-103.

    "Contract for sale". Section 2-106.

    "Goods". Section 2-105.

    "Party". Section 1-201.

    "Rights". Section 1-201.

    "Security interest". Section 1-201.


2-723. Proof of market price; time and place.

(1) If an action based on anticipatory repudiation comes to trial before the time for performance with respect to some or all of the goods, any damages based on market price (section 2-708 or section 2-713) shall be determined according to the price of such goods prevailing at the time when the aggrieved party learned of the repudiation.

(2) If evidence of a price prevailing at the times or places described in this article is not readily available the price prevailing within any reasonable time before or after the time described or at any other place which in commercial judgment or under usage of trade would serve as a reasonable substitute for the one described may be used, making any proper allowance for the cost of transporting the goods to or from such other place.

(3) Evidence of a relevant price prevailing at a time or place other than the one described in this article offered by one party is not admissible unless and until he has given the other party such notice as the court finds sufficient to prevent unfair surprise.

Source:Laws 1963, c. 544, Art. II, § 2-723, p. 1766.


Annotations
    The measure of damages for nondelivery of goods or repudiation by the seller of the contract for sale is the difference between the market price at the time when the buyer learned of the breach and the contract price, together with any incidental and consequential damages as provided in 2-715, U.C.C., but less expenses saved in consequence of the seller's breach. Carlson v. Nelson, 204 Neb. 765, 285 N.W.2d 505 (1979).

    Measure of damages for nondelivery or repudiation by seller is the difference between market price and contract price at the place of tender at the time the buyer learns of the breach. Burgess v. Curly Olney's, Inc., 198 Neb. 153, 251 N.W.2d 888 (1977).

    COMMENT

    Prior Uniform Statutory Provision: None.

    Purposes:

    To eliminate the most obvious difficulties arising in connection with the determination of market price, when that is stipulated as a measure of damages by some provision of this article. Where the appropriate market price is not readily available the court is here granted reasonable leeway in receiving evidence of prices current in other comparable markets or at other times comparable to the one in question. In accordance with the general principle of this article against surprise, however, a party intending to offer evidence of such a substitute price must give suitable notice to the other party.

    This section is not intended to exclude the use of any other reasonable method of determining market price or of measuring damages if the circumstances of the case make this necessary.

    Definitional Cross References:

    "Action". Section 1-201.

    "Aggrieved party". Section 1-201.

    "Goods". Section 2-105.

    "Notifies". Section 1-201.

    "Party". Section 1-201.

    "Reasonable time". Section 1-204.

    "Usage of trade". Section 1-205.


2-724. Repealed. Laws 1975, LB 279, § 75.

2-725. Statute of limitations in contracts for sale.

(1) An action for breach of any contract for sale must be commenced within four years after the cause of action has accrued. By the original agreement the parties may reduce the period of limitation to not less than one year but may not extend it.

(2) A cause of action accrues when the breach occurs, regardless of the aggrieved party's lack of knowledge of the breach. A breach of warranty occurs when tender of delivery is made, except that where a warranty explicitly extends to future performance of the goods and discovery of the breach must await the time of such performance the cause of action accrues when the breach is or should have been discovered.

(3) Where an action commenced within the time limited by subsection (1) is so terminated as to leave available a remedy by another action for the same breach such other action may be commenced after the expiration of the time limited and within six months after the termination of the first action unless the termination resulted from voluntary discontinuance or from dismissal for failure or neglect to prosecute.

(4) This section does not alter the law on tolling of the statute of limitations nor does it apply to causes of action which accrued before the Uniform Commercial Code became effective.

Source:Laws 1963, c. 544, Art. II, § 2-725, p. 1767; Laws 1992, LB 861, § 14.


Annotations
    1. Future performance exception

    2. Section not applicable

    3. Miscellaneous

    1. Future performance exception

    Pursuant to subsection (2) of this section, in order to constitute a future performance warranty, the terms of the warranty must unambiguously indicate that the manufacturer is warranting the future performance of the good for a specified period of time. Controlled Environ. Constr. v. Key Indus. Refrig., 266 Neb. 927, 670 N.W.2d 771 (2003).

    Pursuant to subsection (2) of this section, the determination of a discovery date is essentially an inquiry into all of the facts and circumstances facing the buyer; thus, a court should examine all relevant evidence that bears on the buyer's discovery. Controlled Environ. Constr. v. Key Indus. Refrig., 266 Neb. 927, 670 N.W.2d 771 (2003).

    Pursuant to subsection (2) of this section, the mere existence of "repair or replace" language in a warranty will not disturb a finding that the warranty extends to future performance. Controlled Environ. Constr. v. Key Indus. Refrig., 266 Neb. 927, 670 N.W.2d 771 (2003).

    Pursuant to subsection (2) of this section, when a warranty extends to future performance, the statute of limitations is tolled and the cause of action does not begin to accrue until the breach of that warranty is or should have been discovered. The discovery analysis should focus on the buyer's knowledge of the nature and extent of the problem(s) with the goods. It is only when a buyer discovers, or should have discovered, facts sufficient to doubt the overall quality of the goods that subsection (2) is satisfied and the statute of limitations begins to run. Controlled Environ. Constr. v. Key Indus. Refrig., 266 Neb. 927, 670 N.W.2d 771 (2003).

    The future performance exception contained in subsection (2) of this section applies only to an express warranty and not to an implied warranty. Controlled Environ. Constr. v. Key Indus. Refrig., 266 Neb. 927, 670 N.W.2d 771 (2003).

    In order to meet the exception in subsection (2) of this section based on a warranty of future performance, the warranty must be an express rather than an implied warranty and the warranty must explicitly extend to future performance. A warranty to repair or replace, without more, is not an explicit warranty of future performance and will not extend the commencement of the 4-year statute of limitations set forth in subsection (1) of this section. Nebraska Popcorn, Inc. v. Wing, 258 Neb. 60, 602 N.W.2d 18 (1999).

    The future performance exception of this section applies only to express warranties and does not apply to implied warranties. Murphy v. Spelts-Schultz Lumber Co., 240 Neb. 275, 481 N.W.2d 422 (1992).

    An action for breach of warranty in the sale of goods must be commenced within four years of tender of delivery. The failure to discover the breach prevents the running of the statute only when the warranty explicitly extends to future performance, and an implied warranty cannot explicitly extend to future performance. Allan v. Massey-Ferguson, Inc., 221 Neb. 528, 378 N.W.2d 664 (1985).

    When an express warranty is created by operation of section 2-313(1)(b) so that certain contemplations of the parties are contained in the representation such that those representations constitute a part of the description of the goods and therefor become a part of the basis of the bargain and an express warranty is created thereby, such express warranty will necessarily extend to future performance if the representations relate to such, and discovery of a breach relating thereto must await the time of such performance; in such a situation, the cause will accrue when the breach is or should have been discovered, and not upon tender of delivery. Moore v. Puget Sound Plywood, 214 Neb. 14, 332 N.W.2d 212 (1983).

    An action for breach of warranty in the sale of goods must be commenced within four years of tender of delivery. Failure to discover the breach prevents the running of the statute only when the warranty explicitly extends to future performance. Grand Island School Dist. No. 2 v. Celotex Corp, 203 Neb. 559, 279 N.W.2d 603 (1979).

    2. Section not applicable

    The period of limitations contained in this section does not apply to sales indemnity actions. Hillcrest Country Club v. N.D. Judds Co., 236 Neb. 233, 461 N.W.2d 55 (1990).

    This section does not apply where a party is seeking indemnification. City of Wood River v. Geer-Melkus Constr. Co., 233 Neb. 179, 444 N.W.2d 305 (1989).

    3. Miscellaneous

    Subsection (1) of this section prohibits the parties, at least by original agreement, from extending the statute of limitations. Controlled Environ. Constr. v. Key Indus. Refrig., 266 Neb. 927, 670 N.W.2d 771 (2003).

    The limitations period was designed to be relatively short to serve as a point of finality for businesses after which they could destroy records without the fear of subsequent suits. Controlled Environ. Constr. v. Key Indus. Refrig., 266 Neb. 927, 670 N.W.2d 771 (2003).

    The statute of limitations accrues upon tender, unless the warranty extends to future performance. There is no exception for new warranties extended postsale, and the creation of such an exception is not a matter for this court. Controlled Environ. Constr. v. Key Indus. Refrig., 266 Neb. 927, 670 N.W.2d 771 (2003).

    When a party brings a suit which is characterized as a suit in tort alleging negligence in the performance of a contract, the applicable statute of limitations is that which is applied to actions in tort. Thomas v. Countryside of Hastings, 246 Neb. 907, 524 N.W.2d 311 (1994).

    A breach of warranty alleging only economic loss is governed solely by the U.C.C. statute of limitations found in this section. Gillette Dairy, Inc. v. Mallard Mfg. Corp., 707 F.2d 351 (8th Cir. 1983).

    COMMENT

    Prior Uniform Statutory Provision: None.

    Purposes:

    To introduce a uniform statute of limitations for sales contracts, thus eliminating the jurisdictional variations and providing needed relief for concerns doing business on a nationwide scale whose contracts have heretofore been governed by several different periods of limitation depending upon the state in which the transaction occurred. This article takes sales contracts out of the general laws limiting the time for commencing contractual actions and selects a four-year period as the most appropriate to modern business practice. This is within the normal commercial record-keeping period.

    Subsection (1) permits the parties to reduce the period of limitation. The minimum period is set at one year. The parties may not, however, extend the statutory period.

    Subsection (2), providing that the cause of action accrues when the breach occurs, states an exception where the warranty extends to future performance.

    Subsection (3) states the saving provision included in many state statutes and permits an additional short period for bringing new actions, where suits begun within the four-year period have been terminated so as to leave a remedy still available for the same breach.

    Subsection (4) makes it clear that this article does not purport to alter or modify in any respect the law on tolling of the statute of limitations as it now prevails in the various jurisdictions.

    Definitional Cross References:

    "Action". Section 1-201.

    "Aggrieved party". Section 1-201.

    "Agreement". Section 1-201.

    "Contract for sale". Section 2-106.

    "Goods". Section 2-105.

    "Party". Section 1-201.

    "Remedy". Section 1-201.

    "Term". Section 1-201.

    "Termination". Section 2-106.


2A-101. Short title.

This article shall be known and may be cited as the Uniform Commercial Code—

Source:Laws 1991, LB 159, § 3.


Annotations
    COMMENT

    Rationale for Codification:

    There are several reasons for codifying the law with respect to leases of goods. An analysis of the case law as it applies to leases of goods suggests at least three significant issues to be resolved by codification. First, what is a lease? It is necessary to define lease to determine whether a transaction creates a lease or a security interest disguised as a lease. If the transaction creates a security interest disguised as a lease, the lessor will be required to file a financing statement or take other action to perfect its interest in the goods against third parties. There is no such requirement with respect to leases. Yet the distinction between a lease and a security interest disguised as a lease is not clear. Second, will the lessor be deemed to have made warranties to the lessee? If the transaction is a sale the express and implied warranties of article 2 of the code apply. However, the warranty law with respect to leases is uncertain. Third, what remedies are available to the lessor upon the lessee's default? If the transaction is a security interest disguised as a lease, the answer is stated in part 5 of the Article on Secured Transactions (Article 9). There is no clear answer with respect to leases.

    There are reasons to codify the law with respect to leases of goods in addition to those suggested by a review of the reported cases. The answer to this important question should not be limited to the issues raised in these cases. Is it not also proper to determine the remedies available to the lessee upon the lessor's default? It is, but that issue is not reached through a review of the reported cases. This is only one of the many issues presented in structuring, negotiating, and documenting a lease of goods.

    Statutory Analogue:

    After it was decided to proceed with the codification project, the drafting committee of the National Conference of Commissioners on Uniform State Laws looked for a statutory analogue, gradually narrowing the focus to the Article on Sales (Article 2) and the Article on Secured Transactions (Article 9). A review of the literature with respect to the sale of goods reveals that article 2 is predicated upon certain assumptions: Parties to the sales transaction frequently are without counsel; the agreement of the parties often is oral or evidenced by scant writings; obligations between the parties are bilateral; applicable law is influenced by the need to preserve freedom of contract. A review of the literature with respect to personal property security law reveals that article 9 is predicated upon very different assumptions: Parties to a secured transaction regularly are represented by counsel; the agreement of the parties frequently is reduced to a writing, extensive in scope; the obligations between the parties are essentially unilateral; and applicable law seriously limits freedom of contract.

    The lease is closer in spirit and form to the sale of goods than to the creation of a security interest. While parties to a lease are sometimes represented by counsel and their agreement is often reduced to a writing, the obligations of the parties are bilateral and the common law of leasing is dominated by the need to preserve freedom of contract. Thus the drafting committee concluded that article 2 was the appropriate statutory analogue.

    Issues:

    The drafting committee then identified and resolved several issues critical to codification:

    Scope: The scope of the article was limited to leases (section 2A-102). There was no need to include leases intended as security, i.e., security interests disguised as leases, as they are adequately treated in article 9. Further, even if leases intended as security were included, the need to preserve the distinction would remain, as policy suggests treatment significantly different from that accorded leases.

    Definition of Lease: Lease was defined to exclude leases intended as security (section 2A-103(1)(j)). Given the litigation to date a revised definition of security interest was suggested for inclusion in the code. (Section 1-201(37)). This revision sharpens the distinction between leases and security interests disguised as leases.

    Filing: The lessor was not required to file a financing statement against the lessee or take any other action to protect the lessor's interest in the goods (section 2A-301). The refined definition of security interest will more clearly signal the need to file to potential lessors of goods. Those lessors who are concerned will file a protective financing statement (section 9-505).

    Warranties: All of the express and implied warranties of the Article on Sales (Article 2) were included (sections 2A-210 through 2A-216), revised to reflect differences in lease transactions. The lease of goods is sufficiently similar to the sale of goods to justify this decision. Further, many courts have reached the same decision.

    Certificate of Title Laws: Many leasing transactions involve goods subject to certificate of title statutes. To avoid conflict with those statutes, this article is subject to them (section 2A-104(1)(a)).

    Consumer Leases: Many leasing transactions involve parties subject to consumer protection statutes or decisions. To avoid conflict with those laws this article is subject to them to the extent provided in section 2A-104(1)(c) and (2). Further, certain consumer protections have been incorporated in the article.

    Finance Leases: Certain leasing transactions substitute the supplier of the goods for the lessor as the party responsible to the lessee with respect to warranties and the like. The definition of finance lease (section 2A-103(1)(g)) was developed to describe these transactions. Various sections of the article implement the substitution of the supplier for the lessor, including sections 2A-209 and 2A-407. No attempt was made to fashion a special rule where the finance lessor is an affiliate of the supplier of goods; this is to be developed by the courts, case by case.

    Sale and Leaseback: Sale and leaseback transactions are becoming increasingly common. A number of state statutes treat transactions where possession is retained by the seller as fraudulent per se or prima facie fraudulent. That position is not in accord with modern practice and thus is changed by the article "if the buyer bought for value and in good faith" (section 2A-308(3)).

    Remedies: The article has not only provided for lessor's remedies upon default by the lessee (sections 2A-523 through 2A-532), but also for lessee's remedies upon default by the lessor (sections 2A-508 through 2A-522). This is a significant departure from article 9, which provides remedies only for the secured party upon default by the debtor. This difference is compelled by the bilateral nature of the obligations between the parties to a lease.

    Damages: Many leasing transactions are predicated on the parties' ability to stipulate an appropriate measure of damages in the event of default. The rule with respect to sales of goods (section 2-718) is not sufficiently flexible to accommodate this practice. Consistent with the common-law emphasis upon freedom to contract, the article has created a revised rule that allows greater flexibility with respect to leases of goods (section 2A-504(1)).

    History:

    This article is a revision of the Uniform Personal Property Leasing Act, which was approved by the National Conference of Commissioners on Uniform State Laws in August, 1985. However, it was believed that the subject matter of the Uniform Personal Property Leasing Act would be better treated as an article of the code. Thus, although the conference promulgated the Uniform Personal Property Leasing Act as a uniform law, activity was held in abeyance to allow time to restate the Uniform Personal Property Leasing Act as article 2A.

    In August, 1986 the conference approved and recommended this article (including conforming amendments to article 1 and article 9) for promulgation as an amendment to the code. In December, 1986 the Council of the American Law Institute approved and recommended this article (including conforming amendments to article 1 and article 9), with official comments, for promulgation as an amendment to the code. In March, 1987 the Permanent Editorial Board for the Uniform Commercial Code approved and recommended this article (including conforming amendments to article 1 and article 9), with official comments, for promulgation as an amendment to the code. In May, 1987 the American Law Institute approved and recommended this article (including conforming amendments to article 1 and article 9), with official comments, for promulgation as an amendment to the code. In August, 1987 the conference confirmed its approval of the final text of this article.

    Upon its initial promulgation, article 2A was rapidly enacted in several states, was introduced in a number of other states, and underwent bar association, law revision commission, and legislative study in still further states. In that process debate emerged, principally sparked by the study of article 2A by the California Bar Association, California's nonuniform amendments to article 2A, and articles appearing in a symposium on article 2A published after its promulgation in the Alabama Law Review. The debate chiefly centered on whether article 2A had struck the proper balance or was clear enough concerning the ability of a lessor to grant a security interest in its leasehold interest and in the residual, priority between a secured party and the lessee, and the lessor's remedy structure under article 2A.

    This debate over issues on which reasonable minds could and did differ began to affect the enactment effort for article 2A in a deleterious manner. Consequently, the Standby Committee for article 2A, composed predominantly of the former members of the drafting committee, reviewed the legislative actions and studies in the various states, and opened a dialogue with the principal proponents of the nonuniform amendments. Negotiations were conducted in conjunction with, and were facilitated by, a study of the uniform article and the nonuniform amendments by the New York Law Revision Commission. Ultimately, a consensus was reached, which has been approved by the membership of the conference, the Permanent Editorial Board, and the council of the institute. Rapid and uniform enactment of article 2A is expected as a result of the completed amendments. The article 2A experience reaffirms the essential viability of the procedures of the conference and the institute for creating and updating uniform state law in the commercial law area.

    Relationship of Article 2A to Other Articles:

    The Article on Sales provided a useful point of reference for codifying the law of leases. Many of the provisions of that article were carried over, changed to reflect differences in style, leasing terminology, or leasing practices. Thus, the official comments to those sections of article 2 whose provisions were carried over are incorporated by reference in article 2A, as well; further, any case law interpreting those provisions should be viewed as persuasive but not binding on a court when deciding a similar issue with respect to leases. Any change in the sequence that has been made when carrying over a provision from article 2 should be viewed as a matter of style, not substance. This is not to suggest that in other instances article 2A did not also incorporate substantially revised provisions of article 2, article 9, or otherwise where the revision was driven by a concern over the substance; but for the lack of a mandate, the drafting committee might well have made the same or a similar change in the statutory analogue. Those sections in article 2A include sections 2A-104, 2A-105, 2A-106, 2A-108(2) and (4), 2A-109(2), 2A-208, 2A-214(2) and (3)(a), 2A-216, 2A-303, 2A-306, 2A-503, 2A-504(3)(b), 2A-506(2), and 2A-515. For lack of relevance or significance not all of the provisions of article 2 were incorporated in article 2A.

    This codification was greatly influenced by the fundamental tenet of the common law as it has developed with respect to leases of goods: Freedom of the parties to contract. Note that, like all other articles of the code, the principles of construction and interpretation contained in article 1 are applicable throughout article 2A (section 2A-103(4)). These principles include the ability of the parties to vary the effect of the provisions of article 2A, subject to certain limitations including those that relate to the obligations of good faith, diligence, reasonableness, and care (section 1-102(3)). Consistent with those principles no negative inference is to be drawn by the episodic use of the phrase "unless otherwise agreed" in certain provisions of article 2A. Section 1-102(4). Indeed, the contrary is true, as the general rule in the code, including this article, is that the effect of the code's provisions may be varied by agreement. Section 1-102(3). This conclusion follows even where the statutory analogue contains the phrase and the correlative provision in article 2A does not.


2A-102. Scope.

This article applies to any transaction, regardless of form, that creates a lease.

Source:Laws 1991, LB 159, § 4.


Annotations
    COMMENT

    Uniform Statutory Source: Section 9-109. Throughout this article, unless otherwise stated, references to "section" are to other sections of the code.

    Changes: Substantially revised.

    Purposes:

    This article governs transactions as diverse as the lease of a hand tool to an individual for a few hours and the leveraged lease of a complex line of industrial equipment to a multinational organization for a number of years.

    To achieve that end it was necessary to provide that this article applies to any transaction, regardless of form, that creates a lease. Since lease is defined as a transfer of an interest in goods (section 2A-103(1)(j)) and goods is defined to include fixtures (section 2A-103(1)(h)), application is limited to the extent the transaction relates to goods, including fixtures. Further, since the definition of lease does not include a sale (section 2-106(1)) or retention or creation of a security interest (section 1-201(37)), application is further limited; sales and security interests are governed by other articles of the code.

    Finally, in recognition of the diversity of the transactions to be governed, the sophistication of many of the parties to these transactions, and the common-law tradition as it applies to the bailment for hire or lease, freedom of contract has been preserved. DeKoven, Proceedings After Default by the Lessee Under a True Lease of Equipment, in 1C P. Coogan, W. Hogan, D. Vagts, Secured Transactions Under the Uniform Commercial Code, section 29B.02(2) (1986). Thus, despite the extensive regulatory scheme established by this article, the parties to a lease will be able to create private rules to govern their transaction. Sections 2A-103(4) and 1-102(3). However, there are special rules in this article governing consumer leases, as well as other state and federal statutes, that may further limit freedom of contract with respect to consumer leases.

    A court may apply this article by analogy to any transaction, regardless of form, that creates a lease of personal property other than goods, taking into account the expressed intentions of the parties to the transaction and any differences between a lease of goods and a lease of other property. Such application has precedent as the provisions of the Article on Sales (Article 2) have been applied by analogy to leases of goods. E.g., Hawkland, The Impact of the Uniform Commercial Code on Equipment Leasing, 1972 Ill. L.F. 446; Murray, Under the Spreading Analogy of Article 2 of the Uniform Commercial Code, 39 Fordham L. Rev. 447 (1971). Whether such application would be appropriate for other bailments of personal property, gratuitous or for hire, should be determined by the facts of each case. See Mieske v. Bartell Drug Co., 92 Wash. 2d 40, 46-48, 593 P.2d 1308, 1312 (1979).

    Further, parties to a transaction creating a lease of personal property other than goods, or a bailment of personal property may provide by agreement that this article applies. Upholding the parties' choice is consistent with the spirit of this article.

    Cross References:

    Sections 1-102(3), 1-201(37), article 2, especially section 2-106(1), and sections 2A-103(1)(h), 2A-103(1)(j), and 2A-103(4).

    Definitional Cross Reference:

    "Lease". Section 2A-103(1)(j).


2A-103. Definitions and index of definitions.

(1) In this article unless the context otherwise requires:

(a) "Buyer in ordinary course of business" means a person who in good faith and without knowledge that the sale to him or her is in violation of the ownership rights or security interest or leasehold interest of a third party in the goods, buys in ordinary course from a person in the business of selling goods of that kind but does not include a pawnbroker. "Buying" may be for cash or by exchange of other property or on secured or unsecured credit and includes acquiring goods or documents of title under a preexisting contract for sale but does not include a transfer in bulk or as security for or in total or partial satisfaction of a money debt.

(b) "Cancellation" occurs when either party puts an end to the lease contract for default by the other party.

(c) "Commercial unit" means such a unit of goods as by commercial usage is a single whole for purposes of lease and division of which materially impairs its character or value on the market or in use. A commercial unit may be a single article, as a machine, or a set of articles, as a suite of furniture or a line of machinery, or a quantity, as a gross or carload, or any other unit treated in use or in the relevant market as a single whole.

(d) "Conforming" goods or performance under a lease contract means goods or performance that are in accordance with the obligations under the lease contract.

(e) "Consumer lease" means a lease that a lessor regularly engaged in the business of leasing or selling makes to a lessee who is an individual and who takes under the lease primarily for a personal, family, or household purpose, if the total payments to be made under the lease contract, excluding payments for options to renew or buy, do not exceed twenty-five thousand dollars.

(f) "Fault" means wrongful act, omission, breach, or default.

(g) "Finance lease" means a lease with respect to which:

(i) the lessor does not select, manufacture, or supply the goods;

(ii) the lessor acquires the goods or the right to possession and use of the goods in connection with the lease; and

(iii) one of the following occurs:

(A) the lessee receives a copy of the contract by which the lessor acquired the goods or the right to possession and use of the goods before signing the lease contract;

(B) the lessee's approval of the contract by which the lessor acquired the goods or the right to possession and use of the goods is a condition to effectiveness of the lease contract;

(C) the lessee, before signing the lease contract, receives an accurate and complete statement designating the promises and warranties, and any disclaimers of warranties, limitations or modifications of remedies, or liquidated damages, including those of a third party, such as the manufacturer of the goods, provided to the lessor by the person supplying the goods in connection with or as part of the contract by which the lessor acquired the goods or the right to possession and use of the goods; or

(D) if the lease is not a consumer lease, the lessor, before the lessee signs the lease contract, informs the lessee in writing (a) of the identity of the person supplying the goods to the lessor, unless the lessee has selected that person and directed the lessor to acquire the goods or the right to possession and use of the goods from that person, (b) that the lessee is entitled under this article to the promises and warranties, including those of any third party, provided to the lessor by the person supplying the goods in connection with or as part of the contract by which the lessor acquired the goods or the right to possession and use of the goods, and (c) that the lessee may communicate with the person supplying the goods to the lessor and receive an accurate and complete statement of those promises and warranties, including any disclaimers and limitations of them or of remedies.

(h) "Goods" means all things that are movable at the time of identification to the lease contract, or are fixtures (section 2A-309), but the term does not include money, documents, instruments, accounts, chattel paper, general intangibles, or minerals or the like, including oil and gas, before extraction. The term also includes the unborn young of animals.

(i) "Installment lease contract" means a lease contract that authorizes or requires the delivery of goods in separate lots to be separately accepted, even though the lease contract contains a clause "each delivery is a separate lease" or its equivalent.

(j) "Lease" means a transfer of the right to possession and use of goods for a term in return for consideration, but a sale, including a sale on approval or a sale or return, or retention or creation of a security interest is not a lease. Unless the context clearly indicates otherwise, the term includes a sublease.

(k) "Lease agreement" means the bargain, with respect to the lease, of the lessor and the lessee in fact as found in their language or by implication from other circumstances including course of dealing or usage of trade or course of performance as provided in this article. Unless the context clearly indicates otherwise, the term includes a sublease agreement.

(l) "Lease contract" means the total legal obligation that results from the lease agreement as affected by this article and any other applicable rules of law. Unless the context clearly indicates otherwise, the term includes a sublease contract.

(m) "Leasehold interest" means the interest of the lessor or the lessee under a lease contract.

(n) "Lessee" means a person who acquires the right to possession and use of goods under a lease. Unless the context clearly indicates otherwise, the term includes a sublessee.

(o) "Lessee in ordinary course of business" means a person who in good faith and without knowledge that the lease to him or her is in violation of the ownership rights or security interest or leasehold interest of a third party in the goods leases in ordinary course from a person in the business of selling or leasing goods of that kind but does not include a pawnbroker. "Leasing" may be for cash or by exchange of other property or on secured or unsecured credit and includes acquiring goods or documents of title under a preexisting lease contract but does not include a transfer in bulk or as security for or in total or partial satisfaction of a money debt.

(p) "Lessor" means a person who transfers the right to possession and use of goods under a lease. Unless the context clearly indicates otherwise, the term includes a sublessor.

(q) "Lessor's residual interest" means the lessor's interest in the goods after expiration, termination, or cancellation of the lease contract.

(r) "Lien" means a charge against or interest in goods to secure payment of a debt or performance of an obligation, but the term does not include a security interest.

(s) "Lot" means a parcel or a single article that is the subject matter of a separate lease or delivery, whether or not it is sufficient to perform the lease contract.

(t) "Merchant lessee" means a lessee that is a merchant with respect to goods of the kind subject to the lease.

(u) "Present value" means the amount as of a date certain of one or more sums payable in the future, discounted to the date certain. The discount is determined by the interest rate specified by the parties if the rate was not manifestly unreasonable at the time the transaction was entered into; otherwise, the discount is determined by a commercially reasonable rate that takes into account the facts and circumstances of each case at the time the transaction was entered into.

(v) "Purchase" includes taking by sale, lease, mortgage, security interest, pledge, gift, or any other voluntary transaction creating an interest in goods.

(w) "Sublease" means a lease of goods the right to possession and use of which was acquired by the lessor as a lessee under an existing lease.

(x) "Supplier" means a person from whom a lessor buys or leases goods to be leased under a finance lease.

(y) "Supply contract" means a contract under which a lessor buys or leases goods to be leased.

(z) "Termination" occurs when either party pursuant to a power created by agreement or law puts an end to the lease contract otherwise than for default.

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

"Accessions". Section 2A-310(1).
"Construction mortgage". Section 2A-309(1)(d).
"Encumbrance". Section 2A-309(1)(e).
"Fixtures". Section 2A-309(1)(a).
"Fixture filing". Section 2A-309(1)(b).
"Purchase money lease". Section 2A-309(1)(c).

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

"Account". Section 9-102(a)(2).
"Between merchants". Section 2-104(3).
"Buyer". Section 2-103(1)(a).
"Chattel paper". Section 9-102(a)(11).
"Consumer goods". Section 9-102(a)(23).
"Document". Section 9-102(a)(30).
"Entrusting". Section 2-403(3).
"General intangible". Section 9-102(a)(42).
"Good faith". Section 2-103(1)(b).
"Instrument". Section 9-102(a)(47).
"Merchant". Section 2-104(1).
"Mortgage". Section 9-102(a)(55).
"Pursuant to commitment". Section 9-102(a)(69).
"Receipt". Section 2-103(1)(c).
"Sale". Section 2-106(1).
"Sale on approval". Section 2-326.
"Sale or return". Section 2-326.
"Seller". Section 2-103(1)(d).

(4) In addition, article 1 contains general definitions and principles of construction and interpretation applicable throughout this article.



Annotations
    COMMENT

    (a) "Buyer in ordinary course of business".

    Section 1-201(9).

    (b) "Cancellation". Section 2-106(4). The effect of a cancellation is provided in section 2A-505(1).

    (c) "Commercial unit". Section 2-105(6).

    (d) "Conforming". Section 2-106(2).

    (e) "Consumer lease". New. This article includes a subset of rules that applies only to consumer leases. Sections 2A-106, 2A-108(2), 2A-108(4), 2A-109(2), 2A-221, 2A-309, 2A-406, 2A-407, 2A-504(3)(b), and 2A-516(3)(b).

    For a transaction to qualify as a consumer lease it must first qualify as a lease. Section 2A-103(1)(j). Note that this article regulates the transactional elements of a lease, including a consumer lease; consumer protection statutes, present and future, and existing consumer protection decisions are unaffected by this article. Section 2A-104(1)(c) and (2). Of course, article 2A as state law also is subject to federal consumer protection law.

    This definition is modeled after the definition of consumer lease in the Consumer Leasing Act, 15 U.S.C. section 1667 (1982), and in the Unif. Consumer Credit Code section 1.301(14), 7A U.L.A. 43 (1974). However, this definition of consumer lease differs from its models in several respects: The lessor can be a person regularly engaged either in the business of leasing or of selling goods, the lease need not be for a term exceeding four months, a lease primarily for an agricultural purpose is not covered, and whether there should be a limitation by dollar amount and its amount is left up to the individual states.

    This definition focuses on the parties as well as the transaction. If a lease is within this definition, the lessor must be regularly engaged in the business of leasing or selling, and the lessee must be an individual not an organization; note that a lease to two or more individuals having a common interest through marriage or the like is not excluded as a lease to an organization under section 1-201(28). The lessee must take the interest primarily for a personal, family, or household purpose. If required by the enacting state, total payments under the lease contract, excluding payments for options to renew or buy, cannot exceed the figure designated.

    (f) "Fault". Section 1-201(16).

    (g) "Finance lease". New. This article includes a subset of rules that applies only to finance leases. Sections 2A-209, 2A-211(2), 2A-212(1), 2A-213, 2A-219(1), 2A-220(1)(a), 2A-221, 2A-405(c), 2A-407, 2A-516(2), and 2A-517(1)(a) and (2).

    For a transaction to qualify as a finance lease it must first qualify as a lease. Section 2A-103(1)(j). Unless the lessor is comfortable that the transaction will qualify as a finance lease, the lease agreement should include provisions giving the lessor the benefits created by the subset of rules applicable to the transaction that qualifies as a finance lease under this article.

    A finance lease is the product of a three-party transaction. The supplier manufactures or supplies the goods pursuant to the lessee's specification, perhaps even pursuant to a purchase order, sales agreement, or lease agreement between the supplier and the lessee. After the prospective finance lease is negotiated, a purchase order, sales agreement, or lease agreement is entered into by the lessor (as buyer or prime lessee) or an existing order, agreement, or lease is assigned by the lessee to the lessor, and the lessor and the lessee then enter into a lease or sublease of the goods. Due to the limited function usually performed by the lessor, the lessee looks almost entirely to the supplier for representations, covenants, and warranties. If a manufacturer's warranty carries through, the lessee may also look to that. Yet, this definition does not restrict the lessor's function solely to the supply of funds; if the lessor undertakes or performs other functions, express warranties, covenants, and the common law will protect the lessee.

    This definition focuses on the transaction, not the status of the parties; to avoid confusion it is important to note that in other contexts, e.g., tax and accounting, the term finance lease has been used to connote different types of lease transactions, including leases that are disguised secured transactions. M. Rice, Equipment Financing, 62-71 (1981). A lessor who is a merchant with respect to goods of the kind subject to the lease may be a lessor under a finance lease. Many leases that are leases back to the seller of goods (section 2A-308(3)) will be finance leases. This conclusion is easily demonstrated by a hypothetical. Assume that B has bought goods from C pursuant to a sales contract. After delivery to and acceptance of the goods by B, B negotiates to sell the goods to A and simultaneously to lease the goods back from A, on terms and conditions that, we assume, will qualify the transaction as a lease. Section 2A-103(1)(j). In documenting the sale and lease back, B assigns the original sales contract between B, as buyer, and C, as seller, to A. A review of these facts leads to the conclusion that the lease from A to B qualifies as a finance lease, as all three conditions of the definition are satisfied. Subparagraph (i) is satisfied as A, the lessor, had nothing to do with the selection, manufacture, or supply of the equipment. Subparagraph (ii) is satisfied as A, the lessor, bought the equipment at the same time that A leased the equipment to B, which certainly is in connection with the lease. Finally, subparagraph (iii)(A) is satisfied as A entered into the sales contract with B at the same time that A leased the equipment back to B. B, the lessee, will have received a copy of the sales contract in a timely fashion.

    Subsection (i) requires the lessor to remain outside the selection, manufacture, and supply of the goods; that is the rationale for releasing the lessor from most of its traditional liability. The lessor is not prohibited from possession, maintenance, or operation of the goods, as policy does not require such prohibition. To insure the lessee's reliance on the supplier, and not on the lessor, subsection (ii) requires that the goods (where the lessor is the buyer of the goods) or that the right to possession and use of the goods (where the lessor is the prime lessee and the sublessor of the goods) be acquired in connection with the lease (or sublease) to qualify as a finance lease. The scope of the phrase "in connection with" is to be developed by the courts, case by case. Finally, as the lessee generally relies almost entirely upon the supplier for representations and covenants and upon the supplier or a manufacturer, or both, for warranties with respect to the goods, subsection (iii) requires that one of the following occur: (A) The lessee receive a copy of the supply contract before signing the lease contract; (B) the lessee's approval of the supply contract is a condition to the effectiveness of the lease contract; (C) the lessee receive a statement describing the promises and warranties and any limitations relevant to the lessee before signing the lease contract; or (D) before signing the lease contract and except in a consumer lease, the lessee receive a writing identifying the supplier (unless the supplier was selected and required by the lessee) and the rights of the lessee under section 2A-209, and advising the lessee a statement of promises and warranties is available from the supplier. Thus, even where oral supply orders or computer-placed supply orders are compelled by custom and usage the transaction may still qualify as a finance lease if the lessee approves the supply contract before the lease contract is effective and such approval was a condition to the effectiveness of the lease contract. Moreover, where the lessor does not want the lessee to see the entire supply contract, including price information, the lessee may be provided with a separate statement of the terms of the supply contract relevant to the lessee; promises between the supplier and the lessor that do not affect the lessee need not be included. The statement can be a restatement of those terms or a copy of portions of the supply contract with the relevant terms clearly designated. Any implied warranties need not be designated, but a disclaimer or modification of remedy must be designated. A copy of any manufacturer's warranty is sufficient if that is the warranty provided. However, a copy of any Regulation M disclosure given pursuant to 12 C.F.R. section 213.4(g) concerning warranties in itself is not sufficient since those disclosures need only briefly identify express warranties and need not include any disclaimer of warranty.

    If a transaction does not qualify as a finance lease, the parties may achieve the same result by agreement; no negative implications are to be drawn if the transaction does not qualify. Further, absent the application of special rules (fraud, duress, and the like), a lease that qualifies as a finance lease and is assigned by the lessor or the lessee to a third party does not lose its status as a finance lease under this article. Finally, this article creates no special rule where the lessor is an affiliate of the supplier; whether the transaction qualifies as a finance lease will be determined by the facts of each case.

    (h) "Goods". Section 9-102(a)(44). See section 2A-103(3) for reference to the definition of "account", "chattel paper", "document", "general intangible", and "instrument". See section 2A-217 for determination of the time and manner of identification.

    (i) "Installment lease contract". Section 2-612(1).

    (j) "Lease". New. There are several reasons to codify the law with respect to leases of goods. An analysis of the case law as it applies to leases of goods suggests at least several significant issues to be resolved by codification. First and foremost is the definition of a lease. It is necessary to define lease to determine whether a transaction creates a lease or a security interest disguised as a lease. If the transaction creates a security interest disguised as a lease, the transaction will be governed by the Article on Secured Transactions (Article 9) and the lessor will be required to file a financing statement or take other action to perfect its interest in the goods against third parties. There is no such requirement with respect to leases under the common law and, except with respect to leases of fixtures (section 2A-309), this article imposes no such requirement. Yet the distinction between a lease and a security interest disguised as a lease is not clear from the case law at the time of the promulgation of this article. DeKoven, Leases of Equipment: Puritan Leasing Company v. August, A Dangerous Decision, 12 U.S.F. L. Rev. 257 (1978).

    At common law a lease of personal property is a bailment for hire. While there are several definitions of bailment for hire, all require a thing to be let and a price for the letting. Thus, in modern terms and as provided in this definition, a lease is created when the lessee agrees to furnish consideration for the right to the possession and use of goods over a specified period of time. Mooney, Personal Property Leasing: A Challenge, 36 Bus. Law. 1605, 1607 (1981). Further, a lease is neither a sale (section 2-106(1)) nor a retention or creation of a security interest (sections 1-201(b)(35) and 1-203)). Due to extensive litigation to distinguish true leases from security interests, an amendment to former section 1-201(37) (now codified as section 1-203) was promulgated with this article to create a sharper distinction.

    This section as well as section 1-203 must be examined to determine whether the transaction in question creates a lease or a security interest. The following hypotheticals indicate the perimeters of the issue. Assume that A has purchased a number of copying machines, new, for $1,000 each; the machines have an estimated useful economic life of three years. A advertises that the machines are available to rent for a minimum of one month and that the monthly rental is $100.00. A intends to enter into leases where A provides all maintenance, without charge to the lessee. Further, the lessee will rent the machine, month to month, with no obligation to renew. At the end of the lease term the lessee will be obligated to return the machine to A's place of business. This transaction qualifies as a lease under the first half of the definition, for the transaction includes a transfer by A to a prospective lessee of possession and use of the machine for a stated term, month to month. The machines are goods (section 2A-103(1)(h)). The lessee is obligated to pay consideration in return, $100.00 for each month of the term.

    However, the second half of the definition provides that a sale or a security interest is not a lease. Since there is no passing of title, there is no sale. Sections 2-106(1) and 2A-103(3). Under pre-code security law this transaction would have created a bailment for hire or a true lease and not a conditional sale. Da Rocha v. Macomber, 330 Mass. 611, 614-15, 116 N.E.2d 139, 142 (1953). Under section 1-203, the same result would follow. While the lessee is obligated to pay rent for the one-month term of the lease, one of the other four conditions of section 1-203(b) must be met and none is. The term of the lease is one month and the economic life of the machine is 36 months; thus, section 1-203(b)(1) is not now satisfied. Considering the amount of the monthly rent, absent economic duress or coercion, the lessee is not bound either to renew the lease for the remaining economic life of the goods or to become the owner. If the lessee did lease the machine for 36 months, the lessee would have paid the lessor $3,600 for a machine that could have been purchased for $1,000; thus, section 1-203(b)(2) is not satisfied. Finally, there are no options; thus, subparagraphs (3) and (4) of section 1-203(b) are not satisfied. This transaction creates a lease, not a security interest. However, with each renewal of the lease the facts and circumstances at the time of each renewal must be examined to determine if that conclusion remains accurate, as it is possible that a transaction that first creates a lease, later creates a security interest.

    Assume that the facts are changed and that A requires each lessee to lease the goods for 36 months, with no right to terminate. Under pre-code security law this transaction would have created a conditional sale, and not a bailment for hire or true lease. Hervey v. Rhode Island Locomotive Works, 93 U.S. 664, 672-73 (1876). Under this subsection, and section 1-203, the same result would follow. The lessee's obligation for the term is not subject to termination by the lessee and the term is equal to the economic life of the machine.

    Between these extremes there are many transactions that can be created. Some of the transactions were not properly categorized by the courts in applying the 1978 and earlier official texts of former section 1-201(37). This subsection, together with section 1-203, draws a brighter line, which should create a clearer signal to the professional lessor and lessee.

    (k) "Lease agreement". This definition is derived from section 1-201(b)(3). Because the definition of lease is broad enough to cover future transfers, lease agreement includes an agreement contemplating a current or subsequent transfer. Thus it was not necessary to make an express reference to an agreement for the future lease of goods (section 2-106(1)). This concept is also incorporated in the definition of lease contract. Note that the definition of lease does not include transactions in ordinary building materials that are incorporated into an improvement on land. Section 2A-309(2).

    The provisions of this article, if applicable, determine whether a lease agreement has legal consequences; otherwise the law of bailments and other applicable law determine the same. Sections 1-103 and 2A-103(4).

    (l) "Lease contract". This definition is derived from the definition of contract in section 1-201(b)(12). Note that a lease contract may be for the future lease of goods, since this notion is included in the definition of lease.

    (m) "Leasehold interest". New.

    (n) "Lessee". New.

    (o) "Lessee in ordinary course of business". Section 1-201(b)(9).

    (p) "Lessor". New.

    (q) "Lessor's residual interest". New.

    (r) "Lien". New. This term is used in section 2A-307 (priority of liens arising by attachment or levy on, security interests in, and other claims to goods).

    (s) "Lot". Section 2-105(5).

    (t) "Merchant lessee". New. This term is used in section 2A-511 (merchant lessee's duties as to rightfully rejected goods). A person may satisfy the requirement of dealing in goods of the kind subject to the lease as lessor, lessee, seller, or buyer.

    (u) "Purchase". Section 1-201(b)(29). This definition omits the reference to lien contained in the definition of purchase in article 1 (section 1-201(b)(29)). This should not be construed to exclude consensual liens from the definition of purchase in this article; the exclusion was mandated by the scope of the definition of lien in section 2A-103(1)(r). Further, the definition of purchaser in this article adds a reference to lease; as purchase is defined in section 1-201(b)(29) to include any other voluntary transaction creating an interest in property, this addition is not substantive.

    (v) "Sublease". New.

    (w) "Supplier". New.

    (x) "Supply contract". New.

    (y) "Termination". Section 2-106(3).

    The effect of a termination is provided in section 2A-505(2).


2A-104. Leases subject to other law.

(1) A lease, although subject to this article, is also subject to any applicable:

(a) certificate of title statute of this state (the Motor Vehicle Certificate of Title Act);

(b) certificate of title statute of another jurisdiction (section 2A-105); or

(c) consumer protection statute of this state, or final consumer protection decision of a court of this state existing on September 6, 1991.

(2) In case of conflict between this article, other than sections 2A-105, 2A-304(3), and 2A-305(3), and a statute or decision referred to in subsection (1), the statute or decision controls.

(3) Failure to comply with an applicable law has only the effect specified therein.

Source:Laws 1991, LB 159, § 6; Laws 1995, LB 589, § 11; Laws 2005, LB 276, § 113.    


Cross References
    Motor Vehicle Certificate of Title Act, see section 60-101.

Annotations
    COMMENT

    Uniform Statutory Source: Sections 9-201 and 9-311.

    Changes: Substantially revised.

    Purposes:

    1. This article creates a comprehensive scheme for the regulation of transactions that create leases. Section 2A-102. Thus, the article supersedes all prior legislation dealing with leases, except to the extent set forth in this section.

    2. Subsection (1) states the general rule that a lease, although governed by the scheme of this article, also may be governed by certain other applicable laws. This may occur in the case of a consumer lease. Section 2A-103(1)(e). Those laws may be state statutes existing prior to enactment of article 2A or passed afterward. In this case, it is desirable for this article to specify which statute controls. Or the law may be a preexisting consumer protection decision. This article preserves such decisions. Or the law may be a statute of the United States. Such a law controls without any statement in this article under applicable principles of preemption.

    An illustration of a statute of the United States that governs consumer leases is the Consumer Leasing Act, 15 U.S.C. sections 1667-1667(e) (1982) and its implementing regulation, Regulation M, 12 C.F.R. section 213 (1986); the statute mandates disclosures of certain lease terms, delimits the liability of a lessee in leasing personal property, and regulates the advertising of lease terms. An illustration of a state statute that governs consumer leases and which if adopted in the enacting state prevails over this article is the Unif. Consumer Credit Code, which includes many provisions similar to those of the Consumer Leasing Act, e.g., Unif. Consumer Credit Code sections 3.202, 3.209, 3.401, 7A U.L.A. 108-09, 115, 125 (1974), as well as provisions in addition to those of the Consumer Leasing Act, e.g., Unif. Consumer Credit Code sections 5.109-.111, 7A U.L.A. 171-76 (1974) (the right to cure a default). Such statutes may define consumer lease so as to govern transactions within and without the definition of consumer lease under this article.

    3. Under subsection (2), subject to certain limited exclusions, in case of conflict a statute or a decision described in subsection (1) prevails over this article. For example, a provision like Unif. Consumer Credit Code section 5.112, 7A U.L.A. 176 (1974), limiting self-help repossession, prevails over section 2A-525(3). A consumer protection decision rendered after the effective date of this article may supplement its provisions. For example, in relation to article 9 a court might conclude that an acceleration clause may not be enforced against an individual debtor after late payments have been accepted unless a prior notice of default is given. To the extent the decision establishes a general principle applicable to transactions other than secured transactions, it may supplement section 2A-502.

    4. Consumer protection in lease transactions is primarily left to other law. However, several provisions of this article do contain special rules that may not be varied by agreement in the case of a consumer lease. E.g., sections 2A-106, 2A-108, and 2A-109(2). Were that not so, the ability of the parties to govern their relationship by agreement together with the position of the lessor in a consumer lease too often could result in a one-sided lease agreement.

    5. In construing this provision the reference to statute should be deemed to include applicable regulations. A consumer protection decision is "final" on the effective date of this article if it is not subject to appeal on that date or, if subject to appeal, is not later reversed on appeal. Of course, such a decision can be overruled by a later decision or superseded by a later statute.

    Cross References:

    Sections 2A-103(1)(e), 2A-106, 2A-108, 2A-109(2), and 2A-525(3).

    Definitional Cross Reference:

    "Lease". Section 2A-103(1)(j).


2A-105. Territorial application of article to goods covered by certificate of title.

Subject to the provisions of sections 2A-304(3) and 2A-305(3), with respect to goods covered by a certificate of title issued under a statute of this state or of another jurisdiction, compliance and the effect of compliance or noncompliance with a certificate of title statute are governed by the law (including the conflict of laws rules) of the jurisdiction issuing the certificate until the earlier of (a) surrender of the certificate, or (b) four months after the goods are removed from that jurisdiction and thereafter until a new certificate of title is issued by another jurisdiction.

Source:Laws 1991, LB 159, § 7.


Annotations
    COMMENT

    Uniform Statutory Source: Sections 9-303 and 9-316.

    Changes: Substantially revised. The provisions of the last sentence of section 9-103(2)(b) have not been incorporated as they are superfluous in this context. The provisions of section 9-103(2)(d) have not been incorporated because the problems dealt with are adequately addressed by this section and sections 2A-304(3) and 2A-305(3).

    Purposes:

    The new certificate referred to in (b) must be permanent, not temporary. Generally, the lessor or creditor whose interest is indicated on the most recently issued certificate of title will prevail over interests indicated on certificates issued previously by other jurisdictions. This provision reflects a policy that it is reasonable to require holders of interests in goods covered by a certificate of title to police the goods or risk losing their interests when a new certificate of title is issued by another jurisdiction.

    Cross References:

    Sections 2A-304(3), 2A-305(3), 9-316, and 9-337.

    Definitional Cross Reference:

    "Goods". Section 2A-103(1)(h).


2A-106. Limitation on power of parties to consumer lease to choose applicable law and judicial forum.

(1) If the law chosen by the parties to a consumer lease is that of a jurisdiction other than a jurisdiction in which the lessee resides at the time the lease agreement becomes enforceable or within thirty days thereafter or on which the goods are to be used, the choice is not enforceable.

(2) If the judicial forum chosen by the parties to a consumer lease is a forum that would not otherwise have jurisdiction over the lessee, the choice is not enforceable.

Source:Laws 1991, LB 159, § 8.


Annotations
    COMMENT

    Uniform Statutory Source: Unif. Consumer Credit Code section 1.201(8), 7A U.L.A. 36 (1974).

    Changes: Substantially revised.

    Purposes:

    There is a real danger that a lessor may induce a consumer lessee to agree that the applicable law will be a jurisdiction that has little effective consumer protection, or to agree that the applicable forum will be a forum that is inconvenient for the lessee in the event of litigation. As a result, this section invalidates these choice of law or forum clauses, except where the law chosen is that of the state of the consumer's residence or where the goods will be kept, or the forum chosen is one that otherwise would have jurisdiction over the lessee.

    Subsection (1) limits potentially abusive choice of law clauses in consumer leases. The 30-day rule in subsection (1) was suggested by former section 9-103(1)(c). This section has no effect on choice of law clauses in leases that are not consumer leases. Such clauses would be governed by other law.

    Subsection (2) prevents enforcement of potentially abusive jurisdictional consent clauses in consumer leases. By using the term judicial forum, this section does not limit selection of a nonjudicial forum, such as arbitration. This section has no effect on choice of forum clauses in leases that are not consumer leases; such clauses are, as a matter of current law, "prima facie valid". The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 10 (1972). Such clauses would be governed by other law, including the Model Uniform Choice of Forum Act (1968).

    Cross Reference:

    Section 9-103(1)(c).

    Definitional Cross References:

    "Consumer lease". Section 2A-103(1)(e).

    "Goods". Section 2A-103(1)(h).

    "Lease agreement". Section 2A-103(1)(k).

    "Lessee". Section 2A-103(1)(n).

    "Party". Section 1-201(29).


2A-107. Waiver or renunciation of claim or right after default.

Any claim or right arising out of an alleged default or breach of warranty may be discharged in whole or in part without consideration by a written waiver or renunciation signed and delivered by the aggrieved party.

Source:Laws 1991, LB 159, § 9.


Annotations
    COMMENT

    Uniform Statutory Source: Section 1-107.

    Changes: Revised to reflect leasing practices and terminology. This clause is used throughout the official comments to this article to indicate the scope of change in the provisions of the uniform statutory source included in the section; these changes range from one extreme, e.g., a significant difference in practice (a warranty as to merchantability is not implied in a finance lease (section 2A-212)) to the other extreme, e.g., a modest difference in style or terminology (the transaction governed is a lease not a sale (section 2A-103)).

    Cross References:

    Sections 2A-103 and 2A-212.

    Definitional Cross References:

    "Aggrieved party". Section 1-201(2).

    "Delivery". Section 1-201(14).

    "Rights". Section 1-201(36).

    "Signed". Section 1-201(39).

    "Written". Section 1-201(46).


2A-108. Unconscionability.

(1) If the court as a matter of law finds a lease contract or any clause of a lease contract to have been unconscionable at the time it was made the court may refuse to enforce the lease contract, or it may enforce the remainder of the lease contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.

(2) With respect to a consumer lease, if the court as a matter of law finds that a lease contract or any clause of a lease contract has been induced by unconscionable conduct or that unconscionable conduct has occurred in the collection of a claim arising from a lease contract, the court may grant appropriate relief.

(3) Before making a finding of unconscionability under subsection (1) or (2), the court, on its own motion or that of a party, shall afford the parties a reasonable opportunity to present evidence as to the setting, purpose, and effect of the lease contract or clause thereof, or of the conduct.

(4) In an action in which the lessee claims unconscionability with respect to a consumer lease:

(a) If the court finds unconscionability under subsection (1) or (2), the court shall award reasonable attorney's fees to the lessee.

(b) If the court does not find unconscionability and the lessee claiming unconscionability has brought or maintained an action he or she knew to be groundless, the court shall award reasonable attorney's fees to the party against whom the claim is made.

(c) In determining attorney's fees, the amount of the recovery on behalf of the claimant under subsections (1) and (2) is not controlling.

Source:Laws 1991, LB 159, § 10.


Annotations
    COMMENT

    Uniform Statutory Source: Section 2-302 and Unif. Consumer Credit Code section 5.108, 7A U.L.A. 167-69 (1974).

    Changes: Subsection (1) is taken almost verbatim from the provisions of section 2-302(1). Subsection (2) is suggested by the provisions of Unif. Consumer Credit Code section 5.108(1), (2), 7A U.L.A. 167 (1974). Subsection (3), taken from the provisions of section 2-302(2), has been expanded to cover unconscionable conduct. Unif. Consumer Credit Code section 5.108(3), 7A U.L.A. 167 (1974). The provision for the award of attorney's fees to consumers, subsection (4), covers unconscionability under subsection (1) as well as (2). Subsection (4) is modeled on the provisions of Unif. Consumer Credit Code section 5.108(6), 7A U.L.A. 169 (1974).

    Purposes:

    Subsections (1) and (3) of this section apply the concept of unconscionability reflected in the provisions of section 2-302 to leases. See Dillman & Assocs. v. Capitol Leasing Co., 110 Ill. App. 3d 335, 342, 442 N.E.2d 311, 316 (App. Ct. 1982). Subsection (3) omits the adjective "commercial" found in subsection 2-302(2) because subsection (3) is concerned with all leases and the relevant standard of conduct is determined by the context.

    The balance of the section is modeled on the provisions of Unif. Consumer Credit Code section 5.108, 7A U.L.A. 167-69 (1974). Thus subsection (2) recognizes that a consumer lease or a clause in a consumer lease may not itself be unconscionable but that the agreement would never have been entered into if unconscionable means had not been employed to induce the consumer to agree. To make a statement to induce the consumer to lease the goods, in the expectation of invoking an integration clause in the lease to exclude the statement's admissibility in a subsequent dispute, may be unconscionable. Subsection (2) also provides a consumer remedy for unconscionable conduct, such as using or threatening to use force or violence, in the collection of a claim arising from a lease contract. These provisions are not exclusive. The remedies of this section are in addition to remedies otherwise available for the same conduct under other law, for example, an action in tort for abusive debt collection or under another statute of this state for such conduct. The reference to appropriate relief in subsection (2) is intended to foster liberal administration of this remedy. Sections 1-106(1) and 2A-103(4).

    Subsection (4) authorizes an award of reasonable attorney's fees if the court finds unconscionability with respect to a consumer lease under subsection (1) or (2). Provision is also made for recovery by the party against whom the claim was made if the court does not find unconscionability and does find that the consumer knew the action to be groundless. Further, subsection (4)(b) is independent of, and thus will not override, a term in the lease agreement that provides for the payment of attorney's fees.

    Cross References:

    Sections 1-106(1), 2-302, and 2A-103(4).

    Definitional Cross References:

    "Action". Section 1-201(1).

    "Consumer lease". Section 2A-103(1)(e).

    "Lease contract". Section 2A-103(1)(l).

    "Lessee". Section 2A-103(1)(n).

    "Party". Section 1-201(29).


2A-109. Option to accelerate at will.

(1) A term providing that one party or his or her successor in interest may accelerate payment or performance or require collateral or additional collateral "at will" or "when he or she deems himself or herself insecure" or in words of similar import must be construed to mean that he or she has power to do so only if he or she in good faith believes that the prospect of payment or performance is impaired.

(2) With respect to a consumer lease, the burden of establishing good faith under subsection (1) is on the party who exercised the power; otherwise the burden of establishing lack of good faith is on the party against whom the power has been exercised.

Source:Laws 1991, LB 159, § 11.


Annotations
    COMMENT

    Uniform Statutory Source: Section 1-208 and Unif. Consumer Credit Code section 5.109(2), 7A U.L.A. 171 (1974).

    Purposes:

    Subsection (1) reflects modest changes in style to the provisions of the first sentence of section 1-208.

    Subsection (2), however, reflects a significant change in the provisions of the second sentence of section 1-208 by creating a new rule with respect to a consumer lease. A lease provision allowing acceleration at the will of the lessor or when the lessor deems itself insecure is of critical importance to the lessee. In a consumer lease it is a provision that is not usually agreed to by the parties but is usually mandated by the lessor. Therefor, where its invocation depends not on specific criteria but on the discretion of the lessor, its use should be regulated to prevent abuse. Subsection (1) imposes a duty of good faith upon its exercise. Subsection (2) shifts the burden of establishing good faith to the lessor in the case of a consumer lease, but not otherwise.

    Cross Reference:

    Section 1-208.

    Definitional Cross References:

    "Burden of establishing". Section 1-201(8).

    "Consumer lease". Section 2A-103(1)(e).

    "Good faith". Sections 1-201(19) and 2-103(1)(b).

    "Party". Section 1-201(29).

    "Term". Section 1-201(42).


2A-201. Statute of frauds.

(1) A lease contract is not enforceable by way of action or defense unless:

(a) the total payments to be made under the lease contract, excluding payments for options to renew or buy, are less than one thousand dollars; or

(b) there is a writing, signed by the party against whom enforcement is sought or by that party's authorized agent, sufficient to indicate that a lease contract has been made between the parties and to describe the goods leased and the lease term.

(2) Any description of leased goods or of the lease term is sufficient and satisfies subsection (1)(b), whether or not it is specific, if it reasonably identifies what is described.

(3) A writing is not insufficient because it omits or incorrectly states a term agreed upon, but the lease contract is not enforceable under subsection (1)(b) beyond the lease term and the quantity of goods shown in the writing.

(4) A lease contract that does not satisfy the requirements of subsection (1), but which is valid in other respects, is enforceable:

(a) if the goods are to be specially manufactured or obtained for the lessee and are not suitable for lease or sale to others in the ordinary course of the lessor's business, and the lessor, before notice of repudiation is received and under circumstances that reasonably indicate that the goods are for the lessee, has made either a substantial beginning of their manufacture or commitments for their procurement;

(b) if the party against whom enforcement is sought admits in that party's pleading, testimony, or otherwise in court that a lease contract was made, but the lease contract is not enforceable under this provision beyond the quantity of goods admitted; or

(c) with respect to goods that have been received and accepted by the lessee.

(5) The lease term under a lease contract referred to in subsection (4) is:

(a) if there is a writing signed by the party against whom enforcement is sought or by that party's authorized agent specifying the lease term, the term so specified;

(b) if the party against whom enforcement is sought admits in that party's pleading, testimony, or otherwise in court a lease term, the term so admitted; or

(c) a reasonable lease term.

Source:Laws 1991, LB 159, § 12.


Annotations
    COMMENT

    Uniform Statutory Source: Sections 2-201, 9-108, and 9-203.

    Changes: This section is modeled on section 2-201, with changes to reflect the differences between a lease contract and a contract for the sale of goods. In particular, subsection (1)(b) adds a requirement that the writing "describe the goods leased and the lease term", borrowing that concept, with revisions, from the provisions of section 9-203. Subsection (2), relying on the statutory analogue in section 9-108, sets forth the minimum criterion for satisfying that requirement.

    Purposes:

    The changes in this section conform the provisions of section 2-201 to custom and usage in lease transactions. Section 2-201(2), stating a special rule between merchants, was not included in this section as the number of such transactions involving leases, as opposed to sales, was thought to be modest. Subsection (4) creates no exception for transactions where payment has been made and accepted. This represents a departure from the analogue, section 2-201(3)(c). The rationale for the departure is grounded in the distinction between sales and leases. Unlike a buyer in a sales transaction, the lessee does not tender payment in full for goods delivered, but only payment of rent for one or more months. It was decided that, as a matter of policy, this act of payment is not a sufficient substitute for the required memorandum. Subsection (5) was needed to establish the criteria for supplying the lease term if it is omitted, as the lease contract may still be enforceable under subsection (4).

    Cross References:

    Sections 2-201, 9-108, and 9-203.

    Definitional Cross References:

    "Action". Section 1-201(1).

    "Agreement". Section 1-201(3).

    "Buying". Section 2A-103(1)(a).

    "Goods". Section 2A-103(1)(h).

    "Lease". Section 2A-103(1)(j).

    "Lease contract". Section 2A-103(1)(l).

    "Lessee". Section 2A-103(1)(n).

    "Lessor". Section 2A-103(1)(p).

    "Notice". Section 1-201(25).

    "Party". Section 1-201(29).

    "Sale". Section 2-106(1).

    "Signed". Section 1-201(39).

    "Term". Section 1-201(42).

    "Writing". Section 1-201(46).


2A-202. Final written expression: parol or extrinsic evidence.

Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented:

(a) by course of dealing or usage of trade or by course of performance; and

(b) by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.

Source:Laws 1991, LB 159, § 13.


Annotations
    COMMENT

    Uniform Statutory Source: Section 2-202.

    Definitional Cross References:

    "Agreement". Section 1-201(3).

    "Course of dealing". Section 1-205.

    "Party". Section 1-201(29).

    "Term". Section 1-201(42).

    "Usage of trade". Section 1-205.

    "Writing". Section 1-201(46).


2A-203. Seals inoperative.

The affixing of a seal to a writing evidencing a lease contract or an offer to enter into a lease contract does not render the writing a sealed instrument and the law with respect to sealed instruments does not apply to the lease contract or offer.

Source:Laws 1991, LB 159, § 14.


Annotations
    COMMENT

    Uniform Statutory Source: Section 2-203.

    Changes: Revised to reflect leasing practices and terminology.

    Definitional Cross References:

    "Lease contract". Section 2A-103(1)(l).

    "Writing". Section 1-201(46).


2A-204. Formation in general.

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

(2) An agreement sufficient to constitute a lease contract may be found although the moment of its making is undetermined.

(3) Although one or more terms are left open, a lease contract does not fail for indefiniteness if the parties have intended to make a lease contract and there is a reasonably certain basis for giving an appropriate remedy.

Source:Laws 1991, LB 159, § 15.


Annotations
    COMMENT

    Uniform Statutory Source: Section 2-204.

    Changes: Revised to reflect leasing practices and terminology.

    Definitional Cross References:

    "Agreement". Section 1-201(3).

    "Lease contract". Section 2A-103(1)(l).

    "Party". Section 1-201(29).

    "Remedy". Section 1-201(34).

    "Term". Section 1-201(42).


2A-205. Firm offers.

An offer by a merchant to lease goods to or from another person in a signed writing that by its terms gives assurance it will be held open is not revocable, for lack of consideration, during the time stated or, if no time is stated, for a reasonable time, but in no event may the period of irrevocability exceed three months. Any such term of assurance on a form supplied by the offeree must be separately signed by the offeror.

Source:Laws 1991, LB 159, § 16.


Annotations
    COMMENT

    Uniform Statutory Source: Section 2-205.

    Changes: Revised to reflect leasing practices and terminology.

    Definitional Cross References:

    "Goods". Section 2A-103(1)(h).

    "Lease". Section 2A-103(1)(j).

    "Merchant". Section 2-104(1).

    "Person". Section 1-201(30).

    "Reasonable time". Section 1-204(1) and (2).

    "Signed". Section 1-201(39).

    "Term". Section 1-201(42).

    "Writing". Section 1-201(46).


2A-206. Offer and acceptance in formation of lease contract.

(1) Unless otherwise unambiguously indicated by the language or circumstances, an offer to make a lease contract must be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances.

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

Source:Laws 1991, LB 159, § 17.


Annotations
    COMMENT

    Uniform Statutory Source: Section 2-206(1)(a) and (2).

    Changes: Revised to reflect leasing practices and terminology.

    Definitional Cross References:

    "Lease contract". Section 2A-103(1)(l).

    "Notifies". Section 1-201(26).

    "Reasonable time". Section 1-204(1) and (2).


2A-207. Repealed. Laws 2005, LB 570, § 116.

2A-208. Modification, rescission, and waiver.

(1) An agreement modifying a lease contract needs no consideration to be binding.

(2) A signed lease agreement that excludes modification or rescission except by a signed writing may not be otherwise modified or rescinded, but, except as between merchants, such a requirement on a form supplied by a merchant must be separately signed by the other party.

(3) Although an attempt at modification or rescission does not satisfy the requirements of subsection (2), it may operate as a waiver.

(4) A party who has made a waiver affecting an executory portion of a lease contract may retract the waiver by reasonable notification received by the other party that strict performance will be required of any term waived, unless the retraction would be unjust in view of a material change of position in reliance on the waiver.

Source:Laws 1991, LB 159, § 19.


Annotations
    COMMENT

    Uniform Statutory Source: Section 2-209.

    Changes: Revised to reflect leasing practices and terminology, except that the provisions of subsection 2-209(3) were omitted.

    Purposes:

    Section 2-209(3) provides that "the requirements of the statute of frauds section of this article (section 2-201) must be satisfied if the contract as modified is within its provisions". This provision was not incorporated as it is unfair to allow an oral modification to make the entire lease contract unenforceable, e.g., if the modification takes it a few dollars over the dollar limit. At the same time, the problem could not be solved by providing that the lease contract would still be enforceable in its premodification state (if it then satisfied the statute of frauds) since in some cases that might be worse than no enforcement at all. Resolution of the issue is left to the courts based on the facts of each case.

    Cross References:

    Sections 2-201 and 2-209.

    Definitional Cross References:

    "Agreement". Section 1-201(3).

    "Between merchants". Section 2-104(3).

    "Lease agreement". Section 2A-103(1)(k).

    "Lease contract". Section 2A-103(1)(l).

    "Merchant". Section 2-104(1).

    "Notification". Section 1-201(26).

    "Party". Section 1-201(29).

    "Signed". Section 1-201(39).

    "Term". Section 1-201(42).

    "Writing". Section 1-201(46).


2A-209. Lessee under finance lease as beneficiary of supply contract.

(1) The benefit of a supplier's promises to the lessor under the supply contract and of all warranties, whether express or implied, including those of any third party provided in connection with or as part of the supply contract, extends to the lessee to the extent of the lessee's leasehold interest under a finance lease related to the supply contract, but is subject to the terms of the warranty and of the supply contract and all defenses or claims arising therefrom.

(2) The extension of the benefit of a supplier's promises and of warranties to the lessee (section 2A-209(1)) does not: (i) modify the rights and obligations of the parties to the supply contract, whether arising therefrom or otherwise, or (ii) impose any duty or liability under the supply contract on the lessee.

(3) Any modification or rescission of the supply contract by the supplier and the lessor is effective between the supplier and the lessee unless, before the modification or rescission, the supplier has received notice that the lessee has entered into a finance lease related to the supply contract.

If the modification or rescission is effective between the supplier and the lessee, the lessor is deemed to have assumed, in addition to the obligations of the lessor to the lessee under the lease contract, promises of the supplier to the lessor and warranties that were so modified or rescinded as they existed and were available to the lessee before modification or rescission.

(4) In addition to the extension of the benefit of the supplier's promises and of warranties to the lessee under subsection (1), the lessee retains all rights that the lessee may have against the supplier which arise from an agreement between the lessee and the supplier or under other law.

Source:Laws 1991, LB 159, § 20.


Annotations
    COMMENT

    Uniform Statutory Source: None.

    Changes: This section is modeled on section 9-318, the Restatement (Second) of Contracts sections 302-315 (1981), and leasing practices. See Earman Oil Co. v. Burroughs Corp., 625 F.2d 1291, 1296-97 (5th Cir. 1980).

    Purposes:

    1. The function performed by the lessor in a finance lease is extremely limited. Section 2A-103(1)(g). The lessee looks to the supplier of the goods for warranties and the like or, in some cases as to warranties, to the manufacturer if a warranty made by that person is passed on. That expectation is reflected in subsection (1), which is self-executing. As a matter of policy, the operation of this provision may not be excluded, modified, or limited; however, an exclusion, modification, or limitation of any term of the supply contract or warranty, including any with respect to rights and remedies, and any defense or claim such as a statute of limitations, effective against the lessor as the acquiring party under the supply contract, is also effective against the lessee as the beneficiary designated under this provision. For example, the supplier is not precluded from excluding or modifying an express or implied warranty under a supply contract. Sections 2-312(2) and 2-316, or section 2A-214. Further, the supplier is not precluded from limiting the rights and remedies of the lessor and from liquidating damages. Sections 2-718 and 2-719 or sections 2A-503 and 2A-504. If the supply contract excludes or modifies warranties, limits remedies, or liquidates damages with respect to the lessor, such provisions are enforceable against the lessee as beneficiary. Thus, only selective discrimination against the beneficiaries designated under this section is precluded, i.e., exclusion of the supplier's liability to the lessee with respect to warranties made to the lessor. This section does not affect the development of other law with respect to products liability.

    2. Enforcement of this benefit is by action. Sections 1-106(2) and 2A-103(4).

    3. The benefit extended by these provisions is not without a price, as this article also provides in the case of a finance lease that is not a consumer lease that the lessee's promises to the lessor under the lease contract become irrevocable and independent upon the lessee's acceptance of the goods. Section 2A-407.

    4. Subsection (2) limits the effect of subsection (1) on the supplier and the lessor by preserving, notwithstanding the transfer of the benefits of the supply contract to the lessee, all of the supplier's and the lessor's rights and obligations with respect to each other and others; it further absolves the lessee of any duties with respect to the supply contract that might have been inferred from the extension of the benefits thereof.

    5. Subsections (2) and (3) also deal with difficult issues related to modification or rescission of the supply contract. Subsection (2) states a rule that determines the impact of the statutory extension of benefit contained in subsection (1) upon the relationship of the parties to the supply contract and, in a limited respect, upon the lessee. This statutory extension of benefit, like that contained in sections 2-318 and 2A-216, is not a modification of the supply contract by the parties. Thus, subsection (3) states the rules that apply to a modification or rescission of the supply contract by the parties. Subsection (3) provides that a modification or rescission is not effective between the supplier and the lessee if, before the modification or rescission occurs, the supplier received notice that the lessee has entered into the finance lease. On the other hand, if the modification or rescission is effective, then to the extent of the modification or rescission of the benefit or warranty, the lessor by statutory dictate assumes an obligation to provide to the lessee that which the lessee would otherwise lose. For example, assume a reduction in an express warranty from four years to one year. No prejudice to the lessee may occur if the goods perform as agreed. If, however, there is a breach of the express warranty after one year and before four years pass, the lessor is liable. A remedy for any prejudice to the lessee because of the bifurcation of the lessee's recourse resulting from the action of the supplier and the lessor is left to resolution by the courts based on the facts of each case.

    6. Subsection (4) makes it clear that the rights granted to the lessee by this section do not displace any rights the lessee otherwise may have against the supplier.

    Cross References:

    Sections 2A-103(1)(g), 2A-407, and 9-318.

    Definitional Cross References:

    "Action". Section 1-201(1).

    "Finance lease". Section 2A-103(1)(g).

    "Leasehold interest". Section 2A-103(1)(m).

    "Lessee". Section 2A-103(1)(n).

    "Lessor". Section 2A-103(1)(p).

    "Notice". Section 1-201(25).

    "Party". Section 1-201(29).

    "Rights". Section 1-201(36).

    "Supplier". Section 2A-103(1)(x).

    "Supply contract". Section 2A-103(1)(y).

    "Term". Section 1-201(42).


2A-210. Express warranties.

(1) Express warranties by the lessor are created as follows:

(a) Any affirmation of fact or promise made by the lessor to the lessee which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods will conform to the affirmation or promise.

(b) Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods will conform to the description.

(c) Any sample or model that is made part of the basis of the bargain creates an express warranty that the whole of the goods will conform to the sample or model.

(2) It is not necessary to the creation of an express warranty that the lessor use formal words, such as "warrant" or "guarantee", or that the lessor have a specific intention to make a warranty, but an affirmation merely of the value of the goods or a statement purporting to be merely the lessor's opinion or commendation of the goods does not create a warranty.

Source:Laws 1991, LB 159, § 21.


Annotations
    COMMENT

    Uniform Statutory Source: Section 2-313.

    Changes: Revised to reflect leasing practices and terminology.

    Purposes:

    All of the express and implied warranties of the Article on Sales (Article 2) are included in this article, revised to reflect the differences between a sale of goods and a lease of goods. Sections 2A-210 through 2A-216. The lease of goods is sufficiently similar to the sale of goods to justify this decision. Hawkland, The Impact of the Uniform Commercial Code on Equipment Leasing, 1972 Ill. L.F. 446, 459-60. Many state and federal courts have reached the same conclusion.

    Value of the goods, as used in subsection (2), includes rental value.

    Cross References:

    Article 2, especially section 2-313, and sections 2A-210 through 2A-216.

    Definitional Cross References:

    "Conforming". Section 2A-103(1)(d).

    "Goods". Section 2A-103(1)(h).

    "Lessee". Section 2A-103(1)(n).

    "Lessor". Section 2A-103(1)(p).

    "Value". Section 1-201(44).


2A-211. Warranties against interference and against infringement; lessee's obligation against infringement.

(1) There is in a lease contract a warranty that for the lease term no person holds a claim to or interest in the goods that arose from an act or omission of the lessor, other than a claim by way of infringement or the like, which will interfere with the lessee's enjoyment of its leasehold interest.

(2) Except in a finance lease there is in a lease contract by a lessor who is a merchant regularly dealing in goods of the kind a warranty that the goods are delivered free of the rightful claim of any person by way of infringement or the like.

(3) A lessee who furnishes specifications to a lessor or a supplier shall hold the lessor and the supplier harmless against any claim by way of infringement or the like that arises out of compliance with the specifications.

Source:Laws 1991, LB 159, § 22.


Annotations
    COMMENT

    Uniform Statutory Source: Section 2-312.

    Changes: This section is modeled on the provisions of section 2-312, with modifications to reflect the limited interest transferred by a lease contract and the total interest transferred by a sale. Section 2-312(2), which is omitted here, is incorporated in section 2A-214. The warranty of quiet possession was abolished with respect to sales of goods. Section 2-312 official comment 1. Section 2A-211(1) reinstates the warranty of quiet possession with respect to leases. Inherent in the nature of the limited interest transferred by the lease — the right to possession and use of the goods — is the need of the lessee for protection greater than that afforded to the buyer. Since the scope of the protection is limited to claims or interests that arose from acts or omissions of the lessor, the lessor will be in position to evaluate the potential cost, certainly a far better position than that enjoyed by the lessee. Further, to the extent the market will allow, the lessor can attempt to pass on the anticipated additional cost to the lessee in the guise of higher rent.

    Purposes:

    General language was chosen for subsection (1) that expresses the essence of the lessee's expectation: With an exception for infringement and the like, no person holding a claim or interest that arose from an act or omission of the lessor will be able to interfere with the lessee's use and enjoyment of the goods for the lease term. Subsection (2), like other similar provisions in later sections, excludes the finance lessor from extending this warranty; with few exceptions (sections 2A-210 and 2A-211(1)), the lessee under a finance lease is to look to the supplier for warranties and the like or, in some cases as to warranties, to the manufacturer if a warranty made by that person is passed on. Subsections (2) and (3) are derived from section 2-312(3). These subsections, as well as the analogue, should be construed so that applicable principles of law and equity supplement their provisions. Sections 1-103 and 2A-103(4).

    Cross References:

    Sections 2-312, 2-312(1), 2-312(2), 2-312 official comment 1, 2A-210, 2A-211(1), and 2A-214.

    Definitional Cross References:

    "Delivery". Section 1-201(14).

    "Finance lease". Section 2A-103(1)(g).

    "Goods". Section 2A-103(1)(h).

    "Lease". Section 2A-103(1)(j).

    "Lease contract". Section 2A-103(1)(l).

    "Leasehold interest". Section 2A-103(1)(m).

    "Lessee". Section 2A-103(1)(n).

    "Lessor". Section 2A-103(1)(p).

    "Merchant". Section 2-104(1).

    "Person". Section 1-201(30).

    "Supplier". Section 2A-103(1)(x).


2A-212. Implied warranty of merchantability.

(1) Except in a finance lease, a warranty that the goods will be merchantable is implied in a lease contract if the lessor is a merchant with respect to goods of that kind.

(2) Goods to be merchantable must be at least such as

(a) pass without objection in the trade under the description in the lease agreement;

(b) in the case of fungible goods, are of fair average quality within the description;

(c) are fit for the ordinary purposes for which goods of that type are used;

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

(e) are adequately contained, packaged, and labeled as the lease agreement may require; and

(f) conform to any promises or affirmations of fact made on the container or label.

(3) Other implied warranties may arise from course of dealing or usage of trade.

Source:Laws 1991, LB 159, § 23.


Annotations
    COMMENT

    Uniform Statutory Source: Section 2-314.

    Changes: Revised to reflect leasing practices and terminology. E.g., Glenn Dick Equip. Co. v. Galey Constr., Inc., 97 Idaho 216, 225, 541 P.2d 1184, 1193 (1975) (implied warranty of merchantability (article 2) extends to lease transactions).

    Definitional Cross References:

    "Conforming". Section 2A-103(1)(d).

    "Course of dealing". Section 1-205.

    "Finance lease". Section 2A-103(1)(g).

    "Fungible". Section 1-201(17).

    "Goods". Section 2A-103(1)(h).

    "Lease agreement". Section 2A-103(1)(k).

    "Lease contract". Section 2A-103(1)(l).

    "Lessor". Section 2A-103(1)(p).

    "Merchant". Section 2-104(1).

    "Usage of trade". Section 1-205.


2A-213. Implied warranty of fitness for particular purpose.

Except in a finance lease, if the lessor at the time the lease contract is made has reason to know of any particular purpose for which the goods are required and that the lessee is relying on the lessor's skill or judgment to select or furnish suitable goods, there is in the lease contract an implied warranty that the goods will be fit for that purpose.

Source:Laws 1991, LB 159, § 24.


Annotations
    COMMENT

    Uniform Statutory Source: Section 2-315.

    Changes: Revised to reflect leasing practices and terminology. E.g., All-States Leasing Co. v. Bass, 96 Idaho 873, 879, 538 P.2d 1177, 1183 (1975) (implied warranty of fitness for a particular purpose (article 2) extends to lease transactions).

    Definitional Cross References:

    "Finance lease". Section 2A-103(1)(g).

    "Goods". Section 2A-103(1)(h).

    "Knows". Section 1-201(25).

    "Lease contract". Section 2A-103(1)(l).

    "Lessee". Section 2A-103(1)(n).

    "Lessor". Section 2A-103(1)(p).


2A-214. Exclusion or modification of warranties.

(1) Words or conduct relevant to the creation of an express warranty and words or conduct tending to negate or limit a warranty must be construed wherever reasonable as consistent with each other; but, subject to the provisions of section 2A-202 on parol or extrinsic evidence, negation or limitation is inoperative to the extent that the construction is unreasonable.

(2) Subject to subsection (3), to exclude or modify the implied warranty of merchantability or any part of it the language must mention "merchantability", be by a writing, and be conspicuous. Subject to subsection (3), to exclude or modify any implied warranty of fitness the exclusion must be by a writing and be conspicuous. Language to exclude all implied warranties of fitness is sufficient if it is in writing, is conspicuous, and states, for example, "There is no warranty that the goods will be fit for a particular purpose".

(3) Notwithstanding subsection (2), but subject to subsection (4),

(a) unless the circumstances indicate otherwise, all implied warranties are excluded by expressions like "as is", or "with all faults", or by other language that in common understanding calls the lessee's attention to the exclusion of warranties and makes plain that there is no implied warranty, if in writing and conspicuous;

(b) if the lessee before entering into the lease contract has examined the goods or the sample or model as fully as desired or has refused to examine the goods, there is no implied warranty with regard to defects that an examination ought in the circumstances to have revealed; and

(c) an implied warranty may also be excluded or modified by course of dealing, course of performance, or usage of trade.

(4) To exclude or modify a warranty against interference or against infringement (section 2A-211) or any part of it, the language must be specific, be by a writing, and be conspicuous, unless the circumstances, including course of performance, course of dealing, or usage of trade, give the lessee reason to know that the goods are being leased subject to a claim or interest of any person.

Source:Laws 1991, LB 159, § 25.


Annotations
    COMMENT

    Uniform Statutory Source: Sections 2-312(2) and 2-316.

    Changes: Subsection (2) requires that a disclaimer of the warranty of merchantability be conspicuous and in writing as is the case for a disclaimer of the warranty of fitness; this is contrary to the rule stated in section 2-316(2) with respect to the disclaimer of the warranty of merchantability. This section also provides that to exclude or modify the implied warranty of merchantability, fitness, or against interference or infringement the language must be in writing and conspicuous. There are, however, exceptions to the rule. E.g., course of dealing, course of performance, or usage of trade may exclude or modify an implied warranty. Section 2A-214(3)(c). The analogue of section 2-312(2) has been moved to subsection (4) of this section for a more unified treatment of disclaimers; there is no policy with respect to leases of goods that would justify continuing certain distinctions found in the Article on Sales (Article 2) regarding the treatment of the disclaimer of various warranties. Compare sections 2-312(2) and 2-316(2). Finally, the example of a disclaimer of the implied warranty of fitness stated in subsection (2) differs from the analogue stated in section 2-316(2); this example should promote a better understanding of the effect of the disclaimer.

    Purposes:

    These changes were made to reflect leasing practices. E.g., FMC Finance Corp. v. Murphree, 632 F.2d 413, 418 (5th Cir. 1980) (disclaimer of implied warranty under lease transactions must be conspicuous and in writing). The omission of the provisions of section 2-316(4) was not substantive. Sections 2A-503 and 2A-504.

    Cross References:

    Article 2, especially sections 2-312(2) and 2-316, and sections 2A-503 and 2A-504.

    Definitional Cross References:

    "Conspicuous". Section 1-201(10).

    "Course of dealing". Section 1-205.

    "Fault". Section 2A-103(1)(f).

    "Goods". Section 2A-103(1)(h).

    "Knows". Section 1-201(25).

    "Lease". Section 2A-103(1)(j).

    "Lease contract". Section 2A-103(1)(l).

    "Lessee". Section 2A-103(1)(n).

    "Person". Section 1-201(30).

    "Usage of trade". Section 1-205.

    "Writing". Section 1-201(46).


2A-215. Cumulation and conflict of warranties express or implied.

Warranties, whether express or implied, must be construed as consistent with each other and as cumulative, but if that construction is unreasonable, the intention of the parties determines which warranty is dominant. In ascertaining that intention the following rules apply:

(a) Exact or technical specifications displace an inconsistent sample or model or general language of description.

(b) A sample from an existing bulk displaces inconsistent general language of description.

(c) Express warranties displace inconsistent implied warranties other than an implied warranty of fitness for particular purpose.

Source:Laws 1991, LB 159, § 26.


Annotations
    COMMENT

    Uniform Statutory Source: Section 2-317.

    Definitional Cross Reference:

    "Party". Section 1-201(29).


2A-216. Third-party beneficiaries of express and implied warranties.

A warranty to or for the benefit of a lessee under this article, whether express or implied, extends to any natural person who is in the family or household of the lessee or who is a guest in the lessee's home if it is reasonable to expect that such person may use, consume, or be affected by the goods and who is injured in person by breach of the warranty. This section does not displace principles of law and equity that extend a warranty to or for the benefit of a lessee to other persons. The operation of this section may not be excluded, modified, or limited, but an exclusion, modification, or limitation of the warranty, including any with respect to rights and remedies, effective against the lessee is also effective against any beneficiary designated under this section.

Source:Laws 1991, LB 159, § 27.


Annotations
    COMMENT

    Uniform Statutory Source: Section 2-318.

    Changes: The provisions of section 2-318 have been included in this section, modified in two respects: First, to reflect leasing practice, including the special practices of the lessor under a finance lease; second, to reflect and thus codify elements of the official comment to section 2-318 with respect to the effect of disclaimers and limitations of remedies against third parties.

    Purposes:

    The last sentence of this section does not preclude the lessor from excluding or modifying an express or implied warranty under a lease. Section 2A-214. Further, that sentence does not preclude the lessor from limiting the rights and remedies of the lessee and from liquidating damages. Sections 2A-503 and 2A-504. If the lease excludes or modifies warranties, limits remedies for breach, or liquidates damages with respect to the lessee, such provisions are enforceable against the beneficiaries designated under this section. However, this last sentence forbids selective discrimination against the beneficiaries designated under this section, i.e., exclusion of the lessor's liability to the beneficiaries with respect to warranties made by the lessor to the lessee.

    Other law, including the Article on Sales (Article 2), may apply in determining the extent to which a warranty to or for the benefit of the lessor extends to the lessee and third parties. This is in part a function of whether the lessor has bought or leased the goods.

    This article does not purport to change the development of the relationship of the common law, with respect to products liability, including strict liability in tort (as restated in Restatement (Second) of Torts, section 402A (1965)), to the provisions of the code. Compare Cline v. Prowler Indus. of Maryland, 418 A.2d 968 (Del. 1980) and Hawkins Constr. Co. v. Matthews Co., 190 Neb. 546, 209 N.W.2d 643 (1973) with Dippel v. Sciano, 37 Wis. 2d 443, 155 N.W.2d 55 (1967).

    Cross References:

    Article 2, especially section 2-318, and sections 2A-214, 2A-503, and 2A-504.

    Definitional Cross References:

    "Goods". Section 2A-103(1)(h).

    "Lessee". Section 2A-103(1)(n).

    "Person". Section 1-201(30).

    "Remedy". Section 1-201(34).

    "Rights". Section 1-201(36).


2A-217. Identification.

Identification of goods as goods to which a lease contract refers may be made at any time and in any manner explicitly agreed to by the parties. In the absence of explicit agreement, identification occurs:

(a) when the lease contract is made if the lease contract is for a lease of goods that are existing and identified;

(b) when the goods are shipped, marked, or otherwise designated by the lessor as goods to which the lease contract refers, if the lease contract is for a lease of goods that are not existing and identified; or

(c) when the young are conceived, if the lease contract is for a lease of unborn young of animals.

Source:Laws 1991, LB 159, § 28.


Annotations
    COMMENT

    Uniform Statutory Source: Section 2-501.

    Changes: This section, together with section 2A-218, is derived from the provisions of section 2-501, with changes to reflect lease terminology; however, this section omits as irrelevant to leasing practice the treatment of special property.

    Purposes:

    With respect to subsection (b) there is a certain amount of ambiguity in the reference to when goods are designated, e.g., when the lessor is both selling and leasing goods to the same lessee/buyer and has marked goods for delivery but has not distinguished between those related to the lease contract and those related to the sales contract. As in section 2-501(1)(b), this issue has been left to be resolved by the courts, case by case.

    Cross References:

    Sections 2-501 and 2A-218.

    Definitional Cross References:

    "Agreement". Section 1-201(3).

    "Goods". Section 2A-103(1)(h).

    "Lease". Section 2A-103(1)(j).

    "Lease contract". Section 2A-103(1)(l).

    "Lessor". Section 2A-103(1)(p).

    "Party". Section 1-201(29).


2A-218. Insurance and proceeds.

(1) A lessee obtains an insurable interest when existing goods are identified to the lease contract even though the goods identified are nonconforming and the lessee has an option to reject them.

(2) If a lessee has an insurable interest only by reason of the lessor's identification of the goods, the lessor, until default or insolvency or notification to the lessee that identification is final, may substitute other goods for those identified.

(3) Notwithstanding a lessee's insurable interest under subsections (1) and (2), the lessor retains an insurable interest until an option to buy has been exercised by the lessee and risk of loss has passed to the lessee.

(4) Nothing in this section impairs any insurable interest recognized under any other statute or rule of law.

(5) The parties by agreement may determine that one or more parties have an obligation to obtain and pay for insurance covering the goods and by agreement may determine the beneficiary of the proceeds of the insurance.

Source:Laws 1991, LB 159, § 29.


Annotations
    COMMENT

    Uniform Statutory Source: Section 2-501.

    Changes: This section, together with section 2A-217, is derived from the provisions of section 2-501, with changes and additions to reflect leasing practices and terminology.

    Purposes:

    Subsection (2) states a rule allowing substitution of goods by the lessor under certain circumstances, until default or insolvency of the lessor, or until notification to the lessee that identification is final. Subsection (3) states a rule regarding the lessor's insurable interest that, by virtue of the difference between a sale and a lease, necessarily is different from the rule stated in section 2-501(2) regarding the seller's insurable interest. For this purpose the option to buy shall be deemed to have been exercised by the lessee when the resulting sale is closed, not when the lessee gives notice to the lessor. Further, subsection (5) is new and reflects the common practice of shifting the responsibility and cost of insuring the goods between the parties to the lease transaction.

    Cross References:

    Sections 2-501, 2-501(2), and 2A-217.

    Definitional Cross References:

    "Agreement". Section 1-201(3).

    "Buying". Section 2A-103(1)(a).

    "Conforming". Section 2A-103(1)(d).

    "Goods". Section 2A-103(1)(h).

    "Insolvent". Section 1-201(23).

    "Lease contract". Section 2A-103(1)(l).

    "Lessee". Section 2A-103(1)(n).

    "Lessor". Section 2A-103(1)(p).

    "Notification". Section 1-201(26).

    "Party". Section 1-201(29).


2A-219. Risk of loss.

(1) Except in the case of a finance lease, risk of loss is retained by the lessor and does not pass to the lessee. In the case of a finance lease, risk of loss passes to the lessee.

(2) Subject to the provisions of this article on the effect of default on risk of loss (section 2A-220), if risk of loss is to pass to the lessee and the time of passage is not stated, the following rules apply:

(a) If the lease contract requires or authorizes the goods to be shipped by carrier

(i) and it does not require delivery at a particular destination, the risk of loss passes to the lessee when the goods are duly delivered to the carrier; but

(ii) if it does require delivery at a particular destination and the goods are there duly tendered while in the possession of the carrier, the risk of loss passes to the lessee when the goods are there duly so tendered as to enable the lessee to take delivery.

(b) If the goods are held by a bailee to be delivered without being moved, the risk of loss passes to the lessee on acknowledgment by the bailee of the lessee's right to possession of the goods.

(c) In any case not within subsection (a) or (b), the risk of loss passes to the lessee on the lessee's receipt of the goods if the lessor, or, in the case of a finance lease, the supplier, is a merchant; otherwise the risk passes to the lessee on tender of delivery.

Source:Laws 1991, LB 159, § 30.


Annotations
    COMMENT

    Uniform Statutory Source: Section 2-509(1) through (3).

    Changes: Subsection (1) is new. The introduction to subsection (2) is new, but subparagraph (a) incorporates the provisions of section 2-509(1); subparagraph (b) incorporates the provisions of section 2-509(2) only in part, reflecting current practice in lease transactions.

    Purposes:

    Subsection (1) states rules related to retention or passage of risk of loss consistent with current practice in lease transactions. The provisions of subsection (4) of section 2-509 are not incorporated as they are not necessary. This section does not deal with responsibility for loss caused by the wrongful act of either the lessor or the lessee.

    Cross References:

    Sections 2-509(1), 2-509(2), and 2-509(4).

    Definitional Cross References:

    "Delivery". Section 1-201(14).

    "Finance lease". Section 2A-103(1)(g).

    "Goods". Section 2A-103(1)(h).

    "Lease contract". Section 2A-103(1)(l).

    "Lessee". Section 2A-103(1)(n).

    "Lessor". Section 2A-103(1)(p).

    "Merchant". Section 2-104(1).

    "Receipt". Section 2-103(1)(c).

    "Rights". Section 1-201(36).

    "Supplier". Section 2A-103(1)(x).


2A-220. Effect of default on risk of loss.

(1) Where risk of loss is to pass to the lessee and the time of passage is not stated:

(a) If a tender or delivery of goods so fails to conform to the lease contract as to give a right of rejection, the risk of their loss remains with the lessor, or, in the case of a finance lease, the supplier, until cure or acceptance.

(b) If the lessee rightfully revokes acceptance, he or she, to the extent of any deficiency in his or her effective insurance coverage, may treat the risk of loss as having remained with the lessor from the beginning.

(2) Whether or not risk of loss is to pass to the lessee, if the lessee as to conforming goods already identified to a lease contract repudiates or is otherwise in default under the lease contract, the lessor, or, in the case of a finance lease, the supplier, to the extent of any deficiency in his or her effective insurance coverage may treat the risk of loss as resting on the lessee for a commercially reasonable time.

Source:Laws 1991, LB 159, § 31.


Annotations
    COMMENT

    Uniform Statutory Source: Section 2-510.

    Changes: Revised to reflect leasing practices and terminology. The rule in subsection (1)(b) does not allow the lessee under a finance lease to treat the risk of loss as having remained with the supplier from the beginning. This is appropriate given the limited circumstances under which the lessee under a finance lease is allowed to revoke acceptance. Section 2A-516 official comment and section 2A-517.

    Definitional Cross References:

    "Conforming". Section 2A-103(1)(d).

    "Delivery". Section 1-201(14).

    "Finance lease". Section 2A-103(1)(g).

    "Goods". Section 2A-103(1)(h).

    "Lease contract". Section 2A-103(1)(l).

    "Lessee". Section 2A-103(1)(n).

    "Lessor". Section 2A-103(1)(p).

    "Reasonable time". Section 1-204(1) and (2).

    "Rights". Section 1-201(36).

    "Supplier". Section 2A-103(1)(x).


2A-221. Casualty to identified goods.

If a lease contract requires goods identified when the lease contract is made, and the goods suffer casualty without fault of the lessee, the lessor, or the supplier before delivery, or the goods suffer casualty before risk of loss passes to the lessee pursuant to the lease agreement or section 2A-219, then:

(a) if the loss is total, the lease contract is avoided; and

(b) if the loss is partial or the goods have so deteriorated as to no longer conform to the lease contract, the lessee may nevertheless demand inspection and at his or her option either treat the lease contract as avoided or, except in a finance lease that is not a consumer lease, accept the goods with due allowance from the rent payable for the balance of the lease term for the deterioration or the deficiency in quantity but without further right against the lessor.

Source:Laws 1991, LB 159, § 32.


Annotations
    COMMENT

    Uniform Statutory Source: Section 2-613.

    Changes: Revised to reflect leasing practices and terminology.

    Purpose:

    Due to the vagaries of determining the amount of due allowance (section 2-613(b)), no attempt was made in subsection (b) to treat a problem unique to lease contracts and installment sales contracts: Determining how to recapture the allowance, e.g., application to the first or last rent payments or allocation, pro rata, to all rent payments.

    Cross Reference:

    Section 2-613.

    Definitional Cross References:

    "Conforming". Section 2A-103(1)(d).

    "Consumer lease". Section 2A-103(1)(e).

    "Delivery". Section 1-201(14).

    "Fault". Section 2A-103(1)(f).

    "Finance lease". Section 2A-103(1)(g).

    "Goods". Section 2A-103(1)(h).

    "Lease". Section 2A-103(1)(j).

    "Lease agreement". Section 2A-103(1)(k).

    "Lease contract". Section 2A-103(1)(l).

    "Lessee". Section 2A-103(1)(n).

    "Lessor". Section 2A-103(1)(p).

    "Rights". Section 1-201(36).

    "Supplier". Section 2A-103(1)(x).


2A-301. Enforceability of lease contract.

Except as otherwise provided in this article, a lease contract is effective and enforceable according to its terms between the parties, against purchasers of the goods, and against creditors of the parties.

Source:Laws 1991, LB 159, § 33.


Annotations
    COMMENT

    Uniform Statutory Source: Section 9-201.

    Changes: Section 9-201(a) was incorporated, modified to reflect leasing terminology.

    Purposes:

    1. This section establishes a general rule regarding the validity and enforceability of a lease contract. The lease contract is effective and enforceable between the parties and against third parties. Exceptions to this general rule arise where there is a specific rule to the contrary in this article. Enforceability is, thus, dependent upon the lease contract meeting the requirements of the statute of frauds provisions of section 2A-201. Enforceability is also a function of the lease contract conforming to the principles of construction and interpretation contained in the Article on General Provisions (Article 1). Section 2A-103(4).

    2. The effectiveness or enforceability of the lease contract is not dependent upon the lease contract or any financing statement or the like being filed or recorded; however, the priority of the interest of a lessor of fixtures with respect to the interests of certain third parties in such fixtures is subject to the provisions of the Article on Secured Transactions (Article 9). Section 2A-309. Prior to the adoption of this article filing or recording was not required with respect to leases, only leases intended as security. The definition of security interest, as amended concurrently with the adoption of this article, more clearly delineates leases and leases intended as security and thus signals the need to file. Section 1-201(37). Those lessors who are concerned about whether the transaction creates a lease or a security interest will continue to file a protective financing statement. Section 9-505. Coogan, Leasing and the Uniform Commercial Code, in Equipment Leasing — Leveraged Leasing 681, 744-46 (2d ed. 1980).

    3. Hypothetical:

    (a) In construing this section it is important to recognize its relationship to other sections in this article. This is best demonstrated by reference to a hypothetical. Assume that on February 1 A, a manufacturer of combines and other farm equipment, leased a fleet of six combines to B, a corporation engaged in the business of farming, for a 12-month term. Under the lease agreement between A and B, A agreed to defer B's payment of the first two months' rent to April 1. On March 1 B recognized that it would need only four combines and thus subleased two combines to C for an 11-month term.

    (b) This hypothetical raises a number of issues that are answered by the sections contained in this part. Since lease is defined to include sublease (section 2A-103(1)(j) and (w)), this section provides that the prime lease between A and B and the sublease between B and C are enforceable in accordance with their terms, except as otherwise provided in this article; that exception, in this case, is one of considerable scope.

    (c) The separation of ownership, which is in A, and possession, which is in B with respect to four combines and which is in C with respect to two combines, is not relevant. Section 2A-302. A's interest in the six combines cannot be challenged simply because A parted with possession to B, who in turn parted with possession of some of the combines to C. Yet it is important to note that by the terms of section 2A-302 this conclusion is subject to change if otherwise provided in this article.

    (d) B's entering the sublease with C raises an issue that is treated by this part. In a dispute over the leased combines A may challenge B's right to sublease. The rule is permissive as to transfers of interests under a lease contract, including subleases. Section 2A-303(2). However, the rule has two significant qualifications. If the prime lease contract between A and B prohibits B from subleasing the combines, or makes such a sublease an event of default, section 2A-303(2) applies; thus, while B's interest under the prime lease may not be transferred under the sublease to C, A may have a remedy pursuant to section 2A-303(4). Absent a prohibition or default provision in the prime lease contract A might be able to argue that the sublease to C materially increases A's risk; thus, while B's interest under the prime lease may be transferred under the sublease to C, A may have a remedy pursuant to section 2A-303(4). Section 2A-303(4)(b)(ii).

    (e) Resolution of this issue is also a function of the section dealing with the sublease of goods by a prime lessee (section 2A-305). Subsection (1) of section 2A-305, which is subject to the rules of section 2A-303 stated above, provides that C takes subject to the interest of A under the prime lease between A and B. However, there are two exceptions. First, if B is a merchant (sections 2-104(1) and 2A-103(3)) dealing in goods of that kind and C is a sublessee in the ordinary course of business (sections 2A-103(1)(n) and 2A-103(1)(o)), C takes free of the prime lease between A and B. Second, if B has rejected the six combines under the prime lease with A, and B disposes of the goods by sublease to C, C takes free of the prime lease if C can establish good faith. Section 2A-511(4).

    (f) If the facts of this hypothetical are expanded and we assume that the prime lease obligated B to maintain the combines, an additional issue may be presented. Prior to entering the sublease, B, in satisfaction of its maintenance covenant, brought the two combines that it desired to sublease to a local independent dealer of A's. The dealer did the requested work for B. C inspected the combines on the dealer's lot after the work was completed. C signed the sublease with B two days later. C, however, was prevented from taking delivery of the two combines as B refused to pay the dealer's invoice for the repairs. The dealer furnished the repair service to B in the ordinary course of the dealer's business. If under applicable law the dealer has a lien on repaired goods in the dealer's possession, the dealer's lien will take priority over B's and C's interests, and also should take priority over A's interest, depending upon the terms of the lease contract and the applicable law. Section 2A-306.

    (g) Now assume that C is in financial straits and one of C's creditors obtains a judgment against C. If the creditor levies on C's subleasehold interest in the two combines, who will prevail? Unless the levying creditor also holds a lien covered by section 2A-306, discussed above, the judgment creditor will take its interest subject to B's rights under the sublease and A's rights under the prime lease. Section 2A-307(1). The hypothetical becomes more complicated if we assume that B is in financial straits and B's creditor holds the judgment. Here the judgment creditor takes subject to the sublease unless the lien attached to the two combines before the sublease contract became enforceable. Section 2A-307(2). However, B's judgment creditor cannot prime A's interest in the goods because, with respect to A, the judgment creditor is a creditor of B in its capacity as lessee under the prime lease between A and B. Thus, here the judgment creditor's interest is subject to the lease between A and B. Section 2A-307(1).

    (h) Finally, assume that on April 1 B is unable to pay A the deferred rent then due under the prime lease, but that C is current in its payments under the sublease from B. What effect will B's default under the prime lease between A and B have on C's rights under the sublease between B and C? Section 2A-301 provides that a lease contract is effective against the creditors of either party. Since a lease contract includes a sublease contract (section 2A-103(1)(l)), the sublease contract between B and C arguably could be enforceable against A, a prime lessor who has extended unsecured credit to B, the prime lessee/sublessor, if the sublease contract meets the requirements of section 2A-201. However, the rule stated in section 2A-301 is subject to other provisions in this article. Under section 2A-305, C, as sublessee, would take subject to the prime lease contract in most cases. Thus, B's default under the prime lease will in most cases lead to A's recovery of the goods from C. Section 2A-523. A and C could provide otherwise by agreement. Section 2A-311. C's recourse will be to assert a claim for damages against B. Sections 2A-211(1) and 2A-508.

    4. Relationship between sections:

    (a) As the analysis of the hypothetical demonstrates, part 3 of the article focuses on issues that relate to the enforceability of the lease contract (sections 2A-301, 2A-302, and 2A-303) and to the priority of various claims to the goods subject to the lease contract (sections 2A-304, 2A-305, 2A-306, 2A-307, 2A-308, 2A-309, 2A-310, and 2A-311).

    (b) This section states a general rule of enforceability, which is subject to specific rules to the contrary stated elsewhere in the article. Section 2A-302 negates any notion that the separation of title and possession is fraudulent as a rule of law. Finally, section 2A-303 states rules with respect to the transfer of the lessor's interest (as well as the residual interest in the goods) or the lessee's interest under the lease contract. Qualifications are imposed as a function of various issues, including whether the transfer is the creation or enforcement of a security interest or one that is material to the other party to the lease contract. In addition, a system of rules is created to deal with the rights and duties among assignor, assignee, and the other party to the lease contract.

    (c) Sections 2A-304 and 2A-305 are twins that deal with good faith transferees of goods subject to the lease contract. Section 2A-304 creates a set of rules with respect to transfers by the lessor of goods subject to a lease contract; the transferee considered is a subsequent lessee of the goods. The priority dispute covered here is between the subsequent lessee and the original lessee of the goods (or persons claiming through the original lessee). Section 2A-305 creates a set of rules with respect to transfers by the lessee of goods subject to a lease contract; the transferees considered are buyers of the goods or sublessees of the goods. The priority dispute covered here is between the transferee and the lessor of the goods (or persons claiming through the lessor).

    (d) Section 2A-306 creates a rule with respect to priority disputes between holders of liens for services or materials furnished with respect to goods subject to a lease contract and the lessor or the lessee under that contract. Section 2A-307 creates a rule with respect to priority disputes between the lessee and creditors of the lessor and priority disputes between the lessor and creditors of the lessee.

    (e) Section 2A-308 creates a series of rules relating to allegedly fraudulent transfers and preferences. The most significant rule is that set forth in subsection (3) which validates sale-leaseback transactions if the buyer-lessor can establish that he or she bought for value and in good faith.

    (f) Sections 2A-309 and 2A-310 create a series of rules with respect to priority disputes between various third parties and a lessor of fixtures or accessions, respectively, with respect thereto.

    (g) Finally, section 2A-311 allows parties to alter the statutory priorities by agreement.

    Cross References:

    Article 1, especially section 1-201(37), sections 2-104(1), 2A-103(1)(j), 2A-103(1)(l), 2A-103(1)(n), 2A-103(1)(o), 2A-103(1)(w), 2A-103(3), 2A-103(4), 2A-201, 2A-301 through 2A-303, 2A-303(2), 2A-303(4), 2A-304 through 2A-307, 2A-307(1), 2A-307(2), 2A-308 through 2A-311, 2A-508, 2A-511(4), and 2A-523, and article 9, especially sections 9-201 and 9-505.

    Definitional Cross References:

    "Creditor". Section 1-201(12).

    "Goods". Section 2A-103(1)(h).

    "Lease contract". Section 2A-103(1)(l).

    "Party". Section 1-201(29).

    "Purchaser". Section 1-201(33).

    "Term". Section 1-201(42).


2A-302. Title to and possession of goods.

Except as otherwise provided in this article, each provision of this article applies whether the lessor or a third party has title to the goods, and whether the lessor, the lessee, or a third party has possession of the goods, notwithstanding any statute or rule of law that possession or the absence of possession is fraudulent.

Source:Laws 1991, LB 159, § 34.


Annotations
    COMMENT

    Uniform Statutory Source: Section 9-202.

    Changes: Section 9-202 was modified to reflect leasing terminology and to clarify the law of leases with respect to fraudulent conveyances or transfers.

    Purposes:

    The separation of ownership and possession of goods between the lessor and the lessee (or a third party) has created problems under certain fraudulent conveyance statutes. See, e.g., In re Ludlum Enters., 510 F.2d 996 (5th Cir. 1975); Suburbia Fed. Sav. & Loan Ass'n v. Bel-Air Conditioning Co., 385 So.2d 1151 (Fla. Dist. Ct. App. 1980). This section provides, among other things, that separation of ownership and possession per se does not affect the enforceability of the lease contract. Sections 2A-301 and 2A-308.

    Cross References:

    Sections 2A-301, 2A-308, and 9-202.

    Definitional Cross References:

    "Goods". Section 2A-103(1)(h).

    "Lessee". Section 2A-103(1)(n).

    "Lessor". Section 2A-103(1)(p).


2A-303. Alienability of party's interest under lease contract or of lessor's residual interest in goods; delegation of performance; transfer of rights.

(1) As used in this section, "creation of a security interest" includes the sale of a lease contract that is subject to Article 9, Secured Transactions, by reason of section 9-109(a)(3).

(2) Except as provided in subsection (3) and section 9-407, a provision in a lease agreement which (i) prohibits the voluntary or involuntary transfer, including a transfer by sale, sublease, creation or enforcement of a security interest, or attachment, levy, or other judicial process, of an interest of a party under the lease contract or of the lessor's residual interest in the goods, or (ii) makes such a transfer an event of default, gives rise to the rights and remedies provided in subsection (4), but a transfer that is prohibited or is an event of default under the lease agreement is otherwise effective.

(3) A provision in a lease agreement which (i) prohibits a transfer of a right to damages for default with respect to the whole lease contract or of a right to payment arising out of the transferor's due performance of the transferor's entire obligation, or (ii) makes such a transfer an event of default, is not enforceable, and such a transfer is not a transfer that materially impairs the prospect of obtaining return performance by, materially changes the duty of, or materially increases the burden or risk imposed on, the other party to the lease contract within the purview of subsection (4).

(4) Subject to subsection (3) and section 9-407:

(a) if a transfer is made which is made an event of default under a lease agreement, the party to the lease contract not making the transfer, unless that party waives the default or otherwise agrees, has the rights and remedies described in section 2A-501(2);

(b) if paragraph (a) is not applicable and if a transfer is made that (i) is prohibited under a lease agreement or (ii) materially impairs the prospect of obtaining return performance by, materially changes the duty of, or materially increases the burden or risk imposed on, the other party to the lease contract, unless the party not making the transfer agrees at any time to the transfer in the lease contract or otherwise, then, except as limited by contract, (i) the transferor is liable to the party not making the transfer for damages caused by the transfer to the extent that the damages could not reasonably be prevented by the party not making the transfer and (ii) a court having jurisdiction may grant other appropriate relief, including cancellation of the lease contract or an injunction against the transfer.

(5) A transfer of "the lease" or of "all my rights under the lease", or a transfer in similar general terms, is a transfer of rights and, unless the language or the circumstances, as in a transfer for security, indicate the contrary, the transfer is a delegation of duties by the transferor to the transferee. Acceptance by the transferee constitutes a promise by the transferee to perform those duties. The promise is enforceable by either the transferor or the other party to the lease contract.

(6) Unless otherwise agreed by the lessor and the lessee, a delegation of performance does not relieve the transferor as against the other party of any duty to perform or of any liability for default.

(7) In a consumer lease, to prohibit the transfer of an interest of a party under the lease contract or to make a transfer an event of default, the language must be specific, by a writing, and conspicuous.

Source:Laws 1991, LB 159, § 35; Laws 1999, LB 550, § 60.    


Annotations
    COMMENT

    1. Subsection (2) states a rule, consistent with section 9-401(b), that voluntary and involuntary transfers of an interest of a party under the lease contract or of the lessor's residual interest, including by way of the creation or enforcement of a security interest, are effective, notwithstanding a provision in the lease agreement prohibiting the transfer or making the transfer an event of default. Although the transfers are effective, the provision in the lease agreement is nevertheless enforceable, but only as provided in subsection (4). Under subsection (4) the prejudiced party is limited to the remedies on "default under the lease contract" in this article and, except as limited by this article, as provided in the lease agreement, if the transfer has been made an event of default. Section 2A-501(2). Usually, there will be a specific provision to this effect or a general provision making a breach of a covenant an event of default. In those cases where the transfer is prohibited, but not made an event of default, the prejudiced party may recover damages; or, if the damage remedy would be ineffective adequately to protect that party, the court can order cancellation of the lease contract or enjoin the transfer. This rule that such provisions generally are enforceable is subject to subsection (3) and section 9-407, which make such provisions unenforceable in certain instances.

    2. Under section 9-407, a provision in a lease agreement which prohibits the creation or enforcement of a security interest, including sales of lease contracts subject to article 9 (section 9-109(a)(3)), or makes it an event of default is generally not enforceable, reflecting the policy of section 9-406 and former section 9-318(4).

    3. Subsection (3) is based upon section 2-210(2) and section 9-406. It makes unenforceable a prohibition against transfers of certain rights to payment or a provision making the transfer an event of default. It also provides that such transfers do not materially impair the prospect of obtaining return performance by, materially change the duty of, or materially increase the burden or risk imposed on, the other party to the lease contract so as to give rise to the rights and remedies stated in subsection (4). Accordingly, a transfer of a right to payment cannot be prohibited or made an event of default, or be one that materially impairs performance, changes duties, or increases risk, if the right is already due or will become due without further performance being required by the party to receive payment. Thus, a lessor can transfer the right to future payments under the lease contract, including by way of a grant of a security interest, and the transfer will not give rise to the rights and remedies stated in subsection (4) if the lessor has no remaining performance under the lease contract. The mere fact that the lessor is obligated to allow the lessee to remain in possession and to use the goods as long as the lessee is not in default does not mean that there is "remaining performance" on the part of the lessor. Likewise, the fact that the lessor has potential liability under a "nonoperating" lease contract for breaches of warranty does not mean that there is "remaining performance". In contrast, the lessor would have "remaining performance" under a lease contract requiring the lessor to regularly maintain and service the goods or to provide "upgrades" of the equipment on a periodic basis in order to avoid obsolescence. The basic distinction is between a mere potential duty to respond which is not "remaining performance", and an affirmative duty to render stipulated performance. Although the distinction may be difficult to draw in some cases, it is instructive to focus on the difference between "operating" and "nonoperating" leases as generally understood in the marketplace. Even if there is "remaining performance" under a lease contract, a transfer for security of a right to payment that is made an event of default or that is in violation of a prohibition against transfer does not give rise to the rights and remedies under subsection (4) if it does not constitute an actual delegation of a material performance under section 9-407.

    4. The application of either the rule of section 9-407 or the rule of subsection (3) to the grant by the lessor of a security interest in the lessor's right to future payment under the lease contract may produce the same result. Both provisions generally protect security transfers by the lessor in particular because the creation by the lessor of a security interest or the enforcement of that interest generally will not prejudice the lessee's rights if it does not result in a delegation of the lessor's duties. To the contrary, the receipt of loan proceeds or relief from the enforcement of an antecedent debt normally should enhance the lessor's ability to perform its duties under the lease contract. Nevertheless, there are circumstances where relief might be justified. For example, if ownership of the goods is transferred pursuant to enforcement of a security interest to a party whose ownership would prevent the lessee from continuing to possess the goods, relief might be warranted. See 49 U.S.C. sections 44101 and 44102 which place limitations on the operation of aircraft in the United States based on the citizenship or corporate qualification of the registrant.

    5. Relief on the ground of material prejudice when the lease agreement does not prohibit the transfer or make it an event of default should be afforded only in extreme circumstances, considering the fact that the party asserting material prejudice did not insist upon a provision in the lease agreement that would protect against such a transfer.

    6. Subsection (4) implements the rule of subsection (2). Subsection (2) provides that, even though a transfer is effective, a provision in the lease agreement prohibiting it or making it an event of default may be enforceable as provided in subsection (4). See Brummond v. First National Bank of Clovis, 656 P.2d 884, 35 U.C.C. Rep. Serv. (Callaghan) 1311 (N. Mex. 1983), stating the analogous rule for section 9-311. If the transfer prohibited by the lease agreement is made an event of default, then, under subsection (4)(a), unless the default is waived or there is an agreement otherwise, the aggrieved party has the rights and remedies referred to in section 2A-501(2), viz. those in this article and, except as limited in the article, those provided in the lease agreement. In the unlikely circumstance that the lease agreement prohibits the transfer without making a violation of the prohibition an event of default or, even if there is no prohibition against the transfer, and the transfer is one that materially impairs performance, changes duties, or increases risk (for example, a sublease or assignment to a party using the goods improperly or for an illegal purpose), then subsection (4)(b) is applicable. In that circumstance, unless the party aggrieved by the transfer has otherwise agreed in the lease contract, such as by assenting to a particular transfer or to transfers in general, or agrees in some other manner, the aggrieved party has the right to recover damages from the transferor and a court may, in appropriate circumstances, grant other relief, such as cancellation of the lease contract or an injunction against the transfer.

    7. If a transfer gives rise to the rights and remedies provided in subsection (4), the transferee as an alternative may propose, and the other party may accept, adequate cure or compensation for past defaults and adequate assurance of future due performance under the lease contract. Subsection (4) does not preclude any other relief that may be available to a party to the lease contract aggrieved by a transfer subject to an enforceable prohibition, such as an action for interference with contractual relations.

    8. Subsection (7) requires that a provision in a consumer lease prohibiting a transfer, or making it an event of default, must be specific, written, and conspicuous. See section 1-201(10). This assists in protecting a consumer lessee against surprise assertions of default.

    9. Subsection (5) is taken almost verbatim from the provisions of section 2-210(5). The subsection states a rule of construction that distinguishes a commercial assignment, which substitutes the assignee for the assignor as to rights and duties, and an assignment for security or financing assignment, which substitutes the assignee for the assignor only as to rights. Note that the assignment for security or financing assignment is a subset of all security interests. Security interest is defined to include "any interest of a buyer of ... chattel paper". Section 1-201(37). Chattel paper is defined to include a lease. Section 9-102. Thus, a buyer of leases is the holder of a security interest in the leases. That conclusion should not influence this issue, as the policy is quite different. Whether a buyer of leases is the holder of a commercial assignment, or an assignment for security or financing assignment should be determined by the language of the assignment or the circumstances of the assignment.


2A-304. Subsequent lease of goods by lessor.

(1) Subject to section 2A-303, a subsequent lessee from a lessor of goods under an existing lease contract obtains, to the extent of the leasehold interest transferred, the leasehold interest in the goods that the lessor had or had power to transfer, and except as provided in subsection (2) and section 2A-527(4), takes subject to the existing lease contract. A lessor with voidable title has power to transfer a good leasehold interest to a good faith subsequent lessee for value, but only to the extent set forth in the preceding sentence. If goods have been delivered under a transaction of purchase, the lessor has that power even though:

(a) the lessor's transferor was deceived as to the identity of the lessor;

(b) the delivery was in exchange for a check which is later dishonored;

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

(d) the delivery was procured through fraud punishable as larcenous under the criminal law.

(2) A subsequent lessee in the ordinary course of business from a lessor who is a merchant dealing in goods of that kind to whom the goods were entrusted by the existing lessee of that lessor before the interest of the subsequent lessee became enforceable against that lessor obtains, to the extent of the leasehold interest transferred, all of that lessor's and the existing lessee's rights to the goods, and takes free of the existing lease contract.

(3) A subsequent lessee from the lessor of goods that are subject to an existing lease contract and are covered by a certificate of title issued under a statute of this state or of another jurisdiction takes no greater rights than those provided both by this section and by the certificate of title statute.

Source:Laws 1991, LB 159, § 36.


Annotations
    COMMENT

    Uniform Statutory Source: Section 2-403.

    Changes: While section 2-403 was used as a model for this section, the provisions of section 2-403 were significantly revised to reflect leasing practices and to integrate this article with certificate of title statutes.

    Purposes:

    1. This section must be read in conjunction with, as it is subject to, the provisions of section 2A-303, which govern voluntary and involuntary transfers of rights and duties under a lease contract, including the lessor's residual interest in the goods.

    2. This section must also be read in conjunction with section 2-403. This section and section 2A-305 are derived from section 2-403, which states a unified policy on good faith purchases of goods. Given the scope of the definition of purchaser (section 1-201(33)), a person who bought goods to lease as well as a person who bought goods subject to an existing lease from a lessor will take pursuant to section 2-403. Further, a person who leases such goods from the person who bought them should also be protected under section 2-403, first because the lessee's rights are derivative and second because the definition of purchaser should be interpreted to include one who takes by lease; no negative implication should be drawn from the inclusion of lease in the definition of purchase in this article. Section 2A-103(1)(v).

    3. There are hypotheticals that relate to an entrustee's unauthorized lease of entrusted goods to a third party that are outside the provisions of sections 2-403, 2A-304, and 2A-305. Consider a sale of goods by M, a merchant, to B, a buyer. After paying for the goods B allows M to retain possession of the goods as B is short of storage. Before B calls for the goods M leases the goods to L, a lessee. This transaction is not governed by section 2-403(2) as L is not a buyer in the ordinary course of business. Section 1-201(9). Further, this transaction is not governed by section 2A-304(2) as B is not an existing lessee. Finally, this transaction is not governed by section 2A-305(2) as B is not M's lessor. Section 2A-307(2) resolves the potential dispute between B, M, and L. By virtue of B's entrustment of the goods to M and M's lease of the goods to L, B has a cause of action against M under the common law. Sections 1-103 and 2A-103(4). See, e.g., Restatement (Second) of Torts sections 222A-243. Thus, B is a creditor of M. Sections 1-201(12) and 2A-103(4). Section 2A-307(2) provides that B, as M's creditor, takes subject to M's lease to L. Thus, if L does not default under the lease, L's enjoyment and possession of the goods should be undisturbed. However, B is not without recourse. B's action should result in a judgment against M providing, among other things, a turnover of all proceeds arising from M's lease to L, as well as a transfer of all of M's right, title, and interest as lessor under M's lease to L, including M's residual interest in the goods. Section 2A-103(1)(q).

    4. Subsection (1) states a rule with respect to the leasehold interest obtained by a subsequent lessee from a lessor of goods under an existing lease contract. The interest will include such leasehold interest as the lessor has in the goods as well as the leasehold interest that the lessor had the power to transfer. Thus, the subsequent lessee obtains unimpaired all rights acquired under the law of agency, apparent agency, ownership, or other estoppel, whether based upon statutory provisions or upon case law principles. Sections 1-103 and 2A-103(4). In general, the subsequent lessee takes subject to the existing lease contract, including the existing lessee's rights thereunder. Furthermore, the subsequent lease contract is, of course, limited by its own terms, and the subsequent lessee takes only to the extent of the leasehold interest transferred thereunder.

    5. Subsection (1) further provides that a lessor with voidable title has power to transfer a good leasehold interest to a good faith subsequent lessee for value. In addition, subsections (1)(a) through (d) provide specifically for the protection of the good faith subsequent lessee for value in a number of specific situations which have been troublesome under prior law.

    6. The position of an existing lessee who entrusts leased goods to its lessor is not distinguishable from the position of other entrusters. Thus, subsection (2) provides that the subsequent lessee in the ordinary course of business takes free of the existing lease contract between the lessor entrustee and the lessee entruster, if the lessor is a merchant dealing in goods of that kind. Further, the subsequent lessee obtains all of the lessor entrustee's and the lessee entruster's rights to the goods, but only to the extent of the leasehold interest transferred by the lessor entrustee. Thus, the lessor entrustee retains the residual interest in the goods. Section 2A-103(1)(q). However, entrustment by the existing lessee must have occurred before the interest of the subsequent lessee became enforceable against the lessor. Entrusting is defined in section 2-403(3) and that definition applies here. Section 2A-103(3).

    7. Subsection (3) states a rule with respect to a transfer of goods from a lessor to a subsequent lessee where the goods are subject to an existing lease and covered by a certificate of title. The subsequent lessee's rights are no greater than those provided by this section and the applicable certificate of title statute, including any applicable case law construing such statute. Where the relationship between the certificate of title statute and section 2-403, the statutory analogue to this section, has been construed by a court, that construction is incorporated here. Sections 1-102(1) and (2) and 2A-103(4). The better rule is that the certificate of title statutes are in harmony with section 2-403 and thus would be in harmony with this section. E.g., Atwood Chevrolet-Olds v. Aberdeen Mun. School Dist., 431 So.2d 926, 928 (Miss. 1983); Godfrey v. Gilsdorf, 476 P.2d 3, 6, 86 Nev. 714, 718 (1970); Martin v. Nager, 192 N.J. Super. 189, 197-98, 469 A.2d 519, 523 (Super. Ct. Ch. Div. 1983). Where the certificate of title statute is silent on this issue of transfer, this section will control.

    Cross References:

    Sections 1-102, 1-103, 1-201(33), 2-403, 2A-103(1)(v), 2A-103(3), 2A-103(4), 2A-303, and 2A-305.

    Definitional Cross References:

    "Agreement". Section 1-201(3).

    "Delivery". Section 1-201(14).

    "Entrusting". Section 2-403(3).

    "Good faith". Sections 1-201(19) and 2-103(1)(b).

    "Goods". Section 2A-103(1)(h).

    "Lease". Section 2A-103(1)(j).

    "Lease contract". Section 2A-103(1)(l).

    "Leasehold interest". Section 2A-103(1)(m).

    "Lessee". Section 2A-103(1)(n).

    "Lessee in the ordinary course of business". Section 2A-103(1)(o).

    "Lessor". Section 2A-103(1)(p).

    "Merchant". Section 2-104(1).

    "Purchase". Section 2A-103(1)(v).

    "Rights". Section 1-201(36).

    "Value". Section 1-201(44).


2A-305. Sale or sublease of goods by lessee.

(1) Subject to the provisions of section 2A-303, a buyer or sublessee from the lessee of goods under an existing lease contract obtains, to the extent of the interest transferred, the leasehold interest in the goods that the lessee had or had power to transfer, and except as provided in subsection (2) and section 2A-511(4), takes subject to the existing lease contract. A lessee with a voidable leasehold interest has power to transfer a good leasehold interest to a good faith buyer for value or a good faith sublessee for value, but only to the extent set forth in the preceding sentence. When goods have been delivered under a transaction of lease the lessee has that power even though:

(a) the lessor was deceived as to the identity of the lessee;

(b) the delivery was in exchange for a check which is later dishonored; or

(c) the delivery was procured through fraud punishable as larcenous under the criminal law.

(2) A buyer in the ordinary course of business or a sublessee in the ordinary course of business from a lessee who is a merchant dealing in goods of that kind to whom the goods were entrusted by the lessor obtains, to the extent of the interest transferred, all of the lessor's and lessee's rights to the goods, and takes free of the existing lease contract.

(3) A buyer or sublessee from the lessee of goods that are subject to an existing lease contract and are covered by a certificate of title issued under a statute of this state or of another jurisdiction takes no greater rights than those provided both by this section and by the certificate of title statute.

Source:Laws 1991, LB 159, § 37.


Annotations
    COMMENT

    Uniform Statutory Source: Section 2-403.

    Changes: While section 2-403 was used as a model for this section, the provisions of section 2-403 were significantly revised to reflect leasing practice and to integrate this article with certificate of title statutes.

    Purposes:

    This section, a companion to section 2A-304, states the rule with respect to the leasehold interest obtained by a buyer or sublessee from a lessee of goods under an existing lease contract. Cf. section 2A-304 official comment. Note that this provision is consistent with existing case law, which prohibits the bailee's transfer of title to a good faith purchaser for value under section 2-403(1). Rohweder v. Aberdeen Product. Credit Ass'n, 765 F.2d 109 (8th Cir. 1985).

    Subsection (2) is also consistent with existing case law. American Standard Credit, Inc. v. National Cement Co., 643 F.2d 248, 269-70 (5th Cir. 1981); but cf. Exxon Co., U.S.A. v. TLW Computer Indus., 37 U.C.C. Rep. Serv. (Callaghan) 1052, 1057-58 (D. Mass. 1983). Unlike section 2A-304(2), this subsection does not contain any requirement with respect to the time that the goods were entrusted to the merchant. In section 2A-304(2) the competition is between two customers of the merchant lessor; the time of entrusting was added as a criterion to create additional protection to the customer who was first in time: the existing lessee. In subsection (2) the equities between the competing interests were viewed as balanced.

    There appears to be some overlap between section 2-403(2) and section 2A-305(2) with respect to a buyer in the ordinary course of business. However, an examination of this article's definition of buyer in the ordinary course of business (section 2A-103(1)(a)) makes clear that this reference was necessary to treat entrusting in the context of a lease.

    Subsection (3) states a rule of construction with respect to a transfer of goods from a lessee to a buyer or sublessee, where the goods are subject to an existing lease and covered by a certificate of title. Cf. section 2A-304 official comment.

    Cross References:

    Sections 2-403, 2A-103(1)(a), 2A-304, and 2A-305(2).

    Definitional Cross References:

    "Buyer". Section 2-103(1)(a).

    "Buyer in the ordinary course of business". Section 2A-103(1)(a).

    "Delivery". Section 1-201(14).

    "Entrusting". Section 2-403(3).

    "Good faith". Sections 1-201(19) and 2-103(1)(b).

    "Goods". Section 2A-103(1)(h).

    "Lease". Section 2A-103(1)(j).

    "Lease contract". Section 2A-103(1)(l).

    "Leasehold interest". Section 2A-103(1)(m).

    "Lessee". Section 2A-103(1)(n).

    "Lessee in the ordinary course of business". Section 2A-103(1)(o).

    "Lessor". Section 2A-103(1)(p).

    "Merchant". Section 2-104(1).

    "Rights". Section 1-201(36).

    "Sale". Section 2-106(1).

    "Sublease". Section 2A-103(1)(w).

    "Value". Section 1-201(44).


2A-306. Priority of certain liens arising by operation of law.

If a person in the ordinary course of his or her business furnishes services or materials with respect to goods subject to a lease contract, a lien upon those goods in the possession of that person given by statute or rule of law for those materials or services takes priority over any interest of the lessor or lessee under the lease contract or this article unless the lien is created by statute and the statute provides otherwise or unless the lien is created by rule of law and the rule of law provides otherwise.

Source:Laws 1991, LB 159, § 38.


Annotations
    COMMENT

    Uniform Statutory Source: Section 9-333.

    Changes: The approach reflected in the provisions of section 9-333 was included, but revised to conform to leasing terminology and to expand the exception to the special priority granted to protected liens to cover liens created by rule of law as well as those created by statute.

    Purposes:

    This section should be interpreted to allow a qualified lessor or a qualified lessee to be the competing lienholder if the statute or rule of law so provides. The reference to statute includes applicable regulations and cases; these sources must be reviewed in resolving a priority dispute under this section.

    Cross Reference:

    Section 9-333.

    Definitional Cross References:

    "Goods". Section 2A-103(1)(h).

    "Lease contract". Section 2A-103(1)(l).

    "Lessee". Section 2A-103(1)(n).

    "Lessor". Section 2A-103(1)(p).

    "Lien". Section 2A-103(1)(r).

    "Person". Section 1-201(30).


2A-307. Priority of liens arising by attachment or levy on, security interests in, and other claims to goods.

(1) Except as otherwise provided in section 2A-306, a creditor of a lessee takes subject to the lease contract.

(2) Except as otherwise provided in subsection (3) and in sections 2A-306 and 2A-308, a creditor of a lessor takes subject to the lease contract unless the creditor holds a lien that attached to the goods before the lease contract became enforceable.

(3) Except as otherwise provided in sections 9-317, 9-321, and 9-323, a lessee takes a leasehold interest subject to a security interest held by a creditor of the lessor.

Source:Laws 1991, LB 159, § 39; Laws 1999, LB 550, § 61.    


Annotations
    COMMENT

    Uniform Statutory Source: None for subsection (1). Subsection (2) is derived from section 9-317.

    Changes: The provisions of section 9-317 were incorporated, and modified to reflect leasing terminology and the basic concepts reflected in this article.

    Purposes:

    1. Subsection (1) states a general rule of priority that a creditor of the lessee takes subject to the lease contract. The term lessee (section 2A-103(1)(n)) includes sublessee. Therefor, this subsection not only covers disputes between the prime lessor and a creditor of the prime lessee but also disputes between the prime lessor, or the sublessor, and a creditor of the sublessee. Section 2A-301 official comment 3(g). Further, by using the term creditor (section 1-201(12)), this subsection will cover disputes with a general creditor, a secured creditor, a lien creditor, and any representative of creditors. Section 2A-103(4).

    2. Subsection (2) states a general rule of priority that a creditor of a lessor takes subject to the lease contract. Note the discussion above with regard to the scope of these rules. Section 2A-301 official comment 3(g). Thus, the section will not only cover disputes between the prime lessee and a creditor of the prime lessor but also disputes between the prime lessee, or the sublessee, and a creditor of the sublessor.

    3. To take priority over the lease contract, and the interests derived therefrom, the creditor must come within the exception stated in subsection (2) or within one of the provisions of article 9 mentioned in subsection (3). Subsection (2) provides that where the creditor holds a lien (section 2A-103(1)(r)) that attached before the lease contract became enforceable (section 2A-301), the creditor does not take subject to the lease. Subsection (3) provides that a lessee takes its leasehold interest subject to a security interest except as otherwise provided in section 9-317, 9-321, or 9-323.

    4. The rules of this section operate in favor of whichever party to the lease contract may enforce it, even if one party perhaps may not, e.g., under section 2A-201(1)(b).

    Cross References:

    Sections 1-201(12), 1-201(25), 1-201(37), 1-201(44), 2A-103(1)(n), 2A-103(1)(o), 2A-103(1)(r), 2A-103(4), 2A-201(1)(b), and 2A-301 official comment 3(g), and article 9, especially section 9-333.

    Definitional Cross References:

    "Creditor". Section 1-201(12).

    "Goods". Section 2A-103(1)(h).

    "Knowledge" and "knows". Section 1-201(25).

    "Lease". Section 2A-103(1)(j).

    "Lease contract". Section 2A-103(1)(l).

    "Leasehold interest". Section 2A-103(1)(m).

    "Lessee". Section 2A-103(1)(n).

    "Lessee in the ordinary course of business". Section 2A-103(1)(o).

    "Lessor". Section 2A-103(1)(p).

    "Lien". Section 2A-103(1)(r).

    "Party". Section 1-201(29).

    "Pursuant to commitment". Section 2A-103(3).

    "Security interest". Section 1-201(37).


2A-308. Special rights of creditors.

(1) A creditor of a lessor in possession of goods subject to a lease contract may treat the lease contract as void if as against the creditor retention of possession by the lessor is fraudulent under any statute or rule of law, but retention of possession in good faith and current course of trade by the lessor for a commercially reasonable time after the lease contract becomes enforceable is not fraudulent.

(2) Nothing in this article impairs the rights of creditors of a lessor if the lease contract (a) becomes enforceable, not in current course of trade but in satisfaction of or as security for a preexisting claim for money, security, or the like, and (b) is made under circumstances which under any statute or rule of law apart from this article would constitute the transaction a fraudulent transfer or voidable preference.

(3) A creditor of a seller may treat a sale or an identification of goods to a contract for sale as void if as against the creditor retention of possession by the seller is fraudulent under any statute or rule of law, but retention of possession of the goods pursuant to a lease contract entered into by the seller as lessee and the buyer as lessor in connection with the sale or identification of the goods is not fraudulent if the buyer bought for value and in good faith.

Source:Laws 1991, LB 159, § 40.


Annotations
    COMMENT

    Uniform Statutory Source: Section 2-402(2) and (3)(b).

    Changes: Rephrased and new material added to conform to leasing terminology and practice.

    Purposes:

    Subsection (1) states a general rule of avoidance where the lessor has retained possession of goods if such retention is fraudulent under any statute or rule of law. However, the subsection creates an exception under certain circumstances for retention of possession of goods for a commercially reasonable time after the lease contract becomes enforceable.

    Subsection (2) also preserves the possibility of an attack on the lease by creditors of the lessor if the lease was made in satisfaction of or as security for a preexisting claim, and would constitute a fraudulent transfer or voidable preference under other law.

    Finally, subsection (3) states a new rule with respect to sale-leaseback transactions, i.e., transactions where the seller sells goods to a buyer but possession of the goods is retained by the seller pursuant to a lease contract between the buyer as lessor and the seller as lessee. Notwithstanding any statute or rule of law that would treat such retention as fraud, whether per se, prima facie, or otherwise, the retention is not fraudulent if the buyer bought for value (section 1-201(44)) and in good faith (sections 1-201(19) and 2-103(1)(b)). Section 2A-103(3) and (4). This provision overrides section 2-402(2) to the extent it would otherwise apply to a sale-leaseback transaction.

    Cross References:

    Sections 1-201(19), 1-201(44), 2-402(2), and 2A-103(4).

    Definitional Cross References:

    "Buyer". Section 2-103(1)(a).

    "Contract". Section 1-201(11).

    "Creditor". Section 1-201(12).

    "Good faith". Sections 1-201(19) and 2-103(1)(b).

    "Goods". Section 2A-103(1)(h).

    "Lease contract". Section 2A-103(1)(l).

    "Lessee". Section 2A-103(1)(n).

    "Lessor". Section 2A-103(1)(p).

    "Money". Section 1-201(24).

    "Reasonable time". Section 1-204(1) and (2).

    "Rights". Section 1-201(36).

    "Sale". Section 2-106(1).

    "Seller". Section 2-103(1)(d).

    "Value". Section 1-201(44).


2A-309. Lessor's and lessee's rights when goods become fixtures.

(1) In this section:

(a) goods are "fixtures" when they become so related to particular real estate that an interest in them arises under real estate law;

(b) a "fixture filing" is the filing, in the office where a record of a mortgage on the real estate would be filed or recorded, of a financing statement covering goods that are or are to become fixtures and conforming to the requirements of section 9-502(a) and (b);

(c) a lease is a "purchase money lease" unless the lessee has possession or use of the goods or the right to possession or use of the goods before the lease agreement is enforceable;

(d) a mortgage is a "construction mortgage" to the extent it secures an obligation incurred for the construction of an improvement on land including the acquisition cost of the land, if the recorded writing so indicates; and

(e) "encumbrance" includes real estate mortgages and other liens on real estate and all other rights in real estate that are not ownership interests.

(2) Under this article a lease may be of goods that are fixtures or may continue in goods that become fixtures, but no lease exists under this article of ordinary building materials incorporated into an improvement on land.

(3) This article does not prevent creation of a lease of fixtures pursuant to real estate law.

(4) The perfected interest of a lessor of fixtures has priority over a conflicting interest of an encumbrancer or owner of the real estate if:

(a) the lease is a purchase money lease, the conflicting interest of the encumbrancer or owner arises before the goods become fixtures, the interest of the lessor is perfected by a fixture filing before the goods become fixtures or within ten days thereafter, and the lessee has an interest of record in the real estate or is in possession of the real estate; or

(b) the interest of the lessor is perfected by a fixture filing before the interest of the encumbrancer or owner is of record, the lessor's interest has priority over any conflicting interest of a predecessor in title of the encumbrancer or owner, and the lessee has an interest of record in the real estate or is in possession of the real estate.

(5) The interest of a lessor of fixtures, whether or not perfected, has priority over the conflicting interest of an encumbrancer or owner of the real estate if:

(a) the fixtures are readily removable factory or office machines, readily removable equipment that is not primarily used or leased for use in the operation of the real estate, or readily removable replacements of domestic appliances that are goods subject to a consumer lease, and before the goods become fixtures the lease contract is enforceable; or

(b) the conflicting interest is a lien on the real estate obtained by legal or equitable proceedings after the lease contract is enforceable; or

(c) the encumbrancer or owner has consented in writing to the lease or has disclaimed an interest in the goods as fixtures; or

(d) the lessee has a right to remove the goods as against the encumbrancer or owner. If the lessee's right to remove terminates, the priority of the interest of the lessor continues for a reasonable time.

(6) Notwithstanding subsection (4)(a) but otherwise subject to subsections (4) and (5), the interest of a lessor of fixtures, including the lessor's residual interest, is subordinate to the conflicting interest of an encumbrancer of the real estate under a construction mortgage recorded before the goods become fixtures if the goods become fixtures before the completion of the construction. To the extent given to refinance a construction mortgage, the conflicting interest of an encumbrancer of the real estate under a mortgage has this priority to the same extent as the encumbrancer of the real estate under the construction mortgage.

(7) In cases not within the preceding subsections, priority between the interest of a lessor of fixtures, including the lessor's residual interest, and the conflicting interest of an encumbrancer or owner of the real estate who is not the lessee is determined by the priority rules governing conflicting interests in real estate.

(8) If the interest of a lessor of fixtures, including the lessor's residual interest, has priority over all conflicting interests of all owners and encumbrancers of the real estate, the lessor or the lessee may (i) on default, expiration, termination, or cancellation of the lease agreement but subject to the lease agreement and this article, or (ii) if necessary to enforce other rights and remedies of the lessor or lessee under this article, remove the goods from the real estate, free and clear of all conflicting interests of all owners and encumbrancers of the real estate, but the lessor or lessee must reimburse any encumbrancer or owner of the real estate who is not the lessee and who has not otherwise agreed for the cost of repair of any physical injury, but not for any diminution in value of the real estate caused by the absence of the goods removed or by any necessity of replacing them. A person entitled to reimbursement may refuse permission to remove until the party seeking removal gives adequate security for the performance of this obligation.

(9) Even though the lease agreement does not create a security interest, the interest of a lessor of fixtures, including the lessor's residual interest, is perfected by filing a financing statement as a fixture filing for leased goods that are or are to become fixtures in accordance with the relevant provisions of Article 9 - Secured Transactions.

Source:Laws 1991, LB 159, § 41; Laws 1999, LB 550, § 62.    


Annotations
    COMMENT

    Uniform Statutory Source: Sections 9-334 and 9-604.

    Changes: Revised to reflect leasing terminology and to add new material.

    Purposes:

    1. While sections 9-334 and 9-604 provided a model for this section, certain provisions were substantially revised.

    2. Section 2A-309(1)(c), which is new, defines purchase money lease to exclude leases where the lessee had possession or use of the goods or the right thereof before the lease agreement became enforceable. This term is used in subsection (4)(a) as one of the conditions that must be satisfied to obtain priority over the conflicting interest of an encumbrancer or owner of the real estate.

    3. Section 2A-309(4), which states one of several priority rules found in this section, deletes reference to office machines and the like as well as certain liens. However, these items are included in subsection (5), another priority rule that is more permissive than the rule found in subsection (4) as it applies whether or not the interest of the lessor is perfected. In addition, subsection (5)(a) expands the scope of the provisions of section 9-334(e) to include readily removable equipment not primarily used or leased for use in the operation of real estate; the qualifier is intended to exclude from the expanded rule equipment integral to the operation of real estate, e.g., heating and air conditioning equipment.

    4. The rule stated in subsection (7) is more liberal than the rule stated in section 9-334(c) in that issues of priority not otherwise resolved in this subsection are left for resolution by the priority rules governing conflicting interests in real estate, as opposed to the section 9-334(c) automatic subordination of the security interest in fixtures. Note that, for the purpose of this section, where the interest of an encumbrancer or owner of the real estate is paramount to the intent of the lessor, the latter term includes the residual interest of the lessor.

    5. The rule stated in subsection (8) is more liberal than the rule stated in section 9-604 in that the right of removal is extended to both the lessor and the lessee and the occasion for removal includes expiration, termination, or cancellation of the lease agreement, and enforcement of rights and remedies under this article, as well as default. The new language also provides that upon removal the goods are free and clear of conflicting interests of owners and encumbrancers of the real estate.

    6. Finally, subsection (9) provides a mechanism for the lessor of fixtures to perfect its interest by filing a financing statement under the provisions of the Article on Secured Transactions (Article 9), even though the lease agreement does not create a security interest. Section 1-201(37). The relevant provisions of article 9 must be interpreted permissively to give effect to this mechanism as it implicitly expands the scope of article 9 so that its filing provisions apply to transactions that create a lease of fixtures, even though the lease agreement does not create a security interest. This mechanism is similar to that provided in section 9-109 for the seller of goods on consignment, even though the consignment is not "intended as security". Section 1-201(37). Given the lack of litigation with respect to the mechanism created for consignment sales, this new mechanism should prove effective.

    Cross References:

    Sections 1-201(37), 2A-309(1)(c), and 2A-309(4), and article 9, especially sections 9-334, 9-408, and 9-604.

    Definitional Cross References:

    "Agreement". Section 1-201(3).

    "Cancellation". Section 2A-103(1)(b).

    "Conforming". Section 2A-103(1)(d).

    "Consumer lease". Section 2A-103(1)(e).

    "Goods". Section 2A-103(1)(h).

    "Lease". Section 2A-103(1)(j).

    "Lease agreement". Section 2A-103(1)(k).

    "Lease contract". Section 2A-103(1)(l).

    "Lessee". Section 2A-103(1)(n).

    "Lessor". Section 2A-103(1)(p).

    "Lien". Section 2A-103(1)(r).

    "Mortgage". Section 9-105(1)(j).

    "Party". Section 1-201(29).

    "Person". Section 1-201(30).

    "Reasonable time". Section 1-204(1) and (2).

    "Remedy". Section 1-201(34).

    "Rights". Section 1-201(36).

    "Security interest". Section 1-201(37).

    "Termination". Section 2A-103(1)(z).

    "Value". Section 1-201(44).

    "Writing". Section 1-201(46).


2A-310. Lessor's and lessee's rights when goods become accessions.

(1) Goods are "accessions" when they are installed in or affixed to other goods.

(2) The interest of a lessor or a lessee under a lease contract entered into before the goods became accessions is superior to all interests in the whole except as stated in subsection (4).

(3) The interest of a lessor or a lessee under a lease contract entered into at the time or after the goods became accessions is superior to all subsequently acquired interests in the whole except as stated in subsection (4) but is subordinate to interests in the whole existing at the time the lease contract was made unless the holders of such interests in the whole have in writing consented to the lease or disclaimed an interest in the goods as part of the whole.

(4) The interest of a lessor or a lessee under a lease contract described in subsection (2) or (3) is subordinate to the interest of

(a) a buyer in the ordinary course of business or a lessee in the ordinary course of business of any interest in the whole acquired after the goods became accessions; or

(b) a creditor with a security interest in the whole perfected before the lease contract was made to the extent that the creditor makes subsequent advances without knowledge of the lease contract.

(5) When under subsections (2) or (3) and (4) a lessor or a lessee of accessions holds an interest that is superior to all interests in the whole, the lessor or the lessee may (a) on default, expiration, termination, or cancellation of the lease contract by the other party but subject to the provisions of the lease contract and this article, or (b) if necessary to enforce his or her other rights and remedies under this article, remove the goods from the whole, free and clear of all interests in the whole, but he or she must reimburse any holder of an interest in the whole who is not the lessee and who has not otherwise agreed for the cost of repair of any physical injury but not for any diminution in value of the whole caused by the absence of the goods removed or by any necessity for replacing them. A person entitled to reimbursement may refuse permission to remove until the party seeking removal gives adequate security for the performance of this obligation.

Source:Laws 1991, LB 159, § 42.


Annotations
    COMMENT

    Uniform Statutory Source: Section 9-335.

    Changes: Revised to reflect leasing terminology and to add new material.

    Cross References:

    Sections 2A-309(8) and 9-335.

    Definitional Cross References:

    "Agreement". Section 1-201(3).

    "Buyer in the ordinary course of business". Section 2A-103(1)(a).

    "Cancellation". Section 2A-103(1)(b).

    "Creditor". Section 1-201(12).

    "Goods". Section 2A-103(1)(h).

    "Holder". Section 1-201(20).

    "Knowledge". Section 1-201(25).

    "Lease". Section 2A-103(1)(j).

    "Lease contract". Section 2A-103(1)(l).

    "Lessee". Section 2A-103(1)(n).

    "Lessee in the ordinary course of business". Section 2A-103(1)(o).

    "Lessor". Section 2A-103(1)(p).

    "Party". Section 1-201(29).

    "Person". Section 1-201(30).

    "Remedy". Section 1-201(34).

    "Rights". Section 1-201(36).

    "Security interest". Section 1-201(37).

    "Termination". Section 2A-103(1)(z).

    "Value". Section 1-201(44).

    "Writing". Section 1-201(46).


2A-311. Priority subject to subordination.

Nothing in this article prevents subordination by agreement by any person entitled to priority.

Source:Laws 1991, LB 159, § 43.


Annotations
    COMMENT

    Uniform Statutory Source: Section 9-339.

    Purposes:

    The several preceding sections deal with questions of priority. This section is inserted to make it entirely clear that a person entitled to priority may effectively agree to subordinate the claim. Only the person entitled to priority may make such an agreement: The rights of such a person cannot be adversely affected by an agreement to which that person is not a party.

    Cross References:

    Sections 1-102 and 2A-304 through 2A-310.

    Definitional Cross References:

    "Agreement". Section 1-201(3).

    "Person". Section 1-201(30).


2A-401. Insecurity: adequate assurance of performance.

(1) A lease contract imposes an obligation on each party that the other's expectation of receiving due performance will not be impaired.

(2) If reasonable grounds for insecurity arise with respect to the performance of either party, the insecure party may demand in writing adequate assurance of due performance. Until the insecure party receives that assurance, if commercially reasonable the insecure party may suspend any performance for which he or she has not already received the agreed return.

(3) A repudiation of the lease contract occurs if assurance of due performance adequate under the circumstances of the particular case is not provided to the insecure party within a reasonable time, not to exceed thirty days after receipt of a demand by the other party.

(4) Between merchants, the reasonableness of grounds for insecurity and the adequacy of any assurance offered must be determined according to commercial standards.

(5) Acceptance of any nonconforming delivery or payment does not prejudice the aggrieved party's right to demand adequate assurance of future performance.

Source:Laws 1991, LB 159, § 44.


Annotations
    COMMENT

    Uniform Statutory Source: Section 2-609.

    Changes: Revised to reflect leasing practices and terminology. Note that in the analogue to subsection (3) (section 2-609(4)), the adjective "justified" modifies demand. The adjective was deleted here as unnecessary, implying no substantive change.

    Definitional Cross References:

    "Aggrieved party". Section 1-201(2).

    "Agreement". Section 1-201(3).

    "Between merchants". Section 2-104(3).

    "Conforming". Section 2A-103(1)(d).

    "Delivery". Section 1-201(14).

    "Lease contract". Section 2A-103(1)(l).

    "Party". Section 1-201(29).

    "Reasonable time". Section 1-204(1) and (2).

    "Receipt". Section 2-103(1)(c).

    "Rights". Section 1-201(36).

    "Writing". Section 1-201(46).


2A-402. Anticipatory repudiation.

If either party repudiates a lease contract with respect to a performance not yet due under the lease contract, the loss of which performance will substantially impair the value of the lease contract to the other, the aggrieved party may:

(a) for a commercially reasonable time, await retraction of repudiation and performance by the repudiating party;

(b) make demand pursuant to section 2A-401 and await assurance of future performance adequate under the circumstances of the particular case; or

(c) resort to any right or remedy upon default under the lease contract or this article, even though the aggrieved party has notified the repudiating party that the aggrieved party would await the repudiating party's performance and assurance and has urged retraction. In addition, whether or not the aggrieved party is pursuing one of the foregoing remedies, the aggrieved party may suspend performance or, if the aggrieved party is the lessor, proceed in accordance with the provisions of this article on the lessor's right to identify goods to the lease contract notwithstanding default or to salvage unfinished goods (section 2A-524).

Source:Laws 1991, LB 159, § 45.


Annotations
    COMMENT

    Uniform Statutory Source: Section 2-610.

    Changes: Revised to reflect leasing practices and terminology.

    Definitional Cross References:

    "Aggrieved party". Section 1-201(2).

    "Goods". Section 2A-103(1)(h).

    "Lease contract". Section 2A-103(1)(l).

    "Lessor". Section 2A-103(1)(p).

    "Notifies". Section 1-201(26).

    "Party". Section 1-201(29).

    "Reasonable time". Section 1-204(1) and (2).

    "Remedy". Section 1-201(34).

    "Rights". Section 1-201(36).

    "Value". Section 1-201(44).


2A-403. Retraction of anticipatory repudiation.

(1) Until the repudiating party's next performance is due, the repudiating party can retract the repudiation unless, since the repudiation, the aggrieved party has canceled the lease contract or materially changed the aggrieved party's position or otherwise indicated that the aggrieved party considers the repudiation final.

(2) Retraction may be by any method that clearly indicates to the aggrieved party that the repudiating party intends to perform under the lease contract and includes any assurance demanded under section 2A-401.

(3) Retraction reinstates a repudiating party's rights under a lease contract with due excuse and allowance to the aggrieved party for any delay occasioned by the repudiation.

Source:Laws 1991, LB 159, § 46.


Annotations
    COMMENT

    Uniform Statutory Source: Section 2-611.

    Changes: Revised to reflect leasing practices and terminology. Note that in the analogue to subsection (2) (section 2-611(2)) the adjective "justifiably" modifies demanded. The adjective was deleted here (as it was in section 2A-401) as unnecessary, implying no substantive change.

    Definitional Cross References:

    "Aggrieved party". Section 1-201(2).

    "Cancellation". Section 2A-103(1)(b).

    "Lease contract". Section 2A-103(1)(l).

    "Party". Section 1-201(29).

    "Rights". Section 1-201(36).


2A-404. Substituted performance.

(1) If without fault of the lessee, the lessor, and the supplier, the agreed berthing, loading, or unloading facilities fail or the agreed type of carrier becomes unavailable or the agreed manner of delivery otherwise becomes commercially impracticable, but a commercially reasonable substitute is available, the substitute performance must be tendered and accepted.

(2) If the agreed means or manner of payment fails because of domestic or foreign governmental regulation:

(a) the lessor may withhold or stop delivery or cause the supplier to withhold or stop delivery unless the lessee provides a means or manner of payment that is commercially a substantial equivalent; and

(b) if delivery has already been taken, payment by the means or in the manner provided by the regulation discharges the lessee's obligation unless the regulation is discriminatory, oppressive, or predatory.

Source:Laws 1991, LB 159, § 47.


Annotations
    COMMENT