OFFICIAL 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.

ANNOTATION

Law reviews. For article, "Impact of the Uniform Commercial Code on Colorado Law", see 42 Den. L. Ctr. J. 67 (1965). For list of Colorado general assembly changes in the Uniform Commercial Code, see 38 U. Colo. L. Rev. 2 (1965).

OFFICIAL 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. As this section makes clear, the 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. This article does not apply to transactions to the extent that they are governed by other law. See Official Comment 1 to Section 1-301.

OFFICIAL 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, 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 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 developed by the courts in the light of unforeseen and new circumstances and practices. However, the proper construction of the Uniform Commercial Code requires 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. [Pacific Wool Growers v. Draper & Co., 158 Or. 1, 73 P.2d 1391 (1937), and] compare Section 1-104. The courts recognized the policies embodied in an act as 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 it 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. Therefore, while principles of common law and equity may supplement provisions of the Uniform Commercial Code, they may not be used to supplant its provisions, including 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 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 Code provisions. 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 does not accurately reflect the proper scope of Code preemption, which extends to displacement of other law that is inconsistent with its purposes and policies as well as 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 will be supplemented by other principles of statutory interpretation that specifically address the interrelationship between statutes. 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 -- under 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.

ANNOTATION

Law reviews. For article, "Exclusion and Modification of Warranty under the U.C.C. -- How to Succeed in Business Without Being Liable for Not Really Trying", see 46 Den. L.J. 579 (1969). For article, "Buyer-Secured Party Conflicts Under Section 9-307(1) of the Uniform Commercial Code", see 46 U. Colo. L. Rev. 333 (1974-75).

Annotator's note. Since § 4-1-103 is similar to §§ 4-1-102 and 4-1-103 as they existed prior to the 2006 repeal and reenactment of this article, relevant cases construing those provisions have been included in the annotations to this section.

The parties to a contract may vary the provisions of the Uniform Commercial Code (UCC) by agreement and may provide for remedies in addition to or in substitution for those provided by the UCC. Colorado Interstate Gas Co. v. Chemco, Inc., 854 P.2d 1232 ( Colo. 1993 ).

Evidence of current commercial practices and customs are considered when interpreting the UCC. The practice and custom of this state's real estate closings is that an original note is not presented at the closing. Citywide Banks v. Armijo, 313 P.3d 647 (Colo. App. 2011).

Section 90(1) of the restatement (second) of contracts adopted, which articulates the doctrine of promissory estoppel. Kiely v. St. Germain, 670 P.2d 764 (Colo. 1983).

The UCC does not exclude the application of promissory estoppel. Germain v. Boshouwers, 646 P.2d 952 (Colo. App. 1982), aff'd in part and rev'd in part on other grounds, 670 P.2d 764 ( Colo. 1983 ).

Recovery will be allowed on a theory of promissory estoppel, notwithstanding a statute of frauds defense, if injustice can be avoided only by enforcement of the promise. Germain v. Boshouwers, 646 P.2d 952 (Colo. App. 1982), aff'd in part and rev'd in part on other grounds, 670 P.2d 764 ( Colo. 1983 ).

Elements of promissory estoppel are: (1) A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee; and (2) which does induce such action or forbearance; and (3) if injustice can be avoided only by enforcement of the promise. Germain v. Boshouwers, 646 P.2d 952 (Colo. App. 1982), aff'd in part and rev'd in part on other grounds, 670 P.2d 764 ( Colo. 1983 ).

The doctrine of estoppel was properly applied in a case arising under the secured transaction provisions of the code. First Nat'l Bank v. Ulibarri, 38 Colo. App. 428, 557 P.2d 1221 (1976).

Detrimental reliance upon oral promises. The principle embodied in section 139 of the restatement (second) of contracts that detrimental action performed in justifiable reliance upon oral promises may be sufficient to compel full or partial performance of the promise in spite of the applicability of a statute of frauds defense was applicable in a case involving an oral agreement to sell securities. Kiely v. St. Germain, 670 P.2d 764 (Colo. 1983).

Section 4-3-419 (3) does not explicitly displace common-law cause of action for moneys had and received. Citizens State Bank v. Nat'l Sur. Corp., 199 Colo. 497 , 612 P.2d 70 (1980).

Common-law claim for money had and received is still viable since the uniform commercial code contains no provision dealing with such a claim. Nat'l Sur. Corp. v. Citizens State Bank, 41 Colo. App. 580, 593 P.2d 362 (1978), aff'd, 199 Colo. 497 , 612 P.2d 70 (1980).

The common law of agency supplements the UCC. So, payment to an authorized agent has the same legal effect as payment to the holder. Citywide Banks v. Armijo, 313 P.3d 647 (Colo. App. 2011).

Statute as basis for jurisdiction. Stroh v. Am. Recreation & Mobile Home Corp., 35 Colo. App. 196, 530 P.2d 989 (1975).

Applied in Rancher & Farmers Livestock Auction Co. v. Honey, 38 Colo. App. 69, 552 P.2d 313 (1976); Midland Bean Co. v. Farmers State Bank, 37 Colo. App. 452, 552 P.2d 317 (1976); Caldwell v. Kats, 38 Colo. App. 156, 555 P.2d 190 (1976); Commercial Credit Corp. v. Univ. Nat'l Bank, 590 F.2d 849 (10th Cir. 1979); Colorado-Ute Elec. Ass'n v. Envirotech Corp., 524 F. Supp. 1152 (D. Colo. 1981 ).

OFFICIAL 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 UCC 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.

OFFICIAL 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 UCC 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.

OFFICIAL COMMENT

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

Changes from former law: Other than minor stylistic changes, this Section is identical to former UCC 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 -- singular 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.

OFFICIAL 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 Official 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.").

OFFICIAL 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 in Article 1 -- do not apply if the context otherwise requires, a new subsection (a) to that effect has been added. The reference to the "context" is intended to refer to the context in which the defined term is used in the UCC. 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, UCC §§ 3-103(a)(9) (defining "promise," in relevant part, as "a written undertaking to pay money signed by the person undertaking to pay") and 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 § 3-303(a)(1) that the term was not used in the sense of its definition in § 3-103(a)(9). Thus, the § 3-103(a)(9) definition should not be used to give meaning to the word "promise" in § 3-303(a). The remainder of former Section 1-201, as revised, now appears as subsection (b).

Other than minor stylistic changes, the definitions in this draft are as in former Article 1 (as amended, most recently, in conjunction with revisions to Article 9) except as noted below. It should be noted that numbering of existing definitions has been left constant even though some new definitions have been added to this section and some others have been moved to other sections.

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.

3a. "Authenticate." This is the standard definition of the term used in acts prepared by the National Conference of Commissioners on Uniform State Laws.

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 airbills 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." Unchanged from 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 tracks Section 6-102(1)(m). It explains what it means to buy "in the ordinary course." The penultimate sentence prevents a buyer that does not have the right to possession 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 Section 2-103(a)(10). It 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. "Contract." Unchanged from former Section 1-201.

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

12. "Creditor." Unchanged from former Section 1-201.

13. "Defendant." Unchanged from former Section 1-201, which was derived from Section 76, Uniform Sales Act.

14. "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.

15. "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 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.

16. "Fault." Derived from former Section 1-201. "Default" has been added to the list events constituting fault.

17. "Fungible." Derived from former Section 1-201. The definition has been reorganized and references to securities have been deleted because Article 8 no longer uses the term "fungible" to describe securities.

18. "Genuine." Unchanged from former Section 1-201.

19. "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 this 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 in three ways. First, it applied only to transactions within the scope of Article 2. Second, it applied only to merchants. Third, strictly construed it applied only to uses of the phrase "good faith" in Article 2; thus, so construed it would not define "good faith" for its most important use -- the obligation of good faith imposed by former UCC Section 1-203.

Over time, however, amendments to the UCC brought the Article 2 merchant concept of good faith (subjective honesty and objective reasonableness) into other Articles. First, Article 2A explicitly incorporated the Article 2 standard. See current UCC 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., UCC Sections 3-103(a)(4), 4A-105(a)(6), 8-102(a)(10), and 9-102(a)(43). See also Draft of Revised Article 2. All of these definitions are comprised of two elements -- honesty 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 and Article 7 are without definitions of good faith. (It should be noted that, while revised Article 6 did not define good faith, Comment 2 to revised UCC 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.") Given this near unanimity, it is appropriate to move the broader definition of "good faith" to Article 1. Of course, this definition is subject to the applicability of the narrower definition in revised Article 5.

20. "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 -- "generally 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" -- are expressly set up as alternative tests and must be approached from a commercial standpoint.

24. "Money." Unchanged from 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.

28. "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.

29. "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.

30. "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.

30a. "Present value." This definition was formerly contained within the definition of "security interest" in former Section 1-201(37).

31. "Presumption." Unchanged from former Section 1-201.

32. "Purchase." Derived from former UCC Section 1-201. The form of definition has been changed from "includes" to "means."

33. "Purchaser." Unchanged from former Section 1-201.

33a. "Record." Derived from Section 9-102(a)(69).

34. "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 can resort on its own motion.

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

36. "Right." Unchanged from former Section 1-201.

37. "Security Interest." The definition is the first paragraph of the definition of "security interest" in former Section 1-201. The remaining portion has been moved to Section 1-203. Notice that in view of Article 9 the term includes the interest of certain outright buyers of certain kinds of property.

38. "Send." New. Compare "notifies".

39. "Signed." Derived from former Section 1-201. Former Section 1-201 referred to "intention to authenticate"; because authenticate is now a defined term, the language has been changed to "intention to adopt or accept." The latter formulation is derived from the definition of "authenticate," The definition of "signed" is to make clear that, as the term 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.

39a. "State." This is the standard definition of the term used in acts prepared by the National Conference of Commissioners on Uniform State Laws.

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

42. "Term." Unchanged from former Section 1-201.

43. "Unauthorized signature." Unchanged from former Section 1-201.

45. "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.

46. "Written" or "writing." Unchanged from former Section 1-201.

ANNOTATION

Analysis

• I. General Consideration.
• II. Agreement.
• III. Buyer in Ordinary Course of Business.
• IV. Conspicuous.
• V. Creditor.
• VI. Documents of Title.
• VII. Genuine.
• VIII. Good Faith.
• IX. Holder.
• X. Purchase.
• XI. Purchaser.
• XII. Written or Writing.

OFFICIAL COMMENT

Source: Derived from former Sections 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.

1. Under subsection (a), a person has notice when, inter alia , the person has received a notification of the fact in question. The subsection leaves open the time and circumstances under which notice or notification may cease to be effective. Therefore such cases as Graham v. White-Phillips Co., 296 U.S. 27, 56 S. Ct. 21, 80 L. Ed. 20 (1935), are not overruled.

2. As shown in subsection (d), the word "notifies" 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 reason to know, 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.

ANNOTATION

Annotator's note. Since § 4-1-202 is similar to § 4-1-201 (25), (26), and (27) as they existed prior to the 2006 repeal and reenactment of this article, relevant cases construing those provisions have been included in the annotations to this section.

There is no actual notice of the unauthorized issuance of stock certificates where it does not appear that one was aware of the provision in the Colorado law requiring that certificates issued with facsimile signatures of the president and the secretary be countersigned by a transfer agent when the certificates do not contain a statement that they are void unless countersigned by a transfer agent and it does not appear that there were facts or circumstances known which would have put one on notice of illegality issue or of the deficiency arising from the failure of the transfer agent to countersign them. Dempsey-Tegeler & Co. v. Otis Oil & Gas Corp., 293 F. Supp. 1383 (D. Colo. 1968).

Tests other than "actual knowledge" may be used in resolving the issue of whether an endorsee of a promissory note is a holder in due course, including whether the holder had in his possession facts from which he had reason to know of the defenses "at the time in question". The critical time for such notice is when the party comes into possession of the note as a holder. Salter v. Vanotti, 42 Colo. App. 448, 599 P.2d 962 (1979).

Inquiry required. If the purchaser has actual knowledge of facts which would apprise him of possible irregularities some inquiry is required by the notice provisions of the UCC. Salter v. Vanotti, 42 Colo. App. 448, 599 P.2d 962 (1979).

Inquiry not required. Where an instrument is regular on its face there is no duty on the part of a check cashing service to inquire as to possible defenses, unless circumstances of which the holder in due course has knowledge are of such a nature that the failure to inquire reveals a deliberate desire to evade knowledge because of a fear that investigation would disclose the existence of a defense. Money Mart Check Cashing Ctr., Inc. v. Epicycle Corp., 667 P.2d 1372 (Colo. 1983).

Refusal to investigate. The protection afforded a holder in due course cannot be used to shield one who simply refuses to investigate when the facts known to him suggest an irregularity concerning the commercial paper he purchases. Salter v. Vanotti, 42 Colo. App. 448, 599 P.2d 962 (1979).

Patient gave sufficient notice to physician of defective character of product and such notice "came to the attention" of the physician, within the meaning of subsection (26), when patient presented herself to the physician in a life-threatening condition. Palmer v. A.H. Robins Co., Inc., 684 P.2d 187 (Colo. 1984).

Facts not sufficient to constitute notice. The fact that the documents given to subsequent holder referred to a "Deed of Trust" rather than a "Land Sales Agreement" did not give such holder reason to know that the transaction may not have been consummated. Therefore, the subsequent holder did not have knowledge of facts that would give him reason to know of the maker's defense under the Truth in Lending Act. Merchants Mortg. & Trust Corp. v. Dawe, 754 P.2d 418 (Colo. App. 1987).

Record supported the trial court's finding that the bank had no notice of any offset against the promissory note where the note was current in its payments at the time of the transfer, the maker of the note made another payment thereon subsequent to the transfer to the bank, and the note itself did not specify any offset against it. First Nat'l Bank v. Lohman, 827 P.2d 583 (Colo. App. 1992).

OFFICIAL COMMENT

Source: Former Section 1-201(37).

Changes from former law: This Section is substantively identical to those portions of former UCC 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 UCC Section 1-201(30a).

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 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 § 3.6, at 76 (1965).

Under pre-UCC 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--Leveraged 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(37) 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 in this Section, the 1978 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) are 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 this Act 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 or 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). Subparagraph (2) 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 (3) restates and expands the provisions of former Section 1-201(37) to make clear that the option can be to buy or renew. Subparagraphs (4) and (5) 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.

ANNOTATION

Annotator's note. Since § 4-1-202 is similar to § 4-1-201 (37) as it existed prior to the 2006 repeal and reenactment of this article, relevant cases construing that provision have been included in the annotations to this section.

A "joint payment agreement" which provides that payments on a contract are to be made jointly to a workman and his supplier is a security agreement which creates a security interest in a contract right. Welbourne Dev. Co. v. Affiliated Clearance Corp., 28 Colo. App. 313, 472 P.2d 684 (1970).

Factors in determining whether a transaction is a lease or sale may include: (1) Whether the lessee is given an option to purchase the equipment, and, if so, whether the option price is nominal; (2) whether the lessee acquires any equity in the equipment; (3) whether the lessee is required to bear the entire risk of the loss; (4) who pays all charges and taxes imposed on ownership; (5) whether there is a provision for acceleration of rental payments; (6) whether the property was purchased specifically for lease to this lessee; and (7) whether the warranties of merchantability and fitness for a particular purpose are specifically excluded by the lease agreement. Lease Fin., Inc. v. Burger, 40 Colo. App. 107, 575 P.2d 857 (1977).

Characterization of transaction as lease or sale is not conclusive. Whether a transaction is characterized as a lease or sale is not conclusive, but rather it is the intention of the parties that is controlling, that intention to be determined by the facts of each case. Lease Fin., Inc. v. Burger, 40 Colo. App. 107, 575 P.2d 857 (1977).

Right to reclaim not right to secure payment. The right to reclaim created by § 4-2-507 (2) is a right to undo the transaction, not a right to "secure" payment of the price as required by the definition of "security interest" under subsection (37) of this section. Guy Martin Buick, Inc. v. Colo. Springs Nat'l Bank, 184 Colo. 166 , 519 P.2d 354 (1974).

Whether a lease is a security interest is applied in In re Mesa Refining, Inc., 52 B.R. 359 (Bankr. D. Colo. 1985).

OFFICIAL 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, 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; 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 pre-existing 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 pre-existing 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 4-208, 4-209, 3-303. 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 charge-back is not discretionary with the bank, but may only be made when difficulties in collection arise in connection with the specific transaction involved.

OFFICIAL 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.

ANNOTATION

Annotator's note. Since § 4-1-205 is similar to § 4-1-204 as it existed prior to the 2006 repeal and reenactment of this article, relevant cases construing that provision have been included in the annotations to this section.

The question of reasonableness is a question of fact to be measured by all of the circumstances of the case, and pre U.C.C. cases are applicable as they relate to the time for rescission of a contract of sale. Irrigation Motor & Pump Co. v. Belcher, 29 Colo. App. 343, 483 P.2d 980 (1971); Stroh v. Am. Recreation & Mobile Home Corp., 35 Colo. App. 196, 530 P.2d 989 (1975).

Whether notice is given within a reasonable time is a question of fact to be measured by all the circumstances of the case. White v. Mississippi Order Buyers, Inc., 648 P.2d 682 (Colo. App. 1982).

Delivery date not specified. Under either the UCC or common law, where no delivery date is specified, a reasonable date will be furnished by the court. Beiriger and Sons Irrigation, Inc. v. Southwest Land Co., Inc., 705 P.2d 532 (Colo. App. 1985).

Applied in Surplus Electronics Corp. v. Gallin, 653 P.2d 752 (Colo. App. 1982).

OFFICIAL COMMENT

Source: Former Section 1-105.

Summary of changes from former law: Section 1-301,which replaces former UCC Section 1-105, represents a significant rethinking of choice of law issues addressed in that section. The new section reexamines both the power of parties to select the jurisdiction whose law will govern their transaction and the determination of the governing law in the absence of such selection by the parties. With respect to the power to select governing law, the draft affords greater party autonomy than former section 1-105, but with important safeguards protecting consumer interests and fundamental policies. While the Drafting Committee considered addressing the related topic of forum selection clauses, it ultimately decided that Article 1 of the Uniform Commercial Code is not an appropriate vehicle for addressing this issue.

Revised UCC section 1-301 addresses contractual designation of governing law somewhat differently than does former section 1-105. Former law allows the parties to any transaction to designate a jurisdiction whose law governs if the transaction bears a "reasonable relation" to that jurisdiction. Revised Article 1 deviates from this unified approach by providing different rules for consumer transactions than for "business to business" transactions.

In the context of consumer transactions, revised Article 1, unlike former law, generally protects consumers against the possibility of losing the protection of consumer protection laws of their home jurisdiction.

In the context of business-to-business transactions, revised Article 1 generally provides the parties with greater autonomy to designate a jurisdiction whose law will govern than does former Article 1, but also provides some safeguards against abuse that do not appear in former Article 1. Following emerging international norms, greater autonomy is provided in subsections (b) and (c) by deleting the requirement that the transaction bear a "reasonable relation" to the jurisdiction designated in this non-consumer context. It should be noted in this regard that in the case of wholly domestic transactions the jurisdiction designated must be a State. An important safeguard not present in former law is provided in subsection (e). Subsection (e) indicates that the designation of a jurisdiction's law is not effective (even if the transaction bears a reasonable relation to that jurisdiction) to the extent that application of that law would be contrary to a fundamental policy of the jurisdiction whose law would govern in the absence of contractual designation. Application of the law designated may be contrary to a fundamental policy of the State or country whose law would otherwise govern either because of the nature of the law designated or because of the "mandatory" nature of the law that would otherwise apply.

In the absence of an effective contractual designation of governing law, former UCC section 1-105(1) directs the forum to apply its own law if the transaction bears "an appropriate relation to this state." This provision, however, is frequently ignored by courts. Revised UCC section 1-301(c) provides simply that, in the absence of contractual designation, the court should apply the forum's choice of law principles.

1. Applicability of section. This section is neither a full Restatement of choice of law principles nor a free-standing choice of law statute. Rather, it is a provision of Article 1 of the Uniform Commercial Code. As such, it is subject to Section 1-102, which states the scope of Article 1. As that section indicates, Article 1, and the rules contained therein, apply to transactions to the extent that they are governed by one of the other Articles of the Uniform Commercial Code. Thus, this section does not apply to a transaction outside the scope of the Uniform Commercial Code such as a services contract or a contract for the sale of real estate. On the other hand, if the transaction is within the scope of a substantive Article of the Uniform Commercial Code, such as in the case of a sale or lease of goods, this section does apply.

In some cases, a transaction is neither completely within the scope of the Uniform Commercial Code (as in the case of a sale or lease of goods) nor completely outside the scope of the Uniform Commercial Code (as in the case of a contract for the sale of real estate). Rather, some aspects of the transaction are within the substantive scope of the Uniform Commercial Code while other aspects are not. One example of this phenomenon is an agreement to loan money in which the borrower's obligation to repay the loan is secured by a security interest in personal property. The security agreement, and the security interest created thereby, are clearly within the scope of Article 9. The loan agreement, on the other hand, is governed not by the Uniform Commercial Code but by the general law of contracts. Another example is provided by a real estate lease in which the lessee's obligation to pay the stated rent is backed by a standby letter of credit issued by a bank. The lease is governed by realty law outside the Uniform Commercial Code, while the letter of credit is governed by Article 5. While this section, by its terms, only applies to the UCC aspect of such a "mixed transaction," it is within a court's discretion to decide in a particular case that bifurcation of the choice of law principles applicable to the transaction is inadvisable and, accordingly, to apply principles of this section to the non-UCC aspects of the transaction in order to have the law of the same State or country apply to the entire transaction. When the UCC aspects of such a "mixed transaction" predominate, such a decision may be particularly appropriate.

2. Contractual choice of law. This section allows parties broad autonomy, with several important limitations, to select the law governing their transaction, even if the transaction does not bear a relation to the State or country whose law is selected. This recognition of party autonomy with respect to governing law has already been established in several Articles of the Uniform Commercial Code (see UCC Sections 4A-507, 5-116, and 8-110) and is consistent with international norms. See, e.g., Inter-American Convention on the Law Applicable to International Contracts, Article 7 (Mexico City 1994); Convention on the Law Applicable to Contracts for the International Sale of Goods, Article 7(1) (The Hague 1986); EC Convention on the Law Applicable to Contractual Obligations, Article 3(1) (Rome 1980).

There are three important limitations on this party autonomy to select governing law. First, a different, and more protective, rule applies in the context of consumer transactions (see note c). Second, in an entirely domestic transaction, this section does not validate the selection of foreign law. (See note d.) Third, contractual choice of law will not be given effect to the extent that application of the law designated would be contrary to a fundamental policy of the State or country whose law would be applied in the absence of such contractual designation (see Comment 5).

The Drafting Committee considered whether this Section should expressly provide for the ability of parties to designate non-legal codes such as trade codes as the set of rules governing their transaction, but decided that the principles of Section 1-302 allowing parties broad freedom of contract to structure their relation are adequate for this purpose. A similar decision was made with respect to the ability of the parties to designate recognized bodies of rules or principles applicable to commercial transactions that are promulgated by intergovernmental authorities such as UNCITRAL or UNIDROIT. See, e.g., UNIDROIT Principles of International Commercial Contracts.

3. Consumer transactions. If one of the parties is a consumer (as defined in section 1-201(11a)), subsection (d) provides the parties less autonomy to designate the State or country whose law will govern. First, in a consumer transaction subsection (d)(1) provides that the transaction must bear a reasonable relation to the State or country designated. Second, except as noted below, subsection (d)(2) provides that a designation of the law of a State or country other than that of the consumer's habitual residence, even if the transaction bears a reasonable relation to that State or country, will not deprive the consumer of the protection of any rules of law of the consumer's habitual residence which are protective of consumers and are not variable by agreement. (It should be noted that the phrase "rule of law" is intended to refer to case law as well as statutes and administrative regulations.) Thus, for example, in the case of a sale of goods by a seller in Indiana to a consumer buyer in New York, in which transaction the contract designates Indiana law as governing, the New York buyer will retain the protection of nonwaivable New York rules of law that are protective of consumers.

There is one exception to this principle. In the case of a sale of goods to a consumer in which the consumer makes the contract and takes possession of the goods in a State or country other than the consumer's habitual residence, subsection (d)(2)(B) provides that it is the consumer protection rules of law of that State or country that cannot be eliminated by choice of law. Thus, for example, if a New York consumer, while on vacation in Indiana, buys goods and takes delivery of them at an Indiana branch of an Ohio retailer, and the contract designates Ohio law as governing, this choice of law may not deprive the New York consumer buyer of nonwaivable Indiana rules of law that are protective of consumers, but may deprive that buyer of analogous New York rules. This exception, adapted from UCC section 2A-106 and Article 5 of the EC Convention on the Law Applicable to Contractual Obligations, enables a seller that engages in only face-to-face transactions to ascertain in advance which consumer protection law it is subject to. The reference in subsection (d)(2)(B) to the State or country in which the consumer makes the contract should not be read to incorporate formalistic concepts of where the last event necessary to conclude the contract took place; rather, the intent is to identify the state in which all material steps were taken by the consumer to enter into the contract.

In the absence of a contractual designation of governing law, application of the choice of law rules of the forum, as mandated by subsection (c), could lead to application of the laws of a State or country other than that of the consumer's habitual residence. In such a case, subsection (d)(2) still applies to preserve consumer protection rules for the benefit of the consumer as described in the preceding paragraph.

4. Wholly domestic transactions. While this Section provides parties broad autonomy to select governing law, that autonomy is limited in the case of wholly domestic transactions. In a "domestic transaction," subsection (b)(1) validates only the designation of the law of a State. A "domestic transaction" is a transaction that does not bear a reasonable relation to a country other than the United States. See subsection (a). Thus, in a wholly domestic non-consumer transaction, parties may (subject to the limitations set out in subsections (e) and (f)) designate the law of any State but not the law of a foreign country.

5. International transactions. This section provides greater autonomy in the context of international transactions. As defined in subsection (a)(2), a transaction is an "international transaction" if it bears a reasonable relation to a country other than the United States. In a non-consumer international transaction, subsection (b)(2) provides that a designation of the law of any State or country is effective (subject, of course, to the limitations set out in subsections (e) and (f)). It is important to note that the transaction need not bear a relation to the State or country designated so long as the transaction is international. Thus, for example, in a non-consumer lease of goods in which the lessor is located in Mexico and the lessee is located in Louisiana, a designation of the law of Ireland to govern the transaction would be given effect under this section even though the transaction may bear no relation to Ireland. The ability to designate the law of any country in non-consumer international transactions is important in light of the common practice in many commercial contexts of designating the law of a "neutral" jurisdiction whose law is well-developed.

6. Fundamental policy. Subsection (e) provides that an agreement designating the governing law will not be given effect to the extent that application of the designated law would be contrary to a fundamental policy of the State or country whose law would otherwise govern. This rule provides a narrow exception to the broad autonomy afforded to parties in subsection (b). One of the prime objectives of contract law is to protect the justified expectations of the parties and to make it possible for them to foretell with accuracy what will be their rights and liabilities under the contract. In this way, certainty and predictability of result are most likely to be secured. See Restatement (Second) Conflict of Laws, § 187, comment e.

Under the fundamental policy doctrine, a court should not refrain from applying the designated law merely because this would lead to a result different than would be obtained under the local law of the State or country whose law would otherwise govern. Rather, the difference must be contrary to a public policy that is so substantial that it justifies overriding the concerns for certainty and predictability underlying modern commercial law as well as concerns for judicial economy generally. Thus, application of the designated law will rarely be found to be contrary to a fundamental policy of the State or country whose law would otherwise govern when the difference between the two concerns a requirement, such as a statute of frauds, that relates to formalities, or general rules of contract law, such as those concerned with the need for consideration.

The opinion of Judge Cardozo in Loucks v. Standard Oil Co. of New York , 120 N.E. 198 (1918), regarding the related issue of when a state court may decline to apply the law of another state, is a helpful touchstone here:

Our own scheme of legislation may be different. We may even have no legislation on the subject. That is not enough to show that public policy forbids us to enforce the foreign right. A right of action is property. If a foreign statute gives the right, the mere fact that we do not give a like right is no reason for refusing to help the plaintiff in getting what belongs to him. We are not so provincial as to say that every solution of a problem is wrong because we deal with it otherwise at home. Similarity of legislation has indeed this importance; its presence shows beyond question that the foreign statute does not offend the local policy. But its absence does not prove the contrary. It is not to be exalted into an indispensable condition. The misleading word 'comity' has been responsible for much of the trouble. It has been fertile in suggesting a discretion unregulated by general principles.

* * *

The courts are not free to refuse to enforce a foreign right at the pleasure of the judges, to suit the individual notion of expediency or fairness. They do not close their doors, unless help would violate some fundamental principle of justice, some prevalent conception of good morals, some deep-rooted tradition of the common weal.

120 N.E. at 201-02 (citations to authorities omitted).

Analytically, one might conclude that application of the designated law is contrary to a fundamental policy of the State or country whose law would otherwise govern either (i) because the substance of the designated law violates a fundamental principle of justice of that State or country or (ii) because it differs from a rule of that State or country that is "mandatory" in that it must be applied in the courts of that State or country without regard to otherwise-applicable choice of law rules of that State or country and without regard to whether the designated law is otherwise offensive. This distinction, which may have more theoretical than practical significance, has been suggested in some international conventions in this area, although in some cases the concept is applied to authorize the forum state to apply its mandatory rules, rather than those of the State or country whose law would otherwise govern. The latter situation is not addressed by this section. See comment 9.

In any event, it is obvious that a rule that is freely changeable by agreement of the parties under the law of the State or country whose law would otherwise govern can hardly be construed as a mandatory rule of that State or country. This does not mean, however, that rules that cannot be changed by agreement under that law are, for that reason alone, mandatory rules. Otherwise, contractual choice of law in the UCC context would be illusory and redundant; the parties would be able to accomplish by choice of law no more than can be accomplished under Section 1-302 (by agreeing to vary the rules that would otherwise govern their transaction by substituting for those rules the rules that would apply if the transaction were governed by the designated State or country) without designation of governing law. Indeed, other than cases in which a mandatory choice of law rule is established by statute (see, e.g., UCC sections 9-301 through 9-307, explicitly preserved in subsection (f)), cases in which courts have declined to follow the designated law solely because a rule of the State or country whose law would otherwise govern is mandatory are rare.

7. Choice of law in the absence of contractual designation. Subsection (c), which replaces the second sentence of former UCC Section 1-105(1), determines which jurisdiction's law governs a transaction in the absence of an effective contractual choice by the parties. Former Section 1-105(1), provided that the law of the forum ( i.e., the Uniform Commercial Code) applies if the transaction bears "an appropriate relation to this state." By using an "appropriate relation" test, rather than, say, requiring that the forum be the location of the "most significant" contact, Section 1-105(1) expressed a bias in favor of applying the forum's law. This bias, while not universally respected by the courts, was justifiable in light of the uncertainty that existed at the time of drafting as to whether the Uniform Commercial Code would be adopted by all the states; the pro-forum bias would assure that the Uniform Commercial Code would be applied so long as the transaction bore an "appropriate" relation to the forum. Inasmuch as the Uniform Commercial Code has been adopted, at least in part, in all U.S. jurisdictions, the vitality of this point is minimal in the domestic context, and international comity concerns militate against continuing the pro-forum, pro-UCC bias in transnational transactions. When the choice is between the law of two jurisdictions that have adopted the Uniform Commercial Code, but whose law differs (whether because of differences in enacted language or differing judicial interpretations), there is no strong justification for directing a court to apply different choice of law rules to its determination than it would apply if the matter were not governed by the Uniform Commercial Code. Similarly, given the wide variety of choice of law principles applied by the states, it would not be prudent to designate only one such principle as the proper one for transactions governed by the Uniform Commercial Code. Accordingly, in cases in which the parties have not made an effective choice of law, Section 1-301(a) simply directs the forum to apply its ordinary choice of law principles to determine which jurisdiction's law governs.

8. Primacy of other UCC choice of law rules. Subsection (f), which is essentially identical to former UCC Section 1-105(2), indicates that choice of law rules provided in the other Articles govern when applicable.

9. Matters not addressed by this section. As noted in comment 1, this section is not a complete statement of conflict of laws doctrines applicable in commercial cases. In particular, this section does not address, and leaves to other law, two issues that relate to the forum and its law. First, a forum will occasionally decline to apply the law of a different jurisdiction selected by the parties when application of that law would be contrary to a fundamental policy of the forum jurisdiction, even if it would not be contrary to a fundamental policy of the State or country whose law would govern in the absence of contractual designation. Standards for application of this doctrine relate primarily to concepts of sovereignty rather than commercial law and are thus left to the courts. Second, in determining whether to give effect to the parties' agreement that the law of a particular State or country will govern their relationship, courts must, of necessity, address some issues as to the basic validity of that agreement. These issues might relate, for example, to capacity to contract and absence of duress. This section does not address these issues.

OFFICIAL 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 pre-Code 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 non-legal 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.

OFFICIAL COMMENT

Source: Former Sections 1-205, 2-208, and Section 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 UCC 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. Therefore, 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, 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 Act's liberal recognition of the needs of commerce in regard to usage of trade shall not be made into an instrument of abuse.

ANNOTATION

Law reviews. For article, "Buyer-Secured Party Conflicts Under Section 9-307(1) of the Uniform Commercial Code", see 46 U. Colo. L. Rev. 333 (1974-75).

Annotator's note. Since § 4-1-303 is similar to § 4-1-205 as it existed prior to the 2006 repeal and reenactment of this article, relevant cases construing that provision have been included in the annotations to this section.

Previous course of dealing considered in determining meaning of contract provisions. It is the policy of the uniform commercial code to consider previous course of dealing in determining the meaning of contract provisions. Amerine Nat'l Corp. v. Denver Feed Co., 493 F.2d 1275 (10th Cir. 1974); Great W. Sugar Co. v. Northern Natural Gas Co., 661 P.2d 684 (Colo. App. 1982), aff'd sub nom. KN Energy, Inc. v. Great Western Sugar Co., 698 P.2d 769 ( Colo. 1985 ), cert. denied, 472 U.S. 1022, 105 S. Ct. 3489, 87 L. Ed. 2d 623 (1985).

Test of admissibility of evidence of prior course of dealing is not whether the contract appears to be complete in every detail, but whether the proffered evidence of course of dealing reasonably can be construed as consistent with the express terms of the agreement; if this evidence contradicts or negates the terms of a written agreement, it is inadmissible. Budget Sys. v. Seifert Pontiac, Inc., 40 Colo. App. 406, 579 P.2d 87 (1978).

Evidence of course of dealing and course of performance is admissible if it does not directly contradict the terms of a written agreement, but merely explains or supplements it. Great W. Sugar Co. v. Northern Natural Gas Co., 661 P.2d 684 (Colo. App. 1982), aff'd sub nom. KN Energy, Inc. v. Great Western Sugar Co., 698 P.2d 769 ( Colo. 1985 ), cert. denied, 472 U.S. 1022, 105 S. Ct. 3489, 87 L. Ed. 2d 623 (1985).

Course of dealing not purchased with business. Absent evidence to the contrary, the purchaser of a business does not automatically adopt the seller's prior course of dealing with third parties. Budget Sys. v. Seifert Pontiac, Inc., 40 Colo. App. 406, 579 P.2d 87 (1978).

The provisions of a security agreement may be supplemented by the "usage of trade", provided the express terms of the agreement and the supplement are consistent with each other. Colo. Bank & Trust Co. v. Western Slope Invs., Inc., 36 Colo. App. 149, 539 P.2d 501 (1975).

Absent express or otherwise demonstrated authorization for borrower's conduct, the UCC mandates that the express terms of the agreement are controlling. U.S. v. Winter Livestock Comm'n, 924 F.2d 986 (10th Cir. 1991).

Terms of agreement control. Even assuming that a loan officer's testimony showed a "usage of trade", where that usage would not be consistent with the terms of the security agreement, the express terms of the agreement control. Colo. Bank & Trust Co. v. Western Slope Invs., Inc., 36 Colo. App. 149, 539 P.2d 501 (1975).

Course of dealing supported interest charge. Murray Equipment Co. v. Curtis, Inc., 725 P.2d 35 (Colo. App. 1986).

Course of dealing did not support interest charge. Winer's Pumping Units v. Emerald Gas Operating Co., 936 P.2d 627 (Colo. App. 1997).

Applied in Midland Bean Co. v. Farmers State Bank, 37 Colo. App. 452, 552 P.2d 317 (1976).

OFFICIAL 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 UCC Section 1-203. A comment will make it clear that this section applies to the exercise of rights granted by the Uniform Commercial Code.

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 Act. 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.

ANNOTATION

Annotator's note. Since § 4-1-304 is similar to § 4-1-203 as it existed prior to the 2006 repeal and reenactment of this article, relevant cases construing that provision have been included in the annotations to this section.

Notwithstanding a provision precluding implied covenants, all contracts contain an implied duty of good faith and fair dealing. Amoco Oil Co. v. Ervin, 908 P.2d 493 ( Colo. 1995 ); Transamerica Premier Ins. Co. v. Brighton Sch. Dist. 27J, 940 P.2d 348 ( Colo. 1997 ).

Financial statement not listing partners as debtors does not violate good faith. A financial statement which does not list the partners as debtors, but only sets forth the partnership name, does not violate the obligation of good faith required by this section. Bd. of County Comm'rs v. Berkeley Vill., 40 Colo. App. 431, 580 P.2d 1251 (1978).

Implied covenant of good faith and fair dealing found in some commercial contracts held not to extend to employment contracts. Pittman v. Larson Distributing Co., 724 P.2d 1379 (Colo. App. 1986).

Applied in MacGregor v. McReki, Inc., 30 Colo. App. 196, 494 P.2d 1297 (1971); Layne v. Fort Carson Nat'l Bank, 655 P.2d 856 (Colo. App. 1982); ADT Sec. Servs. v. Premier Home Prot., 181 P.3d 288 (Colo. App. 2007).

OFFICIAL 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 UCC 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 1-203, 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, 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.

ANNOTATION

Law reviews. For article, "An Introduction to the Economic Analysis of Contract Remedies", see 57 U. Colo. L. Rev. 683 (1986).

Annotator's note. Since § 4-1-305 is similar to § 4-1-106 as it existed prior to the 2006 repeal and reenactment of this article, relevant cases construing that provision have been included in the annotations to this section.

Damages need not be exactly calculable. Although damages may not be calculable with mathematical exactitude, so long as the plaintiff introduces some evidence which is sufficient to allow a reasonable estimate of damages, it is incumbent upon the trier of fact to determine a monetary award which will adequately compensate the plaintiff. Great W. Food Packers, Inc. v. Longmont Foods Co., 636 P.2d 1331 (Colo. App. 1981).

Damages need not be allocatable where defendant manufactures number of defective products. Where a plaintiff's total damages can be ascertained and they stem from a number of defective products manufactured by the same defendant, it is not necessary to allocate damages among specific items. Great W. Food Packers, Inc. v. Longmont Foods Co., 636 P.2d 1331 (Colo. App. 1981).

Where award of replacement cost of defective part insufficient. Where there is a "latent defect" which cannot be corrected simply by replacing a defective part and awarding the costs of replacing that part would not make the aggrieved party whole, an award of the entire value of the product damages is appropriate. Gibbons v. Windish, Inc., 662 P.2d 500 (Colo. App. 1983).

OFFICIAL 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.

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).

ANNOTATION

Law reviews. For article, "Buyer-Secured Party Conflicts Under Section 9-307(1) of the Uniform Commercial Code", see 46 U. Colo. L. Rev. 333 (1974-75). For article, "Loan Documentation Clauses to Avoid Lender Liability", 19 Colo. Law. 2225 (1990).

Annotator's note. Since § 4-1-306 is similar to § 4-1-107 as it existed prior to the 2006 repeal and reenactment of this article, a relevant case construing that provision has been included in the annotations to this section.

Payors were not "aggrieved parties", and thus could not relieve themselves of their obligations under notes by notifying bank that they waived their signatures. Farmers and Stockmens Bank v. Stafford, 738 P.2d 60 (Colo. App. 1987).

OFFICIAL COMMENT

Source: Former Section 1-202.

Changes from former law: No changes.

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.

OFFICIAL COMMENT

Source: Former Section 1-207.

Changes from former law: This section is identical to former UCC 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 therefore 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 Act 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.

ANNOTATION

Law reviews. For article, "UCC Section 1-207 on 'Full Payment' Checks: Lawyers Beware", see 11 Colo. Law. 2584 (1982).

Annotator's note. Since § 4-1-308 is similar to § 4-1-207 as it existed prior to the 2006 repeal and reenactment of this article, relevant cases construing that provision have been included in the annotations to this section.

This section does not alter the law of accord and satisfaction. If a check is tendered as full satisfaction of an obligation, acceptance and negotiation of the check by the obligee discharges the underlying obligation notwithstanding a restrictive endorsement made by the obligee. R.A. Reither Const. Co. v. Wheatland Rural Elec. Ass'n, 680 P.2d 1342 (Colo. App. 1984); Anderson v. Rosebrook, 737 P.2d 417 ( Colo. 1987 ).

Plaintiff landowner who promised performance "under protest" by letter from his attorney to the defendants and then later discharged a note and deed of trust without protest at closing, did not relinquish his rights having complied with the plain language of this section by protesting before performance. Margason v. Roberts, 919 P.2d 818 (Colo. App. 1995).

As plaintiff was not required to renew his protest at closing, so any reliance defendants placed on plaintiff's silence was unreasonable. Margason v. Roberts, 919 P.2d 818 (Colo. App. 1995).

OFFICIAL COMMENT

Source: Former Section 1-208.

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

ANNOTATION

Law reviews. For article, "Setoff and Security Interests In Deposit Accounts", see 17 Colo. Law. 2107 (1988).

Annotator's note. Since § 4-1-309 is similar to § 4-1-208 as it existed prior to the 2006 repeal and reenactment of this article, a relevant case construing that provision has been included in the annotations to this section.

Objective test, rather than subjective test, should be applied to determine proper invocation of insecurity clause. The appropriate determination in the context of an insecurity clause is whether a reasonable person, under all the circumstances of the transaction, and motivated by good faith, would have accelerated the debt. Richards Engineers, Inc. v. Spanel, 745 P.2d 1031 (Colo. App. 1987).

OFFICIAL 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 non-negotiable 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 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 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.

OFFICIAL 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 34 states and Alaska, the District of Columbia and Hawaii.

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 men turn upon the location of an intangible something, the passing of which no man can prove by evidence and to substitute for such abstractions proof of words and actions of a tangible character.

ANNOTATION

Law reviews. For article, "Impact of the Uniform Commercial Code on Colorado Law", see 42 Den. L. Ctr. J. 67 (1965). For article, "The Uniform Commercial Code and Sales Warranties in Colorado", see 38 U. Colo. L. Rev. 7 (1965).

OFFICIAL 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 4-1-201.

"Contract for sale". Section 4-2-106.

"Present sale". Section 4-2-106.

"Sale". Section 4-2-106.

ANNOTATION

Uniform commercial code does not apply to the transfer of interests in real property. Gallegos v. Graff, 32 Colo. App. 213, 508 P.2d 798 (1973).

The uniform commercial code does not supplant livestock bill of sale laws. Although livestock are "goods", the UCC does not supplant the livestock bill of sale laws concerning the passage of title to livestock. Cugnini v. Reynolds Cattle Co., 648 P.2d 159 (Colo. App. 1981), aff'd, 687 P.2d 962 ( Colo. 1984 ).

Application of term "goods". The term "goods" as employed in this section applies to a sale by a merchant of used, as well as new, goods. Moore v. Burt Chevrolet, Inc., 39 Colo. App. 11, 563 P.2d 369 (1977).

Refinery sale did not involve sale of "goods" and thus was not covered by this article. McClanahan v. Am. Gilsonite Co., 494 F. Supp. 1334 (D. Colo. 1980).

Statutory warranties not applicable to service contracts. The statutory warranties imposed by the uniform sales act do not apply as a matter of law to service contracts. Samuelson v. Chutich, 187 Colo. 155 , 529 P.2d 631 (1974).

A contract for the delivery of natural gas is a sale of goods within the meaning of the sales article of the uniform commercial code. KN Energy, Inc. v. Great Western Sugar Co., 698 P.2d 769 (Colo. 1985), cert. denied, 472 U.S. 1022, 105 S. Ct. 3489, 87 L. Ed. 2d 623 (1985).

Transaction was within the scope of the sales article of the uniform commercial code. Guy Martin Buick, Inc. v. Colo. Springs Nat'l Bank, 32 Colo. App. 235, 511 P.2d 912 (1973), aff'd, 184 Colo. 166 , 519 P.2d 354 (1974).

Marketing agreements for manufactured products was within the scope of the sales article of the uniform commercial code where one party purchased and maintained an inventory of the manufacturer's products for direct sales to customers. William H. White Co. v. B&A Mfg. Co., 794 P.2d 1099 (Colo. App. 1990).

Applied in Smith v. Union Supply Co., 675 P.2d 333 (Colo. App. 1983).

OFFICIAL 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 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. Otherwise the many divergent incidents of delivery are handled incident by incident.

Cross References:

Point 1: See Section 4-2-210 and Comment thereon.

Point 2: Section 4-1-201.

Definitional Cross Reference:

"Person". Section 4-1-201.

ANNOTATION

Law reviews. For article, "Buyer-Secured Party Conflicts Under Section 9-307(1) of the Uniform Commercial Code", see 46 U. Colo. L. Rev. 333 (1974-75).

Upon repossession of collateral, a secured creditor becomes a legal successor in interest to its debtor, the initial buyer, and therefore becomes a buyer within the meaning of this section and may recover as a third-party beneficiary on a breach of warranty claim. Cheyenne Mtn. Bank v. Whetstone Corp., 787 P.2d 210 (Colo. App. 1990).

Applied in Palmer v. A.H. Robins, Co., Inc., 684 P.2d 187 (Colo. 1984).

OFFICIAL 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, therefore, 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 non-specialized 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 mercantile capacity; a lawyer or bank president buying fishing tackle for his 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 4-1-102 and 4-1-203.

Point 2: See Sections 4-2-314, 4-2-315 and 4-2-320 to 4-2-325, of this Article, and Article 9.

Definitional Cross References:

"Bank". Section 4-1-201.

"Buyer". Section 4-2-103.

"Contract for sale". Section 4-2-106.

"Document of title". Section 4-1-201.

"Draft". Section 4-3-104.

"Goods". Section 4-2-105.

"Person". Section 4-1-201.

"Purchase". Section 4-1-201.

"Seller". Section 4-2-103.

ANNOTATION

Law reviews. For comment, "Implied Warranties in the Sale of Real Estate in Colorado: Rational Boundaries of the Doctrine", see 53 U. Colo. L. Rev. 137 (1981).

Where transaction "between merchants". A transaction between a manufacturer of pipe and one who regularly uses pipe in major construction projects, is a transaction between "merchants." Cement Asbestos Prods. Co. v. Hartford Accident & Indem. Co., 592 F.2d 1144 (10th Cir. 1979).

Farmer held to be "merchant" for purposes of § 4-2-201 (1) . Transaction between long-time farmer and merchandiser of agricultural commodities for sale of corn upon harvest was between merchants. Colorado-Kansas Grain v. Reifschneider, 817 P.2d 637 (Colo. App. 1991); Am. Pride Co-op v. Seewald, 968 P.2d 139 (Colo. App. 1998).

Applied in Cargill, Inc. v. Stafford, 553 F.2d 1222 (10th Cir. 1977).

OFFICIAL 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 Act 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 4-2-107, 4-2-201, 4-2-501 and Article 8.

Point 5: Section 4-2-501.

See also Section 4-1-201.

Definitional Cross References:

"Buyer". Section 4-2-103.

"Contract". Section 4-1-201.

"Contract for sale". Section 4-2-106.

"Fungible". Section 4-1-201.

"Money". Section 4-1-201.

"Present sale". Section 4-2-106.

"Sale". Section 4-2-106.

"Seller". Section 4-2-103.

ANNOTATION

Law reviews. For article, "Technology Transfers: Do They Transfer Goods or Services?", see 25 Colo. Law. 13 (Jan. 1996).

Uniform commercial code does not apply to the transfer of interests in real property. Gallegos v. Graff, 32 Colo. App. 213, 508 P.2d 798 (1973).

Uniform commercial code does not supplant livestock bill of sale laws. Although livestock are "goods", the UCC does not supplant the livestock bill of sale laws concerning the passage of title to livestock. Cugnini v. Reynolds Cattle Co., 648 P.2d 159 (Colo. App. 1981), aff'd, 687 P.2d 962 ( Colo. 1984 ).

Refinery sale did not involve sale of "goods" and thus was not covered by this article. McClanahan v. Am. Gilsonite Co., 494 F. Supp. 1334 (D. Colo. 1980).

Hose used in hydronic radiant heating systems is a "good" for purposes of the UCC. The hose was an existing and identifiable thing which was movable at the time of identification to the contract for sale, making it a "good" for purposes of the UCC. Separate units of goods that are later incorporated into a home or other building are still goods at the time that they are procured for installation. The fact that materials sold might later be installed in a home and assume the character of fixtures does not undermine the primary purpose of the contract as one for a sale of goods. Loughridge v. Goodyear Tire & Rubber Co., 192 F. Supp. 2d 1175 (D. Colo. 2002).

Automobiles held movable goods at the time of their identification to the contract for sale. Guy Martin Buick, Inc. v. Colo. Springs Nat'l Bank, 32 Colo. App. 235, 511 P.2d 912 (1973), aff'd, 184 Colo. 166 , 519 P.2d 354 (1974).

Right to use office space, right to use telephone equipment, and customer list were not "goods" and therefore not covered by the Bulk Transfers Act. Smith Office Serv., Inc. v. Kelley, 762 P.2d 791 (Colo. App. 1988).

Applied in Smith v. Union Supply Co., 675 P.2d 333 (Colo. App. 1983); Homier v. Faricy Truck & Equipment Co., 784 P.2d 798 (Colo. App. 1988).

OFFICIAL 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 obligations as a condition to his 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 4-1-203, 4-1-205, 4-2-208 and 4-2-508.

Definitional Cross References:

"Agreement". Section 4-1-201.

"Buyer". Section 4-2-103.

"Contract". Section 4-1-201.

"Goods". Section 4-2-105.

"Party". Section 4-1-201.

"Remedy". Section 4-1-201.

"Rights". Section 4-1-201.

"Seller". Section 4-2-103.

ANNOTATION

Nonconformity cannot be viewed as a question of the quantity and quality of goods alone, but of the performance of the totality of the seller's contractual undertaking. Irrigation Motor & Pump Co. v. Belcher, 29 Colo. App. 343, 483 P.2d 980 (1971).

Applied in R.H. Lindsay Co. v. Greager, 204 F.2d 129 (10th Cir. 1953) (decided under repealed CSA, C. 143A, § 1, uniform sales act); Waggoner v. Wilson, 31 Colo. App. 518, 507 P.2d 482 (1972); Guy Martin Buick, Inc. v. Colo. Springs Nat'l Bank, 32 Colo. App. 235, 511 P.2d 912 (1973); Walgreen Co. v. Charnes, 859 P.2d 235 (Colo. App. 1992).

OFFICIAL 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. Therefore, 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 4-2-201.

Point 2: Section 4-2-105.

Point 3: Articles 9 and 9-105.

Definitional Cross References:

"Buyer". Section 4-2-103.

"Contract". Section 4-1-201.

"Contract for sale". Section 4-2-106.

"Goods". Section 4-2-105.

"Party". Section 4-1-201.

"Present sale". Section 4-2-106.

"Rights". Section 4-1-201.

"Seller". Section 4-2-103.

ANNOTATION

Refinery sale did not involve sale of "goods" and thus was not covered by this article. McClanahan v. Am. Gilsonite Co., 494 F. Supp. 1334 (D. Colo. 1980).

OFFICIAL 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 the 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, therefore, 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 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 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 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 4-1-201, 4-2-202, 4-2-207, 4-2-209 and 4-2-304.

Definitional Cross References:

"Action". Section 4-1-201.

"Between merchants". Section 4-2-104.

"Buyer". Section 4-2-103.

"Contract". Section 4-1-201.

"Contract for sale". Section 4-2-106.

"Goods". Section 4-2-105.

"Notice". Section 4-1-201.

"Party". Section 4-1-201.

"Reasonable time". Section 4-1-204.

"Sale". Section 4-2-106.

"Seller". Section 4-2-103.

ANNOTATION

Law reviews. For article, "Buyer-Secured Party Conflicts Under Section 9-307(1) of the Uniform Commercial Code", see 46 U. Colo. L. Rev. 333 (1974-75). For article, "Commercial Law", see 55 Den. L.J. 425 (1978).

Annotator's note. Since § 4-2-201 is similar to repealed C.R.S. 1963, § 121-1-4 (uniform sales act), a relevant case construing § 121-1-4 has been included in the annotations to this section.

This section is a parallel provision to section 38-10-112 . Howse v. Crumb, 143 Colo. 90 , 352 P.2d 285 (1960).

Acceptance must be voluntary and unconditional. Howse v. Crumb, 143 Colo. 90 , 352 P.2d 285 (1960).

Acceptance may be inferred from the buyer's conduct in taking physical possession of the goods or some part of them. Howse v. Crumb, 143 Colo. 90 , 352 P.2d 285 (1960).

Question of having received and accepted "part of goods" where taken and returned. In an action against a buyer to recover for failure to complete the purchase, testimony that the buyer took part of the goods away, but returned such later, is prima facie evidence warranting submission to the trier of facts of the question whether the buyer received and accepted "part of the goods" within the meaning of this section. Howse v. Crumb, 143 Colo. 90 , 352 P.2d 285 (1960).

Provisions not expressed in writing may be established by parol. In an action for damages for failure to complete purchase where the evidence presents a question of fact on the issue of acceptance of part of the goods, such evidence, if satisfactory to the trier of facts, takes the case from under the statute of frauds; and the provisions of the contract, not expressed in the writing, may then be established by parol. Howse v. Crumb, 143 Colo. 90 , 352 P.2d 285 (1960).

Burden on plaintiff to prove preexisting oral contract. Under this section the burden is on the plaintiff to prove that an oral contract had been entered into before the purchase order was drawn, and to constitute a sufficient writing to take the oral contract outside the statute of frauds, the writing must be "in confirmation of the contract". Nations Enters., Inc. v. Process Equip. Co., 40 Colo. App. 390, 579 P.2d 655 (1978).

Defendant has burden of proving the applicability of this section as an affirmative defense to a breach of contract claim. However, the burden switches back to the plaintiff to prove that the merchant exception in subsection (2) applies. Thus, it was reversible error for the trial court to instruct the jury that the defendant had the burden of proving that he was not a merchant and that no confirmatory writing was sent. Am. Pride Co-op v. Seewald, 968 P.2d 139 (Colo. App. 1998).

Totality of circumstances support trial court's conclusion that plaintiff intended to retain ownership of goods and that defendant's conduct did not constitute an acceptance for purposes of exception to the statute of frauds and, therefore, plaintiff's action to enforce oral contract was barred by statute of frauds. Lockhart v. Elm, 736 P.2d 429 (Colo. App. 1987).

Farmer held to be "merchant" for purposes of § 4-2-201 (1) . Transaction between long-time farmer and merchandiser of agricultural commodities for sale of corn upon harvest was between merchants, and written confirmation of oral agreement held sufficient to take transaction out of statute of frauds. Colorado-Kansas Grain v. Reifschneider, 817 P.2d 637 (Colo. App. 1991).

Contract contemplating both service and goods. A contract which contemplates both the performance of services and the sale of goods must be examined to determine whether its primary purpose is the sale of goods or the rendition of services. Colo. Carpet Installation, Inc. v. Palermo, 647 P.2d 686 (Colo. App. 1982), aff'd, 668 P.2d 1384 ( Colo. 1983 ).

If the primary purpose of the contract is the sale of goods and the performance of services is merely incidental, then the statute of frauds will bar any claim which lacks the requisite writing. Colo. Carpet Installation, Inc. v. Palermo, 647 P.2d 686 (Colo. App. 1982), aff'd, 668 P.2d 1384 ( Colo. 1983 ).

Effect of part performance. While part performance can be sufficient to remove the bar of the statute of frauds, it will remove only that portion of the contract which relates to goods which have actually been received and accepted. Colo. Carpet Installation, Inc. v. Palermo, 647 P.2d 686 (Colo. App. 1982), aff'd, 668 P.2d 1384 ( Colo. 1983 ).

Applicability of specially manufactured goods exception. The specially manufactured goods exception, subsection (3)(a), applies only when goods are not a stock item and are unsuitable for sale to others in the ordinary course of business. Colo. Carpet Installation, Inc. v. Palermo, 647 P.2d 686 (Colo. App. 1982), aff'd, 668 P.2d 1384 ( Colo. 1983 ).

Applied in Lease Fin., Inc. v. Burger, 40 Colo. App. 107, 575 P.2d 857 (1977); Morrison v. Droll, 41 Colo. App. 354, 588 P.2d 383 (1978); United States ex rel. Mobile Premix Concrete, Inc. v. Santa Fe Eng'rs, Inc., 515 F. Supp. 512 (D. Colo. 1981 ).

OFFICIAL COMMENT

1. This section definitely rejects:

1. 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;
2. 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
3. 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 4-1-205, 4-2-207, 4-2-302 and 4-2-316.

Definitional Cross References:

"Agreed" and "agreement". Section 4-1-201.

"Course of dealing". Section 4-1-205.

"Parties". Section 4-1-201.

"Term". Section 4-1-201.

"Usage of trade". Section 4-1-205.

"Written" and "writing". Section 4-1-201.

ANNOTATION

Law reviews. For article, "Exclusion and Modification of Warranty under the U.C.C. -- How to Succeed in Business Without Being Liable for Not Really Trying", see 46 Den. L.J. 579 (1969). For article, "Buyer-Secured Party Conflicts Under Section 9-307(1) of the Uniform Commercial Code", see 46 U. Colo. L. Rev. 333 (1974-75).

Parol evidence is to be excluded if the writing was intended as a final, complete, and exclusive statement of the terms of the agreement. MacGregor v. McReki, Inc., 30 Colo. App. 196, 494 P.2d 1297 (1971).

If the written expression is not "complete and exclusive", parol evidence is admissible if it relates to additional terms which are not inconsistent with a term of the written agreement. MacGregor v. McReki, Inc., 30 Colo. App. 196, 494 P.2d 1297 (1971).

There is no longer the assumption that the parties intended a writing to be the complete expression of their agreement. The assumption is to the contrary, unless the court expressly finds that the parties intended the contract to be completely integrated. Amoco Prod. Co. v. W. Slope Gas Co., 745 F.2d 303 (10th Cir. 1985); Nw. Cent. Pipeline Corp. v. JER P'ship, 943 F.2d 1219 (10th Cir. 1991).

Parol evidence admissible to vary or contradict terms of ambiguous agreement. Montoya v. Cherry Creek Dodge, Inc., 708 P.2d 491 (Colo. App. 1985); Nw. Cent. Pipeline Corp. v. JER P'ship, 943 F.2d 1219 (10th Cir. 1991).

General integration clause does not effect a waiver of a claim of negligent misrepresentation not specifically prohibited by the terms of the agreement. Parol evidence as to such misrepresentation allowed. Keller v. A.O. Smith Harvestore Prods., 819 P.2d 69 (Colo. 1991).

Parol evidence rule applicable to contract disputes had no force in a tort action alleging fraudulent misrepresentation in the inducement to execute an agreement. Bill Dreiling Motor Co. v. Shultz, 168 Colo. 59 , 450 P.2d 70 (1969); Keller v. A.O. Smith Harvestore Prods., 819 P.2d 69 ( Colo. 1991 ).

To be inconsistent, the offered evidence must contradict or negate the written terms. MacGregor v. McReki, Inc., 30 Colo. App. 196, 494 P.2d 1297 (1971).

Where a buyer alleges the existence of oral warranties prior to execution of a written contract and there is conduct following the sale which tends to show that warranties were in fact made, there is a material issue of fact for resolution, namely, whether the parties intended the written contract to be a final expression of their agreement, and, if not, what the terms actually agreed upon by the parties consisted of. Evidence of both oral warranties and the conduct of the parties subsequent to signing the contract is admissible for purpose of resolving this issue. O'Neil v. Int'l Harvester Co., 40 Colo. App. 369, 575 P.2d 862 (1978).

Previous course of dealing considered in determining meaning of contract provisions. It is the policy of the uniform commercial code to consider previous course of dealing in determining the meaning of contract provisions. Amerine Nat'l Corp. v. Denver Feed Co., 493 F.2d 1275 (10th Cir. 1974); KN Energy, Inc. v. Great W. Sugar Co., 698 P.2d 769 (Colo. 1985), cert. denied, 472 U.S. 1022, 105 S. Ct. 3489, 87 L. Ed. 2d 623 (1985).

The lack of facial ambiguity in the contract language is basically irrelevant to whether extrinsic evidence ought to be considered by the court as an initial matter. Amoco Prod. Co. v. W. Slope Gas Co., 754 F.2d 303 (10th Cir. 1985).

If a contract's construction depends upon extrinsic facts, then its terms become questions of fact, and the district court's construction will be overturned only if clearly erroneous. Amoco Prod. Co. v. W. Slope Gas Co., 745 F.2d 303 (10th Cir. 1985); Nw. Cent. Pipeline Corp. v. JER P'ship, 943 F.2d 1219 (10th Cir. 1991).

Applied in Lease Fin., Inc. v. Burger, 40 Colo. App. 107, 575 P.2d 857 (1977); Universal Drilling Co. v. Camay Drilling Co., 737 F.2d 869 (10th Cir. 1984).

OFFICIAL 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 4-2-205.

Definitional Cross References:

"Contract for sale". Section 4-2-106.

"Goods". Section 4-2-105.

"Writing". Section 4-1-201.

OFFICIAL 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, this Act 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, 4-2-201 and 4-2-302.

Subsection (2): Sections 4-2-205 through 4-2-209.

Subsection (3): See Part 3.

Definitional Cross References:

"Agreement". Section 4-1-201.

"Contract". Section 4-1-201.

"Contract for sale". Section 4-2-106.

"Goods". Section 4-2-105.

"Party". Section 4-1-201.

"Remedy". Section 4-1-201.

"Term". Section 4-1-201.

ANNOTATION

Applied in Cargill, Inc. v. Stafford, 553 F.2d 1222 (10th Cir. 1977); Nations Enters., Inc. v. Process Equip. Co., 40 Colo. App. 390, 579 P.2d 655 (1978); Western Conference Resorts, Inc. v. Pease, 668 P.2d 973 (Colo. App. 1983).

OFFICIAL 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 separately authenticates it, he 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 4-1-102.

Point 2: Section 4-1-102.

Point 3: Section 4-2-201.

Point 5: Section 4-2-302.

Definitional Cross References:

"Goods". Section 4-2-105.

"Merchant". Section 4-2-104.

"Signed". Section 4-1-201.

"Writing". Section 4-1-201.

ANNOTATION

An offer can be "firm" even if not made in writing. This section is not intended to provide the exclusive mechanism by which a valid offer can be made. Its purpose is only to establish a type of offer that, although not supported by consideration, is nonetheless irrevocable. Scoular Co. v. Denney, 151 P.3d 615 (Colo. App. 2006).

OFFICIAL 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. 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 non-conforming 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 non-conforming 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 4-2-103.

"Conforming". Section 4-2-106.

"Contract". Section 4-1-201.

"Goods". Section 4-2-105.

"Notifies". Section 4-1-201.

"Reasonable time". Section 4-1-204.

ANNOTATION

Where partial performance not adequate acceptance. In cases where the purchase order provides for an acceptance in writing, and the acceptance copy points out that the order is not valid until the acceptance copy is received, the buyer's purchase order does not invite acceptance by partial performance, and the seller's conduct in shipping some of the pumps more than a year after the date of the purchase order does not amount to acceptance. Nations Enters., Inc. v. Process Equip. Co., 40 Colo. App. 390, 579 P.2d 655 (1978).

Small print on acknowledging invoice held not part of contract. Evidence held insufficient to establish that the small print on the invoice acknowledging purchaser's order was a part of the contract. Surplus Electronics Corp. v. Gallin, 653 P.2d 752 (Colo. App. 1982).

A grain reseller's agreement to sell millet to a third party is not the beginning of a requested performance sufficient to constitute acceptance of a millet grower's offer to sell grain to the reseller. The performance desired by the millet grower was payment of money, which was not made, and nothing in the contract with the third party specified that the grain to be resold to the third party was to be grain purchased from the millet grower. Scoular Co. v. Denney, 151 P.3d 615 (Colo. App. 2006).

OFFICIAL 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 "acknowledgment") 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. [Comment 1 was amended in 1966.]

2. Under this Article a proposed deal which in commercial understanding has in fact been closed is recognized as a contract. Therefore, 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. [Comment 2 was amended in 1966.]

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 or 100 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 therefore 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 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 sub-sale, providing for inspection by the sub-purchaser; 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. 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 this Act, 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. [Comment 6 was amended in 1966.]

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. [Comment 7 was added in 1966.]

Cross References:

See generally Section 4-2-302.

Point 5: Sections 4-2-513, 4-2-602, 4-2-607, 4-2-609, 4-2-612, 4-2-614, 4-2-615, 4-2-616, 4-2-718 and 4-2-719.

Point 6: Sections 1-102 and 4-2-104.

Definitional Cross References:

"Between merchants". Section 4-2-104.

"Contract". Section 4-1-201.

"Notification". Section 4-1-201.

"Reasonable time". Section 4-1-204.

"Seasonably". Section 4-1-204.

"Send". Section 4-1-201.

"Term". Section 4-1-201.

"Written". Section 4-1-201.

ANNOTATION

Law reviews. For article, "Commercial Law", see 55 Den. L.J. 425 (1978). For article, "The 'Battle of the Forms' Under the Colorado Uniform Commercial Code", see 11 Colo. Law. 78 (1982).

Counteroffer. Under this section, whenever an offeree's acceptance contains terms that materially alter the contract, and the offeree had conditioned his participation on the offeror's acceptance of such terms, the offeree's response becomes a counteroffer, to be accepted or rejected by the offeror, rather than an acknowledgment of the original offer. Master Palletizer Sys. v. T.S. Ragsdale Co., 725 F. Supp. 1525 (D. Colo. 1989).

Effect of addition of material term on contract. Under this section, in transactions between merchants the addition of a material term does not void the contract but the other party is not bound by the new term. Cargill, Inc. v. Stafford, 553 F.2d 1222 (10th Cir. 1977).

Test for determining materiality consists of three-part analysis to find subjective surprise, objective surprise, and hardship. Avedon Eng'g, Inc. v. Seatex, 112 F. Supp. 2d 1090 (D. Colo. 2000).

Material alteration not found. Boilerplate "future transactions" clause, requiring future transactions between the parties to be governed by written terms printed on sales confirmation form unless superseded by a signed contract, was held not to "materially alter" the agreement and therefore was enforceable although not expressly bargained for. Avedon Eng'g, Inc. v. Seatex, 112 F. Supp. 2d 1090 (D. Colo. 2000).

Limitation of a seller's liability for incidental and consequential damages is a material alteration to the contract and therefore does not become a part of the contract. Leica Geosystems, Inc. v. L.W.S. Leasing, Inc., 872 F. Supp. 2d 1191 (D. Colo. 2012).

Boilerplate choice of law provision was held not to "materially alter" the contract and therefore was part of the parties' agreement. Leica Geosystems, Inc. v. L.W.S. Leasing, Inc., 872 F. Supp. 2d 1191 (D. Colo. 2012).

Boilerplate arbitration clause was held not to "materially alter" the agreement and therefore was enforceable although not expressly bargained for. Avedon Eng'g, Inc. v. Seatex, 112 F. Supp. 2d 1090 (D. Colo. 2000).

Material alteration found. Boilerplate clause purporting to reduce limitation period from three years to one year, contrary to state statute, was held to "materially alter" the agreement and therefore was not enforceable. Avedon Eng'g, Inc. v. Seatex, 112 F. Supp. 2d 1090 (D. Colo. 2000).

Material alteration held not agreed to and therefore is not binding. Flight Sys. v. Elgood-Mayo Corp., 660 P.2d 909 (Colo. App. 1982).

Small print on acknowledging invoice held not part of contract. Evidence held insufficient to establish that the small print on the invoice acknowledging purchaser's order was a part of the contract. Surplus Elecs. Corp. v. Gallin, 653 P.2d 752 (Colo. App. 1982).

Penalty interest and attorney fee provisions included on an invoice which constitutes written confirmation of terms orally agreed to by the parties do not materially alter a contract and thus become a part thereof absent objection to such terms. Offen, Inc. v. Rocky Mtn. Constructors, 765 P.2d 600 (Colo. App. 1988).

After defendant was provided a copy of the manufacturer's statement and disclaimer of warranty, those items became part of the agreement between the parties. Graham Hydraulic v. Stewart & Stevenson, 797 P.2d 835 (Colo. App. 1990).

Whether a contract is established pursuant to subsection (3) is applied in Westinghouse Elec. Corp. v. Nielsons, Inc., 647 F. Supp. 896 (D. Colo. 1986).

OFFICIAL COMMENT

1. The parties themselves know best what they have meant by their words of agreement and their action under that agreement is the best indication of what that meaning was. This section thus rounds out the set of factors which determines the meaning of the "agreement" and therefore also of the "unless otherwise agreed" qualification to various provisions of this Article.

2. Under this section a course of performance is always relevant to determine the meaning of the agreement. Express mention of course of performance elsewhere in this Article carries no contrary implication when there is a failure to refer to it in other sections.

3. Where it is difficult to determine whether a particular act merely sheds light on the meaning of the agreement or represents a waiver of a term of the agreement, the preference is in favor of "waiver" whenever such construction, plus the application of the provisions on the reinstatement of rights waived (see Section 2-209), is needed to preserve the flexible character of commercial contracts and to prevent surprise or other hardship.

4. A single occasion of conduct does not fall within the language of this section but other sections such as the ones on silence after acceptance and failure to specify particular defects can affect the parties' rights on a single occasion (see Sections 2-605 and 2-607).

Cross References:

Point 1: Section 4-1-201.

Point 2: Section 4-2-202.

Point 3: Sections 4-2-209, 4-2-601 and 4-2-607.

Point 4: Sections 4-2-605 and 4-2-607.

ANNOTATION

Law reviews. For article, "Buyer-Secured Party Conflicts Under Section 9-307(1) of the Uniform Commercial Code", see 46 U. Colo. L. Rev. 333 (1974-75).

When evidence admissible. Evidence of course of dealing and course of performance is admissible if it does not directly contradict the terms of a written agreement, but merely explains or supplements it. Great W. Sugar Co. v. Northern Natural Gas Co., 661 P.2d 684 (Colo. App. 1982), aff'd sub nom. KN Energy, Inc. v. Great Western Sugar Co., 698 P.2d 769 ( Colo. 1985 ), cert. denied, 472 U.S. 1022, 105 S. Ct. 3489, 87 L. Ed. 2d 623 (1985).

It is the policy of the UCC to consider the previous course of dealing in determining the meaning of contract provisions. Great W. Sugar Co. v. Northern Natural Gas Co., 661 P.2d 684 (Colo. App. 1982), aff'd sub nom. KN Energy, Inc. v. Great Western Sugar Co., 698 P.2d 769 ( Colo. 1985 ), cert. denied, 472 U.S. 1022, 105 S. Ct. 3489, 87 L. Ed. 2d 623 (1985).

Applied in U.S., Trans-Colorado Concrete v. Midwest Const. Co., 653 F. Supp. 903 (D. Colo. 1987).

OFFICIAL 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 this Act. 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 therefore 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 4-1-203.

Point 2: Sections 4-1-201, 4-1-203, 4-2-615 and 4-2-616.

Point 3: Sections 4-2-106, 4-2-201 and 4-2-202.

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

Definitional Cross References:

"Agreement". Section 4-1-201.

"Between merchants". Section 4-2-104.

"Contract". Section 4-1-201.

"Notification". Section 4-1-201.

"Signed". Section 4-1-201.

"Term". Section 4-1-201.

"Writing". Section 4-1-201.

ANNOTATION

Law reviews. For article, "Buyer-Secured Party Conflicts Under Section 9-307(1) of the Uniform Commercial Code", see 46 U. Colo. L. Rev. 333 (1974-75).

Meaning of "waiver". The term "waiver" as used in this section has been accorded its usual meaning, namely, the intentional relinquishment of a known right. Lease Fin., Inc. v. Burger, 40 Colo. App. 107, 575 P.2d 857 (1977).

A waiver may be shown by a course of conduct or by oral statement. Lease Fin., Inc. v. Burger, 40 Colo. App. 107, 575 P.2d 857 (1977).

A waiver can be shown by unequivocal conduct or statements betraying an intent to relinquish known rights. Jelen and Son, Inc. v. Bandimere, 801 P.2d 1182 (Colo. 1990).

Applied in United States ex rel. Mobile Premix Concrete, Inc. v. Santa Fe Eng'rs, Inc., 515 F. Supp. 512 (D. Colo. 1981).

OFFICIAL 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 or a right to payment of an "account" as defined in the Article on Secured Transactions (Article 9) may be assigned although the agreement prohibits assignment. In such cases no question of delegation of any performance is involved. The assignment of a "contract right" as defined in the Article on Secured Transactions (Article 9) is not covered by this subsection.

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 under an assignment of the character in question by permitting him to demand adequate assurance of due performance without which he may suspend his 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 non-assigning original party has a stake in the reliability of the person with whom he has closed the original contract, and is, therefore, 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 4-2-306 and 4-2-609.

Point 5: Article 9, Sections 9-317 and 9-318.

Point 7: Article 9.

Definitional Cross References:

"Agreement". Section 4-1-201.

"Buyer". Section 4-2-103.

"Contract". Section 4-1-201.

"Party". Section 4-1-201.

"Rights". Section 4-1-201.

"Seller". Section 4-2-103.

"Term". Section 4-1-201.

ANNOTATION

Law reviews. For article, "Buyer-Secured Party Conflicts Under Section 9-307(1) of the Uniform Commercial Code", see 46 U. Colo. L. Rev. 333 (1974-75).

OFFICIAL 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 4-1-106. See also Sections 4-1-205, 4-2-208, 4-2-209, 4-2-508 and 4-2-612.

Definitional Cross References:

"Buyer". Section 4-2-103.

"Contract". Section 4-1-201.

"Party". Section 4-1-201.

"Seller". Section 4-2-103.

OFFICIAL 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 non-delivery 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 triers of the facts.

Definitional Cross Reference:

"Contract". Section 4-1-201.

ANNOTATION

Law reviews. For article, "Exclusion and Modification of Warranty under the U.C.C. -- How to Succeed in Business Without Being Liable for Not Really Trying", see 46 Den. L.J. 579 (1969). For note, "Exculpatory Clauses and Public Policy: A Judicial Dilemma", see 53 U. Colo. L. Rev. 793 (1982). For article, "When are Merger Clauses Unconscionable?", see 64 Den. U.L. Rev. 529 (1988).

Finding of unconscionability is a question of law. Mullan v. Quickie Aircraft Corp., 797 F.2d 845 (10th Cir. 1986).

In order to support a finding of unconscionability, there must be evidence of some overreaching on the part of one of the parties such as that which results from an inequality of bargaining power or under other circumstances in which there is an absence of meaningful choice on the part of one of the parties, together with contract terms which are unreasonably favorable to that party. McMillion v. McMillion, 31 Colo. App. 33, 522 P.2d 125 (1974); Davis v. M.L.G. Corp., 712 P.2d 985 ( Colo. 1986 ); Mullan v. Quickie Aircraft Corp., 797 F.2d 845 (10th Cir. 1986); Leprino v. Intermountain Brick Co., 759 P.2d 835 (Colo. App. 1988).

Whether contract was unconscionable is discussed in Mullan v. Quickie Aircraft Corp., 797 F.2d 845 (10th Cir. 1986); Leprino v. Intermountain Brick Co., 759 P.2d 835 (Colo. App. 1988).

Applied in In re Stokes, 43 Colo. App. 461, 608 P.2d 824 (1979); In re Manzo, 659 P.2d 669 ( Colo. 1983 ).

OFFICIAL 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 Act 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 4-1-102, 4-2-302.

Point 2: Section 4-1-201.

Definitional Cross References:

"Party". Section 4-1-201.

"Agreement". Section 4-1-201.

OFFICIAL 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 4-1-102.

Point 3: Sections 4-1-102, 4-1-103, 4-1-104 and 4-2-107.

Definitional Cross References:

"Goods". Section 4-2-105.

"Money". Section 4-1-201.

"Party". Section 4-1-201.

"Seller". Section 4-2-103.

ANNOTATION

Applied in Jelen and Son, Inc. v. Bandimere, 801 P.2d 1182 (Colo. 1990).

OFFICIAL 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 may fix any price he 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 this Act. (Section 1-203).

Cross References:

Point 1: Sections 4-2-204(3), 4-2-706, 4-2-712 and 4-2-716.

Point 3: Section 4-2-103.

Point 5: Sections 4-2-311 and 4-2-610.

Point 6: Section 4-1-203.

Definitional Cross References:

"Agreement". Section 4-1-201.

"Burden of establishing". Section 4-1-201.

"Buyer". Section 4-2-103.

"Cancellation". Section 4-2-106.

"Contract". Section 4-1-201.

"Contract for sale". Section 4-2-106.

"Fault". Section 4-1-201.

"Goods". Section 4-2-105.

"Party". Section 4-1-201.

"Receipt of goods". Section 4-2-103.

"Seller". Section 4-2-103.

"Term". Section 4-1-201.

ANNOTATION

The question of a reasonable price for goods pursuant to this section is a question for a jury. Fischer Imaging Corp. v. General Elec. Co., 187 F.3d 1165 (10th Cir. 1999).

OFFICIAL 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 this Act 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 plant or conduct his business in good faith and according to commercial standards of fair dealing in the trade so that his 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 shut-down by a requirements buyer for lack of orders might be permissible when a shut-down 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 this Act 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 4-2-210.

Point 5: Sections 4-1-203 and 4-2-609.

Definitional Cross References:

"Agreement". Section 4-1-201.

"Buyer". Section 4-2-103.

"Contract for sale". Section 4-2-106.

"Good faith". Section 4-1-201.

"Goods". Section 4-2-105.

"Party". Section 4-1-201.

"Term". Section 4-1-201.

"Seller". Section 4-2-103.

ANNOTATION

"Best efforts" requirement enforced. The "best efforts" requirement of an exclusive distributorship contract, governed by subsection (2), was held not negated by agreement of the parties, and remained as an obligation of the distributors. Stone v. Caroselli, 653 P.2d 754 (Colo. App. 1982).

OFFICIAL 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 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, 2 A.L.R. 685 (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 4-1-201.

Point 2: Sections 4-2-508 and 4-2-601.

Point 3: Sections 4-2-503, 4-2-608 and 4-2-609.

Definitional Cross References:

"Contract for sale". Section 4-2-106.

"Goods". Section 4-2-105.

"Lot". Section 4-2-105.

"Party". Section 4-1-201.

"Rights". Section 4-1-201.

ANNOTATION

Parties "otherwise agreed" to delivery terms; therefore the contract obligated the buyer to pay the full amount of the invoice in spite of the fact that the seller had terminated only forty-five percent of the goods. Murray Equipment Co. v. Curtis, Inc., 725 P.2d 35 (Colo. App. 1986).

OFFICIAL 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 acknowledgment 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 on hand, leaving the buyer himself 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 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.

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 4-2-504 and 4-2-505.

Point 2: Section 4-2-503.

Point 3: Section 4-2-512, Articles 4, Part 5, and 5.

Definitional Cross References:

"Contract for sale". Section 4-2-106.

"Delivery". Section 4-1-201.

"Document of title". Section 4-1-201.

"Goods". Section 4-2-105.

"Party". Section 4-1-201.

"Seller". Section 4-2-103.

OFFICIAL 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 this Act 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 4-1-203, 4-1-204 and 4-2-103.

Point 2: Sections 4-2-320, 4-2-321, 4-2-504, and 4-2-511 through 4-2-514.

Point 5: Section 4-1-203.

Point 6: Section 4-2-609.

Point 7: Section 4-2-204.

Point 9: Sections 4-2-106, 4-2-318, 4-2-610 and 4-2-703.

Definitional Cross References:

"Agreement". Section 4-1-201.

"Contract". Section 4-1-201.

"Notification". Section 4-1-201.

"Party". Section 4-1-201.

"Reasonable time". Section 4-1-204.

"Termination". Section 4-2-106.

ANNOTATION

Where there is a material question of fact as to whether reasonable notice of termination as required by this section was given, the entry of summary judgment was error. William H. White Co. v. B&A Mfg. Co., 794 P.2d 1099 (Colo. App. 1990).

OFFICIAL 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 preliminary right to inspection before paying even though under the delivery term the risk of loss may have previously passed to him or the running of the credit period has already started.

2. Paragraph (b) while providing for inspection by the buyer before he pays, protects the seller. He is not required to give up possession of the goods until he 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. In the absence of a credit term, the seller is permitted to ship under reservation and if he does payment is then due where and when the buyer is to receive the documents.

3. Unless otherwise agreed, the place for the receipt 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.

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 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 full notice and warning as to when he must be prepared to pay.

Cross References:

Generally: Part 5.

Point 1: Section 4-2-509.

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

Point 3: Sections 4-2-308(b), 4-2-512 and 4-2-513.

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

Definitional Cross References:

"Buyer". Section 4-2-103.

"Delivery". Section 4-1-201.

"Document of title". Section 4-1-201.

"Goods". Section 4-2-105.

"Receipt of goods". Section 4-2-103.

"Seller". Section 4-2-103.

"Send". Section 4-1-201.

"Term". Section 4-1-201.

OFFICIAL 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 delay in performance as the case may be. The contract-keeping party may at his 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 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 4-1-201, 4-2-204 and 4-1-203.

Point 3: Sections 4-1-203 and 4-2-609.

Point 4: Section 4-2-614.

Definitional Cross References:

"Agreement". Section 4-1-201.

"Buyer". Section 4-2-103.

"Contract for sale". Section 4-2-106.

"Goods". Section 4-2-105.

"Party". Section 4-1-201.

"Remedy". Section 4-1-201.

"Seasonably". Section 4-1-204.

"Seller". Section 4-2-103.

OFFICIAL 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 in good faith expects to acquire by his purchase, namely, that he receive a good, clean title transferred to him also in a rightful manner so that he 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 cannot be permitted to claim that he 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 normal course of business, it is his 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 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 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 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, foreclosing lienors and persons similarly situated are so out of the ordinary commercial course that their peculiar character is immediately apparent to the buyer and therefore 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.

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 4-2-403.

Point 2: Sections 4-2-607 and 4-2-725.

Point 3: Section 4-1-203.

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

Point 6: Section 4-2-316.

Definitional Cross References:

"Buyer". Section 4-2-103.

"Contract for sale". Section 4-2-106.

"Goods". Section 4-2-105.

"Person". Section 4-1-201.

"Right". Section 4-1-201.

"Seller". Section 4-2-103.

ANNOTATION

Law reviews. For article, "One Year Review of Contracts", see 38 Dicta 161 (1961).

Annotator's note. Since § 4-2-312 is similar to repealed § 121-1-13, CRS 53, and CSA, C. 143A, § 13 (uniform sales act), relevant cases construing those provisions have been included in the annotations to this section.

This section deals with implied warranties of titles. Koscove v. Brunger, 143 Colo. 354 , 352 P.2d 961 (1960).

Purchaser may rescind entire transaction although portion has been disposed of. Where a seller of chattels is guilty of a breach of an implied warranty of title and the purchaser relying upon such warranty has sold or disposed of a minor portion of the chattels, the purchaser, upon learning of the defect of title, may elect to rescind the entire transaction. Koscove v. Brunger, 143 Colo. 354 , 352 P.2d 961 (1960).

Where one buys produce from a tenant farmer without determining landlord's lien upon such, he does so at his peril. Peterson & Co. v. Novinger, 121 Colo. 171 , 214 P.2d 373 (1950).

OFFICIAL 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 this Act 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 therefore 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 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 4-2-316.

Point 2: Sections 1-102(3) and 4-2-318.

Point 3: Section 4-2-316(2)(b).

Point 4: Section 4-2-316.

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

Point 6: Section 4-2-316.

Point 7: Section 4-2-209.

Point 8: Section 4-1-103.

Definitional Cross References:

"Buyer". Section 4-2-103.

"Conforming". Section 4-2-106.

"Goods". Section 4-2-105.

"Seller". Section 4-2-103.

ANNOTATION

Analysis

• I. General Consideration.
• II. Express Warranties.
  • A. Affirmation or Promise.
  • B. Description.
  • C. Sample.
• III. Formal Words not Necessary.

OFFICIAL 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 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 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 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 therefore 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 remainder 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 labelling 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 therefore 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 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 4-2-316.

Point 3: Sections 4-1-203 and 4-2-104.

Point 5: Section 4-2-315.

Point 11: Section 4-2-316.

Point 12: Sections 4-1-201, 4-1-205 and 4-2-316.

Definitional Cross References:

"Agreement". Section 4-1-201.

"Contract". Section 4-1-201.

"Contract for sale". Section 4-2-106.

"Goods". Section 4-2-105.

"Merchant". Section 4-2-104.

"Seller". Section 4-2-103.

ANNOTATION

Law reviews. For article, "The Uniform Commercial Code and Sales Warranties in Colorado", see 38 U. Colo. L. Rev. 7 (1965). For note, "Implied Warranty of Fitness for Habitation in Sale of Residential Dwellings", see 43 Den. L. J. 379 (1966). For note, "Implied Warranties -- Sales of Used Cars in Colorado", see 42 U. Colo. L. Rev. 473 (1971). For article, "Buyer-Secured Party Conflicts Under Section 9-307(1) of the Uniform Commercial Code", see 46 U. Colo. L. Rev. 333 (1974-75). For article, "The Enterprise Liability Theory of Torts", see 47 U. Colo. L. Rev. 153 (1976). For comment, "Implied Warranties in the Sale of Real Estate in Colorado: Rational Boundaries of the Doctrine", see 53 U. Colo. L. Rev. 137 (1981). For article, "Let the Builder-Vendor Beware: The Demise of Caveat Emptor in Colorado -- Part I", see 16 Colo. Law. 463 (1987). For article, "Let the Builder-Vendor Beware: Defenses and Damages in Home Builder Litigation -- Part II", see 16 Colo. Law. 629 (1987). For article, "What's in the Package: Food, Beverage, and Dietary Supplement Law and Litigation Part I", see 43 Colo. Law. 77 (July 2014).

Annotator's note. Since § 4-2-314 is similar to repealed § 121-1-15(1)(c), C.R.S. 1963, § 121-1-15(2), CRS 53, and CSA, C. 143A, § 15(2) (uniform sales act), relevant cases construing those provisions have been included in the annotations to this section.

The several types of warranties coexist. Westric Battery Co. v. Standard Elec. Co., 482 F.2d 1307 (10th Cir. 1973).

Implied warranties of merchantability and fitness for a particular purpose may coexist when there is sufficient evidence to support the creation of each warranty. Palmer v. A.H. Robins Co., Inc., 684 P.2d 187 (Colo. 1984); Hawkinson v. A.H. Robins Co., Inc., 595 F. Supp. 1290 (D. Colo. 1984).

Evidence that woman selected intrauterine device not only for the ordinary purpose of preventing pregnancy, but also for the particular purpose of providing her with a safe contraceptive device was sufficient to justify submission to the jury of the dual implied warranties of fitness for a particular purpose and merchantability. Palmer v. A.H. Robins Co., Inc., 684 P.2d 187 (Colo. 1984).

Doctrine of strict liability adopted where design renders unreasonably dangerous an otherwise properly manufactured product. Pust v. Union Supply Co., 38 Colo. App. 435, 561 P.2d 355 (1976), rev'd sub nom. Holly Sugar Corp. v. Union Supply Co., 194 Colo. 316 , 572 P.2d 148 (1977) (third party indemnification issue), and aff'd, 196 Colo. 162 , 583 P.2d 276 (1978).

Design enhances extent of injuries. Strict liability attaches to an automobile design defect which, though not contributing to the collision itself, may have enhanced the injuries sustained. Roberts v. May, 41 Colo. App. 82, 583 P.2d 305 (1978).

Defect in design may render product unmerchantable or not fit for the particular purposes for which it was required. Union Supply Co. v. Pust, 196 Colo. 162 , 583 P.2d 276 (1978).

For effect on manufacturer's liability where product is unavoidably unsafe, see Belle Bonfils Mem. Blood Bank v. Hansen, 665 P.2d 118 (Colo. 1983).

Summary judgment improper where factual question as to reasonableness of design. Where plaintiff's experts raise a factual question about the reasonableness of defendant's design strategies, the drastic remedy of summary judgment is improper, and the issue of whether the design of the car unreasonably increased the risks of injury by collision should be presented to the jury. Roberts v. May, 41 Colo. App. 82, 583 P.2d 305 (1978).

A dealer who sells articles which ordinarily are used in but one way impliedly warrants fitness for use in that particular way, unless there is evidence to the contrary, and this is a warrant of merchantability. Comet Indus., Inc. v. Best Plastic Container Corp., 222 F. Supp. 723 (D. Colo. 1963).

Contract required to involve sale of product. A claim asserting a breach of the "implied warranty of merchantability and fitness" under this section required that the contract in question involve the sale of a product. Strong v. Retail Credit Co., 38 Colo. App. 125, 552 P.2d 1025 (1976).

Concepts of liability without fault are not applicable to service contracts. Strong v. Retail Credit Co., 38 Colo. App. 125, 552 P.2d 1025 (1976).

Warranties arise in every contract for sale unless excluded. Warranties of merchantability and of fitness for a particular purpose, assuming all other statutory prerequisites have been met, arise in every contract for sale, unless properly excluded. Lease Fin., Inc. v. Burger, 40 Colo. App. 107, 575 P.2d 857 (1977).

A seller in connection with a sale of goods who incidentally renders services in the installation of those goods, knows the use and purpose intended for the goods, and knows that the user is relying on his skill and judgment in connection with the sale is liable under the theory of implied warranty of merchantability for each and every step of the process under his control by which the goods are transferred to the ultimate user, including any services rendered. Bailey v. Montgomery Ward & Co., Inc., 690 P.2d 1280 (Colo. App. 1984).

Where contract provides for sale of goods and for performance of labor or service, test under this section is whether the circumstances underlying the formation of the agreement and the performance reasonably expected demonstrate that the primary purpose of the contract is either the sale of goods or the sale of labor or service. Factors to be considered include: 1) The contractual language; 2) whether an overall price is charged, or the goods and labor are separately billed; 3) the ratio of the cost of goods to the overall contract price; and 4) the nature and reasonableness of the purchaser's expectations of acquiring a property interest in the goods. Bailey v. Montgomery Ward & Co., Inc., 690 P.2d 1280 (Colo. App. 1984).

Warranty applicable to heating system which was moved into buyers' residence for installation and later removed. Thomas v. Bove, 687 P.2d 534 (Colo. App. 1984).

Transfusion of blood was not sale of product. St. Luke's Hosp. v. Schmaltz, 188 Colo. 353 , 534 P.2d 781 (1975).

Implied warranty liability extended to component parts manufacturer. As in the area of strict liability, implied warranty liability may extend to the manufacturer of component parts if the lack of fitness for the purpose or use required is found in the component parts before they leave the component parts manufacturer, and not merely in the completed system. Union Supply Co. v. Pust, 196 Colo. 162 , 583 P.2d 276 (1978); Shaw v. General Motors Corp., 727 P.2d 387 (Colo. App. 1986).

Corporation's dissemination of information qualified as warranties. Where a corporation disseminated information using advertising materials, trade publications, or technical publications and oral statements representing the quality of its product, this activity qualifies in law as warranties. Westric Battery Co. v. Standard Elec. Co., 482 F.2d 1307 (10th Cir. 1973).

Admission of industry safety codes as substantive evidence on strict liability issue of whether a product is in a defective condition unreasonably dangerous is valid. Union Supply Co. v. Pust, 196 Colo. 162 , 583 P.2d 276 (1978).

Evidence of industry safety standards, when relevant as to a defect, must be introduced through an expert, must be authenticated as reliable and bona fide industry-wide safety codes, and sufficient advance notice of the intended use of such standards must be given to the adverse party so that he will have sufficient time to prepare to meet the evidence. Union Supply Co. v. Pust, 196 Colo. 162 , 583 P.2d 276 (1978).

Fertilizer containing herbicides was neither fit for its ordinary purpose nor for the farmers particular purpose, and therefore, breaches both the implied warranty of fitness and the implied warranty of merchantability. Deacon v. Am. Plant Food Corp., 782 P.2d 861 (Colo. App. 1989), rev'd on other grounds sub nom. Stone's Farm Supply, Inc. v. Deacon, 805 P.2d 1109 ( Colo. 1991 ).

Lessee as third party beneficiary of warranties. Although a lessee of a machine does not directly receive the benefits of the warranties made by the seller to the lessor, the lessee may be a third party beneficiary of such warranties who could "reasonably be expected to use, consume, or be affected by the goods". Lease Fin., Inc. v. Burger, 40 Colo. App. 107, 575 P.2d 857 (1977).

One who sells an article for use as food for human consumption is held to have impliedly warranted that it is fit for the purpose for which it was sold, and for breach of that warranty proximately resulting in injury, may be held to respond in damages. Gonzales v. Safeway Stores, Inc., 147 Colo. 358 , 363 P.2d 667 (1961).

Aside from the statute, a retailer who sells unwholesome food for human consumption is liable to the customer for the consequences under an implied warranty imposed by law as a matter of public policy, even though the food is in sealed containers bearing the label of the manufacturer and the retailer has no means of knowing that the contents are unfit for human consumption. Gonzales v. Safeway Stores, Inc., 147 Colo. 358 , 363 P.2d 667 (1961).

Where an advertisement does not mention the name of the product and the buyer does not see a label or other evidence of the name of the product before using it, but relies on the seller's judgment and skill to supply him with a sufficient and safe product, there is an implied warranty that the product is of merchantable quality, permitting recovery of actual damages sustained. Huscher v. Pfost, 122 Colo. 301 , 221 P.2d 931 (1950). See Gonzales v. Safeway Stores, Inc., 147 Colo. 358 , 363 P.2d 667 (1961).

Warranties will be implied in a house purchased in the course of construction that it is built in an efficient and workmanlike manner and of proper materials and when finished will be fit for habitation. Carpenter v. Donohoe, 154 Colo. 78 , 388 P.2d 399 (1964).

Implied warranties include completed buildings. The implied warranty doctrine includes agreements between builder-vendors and purchasers for the sale of newly constructed buildings, completed at the time of contracting. There is an implied warranty that builder-vendors have complied with the building code of the area in which the structure is located, and where a home is the subject of sale, there are implied warranties that the home was built in workmanlike manner and is suitable for habitation. Carpenter v. Donohoe, 154 Colo. 78 , 388 P.2d 399 (1964).

Implied warranty extends to a buyer who incurs injury through an allergic reaction to a product where such an individual is a member of an identifiable class of persons allergic thereto. Howard v. Avon Prods., Inc., 155 Colo. 444 , 395 P.2d 1007 (1964).

The buyer has the burden of establishing that the product is injurious to a "significant number" of the population. Howard v. Avon Prods., Inc., 155 Colo. 444 , 395 P.2d 1007(1964).

One fails to bring himself within the identifiable class or significant number concept when at the time of purchase, at which point the implied warranty attaches, there is no reasonably foreseeable class of potential users who could be described as prone to suffer from an allergic reaction. Howard v. Avon Prods., Inc., 155 Colo. 444 , 395 P.2d 1007 (1964).

Sellers who failed to provide purchase documentation for liquor inventory to buyers of inn breached implied warranty of merchantability entitling buyers to reject undocumented portion of liquor inventory. Purpose of this section is to allocate to seller the risk of loss stemming from defects that render goods unmerchantable. Loden v. Drake, 881 P.2d 467 (Colo. App. 1994).

Plaintiff must prove injuries proximately caused. It is incumbent upon the plaintiff in an action for breach of an implied warranty of fitness to prove that the injuries were proximately caused by the breach of such warranty. Dallison v. Sears, Roebuck & Co., 313 F.2d 343 (10th Cir. 1962).

Negligence is a defense to an action for breach of such an implied warranty. Dallison v. Sears, Roebuck & Co., 313 F.2d 343 (10th Cir. 1962).

Applied in Eggen v. M. & K. Trailers & Mobile Home Brokers, Inc., 29 Colo. App. 177, 482 P.2d 435 (1971); Pust v. Union Supply Co., 38 Colo. App. 435, 561 P.2d 355 (1976); Colorado-Ute Elec. Ass'n v. Envirotech Corp., 524 F. Supp. 1152 (D. Colo. 1981 ); White v. Mississippi Order Buyers, Inc., 648 P.2d 682 (Colo. App. 1982).

OFFICIAL 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 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 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 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 non-merchants 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 is insisting on a particular brand he 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 4-2-314 and 4-2-317.

Point 3: Section 4-2-303.

Point 6: Section 4-2-316.

Definitional Cross References:

"Buyer". Section 4-2-103.

"Goods". Section 4-2-105.

"Seller". Section 4-2-103.

ANNOTATION

Law reviews. For article, "The Uniform Commercial Code and Sales Warranties in Colorado", see 38 U. Colo. L. Rev. 7 (1965). For note, "Implied Warranties -- Sales of Used Cars in Colorado", see 42 U. Colo. L. Rev. 473 (1971). For article, "Buyer-Secured Party Conflicts Under Section 9-307(1) of the Uniform Commercial Code", see 46 U. Colo. L. Rev. 33 (1974-75). For comment, "Implied Warranties in the Sale of Real Estate in Colorado: Rational Boundaries of the Doctrine", see 53 U. Colo. L. Rev. 137 (1981).

Annotator's note. Since § 4-2-315 is similar to repealed § 121-1-15(1)(b), (3), and (4), C.R.S. 1963, § 121-1-15(1), (4), and (5), CRS 53, and CSA, C. 143A, § 15(1), (4), and (5)(uniform sales act), relevant cases construing those provisions have been included in the annotations to this section.

This section provides for an implied warranty that the goods be reasonably fit for the uses, made known to the seller by the buyer, for which they were purchased. Wallower v. Elder, 126 Colo. 109 , 247 P.2d 682 (1952).

This section includes cases for which an implied warranty hinges on the question of whether or not the buyer makes known to the seller the uses for which he desires the chattels. Wallower v. Elder, 126 Colo. 109 , 247 P.2d 682 (1952).

Expressly or by implication. There is no implied warranty of fitness for any particular purpose unless the buyer expressly or by implication makes known to the seller the particular purpose for which the goods are required. Schlottman v. Pressey, 96 F. Supp. 979 (D. Colo. 1951); Schlottman v. Pressey, 195 F.2d 343 (10th Cir. 1952); Comet Indus., Inc. v. Best Plastic Container Corp., 222 F. Supp. 723 (D. Colo. 1963).

General or specific purpose. The buyer's particular purpose may be equivalent to nothing more than a general purpose or it may relate to a more specific purpose. Comet Indus., Inc. v. Best Plastic Container Corp., 222 F. Supp. 723 (D. Colo. 1963).

Under this section the buyer's reliance on the seller's skill or judgment must be shown before an implied warranty of fitness of purpose can arise. Wallower v. Elder, 126 Colo. 109 , 247 P.2d 682 (1952); Comet Indus., Inc. v. Best Plastic Container Corp., 222 F. Supp. 723 (D. Colo. 1963 ); Klipfel v. Neill, 30 Colo. App. 428, 494 P.2d 115. (1972).

Actual reliance is required; affidavit alleging that a purchaser would have relied on the seller had the seller advised her the product was unsuitable does not create a genuine issue of material fact when the purchaser testified that she decided to buy the product before entering the seller's store. Wallman v. Kelley, 976 P.2d 330 (Colo. App. 1998).

The several types of warranties coexist. Westric Battery Co. v. Standard Elec. Co., 482 F.2d 1307 (10th Cir. 1973).

Implied warranties of merchantability and fitness for a particular purpose may coexist when there is sufficient evidence to support the creation of each warranty. Palmer v. A.H. Robins Co., Inc., 684 P.2d 187 (Colo. 1984); Hawkinson v. A.H. Robins Co., Inc., 595 F. Supp. 1290 (D. Colo. 1984).

Evidence that woman selected intrauterine device not only for the ordinary purpose of preventing pregnancy, but also for the particular purpose of providing her with a safe contraceptive device was sufficient to justify submission to the jury of the dual implied warranties of fitness for a particular purpose and merchantability. Palmer v. A.H. Robins Co., Inc., 684 P.2d 187 (Colo. 1984).

Doctrine of strict liability adopted where design renders unreasonably dangerous an otherwise properly manufactured product. Pust v. Union Supply Co., 38 Colo. App. 435, 561 P.2d 355 (1976), rev'd sub nom. Holly Sugar Corp. v. Union Supply Co., 194 Colo. 316 , 572 P.2d 148 (1977) (party indemnification issue), and aff'd, 196 Colo. 162 , 583 P.2d 276 (1978).

Design enhances extent of injuries. Strict liability attaches to an automobile design defect which, though not contributing to the collision itself, may have enhanced the injuries sustained. Roberts v. May, 41 Colo. App. 82, 583 P.2d 305 (1978).

For effect on manufacturer's liability where product is unavoidably unsafe, see Belle Bonfils Mem. Blood Bank v. Hansen, 665 P.2d 118 (Colo. 1983).

Warranties arise in every contract for sale unless excluded. Warranties of merchantability and of fitness for a particular purpose assuming all other statutory prerequisites have been met, arise in every contract for sale, unless properly excluded. Lease Fin., Inc. v. Burger, 40 Colo. App. 107, 575 P.2d 857 (1977).

Defect in design may render product unmerchantable or not fit for the particular purposes for which it was required. Union Supply Co. v. Pust, 196 Colo. 162 , 583 P.2d 276 (1978).

Fertilizer containing herbicides was neither fit for its ordinary purpose nor for the farmers particular purpose, and therefor, breaches both the implied warranty of fitness and the implied warranty of merchantability. Deacon v. Am. Plant Food Corp., 782 P.2d 861 (Colo. App. 1989), rev'd on other grounds sub nom. Stone's Farm Supply, Inc. v. Deacon, 805 P.2d 1109 ( Colo. 1991 ).

Admission of industry safety codes as substantive evidence on strict liability issue of whether a product is in a defective condition unreasonably dangerous is valid. Union Supply Co. v. Pust, 196 Colo. 162 , 583 P.2d 276 (1978).

Evidence of industry safety standards, when relevant as to a defect must be introduced through an expert, must be authenticated as reliable and bona fide industry-wide safety codes and sufficient advance notice of the intended use of such standards must be given to the adverse party so that he will have sufficient time to prepare to meet the evidence. Union Supply Co. v. Pust, 196 Colo. 162 , 583 P.2d 276 (1978).

Summary judgment improper where factual question as to reasonableness of design. Where plaintiff's experts raise a factual question about the reasonableness of defendant's design strategies, the drastic remedy of summary judgment is improper, and the issue of whether the design of the car unreasonably increased the risks of injury by collision should be presented to the jury. Roberts v. May, 41 Colo. App. 82, 583 P.2d 305 (1978).

If the buyer has equal or superior skill and experience to that of the seller, has full opportunity to exercise it by examination and actual test in the uses intended, and fails to do so, then he is not warranted in relying solely upon a seller's statement that whatever is about to be furnished will accomplish the desired result. Wallower v. Elder, 126 Colo. 109 , 247 P.2d 682 (1952).

Where the transaction is one of oral consummation, any question or dispute arising therefrom as to the matter of whether in implied warranty exists or not is a jury question. Wallower v. Elder, 126 Colo. 109 , 247 P.2d 682 (1952).

Where there is no evidence that the seller was informed concerning the particular purpose for which a product is required, and it affirmatively appears that the buyer did not place reliance upon the "skill or judgment" of seller, because they were fully advised that he had no experience with such product, the essential elements set forth in this section which give rise to an implied warranty are wholly absent. Lindsey v. Stalder, 120 Colo. 58 , 208 P.2d 83 (1949).

Where one purchases by relying on the trade name and manufacturer's reputation, there is no implied warranty as to fitness under this section. Elwood Edwards Auto Sales, Inc. v. Kinsey, 123 Colo. 52 , 225 P.2d 59 (1950).

Where the sale is of a known, described, and definite article, designed and on the market for a particular purpose, such carries with it a warranty of fitness for the purpose for which it was sold. Platte Valley Motor Co. v. Wagner, 130 Colo. 365 , 278 P.2d 870 (1954).

Such fitness for a particular purpose may be merely the equivalent of merchantability; in such a case, the warranties coexist and a recovery may be founded upon either. Comet Indus., Inc. v. Best Plastic Container Corp., 222 F. Supp. 723 (D. Colo. 1963).

The buyer of a machine may, either under the common law or this section rely upon an implied warranty of fitness for the purpose indicated where he made known to the manufacturer and seller the purpose for which the machine was desired and trusted to the latter's skill and judgment to furnish a machine suitable for the purpose. Duncan v. Bd. of County Comm'rs, 154 Colo. 447 , 391 P.2d 368 (1964).

Implied warranty liability extended to component parts manufacturer. As in the area of strict liability, implied warranty liability may extend to the manufacturer of component parts if the lack of fitness for the purpose or use required is found in the component parts before they leave the component parts manufacturer, and not merely in the completed system. Union Supply Co. v. Pust, 196 Colo. 162 , 583 P.2d 276 (1978); Shaw v. General Motors Corp., 727 P.2d 387 (Colo. App. 1986).

Warranty applicable to heating system which was moved into buyers' residence for installation and later removed. Thomas v. Bove, 687 P.2d 534 (Colo. App. 1984).

Warranty's existence or breach for trier of fact. The question of the existence of a warranty and whether that warranty was breached is ordinarily one for the trier of fact. Stroh v. Am. Recreation & Mobile Home Corp., 35 Colo. App. 196, 530 P.2d 989 (1975); Aetna Cas. & Sur. v. Crissy Fowler Lumber, 687 P.2d 514 (Colo. App. 1984).

Plaintiff established a prima facie case of breach of warranty and injury resulting from that breach, where it was shown that the plaintiff used the product according to the manufacturer's directions for its intended use, and the product was shown to be contaminated and an inference of proximate cause could arise from the fact of proven injury following use of the product. West v. Alberto Culver Co., 486 F.2d 459 (10th Cir. 1973).

Corporation's dissemination of information qualified as warranties. Where a corporation disseminated information using advertising materials, trade publications, or technical publications and oral statements representing the quality of its product, this activity qualifies in law as warranties. Westric Battery Co. v. Standard Elec. Co., 482 F.2d 1307 (10th Cir. 1973).

An implied warranty is present whether the seller is the manufacturer or not; the seller in such instance warrants that the goods are fit for the purpose for which they are purchased. Comet Indus., Inc. v. Best Plastic Container Corp., 222 F. Supp. 723 (D. Colo. 1963).

Seller is under no duty to inspect or remedy small details of mechanism of national brand articles sold in the ordinary course of business. Am. Furn. Co. v. Veazie, 131 Colo. 340 , 281 P.2d 803 (1955).

A seller who has substantially complied with prescribed specifications will not be held to have extended a warranty of fitness for a particular purpose or be held responsible for the consequences of a deficiency in the specifications. Klipfel v. Neill, 30 Colo. App. 428, 494 P.2d 115 (1972); Shaw v. General Motors Corp., 727 P.2d 387 (Colo. App. 1986).

If a manufacturer undertakes to manufacture a machine according to his own judgment and plans, which is intended by the buyer for a disclosed purpose, there is an implied warranty that the machine will be fit for such purpose. Duncan v. Bd. of County Comm'rs, 154 Colo. 447 , 391 P.2d 368 (1964).

This section also covers used or second-hand chattels. Wallower v. Elder, 126 Colo. 109 , 247 P.2d 682 (1952); Platte Valley Motor Co. v. Wagner, 130 Colo. 365 , 278 P.2d 870 (1954).

Where the buyer fails to give seller notice of a claimed breach of such a warranty within reasonable time, this failure relieves seller of any liability. Am. Furn. Co. v. Veazie, 131 Colo. 340 , 281 P.2d 803 (1955).

Evidence showed water conditioner unfit for buyer's residence. Cherokee Inv. Co. v. Voiles, 166 Colo. 270 , 443 P.2d 727 (1968).

Lessee as third party beneficiary of warranties. Although a lessee of a machine does not directly receive the benefits of the warranties made by the seller to the lessor, the lessee may be a third party beneficiary of such warranties who could "reasonably be expected to use, consume, or be affected by the goods". Lease Fin., Inc. v. Burger, 40 Colo. App. 107, 575 P.2d 857 (1977).

Applied in Colorado-Ute Elec. Ass'n v. Envirotech Corp., 524 F. Supp. 1152 (D. Colo. 1981).

OFFICIAL 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 unreasonably fails to examine the goods before he uses them, resulting injuries may be found to result from his 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 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 is relying on those words rather than on his 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 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 layman 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 4-2-202, 4-2-718 and 4-2-719.

Point 7: Sections 4-1-205 and 4-2-208.

Definitional Cross References:

"Agreement". Section 4-1-201.

"Buyer". Section 4-2-103.

"Contract". Section 4-1-201.

"Course of dealing". Section 4-1-205.

"Goods". Section 4-2-105.

"Remedy". Section 4-1-201.

"Seller". Section 4-2-103.

"Usage of trade". Section 4-1-205.

ANNOTATION

Law reviews. For article, "Exclusion and Modification of Warranty under the U.C.C. -- How to Succeed in Business Without Being Liable for Not Really Trying", see 46 Den. L.J. 579 (1969). For article, "The 'Battle of the Forms' Under the Colorado Uniform Commercial Code", see 11 Colo. Law. 78 (1982).

Annotator's note. Since § 4-2-316 is similar to repealed § 121-1-71, C.R.S. 1963 (uniform sales act), relevant cases construing § 121-1-71 have been included in the annotations to this section.

A broad general disclaimer clause may negate implied warranties if there is a negotiated contract between a commercial seller and a commercial buyer. Cherokee Inv. Co. v. Voiles, 166 Colo. 270 , 443 P.2d 727 (1968).

But it is not appropriate to a consumer who purchases after a home demonstration. Cherokee Inv. Co. v. Voiles, 166 Colo. 270 , 443 P.2d 727 (1968).

Negating implied warranty of fitness for particular purpose by general disclaimer. The uniform commercial code, in providing for an implied warranty of fitness for a particular purpose, announced a public policy adopted by the general assembly to give buyers protection against sellers of unfit merchandise under certain conditions. In order to negative this declaration of public policy, the express agreement provided for in this section must be clear, unequivocal, and the result of a genuine agreement between the parties, and where there is an attempt to negative an implied warranty of fitness by a broad general disclaimer, it must appear that the so-called disclaimer was clearly brought to the attention of the buyer and agreed to by him in order for this disclaimer to be effective. Cherokee Inv. Co. v. Voiles, 166 Colo. 270 , 443 P.2d 727 (1968); Miehle Co. v. Smith-Brooks Printing Co., 303 F. Supp. 501 (D. Colo. 1969 ).

Warranties arise in every contract for sale unless excluded. Warranties of merchantability and of fitness for a particular purpose assuming all other statutory prerequisites have been met, arise in every contract for sale, unless properly excluded. Lease Fin., Inc. v. Burger, 40 Colo. App. 107, 575 P.2d 857 (1977).

How implied warranty of fitness excluded. An implied warranty of fitness for a particular purpose can be excluded by a conspicuous writing which states generally that there are no warranties extending beyond the description in the contract. O'Neil v. Int'l Harvester Co., 40 Colo. App. 369, 575 P.2d 862 (1978).

Where a buyer alleges the existence of oral warranties prior to execution of a written contract and there is conduct following the sale which tends to show that warranties were in fact made, there is a material issue of fact for resolution, namely, whether the parties intended the written contract to be a final expression of their agreement, and, if not, what the terms actually agreed upon by the parties consisted of. Evidence of both oral warranties and the conduct of the parties subsequent to signing the contract is admissible for purpose of resolving this issue. O'Neil v. Int'l Harvester Co., 40 Colo. App. 369, 575 P.2d 862 (1978).

Provision in contract stating that it was sole warranty does not negate buyer's claim of negligent misrepresentation and parol evidence as to such misrepresentation allowable. Keller v. A.O. Harvestore Prods., 819 P.2d 69 (Colo. 1991).

Disclaimer of implied warranty of merchantability is required to include the word "merchantability" and prevalent view is that the provisions of subsection (3) do not qualify this requirement. Richard O'Brien Companies v. Challenge-Cook Bros., 672 F. Supp. 466 (D. Colo. 1987).

Where an inspection of inventory under this section would not have revealed defect affecting merchantability, claim of breach of implied warranty of merchantability under § 4-2-314 is not excluded by reason of such inspection. Loden v. Drake, 881 P.2d 467 (Colo. App. 1994).

Applied in Hummel v. Skyline Dodge, Inc., 41 Colo. App. 572, 589 P.2d 73 (1978); Colorado-Ute Elec. Ass'n v. Envirotech Corp., 524 F. Supp. 1152 (D. Colo. 1981 ); Universal Drilling Co. v. Camay Drilling Co., 737 F.2d 869 (10th Cir. 1984).

OFFICIAL 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. Therefore, 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 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 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 4-2-315.

Definitional Cross Reference:

"Party". Section 4-1-201.

OFFICIAL 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 own buyer and of any beneficiaries, in any manner provided in Sections 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 has made to his 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 [As amended in 1966].

3. The first alternative expressly includes as beneficiaries within its provisions the family, household and guests of the purchaser. Beyond this, the section in this form is neutral and is not intended to enlarge or restrict the developing case law on whether the seller's warranties, given to his buyer who resells, extend to other persons in the distributive chain.

The second alternative is designed for states where the case law has already developed further and for those that desire to expand the class of beneficiaries. The third alternative goes further, following the trend of modern decisions as indicated by Restatement of Torts 2d § 402A (Tentative Draft No. 10, 1965) in extending the rule beyond injuries to the person [As amended in 1966].

Cross References:

Point 1: Sections 4-2-316, 4-2-718 and 4-2-719.

Point 2: Section 4-2-314.

Definitional Cross References:

"Buyer". Section 4-2-103.

"Goods". Section 4-2-105.

"Seller". Section 4-2-103.

COLORADO COMMENT

This section, as amended by Colorado, extends to any person reasonably expected to use, consume, or be affected by goods the same warranty which the buyer received in the contract of sale, thereby freeing any such beneficiaries from any technical rules as to "privity". The Colorado change enlarges the potential liability of a seller by extending the warranty to other persons in the distributive chain. This section 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.

ANNOTATION

The general assembly has expanded the class of persons protected by express and implied warranties beyond that set forth in the original uniform code. Prutch v. Ford Motor Co., 40 Colo. App. 129, 574 P.2d 102 (1977), rev'd on other grounds, 618 P.2d 657 ( Colo. 1980 ).

Privity is not required in warranty actions. Pust v. Union Supply Co., 38 Colo. App. 435, 561 P.2d 355 (1976), rev'd sub nom. Holly Sugar Corp. v. Union Supply Co., 194 Colo. 316 , 572 P.2d 148 (1977)(party indemnification issue), and aff'd, 196 Colo. 162 , 583 P.2d 276 (1978).

Properly executed limitations of warranties or available remedies are equally applicable to anyone that would be a beneficiary of a seller's warranty. Wenner Petro. v. Mitsui & Co., 748 P.2d 356 (Colo. App. 1987).

There is no indication that the general assembly intended to include arbitration as a limitation which could be imposed on remote purchasers through the operation of this section. Recold, S.A. De C.V. v. Monfort of Colo., Inc., 893 F.2d 195 (8th Cir. 1990).

Lessee as beneficiary. Although a lessee of a machine does not directly receive the benefits of the warranties made by the seller to the lessor, the lessee may be a third party beneficiary of such warranties who could "reasonably be expected to use, consume, or be affected by the goods". Lease Fin., Inc. v. Burger, 40 Colo. App. 107, 575 P.2d 857 (1977).

Warranties provided by the uniform commercial code are not the exclusive means of recovery without a showing of negligence or fault. Larson v. Clark Equip. Co., 33 Colo. App. 277, 518 P.2d 308 (1974).

Judicial adoption of strict liability in tort not precluded. The legislative adoption of the UCC warranties without a privity requirement did not preclude the judicial adoption of strict liability in tort. Larson v. Clark Equip. Co., 33 Colo. App. 277, 518 P.2d 308 (1974).

For discussion of the distinction between liability in contract for breach of warranty and strict tort liability for product misrepresentation, see Am. Safety Equip. Corp. v. Winkler, 640 P.2d 216 (Colo. 1982).

Applied in Hansen v. Mercy Hosp., 40 Colo. App. 17, 570 P.2d 1309 (1977).

OFFICIAL 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 Act by Section 2-311(2) (seller's option re arrangements relating to shipment) and Sections 2-614 and 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 case-law; 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 4-2-311(3), 4-2-323, 4-2-503 and 4-2-504.

Definitional Cross References:

"Agreed". Section 4-1-201.

"Bill of lading". Section 4-1-201.

"Buyer". Section 4-2-103.

"Goods". Section 4-2-105.

"Seasonably". Section 4-1-204.

"Seller". Section 4-2-103.

"Term". Section 4-1-201.

OFFICIAL 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 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 must seek his 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 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 part of the goods without a bill of lading because the latter covers a larger quantity, nor is he 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 may of course claim his rights in any goods which have been identified to his contract.

5. The seller is given the option of paying or providing for the payment of freight. He 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 is not obligated to pay the freight; the seller is therefore required to obtain a receipt "showing that the freight has been paid or provided for." The usual notation in the appropriate space 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.

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 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.

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 sub-buyer 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 buyer may not reject the documents on the ground that the original policy does not cover such higher price. If such a sub-buyer desires additional insurance he must procure it for himself.

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 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 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 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 with necessary endorsements, so that before the goods arrive he 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 promptly to assert his remedy against the carrier or insurer. The seller is therefore 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 payment in these circumstances does not constitute an acceptance of the goods nor does it impair his right of subsequent inspection or his options and remedies in the case of improper delivery. All remedies and rights for the seller's breach are reserved to him. The buyer must pay before inspection and assert his 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 rights if he has performed his 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 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 has in force an "open" or "floating" policy covering all shipments made by him or to him, 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 4-2-323.

Point 6: Section 4-2-509(1)(a).

Point 9: Sections 4-2-508 and 4-2-605(1)(a).

Point 12: Sections 4-2-321(3), 4-2-512 and 4-2-513(3) and Article 5.

Definitional Cross References:

"Bill of lading". Section 4-1-201.

"Buyer". Section 4-2-103.

"Contract". Section 4-1-201.

"Goods". Section 4-2-105.

"Rights". Section 4-1-201.

"Seller". Section 4-2-103.

"Term". Section 4-1-201.

OFFICIAL 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 4-2-324.

Definitional Cross References:

"Agreement". Section 4-1-201.

"Contract". Section 4-1-201.

"Delivery". Section 4-1-201.

"Goods". Section 4-2-105.

"Seller". Section 4-2-103.

"Term". Section 4-1-201.

OFFICIAL 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 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 4-2-319(2).

Definitional Cross References:

"Buyer". Section 4-2-103.

"Goods". Section 4-2-105.

"Seller". Section 4-2-103.

"Term". Section 4-1-201.

OFFICIAL 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.

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 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 4-2-508(2), 5-113.

Definitional Cross References:

"Bill of lading". Section 4-1-201.

"Buyer". Section 4-2-103.

"Contract". Section 4-1-201.

"Delivery". Section 4-1-201.

"Financing agency". Section 4-2-104.

"Person". Section 4-1-201.

"Seller". Section 4-2-103.

"Send". Section 4-1-201.

"Term". Section 4-1-201.

OFFICIAL 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 an exemption from liability for non-delivery. 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 the responsibility for making or arranging the shipment, he 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 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, the seller is entitled under the "no arrival, no sale" clause to exemption from payment of damages for non-delivery if the goods do not arrive or if the goods which actually arrive are non-conforming. 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 non-arrival.

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 transshipment.

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 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 from loss due to causes beyond his control.

Cross References:

Point 1: Section 4-1-203.

Point 2: Section 4-2-501(a) and (c).

Point 5: Section 4-2-613.

Definitional Cross References:

"Buyer". Section 4-2-103.

"Conforming". Section 4-2-106.

"Contract". Section 4-1-201.

"Fault". Section 4-1-201.

"Goods". Section 4-2-105.

"Sale". Section 4-2-106.

"Seller". Section 4-2-103.

"Term". Section 4-1-201.

OFFICIAL 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 3-802) 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 intention to demand direct payment from him.

2. Subsection (2) 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 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 4-2-403, 4-2-511(3) and 3-802 and Article 5.

Definitional Cross References:

"Buyer". Section 4-2-103.

"Contract for sale". Section 4-2-106.

"Draft". Section 4-3-104.

"Financing agency". Section 4-2-104.

"Notifies". Section 4-1-201.

"Overseas". Section 4-2-323.

"Purchaser". Section 4-1-201.

"Seasonably". Section 4-1-204.

"Seller". Section 4-2-103.

"Term". Section 4-1-201.

OFFICIAL 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. A "sale on approval" or "sale or return" is distinct from other types of transactions with which they have frequently been confused. The type of "sale on approval," "on trial" or "on satisfaction" dealt with involves a contract under which the seller undertakes a particular business risk to satisfy his prospective buyer with the appearance or performance of the goods in question. 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. The type of "sale or return" involved herein is a sale to a merchant whose unwillingness to buy is overcome only 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. 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."

The right to return the goods for failure to conform to the contract does not make the transaction a "sale on approval" or "sale or return" and has nothing to do with this and the following section. The present 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 peculiar character here described.

Where the buyer's obligation as a buyer is conditioned not on his 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 expense. On the point of "satisfaction" as meaning "reasonable satisfaction" where an industrial machine is involved, this Article takes no position.

2. Pursuant to the general policies of this Act which require good faith not only between the parties to the sales contract, but as against interested third parties, subsection (3) resolves all reasonable doubts as to the nature of the transaction in favor of the general creditors of the buyer. As against such creditors words such as "on consignment" or "on memorandum", with or without words of reservation of title in the seller, are disregarded when the buyer has a place of business at which he deals in goods of the kind involved. A necessary exception is made where the buyer is known to be engaged primarily in selling the goods of others or is selling under a relevant sign law, or the seller complies with the filing provisions of Article 9 as if his interest were a security interest. However, there is no intent in this Section to narrow the protection afforded to third parties in any jurisdiction which has a selling Factors Act. The purpose of the exception is merely to limit the effect of the present subsection itself, in the absence of any such Factors Act, to cases in which creditors of the buyer may reasonably be deemed to have been misled by the secret reservation.

3. Subsection (4) resolves a conflict in the pre-existing case law by recognition that an "or return" provision is so definitely at odds with any ordinary contract for sale of goods that where written agreements are involved it 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. The transactions governed by this section are sales; the persons to whom the goods are delivered are buyers. This section has no application to transactions in which goods are delivered to a person who has neither bought the goods nor contracted to buy them. See PEB Commentary No. 20, dated January 24, 2019. Transactions in which a non-buyer takes delivery of goods for the purpose of selling them are bailments called consignments and are not "sale on approval" or "sale or return" transactions. Certain 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 9-109(a)(4); 9-103(d); 9-319.

Cross References:

Point 2: Article 9.

Point 3: Sections 4-2-201 and 4-2-202.

Definitional Cross References:

"Between merchants". Section 4-2-104.

"Buyer". Section 4-2-103.

"Conform". Section 4-2-106.

"Contract for sale". Section 4-2-106.

"Creditor". Section 4-1-201.

"Goods". Section 4-2-105.

"Sale". Section 4-2-106.

"Seller". Section 4-2-103.

ANNOTATION

Analysis

• I. General Consideration.
• II. Sale on Approval; Sale or Return.
• III. Claims of Buyer's Creditors.
• IV. Selling Goods of Others.

OFFICIAL 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 therefore 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 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. "Seasonable" 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 4-2-501, 4-2-601 and 4-2-603.

Point 2: Sections 4-2-607 and 4-2-608.

Point 4: Sections 4-1-201 and 4-1-204.

Definitional Cross References:

"Agreed". Section 4-1-201.

"Buyer". Section 4-2-103.

"Commercial unit". Section 4-2-105.

"Conform". Section 4-2-106.

"Contract". Section 4-1-201.

"Goods". Section 4-2-105.

"Merchant". Section 4-2-104.

"Notifies". Section 4-1-201.

"Notification". Section 4-1-201.

"Sale on approval". Section 4-2-326.

"Sale or return". Section 4-2-326.

"Seasonably". Section 4-1-204.

"Seller". Section 4-2-103.

OFFICIAL 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 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 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 4-2-205.

Definitional Cross References:

"Buyer". Section 4-2-103.

"Good faith". Section 4-1-201.

"Goods". Section 4-2-105.

"Lot". Section 4-2-105.

"Notice". Section 4-1-201.

"Sale". Section 4-2-106.

"Seller". Section 4-2-103.

OFFICIAL 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 non-performance 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 therefore 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 in regard to specific goods. Thus in a "shipment" contract he commits himself 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.

Cross References:

Point 2: Sections 4-2-102, 4-2-501 and 4-2-502.

Point 3: Sections 4-1-201, 4-2-402, 4-2-403, 4-2-502 and 4-2-716.

Definitional Cross References:

"Agreement". Section 4-1-201.

"Bill of lading". Section 4-1-201.

"Buyer". Section 4-2-103.

"Contract". Section 4-1-201.

"Contract for sale". Section 4-2-106.

"Delivery". Section 4-1-201.

"Document of title". Section 4-1-201.

"Good faith". Section 4-2-103.

"Goods". Section 4-2-105.

"Party". Section 4-1-201.

"Purchaser". Section 4-1-201.

"Receipt" of goods. Section 4-2-103.

"Remedy". Section 4-1-201.

"Rights". Section 4-1-201.

"Sale". Section 4-2-106.

"Security interest". Section 4-1-201.

"Seller". Section 4-2-103.

"Send". Section 4-1-201.

ANNOTATION

Law reviews. For article, "Commercial Law", see 58 Den. L.J. 279 (1981).

Annotator's note. Since § 4-2-401 is similar to repealed CRS 53, §§ 17 through 20, and CSA, C. 143A, §§ 17 through 20 (uniform sales act), relevant cases construing those provisions have been included in the annotations to this section.

Delivery by the seller to a carrier for shipment to the buyer constitutes delivery to the buyer and the title passes. Denver-Chicago Trucking Co. v. Republic Drug Co., 134 Colo. 461 , 306 P.2d 1076 (1957).

Where by the terms of the contract the merchandise to be sold is to be paid for in full upon delivery, the property in the merchandise is not to be transferred to the buyer unless and until payment in full is made by him, and unless this contract is amended, qualified, or in some manner changed, the only way which the buyer could rightfully come into title or property of this merchandise is by payment pursuant to the terms of the agreement. Panhandle Pipe & Supply Co. v. S. W. Pressey & Son, 25 Colo. 355 , 243 P.2d 756 (1952).

Delivery of automobiles sufficient to pass title. Delivery of automobiles to buyer who had made payment by check which subsequently was returned for insufficient funds was sufficient to pass title to the buyer, although the seller failed to provide certificates of title. Guy Martin Buick, Inc. v. Colo. Springs Nat'l Bank, 32 Colo. App. 235, 511 P.2d 912 (1973), aff'd, 184 Colo. 166 , 519 P.2d 354 (1974).

Nondelivery of a certificate of title does not prevent a change of ownership, and delivery of possession constitutes a transfer of ownership as between the parties involved. Retention of an inchoate security interest in a vehicle does not compel a different outcome. Kerns v. Nat'l Union Fire Ins. Co., 281 F. Supp. 3d 1126 (D. Colo. 2017).

Failure to deliver bill of sale after giving buyer possession of assets. Where plaintiffs' testimony revealed that it was their intent to sell the business and its assets to the buyer, the failure to deliver the bill of sale after giving the buyer possession of the assets was, at most, a reservation of title, and as such acted as a reservation of a security interest in the property. Young v. Golden State Bank, 39 Colo. App. 45, 560 P.2d 855 (1977).

Passage of title to livestock. The livestock bill of sale laws are not superseded by the UCC, and passage of title to livestock in Colorado is accomplished by compliance with article 54 of title 35. When neither party has complied with the livestock bill of sale laws, however, the law merchant, as embodied in the UCC provisions governing passage of title, applies. Rochester Ranch Co. v. Stubblefield, 640 P.2d 267 (Colo. App. 1981); Cugnini v. Reynolds Cattle Co., 648 P.2d 159 (Colo. App. 1981), aff'd, 687 P.2d 962 ( Colo. 1984 ).

Application of UCC provisions to aspects of a livestock transaction other than passage of title is not inconsistent with the additional requirements of compliance with the livestock bill of sale laws. Cugnini v. Reynolds Cattle Co., 648 P.2d 159 (Colo. App. 1981), aff'd, 687 P.2d 962 ( Colo. 1984 ).

Applied in Rancher & Farmers Livestock Auction Co. v. Honey, 38 Colo. App. 69, 552 P.2d 313 (1976); John Deere Indus. Equip. Co. v. Moorehead, 38 Colo. App. 220, 556 P.2d 91 (1976); Mari v. Wagner Equipment Co., Inc., 721 P.2d 1208 (Colo. App. 1986); Brink v. McNeil, 761 P.2d 271 (Colo. App. 1988).

OFFICIAL 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 4-2-106.

"Creditor". Section 4-1-201.

"Good faith". Section 4-2-103.

"Goods". Section 4-2-105.

"Merchant". Section 4-2-104.

"Money". Section 4-1-201.

"Reasonable time". Section 4-1-204.

"Rights". Section 4-1-201.

"Sale". Section 4-2-106.

"Seller". Section 4-2-103.

ANNOTATION

Law reviews. For article, "Buyer-Secured Party Conflicts Under Section 9-307(1) of the Uniform Commercial Code", see 46 U. Colo. L. Rev. 333 (1974-75).

Applied in Western Nat'l Bank v. ABC Drilling Co., 42 Colo. App. 407, 599 P.2d 942 (1979).

OFFICIAL COMMENT

Prior Uniform Statutory Provision: Sections 20(4), 23, 24, 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 this Act. Moreover the policy of this Act 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)-(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 warehouseman who is also in the business of buying and selling fungible goods of the kind he warehouses. As to entrusting by a secured party, subsection (2) is limited by the more specific provisions of Section 9-307(1), 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 over-technical 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, Documents of Title, and Bulk Sales.

Cross References:

Point 1: Sections 4-1-103 and 4-1-201.

Point 2: Sections 4-1-201, 4-2-402, 7-205 and 9-307(1).

Points 3 and 4: Sections 1-102, 4-1-201, 4-2-104, 4-2-707 and Articles 6, 7 and 9.

Definitional Cross References:

"Buyer in ordinary course of business". Section 4-1-201.

"Good faith". Sections 4-1-201 and 4-2-103.

"Goods". Section 4-2-105.

"Person". Section 4-1-201.

"Purchaser". Section 4-1-201.

"Signed". Section 4-1-201.

"Term". Section 4-1-201.

"Value". Section 4-1-201.

ANNOTATION

Law reviews. For article, "Buyer-Secured Party Conflicts Under Section 9-307(1) of the Uniform Commercial Code", see 46 U. Colo. L. Rev. 333 (1974-75). For article, "Commercial Law", see 58 Den. L.J. 279 (1981).

Annotator's note. Since § 4-2-403 is similar to repealed § 121-1-24, CRS 53, and CSA, C. 143A, § 23 (uniform sales act), cases construing this provision have been included in the annotations to this section.

Section conflicts with § 18-4-405 which holds that a good faith purchaser of stolen property does not divest the original owner of his or her right to the property. UCC section prevails because it was later in time and because original owner was in a better position to protect his or her interests than the subsequent good faith purchaser. West v. Roberts, 143 P.3d 1037 (Colo. 2006).

The concept of good faith purchaser for value does not require that the purchaser buy from a merchant or dealer. West v. Roberts, 143 P.3d 1037 (Colo. 2006).

The test of a bona fide purchaser is purchase without notice of the defect in the title of the person from whom he purchased and without notice of the right of the original seller to avoid or rescind the sale. General Credit Corp. v. Bill Olsen's Motor, Inc., 147 Colo. 227 , 363 P.2d 489 (1961).

Mere possession of personalty fraudulently obtained was held not alone enough to protect a good faith purchaser against the demands of the defrauded owner where the authorities indicated that possession had to be accompanied by indicia of title. Panhandle Pipe & Supply Co. v. S. W. Pressey & Son, 125 Colo. 355 , 243 P.2d 756 (1952).

Effect of right to reclaim on title. The right to reclaim goods sold in a cash sale transaction is a right to undo that transaction; until reclamation is completed, title, as well as the power to pass good title, remains in the purchaser. Ranchers & Farmers Livestock Auction Co. v. Honey, 38 Colo. App. 69, 552 P.2d 313, cert. dismissed, 191 Colo. 503 , 553 P.2d 799 (1976).

The voidable title which a purchaser receives when payment is made by check is dependent upon the seller's power to transfer an interest in the goods conveyed. Guy Martin Buick, Inc. v. Colo. Springs Nat'l Bank, 184 Colo. 166 , 519 P.2d 354 (1974).

Lender receives enforceable right to security interest as purchaser. Unless there is some showing of conduct amounting to bad faith, a lender receives an enforceable right to its security interest as a purchaser, even though the seller of the security interest has only a voidable title to the underlying goods. Guy Martin Buick, Inc. v. Colo. Springs Nat'l Bank, 184 Colo. 166 , 519 P.2d 354 (1974).

After certificates of title of some automobiles were delivered to a bank, the purchaser acquired a voidable title and could convey an enforceable right in the automobile to the lending bank as a good faith purchaser for value, even though check to the seller was later dishonored. Guy Martin Buick, Inc. v. Colo. Springs Nat'l Bank, 184 Colo. 166 , 519 P.2d 354 (1974).

Purchaser clothed with voidable title on proper transfer of title certificates. Where before the seller presented the purchaser's check for collection, the certificates of title to automobiles were delivered to a bank as security for the bank's loan to the purchaser, in accordance with a security agreement between the purchaser and bank, it could be implied that the bank took possession of the certificates of title as the purchaser's agent. At the moment the seller delivered the certificates of title to the purchaser, through the bank as its agent, the requirements of § 42-6-108 were satisfied. Moreover, once the certificates of title were properly transferred, the purchaser was clothed with voidable title and could legally encumber the automobiles. Guy Martin Buick, Inc. v. Colo. Springs Nat'l Bank, 184 Colo. 166 , 519 P.2d 354 (1974).

Leaving property with a merchant who customarily sells that kind of goods clothes the merchant with either apparent ownership or apparent authority to sell the goods. The overall policy underlying this provision is to restrict impediments to the free flow of commerce when buyers in the ordinary course of business are involved. Keybank, Nat'l Ass'n v. Mascarenas, 17 P.3d 209 (Colo. App. 2000).

When an entrustment occurs within the meaning of the statute, the fact that the entrustee procured the entrustment through larceny, trick, or fraud punishable under the criminal law does not defeat the ability of a merchant-trustee to transfer title to the goods to a buyer in the ordinary course of business. Keybank, Nat'l Ass'n v. Mascarenas, 17 P.3d 209 (Colo. App. 2000).

Applied in Rochester Ranch Co. v. Stubblefield, 640 P.2d 267 (Colo. App. 1981); Cugnini v. Reynolds Cattle Co., 648 P.2d 159 (Colo. App. 1981), aff'd, 687 P.2d 962 ( Colo. 1984 ).

OFFICIAL 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 duties as to the goods and all of his remedies remain dependent upon his 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 4-2-502.

Point 4: Sections 4-2-509, 4-2-510 and 4-2-703.

Point 5: Sections 4-2-105, 4-2-308, 4-2-503 and 4-2-509.

Point 6: Sections 4-2-105(1), 4-2-107(1) and 4-2-402.

Definitional Cross References:

"Agreement". Section 4-1-201.

"Contract". Section 4-1-201.

"Contract for sale". Section 4-2-106.

"Future goods". Section 4-2-105.

"Goods". Section 4-2-105.

"Notification". Section 4-1-201.

"Party". Section 4-1-201.

"Sale". Section 4-2-106.

"Security interest". Section 4-1-201.

"Seller". Section 4-2-103.

ANNOTATION

Identification of fungible goods in a contract for the sale of goods already existing and identified occurs at the time of contract, so this is sufficient to satisfy the statute and allow the seller to recover under the contract. Great Western Sugar v. Pennant Prods., 748 P.2d 1359 (Colo. App. 1987).

Applied in Mari v. Wagner Equipment Co., Inc., 721 P.2d 1208 (Colo. App. 1986).

OFFICIAL 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 the goods on the seller's insolvency occurring within 10 days after he receives the first installment on their price.

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. Subsection (2) is included to preclude the possibility of unjust enrichment which exists 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 4-1-201 and 4-2-702.

Point 2: Article 9.

Definitional Cross References:

"Buyer". Section 4-2-103.

"Conform". Section 4-2-106.

"Contract for sale". Section 4-2-106.

"Goods". Section 4-2-105.

"Insolvent". Section 4-1-201.

"Rights". Section 4-1-201.

"Seller". Section 4-2-103.

OFFICIAL 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 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 fails to proceed in some manner.

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 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 "give the buyer any notice reasonably necessary to enable him 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 must first allow the buyer to inspect the goods in order to avoid impairing his 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 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 acknowledgment 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 acknowledgment 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.

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 4-1-205, 4-2-301, 4-2-310, 4-2-507 and 4-2-513 and Article 7.

Point 5: Sections 4-2-308, 4-2-310 and 4-2-509.

Point 7: Section 4-2-614(1).

Specific matters involving tender are covered in many additional sections of this Article. See Sections 4-1-205, 4-2-301, 4-2-306 to 4-2-319, 4-2-321(3), 4-2-504, 4-2-507(2), 4-2-511(1), 4-2-513, 4-2-612 and 4-2-614.

Definitional Cross References:

"Agreement". Section 4-1-201.

"Bill of lading". Section 4-1-201.

"Buyer". Section 4-2-103.

"Conforming". Section 4-2-106.

"Contract". Section 4-1-201.

"Delivery". Section 4-1-201.

"Dishonor". Section 3-508.

"Document of title". Section 4-1-201.

"Draft". Section 4-3-104.

"Goods". Section 4-2-105.

"Notification". Section 4-1-201.

"Reasonable time". Section 4-1-204.

"Receipt" of goods. Section 4-2-103.

"Rights". Section 4-1-201.

"Seasonably". Section 4-1-204.

"Seller". Section 4-2-103.

"Written". Section 4-1-201.

OFFICIAL 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 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 live stock, 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 in a position to make the appropriate arrangements and the seller gives him 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 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 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 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 error has not been followed by events which justify rejection.

Cross References:

Point 1: Sections 4-2-319, 4-2-320 and 4-2-503(2).

Point 2: Sections 4-1-203, 4-2-323(2), 4-2-601 and 4-2-614(1).

Point 3: Section 4-2-311(2).

Point 5: Section 4-1-203.

Definitional Cross References:

"Agreement". Section 4-1-201.

"Buyer". Section 4-2-103.

"Contract". Section 4-1-201.

"Delivery". Section 4-1-201.

"Goods". Section 4-2-105.

"Notifies". Section 4-1-201.

"Seller". Section 4-2-103.

"Send". Section 4-1-201.

"Usage of trade". Section 4-1-205.

OFFICIAL COMMENT

Prior Uniform Statutory Provision: Section 20(2), (3), (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 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, therefore, must be regarded as a means given to the seller to enforce his 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 agent at destination, the financing agency to which he expects to negotiate the document or the bank issuing a credit to him. 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 non-negotiable 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 seeks to withhold the goods improperly the buyer can tender payment and recover them.

4. In the case of a shipment by non-negotiable 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 de facto loses control as against the carrier except where he 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 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 holding of the document or the goods for the purpose of exacting more than is due him under the contract.

Cross References:

Point 1: Section 4-1-201.

Point 2: Article 7.

Point 3: Sections 4-2-501(2) and 4-2-504.

Point 4: Sections 4-2-403, 4-2-507(2) and 4-2-705.

Point 5: Sections 4-2-310, 4-2-319(4), 4-2-320(4), 4-2-501 and 4-2-502 and Article 7.

Definitional Cross References:

"Bill of lading". Section 4-1-201.

"Buyer". Section 4-2-103.

"Consignee". Section 7-102.

"Contract". Section 4-1-201.

"Contract for sale". Section 4-2-106.

"Delivery". Section 4-1-201.

"Financing agency". Section 4-2-104.

"Goods". Section 4-2-105.

"Holder". Section 4-1-201.

"Person". Section 4-1-201.

"Security interest". Section 4-1-201.

"Seller". Section 4-2-103.

OFFICIAL COMMENT

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 behalf a draft for the price of the goods. It is immaterial whether the draft is formally drawn on the party paying or his 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 any one 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.

Cross References:

Point 1: Section 4-2-104(2) and Article 4.

Point 2: Part 5 of Article 4, and Article 5.

Point 4: Sections 4-2-501 and 4-2-502(1) and Article 7.

Definitional Cross References:

"Buyer". Section 4-2-103.

"Document of title". Section 4-1-201.

"Draft". Section 4-3-104.

"Financing agency". Section 4-2-104.

"Good faith". Section 4-2-103.

"Goods". Section 4-2-105.

"Honor". Section 4-1-201.

"Purchase". Section 4-1-201.

"Rights". Section 4-1-201.

"Value". Section 4-1-201.

OFFICIAL 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 this Act, "contract" means the total obligation in law which results from the parties' agreement including the effect of this Article. In this context, therefore, 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 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. See PEB Commentary No. 1, dated March 10, 1990 Appendix V, infra .

Cross References:

Point 1: Sections 4-2-310, 4-2-503, 4-2-511, 4-2-601 and 4-2-711 to 4-2-713.

Point 2: Sections 4-1-201, 4-2-511 and 4-2-614.

Point 3: Sections 4-2-401, 4-2-403, and 4-2-702(1)(b).

Definitional Cross References:

"Buyer". Section 4-2-103.

"Contract". Section 4-1-201.

"Delivery". Section 4-1-201.

"Document of title". Section 4-1-201.

"Goods". Section 4-2-105.

"Rights". Section 4-1-201.

"Seller". Section 4-2-103.

ANNOTATION

The operator of a livestock ring is a "seller" within the meaning of the UCC. Ranchers & Farmers Livestock Auction Co. v. Honey, 38 Colo. App. 69, 552 P.2d 313 (1976).

Right to reclaim not right to secure payment. The right to reclaim created by subsection (2) of this section is a right to undo the transaction, not a right to "secure" payment of the price as required by the definition of "security interest" under § 4-1-201 (37). Guy Martin Buick, Inc. v. Colo. Springs Nat'l Bank, 184 Colo. 166 , 519 P.2d 354 (1974).

Right to reclaim was not intended to be security interest. The right to reclaim goods sold in a cash sale transaction, as set forth in the UCC, is not and was not intended to be a security interest. Guy Martin Buick, Inc. v. Colo. Springs Nat'l Bank, 184 Colo. 166 , 519 P.2d 354 (1974).

The right to reclaim is not a species of interest in the goods which is the result of a transaction "intended to create a security interest" and is not created by contract as contemplated within the meaning of § 4-9-102 . Guy Martin Buick, Inc. v. Colo. Springs Nat'l Bank, 184 Colo. 166 , 519 P.2d 354 (1974).

Creation of security interest might allow more than mere recovery of goods. Section 4-2-702(3) states that successful reclamation "excludes all other remedies", and the creation of a security interest out of the right to reclaim might allow recovery which would be greater than the mere recovery of goods originally transferred. Guy Martin Buick, Inc. v. Colo. Springs Nat'l Bank, 184 Colo. 166 , 519 P.2d 354 (1974).

Right not interest listed as having priority over unperfected security interest. The right to reclaim goods conveyed as part of a cash sale transaction is not one of the interests which is listed as having priority over an unperfected security interest. Guy Martin Buick, Inc. v. Colo. Springs Nat'l Bank, 184 Colo. 166 , 519 P.2d 354 (1974).

Normally, purchaser may retain or dispose of goods once purchase price tendered. Normally, a seller's demand for payment upon delivery in a cash sale transaction would allow a purchaser of goods to retain or dispose of the goods as he saw fit once the agreed-to purchase price was tendered. Guy Martin Buick, Inc. v. Colo. Springs Nat'l Bank, 184 Colo. 166 , 519 P.2d 354 (1974).

Where payment is due and is demanded on delivery of documents of title to the buyer of goods, his right as against the seller to retain or dispose of them is conditioned upon his making the payment due. Ranchers & Farmers Livestock Auction Co. v. Honey, 38 Colo. App. 69, 552 P.2d 313, cert. dismissed, 191 Colo. 503 , 553 P.2d 799 (1976).

When seller presented buyer's check, which was dishonored, buyer no longer had the right to retain or dispose of the goods, and seller had the right to reclaim. Guy Martin Buick, Inc. v. Colo. Springs Nat'l Bank, 32 Colo. App. 235, 511 P.2d 912 (1973), aff'd, 184 Colo. 166 , 519 P.2d 354 (1974).

Under this section a seller may reclaim goods which he has sold to the buyer when the latter's check has been dishonored. Ranchers & Farmers Livestock Auction Co. v. Honey, 38 Colo. App. 69, 552 P.2d 313, cert. dismissed, 191 Colo. 503 , 553 P.2d 799 (1976).

Payment by check is only conditional and is defeated by dishonor of the check on due presentment. Ranchers & Farmers Livestock Auction Co. v. Honey, 38 Colo. App. 69, 552 P.2d 313, cert. dismissed, 191 Colo. 503 , 553 P.2d 799 (1976).

OFFICIAL COMMENT

Prior Uniform Statutory Provision: None.

Purposes:

1. Subsection (1) permits a seller who has made a non-conforming 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 non-conforming goods and refunded the purchase price. He 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 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 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 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 to comply strictly with his 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 4-2-302.

Point 3: Section 4-2-511.

Point 4: Sections 4-1-205 and 4-2-721.

Definitional Cross References:

"Buyer". Section 4-2-103.

"Conforming". Section 4-2-106.

"Contract". Section 4-1-201.

"Money". Section 4-1-201.

"Notifies". Section 4-1-201.

"Reasonable time". Section 4-1-204.

"Seasonably". Section 4-1-204.

"Seller". Section 4-2-103.

OFFICIAL COMMENT

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, therefore, is limited strictly to those cases where there has been no breach by the seller. Where for any reason his 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 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 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 disposal. Protection is afforded him, 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 own place continues meanwhile to control the goods and can be expected to insure his interest in them. The buyer, on the other hand, has no control of the goods and it is extremely unlikely that he will carry insurance on goods not yet in his 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 acknowledgment by the bailee that he holds for the buyer completes the "delivery" and passes the risk.

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 this Act. "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 4-2-510(1).

Point 2: Sections 4-2-503 and 4-2-504.

Point 3: Sections 4-2-104, 4-2-503 and 4-2-510.

Point 4: Section 4-2-503(4).

Point 5: Section 4-1-201.

Definitional Cross References:

"Agreement". Section 4-1-201.

"Buyer". Section 4-2-103.

"Contract". Section 4-1-201.

"Delivery". Section 4-1-201.

"Document of title". Section 4-1-201.

"Goods". Section 4-2-105.

"Merchant". Section 4-2-104.

"Party". Section 4-1-201.

"Receipt" of goods. Section 4-2-103.

"Sale on approval". Section 4-2-326.

"Seller". Section 4-2-103.

OFFICIAL COMMENT

Prior Uniform Statutory Provision: None.

Purposes: To make clear that:

1. Under subsection (1) the seller by his individual action cannot shift the risk of loss to the buyer unless his action conforms with all the conditions resting on him 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 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 insurance falls upon the contract breaker under subsections (2) and (3) rather than upon him. 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 4-2-509.

Definitional Cross References:

"Buyer". Section 4-2-103.

"Conform". Section 4-2-106.

"Contract for sale". Section 4-2-106.

"Goods". Section 4-2-105.

"Seller". Section 4-2-103.

OFFICIAL 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 non-commercial 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 3-802). 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.

5. Under subsection (3) payment by check is defeated if it is not honored upon due presentment. This corresponds to the provisions of article on Commercial Paper. (Section 3-802). But if the seller procures certification of the check instead of cashing it, the buyer is discharged. (Section 3-411).

6. Where the instrument offered by the buyer is not a payment but a credit instrument such as a note or a check post-dated 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 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 4-2-307, 4-2-310, 4-2-320, 4-2-325, 4-2-503, 4-2-513 and 4-2-609.

Point 2: Sections 4-2-307, 4-2-310, 4-2-319, 4-2-322, 4-2-503, 4-2-504 and 4-2-513.

Point 3: Section 4-2-614.

Point 5: Article 3, esp. Sections 3-802 and 4-3-411.

Point 6: Sections 4-2-507, 4-2-702, and Article 3.

Definitional Cross References:

"Buyer". Section 4-2-103.

"Check". Section 4-3-104.

"Dishonor". Section 4-3-502.

"Party". Section 4-1-201.

"Reasonable time". Section 4-1-204.

"Seller". Section 4-2-103.

ANNOTATION

Purchaser receives voidable title when he pays by check. Under the UCC, the purchaser of goods in a cash sale transaction normally acquires full title to the goods which he purchases after payment is made, but the purchaser is limited to receiving a voidable title when the purchase price is conveyed in the form of a check. Guy Martin Buick, Inc. v. Colo. Springs Nat'l Bank, 184 Colo. 166 , 519 P.2d 354 (1974).

Payment by check is conditional upon the check being honored at presentment. Guy Martin Buick, Inc. v. Colo. Springs Nat'l Bank, 32 Colo. App. 235, 511 P.2d 912 (1973), aff'd, 184 Colo. 166 , 519 P.2d 354 (1974).

Payment by check is only conditional and is defeated by dishonor of the check on due presentment. Ranchers & Farmers Livestock Auction Co. v. Honey, 38 Colo. App. 69, 552 P.2d 313, cert. dismissed, 191 Colo. 503 , 553 P.2d 799 (1976).

Payment by check is conditional only and does not discharge the liability for which payment is given, unless there is an express or implied agreement that the check be accepted as absolute payment. Bolz v. Sec. Mut. Life Ins. Co., 721 P.2d 1216 (Colo. App. 1986).

Such title dependent upon seller's power to transfer an interest in goods. The voidable title which a purchaser receives when payment is made by check is dependent upon the seller's power to transfer an interest in the goods conveyed. Guy Martin Buick, Inc. v. Colo. Springs Nat'l Bank, 184 Colo. 166 , 519 P.2d 354 (1974).

Purchaser took voidable title on proper transfer of title certificates. Where before the seller presented the purchaser's check for collection, the certificates of title to automobiles were delivered to a bank as security for the bank's loan to the purchaser, in accordance with a security agreement between the purchaser and bank, it could be implied that the bank took possession of the certificates of title as the purchaser's agent. At the moment the seller delivered the certificates of title to the purchaser, through the bank as its agent, the requirements of § 42-6-108 were satisfied. Moreover, once the certificates of title were properly transferred, the purchaser was clothed with voidable title and could legally encumber the automobiles. Guy Martin Buick, Inc. v. Colo. Springs Nat'l Bank, 184 Colo. 166 , 519 P.2d 354 (1974).

OFFICIAL 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 non-conformity 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 remedies, which include as a matter of reason the remedy for total non-delivery 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 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 therefore 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 4-1-207.

Point 6: Section 4-2-513(3).

Definitional Cross References:

"Buyer". Section 4-2-103.

"Conform". Section 4-2-106.

"Contract". Section 4-1-201.

"Financing agency". Section 4-2-104.

"Goods". Section 4-2-105.

"Remedy". Section 4-1-201.

"Rights". Section 4-1-201.

OFFICIAL COMMENT

Prior Uniform Statutory Provision: Section 47(2), (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 upon tender, delivery or appropriation of the goods with notice to him. Since inspection is available to him on tender, where payment is due against delivery he may, unless otherwise agreed, make his inspection before payment of the price. It is also available to him 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 right of inspection at any reasonable time or place and in any reasonable manner. It is not necessary that he select the most appropriate time, place or manner to inspect or that his selection be the customary one in the trade or locality. Any reasonable time, place or manner is available to him 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 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 arrive and 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. 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 held until arrival 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.

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 therefore 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 check-up 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 4-2-310(b), 4-2-321(3) and 4-2-606(1)(b).

Point 1: Section 4-2-607.

Point 2: Sections 4-2-501 and 4-2-502.

Point 4: Section 4-2-715.

Point 5: Section 4-2-321(3).

Point 6: Sections 4-2-606 to 4-2-608.

Point 7: Section 4-1-204.

Point 8: Comment to Section 4-2-401.

Point 9: Section 4-2-316(3)(b).

Definitional Cross References:

"Buyer". Section 4-2-103.

"Conform". Section 4-2-106.

"Contract". Section 4-1-201.

"Contract for sale". Section 4-2-106.

"Document of title". Section 4-1-201.

"Goods". Section 4-2-105.

"Party". Section 4-1-201.

"Presumed". Section 4-1-201.

"Reasonable time". Section 4-1-204.

"Rights". Section 4-1-201.

"Seller". Section 4-2-103.

"Send". Section 4-1-201.

"Term". Section 4-1-201.

ANNOTATION

Applied in Hummel v. Skyline Dodge, Inc., 41 Colo. App. 572, 589 P.2d 73 (1978).

OFFICIAL 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 4-2-502, 4-2-505(2), 4-2-507(2), 4-2-512, 4-2-513, 4-2-607 concerning protection of rights of buyer and seller, and 4-503 and 5-112 on delivery of documents.

Definitional Cross References:

"Delivery". Section 4-1-201.

"Draft". Section 4-3-104.

OFFICIAL 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, non-conformity is neither an excuse nor a defense to an action for non-acceptance of documents. Normally, therefore, 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 non-conformity 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 craftsman 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 this Act, for it is a third party document.

Cross References:

Point 2: Sections 4-2-513(3), 4-2-706 and 4-2-711(2) and Article 5.

Point 3: Sections 4-1-202 and 4-1-207.

Definitional Cross References:

"Conform". Section 4-2-106.

"Goods". Section 4-2-105.

"Notification". Section 4-1-201.

"Party". Section 4-1-201.

OFFICIAL COMMENT

Prior Uniform Statutory Provision: No one general equivalent provision but numerous provisions, dealing with situations of non-conformity 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 non-conforming tender is not penalized by the loss of any remedy otherwise open to him. 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 is holding the tender open. However, if the buyer attempts to accept, either in whole or in part, after his 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 is liable even though the seller may choose to treat his 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 4-2-602(2)(a), 4-2-612, 4-2-718 and 4-2-719.

Definitional Cross References:

"Buyer". Section 4-2-103.

"Commercial unit". Section 4-2-105.

"Conform". Section 4-2-106.

"Contract". Section 4-1-201.

"Goods". Section 4-2-105.

"Installment contract". Section 4-2-612.

"Rights". Section 4-1-201.

ANNOTATION

Buyer bound to accept undamaged part of goods. Where a minor part of the goods consigned to the buyer are damaged, but the entire shipment is rejected, the buyer is bound to accept such of the goods as are undamaged. Denver-Chicago Trucking Co. v. Republic Drug Co., 134 Colo. 461 , 306 P.2d 1076 (1957) (decided under repealed § 121-1-69(1), CRS 53, uniform sales act).

Applied in Eccher v. Small Bus. Admin., 643 F.2d 1388 (10th Cir. 1981); Western Conference Resorts, Inc. v. Pease, 668 P.2d 973 (Colo. App. 1983); Mari v. Wagner Equipment Co., Inc., 721 P.2d 1208 (Colo. App. 1986).

OFFICIAL 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 non-conforming, requires affirmative action by the buyer to avoid acceptance. Under subsection (1), therefore, the buyer is given a reasonable time to notify the seller of his rejection, but without such seasonable notification his 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 duty to hold the goods with reasonable care for the buyer's [seller'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 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 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 non-acceptance 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 4-1-201, 4-1-204(1) and (3), 4-2-512(2), 4-2-513(1) and 4-2-606(1)(b).

Point 2: Section 4-2-603(1).

Point 3: Section 4-2-703.

Definitional Cross References:

"Buyer". Section 4-2-103.

"Commercial unit". Section 4-2-105.

"Goods". Section 4-2-105.

"Merchant". Section 4-2-104.

"Notifies". Section 4-1-201.

"Reasonable time". Section 4-1-204.

"Remedy". Section 4-1-201.

"Rights". Section 4-1-201.

"Seasonably". Section 4-1-204.

"Security interest". Section 4-1-201.

"Seller". Section 4-2-103.

ANNOTATION

Purpose of subsection (2)(a) is to insure that the seller may regain possession of the goods in order to resell the goods or utilize them in order to minimize his loss. Moeller Mfg., Inc. v. Mattis, 33 Colo. App. 300, 519 P.2d 1218 (1974); Stroh v. Am. Recreation & Mobile Home Corp., 35 Colo. App. 196, 530 P.2d 989 (1975).

What serves as effective notice of rejection depends on the nature, purpose, and circumstances of such notice. Western Conference Resorts, Inc. v. Pease, 668 P.2d 973 (Colo. App. 1983).

Notice of rejection is sufficient if it gives the seller an opportunity to correct the defect and prepare for negotiations and litigation, and if it protects the seller against claims asserted after it is too late to investigate. Western Conference Resorts, Inc. v. Pease, 668 P.2d 973 (Colo. App. 1983).

Retention of goods for an unreasonable amount of time is not justified. No more than six months can be justified as a reasonable period for inspection and testing, and retaining the goods after demand for payment and even after filing of suit is not a holding in good faith or good faith conduct. Surplus Electronics Corp. v. Gallin, 653 P.2d 752 (Colo. App. 1982).

A failure to reject is acceptance. Purchaser's failure seasonably to notify seller of the ultimate rejection of such of the goods as purchaser deemed unusable renders any claim of rejection ineffective and constitutes an acceptance. Surplus Electronics Corp. v. Gallin, 653 P.2d 752 (Colo. App. 1982).

After rejection of goods, any exercise of dominion and ownership rights is considered wrongful as against the seller. Moeller Mfg., Inc. v. Mattis, 33 Colo. App. 300, 519 P.2d 1218 (1974); Stroh v. Am. Recreation & Mobile Home Corp., 35 Colo. App. 196, 530 P.2d 989 (1975).

Buyer who asserts a right to revoke acceptance has the same duties as a buyer who asserts a right to reject goods prior to acceptance. Moeller Mfg., Inc. v. Mattis, 33 Colo. App. 300, 519 P.2d 1218 (1974).

OFFICIAL 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 "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 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 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 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 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 4-1-106. Compare generally section 4-2-706.

Definitional Cross References:

"Buyer". Section 4-2-103.

"Good faith". Section 4-1-201.

"Goods". Section 4-2-105.

"Merchant". Section 4-2-104.

"Security interest". Section 4-1-201.

"Seller". Section 4-2-103.

ANNOTATION

Retention of goods for an unreasonable amount of time is not justified. No more than six months can be justified as a reasonable period for inspection and testing, and retaining the goods after demand for payment and even after filing of suit is not a holding in good faith or good faith conduct. Surplus Electronics Corp. v. Gallin, 653 P.2d 752 (Colo. App. 1982).

Statute as basis for jurisdiction. See Stroh v. Am. Recreation & Mobile Home Corp., 35 Colo. App. 196, 530 P.2d 989 (1975).

OFFICIAL 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) non-conformity 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 4-2-602(1), and 4-2-603(1) and 4-2-706.

Definitional Cross References:

"Buyer". Section 4-2-103.

"Notification". Section 4-1-201.

"Reasonable time". Section 4-1-204.

"Seller". Section 4-2-103.

ANNOTATION

Seller was entitled to offset of fair and reasonable use value. Where the evidence showed that plaintiffs used mobile home for a considerable length of time after they should have acted under this section, it follows that this use reduced the value of the home, and accordingly, defendants are entitled to an offset of a fair and reasonable use value of the mobile home for this period. Stroh v. Am. Recreation & Mobile Home Corp., 35 Colo. App. 196, 530 P.2d 989 (1975).

OFFICIAL 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 for omissions in his 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 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, therefore insists that the seller's right to correct his 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 can rely. What is needed is that he 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 on their face. 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 non-objection is therefore postponed until after a reasonable time for their inspection. In either situation, however, the buyer "waives" only what is apparent on the face of the documents.

Cross References:

Point 2: Section 4-2-508.

Point 4: Sections 4-2-512(2), 4-2-606(1)(b), 4-2-607(2).

Definitional Cross References:

"Between merchants". Section 4-2-104.

"Buyer". Section 4-2-103.

"Seasonably". Section 4-1-204.

"Seller". Section 4-2-103.

"Writing" and "written". Section 4-1-201.

OFFICIAL 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 own, whether or not he is obligated to do so, and whether he 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 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 claim that he 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 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, despite his insistence that he is rejecting or has rejected the goods, by an act inconsistent with the seller's ownership under paragraph (c), he can obligate himself 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 once rejects a tender, paragraph (a) does not operate in favor of the buyer unless the seller has re-tendered the goods or has taken affirmative action indicating that he 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 4-2-401, 4-2-509, 4-2-510, 4-2-607, 4-2-608 and Part 7.

Point 4: Sections 4-2-601 through 4-2-604.

Point 5: Section 4-2-601.

Definitional Cross References:

"Buyer". Section 4-2-103.

"Commercial unit". Section 4-2-105.

"Goods". Section 4-2-105.

"Seller". Section 4-2-103.

ANNOTATION

Acceptance presumed after five days. Under this section where goods ordered were delivered to the buyer who took physical possession and control of them, stored them, and retained them for five days, such buyer was presumed to have accepted them. Vanadium Corp. of Am. v. Wesco Stores Co., 135 Colo. 77 , 308 P.2d 1011 (1957) (decided under repealed § 121-1-48, CRS 53, uniform sales act).

Failure to reject constitutes acceptance. Purchaser's failure seasonably to notify seller of the ultimate rejection of such of the goods as purchaser deemed unusable renders any claim of rejection ineffective, and constitutes an acceptance. Surplus Electronics Corp. v. Gallin, 653 P.2d 752 (Colo. App. 1982).

Applied in Hummel v. Skyline Dodge, Inc., 41 Colo. App. 572, 589 P.2d 73 (1978); Eccher v. Small Bus. Admin., 643 F.2d 1388 (10th Cir. 1981); Western Conference Resorts, Inc. v. Pease, 668 P.2d 973 (Colo. App. 1983).

OFFICIAL 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 non-conformity known to the buyer at the time of acceptance, except where the buyer has accepted on the reasonable assumption that the non-conformity 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 acceptance of any earlier non-conforming 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 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 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 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 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 non-conforming 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 liability. Subsection (5)(a) codifies for all warranties the practice of voucher to defend. Compare Section 3-803. 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 4-1-201.

Point 2: Section 4-2-608.

Point 4: Sections 4-1-204 and 4-2-605.

Point 5: Section 4-2-318.

Point 6: Section 4-2-717.

Point 7: Sections 4-2-312 and 3-803.

Point 8: Section 4-1-207.

Definitional Cross References:

"Burden of establishing". Section 4-1-201.

"Buyer". Section 4-2-103.

"Conform". Section 4-2-106.

"Contract". Section 4-1-201.

"Goods". Section 4-2-105.

"Notifies". Section 4-1-201.

"Reasonable time". Section 4-1-204.

"Remedy". Section 4-1-201.

"Seasonably". Section 4-1-204.

ANNOTATION

Annotator's note. Since § 4-2-607 is similar to repealed § 121-1-49, CRS 53, and CSA, C. 143A, § 49 (uniform sales act), relevant cases construing this provision have been included in the annotations to this section.

The giving of notice is a condition precedent to a buyer's right to recover for any claimed damage. Comet Indus., Inc. v. Best Plastic Container Corp., 222 F. Supp. 723 (D. Colo. 1963 ); Hoffman's Double Bar Pine Nursery v. Fyke, 633 P.2d 516 (Colo. App. 1981); Palmer v. A.H. Robins Co., Inc., 684 P.2d 187 ( Colo. 1984 ).

Notice of breach of warranty is in the nature of a condition precedent to recovery, and generally no remedy is available to the buyer unless notice is given. Rich's Restaurant, Inc. v. McFann Enters., Inc., 39 Colo. App. 545, 570 P.2d 1305 (1977).

Failure to notify seller until after the goods are sold effectively prevents seller from investigating and attempting to cure the alleged defect in the goods. White v. Miss. Order Buyers, Inc., 648 P.2d 682 (Colo. App. 1982).

Failure to notify seller results in dismissal of breach of warranty claims as a matter of law. Schultz v. Linden-Alimak, Inc., 734 P.2d 146 (Colo. App. 1986).

Whether the notice was given within a reasonable time is a question of fact to be measured by all the circumstances of the case. White v. Miss. Order Buyers, Inc., 648 P.2d 682 (Colo. App. 1982).

Notice must be within a reasonable time after acceptance. This section provides that if, after acceptance of the goods, the buyer fails to give notice to the seller of the breach of any warranty within a reasonable time when the buyer knows of the breach, the seller shall not be liable therefor. Comet Indus., Inc. v. Best Plastic Container Corp., 222 F. Supp. 723 (D. Colo. 1963).

The determination of what is a reasonable time for notice of breach depends on the circumstances of each case. Fiberglass Component Prod. v. Reichhold Chems., Inc., 983 F. Supp. 948 (D. Colo. 1997).

The giving of notice may not be after repeated written promises to pay over period of time. Where a purchaser of goods accepts delivery and, after full knowledge of the quality thereof, repeatedly makes written unqualified promises to pay the contract price, which promises continue over a period of time, such a purchaser cannot thereafter be heard to claim damage for late delivery or for breach of warranty as to quality. E. J. Scarry & Co. v. Paper Prods. Co., 122 Colo. 589 , 224 P.2d 940 (1950) (period of 90 days); Comet Indus., Inc. v. Best Plastic Container Corp., 222 F. Supp. 723 (D. Colo. 1963 ); Cooley v. Big Horn Harvestore Sys., 813 P.2d 736 ( Colo. 1991 ).

There is danger of fraud and false claims even where there is an express warranty, when notice is not early given of the defect; it leads the buyer into temptation. Comet Indus., Inc. v. Best Plastic Container Corp., 222 F. Supp. 723 (D. Colo. 1963).

Notice requirement of subsection (3)(a) 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. White v. Miss. Order Buyers, Inc., 648 P.2d 682 (Colo. App. 1982); Palmer v. A.H. Robins Co., Inc., 684 P.2d 187 ( Colo. 1984 ); Fiberglass Component Prod. v. Reichhold Chems., Inc., 983 F. Supp. 948 (D. Colo. 1997 ).

The entire purpose of giving notice is to protect the seller; to give him an opportunity to check the complaints. Comet Indus., Inc. v. Best Plastic Container Corp., 222 F. Supp. 723 (D. Colo. 1963).

The basis for the requirement of notice is to provide an opportunity for the seller to determine whether there is a shortage, to correct the defect, or to effect settlement through negotiation. Rich's Restaurant, Inc. v. McFann Enters., Inc., 39 Colo. App. 545, 570 P.2d 1305 (1977).

In the law governing breach of warranty, the notice requirement serves three useful purposes: First, notice provides the seller a chance to correct any defect; second, notice affords the seller an opportunity to prepare for negotiation and litigation; and third, notice provides the seller a safeguard against stale claims being asserted after it is too late for the manufacturer or seller to investigate them. Prutch v. Ford Motor Co., 618 P.2d 657 (Colo. 1980).

Fairness requires that a buyer should inform the seller if he considers the contract breached and wishes to preserve any remedies; such notice informs the seller the transaction is troublesome and provides him the opportunity to settle the dispute through negotiations. MacGregor v. McReki, Inc., 30 Colo. App. 196, 494 P.2d 1297 (1971).

The buyer has the burden of proof of establishing the fact that notice of a breach of warranty was given to the seller within a reasonable time after he knew, or should have known, that performance of the seller was objectionable. E. J. Scarry & Co. v. Paper Prods. Co., 122 Colo. 589 , 224 P.2d 940 (1950); Comet Indus., Inc. v. Best Plastic Container Corp., 222 F. Supp. 723 (D. Colo. 1963 ).

The buyer has the burden of proof that the notice was given within a reasonable time. White v. Miss. Order Buyers, Inc., 648 P.2d 682 (Colo. App. 1982).

There is adequate and timely notice of the breach where the seller is contacted immediately after an item is installed and told that it is not working. Irrigation Motor & Pump Co. v. Belcher, 29 Colo. App. 343, 483 P.2d 980 (1971).

Where there is no suggestion that the seller suffered any prejudice as a result of not being notified of a breach of warranty at an earlier date, the harsh rule of forfeiture should not be applied. Schlottman v. Pressey, 195 F.2d 343 (10th Cir. 1952).

Notice of breach due to late delivery given prior to delivery is sufficient to preserve the buyer's remedies, and a second notice after acceptance of delivery is not required under the uniform commercial code. This construction best effectuates the purpose of § 4-2-607 and the general obligation of good faith which the uniform commercial code imposes upon the performance and enforcement of contracts in § 4-1-203 . MacGregor v. McReki, Inc., 30 Colo. App. 196, 494 P.2d 1297 (1971).

This section does not prescribe the kind or the form of the notice. Comet Indus., Inc. v. Best Plastic Container Corp., 222 F. Supp. 723 (D. Colo. 1963).

There is no requirement that the notice be formal. Comet Indus., Inc. v. Best Plastic Container Corp., 222 F. Supp. 723 (D. Colo. 1963).

Communication of defects and of recourse to attorney suffices. Although a formal notice was not given, where the buyer communicated with the seller and notified him of the defects in the goods and the seller acquired firsthand knowledge, the seller could scarcely have concluded that these were mere protests in view of the fact that the buyer had told him that the matter was in the hands of his attorney. Comet Indus., Inc. v. Best Plastic Container Corp., 222 F. Supp. 723 (D. Colo. 1963).

Where buyer relied on filing of lawsuit for notice to seller under subsection (3)(a), it was error for court to grant seller's motion for summary judgment where federal food and drug administration had sought to ban sale of product and press releases on problems with the product had been issued. Wallman v. Kelley, 976 P.2d 330 (Colo. App. 1998).

There is a distinction between notice of breach under § 4-2-607 (3) and notice of revocation of acceptance under § 4-2-608 (2) . Irrigation Motor & Pump Co. v. Belcher, 29 Colo. App. 343, 483 P.2d 980 (1971).

Burden on buyer to prove defects existed at time of sale. The burden is on the buyer seeking to recover damages for defects in quality, or setting up such defects as an affirmative defense in an action for the price, to prove that the defects existed at the time of sale and did not result from deterioration after shipment or from the buyer's negligence after he came into possession of the property, since there is no presumption that the defects discovered after delivery existed at the time of sale. Vanadium Corp. of Am. v. Wesco Stores Co., 135 Colo. 77 , 308 P.2d 1011 (1957).

Where seller may have indirect notice of claim, trial court erred in finding, as a matter of law, that delay in giving notice of breach of warranty was unreasonable. Cheyenne Mtn. Bank v. Whetstone, 787 P.2d 210 (Colo. App. 1990).

There is no statutorily prescribed format for notice of breach. Hoffman's Double Bar Pine Nursery v. Fyke, 633 P.2d 516 (Colo. App. 1981); Palmer v. A.H. Robins Co., Inc., 684 P.2d 187 ( Colo. 1984 ); Hawkinson v. A.H. Robins Co., Inc., 595 F. Supp. 1290 (D. Colo. 1984 ).

Subsection (3)(a) requires notice adequate to permit cure. Hoffman's Double Bar Pine Nursery v. Fyke, 633 P.2d 516 (Colo. App. 1981).

Adequacy of notice is question of fact. Hoffman's Double Bar Pine Nursery v. Fyke, 633 P.2d 516 (Colo. App. 1981); Int'l Tech. Instruments v. Eng'g Measurements, Inc., 678 P.2d 558 (Colo. App. 1983).

Where seller may have indirect notice of claim, trial court erred in finding, as a matter of law, that delay in giving notice of breach of warranty was unreasonable. Cheyenne Mtn. Bank v. Whetstone, 787 P.2d 210 (Colo. App. 1990).

Notice of breach of warranty to remote manufacturer not a condition precedent to purchaser's initiation of litigation against such manufacturer. Cooley v. Big Horn Harvestore Sys., 813 P.2d 736 (Colo. 1991).

Word "seller", as used in subsection (3)(a), construed to refer only to the immediate seller who tendered the goods to the buyer. So long as buyer has given notice of the defect to his immediate seller, no further notification to those distributors beyond the immediate seller is required. Palmer v. A.H. Robins Co., Inc., 684 P.2d 187 (Colo. 1984).

Timely notice of the breach to the immediate seller is all that is required. Separate notice to the seller's supplier or the manufacturer is not necessary. Hawkinson v. A.H. Robins Co., Inc., 595 F. Supp. 1290 (D. Colo. 1984).

Notice of breach given by buyer complied with time parameters of contract notice provision . Myers v. Koop, 757 P.2d 162 (Colo. App. 1988).

Patient gave sufficient notice to physician of defective character of product and such notice "came to the attention" of the physician within the meaning of § 4-1-201 (26), when the patient presented herself to the physician in a life-threatening condition. Palmer v. A.H. Robins Co. Inc., 684 P.2d 187 (Colo. 1984); Hawkinson v. A.H. Robins Co., Inc., 595 F. Supp. 1290 (D. Colo. 1984).

Notice provision not technical procedural barrier to litigation. When the purposes of the notice requirement have been fully served by actual notice, the notice provision should not operate as a technical procedural barrier to deny claimants the opportunity to litigate the case on the merits. Prutch v. Ford Motor Co., 618 P.2d 657 (Colo. 1980).

Notice of breach is legally sufficient when it provides the seller with an opportunity to investigate the buyer's complaint, to correct the alleged defect, or to effect a settlement through negotiation. Int'l Tech. Instruments v. Eng'g Measurements, Inc., 678 P.2d 558 (Colo. App. 1983).

Failure to provide adequate security agreement constitutes breach. Where the failure of the seller to provide a proper and adequate security agreement directly caused the unconscionable delay in buyer's acquiring titles for vehicles sold, this constituted a breach of the sales contract. Eccher v. Small Bus. Admin., 643 F.2d 1388 (10th Cir. 1981).

Statute as basis for jurisdiction. See Stroh v. Am. Recreation & Mobile Home Corp., 35 Colo. App. 129, 574 P.2d 102 (1977).

Applied in Four Sons Bakery v. Dulman, 542 F.2d 829 (10th Cir. 1976); Surplus Elecs. Corp. v. Gallin, 653 P.2d 752 (Colo. App. 1982).

OFFICIAL 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. 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 non-conformity 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 non-conformity 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 non-conformity 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 first statement. Following the general policy of this Article, the requirements of the content of notification are less stringent in the case of a non-merchant 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 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 reoffered 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 acceptance, in appropriate cases, as to the entire lot or any commercial unit thereof.

Cross References:

Point 3: Section 4-2-721.

Point 4: Sections 4-1-204, 4-2-602 and 4-2-607.

Point 5: Sections 4-2-605 and 4-2-607.

Point 7: Section 4-2-601.

Definitional Cross References:

"Buyer". Section 4-2-103.

"Commercial unit". Section 4-2-105.

"Conform". Section 4-2-106.

"Goods". Section 4-2-105.

"Lot". Section 4-2-105.

"Notifies". Section 4-1-201.

"Reasonable time". Section 4-1-204.

"Rights". Section 4-1-201.

"Seasonably". Section 4-1-204.

"Seller". Section 4-2-103.

ANNOTATION

Analysis

• I. General Consideration.
• II. Buyer May Revoke Acceptance.
• III. Reasonable Time.
• IV. Same as if Goods Rejected.

OFFICIAL 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 men 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 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 has been given reason to believe that the buyer's performance has become uncertain, it is an undue hardship to force him to continue his 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 has been buying to assure himself of materials for his current manufacturing or to replenish his stock of merchandise.

2. Three measures have been adopted to meet the needs of commercial men in such situations. First, the aggrieved party is permitted to suspend his 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 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 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 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 intends to use immediately upon delivery, may have reasonable grounds for insecurity if he discovers that his 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 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. Therefore 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 is giving the matter his 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 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 "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 discount as was his custom, the banker's report given in that case would have been "adequate" assurance under this Act, 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. This Act 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 re-establish the security of expectation, results in a breach only "by repudiation" under subsection (4). Therefore, 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 Commercial Paper and Secured Transactions.

Cross References:

Point 3: Section 4-1-203.

Point 5: Section 4-2-611.

Point 6: Sections 4-1-203 and 4-1-208 and Articles 3 and 9.

Definitional Cross References:

"Aggrieved party". Section 4-1-201.

"Between merchants". Section 4-2-104.

"Contract". Section 4-1-201.

"Contract for sale". Section 4-2-106.

"Party". Section 4-1-201.

"Reasonable time". Section 4-1-204.

"Rights". Section 4-1-201.

"Writing". Section 4-1-201.

ANNOTATION

Law reviews. For article, "Executory Contracts in Bankruptcy: Protecting the Fundamental Terms of the Bargain", see 54 U. Colo. L. Rev. 507 (1983).

A seller could not suspend performance where his behavior was not such as to bring him within the provisions of this section. Scott v. Crown, 765 P.2d 1043 (Colo. App. 1988).

Whether a party to a contract has reasonable grounds for insecurity and the adequacy of any assurance of performance are questions of fact for the jury. Colo. Interstate Gas Co. v. Chemco, Inc., 854 P.2d 1232 ( Colo. 1993 ).

OFFICIAL 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 remedies for breach, or he may suspend his own performance while he negotiates with, or awaits performance by, the other party. But if he awaits performance beyond a commercially reasonable time he cannot recover resulting damages which he 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 counter-performance 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 chooses provided he 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. Therefore the aggrieved party is left free to proceed at any time with his options under this section, unless he 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 4-2-609 and 4-2-612.

Point 2: Section 4-2-609.

Point 3: Section 4-2-612.

Point 4: Section 4-1-203.

Definitional Cross References:

"Aggrieved party". Section 4-1-201.

"Contract". Section 4-1-201.

"Party". Section 4-1-201.

"Remedy". Section 4-1-201.

ANNOTATION

Applied in Colo. Nat'l Bank v. Bd. of County Comm'rs, 634 P.2d 32 ( Colo. 1981 ); Stone v. Caroselli, 653 P.2d 754 (Colo. App. 1982); Albright v. McDermond, 14 P.3d 318 ( Colo. 2000 ).

OFFICIAL 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 cancelled the contract or materially changed his 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 4-2-609.

Definitional Cross References:

"Aggrieved party". Section 4-1-201.

"Cancellation". Section 4-2-106.

"Contract". Section 4-1-201.

"Party". Section 4-1-201.

"Rights". Section 4-1-201.

OFFICIAL 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 non-conformity 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 non-conformity is curable and the seller gives adequate assurance of cure. Cure of non-conformity 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 to 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 non-conformity in any given installment justifies cancellation as to the future depends, not on whether such non-conformity indicates an intent or likelihood that the future deliveries will also be defective, but whether the non-conformity substantially impairs the value of the whole contract. If only the seller's security in regard to future installments is impaired, he 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 non-conforming installment which substantially impairs the value of the entire contract should properly be permitted to withhold his decision as to whether or not to cancel pending a response from the seller as to his claim for cure or adjustment. Similarly, a seller may withhold a delivery pending payment for prior ones, at the same time delaying his decision as to cancellation. A reasonable time for notifying of cancellation, judged by commercial standard 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 can be required to perform further.

Cross References:

Point 2: Sections 4-2-307 and 4-2-607.

Point 3: Section 4-1-203.

Point 5: Sections 4-2-208 and 4-2-609.

Point 6: Section 4-2-610.

Definitional Cross References:

"Action". Section 4-1-201.

"Aggrieved party". Section 4-1-201.

"Buyer". Section 4-2-103.

"Cancellation". Section 4-2-106.

"Conform". Section 4-2-106.

"Contract". Section 4-1-201.

"Lot". Section 4-2-105.

"Notifies". Section 4-1-201.

"Seasonably". Section 4-1-204.

"Seller". Section 4-2-103.

ANNOTATION

Law reviews. For article, "Installment Selling in Colorado and Needed Legislation", see 29 Dicta 81 (1952).

OFFICIAL 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 obligation but may at his option take the surviving goods at a fair adjustment. "Fault" is intended to include negligence and not merely wilful wrong. The buyer is expressly given the right to inspect the goods in order to determine whether he 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 4-2-324.

Definitional Cross References:

"Buyer". Section 4-2-103.

"Conform". Section 4-2-106.

"Contract". Section 4-1-201.

"Fault". Section 4-1-201.

"Goods". Section 4-2-105.

"Party". Section 4-1-201.

"Rights". Section 4-1-201.

"Seller". Section 4-2-103.

OFFICIAL 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 non-occurrence 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 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, 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 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 4-2-103.

"Fault". Section 4-1-201.

"Party". Section 4-1-201.

"Seller". Section 4-2-103.

OFFICIAL COMMENT

Prior Uniform Statutory Provision: None.

Purposes:

1. This section excuses a seller from timely delivery of goods contracted for, where his 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 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. Hoffmann-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 that his 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 making good the claim of excuse is the turning over to the buyer of his 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 this Act 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 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 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 performance would be in breach of good faith and would destroy his exemption.

11. An excused seller must fulfill his contract to the extent which the supervening contingency permits, and if the situation is such that his customers are generally affected he must take account of all in supplying one. Subsections (a) and (b), therefore, 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 allocations, and in case of doubt his 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 4-2-613 and 4-2-614.

Point 2: Section 4-1-102.

Point 5: Sections 4-1-203 and 4-2-613.

Point 6: Sections 4-1-102, 4-1-203 and 4-2-609.

Point 7: Section 4-2-614.

Point 8: Sections 4-1-201, 4-2-302 and 4-2-616.

Point 9: Sections 4-1-102, 4-2-306 and 4-2-613.

Definitional Cross References:

"Between merchants". Section 4-2-104.

"Buyer". Section 4-2-103.

"Contract". Section 4-1-201.

"Contract for sale". Section 4-2-106.

"Good faith". Section 4-1-201.

"Merchant". Section 4-2-104.

"Notifies". Section 4-1-201.

"Seasonably". Section 4-1-201.

"Seller". Section 4-2-103.

OFFICIAL 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 may terminate it and under subsection (2) his 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 4-2-209 and 4-2-615.

Definitional Cross References:

"Buyer". Section 4-2-103.

"Contract". Section 4-1-201.

"Installment contract". Section 4-2-612.

"Notification". Section 4-1-201.

"Reasonable time". Section 4-1-204.

"Seller". Section 4-2-103.

"Termination". Section 4-2-106.

"Written". Section 4-1-201.

OFFICIAL 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 in so far as cross-claims or defenses are concerned.

Definitional Cross References:

"Contract for sale". Section 4-2-106.

"Remedy". Section 4-1-201.

OFFICIAL 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 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 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 base line the proposition that any receipt of goods on credit by an insolvent buyer amounts to a tacit business misrepresentation of solvency and therefore 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 other remedies as to the goods involved. As amended 1966.

Cross References:

Point 1: Sections 4-2-401 and 4-2-705.

Compare Section 4-2-502.

Definitional Cross References:

"Buyer". Section 4-2-103.

"Buyer in ordinary course of business". Section 4-1-201.

"Contract". Section 4-1-201.

"Good faith". Section 4-1-201.

"Goods". Section 4-2-105.

"Insolvent". Section 4-1-201.

"Person". Section 4-1-201.

"Purchaser". Section 4-1-201.

"Receipt" of goods. Section 4-2-103.

"Remedy". Section 4-1-201.

"Rights". Section 4-1-201.

"Seller". Section 4-2-103.

"Writing". Section 4-1-201.

ANNOTATION

Law reviews. For article, "Commercial Law", see 58 Den. L.J. 279 (1981). For article, "Executory Contracts in Bankruptcy: Protecting the Fundamental Terms of the Bargain", see 54 U. Colo. L. Rev. 507 (1983).

This section is not applicable where there was no credit transaction. Ranchers & Farmers Livestock Auction Co. v. Honey, 38 Colo. App. 69, 552 P.2d 313, cert. dismissed, 191 Colo. 503 , 553 P.2d 799 (1976).

Necessary prerequisite to the right to reclaim under this section is a demand for the return of the goods made within 10 days of their receipt. In re Colacci's of Am., 490 F.2d 1118 (10th Cir. 1974).

If the credit seller does not follow up on his rights as to possession, there is a waiver. In re Colacci's of Am., Inc., 490 F.2d 1118 (10th Cir. 1974).

"Follow up" by person seeking to be reclaiming seller means regaining of possession or bona fide attempt to do so. In re Colacci's of Am., Inc., 490 F.2d 1118 (10th Cir. 1974).

Creation of a security interest out of the right to reclaim might allow recovery which would be greater than the mere recovery of goods originally transferred. Guy Martin Buick, Inc. v. Colo. Springs Nat'l Bank, 184 Colo. 166 , 519 P.2d 354 (1974).

Seller was not "reclaiming seller". Where the seller did not act, and instead acquiesced in the buyer's retention of the goods for some four months after they were delivered, although not without some argument and without an expressed consent, and the insistent demands were for payment, and the seller hoped to be paid for the goods during the stalling, and so allowed them to remain at the buyer's, and only after two creditors' meetings did the seller take action to "follow up" its demand, the seller did not become a "reclaiming seller". In re Colacci's of Am., Inc., 490 F.2d 1118 (10th Cir. 1974).

OFFICIAL 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 non-acceptance of a draft, and the failure to furnish an agreed letter of credit.

4. It should also be noted that this Act 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 4-2-612.

Point 3: Section 4-2-325.

Point 4: Section 4-1-106.

Definitional Cross References:

"Aggrieved party". Section 4-1-201.

"Buyer". Section 4-2-103.

"Cancellation". Section 4-2-106.

"Contract". Section 4-1-201.

"Goods". Section 4-2-105.

"Remedy". Section 4-1-201.

"Seller". Section 4-2-103.

ANNOTATION

Law reviews. For article, "Mechanics' Liens Relative to Oil and Gas Operations -- Part II", see 34 Dicta 373 (1957).

Paragraph (f) as a "remedy" of the seller is unrealistic in the face of the filing of the petition for bankruptcy within four months thereafter. The "cancellation" by retaking the goods could not be effective because whatever the action is called, it was still a "transfer" within the meaning of the bankruptcy act "for or on account of an antecedent debt" within four months of the filing of the bankruptcy petition, therefore a preferential transfer. In re Colacci's of Am., Inc., 490 F.2d 1118 (10th Cir. 1974).

Applied in Stone v. Caroselli, 653 P.2d 754 (Colo. App. 1982).

OFFICIAL 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 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 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 4-2-703 and 4-2-706.

Definitional Cross References:

"Aggrieved party". Section 4-1-201.

"Conforming". Section 4-2-106.

"Contract". Section 4-1-201.

"Goods". Section 4-2-105.

"Rights". Section 4-1-201.

"Seller". Section 4-2-103.

ANNOTATION

For giving notice as condition precedent to seller's recovery, see B. J. Shelton Co. v. Muckle Eng'r Co., 121 Colo. 509 , 218 P.2d 1057 (1950) (decided under repealed CSA, C. 143A, § 64(3), uniform sales act).

OFFICIAL 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 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 may also be liable to the buyer. The measure of his obligation is dependent on the provisions of the Documents of Title Article (Section 7-303). Subsection 3(b) therefore gives him 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 and the buyer himself never receives the goods. It is entirely proper under this Article that the seller, by making such direct shipment to the sub-purchaser, be regarded as acquiescing in the latter's purchase and as thus barred from stoppage of the goods as against him.

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 subsection (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 "warehouseman" 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 warehouseman.

4. Subsection (3)(c) makes the bailee's obedience of a notification to stop conditional upon the surrender of any outstanding negotiable document.

5. Any charges or losses incurred by the carrier in following the seller's orders, whether or not he 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 had never made a delivery.

Cross References:

Sections 4-2-702 and 4-2-703.

Point 1: Sections 4-2-503 and 4-2-609, and Article 7.

Point 2: Section 4-2-103 and Article 7.

Definitional Cross References:

"Buyer". Section 4-2-103.

"Contract for sale". Section 4-2-106.

"Document of title". Section 4-1-201.

"Goods". Section 4-2-105.

"Insolvent". Section 4-1-201.

"Notification". Section 4-1-201.

"Receipt" of goods. Section 4-2-103.

"Rights". Section 4-1-201.

"Seller". Section 4-2-103.

OFFICIAL 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 to that provided in Section 2-708.

Under this Article the seller resells by authority of law, in his own behalf, for his own benefit and for the purpose of fixing his 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 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 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 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 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 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 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 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 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 right of resale under the present section he does so only for the limited purpose of obtaining cash for his "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 4-2-610, 4-2-702 and 4-2-703.

Point 2: Section 4-1-201.

Point 3: Sections 4-2-708 and 4-2-710.

Point 4: Section 4-2-328.

Point 8: Section 4-2-104.

Point 9: Section 4-2-710.

Point 11: Sections 4-2-401, 4-2-707 and 4-2-711(3).

Definitional Cross References:

"Buyer". Section 4-2-103.

"Contract". Section 4-1-201.

"Contract for sale". Section 4-2-106.

"Good faith". Section 4-2-103.

"Goods". Section 4-2-105.

"Merchant". Section 4-2-104.

"Notification". Section 4-1-201.

"Person in position of seller". Section 4-2-707.

"Purchase". Section 4-1-201.

"Rights". Section 4-1-201.

"Sale". Section 4-2-106.

"Security interest". Section 4-1-201.

"Seller". Section 4-2-103.

ANNOTATION

Law reviews. For article, "Buyer-Secured Party Conflicts Under Section 9-307(1) of the Uniform Commercial Code", see 46 U. Colo. L. Rev. 333 (1974-75).

Annotator's note. Since § 4-2-706 is similar to repealed § 121-1-60, CRS 53 (uniform sales act), a relevant case construing this provision of § 4-2-706 has been included in the annotations to this section.

The seller in possession may sell the goods on the buyer's account where the property in the goods has passed to the buyer who then wrongfully refuses to pay for them. Howse v. Crumb, 143 Colo. 90 , 352 P.2d 285 (1960).

When seller sells good on buyer's account, the measure of damage is the contract price less the amount of recovery on the resale. Howse v. Crumb, 143 Colo. 90 , 352 P.2d 285 (1960).

Measure of damage based on contract price less the amount of recovery on resale may differ from damages for nonacceptance. The measure of the seller's claim when based on the contract price less the net proceeds of a resale may in fact be different from the measure of damages provided in the case of nonacceptance of the goods under § 4-2-708 where the measure is the difference between the contract price and the fair market price at the time when the goods ought to have been accepted. Howse v. Crumb, 143 Colo. 90 , 352 P.2d 285 (1960).

The seller is bound to exercise reasonable care and judgment in reselling the goods. Howse v. Crumb, 143 Colo. 90 , 352 P.2d 285 (1960).

The statutory requirement of reasonable care and judgment is a codification of the common law. Howse v. Crumb, 143 Colo. 90 , 352 P.2d 285 (1960).

Buyer may not select disadvantageous time to resell. Although a difference in the amount of recovery under this section providing for resale and that of § 4-2-708 providing damages for nonacceptance of goods may exist, it is clear that the statute does not contemplate putting the seller in the position of being able to penalize the buyer by selecting a disadvantageous time to resell the goods. Howse v. Crumb, 143 Colo. 90 , 352 P.2d 285 (1960).

Initially the burden is on the seller to prove that the resale was made with reasonable care and judgment. Howse v. Crumb, 143 Colo. 90 , 352 P.2d 285 (1960).

Once the seller has introduced evidence establishing that fairness and good faith was observed, the buyer has the burden of showing that it was not fair and in good faith. Howse v. Crumb, 143 Colo. 90 , 352 P.2d 285 (1960).

Issue determined by trier of facts. Determination of the issue of whether the resale was made with reasonable care and judgment is for the trier of the facts. Howse v. Crumb, 143 Colo. 90 , 352 P.2d 285, (1960).

Proper measure of trade-in upon resale of repossessed vehicle is discussed in A & P Trucking v. Phil Long Ford, Inc., 676 P.2d 1267 (Colo. App. 1984).

OFFICIAL 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 Reference:

Article 5, Section 4-2-506.

Definitional Cross References:

"Consignee". Section 7-102.

"Consignor". Section 7-102.

"Goods". Section 4-2-105.

"Security interest". Section 4-1-201.

"Seller". Section 4-2-103.

OFFICIAL 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 non-acceptance 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 FOB, FAS, CIF, 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 of a new venture is involved.

3. In all cases the seller may recover incidental damages.

Cross References:

Point 1: Sections 4-2-319 through 4-2-324, 4-2-503, 4-2-723 and 4-2-724.

Point 2: Section 4-2-709.

Point 3: Section 4-2-710.

Definitional Cross References:

"Buyer". Section 4-2-103.

"Contract". Section 4-1-201.

"Seller". Section 4-2-103.

ANNOTATION

Annotator's note. Since § 4-2-708 is similar to repealed § 121-1-64, CRS 53, and CSA, C. 143A, 64 (uniform sales act), relevant cases construing these provisions have been included in the annotations to this section.

The measure of damages provided in the case of nonacceptance of the goods is the difference between the contract price and the fair market price at the time when the goods ought to have been accepted. Howse v. Crumb, 143 Colo. 90 , 352 P.2d 285 (1960).

Where buyer wrongfully refuses to accept delivery, the seller's right to retain a down payment is for application on the damages and not addition to them, so if the damages are in excess of such a down payment, only the excess is recoverable. Thach v. Durham, 120 Colo. 253 , 208 P.2d 1159 (1949).

Seller's right to apply down payment on damages is not controlling where the seller exercises the right to resell in good faith. Dolfin v. Bruesselbach, 111 Colo. 525 , 143 P.2d 1014 (1943).

Seller's recovery by resale under § 4-2-706 may differ from that of this section. Howse v. Crumb, 143 Colo. 90 , 352 P.2d 285 (1960).

Where a contract provides for alternative performances, the remedy for its breach is not determined exclusively by the Uniform Commercial Code. The parties to a contract may vary the provisions of the Uniform Commercial Code by agreement, and may provide for remedies in addition to or in substitution for those provided by the Uniform Commercial Code. Colo. Interstate Gas Co. v. Chemco, Inc., 854 P.2d 1232 ( Colo. 1993 ).

OFFICIAL 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 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 to damages for non-acceptance. In such a situation, subsection (3) permits recovery of those damages in the same action.

Cross References:

Point 4: Section 4-1-106.

Point 5: Sections 4-2-501, 4-2-509, 4-2-510 and 4-2-704.

Point 7: Section 4-2-708.

Definitional Cross References:

"Action". Section 4-1-201.

"Buyer". Section 4-2-103.

"Conforming". Section 4-2-106.

"Contract". Section 4-1-201.

"Goods". Section 4-2-105.

"Seller". Section 4-2-103.

ANNOTATION

Annotator's note. Since § 4-2-709 is similar to repealed § 121-1-63, CRS 53, and CSA, C. 143A, § 63 (uniform sales act), relevant cases construing those provisions have been included in the annotations to this section.

This section provides that where the property in the goods has passed to the buyer who then wrongfully refuses to pay for them, the seller may maintain an action for the price of the goods. Howse v. Crumb, 143 Colo. 90 , 352 P.2d 285 (1960).

For the giving notice that seller holds goods as "bailee", see B. J. Shelton Co. v. Muckle Eng'r Co., 121 Colo. 509 , 218 P.2d 1057 (1950).

Record showing status of sugar market and seller's inventory during relevant period shows efforts to resell would have been unavailing. Great Western Sugar v. Pennant Prods., 748 P.2d 1359 (Colo. App. 1987).

Award of damages using downside pricing was in effect specific performance of the contracts and not a penalty. Great Western Sugar v. Pennant Prods., 748 P.2d 1359 (Colo. App. 1987).

In an action for the price, the seller is entitled to recovery of the price of "goods accepted." However, the Uniform Commercial Code limits the definition of "goods accepted" to "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 the seller's rights under this section." Thus, a procedurally effective rejection or revocation bars acceptance, and revocation of acceptance, like rejection, allows the buyer to avoid the obligation to pay the price. To the extent the trial court determined otherwise in its summary judgment rulings, it was incorrect. Cissell Mfg. Co. v. Park, 36 P.3d 85 (Colo. App. 2001).

Applied in Guy Martin Buick, Inc. v. Colo. Springs Nat'l Bank, 32 Colo. App. 235, 511 P.2d 912 (1973); Nations Enters., Inc. v. Process Equip. Co., 40 Colo. App. 390, 579 P.2d 655 (1978).

OFFICIAL 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 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 4-1-201.

"Buyer". Section 4-2-103.

"Goods". Section 4-2-105.

"Seller". Section 4-2-103.

ANNOTATION

Cancellation and carrying costs commercially reasonable. Trial court erred in upholding jury award to seller because the jury could have concluded that the seller's charge to the buyer for carrying and cancellation was a reasonable one arising under the express terms of the contract as an expense incurred as a result of the buyer's request to delay shipment. Murray Equipment Co. v. Curtis, Inc., 725 P.2d 35 (Colo. App. 1986).

Absent other statutory or contractual provisions to the contrary, attorney fees are not incidental damages under this section. Jelen and Son, Inc. v. Bandimere, 801 P.2d 1182 (Colo. 1990).

Seller's damages were not incidental to buyer's refusal to accept delivery of chemicals, but instead were incurred as a result of improper storage, handling, and transportation of hazardous materials and subsequent dealings with a third party. Jelen and Son, Inc. v. Bandimere, 801 P.2d 1182 (Colo. 1990).

The focus of this section is upon damages arising within the scope of the immediate contract. Damages must arise as a result of the breach to be characterized as incidental under this section. Jelen and Son, Inc. v. Bandimere, 801 P.2d 1182 (Colo. 1990).

OFFICIAL 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 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 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 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 might believe adequate for his damages. The buyer's right to cover, or to have damages for non-delivery, is not impaired by his exercise of his right of resale.

3. It should also be noted that this Act 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 4-2-508, 4-2-601(c), 4-2-608, 4-2-612 and 4-2-714.

Point 2: Section 4-2-706.

Point 3: Section 4-1-106.

Definitional Cross References:

"Aggrieved party". Section 4-1-201.

"Buyer". Section 4-2-103.

"Cancellation". Section 4-2-106.

"Contract". Section 4-1-201.

"Cover". Section 4-2-712.

"Goods". Section 4-2-105.

"Notifies". Section 4-1-201.

"Receipt" of goods. Section 4-2-103.

"Remedy". Section 4-1-201.

"Security interest". Section 4-1-201.

"Seller". Section 4-2-103.

ANNOTATION

Law reviews. For article, "One Year Review of Contracts", see 38 Dicta 161 (1961). For article, "Buyer-Secured Party Conflicts Under Section 9-307(1) of the Uniform Commercial Code", see 46 U. Colo. L. Rev. 333 (1974-75).

Buyer may recover amount paid. This section provides that where the buyer justifiably revokes acceptance, the buyer may recover so much of the price as he has paid. Irrigation Motor & Pump Co. v. Belcher, 29 Colo. App. 343, 483 P.2d 980 (1971).

The section provides that the buyer has a security interest in goods in his possession or control for any payments made. Irrigation Motor & Pump Co. v. Belcher, 29 Colo. App. 343, 483 P.2d 980 (1971).

Because of buyer's security interest, the buyer is not required to return the goods or to hold them for seller's disposition. Irrigation Motor & Pump Co. v. Belcher, 29 Colo. App. 343, 483 P.2d 980 (1971).

Buyer vested with security interest upon revocation of acceptance. If a revocation of acceptance of a mobile home under § 4-2-608 is justifiable, subsection (3) vests the buyer with a security interest in the home, and such an interest authorizes continued possession to preserve the collateral, pursuant to § 4-9-207 (1) and (4), subject to the seller's right to an offset for the rental value of the home. Keen v. Modern Trailer Sales, Inc., 40 Colo. App. 527, 578 P.2d 668 (1978).

There is no requirement under the provisions of the UCC that on revocation of acceptance a buyer must deliver title to the goods to the seller. Under this section, a buyer retains a security interest in goods in his possession for any payment made on their price and may resell the goods in the same manner as an aggrieved seller. And, where a buyer does not exercise his right of resale, generally all that is required is that the buyer assign to the seller all of his interest in the goods. Jackson v. Rocky Mtn. Datsun, Inc., 693 P.2d 391 (Colo. App. 1984).

Failure properly to reject bars recovery of expenses. Where, by failure properly to reject, purchaser is deemed to have accepted the goods, there is no basis for recovery of expenses incident to rejection. Surplus Elecs. Corp. v. Gallin, 653 P.2d 752 (Colo. App. 1982).

Statute as basis for jurisdiction. See Stroh v. Am. Recreation & Mobile Home Corp., 35 Colo. App. 196, 530 P.2d 989 (1975).

Applied in Cargill, Inc. v. Stafford, 553 F.2d 1222 (10th Cir. 1977); Danburg v. Realties, Inc., 677 P.2d 439 (Colo. App. 1984).

OFFICIAL COMMENT

Prior Uniform Statutory Provision: None.

Purposes:

1. This section provides the buyer with a remedy aimed at enabling him to obtain the goods he needs thus meeting his 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 to look around and decide as to how he 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 non-delivery 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 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 non-merchant 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 part.

Cross References:

Point 1: Section 4-2-706.

Point 2: Section 4-1-204.

Point 3: Sections 4-2-713, 4-2-715 and 4-2-716.

Point 4: Section 4-1-203.

Definitional Cross References:

"Buyer". Section 4-2-103.

"Contract". Section 4-1-201.

"Good faith". Section 4-2-103.

"Goods". Section 4-2-105.

"Purchase". Section 4-1-201.

"Remedy". Section 4-1-201.

"Seller". Section 4-2-103.

ANNOTATION

Law reviews. For article, "Commercial Law", see 55 Den. L.J. 425 (1978).

Applied in Cargill, Inc. v. Stafford, 553 F.2d 1222 (10th Cir. 1977).

OFFICIAL 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 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 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, 4-2-716 and 4-2-723.

Point 5: Section 4-2-712.

Definitional Cross References:

"Buyer". Section 4-2-103.

"Contract". Section 4-1-201.

"Seller". Section 4-2-103.

ANNOTATION

Law reviews. For article, "One Year Review of Contracts", see 39 Dicta 161 (1962). For article, "Commercial Law", see 55 Den. L.J. 425 (1978).

Annotator's note. Since § 4-2-713 is similar to repealed § 121-1-67, CRS 53, and CSA, C. 143A, § 67 (uniform sales act), relevant cases construing those provisions have been included in the annotations to this section.

Where a corporation refuses to deliver stock pursuant to an option agreement, the price paid for the option is not the measure of damages, and where the stock is available on the market at a much lesser price than that in the option agreement, dismissal for lack of damages is appropriate. Colo. Mgt. Corp. v. Am. Founders Life Ins. Co., 148 Colo. 519 , 367 P.2d 335 (1961).

Where there is no mutual rescission of a contract for sale, the buyer cannot recover a down payment if he wrongfully refuses to accept redelivery. Thack v. Durham, 120 Colo. 253 , 208 P.2d 1159 (1949).

"Time when buyer learned of the breach" means "time of performance" in anticipatory repudiation cases. Cargill, Inc. v. Stafford, 553 F.2d 1222 (10th Cir. 1977).

Damages normally measured from time performance is due. Under this section damages normally should be measured from the time when performance is due and not from the time when the buyer learns of repudiation. Cargill, Inc. v. Stafford, 553 F.2d 1222 (10th Cir. 1977).

Under this section a buyer may urge continued performance for a reasonable time. Cargill, Inc. v. Stafford, 553 F.2d 1222 (10th Cir. 1977).

After reasonable period, buyer should cover. At the end of a reasonable period during which the buyer may urge continued performance he should cover if substitute goods are readily available. Cargill, Inc. v. Stafford, 553 F.2d 1222 (10th Cir. 1977).

Calculation of damages if buyer cannot cover. If a valid reason exists for failure or refusal to cover after the reasonable time for urging continued performance is over, damages may be calculated from the time when performance is due. Cargill, Inc. v. Stafford, 553 F.2d 1222 (10th Cir. 1977).

Calculation if buyer could but does not cover. If after a reasonable time during which a buyer urges continued performance substitution is readily available and buyer does not cover within a reasonable time, damages should be based on the price at the end of that reasonable time rather than on the price when performance is due. Cargill, Inc. v. Stafford, 553 F.2d 1222 (10th Cir. 1977).

Applied in William B. Tanner Co. v. Mesa Broad. Co., 575 F. Supp. 1501 (D. Colo. 1983).

OFFICIAL 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 claim under the section on effects of acceptance, however, operates to bar his remedies under either that section or the present section.

2. The "non-conformity" referred to in subsection (1) includes not only breaches of warranties but also any failure of the seller to perform according to his obligations under the contract. In the case of such non-conformity, the buyer is permitted to recover for his 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 non-delivery 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 acceptance upon the tender. If, however, the non-conformity 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 4-2-711; Sections 4-2-607 and 4-2-717.

Point 2: Section 4-2-106.

Point 3: Sections 4-2-608 and 4-2-713.

Point 4: Section 4-2-715.

Definitional Cross References:

"Buyer". Section 4-2-103.

"Conform". Section 4-2-106.

"Goods". Section 4-1-201.

"Notification". Section 4-1-201.

"Seller". Section 4-2-103.

ANNOTATION

Analysis

• I. General Consideration.
• II. Buyer May Recover.
• III. Measure of Damages.

OFFICIAL 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 non-conformity or non-delivery 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 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 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 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 obligation for consequential damages limited to cases in which he 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 to do so, or if he did in fact discover the defect prior to his 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 4-2-608.

Point 3: Sections 4-1-203, 4-2-615 and 4-2-719.

Point 4: Section 4-1-106.

Definitional Cross References:

"Cover". Section 4-2-712.

"Goods". Section 4-1-201.

"Person". Section 4-1-201.

"Receipt" of goods. Section 4-2-103.

"Seller". Section 4-2-103.

ANNOTATION

Annotator's note. Since § 4-2-715 is similar to repealed § 121-1-70, C.R.S. 1963, and § 121-1-70, CRS 53 (uniform sales act), relevant cases construing those provisions have been included in the annotations to this section.

Interest and carrying charges are consequential damages. Where the goods purchased are entirely worthless and the only way buyer can be made whole is by awarding him the full amount of the obligation he undertook to pay at the time he purchased the goods, then the interest and carrying charges incurred at the time the sale was made are clearly consequential damages directly resulting from the breach of warranty. Cherokee Inv. Co. v. Voiles, 166 Colo. 270 , 443 P.2d 727 (1968).

Special damages where machine is unsuitable. Where there is a breach of a special warranty whereby a seller undertakes to build a machine suitable for a mass production purpose, the buyer is entitled to special damages for its expenditure in the manufacture of the tools and dies to be used with the machine and to those expenditures reasonably attributed to efforts to adjust and repair the machine before the date when notice of breach of warranty was given to the buyer. Comet Indus., Inc. v. Best Plastic Container Corp., 222 F. Supp. 723 (D. Colo. 1963).

The claim of a buyer for damages for loss of profits cannot be allowed where these were not sufficiently proven and where they are in law remote. Comet Indus., Inc. v. Best Plastic Container Corp., 222 F. Supp. 723 (D. Colo. 1963).

Code rejects "tacit agreement" test. The Colorado statutory scheme rejects the "tacit agreement" test that would permit consequential damages only if the seller specifically contemplated or actually assumed the risk of such damages. Prutch v. Ford Motor Co., 618 P.2d 657 ( Colo. 1980 ).

The element which triggers recovery of consequential damages under subsection (2)(a) is foreseeability. Subsection (2)(a) means that consequential damages are recoverable whenever those damages were reasonably foreseeable by the seller when he entered the contract. Prutch v. Ford Motor Co., 40 Colo. App. 129, 574 P.2d 102 (1977), rev'd on other grounds, 618 P.2d 657 ( Colo. 1980 ).

Where a buyer's use of a product which he knows is defective is foreseeable, the seller's liability for consequential damages is not cut off. Prutch v. Ford Motor Co., 40 Colo. App. 129, 574 P.2d 102 (1977), rev'd on other grounds, 618 P.2d 657 ( Colo. 1980 ).

A manufacturer knowing that its products will be used for crop production reasonably can be expected to foresee that defects in those products may cause crop losses. Prutch v. Ford Motor Co., 618 P.2d 657 (Colo. 1980).

"Reason to know" formulation not exclusive remedy in fraud suits. The code does not require that the "reason to know" formulation be applied in fraud suits to the exclusion of other remedies; it only provides that the remedies available under the "reason to know" formulation are included among the remedies available to a defrauded purchaser. Wagner v. Dan Unfug Motors, Inc., 35 Colo. App. 102, 529 P.2d 656 (1974).

Attempt to mitigate losses not intervening cause of damages. Where plaintiffs, in deciding to continue farming with the knowledge that their equipment might continue to malfunction, actually mitigated their losses, their decision to try to produce at least part of a normal crop, rather than no crop at all, was required by their "duty to lessen, rather than increase", their damages and was not an intervening cause of damages. Prutch v. Ford Motor Co., 618 P.2d 657 (Colo. 1980).

Section clearly permits approximations as to extent of damage, providing the fact of damage or lost profits is certain. Eccher v. Small Bus. Admin., 643 F.2d 1388 (10th Cir. 1981).

Proof of true value of the goods as compared to the contract price is relevant where a warranty remedy is sought. Power Equip. Co. v. Fulton, 32 Colo. App. 430, 513 P.2d 234 (1973).

Court's determination of damages will not be disturbed on appeal unless clearly erroneous. Eccher v. Small Bus. Admin., 643 F.2d 1388 (10th Cir. 1981).

Error of omission in instructing on warranty theory of liability. Where the jury specifically rejected a warranty theory of liability, any error of omission in instructing on this theory is harmless error. Power Equip. Co. v. Fulton, 32 Colo. App. 430, 513 P.2d 234 (1973).

Evidence of loss of profit is admissible in determining amount of consequential damages if the prospective loss has been shown with reasonable certainty. Cope v. Vermeer Sales, 650 P.2d 1307 (Colo. App. 1982); Int'l Tech. Instruments v. Eng'g Measurements, Inc., 678 P.2d 558 (Colo. App. 1983).

But the absence of prior profits in a newly established business does not create a "per se" exclusion of loss of profit as an item of damages if sufficient competent evidence is proffered. Cope v. Vermeer Sales, 650 P.2d 1307 (Colo. App. 1982); Int'l Tech. Instruments v. Eng'g Measurements, Inc., 678 P.2d 558 (Colo. App. 1983).

This section specifically allows buyers to recover consequential damages resulting from the seller's breach. There is no corresponding provision in the code allowing the seller to recover consequential damages. Jelen & Son, Inc. v. Bandimere, 801 P.2d 1182 (Colo. 1990).

Applied in Caldwell v. Kats, 38 Colo. App. 156, 555 P.2d 190 (1976); Duncan v. Schuster-Graham Homes, Inc., 194 Colo. 441 , 578 P.2d 637 (1978); Cement Asbestos Prods. Co. v. Hartford Accident & Indem. Co., 592 F.2d 1144 (10th Cir. 1979); W. Conference Resorts, Inc. v. Pease, 668 P.2d 973 (Colo. App. 1983).

OFFICIAL COMMENT

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 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 on the seller's insolvency (Section 2-502).

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 4-2-502.

Point 4: Section 4-2-709.

Point 5: Article 7.

Definitional Cross References:

"Buyer". Section 4-2-103.

"Goods". Section 4-1-201.

"Rights". Section 4-1-201.

ANNOTATION

Applied in Colorado-Ute Elec. Ass'n v. Envirotech Corp., 524 F. Supp. 1152 (D. Colo. 1981).

OFFICIAL 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 intention to withhold all or part of the price if he 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 payment is sufficient.

Cross Reference:

Point 2: Section 4-2-609.

Definitional Cross References:

"Buyer". Section 4-2-103.

"Notifies". Section 4-1-201.

ANNOTATION

This section allows the buyer to accept the goods and to assert a breach of warranty by way of recoupment in diminution or extinction of the price. Comet Indus., Inc. v. Best Plastic Container Corp., 222 F. Supp. 723 (D. Colo. 1963) (decided under repealed § 121-1-69(1)(a), CRS 53, uniform sales act).

OFFICIAL 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% 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 down 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 must make reasonable efforts to realize their true value, and this is assured by requiring him to comply with the conditions laid down in the section on resale by an aggrieved seller.

Cross References:

Point 1: Section 4-2-302.

Point 2: Section 4-2-706.

Definitional Cross References:

"Aggrieved party". Section 4-1-201.

"Agreement". Section 4-1-201.

"Buyer". Section 4-2-103.

"Goods". Section 4-2-105.

"Notice". Section 4-1-201.

"Party". Section 4-1-201.

"Remedy". Section 4-1-201.

"Seller". Section 4-2-103.

"Term". Section 4-1-201.

ANNOTATION

Law reviews. For article, "Exclusion and Modification of Warranty under the U.C.C. -- How to Succeed in Business Without Being Liable for Not Really Trying", see 46 Den. L.J. 579 (1969).

OFFICIAL 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 4-2-302.

Point 3: Section 4-2-316.

Definitional Cross References:

"Agreement". Section 4-1-201.

"Buyer". Section 4-2-103.

"Conforming". Section 4-2-106.

"Contract". Section 4-1-201.

"Goods". Section 4-2-105.

"Remedy". Section 4-1-201.

"Seller". Section 4-2-103.

ANNOTATION

Law reviews. For article, "Exclusion and Modification of Warranty under the U.C.C. -- How to Succeed in Business Without Being Liable for Not Really Trying", see 46 Den. L.J. 579 (1969).

Issues of fact must be determined before the applicability of the doctrines of failure of essential purpose and unconscionability can be ruled upon. Wenner Petro. v. Mitsui & Co., 748 P.2d 356 (Colo. App. 1987).

Whether failure of essential purpose doctrine applies requires a two-tiered evaluation: (1) Identification of the essential purpose of the limited remedy; and (2) whether the remedy in fact failed to accomplish such purpose. Cooley v. Big Horn Harvestore Sys., 813 P.2d 736 (Colo. 1991).

A remedy fails of its essential purpose if it operates to deprive a party of the substantial value of the contract. Cooley v. Big Horn Harvestore Sys., 813 P.2d 736 ( Colo. 1991 ); Curragh Queensland Mining v. Dresser Indus., 55 P.3d 235 (Colo. App. 2002).

When the seller cannot cure the defects by repeated attempts to repair, a limitation of remedy to repair fails of its essential purpose and the buyer is then free to revoke acceptance of the goods. Rose v. Colo. Factory Homes, 10 P.3d 680 (Colo. App. 2000).

Consequential damages are available as a remedy under subsection (2) where contract remedy of replacement or repair of defective parts failed of its essential purpose. Such damages are available despite fact that parties' contract contained a provision which excluded remedy of consequential damages resulting from liability. Cooley v. Big Horn Harvestore Sys., 813 P.2d 736 (Colo. 1991).

The parties to a contract may vary the provisions of the Uniform Commercial Code by agreement, and may provide for remedies in addition to or in substitution for those provided by the Uniform Commercial Code. Colo. Interstate Gas Co. v. Chemco, Inc., 854 P.2d 1232 ( Colo. 1993 ).

Parties may enter into an agreement that the remedy of consequential damages shall not be available in the event the remedy of a suit for breach of a limited warranty to repair or replace fails of its essential purpose; however, such agreement must be expressly stated in clear and unambiguous language. Cooley v. Big Horn Harvestore Sys., 813 P.2d 736 (Colo. 1991).

When a purchase agreement establishing that the only warranty provided is a warranty to repair or replace defective parts contains no separate provision unambiguously recording the intent of parties to prohibit a buyer's recovery of consequential damages even when such sole remedy fails of its essential purpose, the buyer is entitled to the statutory remedy of consequential damages notwithstanding a general contractual disclaimer to the contrary. Cooley v. Big Horn Harvestore Sys., 813 P.2d 736 (Colo. 1991).

Applied in Leprino v. Intermountain Brick Co., 759 P.2d 835 (Colo. App. 1988).

OFFICIAL 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. Therefore, 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 4-1-107.

Definitional Cross References:

"Cancellation". Section 4-2-106.

"Contract". Section 4-1-201.

OFFICIAL 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 non-fraudulent 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 4-2-106.

"Goods". Section 4-1-201.

"Remedy". Section 4-1-201.

ANNOTATION

"Reason to know" formulation not exclusive remedy in fraud suits. The code does not require that the "reason to know" formulation be applied in fraud suits to the exclusion of other remedies; it only provides that the remedies available under the "reason to know" formulation are included among the remedies available to a defrauded purchaser. Wagner v. Dan Unfug Motors, Inc., 35 Colo. App. 102, 529 P.2d 656 (1974).

False representation of a material fact, even though innocently made, may merit rescission of a contract or revocation of acceptance. Keen v. Modern Trailer Sales, Inc., 40 Colo. App. 527, 578 P.2d 668 (1978).

Right to consequential damages. Since a party's right to consequential damages is presumably a "remedy" within the meaning of this section, application of the code to the question of the availability of damages for loss of use of a personal vehicle is warranted. Wagner v. Dan Unfug Motors, Inc., 35 Colo. App. 102, 529 P.2d 656 (1974).

Burden of proof. When fraud is pleaded, it is incumbent upon plaintiff to prove that defendant made the false representation with knowledge of its falsity or with utter disregard for its truth and falsity. Caldwell v. Kats, 38 Colo. App. 156, 555 P.2d 190 (1976), rev'd, 193 Colo. 384 , 567 P.2d 371 (1977).

OFFICIAL 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 4-1-201.

"Buyer". Section 4-2-103.

"Contract for sale". Section 4-2-106.

"Goods". Section 4-2-105.

"Party". Section 4-1-201.

"Rights". Section 4-1-201.

"Security interest". Section 4-1-201.

OFFICIAL 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 4-1-201.

"Aggrieved party". Section 4-1-201.

"Goods". Section 4-2-105.

"Notifies". Section 4-1-201.

"Party". Section 4-1-201.

"Reasonable time". Section 4-1-204.

"Usage of trade". Section 4-1-205.

OFFICIAL COMMENT

Prior Uniform Statutory Provision: None.

Purposes: To make market quotations admissible in evidence while providing for a challenge of the material by showing the circumstances of its preparation.

No explicit provision as to the weight to be given to market quotations is contained in this section, but such quotations, in the absence of compelling challenge, offer an adequate basis for a verdict.

Market quotations are made admissible when the price or value of goods traded "in any established market" is in issue. The reason of the section does not require that the market be closely organized in the manner of a produce exchange. It is sufficient if transactions in the commodity are frequent and open enough to make a market established by usage in which one price can be expected to affect another and in which an informed report of the range and trend of prices can be assumed to be reasonably accurate.

This section does not in any way intend to limit or negate the application of similar rules of admissibility to other material, whether by action of the courts or by statute. The purpose of the present section is to assure a minimum of mercantile administration in this important situation and not to limit any liberalizing trend in modern law.

Definitional Cross Reference:

"Goods". Section 4-2-105.

ANNOTATION

Law reviews. For article, "Hearsay in Criminal Cases Under The Colorado Rules of Evidence: An Overview", see 50 U. Colo. L. Rev. 277 (1979).

OFFICIAL 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 4-1-201.

"Aggrieved party". Section 4-1-201.

"Agreement". Section 4-1-201.

"Contract for sale". Section 4-2-106.

"Goods". Section 4-2-105.

"Party". Section 4-1-201.

"Remedy". Section 4-1-201.

"Term". Section 4-1-201.

"Termination". Section 4-2-106.

ANNOTATION

Subsection (1) prohibits shortening of limitation period. Avedon Eng'g, Inc. v. Seatex, 112 F. Supp. 2d 1090 (D. Colo. 2000).

Whether arbitration is an "action" subject to limitation period does not control the outcome, if a unilateral term shortening limitation period to one year creates surprise and hardship. Avedon Eng'g, Inc. v. Seatex, 112 F. Supp. 2d 1090 (D. Colo. 2000).

Running of statute of limitations for breach of express warranty. In an explicit warranty of a roof for five years the statute begins to run, not when the first leak is discovered, but when the party discovered or should have discovered that the roofer was unable or unwilling to maintain the roof as warranted. Smith v. Union Supply Co., 675 P.2d 333 (Colo. App. 1983).

Breach defined. When performance of a duty under a contract is due, any non-performance is a breach. D.O.M. Farms v. Nakamoto, 718 P.2d 262 (Colo. App. 1986).

Claims for breach of warranty governed by this section and not former § 13-80-127.5 since such claims are causes of action based upon contract. Ayala v. Joy Mfg. Co., 580 F. Supp. 521 (D. Colo. 1984).

Actions or claims for breach of express and implied warranties under the UCC are governed by this section and not former § 13-80-127.5. Wieser v. Firestone Tire & Rubber Co., 596 F. Supp. 1473 (D. Colo. 1984).

Persons not parties to the sale are still subject to the limitations period of this section. Wieser v. Firestone Tire & Rubber Co., 596 F. Supp. 1473 (D. Colo. 1984); Anderson v. Deere & Co., 622 F. Supp. 290 (D. Colo. 1985).

For the future performance exception of statute to apply, there must be a warranty that explicitly extends to future performance of the goods. Smith v. Union Supply Co., 675 P.2d 333 (Colo. App. 1983); Boyd v. A.O. Smith Harvestore Prods., 776 P.2d 1125 (Colo. App. 1989).

Warranty did not extend to future performance of goods and buyer's cause of action accrued when tender of delivery was made where manufacturer, by provisions of sale contract, did not explicitly promise that the product would not malfunction, only that, if it did, it would be repaired or replaced. Boyd v. A.O. Smith Harvestore Prods., 776 P.2d 1125 (Colo. App. 1989).

Actions of seller toll statute of limitations. Where a seller delivered a good, made repeated assurances that the product would be repaired to meet contract performance requirements and made efforts to improve the product, those promises and efforts tolled the statute of limitations in subsection (1) until the seller denied liability and refused to make further efforts to improve the product. Colorado-Ute Elec. Ass'n v. Envirotech Corp., 524 F. Supp. 1152 (D. Colo. 1981).

Where seller guaranteed buyer that product would perform at a certain level of reliability for successive intervals until a specified time, this guarantee effectively delayed commencement of the limitations period for seeking a "true fix" remedy until that time. Curragh Queensland Mining v. Dresser Indus., 55 P.3d 235 (Colo. App. 2002).

Because this section contains no specific tolling provision and does not otherwise indicate to the contrary, the general tolling provisions of § 13-81-103 apply. Haberkorn by Haberkorn v. ROHM-GMBH, 709 P.2d 44 (Colo. App. 1985).

Applied in Glen Peck, Ltd. v. Fritsche, 651 P.2d 414 (Colo. App. 1981); Hawkinson v. A.H. Robins, Co., Inc., 595 F. Supp. 1290 (D. Colo. 1984); Richard O'Brien Companies v. Challenge-Cook Bros., 672 F. Supp. 466 (D. Colo. 1987).

OFFICIAL 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 Uniform Commercial 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 Act. (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 9-408).

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-531), 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 this Act. 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 this Act. 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 this Act. 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 this Act. 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 this Act. 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 non-uniform 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 non-uniform amendments. Negotiations were conducted in conjunction with, and were facilitated by, a study of the uniform Article and the non-uniform 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 this Act, 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 Act, including this Article, is that the effect of the Act'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.

ANNOTATION

Law reviews. For article, "Personal Property Leases and the New UCC Article 2.5", see 21 Colo. Law. 1101 (1992).

OFFICIAL COMMENT

Uniform Statutory Source: Section 9-102(1). Throughout this Article, unless otherwise stated, references to "Section" are to other sections of this Act.

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 multi-national 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 this Act.

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, § 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, esp. 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).

OFFICIAL COMMENT

1. "Buyer in ordinary course of business". Section 1-201(9).
2. "Cancellation". Section 2-106(4). The effect of a cancellation is provided in Section 2A-505(1).
3. "Commercial unit". Section 2-105(6).
4. "Conforming". Section 2-106(2).
5. "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).
6. "Fault". Section 1-201(16).
7. "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).
8. "Goods". Section 9-105(1)(h). See Section 2A-103(3) for reference to the definition of "Account", "Chattel paper", "Document", "General intangibles" and "Instrument". See Section 2A-217 for determination of the time and manner of identification.
9. "Installment lease contract". Section 2-612(1).
10. "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).
11. "Lease agreement". This definition is derived from the first sentence of Section 1-201(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).
12. "Lease contract". This definition is derived from the definition of contract in Section 1-201(11). Note that a lease contract may be for the future lease of goods, since this notion is included in the definition of lease.
13. "Leasehold interest". New.
14. "Lessee". New.
15. "Lessee in ordinary course of business". Section 1-201(9).
16. "Lessor". New.
17. "Lessor's residual interest". New.
18. "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).
19. "Lot". Section 2-105(5).
20. "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.
21. "Present value". New. Authorities agree that present value should be used to determine fairly the damages payable by the lessor or the lessee on default. E.g., Taylor v. Commercial Credit Equip. Corp., 170 Ga. App. 322, 316 S.E.2d 788 (Ct. App. 1984). Present value is defined to mean an amount that represents the discounted value as of a date certain of one or more sums payable in the future. This is a function of the economic principle that a dollar today is more valuable to the holder than a dollar payable in two years. While there is no question as to the principle, reasonable people would differ as to the rate of discount to apply in determining the value of that future dollar today. To minimize litigation, this Article allows the parties to specify the discount or interest rate, if the rate was not manifestly unreasonable at the time the transaction was entered into. In all other cases, the interest rate will be a commercially reasonable rate that takes into account the facts and circumstances of each case, as of the time the transaction was entered into.
22. "Purchase". Section 1-201(32). This definition omits the reference to lien contained in the definition of purchase in Article 1 (Section 1-201(32)). 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(32) to include any other voluntary transaction creating an interest in property, this addition is not substantive.
23. "Sublease". New.
24. "Supplier". New.
25. "Supply contract". New.
26. "Termination". Section 2-106(3). The effect of a termination is provided in Section 2A-505(2).

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. § 1667 (1982), and in the Unif. Consumer Credit Code § 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.

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. § 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.

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 (Section 1- 201(37)). Due to extensive litigation to distinguish true leases from security interests, an amendment to Section 1-201(37) has been promulgated with this Article to create a sharper distinction.

This section as well as Section 1-201(37) 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 2A-103(3) and 2-106(1). Under pre-Act 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 1-201(37), as amended with the promulgation of this Article, 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 the second paragraph of Section 1-201(37) 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, subparagraph (a) of Section 1- 201(37) 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, subparagraph (b) of Section 1-201(37) is not satisfied. Finally, there are no options; thus, subparagraphs (c) and (d) of Section 1-201(37) 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-Act 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 1-201(37), as amended with the inclusion of this Article in the Act, 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 have not been properly categorized by the courts in applying the 1978 and earlier Official Texts of Section 1-201(37). This subsection, together with Section 1-201(37), as amended with the promulgation of this Article, draws a brighter line, which should create a clearer signal to the professional lessor and lessee.

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 2A-103(4) and 1-103.

OFFICIAL COMMENT

Uniform Statutory Source: Sections 9-203(4) and 9-302(3)(b) and (c).

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 pre-existing 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. §§ 1667-1667(e) (1982) and its implementing regulation, Regulation M, 12 C.F.R. § 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 §§ 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 §§ 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 § 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).

OFFICIAL COMMENT

Uniform Statutory Source: Section 9-103(2)(a) and (b).

Changes: Substantially revised. The provisions of the last sentence of Section 9-103(2)(b) have not been incorporated as it is 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 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), 9-103(2)(b) and 9103(2)(d).

Definitional Cross Reference:

"Goods". Section 2A-103(1)(h).

OFFICIAL COMMENT

Uniform Statutory Source: Unif. Consumer Credit Code § 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 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 Choice of Forum Act (1968).

Cross Reference:

Section 9-103(1)(c).

Definitional Cross References:

"Consumer lease". Section 2A-103(1)(e).

"Lease agreement". Section 2A-103(1)(k).

"Lessee". Section 2A-103(1)(n).

"Goods". Section 2A-103(1)(h).

"Party". Section 1-201(29).

ANNOTATION

Private parties cannot enter into a forum selection clause simply to deprive a court of its subject matter jurisdiction. Vanderbeek v. Vernon Corp., 25 P.3d 1242 (Colo. App. 2000), aff'd, 50 P.3d 866 ( Colo. 2002 ); Edge Telecom, Inc. v. Sterling Bank, 143 P.3d 1155 (Colo. App. 2006).

OFFICIAL 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-203)).

Cross References:

Sections 2A-203 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).

OFFICIAL COMMENT

Uniform Statutory Source: Section 2-302 and Unif. Consumer Credit Code § 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 § 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 § 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 § 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 § 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 2A-103(4) and 1-106(1).

Subsection (4) authorizes an award of reasonable attorney's fees if the court finds unconscionability with respect to a consumer lease under subsections (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).

OFFICIAL COMMENT

Uniform Statutory Source: Section 1-208 and Unif. Consumer Credit Code 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. Therefore, 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).

OFFICIAL COMMENT

Uniform Statutory Source: Sections 2-201, 9-203(1) and 9-110.

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(1)(a). Subsection (2), relying on the statutory analogue in Section 9-110, 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, 9-110 and 9-203(1)(a).

Definitional Cross References:

"Action". Section 1-201(1).

"Agreed". 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).

OFFICIAL 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).

OFFICIAL 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).

OFFICIAL 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).

OFFICIAL 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).

OFFICIAL 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).

OFFICIAL COMMENT

Uniform Statutory Source: Sections 2-208 and 1-205(4).

Changes: Revised to reflect leasing practices and terminology, except that subsection (2) was further revised to make the subsection parallel the provisions of Section 1-205(4) by adding that course of dealing controls usage of trade.

Purposes: The section should be read in conjunction with Section 2A-208. In particular, although a specific term may control over course of performance as a matter of lease construction under subsection (2), subsection (3) allows the same course of dealing to show a waiver or modification, if Section 2A-208 is satisfied.

Cross References:

Sections 1-205(4), 2-208 and 2A-208.

Definitional Cross References:

"Course of dealing". Section 1-205.

"Knowledge". Section 1-201(25).

"Lease agreement". Section 2A-103(1)(k).

"Lease contract". Section 2A-103(1)(l).

"Party". Section 1-201(29).

"Term". Section 1-201(42).

"Usage of trade". Section 1-205.

OFFICIAL 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).

OFFICIAL COMMENT

Uniform Statutory Source: None.

Changes: This section is modeled on Section 9-318, the Restatement (Second) of Contracts § § 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 2A-103(4) and 1-106(2).

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 2A-216 and 2-318, 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).

OFFICIAL 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, esp. 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).

OFFICIAL 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 2A-103(4) and 1-103.

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).

OFFICIAL 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.

OFFICIAL 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).

OFFICIAL COMMENT

Uniform Statutory Source: Sections 2-316 and 2-312(2).

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, esp. 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).

OFFICIAL COMMENT

Uniform Statutory Source: Section 2-317.

Definitional Cross Reference:

"Party". Section 1-201(29).

OFFICIAL 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:

Alternative A is based on the 1962 version of Section 2-318 and is least favorable to the injured person as the doctrine of privity imposed by other law is abrogated to only a limited extent. Alternatives B and C are based on later additions to Section 2-318 and are more favorable to the injured person. In determining which alternative to select, the state legislature should consider making its choice parallel to the choice it made with respect to Section 2-318, as interpreted by the courts.

The last sentence of each of Alternatives A, B and C 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, 402A (1965)), to the provisions of this Act. 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, esp. 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).

OFFICIAL 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).

OFFICIAL 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).

OFFICIAL 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).

OFFICIAL COMMENT

Uniform Statutory Source: Section 2-510.

Changes: Revised to reflect leasing practices and terminology. The rule in Section (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-517 and Section 2A-516 official comment.

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).

OFFICIAL COMMENT

Uniform Statutory Source: Section 2-613.

Changes: Revised to reflect leasing practices and terminology.

Purposes: 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 References:

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).

OFFICIAL COMMENT

Uniform Statutory Source: Section 9-201.

Changes: The first sentence of Section 9-201 was incorporated, modified to reflect leasing terminology. The second sentence of Section 9-201 was eliminated as not relevant to leasing practices.

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 9-408. Coogan, Leasing and the Uniform Commercial Code, in Equipment Leasing-Leveraged Leasing 681, 744-46 (2d ed. 1980).

3. Hypothetical:

1. 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.
2. 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.
3. 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.
4. 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 be transferred under the sublease to C, A may have a remedy pursuant to Section 2A-303(5). 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 not be transferred under the sublease to C, A may have a remedy pursuant to Section 2A-303(5). Section 2A-303(5)(b)(ii).
5. 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 2A-103(3) and 2- 104(1)) dealing in goods of that kind and C is a sublessee in the ordinary course of business (Sections 2A-103(1)(o) and 2A-103(1)(n)), 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).
6. 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.
7. 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)(a). 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).
8. 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. Conditions 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), and Sections 2-104(1), 2A-103(1)(j), 2A-103(1)(l), 2A-103(1)(n), 2A-103(1)(o) and 2A-103(1)(w), 2A-103(3), 2A-103(4), 2A-201, 2A-301 through 2A-303, 2A-303(2), 2A-303(5), 2A-304 through 2A-307, 2A-307(1), 2A-307(2)(a), 2A-308 through 2A-311, 2A-508, 2A-511(4), 2A-523, Article 9, especially Sections 9-201 and 9-408.

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).

OFFICIAL 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).

OFFICIAL COMMENT

Uniform Statutory Source: Sections 2-210 and 9-311.

Changes: The provisions of Sections 2-210 and 9-311 were incorporated in this section, with substantial modifications to reflect leasing terminology and practice and to harmonize the principles of the respective provisions, i.e. limitations on delegation of performance on the one hand and alienability of rights on the other. In addition, unlike Section 2-210 which deals only with voluntary transfers, this section deals with involuntary as well as voluntary transfers. Moreover, the principle of Section 9-318(4) denying effectiveness to contractual terms prohibiting assignments of receivables due and to become due also is implemented.

Purposes:

1. Subsection (2) states a rule, consistent with Section 9-311, 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 (5). Under subsection (5) 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 subsections (3) and (4), which make such provisions unenforceable in certain instances.

2. The first such instance is described in subsection (3). 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 (Sections 9-102(1)(b) and 9-104(f)), or makes it an event of default is generally not enforceable, reflecting the policy of Section 9-318(4). However, that policy gives way to the doctrine stated in Section 2-210(2), which gives one party to a contract the right to protect itself against an actual delegation (but not just a provision under which delegation might later occur) of a material performance by the other party. Accordingly, such a provision in a lease agreement is enforceable when the transfer delegates a material performance. Generally, as expressly provided in subsection (6), a transfer for security is not a delegation of duties. However, inasmuch as the creation of a security interest includes the sale of a lease contract, if there are then unperformed duties on the part of the lessor/seller, there could be a delegation of duties in the sale, and, if such a delegation actually takes place and is of a material performance, a provision in a lease agreement prohibiting it or making it an event of default would be enforceable, giving rise to the rights and remedies stated in subsection (5). The statute does not define "material." The parties may set standards to determine its meaning. The term is intended to exclude delegations of matters such as accounting to a professional accountant and the performance of, as opposed to the responsibility for, maintenance duties to a person in the maintenance service industry.

3. For similar reasons, the lessor is entitled to protect its residual interest in the goods by prohibiting anyone but the lessee from possessing or using them. Accordingly, under subsection (3) if there is an actual transfer by the lessee of its right of possession or use of the goods in violation of a provision in the lease agreement, such a provision likewise is enforceable, giving rise to the rights and remedies stated in subsection (5). A transfer of the lessee's right of possession or use of the goods resulting from the enforcement of a security interest granted by the lessee in its leasehold interest is a "transfer by the lessee" under this subsection.

4. Finally, subsection (3) protects against a claim that the creation or enforcement of a security interest in the lessor's interest under the lease contract or in the residual interest is 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 lessee so as to give rise to the rights and remedies stated in subsection (5), unless the transfer involves an actual delegation of a material performance of the lessor.

5. While it is not likely that a transfer by the lessor of its right to payment under the lease contract would impair at a future time the ability of the lessee to obtain the performance due the lessee under the lease contract from the lessor, if under the circumstances reasonable grounds for insecurity as to receiving that performance arise, the lessee may employ the provision of this Article for demanding adequate assurance of due performance and has the remedy provided in that circumstance. Section 2A-401.

6. Sections 9-206 and 9-318(1) through (3) also are relevant. Section 9-206 sanctions an agreement by a lessee not to assert certain types of claims or defenses against the lessor's assignee. Section 9-318(1) through (3) deal with, among other things, the other party's rights against the assignee where Section 9-206(1) does not apply. Since the definition of contract under Section 1-201(11) includes a lease agreement, the definition of account debtor under Section 9-105(1)(a) includes a lessee of goods. As a result, Section 9-206 applies to lease agreements, and there is no need to restate those sections in this Article. The reference to "defenses or claims arising out of a sale" in Section 9-318(1) should be interpreted broadly to include defenses or claims arising out of a lease inasmuch as that section codifies the common law rule with respect to contracts, including lease contracts.

7. Subsection (4) is based upon Section 2-210(2) and Section 9-318(4). 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 (5). 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 (5) 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 "non-operating" 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 "non-operating" 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 (5) if it does not constitute an actual delegation of a material performance under subsection (3).

8. The application of either the rule of subsection (3) or the rule of subsection (4) 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 subsections 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. § 1401(a) and (b) which places limitations on the operation of aircraft in the United States based on the citizenship or corporate qualification of the registrant.

9. 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.

10. Subsection (5) 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 (5). 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 5(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 5(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.

11. If a transfer gives rise to the rights and remedies provided in subsection (5), 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 (5) 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.

12. Subsection (8) 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.

13. Subsection (6) is taken almost verbatim from the provisions of Section 2-210(4). 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 9-105(1)(b). 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.

Cross References:

Sections 1-201(11), 1-201(37), 2-210, 2-609 2A-401, 9-102(1)(b), 9-104(f), 9-105(1)(a), 9-206, and 9-318.

Definitional Cross References:

"Agreed" and "Agreement". Section 1-201(3).

"Conspicuous". Section 1-201(10).

"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).

"Lessor's residual interest". Section 2A-103(1)(q).

"Notice". Section 1-201(25).

"Party". Section 1-201(29).

"Person". Section 1-201(30).

"Reasonable time". Section 1-204(1) and (2).

"Rights". Section 1-201(36).

"Term". Section 1-201(42).

"Writing". Section 1-201(46).

OFFICIAL 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 2A-103(4) and 1-103. See, e.g., Restatement (Second) of Torts §§ 222A-243. Thus, B is a creditor of M. Sections 2A-103(4) and 1-201(12). 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 2A-103(4) and 1-103. 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 2A-103(4) and 1-102(1) and (2). 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:

"Agreed". 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).

OFFICIAL 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).

OFFICIAL COMMENT

Uniform Statutory Source: Section 9-310.

Changes: The approach reflected in the provisions of Section 9-310 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 9-310.

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).

OFFICIAL COMMENT

Uniform Statutory Source: None for subsection (1). Subsection (2) is derived from Section 9-301, and subsections (3) and (4) are derived from Section 9-307(1) and (3), respectively.

Changes: The provisions of Sections 9-301 and 9-307(1) and (3) 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. Therefore, 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 one of three exceptions stated within the rule. First, subsection (2)(a) 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. Second, subsection (2)(b) provides that when the creditor holds a security interest (Section 1-201(37)), whether or not perfected, the creditor has priority over a lessee who did not give value (Section 1-201(44)) and receive delivery of the goods without knowledge (Section 1-201(25)) of the security interest. As to other lessees, under subsection (2)(c) a secured creditor holding a perfected security interest before the time the lease contract became enforceable (Section 2A-301) does not take subject to the lease. With respect to this provision, the lessee in these circumstances is treated like a buyer so that perfection of a purchase money security interest does not relate back (Section 9-301).

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).

5. The rules stated in subsections (2)(b) and (c), and the rule in subsection (3), are best understood by reviewing a hypothetical. Assume that a merchant engaged in the business of selling and leasing musical instruments obtained possession of a truck load of musical instruments on deferred payment terms from a supplier of musical instruments on January 6. To secure payment of such credit the merchant granted the supplier a security interest in the instruments; the security interest was perfected by filing on January 15. The merchant, as lessor, entered into a lease to an individual of one of the musical instruments supplied by the supplier; the lease became enforceable on January 10. Under subsection (2)(b) the lessee will prevail (assuming the lessee qualifies thereunder) unless subsection (c) provides otherwise. Under the rule stated in subsection (2)(c) a priority dispute between the supplier, as the lessor's secured creditor, and the lessee would be determined by ascertaining on January 10 (the day the lease became enforceable) the validity and perfected status of the security interest in the musical instrument and the enforceability of the lease contract by the lessee. Nothing more appearing, under the rule stated in subsection (2)(c), the supplier's security interest in the musical instrument would not have priority over the lease contract. Moreover, subsection (2) states that its rules are subject to the rules of subsections (3) and (4). Under this hypothetical the lessee should qualify as a "lessee in the ordinary course of business". Section 2A-103(1)(o). Subsection (3) also makes clear that the lessee in the ordinary course of business will win even if he or she knows of the existence of the supplier's security interest.

6. Subsections (3) and (4), which are modeled on the provisions of Section 9-307(1) and (3), respectively, state two exceptions to the priority rule stated in subsection (2) with respect to a creditor who holds a security interest. The lessee in the ordinary course of business will be treated in the same fashion as the buyer in the ordinary course of business, given a priority dispute with a secured creditor over goods subject to a lease contract.

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), 2A-301 official comment 3(g), Article 9, especially Sections 9-301, 9-307(1), and 9-307(3).

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).