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.

Legal Periodicals. - For symposium on the Uniform Commercial Code in North Carolina, see 44 N.C.L. Rev. 525 (1966).

For note on choice of law rules in North Carolina, see 48 N.C.L. Rev. 243 (1970).

For survey of 1980 commercial law, see 59 N.C.L. Rev. 1076 (1981).

For symposium on the North Carolina Commercial Code, see 18 Wake Forest L. Rev. 161 (1982).

For note, "Real Estate Finance - Subordination Causes: North Carolina Subordinates Substance to Form - MCB Ltd. v. McGowan," see 23 Wake Forest L. Rev. 575 (1988).

For comment, "Is it a Sale or a Lease?: The Implications of Article 2A and Revised U.C.C. Section 1-201(37) in North Carolina," see 18 N.C. Cent. L.J. 187 (1989).

For article, "The Paper Chase: Securization, Foreclosure, and the Uncertainty of Mortgage Title," see 63 Duke L. J. 637 (2013).

For article, "Contracts Ex Machina,” see 67 Duke L.J. 313 (2017).

CASE NOTES

Cited in Szabo Food Serv., Inc. v. Balentine's, Inc., 285 N.C. 452, 206 S.E.2d 242 (1974); Little v. County of Orange, 31 N.C. App. 495, 229 S.E.2d 823 (1976); American Clipper Corp. v. Howerton, 51 N.C. App. 539, 277 S.E.2d 136 (1981); Gillespie v. DeWitt, 53 N.C. App. 252, 280 S.E.2d 736 (1981); Parker Marking Sys. v. Diagraph-Bradley Indus., Inc., 80 N.C. App. 177, 341 S.E.2d 92 (1986); Wohlfahrt v. Schneider, 82 N.C. App. 69, 345 S.E.2d 448 (1986); Self-Help Ventures Fund v. Custom Finish, LLC, 199 N.C. App. 743, 682 S.E.2d 746 (2009), dismissed 363 N.C. 856, 694 S.E.2d 392, 2010 N.C. LEXIS 220 (2010).

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. This section makes clear what has always been the case - 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. See also Comment 1 to Section 1-301.

NORTH CAROLINA COMMENT

The General Statutes Commission added the reference to G.S. 25-1-301 to make applicable that section's choice of law rules to a transaction that is not subject to the Uniform Commercial Code as enacted in this State but is governed by the Uniform Commercial Code as enacted in one or more other states with contacts to the transaction, as to which North Carolina law would not apply under G.S. 25-1-301.

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 and minor stylistic changes, subsection (b) of this section is identical to former Section 1-103. The provisions have been combined in this section to reflect the interrelationship between them.

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

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

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

2. Applicability of supplemental principles of law. Subsection (b) states the basic relationship of the Uniform Commercial Code to supplemental bodies of law. The Uniform Commercial Code was drafted against the backdrop of existing bodies of law, including the common law and equity, and relies on those bodies of law to supplement 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, or the purposes and policies those provisions reflect, unless a specific provision of the Uniform Commercial Code provides otherwise. In the absence of such a provision, the Uniform Commercial Code preempts principles of common law and equity that are inconsistent with either its provisions or its purposes and policies.

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

3. Application of subsection (b) to statutes. The primary focus of Section 1-103 is on the relationship between the Uniform Commercial Code and principles of common law and equity as developed by the courts. State law, however, increasingly is statutory. Not only are there a growing number of state statutes addressing specific issues that come within the scope of the Uniform Commercial Code, but in some States many general principles of common law and equity have been codified. When the other law relating to a matter within the scope of the Uniform Commercial Code is a statute, the principles of subsection (b) remain relevant to the court's analysis of the relationship between that statute and the Uniform Commercial Code, but other principles of statutory interpretation that specifically address the interrelationship between statutes will be relevant as well. In some situations, the principles of subsection (b) still will be determinative. For example, the mere fact that an equitable principle is stated in statutory form rather than in judicial decisions should not change the court's analysis of whether the principle can be used to supplement the Uniform Commercial Code - 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.

Legal Periodicals. - For note on choice of law rules in North Carolina, see 48 N.C.L. Rev. 243 (1970).

For article on contract modification under Article 2, see 59 N.C.L. Rev. 335 (1981).

For note on promissory estoppel as regards subcontractors' liability in construction bidding cases, in light of Allen M. Campbell Co. v. Virginia Metal Indus., Inc., 708 F.2d 930 (4th Cir. 1983), see 63 N.C.L. Rev. 387 (1985).

For comment, "Return to the Conservative View of Security Agreements in Commercial Transactions," see 8 Campbell L. Rev. 505 (1986).

CASE NOTES

Editor's Note. - Some of the cases cited below were decided under former G.S. 25-1-102 and G.S. 25-1-103.

The provisions of the UCC are not exclusive and do not preclude an action for unfair and deceptive trade practices. United Va. Bank v. Air-Lift Assocs., 79 N.C. App. 315, 339 S.E.2d 90 (1986).

Chapter 75 is applicable to commercial transactions which are also regulated by the UCC. United Va. Bank v. Air-Lift Assocs., 79 N.C. App. 315, 339 S.E.2d 90 (1986).

Termination of Petroleum Franchise. - The Petroleum Marketing Practices Act, 15 U.S.C. § 2806(a), did not preempt G.S. 75-1.1 or subsection (3) of this section or the common law duty of good faith dealing as they arose in litigation involving wrongful termination of a franchise. L.C. Williams Oil Co. v. Exxon Corp., 627 F. Supp. 864 (M.D.N.C. 1985).

Use of Cases from Other Jurisdictions. - Cases from other jurisdictions, including some opinions by referees in bankruptcy and by the federal district courts, were not necessarily authoritative in this jurisdiction, but the Court of Appeals would look to them for guidance and explanation, remembering that one of the purposes of the Uniform Commercial Code is "to make uniform the law among various jurisdictions." Evans v. Everett, 10 N.C. App. 435, 179 S.E.2d 120 (1971), rev'd on other grounds, 279 N.C. 352, 183 S.E.2d 109 (1971).

A contractual provision expanding seller's damages upon breach of the buyer will be upheld where the contractual provision is reasonable and in good faith. Martin v. Sheffer, 102 N.C. App. 802, 403 S.E.2d 555 (1991).

Parties were free to shape their remedies according to their particular needs, and an expansion of the seller's remedies beyond those specified in the Uniform Commercial Code to include specific performance was neither unreasonable nor unconscionable. Martin v. Sheffer, 102 N.C. App. 802, 403 S.E.2d 555 (1991).

Trust Doctrine. - One principle made applicable by this section is the doctrine of trust pursuit, under which a cestui que trust is enabled to follow the trust funds through changes in their state and form in the hands of the trustee. Michigan Nat'l Bank v. Flowers Mobile Homes Sales, 26 N.C. App. 690, 217 S.E.2d 108 (1975).

Rescission. - Assuming without deciding that rescission remains available to a buyer as a remedy by virtue of this section, the Supreme Court gave effect to a buyer's allegation of "rescission" as an allegation of "revocation of acceptance" since that Code concept more nearly reflected the claims asserted by the buyer. Performance Motors, Inc. v. Allen, 280 N.C. 385, 186 S.E.2d 161 (1972).

Supplier's failure to modify express terms of contract with distributor could not be considered violative of the UCC's concept of good faith, as the purpose of the good faith obligation is to determine the terms to be implied in the contract when the terms are not expressly provided. L.C. Williams Oil Co. v. Exxon Corp., 625 F. Supp. 477 (M.D.N.C. 1985).

Applied in D.G. II, LLC v. Nix, 211 N.C. App. 332, 712 S.E.2d 335 (2011).

Cited in Self-Help Ventures Fund v. Custom Finish, LLC, 199 N.C. App. 743, 682 S.E.2d 746 (2009), dismissed 363 N.C. 856, 694 S.E.2d 392, 2010 N.C. LEXIS 220 (2010).

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 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 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. Section 1.

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

1. This section makes it clear that the use of singular or plural in the text of the Uniform Commercial Code is generally only a matter of drafting style - 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 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.").

NORTH CAROLINA COMMENT

The General Statutes Commission added the second sentence of this section to bring forward the second sentence of former G.S. 25-1-109.

OFFICIAL COMMENT

Source:

New.

1. The federal Electronic Signatures in Global and National Commerce Act, 15 U.S.C. Section 7001 et seq became effective in 2000. Section 102(a) of that Act provides that a State statute may modify, limit, or supersede the provisions of section 101 of that Act with respect to state law if such statute, inter alia, specifies the alternative procedures or requirements for the use or acceptance (or both) of electronic records or electronic signatures to establish the legal effect, validity, or enforceability of contracts or other records, and (i) such alternative procedures or requirements are consistent with Titles I and II of that Act, (ii) such alternative procedures or requirements do not require, or accord greater legal status or effect to, the implementation or application of a specific technology or technical specification for performing the functions of creating, storing, generating, receiving, communicating, or authenticating electronic records or electronic signatures; and (iii) if enacted or adopted after the date of the enactment of that Act, makes specific reference to that Act. Article 1 fulfills the first two of those three criteria; this Section fulfills the third criterion listed above.
2. As stated in this section, however, Article 1 does not modify, limit, or supersede Section 101(c) of the Electronic Signatures in Global and National Commerce Act (requiring affirmative consent from a consumer to electronic delivery of transactional disclosures that are required by state law to be in writing); nor does it authorize electronic delivery of any of the notices described in Section 103(b) of that Act.

PART 2. GENERAL DEFINITIONS AND PRINCIPLES OF INTERPRETATION.

OFFICIAL COMMENTS

Source: Former Section 1-201.

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

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

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

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

1. "Action." Unchanged from former Section 1-201, which was derived from similar definitions in Section 191, Uniform Negotiable Instruments Law; Section 76, Uniform Sales Act; Section 58, Uniform Warehouse Receipts Act; Section 53, Uniform Bills of Lading Act.
2. "Aggrieved party." Unchanged from former Section 1-201.
3. "Agreement." Derived from former Section 1-201. As used in the Uniform Commercial Code the word is intended to include full recognition of usage of trade, course of dealing, course of performance and the surrounding circumstances as effective parts thereof, and of any agreement permitted under the provisions of the Uniform Commercial Code to displace a stated rule of law. Whether an agreement has legal consequences is determined by applicable provisions of the Uniform Commercial Code and, to the extent provided in Section 1-103, by the law of contracts.
4. "Bank." Derived from Section 4A-104.
5. "Bearer." Unchanged from former Section 1-201, which was derived from Section 191, Uniform Negotiable Instruments Law.
6. "Bill of Lading." Derived from former Section 1-201. The reference to, and definition of, an "airbill" has been deleted as no longer necessary.
7. "Branch." Unchanged from former Section 1-201.
8. "Burden of establishing a fact." Unchanged from former Section 1-201.
9. "Buyer in ordinary course of business." Except for minor stylistic changes, identical to former Section 1-201 (as amended in conjunction with the 1999 revisions to Article 9). The major significance of the phrase lies in Section 2-403 and in the Article on Secured Transactions (Article 9).
10. "Conspicuous." Derived from former Section 1-201(10). This definition states the general standard that to be conspicuous a term ought to be noticed by a reasonable person. Whether a term is conspicuous is an issue for the court. Subparagraphs (A) and (B) set out several methods for making a term conspicuous. Requiring that a term be conspicuous blends a notice function (the term ought to be noticed) and a planning function (giving guidance to the party relying on the term regarding how that result can be achieved). Although these paragraphs indicate some of the methods for making a term attention-calling, the test is whether attention can reasonably be expected to be called to it. The statutory language should not be construed to permit a result that is inconsistent with that test.
11. "Consumer." Derived from Section 9-102(a)(25).
12. "Contract." Except for minor stylistic changes, identical to former Section 1-201.
13. "Creditor." Unchanged from former Section 1-201.
14. "Defendant." Except for minor stylistic changes, identical to former Section 1-201, which was derived from Section 76, Uniform Sales Act.
15. "Delivery." Derived from former Section 1-201. The reference to certificated securities has been deleted in light of the more specific treatment of the matter in Section 8-301.
16. "Document of title." Unchanged from former Section 1-201, which was derived from Section 76, Uniform Sales Act. By making it explicit that the obligation or designation of a third party as "bailee" is essential to a document of title, this definition clearly rejects any such result as obtained in Hixson v. Ward, 254 Ill.App. 505 (1929), which treated a conditional sales contract as a document of title. Also the definition is left open so that new types of documents may be included. It is unforeseeable what documents may one day serve the essential purpose now filled by warehouse receipts and bills of lading. Truck transport has already opened up problems which do not fit the patterns of practice resting upon the assumption that a draft can move through banking channels faster than the goods themselves can reach their destination. There lie ahead air transport and such probabilities as teletype transmission of what may some day be regarded commercially as "Documents of Title." The definition is stated in terms of the function of the documents with the intention that any document which gains commercial recognition as accomplishing the desired result shall be included within its scope. Fungible goods are adequately identified within the language of the definition by identification of the mass of which they are a part.
17. "Fault." Derived from former Section 1-201. "Default" has been added to the list of events constituting fault.
18. "Fungible goods." Derived from former Section 1-201. References to securities have been deleted because Article 8 no longer uses the term "fungible" to describe securities. Accordingly, this provision now defines the concept only in the context of goods.
19. "Genuine." Unchanged from former Section 1-201.
20. "Good faith." Former Section 1-201(19) defined "good faith" simply as honesty in fact; the definition contained no element of commercial reasonableness. Initially, that definition applied throughout the Code with only one exception. Former Section 2-103(1)(b) provided that "in 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 Section 1-203.
21. "Holder." Derived from former Section 1-201. The definition has been reorganized for clarity.
22. "Insolvency proceedings." Unchanged from former Section 1-201.
23. "Insolvent." Derived from former Section 1-201. The three tests of insolvency- "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." Substantively identical to former Section 1-201. The test is that of sanction of government, whether by authorization before issue or adoption afterward, which recognizes the circulating medium as a part of the official currency of that government. The narrow view that money is limited to legal tender is rejected.
25. "Organization." The former definition of this word has been replaced with the standard definition used in acts prepared by the National Conference of Commissioners on Uniform State Laws.
26. "Party." Substantively identical to former Section 1-201. Mention of a party includes, of course, a person acting through an agent. However, where an agent comes into opposition or contrast to the principal, particular account is taken of that situation.
27. "Person." The former definition of this word has been replaced with the standard definition used in acts prepared by the National Conference of Commissioners on Uniform State Laws.
28. "Present value." This definition was formerly contained within the definition of "security interest" in former Section 1-201(37).
29. "Purchase." Derived from former Section 1-201. The form of definition has been changed from "includes" to "means."
30. "Purchaser." Unchanged from former Section 1-201.
31. "Record." Derived from Section 9-102(a)(69).
32. "Remedy." Unchanged from former Section 1-201. The purpose is to make it clear that both remedy and right (as defined) include those remedial rights of "self help" which are among the most important bodies of rights under the Uniform Commercial Code, remedial rights being those to which an aggrieved party may resort on its own.
33. "Representative." Derived from former Section 1-201. Reorganized, and form changed from "includes" to "means."
34. "Right." Except for minor stylistic changes, identical to former Section 1-201.
35. "Security Interest." The definition is the first paragraph of the definition of "security interest" in former Section 1-201, with minor stylistic changes. The remaining portion of that definition has been moved to Section 1-203. Note that, because of the scope of Article 9, the term includes the interest of certain outright buyers of certain kinds of property.
36. "Send." Derived from former Section 1-201. Compare "notifies".
37. "Signed." Derived from former Section 1-201. Former Section 1-201 referred to "intention to authenticate"; because other articles now use the term "authenticate," the language has been changed to "intention to adopt or accept." The latter formulation is derived from the definition of "authenticate" in Section 9-102(a)(7). This provision refers only to writings, because the term "signed," as used in some articles, refers only to writings. This provision also makes it clear that, as the term "signed" is used in the Uniform Commercial Code, a complete signature is not necessary. The symbol may be printed, stamped or written; it may be by initials or by thumbprint. It may be on any part of the document and in appropriate cases may be found in a billhead or letterhead. No catalog of possible situations can be complete and the court must use common sense and commercial experience in passing upon these matters. The question always is whether the symbol was executed or adopted by the party with present intention to adopt or accept the writing.
38. "State." This is the standard definition of the term used in acts prepared by the National Conference of Commissioners on Uniform State Laws.
39. "Surety." This definition makes it clear that "surety" includes all secondary obligors, not just those whose obligation refers to the person obligated as a surety. As to the nature of secondary obligations generally, see Restatement (Third), Suretyship and Guaranty Section 1 (1996).
40. "Term." Unchanged from former Section 1-201.
41. "Unauthorized signature." Unchanged from former Section 1-201.
42. "Warehouse receipt." Unchanged from former Section 1-201, which was derived from Section 76(1), Uniform Sales Act; Section 1, Uniform Warehouse Receipts Act. Receipts issued by a field warehouse are included, provided the warehouseman and the depositor of the goods are different persons.
43. "Written" or "writing." Unchanged from former Section 1-201.

The first sentence of paragraph (9) makes clear that a buyer from a pawnbroker cannot be a buyer in ordinary course of business. The second sentence explains what it means to buy "in the ordinary course." The penultimate sentence prevents a buyer that does not have the right to 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.

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.

Over time, however, amendments to the Uniform Commercial Code brought the Article 2 merchant concept of good faith (subjective honesty and objective commercial reasonableness) into other Articles. First, Article 2A explicitly incorporated the Article 2 standard. See Section 2A-103(7). Then, other Articles broadened the applicability of that standard by adopting it for all parties rather than just for merchants. See, e.g., Sections 3-103(a)(4), 4A-105(a)(6), 8-102(a)(10), and 9-102(a)(43). 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 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 these developments, 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.

Effect of Amendments. - Session Laws 2006-112, s. 26, effective October 1, 2006, in subsection (b), inserted "a person in control of a negotiable electronic document of title or" and "negotiable tangible" in subdivision (5), inserted "of title" and "directly or indirectly" in the first sentence and added the second sentence of subdivision (6), inserted "to an electronic document of title means voluntary transfer of control and with respect" and "a tangible" in subdivision (15), rewrote subdivision (16), inserted "negotiable tangible" in subdivision (21)b., added subdivision (21)c., and made minor stylistic changes, and substituted "document of title" for "receipt" in subdivision (42).

Legal Periodicals. - For article concerning liens on personal property not governed by the Uniform Commercial Code, see 44 N.C.L. Rev. 322 (1966).

For article on waiver of defense clauses in consumer contracts, see 48 N.C.L. Rev. 545 (1970).

For note on consignments and the consignor's duty to satisfy public notice requirements, see 13 Wake Forest L. Rev. 507 (1977).

For note on commercial reasonableness and the public sale in North Carolina, see 17 Wake Forest L. Rev. 153 (1981).

For comment, "Return to the Conservative View of Security Agreements in Commercial Transactions," see 8 Campbell L. Rev. 505 (1986).

For article, "Court Adjustment of Long-Term Contracts: An Analysis Under Modern Contract Law," see 1987 Duke L.J. 1 (1987).

For article, "Public Filing and Personal Property Leases: Questions of Definition and Doctrine," see 22 Wake Forest L. Rev. 425 (1987).

For comment, "Is it a Sale or a Lease?: The Implications of Article 2A and Revised U.C.C. Section 1-201(37) in North Carolina," see 18 N.C. Cent. L.J. 187 (1989).

CASE NOTES

Editor's Note. - Some of the cases cited below were decided under former G.S. 25-1-201.

Standing to Seek Stay Relief. - Bank had standing to seek stay relief under 11 U.S.C.S. § 362(d), as the bank had possession of the original note specially endorsed to it. It was not necessary for the bank to establish its ownership of the note and deed of trust in the real property records; nor was it required to prove that each transfer of the note and security agreement was by an authorized seller. In re Sears, - Bankr. - (Bankr. W.D.N.C. May 16, 2013).

The UCC protects buyers in the ordinary course of business from the claims of predecessors in interest who place items into the stream of commerce without warning that they subsequently will claim ownership. North Carolina Nat'l Bank v. Robinson, 78 N.C. App. 1, 336 S.E.2d 666 (1985).

"Conspicuousness". - Determination on conspicuousness is a question of law for the court. Billings v. Joseph Harris Co., 27 N.C. App. 689, 220 S.E.2d 361 (1975), aff'd, 290 N.C. 502, 226 S.E.2d 321 (1976); Angola Farm Supply & Equip. Co. v. FMC Corp., 59 N.C. App. 272, 296 S.E.2d 503 (1982).

Language on herbicide to the effect that seller made "no other express or implied warranty of fitness or merchantability or any other express or implied warranty," which was in darker and larger type than the other language on the label, was "conspicuous," as defined by subdivision (10) of this section, and served to effectively disclaim any implied warranties of merchantability or fitness. Tyson v. Ciba-Geigy Corp., 82 N.C. App. 626, 347 S.E.2d 473 (1986).

Forum selection clause was conspicuous where, although the font used in the forum selection clause could have been made larger, the forum selection language was found in two places on the front page of an agreement, both times in bold print and underlined. Price v. Leasecomm Corp., (M.D.N.C. Mar. 31, 2004).

"Delivery" - Delivery of a deed or instrument to the named payee, subject to the control of the person delivering it or subject to an agreed condition, does not constitute delivery in the eyes of the law. State v. First Resort Properties, 81 N.C. App. 499, 344 S.E.2d 354 (1986).

"Purchase." - "Hanging paragraph" of 11 U.S.C.S. § 1325 did not bar bifurcation of creditor's secured claim because original financing of the car was not within 910-day period prior to bankruptcy filing; a subsequent refinancing did not constitute a "purchase" under G.S. 25-1-201(b)(29) because refinancing did not create an interest in property. In re Cunningham, - Bankr. - (Bankr. W.D.N.C. May 8, 2012).

"Purchaser." - Bank was granted relief from automatic stay based on lack of equity because it had security interest in securities accounts, it was purchaser, and it was identified as person having a security entitlement in accounts. Security interest was perfected because bank, as purchaser, became entitlement holder over accounts, and it had control over all security entitlements held in accounts. In re Bressler, - Bankr. - (Bankr. M.D.N.C. Nov. 6, 2013).

"Send." - Creditor's effort to notify debtors of private sale by sending a first class letter to debtors' last known address was reasonable where there was no evidence that the letter was returned, or that the debtors did not receive such notice, or that the debtors had provided creditor with a new address. In re Marshall, 219 Bankr. 687 (Bankr. M.D.N.C. 1997).

Good faith ("honesty in fact") and "notice," although not synonymous, are inherently intertwined. Therefore, the relation between the two cannot be ignored. Branch Banking & Trust Co. v. Gill, 293 N.C. 164, 237 S.E.2d 21 (1977).

The same facts which call a party's "good faith" into question may also give him "notice of a defense." Branch Banking & Trust Co. v. Gill, 293 N.C. 164, 237 S.E.2d 21 (1977).

Albeit "good faith" is literally defined as "honesty in fact in the conduct or transaction concerned," the Uniform Commercial Code does not permit parties to intentionally keep themselves in ignorance of facts which, if known, would defeat their rights in a negotiable document of title. Branch Banking & Trust Co. v. Gill, 293 N.C. 164, 237 S.E.2d 21 (1977).

Honesty in Fact Required of Supplier. - A good faith duty requiring a supplier of products to disclose its internal strategies to distributors was inappropriate, as the breadth of good faith required was limited to the "honesty in fact" definition of this section, which governed distributor's claim under G.S. 25-1-203, rather than the more expansive "reasonable commercial standards of fair dealing in the trade" definition of G.S. 25-2-103. L.C. Williams Oil Co. v. Exxon Corp., 625 F. Supp. 477 (M.D.N.C. 1985).

"Holder." - The definition of "holder" in subdivision (20) of this section is applicable to G.S. 45-21.16. In re Cooke, 37 N.C. App. 575, 246 S.E.2d 801 (1978).

Ownership is not indispensable to holdership. In re Cooke, 37 N.C. App. 575, 246 S.E.2d 801 (1978).

There was ample evidence that the beneficiaries of a deed of trust were holders of a valid debt where the notes secured by the deed of trust were payable to the beneficiaries or order, the notes were not endorsed, and the notes were in the possession of the original beneficiary-payees. In re Cooke, 37 N.C. App. 575, 246 S.E.2d 801 (1978).

As evidence that a plaintiff is holder of a note is an essential element of a cause of action upon such note, the defendant was entitled to demand strict proof of this element. The incorporation by reference into the complaint of a copy of the note was not in itself sufficient evidence to establish for purposes of summary judgment that the plaintiff was the holder of the note. Liles v. Myers, 38 N.C. App. 525, 248 S.E.2d 385 (1978).

Where a negotiable instrument is made payable to order, one becomes a holder of the instrument when it is properly endorsed and delivered to him, and mere possession of a note payable to order does not suffice to prove ownership or holder status. Econo-Travel Motor Hotel Corp. v. Taylor, 301 N.C. 200, 271 S.E.2d 54 (1980).

Where a negotiable instrument is made payable to order, one becomes a holder of the instrument when it is properly endorsed and delivered to him, and mere possession of a note payable to order does not suffice to prove ownership or holder status. Econo-Travel Motor Hotel Corp. v. Taylor, 301 N.C. 200, 271 S.E.2d 54 (1980).

It is the fact of possession which is significant in determining whether a person is a holder, and the absence of possession defeats that status. Connolly v. Potts, 63 N.C. App. 547, 306 S.E.2d 123 (1983).

Bank which had cancelled and released a promissory note because of a clerical error, and therefore was not a "holder" in the traditional sense, could still meet the burden required by this section by showing that debtor never satisfied the underlying obligation. G.E. Capital Mtg. Servs. v. Neely, 135 N.C. App. 187, 519 S.E.2d 553 (1999).

Party seeking to foreclose did not show that it was the current holder of a note under G.S. 25-1-201(21) as although the photocopies of the note and deed of trust established the required elements under G.S. 45-21.16(d) since the debtors did not dispute that they were correct copies, the photocopies indicated that the original holder of both instruments was not the party seeking to foreclose; the photocopies did not indicate that the original holder negotiated, indorsed, or transferred the note to the party seeking to foreclose. In re Foreclosure of a Deed of Trust Executed by Hannia M. Adams & H. Clayton Adams, 204 N.C. App. 318, 693 S.E.2d 705 (2010).

Trial court erred in permitting a substitute trustee to proceed with foreclosure proceedings under G.S. 45-21.16(d) because there was no competent evidence that the trustee was the owner and holder of a mortgagor's adjustable rate note and deed of trust, and production of an original note at trial did not, in itself, establish that the note was transferred to the party presenting the note with the purpose of giving that party the right to enforce the instrument; the trial court's findings of fact did not address who had possession of the mortgagor's note at the time of the de novo hearing, and without a determination of who had physical possession of the note, the trial court could determine, under the Uniform Commercial Code, G.S. 25-1-201(b)(21), the entity that was the holder of the note. In re Foreclosure by David A. Simpson, P.C., 211 N.C. App. 483, 711 S.E.2d 165 (2011).

Assuming that production of a mortgagor's adjustable rate note was evidence of a transfer of the note pursuant to the Uniform Commercial Code and that a substitute trustee was in possession of the note, that was not sufficient evidence that the trustee was the "holder" of the note under the UCC, G.S. 25-1-201(b)(21); the note was not indorsed to the trustee or to bearer, a prerequisite to confer upon the trustee the status of holder under G.S. 25-1-201(b)(21). In re Foreclosure by David A. Simpson, P.C., 211 N.C. App. 483, 711 S.E.2d 165 (2011).

Substitute trustee did not offer sufficient evidence that a bank, as trustee, was the holder of a mortgagor's adjustable rate note and, thus, the party entitled to proceed with a foreclosure action under G.S. 45-21.16(d) because pursuant to the Uniform Commercial Code, G.S. 25-3-110(c), the note was payable to the bank as trustee; the note was clearly indorsed to the bank as trustee. In re Foreclosure by David A. Simpson, P.C., 211 N.C. App. 483, 711 S.E.2d 165 (2011).

Lender's successor's evidence, including a letter from the Comptroller of the Currency officially certifying a merger between the successor and the lender, was sufficient to establish the merger. The successor, as the surviving corporation after the merger, succeeded by operation of law to the lender's status as holder of a note, pursuant to G.S. 55-11-06(a)(2). In re Foreclosure of N.C. Deed of Trust by Carver Pond I L.P., 217 N.C. App. 352, 719 S.E.2d 207 (2011).

Trustee's summary foreclosure proceeding under G.S. 45.21.16 was properly dismissed because the trustee was not the legal holder of the promissory note executed by the borrower and, therefore, lacked authorization to foreclose on the borrower's property securing the note under a deed of trust. In re Foreclosure of a Deed of Trust of Bass, 217 N.C. App. 244, 720 S.E.2d 18 (2011).

Petitioner was the holder of a note as it had physical possession of the note at the hearing and submitted a copy of that note, and a Non-Home Loan Certificate that stated that petitioner was successor by merger to the mortgagee was not challenged; because of the merger, petitioner had all the rights and powers the mortgagee had before the merger under G.S. 53-17 [repealed]. As the mortgagee was the indorser of the note in blank, petitioner received those rights in the merger. In re Yopp, 217 N.C. App. 488, 720 S.E.2d 769 (2011).

Affiant's conclusion that petitioner was the holder of a note and a deed of trust petitioner sought to foreclose was a legal conclusion and was disregarded; whether an entity was a holder under G.S. 25-1-201(b)(21) was a legal conclusion that was to be determined by a court on the basis of factual allegations. In re Yopp, 217 N.C. App. 488, 720 S.E.2d 769 (2011).

Bank was a holder under G.S. 25-1-201(b)(21) of a note entitled to foreclose under G.S. 45-21.16(d) where: (1) a challenged stamp was a signature and an indorsement; (2) the presumption in favor of the validity of the signature prevailed; (3) the mortgagor was in default; and (4) the indorsements on the note unambiguously indicated an intent to transfer the note under G.S. 25-3-201(b) from each lender to the next, and finally to the bank. In re Foreclosure of a Deed of Trust Executed by Bass, 366 N.C. 464, 738 S.E.2d 173 (2013).

Although the Federal Deposit Insurance Corporation (FDIC) did not produce an original promissory note in response to a debtor's demand for strict proof, the FDIC was the holder of the note within the meaning of G.S. 25-1-201(b)(21) and G.S. 25-3-301 because the note was payable to a bank, the FDIC succeeded to all rights of the bank when it was appointed as the bank's receiver, a true and accurate copy of the note was in the record, and the debtor did not produce any evidence suggesting that the copy of the note in the record was somehow inaccurate or anything but a true and correct copy. FDIC v. Cashion, 720 F.3d 169 (4th Cir. 2013).

Transferee bank attained holder status of the borrowers' promissory note because the bank, which had physical possession of the note, presented the original note in open court, the note was unambiguously indorsed in blank by the vice president of the bank's predecessor in interest, and did not identify a person to whom it was payable. In re Dispute over the Sum of $375,757.47, 240 N.C. App. 505, 771 S.E.2d 800 (2015).

Trial court did not err in authorizing a substitute trustee to proceed with a foreclosure sale of property a buyer purchased at an execution sale because an assignee was the holder of the promissory note; the assignee produced the original note indorsed in blank, and that was sufficient to support the trial court's conclusion that it was the holder of the note. In re Foreclosure of a Deed of Trust Executed by Rawls, 243 N.C. App. 316, 777 S.E.2d 796 (2015).

"Holder" of a promissory note may be a bank or other lending institution that is in possession of a note that has been indorsed in blank; a petitioner's production of an original note indorsed in blank establishes that the petitioner is the holder of the note. In re Foreclosure of a Deed of Trust Executed by Rawls, 243 N.C. App. 316, 777 S.E.2d 796 (2015).

Superior court properly authorized a bank to proceed with foreclosure on property a purchaser bought at a foreclosure sale because the bank was the holder of the promissory note secured by the deed of trust encumbering the property; the note was indorsed in blank, and the bank had possession of the note. Greene v. Tr. Servs. of Carolina, LLC, 244 N.C. App. 583, 781 S.E.2d 664 (2016).

An indorsement by an authorized agent of the "holder" is sufficient to validate the transaction. Summerlin v. National Serv. Indus., Inc., 72 N.C. App. 476, 325 S.E.2d 12 (1985).

"Money." - Debtors' interest in unearned portion of a retainer paid to a law firm was a general intangible and as such, a creditor with a properly perfected security interest had a lien on the balance of the retainer fund; in reaching its determination that the retainer was a general intangible, the bankruptcy court reasoned that the debtors' interest in the retainer was neither a deposit account (because the law firm was not a bank or financial institution) or "money" (because the debtors had only the right to receive a refund on the unearned portion of the retainer fund). In re E-Z Serve Convenience Stores, Inc., 299 B.R. 126 (Bankr. M.D.N.C. 2003), aff'd, 318 Bankr. 637 (M.D.N.C. 2004).

"Rights." - The term "all rights" in an assignment included the contractual right of assignor to receive C.O.D. payment from defendant. Gunby v. Pilot Freight Carriers, Inc., 82 N.C. App. 427, 346 S.E.2d 188 (1986).

"Security Interest." - This section defines "security interest" without reference to whether title is in the vendor or the vendee under the security agreement. Szabo Food Serv., Inc. v. Balentine's, Inc., 285 N.C. 452, 206 S.E.2d 242 (1974).

Clause (b) of subsection (37) is not consistent with the fundamental proposition that to create a security interest the parties must have intended to create one. Szabo Food Serv., Inc. v. Balentine's, Inc., 285 N.C. 452, 206 S.E.2d 242 (1974).

The language of a promissory note considered together with the terms and language of a financing statement may be sufficient to create a security interest in collateral owned by the debtor on the note. Mitchell v. Rock Hill Nat'l Bank (In re Mid-Atlantic Piping Prods., Inc.), 24 Bankr. 314 (Bankr. W.D.N.C. 1982).

A financing statement can serve as a written security agreement to satisfy G.S. 25-9-203(1)(b). Mitchell v. Rock Hill Nat'l Bank (In re Mid-Atlantic Piping Prods., Inc.), 24 Bankr. 314 (Bankr. W.D.N.C. 1982).

Article 9 of this Chapter applies to a transaction intended to create a security interest, regardless of whom the certificate lists as the owner. Carter v. Holland (In re Carraway), 65 Bankr. 51 (Bankr. E.D.N.C. 1986).

Deed of trust executed in 1999 by a borrower, who guaranteed two promissory notes made by the borrower's family business in 2004 and 2005, did not provide a basis for the lender to foreclose on the deed of trust following non-payment of the 2004 and 2005 notes, which did not refer to a security interest or right to foreclose. The 1999 note signed in connection with the deed of trust had been paid, extinguishing the security interest pursuant to G.S. 25-1-201(a)(35). Tr. Servs. v. R.C. Koonts & Sons Masonry, Inc., 202 N.C. App. 317, 688 S.E.2d 737 (2010).

Anti-modification provision prevented debtors' proposed modification of creditor's claim because the creditor was secured only by real property that was the debtors' principal residence and no additional security interest was created by boilerplate language in the deed of trust form that granted creditor rights in an escrow account and miscellaneous proceeds. In re Adams, - Bankr. - (Bankr. E.D.N.C. Nov. 30, 2015).

Security Interest v. Lease. - Where a debtor could terminate her rental agreement for a VCR and a washing machine at any time with no further obligation to continue paying rent, the agreement was a "true" lease, not a security interest, under subdivision (37) of this section. In re Frady, 141 Bankr. 600 (Bankr. W.D.N.C. 1991).

An agreement purporting to lease equipment actually was a secured loan, where the lessee could purchase the equipment for $1 upon termination of the lease, the total monthly lease payments approximated the purchase price, the lessor was a financing company, the lessee was not responsible for maintenance, insurance, taxes, and expenses, and the transaction was referred to as a loan in the parties' agreement. L.C. Williams Oil Co. v. NAFCO Capital Corp., 130 N.C. App. 286, 502 S.E.2d 415 (1998).

Although a bankruptcy debtor had a right to terminate an agreement to lease a storage barn at any time, the agreement was properly treated as a true lease rather than a disguised security agreement based on economic reality, since the lack of evidence concerning the value of the barn prevented any finding that the lessor retained a meaningful reversionary interest, a purchase option was for a nominal amount, or the debtor had a right to gain equity in the barn. In re Johnson, 571 B.R. 167 (Bankr. E.D.N.C. 2017).

No Assignment of Security Interest. - Where a bank loaned money to a debtor and filed a financing statement in 1999 and a partnership entered into a factoring agreement with the debtor but did not file a statement until 2003, the bank had a priority lien on the proceeds at issue because it perfected its security interest several years before the partnership; also, a purported financing statement amendment failed to include a security agreement showing an assignment of the security interest in certain accounts receivable. Rentenbach Constructors, Inc. v. CM P'ship, 181 N.C. App. 268, 639 S.E.2d 16 (2007).

"Signed." - Because of the importance placed upon financing statements, in cases dealing with the debtor's signature on financing statements the courts should apply the liberal definition of "signed" in subsection (39) of this section with caution. Provident Fin. Co. v. Beneficial Fin. Co., 36 N.C. App. 401, 245 S.E.2d 510, cert. denied, 295 N.C. 549, 248 S.E.2d 728 (1978).

Contested stamp from an original lender to a transferee was a signature under G.S. 25-1-201(b)(37) as: (1) it indicated an intent to transfer the debt to a transferee; (2) the original note was transferred in accordance with the stamp's intent; and (3) the stamp showed that it was executed or adopted by the party with the intention to adopt or accept the writing. In re Foreclosure of a Deed of Trust Executed by Bass, 366 N.C. 464, 738 S.E.2d 173 (2013).

"Warehouse Receipt." - "Household Goods Descriptive Inventory" was sufficient to constitute a warehouse receipt for purposes of holding defendant moving company responsible under Art. 7 for its actions as a warehouseman where the document listed each item picked up, its condition, the owner's name, the origin loading address, and was signed and dated by defendant's authorized agent and driver. Tate v. Action Moving & Storage, Inc., 95 N.C. App. 541, 383 S.E.2d 229 (1989), cert. denied, 326 N.C. 54, 389 S.E.2d 104 (1990).

Arbitration Is Neither an "Action" nor a "Judicial Proceeding." - By its terms the limitations period stated in G.S. 25-2-725 applies only to an "action," which, under subsection (1) is a "judicial proceeding," and an arbitration is neither an "action" nor a "judicial proceeding," but a nonjudicial, out-of-court proceeding which makes an action or judicial proceeding unnecessary. In re Cameron, 91 N.C. App. 164, 370 S.E.2d 704 (1988).

Applied in First Fed. Bank v. Aldridge, 230 N.C. App. 187, 749 S.E.2d 289 (2013).

Cited in Singletary v. P & A Invs., Inc., 212 N.C. App. 469, 712 S.E.2d 681 (2011); In re Foreclosure of the Deed of Trust from Manning, 228 N.C. App. 591, 747 S.E.2d 286 (2013).

OFFICIAL COMMENTS

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

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

1. Under subsection (a), a person has notice of a fact when, inter alia, the person has received a notification of the fact in question.
2. As provided in subsection (d), the word "notifies" is used when the essential fact is the proper dispatch of the notice, not its receipt. Compare "Send." When the essential fact is the other party's receipt of the notice, that is stated. Subsection (e) states when a notification is received.
3. Subsection (f) makes clear that notice, knowledge, or a notification, although "received," for instance, by a clerk in Department A of an organization, is effective for a transaction conducted in Department B only from the time when it was or should have been communicated to the individual conducting that transaction.

Legal Periodicals. - For article concerning liens on personal property not governed by the Uniform Commercial Code, see 44 N.C.L. Rev. 322 (1966).

For article on waiver of defense clauses in consumer contracts, see 48 N.C.L. Rev. 545 (1970).

For note on consignments and the consignor's duty to satisfy public notice requirements, see 13 Wake Forest L. Rev. 507 (1977).

OFFICIAL COMMENTS

Source: Former Section 1-201(37).

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

1. An interest in personal property or fixtures which secures payment or performance of an obligation is a "security interest." See Section 1-201(37). Security interests are sometimes created by transactions in the form of leases. Because it can be difficult to distinguish leases that create security interests from those that do not, this section provides rules that govern the determination of whether a transaction in the form of a lease creates a security interest.
2. One of the reasons it was decided to codify the law with respect to leases was to resolve an issue that created considerable confusion in the courts: what is a lease? The confusion existed, in part, due to the last two sentences of the definition of security interest in the 1978 Official Text of the Act, Section 1-201(37). The confusion was compounded by the rather considerable change in the federal, state and local tax laws and accounting rules as they relate to leases of goods. The answer is important because the definition of lease determines not only the rights and remedies of the parties to the lease but also those of third parties. If a transaction creates a lease and not a security interest, the lessee's interest in the goods is limited to its leasehold estate; the residual interest in the goods belongs to the lessor. This has significant implications to the lessee's creditors. "On common law theory, the lessor, since he has not parted with title, is entitled to full protection against the lessee's creditors and trustee in bankruptcy...." 1 G. Gilmore, Security Interests in Personal Property Section 3.6, at 76 (1965).

Under pre-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(35) leaves off. It draws a sharper line between leases and security interests disguised as leases to create greater certainty in commercial transactions.

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

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

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

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

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

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

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

Legal Periodicals. - For article concerning liens on personal property not governed by the Uniform Commercial Code, see 44 N.C.L. Rev. 322 (1966).

For article on waiver of defense clauses in consumer contracts, see 48 N.C.L. Rev. 545 (1970).

For note on consignments and the consignor's duty to satisfy public notice requirements, see 13 Wake Forest L. Rev. 507 (1977).

For note on commercial reasonableness and the public sale in North Carolina, see 17 Wake Forest L. Rev. 153 (1981).

For comment, "Return to the Conservative View of Security Agreements in Commercial Transactions," see 8 Campbell L. Rev. 505 (1986).

For article, "Court Adjustment of Long-Term Contracts: An Analysis Under Modern Contract Law," see 1987 Duke L.J. 1.

For article, "Public Filing and Personal Property Leases: Questions of Definition and Doctrine," see 22 Wake Forest L. Rev. 425 (1987).

For comment, "Is it a Sale or a Lease?: The Implications of Article 2A and Revised U.C.C. Section 1-201(37) in North Carolina," see 18 N.C. Cent. L.J. 187 (1989).

CASE NOTES

Editor's Note. - Some of the cases cited below were decided under former G.S. 25-1-201.

"Security Interest." - This section defines "security interest" without reference to whether title is in the vendor or the vendee under the security agreement. Szabo Food Serv., Inc. v. Balentine's, Inc., 285 N.C. 452, 206 S.E.2d 242 (1974).

Clause (b) of subsection (37) is not consistent with the fundamental proposition that to create a security interest the parties must have intended to create one. Szabo Food Serv., Inc. v. Balentine's, Inc., 285 N.C. 452, 206 S.E.2d 242 (1974).

The language of a promissory note considered together with the terms and language of a financing statement may be sufficient to create a security interest in collateral owned by the debtor on the note. Mitchell v. Rock Hill Nat'l Bank (In re Mid-Atlantic Piping Prods., Inc.), 24 Bankr. 314 (Bankr. W.D.N.C. 1982).

A financing statement can serve as a written security agreement to satisfy G.S. 25-9-203(1)(b). Mitchell v. Rock Hill Nat'l Bank (In re Mid-Atlantic Piping Prods., Inc.), 24 Bankr. 314 (Bankr. W.D.N.C. 1982).

Article 9 of this Chapter applies to a transaction intended to create a security interest, regardless of whom the certificate lists as the owner. Carter v. Holland (In re Carraway), 65 Bankr. 51 (Bankr. E.D.N.C. 1986).

Security Interest v. Lease. - Where a debtor could terminate her rental agreement for a VCR and a washing machine at any time with no further obligation to continue paying rent, the agreement was a "true" lease, not a security interest, under subdivision (37) of this section. In re Frady, 141 Bankr. 600 (Bankr. W.D.N.C. 1991).

An agreement purporting to lease equipment actually was a secured loan, where the lessee could purchase the equipment for $1 upon termination of the lease, the total monthly lease payments approximated the purchase price, the lessor was a financing company, the lessee was not responsible for maintenance, insurance, taxes, and expenses, and the transaction was referred to as a loan in the parties' agreement. L.C. Williams Oil Co. v. NAFCO Capital Corp., 130 N.C. App. 286, 502 S.E.2d 415 (1998).

Equipment Schedule No. 1, which covered a linear feed saw and transformer, between a creditor and a Chapter 11 debtor was a true lease under G.S. 25-1-203(b) because the debtor had the option to purchase the equipment for its fair market value, not a nominal value. In re Southeastern Materials, Inc., 433 B.R. 177 (Bankr. M.D.N.C. 2010).

Creditor had a security interest in equipment under G.S. 25-1-203(b) because the lease with the Chapter 11 debtor was not a true lease. It was not terminable by the lessee and the debtor had the option to purchase the equipment at the end of the term for a nominal value; however, a bank had a first priority security interest in the equipment because the creditor did not file its UCC-1 financing statement within 20 days after the debtor received possession of the equipment as required by G.S. 25-9-324(a). In re Southeastern Materials, Inc., 433 B.R. 177 (Bankr. M.D.N.C. 2010).

Under G.S. 25-1-203, a bank's contract with the debtors was a lease and not a disguised security agreement, where the lease provided the lessee with the right to terminate the lease; moreover, even if the debtors did not have the right to terminate, the contract would still be a true lease, as the residual value of the vehicle at the end of the lease term was $12,423, not a nominal sum, and there was no provision to renew the lease for the remaining economic life of the vehicle. In re Calloway, - Bankr. - (Bankr. M.D.N.C. Oct. 28, 2010).

Bank that held a secured interest in equipment that was owned by a lumber company lost its right to repossess the equipment under a lease it entered with the lumber company when it failed to timely file a UCC-3 Continuation Statement with the North Carolina Secretary of State after the company declared bankruptcy. Although the lapse of a UCC-1 Financing Statement was tolled under former G.S. 25-9-403(2) if a debtor entered bankruptcy or another insolvency proceeding, G.S. 25-9-515(c) deleted the former tolling provision and imposed a new burden on secured parties to be sure that a financing statement did not lapse during a debtor's bankruptcy; the court found that the parties' lease created a security interest under G.S. 25-1-203 that was subject to G.S. 25-9-515(c). In re Miller Bros. Lumber Co., - Bankr. - (Bankr. M.D.N.C. May 7, 2012), rev'd and remanded, 2013 U.S. Dist. LEXIS 152176 (M.D.N.C. 2013).

Creditor was not entitled to reclassification of claims because separate classification of unsecured claims was not done to manipulate creditor's votes on Chapter 11 plan. Class 8, Intercompany Claims, consisted of insider claims whose votes would not be considered for purposes of 11 U.S.C.S. § 1129(a)(10); separate classification of unsecured claims was permitted under 11 U.S.C.S. § 1122(b); Class 4 consisted of assumed contracts and leases as permitted under 11 U.S.C.S. § 1123(b)(2) and was an unimpaired class not entitled to vote; and because transaction labelled as finance lease was a disguised security interest under G.S. 25-1-203(b), the debtor had a good business judgment reason for the classification. In re Lichtin/Wade, LLC, - Bankr. - (Bankr. E.D.N.C. Aug. 8, 2012).

Although a bankruptcy debtor had a right to terminate an agreement to lease a storage barn at any time, the agreement was properly treated as a true lease rather than a disguised security agreement based on economic reality, since the lack of evidence concerning the value of the barn prevented any finding that the lessor retained a meaningful reversionary interest, a purchase option was for a nominal amount, or the debtor had a right to gain equity in the barn. In re Johnson, 571 B.R. 167 (Bankr. E.D.N.C. 2017).

Where debtors' lease agreements applicable to certain trailers were security agreements given satisfaction of Bright-Line Test under North Carolina law, debtors were entitled to reconsideration of court's earlier order terminating stay upon any failure to make adequate protection payments to trailer owners because applying that order prospectively was inequitable; thus, automatic stay continued while debtors performed under their Chapter 13 plan. In re Price, 577 B.R. 643 (Bankr. E.D.N.C. 2017).

OFFICIAL COMMENTS

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.

Legal Periodicals. - For article concerning liens on personal property not governed by the Uniform Commercial Code, see 44 N.C.L. Rev. 322 (1966).

For article on waiver of defense clauses in consumer contracts, see 48 N.C.L. Rev. 545 (1970).

For note on consignments and the consignor's duty to satisfy public notice requirements, see 13 Wake Forest L. Rev. 507 (1977).

For note on commercial reasonableness and the public sale in North Carolina, see 17 Wake Forest L. Rev. 153 (1981).

For comment, "Return to the Conservative View of Security Agreements in Commercial Transactions," see 8 Campbell L. Rev. 505 (1986).

For article, "Court Adjustment of Long-Term Contracts: An Analysis Under Modern Contract Law," see 1987 Duke L.J. 1 (1987).

For article, "Public Filing and Personal Property Leases: Questions of Definition and Doctrine," see 22 Wake Forest L. Rev. 425 (1987).

For comment, "Is it a Sale or a Lease?: The Implications of Article 2A and Revised U.C.C. Section 1-201(37) in North Carolina," see 18 N.C. Cent. L.J. 187 (1989).

CASE NOTES

Editor's Note. - The case cited below was decided under former G.S. 25-1-201.

"Value." - Where a finance company refused to finance a vehicle because debtors failed to qualify, the finance company had no lien to assign to the creditor that ultimately extended financing and recorded its lien post-petition; the creditor's reliance on former G.S. 25-1-201(44) (see now G.S. 25-1-204) was misplaced because there were numerous conditions that had to be satisfied before the finance company became bound to extend credit, none of which were ever satisfied. In re Josephs, - Bankr. - (Bankr. M.D.N.C. July 15, 2005).

OFFICIAL COMMENTS

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.

Legal Periodicals. - For discussion of the "reasonable notice" aspect of warranty law, in light of Maybank v. S.S. Kresge, 302 N.C. 129, 273 S.E.2d 681 (1981), see 61 N.C.L. Rev. 177 (1982).

OFFICIAL COMMENTS

Source: Former Section 1-201(31).

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

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

CASE NOTES

Applied in Dogwood Dev. & Mgmt. Co., LLC v. White Oak Transp. Co., 192 N.C. App. 114, 665 S.E.2d 493 (2008).

Cited in In re Foreclosure of a Deed of Trust Executed by Bass, 366 N.C. 464, 738 S.E.2d 173 (2013).

PART 3. TERRITORIAL APPLICABILITY AND GENERAL RULES.

CASE NOTES

Editor's Note. - Some of the cases cited below were decided under former G.S. 25-1-105.

Purpose. - Purpose for adopting subsection (1) (now subsections (a) and (b)), was to change North Carolina's adherence to lex loci contractus approach, which focuses on place of entering contract and on place of performance to determine which law governs contract disputes. Terry v. Pullman Trailmobile, 92 N.C. App. 687, 376 S.E.2d 47 (1989).

UCC provides its own choice of law rule, modifying the traditional place-of-contractor-performance rule previously applied in this State. Boudreau v. Baughman, 322 N.C. 331, 368 S.E.2d 849 (1988).

Section Changes Rigid Conflict of Laws Rules. - The provisions of this section were intended to change the rigid conflict of laws rules. The old rules must give way to the requirements of the Code. Bernick v. Jurden, 306 N.C. 435, 293 S.E.2d 405 (1982).

This section modifies traditional conflict of law rules. Wohlfahrt v. Schneider, 82 N.C. App. 69, 345 S.E.2d 448 (1986).

The enactment of this section was intended to change this State's rigid choice of law rules with respect to transactions under the UCC. Boudreau v. Baughman, 322 N.C. 331, 368 S.E.2d 849 (1988).

Importance of Section. - As the North Carolina Comment which follows this section points out, this section is one of the most important preliminary sections of the UCC and it modifies this State's conflict of laws rules. Bernick v. Jurden, 306 N.C. 435, 293 S.E.2d 405 (1982).

Transaction causing personal injury to a plaintiff in this State has "an appropriate relation" to this State within the meaning of this section. Bernick v. Jurden, 306 N.C. 435, 293 S.E.2d 405 (1982).

Actions Based on Breach of Warranty. - In determining which jurisdiction's law is applicable to actions based on breach of warranty, a court no longer looks only to where the contract was made or where it was intended to be performed. Rather, it looks to whether the transaction bears an appropriate relation to the State. Bernick v. Jurden, 306 N.C. 435, 293 S.E.2d 405 (1982).

A state's interest in enforcing warranties involves protection of its citizens from commercial movement of defective goods into that state. Boudreau v. Baughman, 322 N.C. 331, 368 S.E.2d 849 (1988).

Where defendant, a North Carolina brake manufacturer, initially distributed his product from North Carolina into Kentucky, and plaintiff's injury as a result of a malfunction of brakes supplied by defendant took place in North Carolina, North Carolina law applied to plaintiff's breach of warranty claim. Mahoney v. Ronnie's Road Serv., 122 N.C. App. 150, 468 S.E.2d 279 (1996), aff'd per curiam, 345 N.C. 631, 481 S.E.2d 85 (1997).

UCC is silent on the meaning of the term "appropriate relation," leaving its interpretation to judicial decision. Boudreau v. Baughman, 322 N.C. 331, 368 S.E.2d 849 (1988).

"Appropriate Relation" Defined. - The North Carolina Supreme Court has interpreted "appropriate relation" to mean "most significant relationship." Boudreau v. Baughman, 322 N.C. 331, 368 S.E.2d 849 (1988).

Stipulation as to Law Governing Contract. - North Carolina permits the parties to a contract to stipulate the state whose law is to govern the contract if that state has a reasonable relationship to the transaction. Kaplan v. RCA Corp., 783 F.2d 463 (4th Cir. 1986).

Where defendant maintained its principal offices in New Jersey, the contract documents were prepared (and finally accepted) in New Jersey, and the antenna which was the subject of the suit was designed, engineered and tested there, New Jersey had a reasonable relationship to the transaction so as to permit the parties to stipulate that its law would govern. Kaplan v. RCA Corp., 783 F.2d 463 (4th Cir. 1986).

Where the transaction bears a reasonable relation to more than one state, the UCC permits the parties to agree with respect to which state's law shall govern their rights and duties. Wohlfahrt v. Schneider, 82 N.C. App. 69, 345 S.E.2d 448 (1986).

Where the goods in question were located in Texas and performance was due in this State, the transaction bore a reasonable relationship to both states, and pursuant to the agreement of the parties, the substantive issues involved would be resolved by application of Texas law. Procedural issues, however, would be determined by application of the law of North Carolina. Wohlfahrt v. Schneider, 82 N.C. App. 69, 345 S.E.2d 448 (1986).

State with the Most Significant Relationship to Warranty Claims. - Where Florida was the place of sale, distribution, delivery, and use of the product, as well as the place of injury, in a products liability action, Florida was the state with the most significant relationship to the warranty claims. Boudreau v. Baughman, 322 N.C. 331, 368 S.E.2d 849 (1988).

Where plaintiff was severely injured while operating tractor-trailer and where plaintiff alleged that accident was caused by defective design, manufacture, and assembly of trailer, because sale and distribution occurred in North Carolina, trial court properly applied North Carolina law to plaintiff's breach of warranty claims. Terry v. Pullman Trailmobile, 92 N.C. App. 687, 376 S.E.2d 47 (1989).

OFFICIAL COMMENTS

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.
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.

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.

Legal Periodicals. - For discussion of the "reasonable notice" aspect of warranty law, in light of Maybank v. S.S. Kresge, 302 N.C. 129, 273 S.E.2d 681 (1981), see 61 N.C.L. Rev. 177 (1982).

For comment, "Return to the Conservative View of Security Agreements in Commercial Transactions," see 8 Campbell L. Rev. 505 (1986).

CASE NOTES

Editor's Note. - Some of the cases cited below were decided under former G.S. 25-1-102.

Use of Cases from Other Jurisdictions. - Cases from other jurisdictions, including some opinions by referees in bankruptcy and by the federal district courts, were not necessarily authoritative in this jurisdiction, but the Court of Appeals would look to them for guidance and explanation, remembering that one of the purposes of the Uniform Commercial Code is "to make uniform the law among various jurisdictions." Evans v. Everett, 10 N.C. App. 435, 179 S.E.2d 120 (1971), rev'd on other grounds, 279 N.C. 352, 183 S.E.2d 109 (1971).

A contractual provision expanding seller's damages upon breach of the buyer will be upheld where the contractual provision is reasonable and in good faith. Martin v. Sheffer, 102 N.C. App. 802, 403 S.E.2d 555 (1991).

Parties were free to shape their remedies according to their particular needs, and an expansion of the seller's remedies beyond those specified in the Uniform Commercial Code to include specific performance was neither unreasonable nor unconscionable. Martin v. Sheffer, 102 N.C. App. 802, 403 S.E.2d 555 (1991).

OFFICIAL COMMENTS

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 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.

Legal Periodicals. - For article, "Stock Equipment for the Bargain in Fact: Trade Usage, Express Terms, and Consistency Under Section 1-205 of the Uniform Commercial Code," see 64 N.C.L. Rev. 777 (1986).

For article, "Court Adjustment of Long-Term Contracts: An Analysis Under Modern Contract Law," see 1987 Duke L.J. 1 (1987).

CASE NOTES

Editor's Note. - Some of the cases cited below were decided under former G.S. 25-1-205.

Trade Usage May Be Matter of Fact or Law. - Ordinarily, the existence and the scope of a usage of trade are questions of fact to be determined by the fact finder. When, however, it is established that a usage of trade is embodied in a written code or similar writing, the interpretation of the writing becomes a question of law for the court. Superior Foods, Inc. v. Harris-Teeter Super Mkts., Inc., 288 N.C. 213, 217 S.E.2d 566 (1975).

Subsequent Conduct. - As a course of dealing is a sequence of "previous conduct" between the parties, conduct of the parties after they entered into an agreement could not be used to show a course of dealing. GATX Logistics, Inc. v. Lowe's Cos., 143 N.C. App. 695, 548 S.E.2d 193 (2001).

Express Contract Definition Prevailed. - In a manufacturer's action against a seller and individuals, alleging the breach of contract and other claims, although the course of dealing between the parties as to the type of products covered by the agreement indicated a narrower definition of "product" than that asserted by the manufacturer, under former G.S. 25-1-205 the express definition in the contract prevailed because it was different from that suggested by the parties' course of dealing and it would have been unreasonable to construe the two consistently; however, while the course of performance could not be interpreted to change the express definition of "product" in the agreement, a reasonable jury could have found that the seller provided sufficient evidence that the course of performance acted as a modification of the express definition, creating a genuine issue of material fact in the resolution of the parties' disputes under the agreement and precluding the grant of either the seller's or the manufacturer's motion for summary judgment. Interstate Narrow Fabrics, Inc. v. Century USA, Inc., 218 F.R.D. 455 (M.D.N.C. 2003).

Arbitration as Usage of Trade. - Pursuant to G.S. 25-1-303(c), cotton purchaser met its burden of proving that arbitration is a usage of trade in the textile industry. Atl. Textiles v. Avondale Inc. (In re Cotton Yarn Antitrust Litig.), 505 F.3d 274 (4th Cir. 2007).

Issue Properly One for Jury Where Course of Dealing Did Not Resolve Issue. - Whether a purported agent for a limited liability corporation (LLC) who purchased large quantities of gasoline but failed to pay for it was personally liable was an issue properly left to the jury, where the extensive course of dealing between the parties under G.S. 25-1-303, did not resolve the issue, and the LLC became insolvent. Henderson Oil Co. v. Cowart, - F. Supp. 2d - (W.D.N.C. Jan. 14, 2008).

OFFICIAL COMMENTS

Source: Former Section 1-203.

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

1. This section sets forth a basic principle running throughout the Uniform Commercial Code. The principle is that in commercial transactions good faith is required in the performance and enforcement of all agreements or duties. While this duty is explicitly stated in some provisions of the Uniform Commercial Code, the applicability of the duty is broader than merely these situations and applies generally, as stated in this section, to the performance or enforcement of every contract or duty within this 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.

Legal Periodicals. - For discussion of the limitations on the obligation of good faith, 4 Duke Law J. 619 (1981).

For note, "Check Kiting: The Inadequacy of the Uniform Commercial Code," Duke L.J. 728 (1986).

For note, "Real Estate Finance - Subordination Causes: North Carolina Subordinates Substance to Form - MCB Ltd. v. McGowan," see 23 Wake Forest L. Rev. 575 (1988).

For article, "Application of the Uniform Commercial Code to Option Contracts for the Sale of Goods, and Implying Promises to Find Sufficient Consideration: Why and How the North Carolina Supreme Court Got It Wrong in Fordham v. Eason," see 23 Campbell L. Rev. 49 (2000).

CASE NOTES

Editor's Note. - Some of the cases cited below were decided under former G.S. 25-1-203.

Honesty in Fact Required of Supplier. - A good faith duty requiring a supplier of products to disclose its internal strategies to distributors was inappropriate, as the breadth of good faith required was limited to the "honesty in fact" definition of former G.S. 25-1-201, which governed distributor's claim under this section, rather than the more expansive "reasonable commercial standards of fair dealing in the trade" definition of former G.S. 25-2-203. L.C. Williams Oil Co. v. Exxon Corp., 625 F. Supp. 477 (M.D.N.C. 1985).

Course of Dealing Modifying Contract Term. - In a manufacturer's action against a seller and individuals, alleging the breach of contract and other claims, the seller's evidence of the parties' dealings under a prior contract and their subsequent dealings under the contract at issue indicated a course of dealing as contemplated in former G.S. 25-1-203 that could have modified the term "product" in the contract. Interstate Narrow Fabrics, Inc. v. Century USA, Inc., 218 F.R.D. 455 (M.D.N.C. 2003).

Good Faith Obligation Not Breached. - Apparel company did not breach its obligation of good faith in the performance of its contract with an apparel assembler where (1) there was no evidence to support the assembler's claim that the company failed to provide it with sufficient cut parts under the contract, rather, the evidence showed that, despite having sufficient cut parts, the assembler often failed to meet the contract production levels, (2) the company did not induce the assembler to invest in T-shirt manufacturing machinery or to rely on alleged promises of continued work as the parties did not negotiate a new agreement regarding T-shirt production, and (3) the company did not unlawfully conceal the fact that it was building its own shirt manufacturing capability with the intent of terminating its relationship with the assembler as the parties' contract stated that the assembler was not the company's sole supplier, the contract gave the company the power to determine the assembler's quantities and to terminate their relationship, and the company did not have any obligation to disclose its future plans to the assembler. Sara Lee Corp. v. Quality Mfg., 201 F. Supp. 2d 608 (M.D.N.C. 2002).

OFFICIAL COMMENTS

Source: Former Section 1-106.

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

1. Subsection (a) is intended to effect three propositions. The first is to negate the possibility of unduly narrow or technical interpretation of remedial provisions by providing that the remedies in the Uniform Commercial Code are to be liberally administered to the end stated in this section. The second is to make it clear that compensatory damages are limited to compensation. They do not include consequential or special damages, or penal damages; and the Uniform Commercial Code elsewhere makes it clear that damages must be minimized. Cf. Sections 1-304, 2-706(1), and 2-712(2). The third purpose of subsection (a) is to reject any doctrine that damages must be calculable with mathematical accuracy. Compensatory damages are often at best approximate: they have to be proved with whatever definiteness and accuracy the facts permit, but no more. Cf. Section 2-204(3).
2. Under subsection (b), any right or obligation described in the Uniform Commercial Code is enforceable by action, even though no remedy may be expressly provided, unless a particular provision specifies a different and limited effect. Whether specific performance or other equitable relief is available is determined not by this section but by specific provisions and by supplementary principles. Cf. Sections 1-103, 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.

Legal Periodicals. - For article, "The Seller's Election of Remedies Under the Uniform Commercial Code: An Expectation Theory," see 23 Wake Forest L. Rev. 429 (1988).

CASE NOTES

Editor's Note. - The case cited below was decided under former G.S. 25-1-106.

Purpose of Point 4 of Official Comment to G.S. 25-2-715. - It was to bring the law into harmony with the market place that the draftsmen of the Uniform Commercial Code said in Point 4 of the Official Comment to G.S. 25-2-715: "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." Gurney Indus., Inc. v. St. Paul Fire & Marine Ins. Co., 467 F.2d 588 (4th Cir. 1972).

OFFICIAL COMMENTS

Source: Former Section 1-107.

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

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

CASE NOTES

Editor's Note. - The case cited below was decided under former G.S. 25-1-107.

Acceptance of Full Payment. - This section does not change the common-law rule regarding acceptance of a "full payment check." Sharpe v. Nationwide Mut. Fire Ins. Co., 62 N.C. App. 564, 302 S.E.2d 893, cert. denied, 309 N.C. 823, 310 S.E.2d 353 (1983).

OFFICIAL COMMENTS

Source: Former Section 1-202.

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

1. This section supplies judicial recognition for documents that are relied upon as trustworthy by commercial parties.
2. This section is concerned only with documents that have been given a preferred status by the parties themselves who have required their procurement in the agreement, and for this reason the applicability of the section is limited to actions arising out of the contract that authorized or required the document. The list of documents is intended to be illustrative and not exclusive.
3. The provisions of this section go no further than establishing the documents in question as prima facie evidence and leave to the court the ultimate determination of the facts where the accuracy or authenticity of the documents is questioned. In this connection the section calls for a commercially reasonable interpretation.
4. Documents governed by this section need not be writings if records in another medium are generally relied upon in the context.

CASE NOTES

Editor's Note. - The case cited below was decided under former G.S. 25-1-202.

The bill of lading is evidence of the fact that the goods were delivered in good condition in the absence of notation or entry thereon to the contrary. American Home Prods. Corp. v. Howell's Motor Freight, Inc., 46 N.C. App. 276, 264 S.E.2d 774 (1980).

While a nonnotated bill of lading was some evidence of good condition at time of receipt, it was not sufficient alone to survive a motion for directed verdict where the bill of lading contained the words "in apparent good order, contents and condition of package unknown." American Home Prods. Corp. v. Howell's Motor Freight, Inc., 46 N.C. App. 276, 264 S.E.2d 774 (1980).

OFFICIAL COMMENTS

Source: Former Section 1-207.

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

1. This section provides machinery for the continuation of performance along the lines contemplated by the contract despite a pending dispute, by adopting the mercantile device of going ahead with delivery, acceptance, or payment "without prejudice," "under protest," "under reserve," "with reservation of all our rights," and the like. All of these phrases completely reserve all rights within the meaning of this section. The section 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.
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.

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.

Legal Periodicals. - For article on contract modification under Article 2, see 59 N.C.L. Rev. 335 (1981).

For survey of 1980 commercial law, see 59 N.C.L. Rev. 1076 (1981).

CASE NOTES

Editor's Note. - Some of the cases cited below were decided under former G.S. 25-1-207.

This section does not apply to a check tendered in full payment of a disputed claim. Thus, a disputed claim for compensation for employment was extinguished when the debtor-employer tendered to the creditor-employee a check marked "account in full" and the creditor deposited the check after striking these words from the check and notified the debtor he was reserving his right to contend for the balance of the claim. Brown v. Coastal Truckways, Inc., 44 N.C. App. 454, 261 S.E.2d 266 (1980).

This section does not apply to a "full payment check," that is a check marked with some indication that it is tendered in full payment of a disputed claim. Barber v. White, 46 N.C. App. 110, 264 S.E.2d 385 (1980).

Reservation of Right to Collect Remainder of Unpaid Account. - Where debtor pays thirty-five percent of an account with checks bearing on the face of one the words "first instalment of agreed settlement" and on the other "final instalment of agreed settlement," the creditor reserves its right to collect the remainder of the unpaid account when it indorses the checks "with reservation of all our rights." Baillie Lumber Co. v. Kincaid Carolina Corp., 4 N.C. App. 342, 167 S.E.2d 85 (1969).

OFFICIAL COMMENTS

Source: Former Section 1-208.

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

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

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

Legal Periodicals. - For note on the operation of a due-on-sale clause in a deed of trust to allow a lender to exact higher interest rates from the grantee of a mortgagor, see 13 Wake Forest L. Rev. 490 (1977).

CASE NOTES

Editor's Note. - Some of the cases cited below were decided under former G.S. 25-1-208.

"Good Faith" Standard Applicable Only to Insecurity Clauses. - This section imposes the "good faith" standard in G.S. 25-1-201(19) (now G.S. 25-1-201(20)) only on insecurity-type clauses. Crockett v. First Fed. Sav. & Loan Ass'n, 289 N.C. 620, 224 S.E.2d 580 (1976).

Insecurity and Default Clauses Distinguished. - Insecurity-type clauses are clearly distinguished from default-type clauses where the right to accelerate is conditioned upon the occurrence of a condition which is within the control of the debtor. Crockett v. First Fed. Sav. & Loan Ass'n, 289 N.C. 620, 224 S.E.2d 580 (1976); In re Foreclosure of Sutton Invs., 46 N.C. App. 654, 266 S.E.2d 686 (1989).

Repeated Occasions for Performance - Because an agreement between the parties did not call for repeated occasions for performance by either party, it did not establish a course of performance. GATX Logistics, Inc. v. Lowe's Cos., 143 N.C. App. 695, 548 S.E.2d 193 (2001).

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.

Tables of Comparable Sections for Chapter 25 (Revised Article 1).

TABLES OF COMPARABLE

SECTIONS FOR

CHAPTER 25, REVISED ARTICLE 1

Former to Present

Editor's Note. - The following table shows G.S. sections from former Chapter 25, Article 1, and their comparable, new revised Chapter 25, Article 1 numbers.

Former Present Section Section 25-1-101 .......................................................... 25-1-101 25-1-102 ................................................ 25-1-102, 25-1-103 25-1-102(3) ....................................................... 25-1-302 25-1-102(4) ....................................................... 25-1-302 25-1-102(5) ....................................................... 25-1-106 25-1-103 .......................................................... 25-1-103 25-1-104 .......................................................... 25-1-104 25-1-105 .......................................................... 25-1-301 25-1-106 .......................................................... 25-1-305 25-1-107 .......................................................... 25-1-306 25-1-108 .......................................................... 25-1-105 25-1-109 .......................................................... 25-1-107 25-1-201 .......................................................... 25-1-201 25-1-201(25), (27) ................................................ 25-1-202 25-1-201(31) ...................................................... 25-1-206 25-1-201(37) ...................................................... 25-1-203 25-1-201(44) ...................................................... 25-1-204 25-1-202 .......................................................... 25-1-307 25-1-203 .......................................................... 25-1-304 25-1-204 .......................................................... 25-1-205 25-1-204(1) ....................................................... 25-1-302 25-1-205 .......................................................... 25-1-303 25-1-207 .......................................................... 25-1-308 25-1-208 .......................................................... 25-1-309 25-1-209 ........................................................... 25-1-310

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.

NORTH CAROLINA COMMENT

This article is entirely new. The Uniform Sales Act, although adopted and in effect in thirty-six states and the District of Columbia, was never adopted in North Carolina.

Cross References. - For rules related to drinking water and limitations on implied warranties as to suppliers of water, see G.S. 130A-315.

Legal Periodicals. - For symposium on the Uniform Commercial Code in North Carolina, see 44 N.C.L. Rev. 525 (1966).

For note on "Products Liability - Sales Warranties of the Uniform Commercial Code," see 46 N.C.L. Rev. 451 (1968).

For symposium on the North Carolina Commercial Code, see 18 Wake Forest L. Rev. 161 (1982).

For survey of 1982 commercial law, see 61 N.C.L. Rev. 1018 (1983).

For note on the conflict between the North Carolina Motor Vehicle Act and the UCC, see N.C.L. Rev. 1156 (1987).

For article, "The Seller's Election of Remedies Under the Uniform Commercial Code: An Expectation Theory," see 23 Wake Forest L. Rev. 429 (1988).

For note, "Real Estate Finance - Subordination Causes: North Carolina Subordinates Substance to Form - MCB Ltd. v. McGowan," see 23 Wake Forest L. Rev. 575 (1988).

CASE NOTES

Applied in Coastal Leasing Corp. v. O'Neal, 103 N.C. App. 230, 405 S.E.2d 208 (1991).

Cited in Boudreau v. Baughman, 322 N.C. 331, 368 S.E.2d 849 (1988); Sunamerica Fin. Corp. v. Bonham, 328 N.C. 254, 400 S.E.2d 435 (1991); United States v. 328 Pounds, More Or Less, Of Wild Am. Ginseng, 347 F. Supp. 2d 241 (W.D.N.C. 2004); Riddle Farm Equip., Inc. v. Boles (In re Boles), - Bankr. - (Bankr. M.D.N.C. Oct. 26, 2004); D.G. II, LLC v. Nix, 213 N.C. App. 220, 713 S.E.2d 140 (2011).

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 1-201.

"Contract for sale". Section 2-106.

"Present sale". Section 2-106.

"Sale". Section 2-106.

NORTH CAROLINA COMMENT

This section sets out the scope of the Code, limiting it to transactions in goods (as defined in GS 25-2-105) and indicates that the article on sales does not apply to transactions intended as security even though in the form of an unconditional contract of sale or to sell. The section also makes clear that the sales article does not impair or repeal any statute regulating sales to consumers, farmers or other specified classes of buyers.

Legal Periodicals. - For survey of 1974 case law on the applicability of the Uniform Commercial Code to the sale of a business, see 53 N.C.L. Rev. 1097 (1975).

For survey of 1978 commercial law, see 57 N.C.L. Rev. 919 (1979).

For note, "Real Estate Finance - Subordination Causes: North Carolina Subordinates Substance to Form - MCB Ltd. v. McGowan," see 23 Wake Forest L. Rev. 575 (1988).

CASE NOTES

Uniform Commercial Code Applied. - Because the contract in issue was a contract for the sale of goods, i.e., a boat, the North Carolina version of the Uniform Commercial Code applied. D.G. II, LLC v. Nix, 211 N.C. App. 332, 712 S.E.2d 335 (2011).

Article Not Applicable to True Lease. - Automobile lease agreement with an option to purchase at fair market value at the termination of the lease was a true lease, and not a future sale, and Article 2 was not applicable thereto. Alpiser v. Eagle Pontiac-GMC-Isuzu, Inc., 97 N.C. App. 610, 389 S.E.2d 293 (1990).

A transaction involving a sale of a tractor in consideration of payments of money and delivery of haulage services by the plaintiff is a sale of goods within the purview of this section. Owens v. Harnett Transf., Inc., 42 N.C. App. 532, 257 S.E.2d 136 (1979).

Because the sale of a mobile home is a "transaction in goods," it is subject to Article 2 of North Carolina's version of the Uniform Commercial Code. Alberti v. Manufactured Homes, Inc., 329 N.C. 727, 407 S.E.2d 819 (1991).

Sale of pharmaceutical drugs is governed by the North Carolina Uniform Commercial Code. IWTMM, Inc. v. Forest Hills Rest Home, 156 N.C. App. 556, 577 S.E.2d 175 (2003).

Mixed Contracts - Contract which a buyer and a seller concluded for the purchase of a mobile home was governed by North Carolina's Uniform Commercial Code because the predominant factor of the contract was the delivery of the mobile home, and services provided to install it were incidental, and the trial court ruled correctly that the buyer and seller's contract reduced the time for filing an action for breach of contract from four years to one year, pursuant to G.S. 25-2-725(1), and that the buyer's action against the seller was time-barred. Hensley v. Ray's Motor Co. of Forest City, Inc., 158 N.C. App. 261, 580 S.E.2d 721 (2003).

New Tractor is a Good. - UCC art. 2, enacted in North Carolina as G.S. 25-2-101 et seq., was controlling in a case where a seller sold and delivered a new tractor to a buyer, but the seller claimed that title to the tractor never passed from the seller to the buyer, because the transaction was a transaction involving a good. Riddle Farm Equip., Inc. v. Boles (In re Boles), - Bankr. - (Bankr. M.D.N.C. Oct. 26, 2004).

Mobile Home. - Mobile home was a good for purposes of application of the Uniform Commercial Code art. 2 under G.S. 25-2-102 as it was movable at the time of identification to the contract for sale under G.S. 25-2-105(1); the mobile home, pursuant to a contract for the sale apart from land, could be severed without material harm thereto, even though it was attached to realty, and the parties could by identification effect a present sale before severance for G.S. 25-2-107(2) purposes. Singletary v. P & A Invs., Inc., 212 N.C. App. 469, 712 S.E.2d 681 (2011).

Limitation of Remedies Clauses Violated Public Policy. - Because it was the policy of the state to protect farmers from the potentially devastating consequences of planting mislabeled seed, a corporation's limitation of remedies clauses were unenforceable against commercial farmers; the farmers were sold mislabeled seed and could only recognize the mistake after planting the seeds, and enforcing the corporation's limitation of remedies clauses would foreclose the possibility of them recovering consequential damages and would violate that policy. Kornegay Family Farms LLC v. Cross Creek Seed, Inc., 370 N.C. 23, 803 S.E.2d 377 (2017).

Applied in HPS, Inc. v. All Wood Turning Corp., 21 N.C. App. 321, 204 S.E.2d 188 (1974); North Carolina Nat'l Bank v. Holshouser, 38 N.C. App. 165, 247 S.E.2d 645 (1978).

Cited in Bank of Alamance v. Isley, 74 N.C. App. 489, 328 S.E.2d 867 (1985); Haywood Street Redevelopment Corp. v. Harry S. Peterson, Co., 120 N.C. App. 832, 463 S.E.2d 564 (1995); In re Surplus Furn. Liquidators, Inc., 199 Bankr. 136 (Bankr. M.D.N.C. 1995); Thermal Design, Inc. v. M&M Builders, Inc., 207 N.C. App. 79, 698 S.E.2d 516 (2010); Reeder v. Carter, 226 N.C. App. 270, 740 S.E.2d 913 (2013); SAS Inst., Inc. v. World Programming Ltd., - F. Supp. 2d - (E.D.N.C. June 17, 2016).

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 2-210 and Comment thereon.

Point 2: Section 1-201. Definitional Cross References:

"Person". Section 1-201.

NORTH CAROLINA COMMENT

There appears to be no specific change in prior North Carolina law attributable to this section. There were, however, no statutes related to this section and the cases do not expressly define the terms treated here. They are expressly and explicitly defined in the Code because of the UCC's general concern for the precise use of language in cross references.

Effect of Amendments. - Session Laws 2006-112, ss. 2 and 27, effective October 1, 2006, repealed subdivision (1)(b) and in subsection (3), added "'Control' as provided in G.S. 25-7-106 and" at the beginning of the introductory paragraph and made minor stylistic changes throughout the subsection.

Legal Periodicals. - For article, "North Carolina's New Products Liability Act: A Critical Analysis," see 16 Wake Forest L. Rev. 171 (1980).

For note on North Carolina's automobile warranty legislation, see 66 N.C.L. Rev. 1080 (1988).

CASE NOTES

Right to assign legal rights is not exclusively governed by the UCC. Even if a party technically is not a "buyer" under the UCC, as long as it has a valid claim for breach of contract against defendant, the common law will permit its assignment. Sharrard, McGee & Co. v. Suz's Software, Inc., 100 N.C. App. 428, 396 S.E.2d 815 (1990).

Privity Not Defined. - North Carolina's Uniform Commercial Code does not define "privity" and there are no governing Code provisions dispositive of this issue. Sharrard, McGee & Co. v. Suz's Software, Inc., 100 N.C. App. 428, 396 S.E.2d 815 (1990).

Evidence of Good Faith Required by G.S. 20-305 Held Sufficient. - Where manufacturer gave dealer at least a year's notice concerning the likelihood of cancellation, manufacturer treated dealer no differently than it did any of its other heavy-duty truck franchisees; and more importantly, where there was no evidence of dishonesty by manufacturer, the record was replete with evidence of manufacturer's good faith in cancelling its heavy-duty truck franchises with dealer under G.S. 20-305. Carolina Truck & Body Co. v. GMC, 102 N.C. App. 262, 402 S.E.2d 135, cert. denied, 329 N.C. 266, 407 S.E.2d 831 (1991).

Manufacturer's withdrawal from the heavy duty truck market was in good faith as required by G.S. 20-305(6). Good faith is defined in G.S. 20-286(8b) as honest in fact and the observation of reasonable commercial standards of fair dealing in the trade as defined and interpreted in this section. Carolina Truck & Body Co. v. GMC, 102 N.C. App. 262, 402 S.E.2d 135, cert. denied, 329 N.C. 266, 407 S.E.2d 831 (1991).

Honesty in Fact Required of Supplier. - A good faith duty requiring a supplier of products to disclose its internal strategies to distributors was inappropriate, as the breadth of good faith required was limited to the "honesty in fact" definition of G.S. 25-1-201, which governed distributor's claim under G.S. 25-1-203, rather than the more expansive "reasonable commercial standards of fair dealing in the trade" definition of this section. L.C. Williams Oil Co. v. Exxon Corp., 625 F. Supp. 477 (M.D.N.C. 1985).

Manufacturers of products other than self-propelled motor vehicles who are not in a direct contractual relationship with ultimate purchasers are, by implication, not "sellers" against whom purchasers may revoke acceptance. Alberti v. Manufactured Homes, Inc., 329 N.C. 727, 407 S.E.2d 819 (1991).

Good Faith Obligation Not Breached. - Apparel company did not breach its obligation of good faith in the performance of its contract with an apparel assembler where (1) there was no evidence to support the assembler's claim that the company failed to provide it with sufficient cut parts under the contract, rather, the evidence showed that, despite having sufficient cut parts, the assembler often failed to meet the contract production levels, (2) the company did not induce the assembler to invest in T-shirt manufacturing machinery or to rely on alleged promises of continued work as the parties did not negotiate a new agreement regarding T-shirt production, and (3) the company did not unlawfully conceal the fact that it was building its own shirt manufacturing capability with the intent of terminating its relationship with the assembler as the parties' contract stated that the assembler was not the company's sole supplier, the contract gave the company the power to determine the assembler's quantities and to terminate their relationship, and the company did not have any obligation to disclose its future plans to the assembler. Sara Lee Corp. v. Quality Mfg., 201 F. Supp. 2d 608 (M.D.N.C. 2002).

Applied in Superior Foods, Inc. v. Harris-Teeter Super Mkts., Inc., 288 N.C. 213, 217 S.E.2d 566 (1975); Harrington Mfg. Co. v. Logan Tontz Co., 40 N.C. App. 496, 253 S.E.2d 282 (1979); Branch Banking & Trust Co. v. Creasy, 44 N.C. App. 289, 260 S.E.2d 782 (1979); Coastal Leasing Corp. v. O'Neal, 103 N.C. App. 230, 405 S.E.2d 208 (1991); Crews v. W.A. Brown & Son, 106 N.C. App. 324, 416 S.E.2d 924 (1992).

Cited in B.B. Walker Co. v. Ashland Chem. Co., 474 F. Supp. 651 (M.D.N.C. 1979); Southern of Rocky Mount, Inc. v. Woodward Specialty Sales, Inc., 52 N.C. App. 549, 279 S.E.2d 32 (1981); Halprin v. Ford Motor Co., 107 N.C. App. 423, 420 S.E.2d 686 (1992); McCorkle v. Aeroglide Corp., 115 N.C. App. 651, 446 S.E.2d 145 (1994); Sale Chevrolet, Buick, BMW, Inc. v. Peterbilt of Florence, Inc., 133 N.C. App. 177, 514 S.E.2d 747 (1999); Henderson Oil Co. v. Cowart, - F. Supp. 2d - (W.D.N.C. Jan. 14, 2008).

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 transaction 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 1-102 and 1-203.

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

"Bank". Section 1-201.

"Buyer". Section 2-103.

"Contract for sale". Section 2-106.

"Document of title". Section 1-201.

"Draft". Section 3-104.

"Goods". Section 2-105.

"Person". Section 1-201.

"Purchase". Section 1-201.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

Subsections (1) and (3): One of the unique features of the sales article of the Code finds its genesis in this section. At various points in the Code different standards are applied to "merchants" as opposed to "nonmerchant" buyers and sellers. (See, e.g., inter alia, GS 25-2-201, which provides a special exception to the statute of frauds applicable only to "merchants" wherein a merchant is held liable in contract of sale or to sell upon his receipt of a memorandum and his failure to object to its terms. Also note that GS 25-2-205, which relates to firm offers made without consideration, applies only to "merchants." GS 25-2-207 sets out special provisions as to the effect of the inclusion of additional or different terms to a contract in an acceptance "between merchants." GS 25-2-209 (2) establishes special rules as to limitations or modifications of contracts between "merchants" and "nonmerchants." See also GS 25-2-603, imposing special duties on a "merchant buyer" who has rightfully rejected goods sent by seller, and GS 25-2-605 (1) (b), where merchant seller may request written specification of defects upon which a rejection is based if the buyer is also a merchant. See also GS 25-2-314, relating to the implied warranty of merchantability which under the UCC applies only when the sale is by a seller who is a "merchant.")

The distinctions between "merchants" and "nonmerchants" and as to contracts "between merchants" are new to North Carolina law and result in significant differences of treatment resulting in significant changes in North Carolina law in distinguishing legal relations created between those who are essentially "professionals" and those who are not.

Subsection (2), defining "financing agency," is new in North Carolina law.

Effect of Amendments. - Session Laws 2006-112, s. 28, effective October 1, 2006, inserted "or are associated with" in the first sentence of subsection (2).

Legal Periodicals. - For survey of 1976 case law on commercial law, see 55 N.C.L. Rev. 943 (1977).

For survey of 1977 commercial law, see 56 N.C.L. Rev. 915 (1978).

For note on farmers as merchants under the Uniform Commercial Code, see 1 Campbell L. Rev. 141 (1979).

For article, "Who's Afraid of the CISG? - Why North Carolina Practitioners Should Learn a Thing or Two About the 1980 United Nations Convention on Contracts for the International Sale of Goods," see 30 Campbell L. Rev. 275 (2008).

CASE NOTES

Whether a person is a merchant is a question of law. Cudahy Foods Co. v. Holloway, 55 N.C. App. 626, 286 S.E.2d 606 (1982).

Focus in Determining Who Is Merchant. - The mere fact that one is "in business" does not, without more, give rise to the conclusive presumption that by his occupation, the businessman holds himself out as having knowledge peculiar to the practices involved in the transaction. The focus remains on the occupation or type of business as it relates to the subject matter of the transaction. Cudahy Foods Co. v. Holloway, 55 N.C. App. 626, 286 S.E.2d 606 (1982).

Whether Farmer Is "Merchant" Is Matter for Proof. - Since the growing and marketing of corn and soybeans is an important part of the agricultural economy of the area, and the procedures for marketing these crops are well known, it cannot be said that a particular farmer or grower is not a "merchant" within the code definition; rather, this is a matter for proof. Currituck Grain, Inc. v. Powell, 28 N.C. App. 563, 222 S.E.2d 1 (1976).

Evidence Sufficient to Support Finding That Farmer Was "Merchant". - The evidence that the defendant was a farmer raising corn and soybeans was sufficient to support a jury's finding that the defendant by his occupation held himself out as having knowledge or skill peculiar to corn and soybeans. This would put him within the statutory definition of merchant. There also was sufficient evidence to support a jury's finding that the defendant by his occupation held himself out as having knowledge or skill peculiar to the practice of dealing in corn and soybeans which would also put him within the statutory definition of merchant. Currituck Grain, Inc. v. Powell, 38 N.C. App. 7, 246 S.E.2d 853 (1978).

Vehicle Dealerships as Merchants. - A dealership that sold a used car and a second dealership that accepted it in trade from the purchaser were merchants charged with having knowledge or skill peculiar to the practices of their business transactions and were held to a higher standard of sophistication than non-merchants because they were professionals. Sale Chevrolet, Buick, BMW, Inc. v. Peterbilt of Florence, Inc., 133 N.C. App. 177, 514 S.E.2d 747 (1999).

Isolated Purchase Unrelated to Buyer's Business. - The familiarity with trade customs test is not so broad as to extend to the isolated purchase of a type of goods unrelated and unnecessary to the business or occupation of the buyer. Cudahy Foods Co. v. Holloway, 55 N.C. App. 626, 286 S.E.2d 606 (1982).

Applied in Rose v. Epley Motor Sales, 288 N.C. 53, 215 S.E.2d 573 (1975); Coffer v. Standard Brands, Inc., 30 N.C. App. 134, 226 S.E.2d 534 (1976); Batiste v. American Home Prods. Corp., 32 N.C. App. 1, 231 S.E.2d 269 (1977); Reid v. Eckerds Drugs, Inc., 40 N.C. App. 476, 253 S.E.2d 344 (1979); Maybank v. S.S. Kresge Co., 46 N.C. App. 687, 266 S.E.2d 409 (1980); Coastal Leasing Corp. v. O'Neal, 103 N.C. App. 230, 405 S.E.2d 208 (1991).

Cited in Preston v. Thompson, 53 N.C. App. 290, 280 S.E.2d 780 (1981); Southern of Rocky Mount, Inc. v. Woodward Specialty Sales, Inc., 52 N.C. App. 549, 279 S.E.2d 32 (1981); Goodman v. Wenco Mgt., 100 N.C. App. 108, 394 S.E.2d 832 (1990); Ismael v. Goodman Toyota, 106 N.C. App. 421, 417 S.E.2d 290 (1992); Design Plus Store Fixtures, Inc. v. Citro Corp., 131 N.C. App. 581, 508 S.E.2d 825 (1998); Greene v. GMC, 261 F. Supp. 2d 414 (W.D.N.C. 2003); Singletary v. P & A Invs., Inc., 212 N.C. App. 469, 712 S.E.2d 681 (2011); State v. Fish, 229 N.C. App. 584, 748 S.E.2d 65 (2013), review denied 367 N.C. 292, 753 S.E.2d 784, 2014 N.C. LEXIS 85 (2014).

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:
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.

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).

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

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

Point 5: Section 2-501.

See also Section 1-201. Definitional Cross References:

"Buyer". Section 2-103.

"Contract". Section 1-201.

"Contract for sale". Section 2-106.

"Fungible". Section 1-201.

"Money". Section 1-201.

"Present sale". Section 2-106.

"Sale". Section 2-106.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

Subsection (1), defining "goods," accords with North Carolina cases. See Vaughan v. Town of Murfreesboro, 96 N.C. 317, 2 S.E. 676 (1887); Pippin v. Ellison, 34 N.C. 61 (1851), distinguishing "goods" from choses in action but making the term embrace not only tangible inanimate property such as furniture, farming utensils, corn, etc., but also slaves, horses, cattle, hogs, etc. Growing crops can also be dealt with as personalty. See Odom v. Clark, 146 N.C. 544, 60 S.E. 513 (1908). Unborn animals are likewise the subject of sales as "goods." See Fonville v. Casey, 5 N.C. 389 (1810).

Subsection (2) accords with DeVane v. Fennell, 24 N.C. 36 (1841), and Heiser v. Mears, 120 N.C. 443, 27 S.E. 117 (1897), that no interest passes in goods until in existence and identified, and pending their existence or identification, a contract relating to their sale is only a contract "to sell."

Subsection (3) accords with prior North Carolina law that there may be a sale of a part interest in an identified chattel. See Bullman v. Edney, 232 N.C. 465, 61 S.E.2d 338 (1950), creating a tenancy in common in personalty.

Subsection (4) changes the law in North Carolina. See the case of Waldo v. Belcher, 33 N.C. 609 (1850), which held that a sale of 2800 of 3100 bushels of stored corn did not pass title because not sufficiently identified to the contract. The UCC provision accords with G.S. 6 (1) of the Uniform Sales Act and follows what is known as the "American Rule" as to the sale of fungible goods.

Subsections (5) and (6) have no statutory or decisional parallel in North Carolina law.

Legal Periodicals. - For note discussing liquidated damages, specific performance and other remedies for breach of cotton sales contracts, see 53 N.C.L. Rev. 579 (1974).

For survey of 1974 case law on the applicability of the Uniform Commercial Code to the sale of a business, see 53 N.C.L. Rev. 1097 (1975).

For note, "Real Estate Finance - Subordination Causes: North Carolina Subordinates Substance to Form - MCB Ltd. v. McGowan," see 23 Wake Forest L. Rev. 575 (1988).

For casenote: "Brevorka v. Wolfe Construction, Inc.: Did I Just Waive My Rights to the Implied Warranty of Workmanlike Construction?," see 26 N.C. Cent. L.J. 59 (2003).

CASE NOTES

The term "goods" includes an automobile within the meaning of this section. Gillespie v. AMC, 51 N.C. App. 535, 277 S.E.2d 100 (1981).

New Tractor Is a Good. - UCC art. 2, enacted in North Carolina as G.S. 25-2-101 et seq., was controlling in a case where a seller sold and delivered a new tractor to a buyer, but the seller claimed that title to the tractor never passed from the seller to the buyer, because the transaction was a transaction involving a good. Riddle Farm Equip., Inc. v. Boles (In re Boles), - Bankr. - (Bankr. M.D.N.C. Oct. 26, 2004).

But Not Real Estate. - Real estate does not fall under the definition of "goods." Cudahy Foods Co. v. Holloway, 55 N.C. App. 626, 286 S.E.2d 606 (1982).

Mobile Home - Contract which a buyer and a seller concluded for the purchase of a mobile home was governed by North Carolina's Uniform Commercial Code because the predominant factor of the contract was the delivery of the mobile home, and services provided to install it were incidental, and the trial court ruled correctly that the buyer and seller's contract reduced the time for filing an action for breach of contract from four years to one year, pursuant to G.S. 25-2-725(1), and that the buyer's action against the seller was time-barred. Hensley v. Ray's Motor Co. of Forest City, Inc., 158 N.C. App. 261, 580 S.E.2d 721 (2003).

Mobile home was a good for purposes of application of the Uniform Commercial Code art. 2 under G.S. 25-2-102 as it was movable at the time of identification to the contract for sale under G.S. 25-2-105(1); the mobile home, pursuant to a contract for the sale apart from land, could be severed without material harm thereto, even though it was attached to realty, and the parties could by identification effect a present sale before severance for G.S. 25-2-107(2) purposes. Singletary v. P & A Invs., Inc., 212 N.C. App. 469, 712 S.E.2d 681 (2011).

Sale of spinal scanner was sale of goods; thus, sales transaction was governed by UCC. Muther-Ballenger v. Giffin Elec. Consultants, Inc., 100 N.C. App. 505, 397 S.E.2d 247 (1990).

The sale of potable water constituted a sale of goods under this article. Mulberry-Fairplains Water Ass'n v. Town of N. Wilkesboro, 105 N.C. App. 258, 412 S.E.2d 910 (1992).

Medical professionals do not engage in the sale of "goods" when they either issue a prescription for a drug or prepare and fit dentures. Inherent in the legislation is the recognition that the essence of the transaction between the retail seller and the consumer relates to the article sold, and that the seller is in the business of supplying the product to the consumer. It is the product and that alone for which he is paid. The physician offers his professional services and skill. It is the professional services and his skill for which he is paid, and they are the essence of the relationship between him and his patient. Cameron v. New Hanover Mem. Hosp., 58 N.C. App. 414, 293 S.E.2d 901, cert. denied and appeal dismissed, 307 N.C. 127, 297 S.E.2d 399 (1982).

Sale of pharmaceutical drugs is governed by the North Carolina Uniform Commercial Code. IWTMM, Inc. v. Forest Hills Rest Home, 156 N.C. App. 556, 577 S.E.2d 175 (2003).

Applied in Rose v. Epley Motor Sales, 288 N.C. 53, 215 S.E.2d 573 (1975).

Cited in HPS, Inc. v. All Wood Turning Corp., 21 N.C. App. 321, 204 S.E.2d 188 (1974); Currituck Grain, Inc. v. Powell, 28 N.C. App. 563, 222 S.E.2d 1 (1976); Preston v. Thompson, 53 N.C. App. 290, 280 S.E.2d 780 (1981); Parker Marking Sys. v. Diagraph-Bradley Indus., Inc., 80 N.C. App. 177, 341 S.E.2d 92 (1986); Muther-Ballenger v. Giffin Elec. Consultants, Inc., 100 N.C. App. 505, 397 S.E.2d 247 (1990); Goodman v. Wenco Mgt., 100 N.C. App. 108, 394 S.E.2d 832 (1990); Buffaloe v. Hart, 114 N.C. App. 52, 441 S.E.2d 172 (1994); First Atl. Mgt. Corp. v. Dunlea Realty Co., 131 N.C. App. 242, 507 S.E.2d 56 (1998); Design Plus Store Fixtures, Inc. v. Citro Corp., 131 N.C. App. 581, 508 S.E.2d 825 (1998); United States v. 328 Pounds, More Or Less, Of Wild Am. Ginseng, 347 F. Supp. 2d 241 (W.D.N.C. 2004); Thermal Design, Inc. v. M&M Builders, Inc., 207 N.C. App. 79, 698 S.E.2d 516 (2010); Patterson v. City of Gastonia, 220 N.C. App. 233, 725 S.E.2d 82 (2012).

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 1-203, 1-205, 2-208 and 2-508. Definitional Cross References:

"Agreement". Section 1-201.

"Buyer". Section 2-103.

"Contract". Section 1-201.

"Goods". Section 2-105.

"Party". Section 1-201.

"Remedy". Section 1-201.

"Rights". Section 1-201.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

No significant change in North Carolina law is perceived as a result of this section which serves mainly to fill out the general aims of the Code to provide a self-sufficient statement of the law of sales.

Legal Periodicals. - For survey of 1977 commercial law, see 56 N.C.L. Rev. 915 (1978).

CASE NOTES

Existence of Warranties as Showing Standard for Conformity. - The existence of any express or implied warranties would be relevant to show the standard to which the goods were supposed to conform. Harrington Mfg. Co. v. Logan Tontz Co., 40 N.C. App. 496, 253 S.E.2d 282, cert. denied, 297 N.C. 454, 256 S.E.2d 806 (1979).

Lease Held Not a Future Sale. - Automobile lease agreement with an option to purchase at fair market value at the termination of the lease was a true lease, and not a future sale, and Article 2 was not applicable thereto. Alpiser v. Eagle Pontiac-GMC-Isuzu, Inc., 97 N.C. App. 610, 389 S.E.2d 293 (1990).

Software License Not a Sale of Goods. - In a fraudulent inducement suit by a software licensor against the licensee for entering the license with intent to use the software to develop a competing product, the Uniform Commercial Code's limitations on consequential damages did not apply because the license to use software was not a sale of goods under G.S. 25-2-106(1), but a license with no title passing. SAS Inst., Inc. v. World Programming Ltd., - F. Supp. 2d - (E.D.N.C. June 17, 2016).

Applied in Gillispie v. Great Atl. & Pac. Tea Co., 14 N.C. App. 1, 187 S.E.2d 441 (1972); Superior Foods, Inc. v. Harris-Teeter Super Mkts., Inc., 288 N.C. 213, 217 S.E.2d 566 (1975); Batiste v. American Home Prods. Corp., 32 N.C. App. 1, 231 S.E.2d 269 (1977); North Carolina Nat'l Bank v. Holshouser, 38 N.C. App. 165, 247 S.E.2d 645 (1978); Abbott v. Blackwelder Furn. Co., 33 Bankr. 399 (W.D.N.C. 1983); In re Cunningham, - Bankr. - (Bankr. W.D.N.C. May 8, 2012).

Cited in United Roasters, Inc. v. Colgate-Palmolive Co., 485 F. Supp. 1041 (E.D.N.C. 1979); Southern of Rocky Mount, Inc. v. Woodward Specialty Sales, Inc., 52 N.C. App. 549, 279 S.E.2d 32 (1981); Smith v. Cessna Aircraft Co., 571 F. Supp. 433 (M.D.N.C. 1983); Parker Marking Sys. v. Diagraph-Bradley Indus., Inc., 80 N.C. App. 177, 341 S.E.2d 92 (1986); Parker Marking Sys. v. Diagraph-Bradley Indus., Inc., 80 N.C. App. 177, 341 S.E.2d 92 (1986); Stimpson Hosiery Mills, Inc. v. Pam Trading Corp., 98 N.C. App. 543, 392 S.E.2d 128 (1990); Coastal Leasing Corp. v. T-Bar S Corp., 128 N.C. App. 379, 496 S.E.2d 795 (1998); Singletary v. P & A Invs., Inc., 212 N.C. App. 469, 712 S.E.2d 681 (2011).

CASE NOTES

Contracts for the sale of timber to be cut are governed by Article 2 of the UCC pursuant to subsection (2) of this section; accordingly, the controlling statute is G.S. 25-2-725(1), which provides for a four year period of limitation, and not the three year statute of limitations in G.S. 1-52. Mills v. New River Wood Corp., 77 N.C. App. 576, 335 S.E.2d 759 (1985).

Trespass to Chattel. - A dispute over a trespass to timber where the claim of a possessory interest arises under a contract for sale of timber should be settled using a trespass to chattel analysis because such timber is classified as goods under North Carolina law. Fordham v. Eason, 351 N.C. 151, 521 S.E.2d 701 (1999).

Where, under the Uniform Commercial Code, defendants/loggers had a valid contract for the sale of timber when plaintiff/logger, who held only an option to purchase and had given no consideration to finalize the contract, entered and removed the timber from defendant/owners' land, said removal was unauthorized and resulted in a trespass to chattel. Fordham v. Eason, 351 N.C. 151, 521 S.E.2d 701 (1999).

Mobile Home. - Mobile home was a good for purposes of application of the Uniform Commercial Code art. 2 under G.S. 25-2-102 as it was movable at the time of identification to the contract for sale under G.S. 25-2-105(1); the mobile home, pursuant to a contract for the sale apart from land, could be severed without material harm thereto, even though it was attached to realty, and the parties could by identification effect a present sale before severance for G.S. 25-2-107(2) purposes. Singletary v. P & A Invs., Inc., 212 N.C. App. 469, 712 S.E.2d 681 (2011).

Cited in Fisher v. Elmore, 610 F. Supp. 123 (E.D.N.C. 1985); Fisher v. Elmore, 802 F.2d 771 (4th Cir. 1986).

PART 2. FORM, FORMATION AND READJUSTMENT OF CONTRACT.

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 re-phrased; 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.
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.
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.

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.

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

Part performance by the buyer requires the delivery of something by him 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.

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 1-201, 2-202, 2-207, 2-209 and 2-304. Definitional Cross References:

"Action". Section 1-201.

"Between merchants". Section 2-104.

"Buyer". Section 2-103.

"Contract". Section 1-201.

"Contract for sale". Section 2-106.

"Goods". Section 2-105.

"Notice". Section 1-201.

"Party". Section 1-201.

"Reasonable time". Section 1-204.

"Sale". Section 2-106.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

The statute of frauds relating to the sale of goods, while at one time in effect in North Carolina, has not been in force in this State since 1792. See Odom v. Clark, 146 N.C. 544, 60 S.E. 513 (1908). This entire section is new to the law of North Carolina.

North Carolina, however, does have the statute of frauds as it relates to real property transactions. The statute of frauds provision of the UCC, therefore, will be considered in the context of North Carolina's current decisions relating to the statute of frauds:

The second sentence of subsection (1) of GS 25-2-201 provides that a writing is not insufficient to satisfy the statute of frauds because it omits or incorrectly states a term; but that a contract is not enforceable beyond the quantity of goods shown in writing if terms are omitted in the contract. North Carolina law provides in the statute of frauds cases that a memorandum of contract to satisfy the statute must embody the terms of the contract, the names of the vendor and vendee, a description of the property to be transferred and that it should be signed by the party to be charged therewith or by someone lawfully authorized by the party to be charged. The essential terms of the contract, the price and a description of the property to be transferred must be in the contract. See Harvey v. Linker, 226 N.C. 711, 40 S.E.2d 202 (1946); Hall v. Misenheimer, 137 N.C. 183, 49 S.E. 104 (1904); Shepherd v. Duke Power Co., 140 F. Supp. 27 (M.D.N.C. 1926). But see, even in North Carolina, the cases of Bateman v. Hopkins, 157 N.C. 470, 73 S.E. 133 (1911), and Mizell v. Burnett, 49 N.C. 249 (1857), which hold that if the action is against the vendor on a contract to sell land, it is not required for the validity of the contract that the consideration appear in the writing and parol evidence is admissible to show the purchase price.

This UCC provision, while requiring a memorandum and while requiring application of the statute of frauds to sales of personalty, lessens the rigid requirements of the statute of frauds in effect in North Carolina as now applied to realty, which requires that every essential term of a contract must be in the memorandum before it will be enforced. A memorandum that will satisfy the statute of frauds requirement under this section need only (1) contain a writing sufficient to indicate a contract of sale between the parties; (2) be signed by the parties or by authorized agents; and (3) state a quantity. The quantity term is the "heart" of the contract. The other terms such as price (GS 25-2-305), place of delivery (GS 25-2-308) and time of delivery (GS 25-2-309) will be supplied by this article if omitted in the memorandum of contract. In addition, these terms can apparently be supplied by parol. Prior North Carolina law applicable to the statute of frauds will be materially changed.

Subsection (2) is entirely new and has no parallel in prior North Carolina law. Note that subsection (2) applies "between merchants" only.

Subsection (3)(a) recognizes the doctrine of part performance as taking a contract out of the statute of frauds provision. North Carolina did not recognize that partial performance would take a contract otherwise required to be in writing outside of the statute of frauds. Hall v. Misenheimer, 137 N.C. 183, 49 S.E. 104 (1904); Ebert v. Disher, 216 N.C. 36, 3 S.E.2d 301 (1939); Grantham v. Grantham, 205 N.C. 363, 171 S.E. 331 (1933).

Since North Carolina did not have a statute of frauds as to contracts for the sale of personal property, the same results as were reached will be reached under this UCC provision, subsection (3)(a), requiring a writing but obviating the necessity for a writing where partial performance as set out in subsection (3)(a) is present.

Subsection (3)(b) accords with Sandlin v. Kearney, 154 N.C. 596, 70 S.E. 942 (1911), that the admissions of the parties in their pleadings may stand for the writing required by the statute of frauds.

Subsection (3)(c) would seem to accord with prior North Carolina law that the statute of frauds applies only to executory contracts and not to executed contracts. See Sprinkle v. Ponder, 233 N.C. 312, 64 S.E.2d 171 (1951); Willis v. Willis, 242 N.C. 597, 89 S.E.2d 152 (1955); Keith Bros. v. Kennedy, 194 N.C. 784, 140 S.E. 721 (1927). But note that this UCC section makes the contract enforceable only with respect to goods for which payment has been made and accepted or which have been received and accepted in the absence of a writing.

Legal Periodicals. - For article on statute of frauds as to personal property under the Uniform Commercial Code, see 4 Wake Forest Intra. L. Rev. 41 (1968).

For note on farmers as merchants under the Uniform Commercial Code, see 1 Campbell L. Rev. 141 (1979).

For article on contract modification under Article 2, see 59 N.C.L. Rev. 335 (1981).

For article, "Court Adjustment of Long-Term Contracts: An Analysis Under Modern Contract Law," see 1987 Duke L.J. 1 (1987).

For article, "The Regulation of Contractual Change: A Guide to No Oral Modification Clauses for North Carolina Lawyers," see 81 N.C.L. Rev. 2239 (2003).

For article, "Who's Afraid of the CISG? - Why North Carolina Practitioners Should Learn a Thing or Two About the 1980 United Nations Convention on Contracts for the International Sale of Goods," see 30 Campbell L. Rev. 275 (2008).

For article, "North Carolina Common Law Parol Evidence Rule," see 87 N.C.L. Rev. 1699 (2009).

CASE NOTES

This section applies only to executory contracts and not to executed contracts. Dealers Specialties, Inc. v. Neighborhood Hous. Servs., Inc., 54 N.C. App. 46, 283 S.E.2d 155 (1981), modified, 305 N.C. 633, 291 S.E.2d 137 (1982).

The purpose of subsection (2) of this section is to rectify an abuse that had developed in the law of commerce. The custom arose among business people of confirming oral contracts by sending a letter of confirmation. This letter was binding as a memorandum on the sender, but not on the recipient, because he had not signed it. The abuse was that the recipient, not being bound, could perform or not, according to his whim and the market, whereas the seller had to perform. Cudahy Foods Co. v. Holloway, 55 N.C. App. 626, 286 S.E.2d 606 (1982).

G.S. 75-4 is consistent with the other "statute of frauds" provisions in the law, including G.S. 22-1 and subsection (a) of this section. Manpower of Guilford County, Inc. v. Hedgecock, 42 N.C. App. 515, 257 S.E.2d 109 (1979).

Applicability in Forfeiture Proceeding. - Two companies had met their burden of showing U.S. Const. art. III standing to challenge the government's forfeiture proceeding against seized ginseng by alleging that, pursuant to either G.S. 25-2-501 or Wis. Stat. § 402.501, they paid for part of the seized ginseng and that a portion of the seized ginseng had been identified, marked, or otherwise designated as the ginseng that was to be delivered to them. United States v. 328 Pounds, More Or Less, Of Wild Am. Ginseng, 347 F. Supp. 2d 241 (W.D.N.C. 2004).

Nonmerchant who signs nothing ordinarily will not be bound to a contract under the statute of frauds provision of this section. Currituck Grain, Inc. v. Powell, 28 N.C. App. 563, 222 S.E.2d 1 (1976).

Contract for Services in Repair of Truck. - By its express terms, this section applies only to a contract for the sale of goods. Where the contract was one for services rendered in the repair of a truck, the fact that various parts are also required to properly repair and service the trucks is merely incidental to the repair contract, and does not bar its enforcement, either in its entirety or to the extent of the cost of the parts included. Mack Fin. Corp. v. Harnett Transf., Inc., 42 N.C. App. 116, 256 S.E.2d 491 (1979).

Invoices sent from one party to the other constitute writings "sufficient to indicate that a contract for sale has been made between the parties," within the meaning of this section. Frances Hosiery Mills, Inc. v. Burlington Indus., Inc., 285 N.C. 344, 204 S.E.2d 834 (1974).

Letter from Agent of Plaintiff's Assignor. - In an action to recover the purchase price of goods sold to defendant, a letter from the agent of plaintiff's assignor to defendant which identified the company as an agent and which stated that at the time of the sale it was agreed by the assignor that the goods were sold on a "guaranteed sales basis" is enough to comply with the statute of frauds and to make evidence of the guaranteed sales agreement admissible under the parol evidence rule. Equitable Factors Co. v. Chapman-Harkey Co., 43 N.C. App. 189, 258 S.E.2d 376, cert. denied, 298 N.C. 805, 262 S.E.2d 1 (1979).

Insufficient Writings. - Documents relied upon by plaintiff, who furnished material to builder, and signed by defendant for whom home was being constructed did not make out an enforceable contract under this section. Lowe's Cos. v. Lipe, 20 N.C. App. 106, 201 S.E.2d 81 (1973).

No Written Agreement. - While defendant testified that the parties exchanged drafts of a supply agreement, because defendant provided no written agreement signed by plaintiff regarding the purchase and sale of circuit boards, any such agreement made by the parties was unenforceable under the statute of frauds. Nexus Techs., Inc. v. Unlimited Power, Ltd., - F. Supp. 2d - (W.D.N.C. Nov. 25, 2020).

Evidence of Alleged Oral Agreement Not Admissible. - Plaintiff was precluded from offering evidence of alleged oral agreement, which tended to contradict written memoranda. Phelps v. Spivey, 126 N.C. App. 693, 486 S.E.2d 226 (1997).

Alleged oral contract between the purchaser and the seller for the sale of motor fuel was unenforceable, as the price of fuel deliveries was over $500 and the contract was not in writing as required by G.S. 25-2-201; thus the purchaser did not establish that the contract was formed. Neugent v. Beroth Oil Co., 149 N.C. App. 38, 560 S.E.2d 829 (2002).

Statute Not Defense for Merchant. - If a merchant receives a written confirmation sufficient as against the sender and fails to give written notice within 10 days, the statute of frauds would not be a defense. Currituck Grain, Inc. v. Powell, 28 N.C. App. 563, 222 S.E.2d 1 (1976).

Whether Farmer Is "Merchant" Is Matter for Proof. - Since the growing and marketing of corn and soybeans is an important part of the agricultural economy of the area, and the procedures for marketing these crops are well known, it cannot be said that a particular farmer or grower is not a "merchant" within the code definition; rather, this is a matter for proof. Currituck Grain, Inc. v. Powell, 28 N.C. App. 563, 222 S.E.2d 1 (1976).

The sale of building materials to be used in the construction of a house may come within the statute of frauds provisions of the Uniform Commercial Code if the value of the building supplies (as goods) prior to construction exceeds $500.00. Smith v. Hudson, 48 N.C. App. 347, 269 S.E.2d 172 (1980).

Agreement to Assume Indebtedness for Equipment Installed in Restaurant. - An agreement whereby the purchaser of a restaurant assumed the original owner's indebtedness for equipment installed in the restaurant, and the seller of the equipment released the original owner from liability, was neither a promise to answer for the debt of another nor a contract for the sale of goods for $500 or more, and the statute of frauds did not apply. Thompson & Little, Inc. v. Colvin, 46 N.C. App. 774, 266 S.E.2d 46 (1980).

Tentative Negotiations Insufficient to Show Contract. - Where plaintiff's evidence merely represented tentative negotiations, it was insufficient to show a contract for the sale of stock. Oakley v. Little, 49 N.C. App. 650, 272 S.E.2d 370 (1980).

Goods Specially Manufactured for Buyer. - Where a lawn mower company orally agreed to purchase all of its requirements for footrest pads from defendant manufacturer, and plaintiff placed label on them and made them specifically for defendant, such contract for the sale of specially manufactured goods did not have to be in writing. Custom Molders, Inc. v. Roper Corp., 101 N.C. App. 606, 401 S.E.2d 96, aff'd per curiam, 330 N.C. 191, 410 S.E.2d 55 (1991).

Oral Contract Made by Telephone for Sale of Yarn. - Evidence of both parties showed that a complete and valid oral contract for the sale of yarn was made by telephone, such oral contract being valid and enforceable since each party admitted "in his pleading, testimony or otherwise in court that a contract of sale was made." Frances Hosiery Mills, Inc. v. Burlington Indus., Inc., 285 N.C. 344, 204 S.E.2d 834 (1974).

Sale Between Parties Required. - Statute of frauds was inapplicable and could not be asserted as a defense to plaintiffs' breach of contract claim because there was no sale between plaintiffs and defendants, as required by G.S. 25-2-201(1). Hering v. Haun (In re Hering), - Bankr. - (Bankr. E.D.N.C. Oct. 28, 2010).

Output Contract for Sale of Peanuts. - Alleged oral agreement, made in October, after the peanut growing season, when the quantity and quality of the peanut harvest was certain, which changed the terms of an output contract providing for the sale of plaintiff's peanuts, and had a value of more than $500.00, was governed by the Statute of Frauds. Varnell v. Henry M. Milgrom, Inc., 78 N.C. App. 451, 337 S.E.2d 616 (1985).

The facts alleged, taken in the light most favorable to plaintiff, demonstrated no conduct by defendants that would support plaintiff's claim of an oral waiver of the Statute of Frauds with regard to an alleged oral agreement changing the terms of a written output contract for the sale of peanuts. Varnell v. Henry M. Milgrom, Inc., 78 N.C. App. 451, 337 S.E.2d 616 (1985).

Check as a Writing. - A check may constitute a writing sufficient to satisfy the requirements of subsection (1) provided it (1) contains a writing sufficient to indicate a contract of sale between the parties; (2) is signed by the party or his authorized agent against whom enforcement is sought; and (3) states a quantity. Buffaloe v. Hart, 114 N.C. App. 52, 441 S.E.2d 172 (1994).

Personal check which specified the quantity of "five barns" on the "for" line, was signed by plaintiff, and contained an amount was not sufficient to satisfy this section as a writing because defendants, the parties against whom enforcement was sought, did not endorse the check. Buffaloe v. Hart, 114 N.C. App. 52, 441 S.E.2d 172 (1994).

Certificates of Title and Check as a Writing. - Where plaintiff claimed existence of oral contract giving him use and access to mobile home and boats he sold to defendant, the certificates of title and the checks constituted sufficient memoranda to satisfy the requirements of the Statute of Frauds; thus, the documents reflected that defendant held clear title to the mobile home and boats. Phelps v. Spivey, 126 N.C. App. 693, 486 S.E.2d 226 (1997).

Applied in Harwell Enters., Inc. v. Stevens, 9 N.C. App. 228, 175 S.E.2d 739 (1970); Carolina Bldrs. Corp. v. Howard-Veasey Homes, Inc., 72 N.C. App. 224, 324 S.E.2d 626 (1985).

Cited in Grissett v. Ward, 10 N.C. App. 685, 179 S.E.2d 867 (1971); Currituck Grain, Inc. v. Powell, 38 N.C. App. 7, 246 S.E.2d 853 (1978); Danjee, Inc. v. Addressograph Multigraph Corp., 44 N.C. App. 626, 262 S.E.2d 665 (1980); H.V. Allen Co. v. Quip-Matic, Inc., 47 N.C. App. 40, 266 S.E.2d 768 (1980); Southern of Rocky Mount, Inc. v. Woodward Specialty Sales, Inc., 52 N.C. App. 549, 279 S.E.2d 32 (1981); Preston v. Thompson, 53 N.C. App. 290, 280 S.E.2d 780 (1981); Allen M. Campbell Co. v. Virginia Metal Indus., Inc., 708 F.2d 930 (4th Cir. 1983); Varnell v. Henry M. Milgrom, Inc., 78 N.C. App. 451, 337 S.E.2d 616 (1985); Pee Dee Oil Co. v. Quality Oil Co., 80 N.C. App. 219, 341 S.E.2d 113 (1986); Mulberry-Fairplains Water Ass'n v. Town of N. Wilkesboro, 105 N.C. App. 258, 412 S.E.2d 910 (1992); Computer Decisions, Inc. v. Rouse Office Mgt. of N.C. Inc., 124 N.C. App. 383, 477 S.E.2d 262 (1996); Fordham v. Eason, 351 N.C. 151, 521 S.E.2d 701 (1999); United States v. 328 Pounds, More Or Less, Of Wild Am. Ginseng, 347 F. Supp. 2d 241 (W.D.N.C. 2004); Thermal Design, Inc. v. M&M Builders, Inc., 207 N.C. App. 79, 698 S.E.2d 516 (2010).

OFFICIAL COMMENT

Prior Uniform Statutory Provision: None. Purposes:

1. This section definitely rejects:
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.

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.

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

Point 3: Sections 1-205, 2-207, 2-302 and 2-316. Definitional Cross References:

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

"Course of dealing". Section 1-205.

"Parties". Section 1-201.

"Terms". Section 1-201.

"Usage of trade". Section 1-205.

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

NORTH CAROLINA COMMENT

The purpose of paragraph (a) is to relax the application of the parol evidence rule to written contracts involving the sale of goods. North Carolina has held that where a contract is unambiguous, parol evidence to explain what the contract is, or to add to or vary it, is inadmissible. See Bost v. Bost, 234 N.C. 554, 67 S.E.2d 745 (1951); Pierce v. Cobb, 161 N.C. 300, 77 S.E. 350 (1913). If, on the other hand, terms of uncertain meaning are employed, parol evidence may be admitted to show their meaning in a technical or trade sense. See Layton v. Elba Mfg. Co., 161 N.C. 482, 77 S.E. 677 (1913), where the contract term "car load" was amplified and explained by parol according to custom and usage in a particular business and trade. See also Neal v. Camden Ferry Co., 166 N.C. 563, 82 S.E. 878 (1914).

This UCC provision will allow admission of "course of dealing or usage of trade" evidence even in the absence of ambiguity, thus apparently changing prior North Carolina law. Compare Williamson v. Miller, 231 N.C. 722, 58 S.E.2d 743 (1950). This section would not limit, apparently, parol evidence to an explanation of a term of the written contract.

Paragraph (b) apparently continues prior North Carolina law that when a writing is not complete, consistent additional terms agreed to in parol may be admitted to supply terms on which the writing is silent. See Willis v. Jarrett Constr. Co., 152 N.C. 100, 67 S.E. 265 (1910). The UCC provision says, however, that if the court finds the writing to have been intended as a complete and exclusive statement of the terms of the agreement, evidence of consistent additional terms shall not be added.

The UCC provision seems to indicate a presumption that the written memorandum does not necessarily include all the final terms of the contract - that additional terms may be shown unless the memorandum not only evidences a sale but also that it is in fact the "final and exclusive" statement of terms.

Prior North Carolina law, on the other hand, apparently presumed that a written contract embraces all previous stipulations between the parties and places the burden of showing any ambiguity or omission, or that the writing does not contain all of the terms of the contract upon the party seeking to add to or explain the writing, however consistent the addition may be. See Reynolds v. Palmer, 21 Fed. 433 (W.D.N.C. 1884); Walker v. Horne, 149 F. Supp. 457 (W.D.N.C. 1957); Neal v. Marrone, 239 N.C. 73, 79 S.E.2d 239 (1953).

While the change will not be radical, the parol evidence rule will be liberalized somewhat by this section of the UCC in the absence of an express stipulation that the contract contains the complete and exclusive terms of the contract.

Effect of Amendments. - Session Laws 2006-112, s. 3, effective October 1, 2006, rewrote subdivision (a).

Legal Periodicals. - For note discussing this section, in light of Fiber Indus., Inc. v. Salem Carpet Mills, Inc., 68 N.C. App. 690, 315 S.E.2d 735, cert. denied, 311 N.C. 754, 321 S.E.2d 132 (1984), see 21 Wake Forest L. Rev. 831 (1986).

For article, "Drawing the Boundary Between Copyright and Contract: Copyright Preemption of Software License Terms," see 45 Duke L.J. 479 (1995).

For article, "Who's Afraid of the CISG? - Why North Carolina Practitioners Should Learn a Thing or Two About the 1980 United Nations Convention on Contracts for the International Sale of Goods," see 30 Campbell L. Rev. 275 (2008).

For article, "North Carolina Common Law Parol Evidence Rule," see 87 N.C.L. Rev. 1699 (2009).

CASE NOTES

Subdivision (a) of this section clearly limits the use of trade usage evidence to that which explains or supplements the terms of the written agreement. Fiber Indus., Inc. v. Salem Carpet Mills, Inc., 68 N.C. App. 690, 315 S.E.2d 735, cert. denied, 311 N.C. 754, 321 S.E.2d 132 (1984).

Oral Modifications Made Subsequent to Written Contract. - Parol evidence rule bars admission of evidence of any contemporaneous oral agreements or any prior agreements which contradict terms of parties' final written agreement. Parol evidence rule would not bar plaintiff's evidence of oral modifications made subsequent to written contract. Muther-Ballenger v. Giffin Elec. Consultants, Inc., 100 N.C. App. 505, 397 S.E.2d 247 (1990).

Defendant's subsequent verbal warranties may modify prior written contract and written disclaimer. Muther-Ballenger v. Giffin Elec. Consultants, Inc., 100 N.C. App. 505, 397 S.E.2d 247 (1990).

Explanatory or supplemental information is not to be admitted when the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement. Fiber Indus., Inc. v. Salem Carpet Mills, Inc., 68 N.C. App. 690, 315 S.E.2d 735, cert. denied, 311 N.C. 754, 321 S.E.2d 132 (1984).

Evidence of Additional Consistent Terms. - A security agreement in which the buyer of a mobile home acknowledged delivery of the mobile home "in good condition and repair" was not intended as a complete and exclusive statement of the terms of the agreement within the meaning of subdivision (b) of this section and the buyer's testimony with respect to the defective condition of the mobile home after it was installed was competent as evidence of additional consistent terms of the sale, where the evidence of both parties showed that the mobile home was to be delivered and set up on defendant's lot and where the security agreement was signed by the buyer before the mobile home was delivered and installed. Performance Motors, Inc. v. Allen, 280 N.C. 385, 186 S.E.2d 161 (1972).

Parol Evidence as to Lease-Purchase Agreement. - Under subdivision (a), parol evidence raised by operation of a course of performance may be used in order to help explain and supplement a particular lease-purchase agreement. Robinson v. Branch Moving & Storage Co., 28 N.C. App. 244, 221 S.E.2d 81 (1976).

Parole Evidence Held Inadmissible. - Although defendant's oral statements concerning the condition of the automobile were parole evidence and inadmissible to contradict the terms of a written contract, the evidence was not offered to contradict the contract, but rather to prove an unfair or deceptive practice. Torrance v. AS & L Motors, Ltd., 119 N.C. App. 552, 459 S.E.2d 67 (1995).

Plaintiff was precluded from offering evidence of alleged oral agreement, which tended to contradict written memoranda. Phelps v. Spivey, 126 N.C. App. 693, 486 S.E.2d 226 (1997).

Where plaintiff claimed existence of oral contract giving him use and access to mobile home and boats he sold to defendant, the certificates of title and the checks constituted sufficient memoranda to satisfy the requirements of the Statute of Frauds; thus, the documents reflected that defendant held clear title to the mobile home and boats. Phelps v. Spivey, 126 N.C. App. 693, 486 S.E.2d 226 (1997).

In an adversary proceeding filed by a Chapter 7 trustee, parole evidence concerning what the parties intended concerning the ownership interest of an automobile was not admissible when the promissory note and security agreement executed by the debtor and the creditor established that the debtor had purchased and owned the automobile and that the creditor had retained a security interest, but not an ownership interest in the vehicle. Ivey v. Wilson (In re Payne), - Bankr. - (Bankr. M.D.N.C. Dec. 6, 2006).

Applied in Equitable Factors Co. v. Chapman-Harkey Co., 43 N.C. App. 189, 258 S.E.2d 376 (1979); Smith v. Hudson, 48 N.C. App. 347, 269 S.E.2d 172 (1980); Ace, Inc. v. Maynard, 108 N.C. App. 241, 423 S.E.2d 504 (1992).

Cited in Recreatives, Inc. v. Travel-On Motorcycles Co., 29 N.C. App. 727, 225 S.E.2d 637 (1976).

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 2-205. Definitional Cross References:

"Contract for sale". Section 2-106.

"Goods". Section 2-105.

"Writing". Section 1-201.

NORTH CAROLINA COMMENT

North Carolina has recognized the effect of a seal; if a contract is under seal it obviates requirement of showing any consideration. See Angier v. Howard, 94 N.C. 27 (1886); Basketeria Stores v. Public Indem. Co., 204 N.C. 537, 168 S.E. 822 (1933). The seal imports consideration. See Thomason v. Bescher, 176 N.C. 622, 97 S.E. 654 (1918); Harrell v. Watson, 63 N.C. 454 (1869); Mordecai's Law Lectures 1053-4; Coleman v. Whisnant, 226 N.C. 258, 37 S.E.2d 693 (1946); McGowan v. Beach, 242 N.C. 73, 86 S.E.2d 763 (1955).

This UCC provision makes the prior law of seals inapplicable to sales contracts in North Carolina and therefore changes North Carolina law. All sealed contracts become simple contracts, requiring other consideration to be shown and resulting in a shorter statute of limitations. See GS 25-2-725. Contracts that were enforceable in North Carolina are not enforceable under this UCC provision.

Legal Periodicals. - For comment on the seal in North Carolina and the need for reform, see 15 Wake Forest L. Rev. 251 (1979).

CASE NOTES

Applied in North Carolina Nat'l Bank v. Holshouser, 38 N.C. App. 165, 247 S.E.2d 645 (1978).

Cited in Mobil Oil Corp. v. Wolfe, 297 N.C. 36, 252 S.E.2d 809 (1979).

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, 2-201 and 2-302.

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

Subsection (3): See Part 3. Definitional Cross References:

"Agreement". Section 1-201.

"Contract". Section 1-201.

"Contract for sale". Section 2-106.

"Goods". Section 2-105.

"Party". Section 1-201.

"Remedy". Section 1-201.

"Term". Section 1-201.

NORTH CAROLINA COMMENT

Subsection (1) accords generally with prior North Carolina law. See Crook v. Cowan, 64 N.C. 743 (1870), and T. C. May Co. v. Menzies Shoe Co., 186 N.C. 144, 119 S.E. 227 (1923), that conduct of the parties may indicate the intention of the parties that a contract exists. This provision is inserted primarily to insure a liberal approach to finding the existence of a contract where the sale of goods is concerned because of a belief that commercial practices often recognize very informal dealings as creating binding obligations.

Subsection (2) has no counterpart in prior North Carolina statutory or decisional law.

Subsection (3) would seem to change North Carolina law to some extent. It was a recognized general principle in North Carolina law that parties to a contract had to assent to the same thing in the same sense, and their minds had to meet as to all terms and if any portion of proposed terms was not settled, or no mode was agreed on by which they might be settled, there was no agreement. Kirby v. Stokes County Bd. of Educ., 230 N.C. 619, 55 S.E.2d 322 (1949); Goeckel v. Stokely, 236 N.C. 604, 73 S.E.2d 618 (1952). But in other instances the North Carolina court retreated from this principle and enforced "output" and "requirements" contracts. See Herren v. Gaines, 63 N.C. 72 (1868); Indian Mountain Jellico Coal Co. v. Asheville Ice & Coal Co., 134 N.C. 574, 47 S.E. 116 (1904). The court has supplied a "place of delivery" term when the contract was silent. See Fruit Growers' Express Co. v. Plate Ice Co., 59 F.2d 605 (4th Cir. 1935). The court has supplied "time for performance" terms where omitted in a contract otherwise sufficient. See Hurlburt v. Simpson, 25 N.C. 233 (1842); J. B. Colt Co. v. Kimball, 190 N.C. 169, 129 S.E. 406 (1925). See North Carolina Comments under GS 25-2-305, 25-2-306, 25-2-308, 25-2-309, which are related to this section.

In appropriate cases where the parties intend to be bound but omit certain terms from their contract, subsection (3) will substitute external, objective commercial standards in lieu of having the contract declared void for indefiniteness because of the lack of a statement of the specific terms to which the parties might have agreed.

Legal Periodicals. - For note on "Meeting of the Minds and U.C.C. § 2-204," see 46 N.C.L. Rev. 637 (1968).

For note, "Real Estate Finance - Subordination Causes: North Carolina Subordinates Substance to Form - MCB Ltd. v. McGowan," see 23 Wake Forest L. Rev. 575 (1988).

For article, "Application of the Uniform Commercial Code to Option Contracts for the Sale of Goods, and Implying Promises to Find Sufficient Consideration: Why and How the North Carolina Supreme Court Got It Wrong in Fordham v. Eason," see 23 Campbell L. Rev. 49 (2000).

CASE NOTES

Indication of Intent to Be Bound. - A contract binding on both parties was not made until they each did some act indicating their intent to be bound, i.e., recognizing the existence of the contract. Unitrac, S.A. v. Southern Funding Corp., 75 N.C. App. 142, 330 S.E.2d 44 (1985).

Requirements Contract - Under the North Carolina Uniform Commercial Code, the failure to omit certain material terms will not invalidate the contract because courts are permitted to read into the contract good faith requirements; thus, a contract to purchase pharmaceutical drugs "as required" was not vague, but was instead valid and enforceable. IWTMM, Inc. v. Forest Hills Rest Home, 156 N.C. App. 556, 577 S.E.2d 175 (2003).

Illustrative Cases. - A corporation ("debtor") that owned an equipment dealership committed abuse of process before it declared Chapter 11 bankruptcy when it included false information about a contract it entered with a North Carolina agricultural business in a complaint it filed in state court that asked the court to issue an order under G.S. 1-440.3 which allowed it to attach tractors and equipment it sold; although the debtor and the business did not include all terms and conditions of their agreement in a written contract when the debtor sold tractors and equipment to the business, they had a valid contract under G.S. 25-2-204, and the tractors belonged to the business. Mills Int'l, Inc. v. Holmes (In re Mills Int'l, Inc.), 570 B.R. 169 (Bankr. E.D.N.C. 2017).

Applied in Southern Utils., Inc. v. Jerry Mandel Mach. Corp., 71 N.C. App. 188, 321 S.E.2d 508 (1984); Carolina Bldrs. Corp. v. Howard-Veasey Homes, Inc., 72 N.C. App. 224, 324 S.E.2d 626 (1985).

Cited in Southeastern Adhesives Co. v. Funder Am., Inc., 89 N.C. App. 438, 366 S.E.2d 505 (1988); Fordham v. Eason, 351 N.C. 151, 521 S.E.2d 701 (1999).

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 1-102.

Point 2: Section 1-102.

Point 3: Section 2-201.

Point 5: Section 2-302. Definitional Cross References:

"Goods". Section 2-105.

"Merchant". Section 2-104.

"Signed". Section 1-201.

"Writing". Section 1-201.

NORTH CAROLINA COMMENT

This provision reverses prior North Carolina law. If an offer to sell was without consideration, it could be withdrawn by the offeror at any time before acceptance. Durham Life Ins. Co. v. Moize, 175 N.C. 344, 95 S.E. 552 (1918); Winders v. Kenan, 161 N.C. 628, 77 S.E. 687 (1913); Paddock v. Davenport, 107 N.C. 710, 12 S.E. 464 (1890). That an option to purchase under a sealed instrument could not be revoked, see Thomason v. Bescher, 176 N.C. 622, 97 S.E. 654 (1918). This section would make firm offers made by merchants binding and irrevocable, even though not supported by consideration or seal.

Note that the section applies only to "merchants."

Legal Periodicals. - For note on farmers as merchants under the Uniform Commercial Code, see 1 Campbell L. Rev. 141 (1979).

CASE NOTES

Applied in Fordham v. Eason, 351 N.C. 151, 521 S.E.2d 701 (1999).

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 2-103.

"Conforming". Section 2-106.

"Contract". Section 1-201.

"Goods". Section 2-105.

"Notifies". Section 1-201.

"Reasonable time". Section 1-204.

NORTH CAROLINA COMMENT

Subsection (1)(a) is designed to reject any technical rules of acceptance of contracts and provides that an offer shall be construed as inviting acceptance in any manner or medium reasonable under the circumstances. This was probably already the law of North Carolina. See Crook v. Cowan, 64 N.C. 743 (1870), which holds that while an assent to the terms of an offer is indispensable, it is not material how or through whom it is given. Of course, an offer by mail carries with it an implied invitation, nothing else appearing, that it may be accepted or rejected by mail. See Board of Educ. v. State Bd. of Educ., 217 N.C. 90, 6 S.E.2d 833 (1939). This subsection would appear to accord with reason. Of course, the offeror can specify a particular mode or manner for effective acceptance.

Subsection (1)(b) apparently has no parallel in prior North Carolina law and is therefore new. It is designed to resolve a trick problem not evidenced by any North Carolina case. The general principle is that an order for goods authorizes acceptance by seller's shipment of the goods. Crook v. Cowan, 64 N.C. 743 (1870). The trick comes when the seller ships nonconforming goods in response to an order. If these goods were shipped and accepted by the buyer, he had technically accepted a counteroffer. If he rejected the goods, as he had a right to do, he might find himself without any recourse against the seller, as the seller could claim no contract was ever consummated because his acceptance did not conform to the buyer's offer. The Code shifts tactical advantage somewhat. Unless the seller shipping nonconforming goods notifies the buyer that they are being shipped "for accommodation" only, the seller will be held to have accepted the buyer's offer by his shipment - a contract will have been formed.

Subsection (2) was probably already the law in North Carolina. (Compare Crook v. Cowan, 64 N.C. 743 (1870), dissenting opinion of Rodman, J.)

Legal Periodicals. - For article, "Who's Afraid of the CISG? - Why North Carolina Practitioners Should Learn a Thing or Two About the 1980 United Nations Convention on Contracts for the International Sale of Goods," see 30 Campbell L. Rev. 275 (2008).

CASE NOTES

Cited in Tom Togs, Inc. v. Ben Elias Indus. Corp., 318 N.C. 361, 348 S.E.2d 782 (1986); Fisher v. Elmore, 802 F.2d 771 (4th Cir. 1986).

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 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 acknowledgments or memoranda embodying the terms so far as agreed upon and adding terms not discussed. The other situation is one in which a wire or letter expressed and intended as the closing or confirmation 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.
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 either in the writing intended to close the deal or in a later confirmation 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 terms.
3. Whether or not additional or different terms will become part of the agreement depends upon the provisions of subsection (2). If they are such as materially to alter the original bargain, they will not be included unless expressly agreed to by the other party. If, however, they are terms which would not so change the bargain they will be incorporated unless notice of objection to them has already been given or is given within a reasonable time.
4. Examples of typical clauses which would normally "materially alter" the contract and so result in surprise or hardship if incorporated without express awareness by the other party are: a clause negating such standard warranties as that of merchantability or fitness for a particular purpose in circumstances in which either warranty normally attaches; a clause requiring a guaranty of 90% 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). Cross References:

See generally Section 2-302.

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

Point 6: Sections 1-102 and 2-104. Definitional Cross References:

"Between merchants". Section 2-104.

"Contract". Section 1-201.

"Notification". Section 1-201.

"Reasonable time". Section 1-204.

"Seasonably". Section 1-204.

"Send". Section 1-201.

"Term". Section 1-201.

"Written". Section 1-201.

NORTH CAROLINA COMMENT

This section changes prior North Carolina law. See Morrison v. Parks, 164 N.C. 197, 80 S.E. 85 (1913), that for an acceptance of an offer to become a binding contract, it had to be absolute and unconditional and identical with the offer's terms in all respects and where the acceptance was for a lower price, or specified different kinds of goods, the acceptance was conditional and there was no contract. Wilson v. W. M. Storey Lumber Co., 180 N.C. 271, 104 S.E. 531 (1920). But see Carver v. Britt, 241 N.C. 538, 85 S.E.2d 888 (1955), that where an offer was squarely accepted in positive terms, the addition of a statement relating to ultimate performance of the contract did not make the acceptance conditional and prevent the formation of the contract. In other words, if the acceptance varied materially with the offer and was conditional, there would be no contract. But if the acceptance added terms that were not material or which were minor, or which represented in effect a request, or proposal of alteration or modification, made after an unconditional acceptance of an offer, this would not affect the contract. Compare Richardson v. Greensboro Warehouse & Storage Co., 223 N.C. 344, 26 S.E.2d 897, 149 A.L.R. 201 (1943).

Subsection (1): Under subsection (1) of this section the additional or different terms in the acceptance are not treated as "conditions to acceptance," constituting a counteroffer, but result in a completed contract. The added or different terms set out in the acceptance do not become a part of the contract as between ordinary sellers and purchasers (nonmerchants) but become addenda to the contract which merely "propose" or "suggest" such additional or different terms.

Subsection (2): Under subsection (2), as to "merchants" contracts, if there are additional or different terms in the acceptance or confirmation, the additional or different terms of the acceptance become a part of the contract unless (a) the offer expressly limits acceptance to the terms of the offer; (b) they materially alter it; or (c) notification of objection to such terms is given within a reasonable time.

Subsection (3) accords with J. W. Sanders Cotton Mill v. Capps, 104 F. Supp. 617 (E.D.N.C. 1952), that an acceptance and a binding contract may result from acts and conduct even though writings of the parties may not by themselves constitute a contract.

Legal Periodicals. - For note on farmers as merchants under the Uniform Commercial Code, see 1 Campbell L. Rev. 141 (1979).

For article on contract modification under Article 2, see 59 N.C.L. Rev. 335 (1981).

For article, "Restoring Peace in the Battle of the Forms: A Framework for Making Uniform Commercial Code Section 2-207 Work," see 69 N.C.L. Rev. 893 (1991).

For article, "Who's Afraid of the CISG? - Why North Carolina Practitioners Should Learn a Thing or Two About the 1980 United Nations Convention on Contracts for the International Sale of Goods," see 30 Campbell L. Rev. 275 (2008).

CASE NOTES

Invoices sent from one party to the other constituted a "written confirmation" of a previously made oral contract for sale, within the meaning of this section. Frances Hosiery Mills, Inc. v. Burlington Indus., Inc., 285 N.C. 344, 204 S.E.2d 834 (1974).

Inclusion of Term Not Previously Agreed upon Constitutes Proposal for Addition. - When one party to a valid oral contract for the sale of goods, within a reasonable time after the making of such contract, sends to the other party a document purporting to set out in writing the terms of the contract and includes therein a term not previously agreed upon, this constitutes a proposal for an addition to the contract. Frances Hosiery Mills, Inc. v. Burlington Indus., Inc., 285 N.C. 344, 204 S.E.2d 834 (1974).

Which May Become Part of Contract Unless Materially Altering It. - When the parties to the contract are "merchants," as that term is defined in G.S. 25-2-104(1), all proposed additional terms, to which the other party does not object in due time, become part of the contract, unless "they materially alter it." Frances Hosiery Mills, Inc. v. Burlington Indus., Inc., 285 N.C. 344, 204 S.E.2d 834 (1974).

Term which so drastically affects remedies available to buyer upon seller's breach must be considered material alteration when not explicitly negotiated by the parties. Therefore, plaintiff's attempt to add a disclaimer of warranties to the parties' contracts was ineffective. Southeastern Adhesives Co. v. Funder Am., Inc., 89 N.C. App. 438, 366 S.E.2d 505 (1988).

An addition to an oral contract inserting an "arbitration only" term was a material alteration of the contract, and could not be deemed incorporated into the contract for sale by reason of the mere silence of one party following its receipt of the other party's invoices containing the term. Frances Hosiery Mills, Inc. v. Burlington Indus., Inc., 285 N.C. 344, 204 S.E.2d 834 (1974); Supak & Sons Mfg. Co. v. Pervel Indus., Inc., 593 F.2d 135 (4th Cir. 1979).

An arbitration clause was such a material alteration of plaintiff's oral contract of purchase that it did not become binding on the plaintiff who never recognized, acknowledged or signed an agreement that its oral contract should be so amended or modified. Supak & Sons Mfg. Co. v. Pervel Indus., Inc., 463 F. Supp. 177 (E.D.N.C. 1978).

There is no conflict between 9 U.S.C. § 2, which provides for the validity and enforceability of arbitration clauses in contracts evidencing transactions in interstate commerce, and the decisional law of North Carolina holding an arbitration clause to be a per se material alteration under this section. Supak & Sons Mfg. Co. v. Pervel Indus., Inc., 593 F.2d 135 (4th Cir. 1979).

"Yarn Contracts" Attempting to Attach Additional Terms to Oral Contracts. - Where defendant's "yarn contracts" served not only to confirm oral telephone contracts between the parties but also attempted to attach additional terms to the agreement, to allow additional terms, which were material alterations, under the guise of "confirmation of the contract" would render this section meaningless. Frances Hosiery Mills, Inc. v. Burlington Indus., Inc., 19 N.C. App. 678, 200 S.E.2d 668, aff'd, 285 N.C. 344, 204 S.E.2d 834 (1974).

Applied in General Time Corp. v. Eye Encounter, Inc., 50 N.C. App. 467, 274 S.E.2d 391 (1981).

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.
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.

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 a 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.

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 1-203.

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

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

Point 4: Sections 2-202 and 2-208. Definitional Cross References:

"Agreement". Section 1-201.

"Between merchants". Section 2-104.

"Contract". Section 1-201.

"Notification". Section 1-201.

"Signed". Section 1-201.

"Term". Section 1-201.

"Writing". Section 1-201.

NORTH CAROLINA COMMENT

Subsection (1) makes a change in prior North Carolina law. North Carolina held that a consideration is necessary in order to make binding an agreement modifying or discharging a contract. See Lipschutz v. Weatherly, 140 N.C. 365, 53 S.E. 132 (1906); Brown v. Catawba River Lumber Co., 117 N.C. 287, 23 S.E. 253 (1895).

Subsection (2) changes prior North Carolina law. See Childress v. C. W. Myers Trading Post, Inc., 247 N.C. 150, 100 S.E.2d 391 (1957), which holds that a written contract may be modified or waived by a subsequent parol agreement even though the instrument provides that any modification must be in writing. Subsection (2) permits the parties to prescribe their own "statute of frauds" so to speak by requiring modifications of the contract to be in writing. The last part of subsection (2) (after the comma) provides that a merchant-seller's contract form limiting modification by a buyer (who is not a merchant), specifying that it shall be modified only by a writing, will not limit the nonmerchant buyer unless he separately signs the instrument containing such limitation.

Subsection (3) makes it clear that if contract as modified would be within the statute of frauds provision, the modification must be in writing.

Subsection (4) attempts to provide an equitable solution to situations where there is conduct or parol agreement which would evince intention to modify the contract but for the requirements of subsections (2) and (3). This subsection would seem to accord with prior law in North Carolina. See Childress v. C. W. Myers Trading Post, Inc., 247 N.C. 150, 100 S.E.2d 391 (1957); Whitehurst v. FCX Fruit & Vegetable Serv., 224 N.C. 628, 32 S.E.2d 34 (1944); H. M. Wade Mfg. Co. v. Lefkowitz, 204 N.C. 449, 168 S.E. 517 (1933), which indicate that the doctrine of waiver, in proper cases, is now as firmly established as the doctrine of rigidity and inflexibility of the written word. The latter case defines waiver: "A waiver takes place where a man dispenses with the performance of something which he has a right to exact. A man may do that not only by saying that he dispenses with it, that he excuses the performance, or he may do it as effectually by conduct which naturally and justly leads the other party to believe that he dispenses with it. There can be no waiver unless so intended by one party, and so understood by the other, or one party has so acted as to mislead the other."

Subsection (4) , according to the Official Comment, is directed primarily toward conduct after formation of the contract which will constitute a waiver notwithstanding a provision in the contract that excludes modification or rescission except by a signed writing.

Subsection (5): No statutory or decisional parallel has been located concerning the retraction of a waiver as provided for in subsection (5).

Legal Periodicals. - For note on farmers as merchants under the Uniform Commercial Code, see 1 Campbell L. Rev. 141 (1979).

For article on contract modification under Article 2, see 59 N.C.L. Rev. 335 (1981).

For article, "The Regulation of Contractual Change: A Guide to No Oral Modification Clauses for North Carolina Lawyers," see 81 N.C.L. Rev. 2239 (2003).

CASE NOTES

The clear intent of subsection (4) of this section is to give legal effect to the parties' actual later conduct. Varnell v. Henry M. Milgrom, Inc., 78 N.C. App. 451, 337 S.E.2d 616 (1985).

The references in subsection (5) of this section to waiver affecting an executory portion of the contract and to performance and retraction make it reasonable to conclude that "waiver" is employed with reference to the terms of the contract, not the statute of frauds. Varnell v. Henry M. Milgrom, Inc., 78 N.C. App. 451, 337 S.E.2d 616 (1985).

"Conduct" involves more than a mere oral agreement. Varnell v. Henry M. Milgrom, Inc., 78 N.C. App. 451, 337 S.E.2d 616 (1985).

Waiver for Failure to Plead or Raise Issues. - Failure of the parties to plead or to raise the issues of the statute of frauds, waiver of the disclaimers, and retraction and estoppel resulted in waiver thereof. Bone Int'l, Inc. v. Johnson, 74 N.C. App. 703, 329 S.E.2d 714 (1985).

Evidence of Oral Waiver of Disclaimers Created Issue of Fact. - Even though there was no writing evidencing alleged subsequent oral modification of sales agreement, where buyer presented evidence that seller orally waived written disclaimers and that buyer relied on this waiver to his detriment, this created an issue of fact for the jury on the question of waiver under subsections (4) and (5) of this section, which was not subject to the statute of frauds. Bone Int'l, Inc. v. Johnson, 74 N.C. App. 703, 329 S.E.2d 714 (1985).

Seller's post-sale agreement with buyer to do major engine repairs without charge constituted an oral modification of original written agreement that there were no warranties, and was not subject to the parol evidence rule. Further, under subsection (1), this agreement needed no consideration to be binding. Bone Int'l, Inc. v. Johnson, 74 N.C. App. 703, 329 S.E.2d 714 (1985).

Output Contract for Sale of Peanuts. - Alleged oral agreement, made in October, after the peanut growing season, when the quantity and quality of the peanut harvest was certain, which changed the terms of an output contract providing for the sale of plaintiff's peanuts, and had a value of more than $500.00, was governed by the statute of frauds. Varnell v. Henry M. Milgrom, Inc., 78 N.C. App. 451, 337 S.E.2d 616 (1985).

The facts alleged, taken in the light most favorable to plaintiff, demonstrated no conduct by defendants that would support plaintiff's claim of an oral waiver of the Statute of Frauds with regard to an alleged oral agreement changing the terms of a written output contract for the sale of peanuts. Varnell v. Henry M. Milgrom, Inc., 78 N.C. App. 451, 337 S.E.2d 616 (1985).

Creditor's Letter Served As An Offer to Modify - Evidence presented supported the conclusion that the letter sent by the creditor to the debtor served as an offer to modify the monthly payment term to $155 month and the debtor accepted by performance of tendering payment as requested, G.S. 25-2-209 and G.S. 25-2-208 (repealed; see G.S. 25-1-303); the payments are relevant evidence to show a modification of the contract. In re McClamrock, - Bankr. - (Bankr. M.D.N.C. July 21, 2003).

Price Increase Did Not Violate Contract. - North Carolina Uniform Commercial Code, G.S. 25-2-209(1), abrogates the common law preexisting duty rule and does not require additional consideration for contract modifications; therefore, an apparel assembler did not breach its contract with an apparel company that supplied it with cut shirt parts when it obtained an increase in the assembly price paid to it by the company. Sara Lee Corp. v. Quality Mfg., 201 F. Supp. 2d 608 (M.D.N.C. 2002).

Applied in Danjee, Inc. v. Addressograph Multigraph Corp., 44 N.C. App. 626, 262 S.E.2d 665 (1980); Thermal Design, Inc. v. M&M Builders, Inc., 207 N.C. App. 79, 698 S.E.2d 516 (2010).

Cited in Mulberry-Fairplains Water Ass'n v. Town of N. Wilkesboro, 105 N.C. App. 258, 412 S.E.2d 910 (1992); Dealers Supply Co. v. Cheil Indus., 348 F. Supp. 2d 579 (M.D.N.C. 2004).

CASE NOTES

Assignment of Legal Rights. - Right to assign legal rights is not exclusively governed by the UCC. Even if a party technically is not a "buyer" under the UCC, as long as it has a valid claim for breach of contract against defendant, the common law will permit its assignment. Sharrard, McGee & Co. v. Suz's Software, Inc., 100 N.C. App. 428, 396 S.E.2d 815 (1990).

Applicability. - Because buyer had a valid claim that it could assert by itself, plaintiff as assignee was entitled to assert its claim against defendant. Sharrard, McGee & Co. v. Suz's Software, Inc., 100 N.C. App. 428, 396 S.E.2d 815 (1990).

Case law and general North Carolina contract law provided for an assignor's continued liability to the other party to the original contract rather than to a third party, and thus the statute, applicable to contracts for the sale of goods, had no bearing on the proper resolution of the issue in this case. Hyatt v. Mini Storage on the Green, 236 N.C. App. 278, 763 S.E.2d 166 (2014).

Applied in Webber v. McCoy Lumber Co., 62 N.C. App. 740, 303 S.E.2d 408 (1983).

Cited in Rose v. Vulcan Materials Co., 282 N.C. 643, 194 S.E.2d 521 (1973).

PART 3. GENERAL OBLIGATION AND CONSTRUCTION OF CONTRACT.

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 1-106. See also Sections 1-205, 2-208, 2-209, 2-508 and 2-612. Definitional Cross References:

"Buyer". Section 2-103.

"Contract". Section 1-201.

"Party". Section 1-201.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

This section reflects the prior law of North Carolina and would seem to require no comment. See and compare McAden v. Craig, 222 N.C. 497, 24 S.E.2d 1 (1942).

CASE NOTES

Prima Facie Case Presents Jury Question. - Seller's allegation of the sale and delivery of goods at an agreed price and buyer's admission that he purchased the goods, executed the note and security agreement and refused to pay a portion of the purchase price agreed upon makes out a prima facie case entitling seller to go to the jury and, nothing else appearing, to recover the balance due on the note. Performance Motors, Inc. v. Allen, 280 N.C. 385, 186 S.E.2d 161 (1972).

Applied in Southern Utils., Inc. v. Jerry Mandel Mach. Corp., 71 N.C. App. 188, 321 S.E.2d 508 (1984).

Cited in American Imports, Inc. v. G.E. Employees W. Region Fed. Credit Union, 37 N.C. App. 121, 245 S.E.2d 798 (1978); Henderson Oil Co. v. Cowart, - F. Supp. 2d - (W.D.N.C. Jan. 14, 2008).

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:
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.

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.2d 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.

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 1-201.

Legal Periodicals. - For note on strict liability for breach of warranty, see 50 N.C.L. Rev. 697 (1972).

For note on requirement of privity and express warranties, see 16 Wake Forest L. Rev. 857 (1980).

For article on contract modification under Article 2, see 59 N.C.L. Rev. 335 (1981).

For article, "Court Adjustment of Long-Term Contracts: An Analysis Under Modern Contract Law," see 1987 Duke L.J. 1 (1987).

For article, "Drawing the Boundary Between Copyright and Contract: Copyright Preemption of Software License Terms," see 45 Duke L.J. 479 (1995).

For note, "State Law of Contract Formation in the Shadow of the Federal Arbitration Act," see 46 Duke L.J. 651 (1996).

For article on the impact of automated rights management on copyright's fair use doctrine, see 76 N.C.L. Rev. 557 (1998).

CASE NOTES

Purpose. - As the official comment to this statute makes clear, the purpose behind this section is to permit the courts to do openly what they have been doing for many years in a semi-covert way. Rite Color Chem. Co. v. Velvet Textile Co., 105 N.C. App. 14, 411 S.E.2d 645 (1992).

Under subsection (1), determination of unconscionability is a question of law for the court. Billings v. Joseph Harris Co., 27 N.C. App. 689, 220 S.E.2d 361 (1975), aff'd, 290 N.C. 502, 226 S.E.2d 321 (1976).

Unconscionability is an affirmative defense, and the party asserting it bears the burden of establishing it. Rite Color Chem. Co. v. Velvet Textile Co., 105 N.C. App. 14, 411 S.E.2d 645 (1992).

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 1-102, 2-302.

Point 2: Section 1-201. Definitional Cross References:

"Party". Section 1-201.

"Agreement". Section 1-201.

NORTH CAROLINA COMMENT

This section accords with prior North Carolina law. The risk followed title under such law. Penniman v. Winder, 180 N.C. 73, 103 S.E. 908 (1920). Title passed according to the intent of the parties. Teague v. Howard Grocery Store, 175 N.C. 195, 95 S.E. 173 (1918). Therefore, allocation of risks and burdens could be shifted and allocated by agreement.

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 1-102.

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

"Goods". Section 2-105.

"Money". Section 1-201.

"Party". Section 1-201.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

This would not materially change the prior law of sales, but State v. Albarty, 238 N.C. 130, 76 S.E.2d 381 (1953), holds that for purposes of criminal law a barter is not a sale. See, however, State v. Colonial Club, 154 N.C. 177, 69 S.E. 771 (1910), that a sale is a transmutation of property from one man to another in consideration of some price or recompense in value.

The UCC adds, however, the idea that both traders in a barter situation are both sellers. The UCC provides that the rules herein stated will govern only the barterer of personal property if land is bartered for personal property.

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 2-204(3), 2-706, 2-712 and 2-716.

Point 3: Section 2-103.

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

Point 6: Section 1-203. Definitional Cross References:

"Agreement". Section 1-201.

"Burden of establishing". Section 1-201.

"Buyer". Section 2-103.

"Cancellation". Section 2-106.

"Contract". Section 1-201.

"Contract for sale". Section 2-106.

"Fault". Section 1-201.

"Goods". Section 2-105.

"Party". Section 1-201.

"Receipt of goods". Section 2-103.

"Seller". Section 2-103.

"Term". Section 1-201.

NORTH CAROLINA COMMENT

Subsection (1): Subsections (1)(a) and (b), which state that parties can conclude a sales contract even though the price is not settled, conflict with and change North Carolina law as set out in Wittkowsky v. Wasson, 71 N.C. 451 (1874): "There cannot be an executed sale as to pass the property where the price is to be fixed by agreement between the parties afterwards, and the parties do not afterwards agree." If, however, the thing sold has been delivered to the vendee and consumed, so that the parties cannot be put in status quo, the vendee is liable for a reasonable price. Benjamin, Sales, quoted with approval in Wittkowsky v. Wasson, 71 N.C. 451 (1874).

There are apparently no cases on subsection (1)(c), but it would also conflict with the reasoning of the Wittkowsky case.

Subsection (2): There are apparently no cases relating exactly to subsection (2), but it seems to change the contracts rule set forth in Kirby v. Stokes County Bd. of Educ., 230 N.C. 619, 55 S.E.2d 322 (1949) that: "One of the essential elements of every contract is mutuality of agreement. There must be neither doubt nor difference between the parties. They must assent to the same thing in the same sense and their minds must meet as to all the terms. If any portion of the proposed terms is not settled, or no mode agreed on by which they may be settled, there is no agreement." Compare Richardson v. Greensboro Warehouse & Storage Co., 223 N.C. 344, 26 S.E.2d 897, 149 A.L.R. 201 (1943).

It would seem that under this UCC section contracts of sale are enforceable that would not have been enforceable under prior North Carolina Law.

Subsections (3) and (4): There are no parallels in prior North Carolina law to the other subsections of GS 25-2-305.

It should be noted that subsection (4), as well as the first sentence of this section, pays careful attention to the intention of the parties and a contract is not enforceable under the conditions set out unless the contracting parties intend to be bound.

Legal Periodicals. - For article, "Court Adjustment of Long-Term Contracts: An Analysis Under Modern Contract Law," see 1987 Duke L.J. 1 (1987).

For note, "Real Estate Finance - Subordination Causes: North Carolina Subordinates Substance to Form - MCB Ltd. v. McGowan," see 23 Wake Forest L. Rev. 575 (1988).

CASE NOTES

Fixed Price Formula - Once a buyer or a seller sets a formula or standard to determine the price in a contract pursuant to G.S. 25-2-305, both parties must abide by that formula or standard until mutually amended or changed. Neugent v. Beroth Oil Co., 149 N.C. App. 38, 560 S.E.2d 829 (2002).

Applied in Carolina Bldrs. Corp. v. Howard-Veasey Homes, Inc., 72 N.C. App. 224, 324 S.E.2d 626 (1985).

Cited in Parker Marking Sys. v. Diagraph-Bradley Indus., Inc., 80 N.C. App. 177, 341 S.E.2d 92 (1986); Rhone-Poulenc Agro, S.A. v. DeKalb Genetics Corp., 284 F.3d 1323 (Fed. Cir. 2002); Sara Lee Corp. v. Quality Mfg., 201 F. Supp. 2d 608 (M.D.N.C. 2002).

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 2-210.

Point 5: Sections 1-203 and 2-609. Definitional Cross References:

"Agreement". Section 1-201.

"Buyer". Section 2-103.

"Contract for sale". Section 2-106.

"Good faith". Section 1-201.

"Goods". Section 2-105.

"Party". Section 1-201.

"Term". Section 1-201.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

North Carolina accords with subsection (1). North Carolina has recognized "output" and "requirements" contracts. Herren v. Gaines, 63 N.C. 72 (1868); Indian Mountain Jellico Coal Co. v. Asheville Ice & Coal Co., 134 N.C. 574, 47 S.E. 116 (1904). The limitation to "good faith output" and "good faith requirements" apparently has no parallel in North Carolina, although such limitation seems reasonable.

No North Carolina authority has been found upon subsection (2).

Legal Periodicals. - For note, "Real Estate Finance - Subordination Causes: North Carolina Subordinates Substance to Form - MCB Ltd. v. McGowan," see 23 Wake Forest L. Rev. 575 (1988).

CASE NOTES

Output Contract for Sale of Peanuts. - Alleged oral agreement, made in October, after the peanut growing season, when the quantity and quality of the peanut harvest was certain, which changed the terms of an output contract providing for the sale of plaintiff's peanuts, and had a value of more than $500.00, was governed by the Statute of Frauds. Varnell v. Henry M. Milgrom, Inc., 78 N.C. App. 451, 337 S.E.2d 616 (1985).

The facts alleged, taken in the light most favorable to plaintiff, demonstrated no conduct by defendants that would support plaintiff's claim of an oral waiver of the Statute of Frauds with regard to an alleged oral agreement changing the terms of a written output contract for the sale of peanuts. Varnell v. Henry M. Milgrom, Inc., 78 N.C. App. 451, 337 S.E.2d 616 (1985).

Requirement Contract for Sale of Pharmaceutical Drugs - "Good faith" obligation applies for output contracts; a contract to purchase pharmaceutical drugs "as required" was not vague, but was instead valid and enforceable. IWTMM, Inc. v. Forest Hills Rest Home, 156 N.C. App. 556, 577 S.E.2d 175 (2003).

Applied in Carolina Bldrs. Corp. v. Howard-Veasey Homes, Inc., 72 N.C. App. 224, 324 S.E.2d 626 (1985).

Cited in B.B. Walker Co. v. Ashland Chem. Co., 474 F. Supp. 651 (M.D.N.C. 1979); Parker Marking Sys. v. Diagraph-Bradley Indus., Inc., 80 N.C. App. 177, 341 S.E.2d 92 (1986).

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 1-201.

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

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

"Contract for sale". Section 2-106.

"Goods". Section 2-105.

"Lot". Section 2-105.

"Party". Section 1-201.

"Rights". Section 1-201.

NORTH CAROLINA COMMENT

There are apparently no North Carolina statutes or cases which relate directly to the subject matter of this section. It is therefore new.

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 2-504 and 2-505.

Point 2: Section 2-503.

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

"Contract for sale". Section 2-106.

"Delivery". Section 1-201.

"Document of title". Section 1-201.

"Goods". Section 2-105.

"Party". Section 1-201.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

Subsection (a) accords with prior North Carolina law that where no place for delivery is specified and no contrary intention is shown, the place of delivery is the seller's place of business. See Fruit Growers' Express Co. v. Plate Ice Co., 59 F.2d 605 (4th Cir. 1935). There seems to be no North Carolina authority as to the other two subsections.

Legal Periodicals. - For article, "Court Adjustment of Long-Term Contracts: An Analysis Under Modern Contract Law," see 1987 Duke L.J. 1 (1987).

For note, "Real Estate Finance - Subordination Causes: North Carolina Subordinates Substance to Form - MCB Ltd. v. McGowan," see 23 Wake Forest L. Rev. 575 (1988).

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.
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.

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.

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

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

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

Point 5: Section 1-203.

Point 6: Section 2-609.

Point 7: Section 2-204.

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

"Agreement". Section 1-201.

"Contract". Section 1-201.

"Notification". Section 1-201.

"Party". Section 1-201.

"Reasonable time". Section 1-204.

"Termination". Section 2-106.

NORTH CAROLINA COMMENT

Subsection (1) accords with prior North Carolina law. See Ober & Sons Co. v. Katzenstein, 160 N.C. 439, 76 S.E. 476 (1912), which holds that when no time for shipment is specified in contract for sale of goods, there is an implied understanding that shipment will be within a reasonable time. If no particular time is set in contract for delivery, it must be within a reasonable time. Hurlburt v. Simpson, 25 N.C. 233 (1842); J. B. Colt Co. v. Kimball, 190 N.C. 169, 129 S.E. 406 (1925).

Subsections (2) and (3) also accord with prior North Carolina law that a contract calling for successive and continuing performances, wherein no time is fixed during which the contract is to last and none is fixed by usage, may be terminated at the will of either of the parties upon notice being given to the other party. See Pool v. Walker, 156 N.C. 40, 72 S.E. 70 (1911). The UCC provision requires "reasonable notification" which is probably implicit in the North Carolina decision.

Legal Periodicals. - For article, "Court Adjustment of Long-Term Contracts: An Analysis Under Modern Contract Law," see 1987 Duke L.J. 1.

For note, "Real Estate Finance - Subordination Causes: North Carolina Subordinates Substance to Form - MCB Ltd. v. McGowan," see 23 Wake Forest L. Rev. 575 (1988).

CASE NOTES

The UCC specifically emphasizes the ability of the parties to fix by agreement their rights to terminate a contract for the sale of goods, "termination" being defined under G.S. 25-2-106(3) as the event which occurs when either party pursuant to a power created by agreement or law puts an end to the contract otherwise than for its breach. Parker Marking Sys. v. Diagraph-Bradley Indus., Inc., 80 N.C. App. 177, 341 S.E.2d 92, cert. denied, 317 N.C. 336, 346 S.E.2d 502 (1986).

A contract which contains no definite term as to its duration is terminable at will by either party upon reasonable notice after a reasonable time. Citrini v. Goodwin, 68 N.C. App. 391, 315 S.E.2d 354 (1984).

A contract calling for successive and continuing performances which was indefinite in duration was terminable at will under common law in North Carolina and could be terminated by either party upon giving reasonable notice. The common-law rule is carried forward by subsection (2) of this section. Parker Marking Sys. v. Diagraph-Bradley Indus., Inc., 80 N.C. App. 177, 341 S.E.2d 92, cert. denied, 317 N.C. 336, 346 S.E.2d 502 (1986).

Ambiguous Letter Agreement. - Letter agreement which stated that plaintiff would continue as a distributor of defendant's products indefinitely, but went on to provide that defendant would continue to sell its products to distributor for so long as its purchases did not fall below $51,000.00, in which event either party was given a right of termination, and that the right to terminate at any time, without regard to the amount of purchases, was reserved only to distributor, was unclear and ambiguous as to whether the contract was of indefinite duration and terminable at the will of either party, or whether defendant's right to terminate was conditioned on distributor's failure to meet the minimum purchase levels. Parker Marking Sys. v. Diagraph-Bradley Indus., Inc., 80 N.C. App. 177, 341 S.E.2d 92, cert. denied, 317 N.C. 336, 346 S.E.2d 502 (1986), reversing summary judgment in favor of defendant, whom distributor alleged had unlawfully terminated the agreement.

Where the buyer had agreed to pay in full prior to delivery, and he testified that he knew that the seller would ship the piece of equipment once the price for it was paid, that being the original agreement, the seller's letters requesting payment and impliedly offering delivery were expressions of desire or intention, requesting the assent or acquiescence of the other party, not amounting to breach. Southern Utils., Inc. v. Jerry Mandel Mach. Corp., 71 N.C. App. 188, 321 S.E.2d 508 (1984), cert. denied, 313 N.C. 510, 329 S.E.2d 395 (1985).

Buyer Excused From Tendering Purchase Price. - Because by their words and conduct, sellers indicated that they would no longer honor the contract for the sale of a boat, a buyer was excused from its obligation to tender the purchase price and had an action for breach of contract; the buyer made statements and took actions manifesting an intent that the closing could occur at a later date and never insisted on closing on the specified closing date, the sellers did not show that there was a genuine issue of material fact that the buyer required them to perform at the closing date stated in the contract, and the buyer never declared that the sellers were in default for failure to do so. D.G. II, LLC v. Nix, 211 N.C. App. 332, 712 S.E.2d 335 (2011).

Applied in Superior Foods, Inc. v. Harris-Teeter Super Mkts., Inc., 288 N.C. 213, 217 S.E.2d 566 (1975).

Cited in Foley v. L & L Int'l, Inc., 88 N.C. App. 710, 364 S.E.2d 733 (1988).

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 2-509.

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

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

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

"Buyer". Section 2-103.

"Delivery". Section 1-201.

"Document of title". Section 1-201.

"Goods". Section 2-105.

"Receipt of goods". Section 2-103.

"Seller". Section 2-103.

"Send". Section 1-201.

"Term". Section 1-201.

NORTH CAROLINA COMMENT

Subsection (a) accords with prior North Carolina law which makes the payment of money and the delivery of property simultaneous or concurrent conditions. McAden v. Craig, 222 N.C. 497, 24 S.E.2d 1 (1942); Hughes v. Knott, 138 N.C. 105, 50 S.E. 586 (1905); Wessel v. Seminole Phosphate Co., 13 F.2d 999 (4th Cir. 1926).

Subsection (b) accords with Standard Paint & Lead Works v. Spruill, 186 N.C. 68, 118 S.E. 891 (1923), that goods shipped from a distance point are subject to inspection by the buyer before he becomes liable for the purchase price in the absence of a contractual provision to the contrary.

Subsection (c) accords with common commercial understanding that shipment under C.O.D. contracts and the like deprives the buyer of the right to inspect goods shipped prior to payment. Delivery is not to be made in C.O.D. shipments until payment has been made.

Subsection (d) has no statutory or decisional parallel.

Effect of Amendments. - Session Laws 2006-112, s. 29, effective October 1, 2006, rewrote subsection (c).

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 2-164 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 non-cooperating party. Cross References:

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

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

Point 4: Section 2-614. Definitional Cross References:

"Agreement". Section 1-201.

"Buyer". Section 2-103.

"Contract for sale". Section 2-106.

"Goods". Section 2-105.

"Party". Section 1-201.

"Remedy". Section 1-201.

"Seasonably". Section 1-204.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

The entire section is new and seems to change prior North Carolina law. It states that a contract of sale is not made invalid because particulars of performance are left to be specified by one of the parties. That such particulars of performance may be made by one of the parties and the contract is binding if he acts in good faith and within commercial reasonableness.

This seems to conflict with the statement in Kirby v. Stokes County Bd. of Educ., 230 N.C. 619, 55 S.E.2d 322 (1949), that: "One of the essential elements of every contract is mutuality of agreement. There must be neither doubt nor difference between the parties. They must assent to the same thing in the same sense, and their minds must meet as to all the terms. If any portion of the proposed terms is not settled, or no mode agreed on which they may be settled, there is no agreement." Compare Richardson v. Greensboro Warehouse & Storage Co., 223 N.C. 344, 26 S.E.2d 897, 149 A.L.R. 201 (1943).

It would seem to be a question of materiality under prior North Carolina Law as to whether omitted terms of the contract might be supplied unilaterally by the parties or by the court.

CASE NOTES

Failure to Exercise Stock Option Within Reasonable Time. - Where plaintiffs could have availed themselves of the benefits of a stock option for over 17 months, which was more than a reasonable and seasonable amount of time within which to act, the trial judge properly concluded that plaintiffs had failed to exercise their option and could claim no ownership in the stock. Floto v. Pied Piper Resort, Inc., 96 N.C. App. 241, 385 S.E.2d 157, cert. denied, 326 N.C. 47, 389 S.E.2d 87 (1990).

CASE NOTES

Burden on Plaintiffs Seeking Recovery on Warranty. - In an action to recover the price paid by plaintiffs to defendants for a tractor where plaintiffs alleged that the tractor was sold to satisfy a lien which existed at the time of the sale, summary judgment was improperly granted for the plaintiffs where they neither alleged nor offered evidentiary material to show that they had no knowledge of the existence of the lien, since the burden was on the plaintiffs, as movants, to produce evidence on every element necessary for them to prove in order to be entitled to judgment, and in order to recover on the warranty provided by this section, plaintiffs must prove the presence of a lien or encumbrance of which they had no knowledge. Smith v. Taylor, 44 N.C. App. 363, 261 S.E.2d 19 (1979).

Applied in MAS Corp. v. Thompson, 62 N.C. App. 31, 302 S.E.2d 271 (1983).

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

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

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.

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.

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.

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

Point 1: Section 2-316.

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

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

Point 4: Section 2-316.

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

Point 6: Section 2-316.

Point 7: Section 2-209.

Point 8: Section 1-103. Definitional Cross References:

"Buyer". Section 2-103.

"Conforming". Section 2-106.

"Goods". Section 2-105.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

Subsection (1)(a) accords with North Carolina's prior definition of express warranty. See Wrenn v. Morgan, 148 N.C. 101, 61 S.E. 641 (1908); Hodges v. Smith, 158 N.C. 256, 73 S.E. 807 (1912); Swift & Co. v. Meekins, 179 N.C. 173, 102 S.E. 138 (1920); Potter v. National Supply Co., 230 N.C. 1, 51 S.E.2d 908 (1949).

Subsection (1)(b) stating a warranty where a sale is by description accords with Swift & Co. v. Aydlett, 192 N.C. 330, 135 S.E. 141 (1926), and Lexington Grocery Co. v. Vernoy, 167 N.C. 427, 83 S.E. 567 (1914).

Subsection (1)(c) accords with Woodridge v. Brown, 149 N.C. 299, 62 S.E. 1076 (1908); Robertson v. Halton, 156 N.C. 215, 72 S.E. 316 (1911); Kime v. Riddle, 174 N.C. 442, 93 S.E. 946 (1917); Wrenn v. Morgan, 148 N.C. 101, 61 S.E. 641 (1908).

There will be no change in North Carolina law in connection with this section.

Cross References. - For the New Motor Vehicles Warranties Act, see G.S. 20-351 et seq.

Legal Periodicals. - For note on strict liability for breach of warranty, see 50 N.C.L. Rev. 697 (1972).

For comment on the liability of the bailor for hire for personal injuries caused by defective goods, see 51 N.C.L. Rev. 786 (1973).

For note on requirement of privity and express warranties, see 16 Wake Forest L. Rev. 857 (1980).

For article on contract modification under Article 2, see 59 N.C.L. Rev. 335 (1981).

For article, "Damages and Problems of Proof with Planted Nonconforming Seeds," see 9 Campbell L. Rev. 63 (1986).

For comment on tort reform, see 10 Campbell L. Rev. 439 (1988).

For comment, "Laying the Ghost of Reliance to Rest in Section 2-313 of the Uniform Commercial Code: An 'Endpoints' Analysis," see 28 Wake Forest L. Rev. 1065 (1993).

CASE NOTES

Prior law is in accord with this section with respect to the creation of express warranties. Performance Motors, Inc. v. Allen, 280 N.C. 385, 186 S.E.2d 161 (1972).

Subsections (1)(a) and (2) work no change in the pre-code law of North Carolina. Gurney Indus., Inc. v. St. Paul Fire & Marine Ins. Co., 467 F.2d 588 (4th Cir. 1972).

"Seller." - There is a substantial question as to whether it would be appropriate in light of § 110(f) of the Federal Magnuson-Moss Warranty Act of 1975, 15 U.S.C. § 2301-2312, to interpret the word "seller" in this section to include a manufacturer (or anyone else) who issues an express warranty. Richard W. Cooper Agency, Inc. v. Irwin Yacht & Marine Corp., 46 N.C. App. 248, 264 S.E.2d 768 (1980).

Basic obligation created by description of goods cannot be retracted. - A clause generally disclaiming all warranties, express or implied, cannot reduce seller's obligation with respect to such description. Muther-Ballenger v. Giffin Elec. Consultants, Inc., 100 N.C. App. 505, 397 S.E.2d 247 (1990).

When Privity Not Required. - Privity in the sale of goods is not necessary in a purchaser's action on a manufacturer's express warranty relating to the goods. Richard W. Cooper Agency, Inc. v. Irwin Yacht & Marine Corp., 46 N.C. App. 248, 264 S.E.2d 768 (1980).

The absence of contractual privity does not bar a direct claim by an ultimate purchaser against a manufacturer for breach of the manufacturer's express warranty which is directed to the purchaser. Williams v. Hyatt Chrysler-Plymouth, Inc., 48 N.C. App. 308, 269 S.E.2d 184, cert. denied, 301 N.C. 406, 273 S.E.2d 451 (1980).

A retailer may recover against the manufacturer for breach of warranty where a manufacturer's oral representations made directly to a retailer are intended to be communicated to remote buyers to induce them to buy a product. Alberti v. Manufactured Homes, Inc., 329 N.C. 727, 407 S.E.2d 819 (1991).

Warranty to Buyer and User. - In an action by plaintiff buyer against defendant manufacturer under an express warranty which provides for a remedy in substitution for the general rule of damages applicable to breach of contract for sale of personal property, the remedy provided for in the express warranty is controlling, at least where such provision meets the general tests of legality. Richard W. Cooper Agency, Inc. v. Irwin Yacht & Marine Corp., 46 N.C. App. 248, 264 S.E.2d 768 (1980).

Where defendant obviously knew that buyer was seeking to obtain computer software on behalf of plaintiff, defendant made its express warranty to both plaintiff (buyer) and ultimate user of software in order to induce both parties to go through with the purchase of its software system. Sharrard, McGee & Co. v. Suz's Software, Inc., 100 N.C. App. 428, 396 S.E.2d 815 (1990).

Question of Fact. - Whether the parties to a transaction have created an express warranty is a question of fact. Pake v. Byrd, 55 N.C. App. 551, 286 S.E.2d 588 (1982); Warren v. Joseph Harris Co., 67 N.C. App. 686, 313 S.E.2d 901 (1984).

The plaintiff's evidence was held to have made out a prima facie case that the defendant contracted or expressly warranted to provide the plaintiff with Number 2 milling wheat, a commodity with few defective kernels, and breached its obligation by supplying wheat of an inferior standard that contained a high percentage of defective kernels, breaching the implied warranty of merchantability and the implied warranty of fitness for a particular purpose; under the circumstances, whether these warranties were made or breached were questions of fact, not law. W.A. Davis Realty, Inc. v. Wakelon Agri-Products, Inc., 84 N.C. App. 97, 351 S.E.2d 816 (1987).

Whether defendant made or breached any express warranties that scanner would completely perform quality scanning of human spine is question of fact to be decided by trier of fact. Muther-Ballenger v. Giffin Elec. Consultants, Inc., 100 N.C. App. 505, 397 S.E.2d 247 (1990).

Dismissal was improperly granted on a breach of express warranty counterclaim where the buyers alleged that at the time of purchase, they informed agents of the seller that they were in the market for a vehicle that they both could ride in for their personal use, the agents stated that the vehicle could safely transport both defendants at the same time and that the vehicle was brand new with no mechanical issues, and the buyers relied on this express warranty when purchasing the vehicle and would not have purchased it had the agents not represented to them that the vehicle was in good working order and fit to transport them both. Ford Motor Credit Co. LLC v. McBride, 257 N.C. App. 590, 811 S.E.2d 640 (2018).

Central Issue. - The single most important decision to make is whether the seller's statements were regarded by the buyer as part of his reason for purchasing the goods. Pake v. Byrd, 55 N.C. App. 551, 286 S.E.2d 588 (1982).

Issue of Material Fact as to Breach of Warranty. - Genuine issues of material fact existed as to owner's allegations of breach of express warranty; although manufacturer argued that it offered owner an express warranty which was rejected, architect and engineer for owner stated in his deposition that owner relied upon information and technical assistance by manufacturer in choosing the roof design and, therefore, owner's reliance would establish an express warranty by manufacturer. Westover Prods., Inc. v. Gateway Roofing Co., 94 N.C. App. 63, 380 S.E.2d 369 (1989).

The seller's warranty is not his personal guarantee concerning the continuous and future operation of the goods which he has sold. Pake v. Byrd, 55 N.C. App. 551, 286 S.E.2d 588 (1982).

Neither Formal Words Nor Intent Are Necessary. - Neither the formal words of an express warranty nor the seller's intent to afford such a warranty is necessary to fulfill the requirements of this section. Pake v. Byrd, 55 N.C. App. 551, 286 S.E.2d 588 (1982).

Not All Statements by Seller Create Express Warranty. - The distinction between an affirmation or a description from mere sales talk or opinion or puffing is hazy. The law recognizes that some seller's statements are only sales palaver and not express warranties. Thus, expressions such as "supposed to last a lifetime" or "in perfect condition" do not create an express warranty. Hall v. T.L. Kemp Jewelry, Inc., 71 N.C. App. 101, 322 S.E.2d 7 (1984).

Statement as to Value Is Not Express Warranty. - A review of the case law of this State reveals no case where an opinion as to value, standing alone, was sufficient to amount to an express warranty. This does not necessarily mean that value could never become expressly warranted, but it suggests that in the ordinary course of business, a statement as to value is not considered an express warranty. Hall v. T.L. Kemp Jewelry, Inc., 71 N.C. App. 101, 322 S.E.2d 7 (1984).

Effect of Examination by Buyer. - An examination by the buyer of goods does not necessarily discharge the seller from an express warranty if the defect was one which could not be located by the buyer. Pake v. Byrd, 55 N.C. App. 551, 286 S.E.2d 588 (1982).

Secondhand goods may have an express warranty attached to them, and the warranty provisions are applied without regard to whether the seller is a manufacturer, merchant, or farmer. Pake v. Byrd, 55 N.C. App. 551, 286 S.E.2d 588 (1982).

Under the following circumstances, defendants expressly warranted that, at the time of the sale, a used tractor was in good condition and free from major mechanical defects: (1) Defendants had superior knowledge of the subject matter; (2) the circumstances were such that the plaintiff, as a reasonable man, was entitled to rely on the defendants' statements; and (3) the statements were a part of the basis of the bargain. Pake v. Byrd, 55 N.C. App. 551, 286 S.E.2d 588 (1982).

Statement Held Mere Opinion. - Seller's statement that a mobile home "was supposed to last a lifetime and be in perfect condition" is merely an expression of opinion and does not create an express warranty. Performance Motors, Inc. v. Allen, 280 N.C. 385, 186 S.E.2d 161 (1972).

Statement made by salesman to farmer that a certain herbicide would "do a good job" was a mere expression of opinion and did not create an express warranty. Tyson v. Ciba-Geigy Corp., 82 N.C. App. 626, 347 S.E.2d 473 (1986).

Statement Held to Be "Puffing". - Seller's advertisement that it sold "America's most complete line of reliable, economical gas heating appliances" was, under the Uniform Commercial Code, "a statement purporting to be merely the seller's opinion or commendation of the goods does not create warranty." Seller's statement that the heater was "reliable" could not be regarded by the buyers as part of the reason for their purchase; therefore, the language in seller's advertisement was mere puffing and not an express warranty. Warzynski v. Empire Comfort Sys., 102 N.C. App. 222, 401 S.E.2d 801 (1991).

Statement by Seller Creating Express Warranty. - In letter, president of defendant corporation stated, "We guarantee our programming with full return and refund privileges for the software and printer should our programming not perform as warranted." As a matter of law, this letter constituted an express warranty that the equipment would perform correctly. Sharrard, McGee & Co. v. Suz's Software, Inc., 100 N.C. App. 428, 396 S.E.2d 815 (1990).

Where plaintiffs were informed by defendant's sales agent that their car was subject to a 12-month, 12,000 mile warranty, such a statement was certainly an affirmation of fact relating to the goods which became a basis of the bargain, and plaintiffs had no way of determining that such a warranty was limited to the manufacturer because there was no evidence that plaintiffs were told it was a manufacturer's warranty or that defendant excluded itself from the warranty and they were not even given a written copy of the warranty. The evidence supported the trial court's conclusion that defendant had made an express warranty to plaintiffs. Riley v. Ken Wilson Ford, Inc., 109 N.C. App. 163, 426 S.E.2d 717 (1993).

Breach of Express Warranty Shown. - Evidence was sufficient to support a finding by the jury that defendant breached an express warranty, where plaintiff testified at trial that defendant told him that certain engine parts on the car which he purchased had been replaced within six months, while testimony of an employee of defendant that he had replaced these parts approximately "a year and a half" before the sale was uncontroverted. Bailey v. LeBeau, 79 N.C. App. 345, 339 S.E.2d 460, modified and aff'd, 318 N.C. 411, 348 S.E.2d 524 (1986).

Breach of Express Warranty Not Shown. - In action for damages resulting from aircraft crash, plaintiffs-air passengers contended that they were third-party beneficiaries of an alleged express or implied warranty existing between aircraft manufacturer and preparer of negligently prepared and published aircraft instruction manual and aircraft pilot; however, plaintiffs did not allege that any relationship of the type required by this section existed at the time of the crash. Therefore, plaintiffs were not entitled to relief based upon their theories as a matter of law. Driver v. Burlington Aviation, Inc., 110 N.C. App. 519, 430 S.E.2d 476 (1993).

Airplane seller was entitled to summary judgment in a buyer's claim for breach of express warranty in a sales contract, G.S. 25-2-313(1)(a), because the airplane was in "airworthy condition" at the time of the sale; the pre-purchase examination did not reveal any defects that called into question the plane's "airworthiness," the plane made at least four flights shortly after the sale, and the defects discovered one year after the sale were not abnormal for a forty-five year old plane that was months overdue for its annual inspection. Prichard Enters. v. Adkins, - F. Supp. 2d - (E.D.N.C. Mar. 14, 2012).

Interlocutory Review of Discovery Order. - When a homeowners' association sued a manufacturer for product liability under G.S. 99B-1 et seq., and a trial court ordered the association to return documents to the manufacturer that were inadvertently released to the association in discovery, the association could not immediately appeal the order under G.S. 1-277 or G.S. 7A-27(d)(1) on the theory that the order affected the association's substantial right, because: (1) the association did not identify a right that was affected or show how such a right would be jeopardized without immediate review; (2) unsupported opinions in a memo the association was ordered to return to the manufacturer did not affect a substantial right, as the memo did not show what the manufacturer's employees, outside testers and experts, knew about the product's adequacy and when the employees knew the information, and such prior knowledge was not critical to claims against the manufacturer; and (3), if such knowledge were critical, the memo did not contribute significantly to a determination of the issue. Harbour Point Homeowners' Ass'n v. DJF Enters., 206 N.C. App. 152, 697 S.E.2d 439 (2010).

Applied in Helson's Premiums & Gifts, Inc. v. Duncan, 9 N.C. App. 653, 177 S.E.2d 428 (1970); HPS, Inc. v. All Wood Turning Corp., 21 N.C. App. 321, 204 S.E.2d 188 (1974); Potter v. Tyndall, 22 N.C. App. 129, 205 S.E.2d 808 (1974); Hobson Constr. Co. v. Hajoca Corp., 28 N.C. App. 684, 222 S.E.2d 709 (1976); Coffer v. Standard Brands, Inc., 30 N.C. App. 134, 226 S.E.2d 534 (1976); ITT-Industrial Credit Co. v. Milo Concrete Co., 31 N.C. App. 450, 229 S.E.2d 814 (1976); Byrd Motor Lines v. Dunlop Tire & Rubber Corp., 63 N.C. App. 292, 304 S.E.2d 773 (1983); Warren v. Guttanit, Inc., 69 N.C. App. 103, 317 S.E.2d 5 (1984); Russel v. Baity, 95 N.C. App. 422, 383 S.E.2d 217 (1989); Bryant v. Adams, 116 N.C. App. 448, 448 S.E.2d 832 (1994); McDonald Bros., Inc. v. Tinder Wholesale, LLC, 395 F. Supp. 2d 255 (M.D.N.C. 2005).

Cited in Griffin v. Wheeler-Leonard & Co., 290 N.C. 185, 225 S.E.2d 557 (1976); Harrington Mfg. Co. v. Logan Tontz Co., 40 N.C. App. 496, 253 S.E.2d 282 (1979); McNair Constr. Co. v. Fogle Bros. Co., 64 N.C. App. 282, 307 S.E.2d 200 (1983).

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 reminder of the frequent usages of trade which permit substantial variations both with and without an allowance or an obligation to replace the varying units.
10. Paragraph (e) applies only where the nature of the goods and of the transaction requires 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 ex-ercised care in the manufacture, processing or selection of the goods is relevant to the issue of whether the warranty was in fact broken. Action by the buyer following an examination of the goods which ought to have indicated the defect complained of can be shown as matter bearing on whether the breach itself was the cause of the injury. Cross References:

Point 1: Section 2-316.

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

Point 5: Section 2-315.

Point 11: Section 2-316.

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

"Agreement". Section 1-201.

"Contract". Section 1-201.

"Contract for sale". Section 2-106.

"Merchant". Section 2-104.

"Goods". Section 2-105.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

Subsection (1): The first sentence of subsection (1), implying warranty of merchantability that personal property is merchantable and reasonably fit for the purposes for which sold, accords with prior North Carolina law. See Aldridge Motors v. Alexander, 217 N.C. 750, 9 S.E.2d 469 (1940); Swift & Co. v. Aydlett, 192 N.C. 330, 135 S.E. 141 (1926); Continental Jewelry Co. v. Stanfield, 183 N.C. 10, 110 S.E. 585 (1922); Ashford v. H. C. Shrader Co., 167 N.C. 45, 83 S.E. 29 (1914); Shoop Family Medicine Co. v. Davenport, 163 N.C. 294, 79 S.E. 602 (1913).

The second sentence of subsection (1) negates the possibility of argument that a restaurateur merely "utters a service" and does not make a "sale." This argument had been upheld in a bulk sales case in Swift & Co. v. Tempelos, 178 N.C. 487, 101 S.E. 8 (1919), but expressly was not decided in Williams v. Elson, 218 N.C. 157, 10 S.E.2d 668 (1940), in a food warranty case. The UCC makes restaurants liable for "sales" whether the food served is to be consumed on or off the premises. It clarifies a point that may have been questionable under prior law. This can be quite important in North Carolina because of the practical nonavailability of the doctrine of res ipsa loquitur in negligence actions, often necessitating resort to warranty actions when proof of negligence is not available.

Subsection (2) accords with prior North Carolina law in general but spells out in detail the requirements of "merchantability." North Carolina's definition of merchantability under prior law is set out in Swift & Co. v. Aydlett, 192 N.C. 330, 135 S.E. 141 (1926): "A vendor of an article of personal property, by name and description, cannot relieve himself of the obligation arising from the warranty implied by law to deliver an article which is at least merchantable, or saleable or fit for the use of which articles of that name and description are ordinarily sold and bought."

Note that the section only applies when the seller is a merchant.

Cross References. - For the New Motor Vehicles Warranties Act, see G.S. 20-351 et seq.

For rules related to drinking water and limitations on implied warranties as to suppliers of water, see G.S. 130A-315.

As to the Childhood Vaccine-Related Injury Compensation Program, see G.S. 130A-422 et seq.

Legal Periodicals. - For comment on the liability of the bailor for hire for personal injuries caused by defective goods, see 51 N.C.L. Rev. 786 (1973).

For survey of 1972 case law on recovery for personal injury under implied warranty, see 51 N.C.L. Rev. 1159 (1973).

For survey of 1976 case law on commercial law, see 55 N.C.L. Rev. 943 (1977).

For survey of 1977 commercial law, see 56 N.C.L. Rev. 915 (1978).

For note on farmers as merchants under the Uniform Commercial Code, see 1 Campbell L. Rev. 141 (1979).

For survey of 1979 commercial law, see 58 N.C.L. Rev. 1290 (1980).

For article, "North Carolina's New Products Liability Act: A Critical Analysis," see 16 Wake Forest L. Rev. 171 (1980).

For survey of 1980 commercial law, see 59 N.C.L. Rev. 1084 (1981).

For comment, "The Crashworthy Vehicle: Heading for a Collision in the North Carolina Courts," see 18 Wake Forest L. Rev. 711 (1982).

For article, "Damages and Problems of Proof with Planted Nonconforming Seeds," see 9 Campbell L. Rev. 63 (1986).

For comment on tort reform, see 10 Campbell L. Rev. 439 (1988).

For survey, "Contract Warranties and Remedies: A Comprehensive Survey of the Creation, Modification and Exclusion of Contract Warranties and Remedies for Attorneys and Contracting Professionals," see 14 Campbell L. Rev. 323 (1993).

For article, "Products Liability - Emerging Consensus and Persisting Problems: An Analytical Review Presenting Some Options," see 25 Campbell L. Rev. 1 (2002).

For note, "Big Brother and Buyers," see 51 Wake Forest L. Rev. 917 (2016).

CASE NOTES

• I. General Consideration.
• II. Warranty given.
• III. Breach of Warranty.

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.
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.

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.

6. The specific reference forward in the present section to the following section on exclusion or modification of warranties is to call attention to the possibility of eliminating the warranty in any given case. However, it must be noted that under the following section the warranty of fitness for a particular purpose must be excluded or modified by a conspicuous writing. Cross References:

Point 2: Sections 2-314 and 2-317.

Point 3: Section 2-303.

Point 6: Section 2-316. Definitional Cross References:

"Buyer". Section 2-103.

"Goods". Section 2-105.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

This section accords with Stokes v. Edwards, 230 N.C. 306, 52 S.E.2d 797 (1949); Southern Box & Lumber Co. v. Home Chair Co., 250 N.C. 71, 108 S.E.2d 70 (1959).

Cross References. - For the New Motor Vehicles Warranties Act, see G.S. 20-351 et seq.

For rules related to drinking water and limitations on implied warranties as to suppliers of water, see G.S. 130A-315.

As to the Childhood Vaccine-Related Injury Compensation Program, see G.S. 130A-422 et seq.

Legal Periodicals. - For comment on the liability of the bailor for hire for personal injuries caused by defective goods, see 51 N.C.L. Rev. 786 (1973).

For survey of 1981 commercial law, see 60 N.C.L. Rev. 1238 (1982).

For article, "Damages and Problems of Proof with Planted Nonconforming Seeds," see 9 Campbell L. Rev. 63 (1986).

For note, "The Legal Liability of Blood Donor Services and Transfusion Providers in the Wake of the AIDS Crisis," see 290 N.C. Cent. L.J. 20 (1992).

For survey, "Contract Warranties and Remedies: A Comprehensive Survey of the Creation, Modification and Exclusion of Contract Warranties and Remedies for Attorneys and Contracting Professionals," see 14 Campbell L. Rev. 323 (1993).

CASE NOTES

This section did not repeal or limit the scope of former G.S. 106-50.7(e)(4), since G.S. 25-2-102 provides that the Uniform Commercial Code does not "impair or repeal any statute regulating sales to . . . farmers." Potter v. Tyndall, 22 N.C. App. 129, 205 S.E.2d 808, cert. denied, 285 N.C. 661, 207 S.E.2d 762 (1974).

This section and G.S. 25-2-314 are not applicable to one who simply allows his seal of inspection to be placed on a product manufactured by someone else. Any implied warranty in such a case would concern the quality of inspection services rather than the quality of goods. Jones v. Clark, 36 N.C. App. 327, 244 S.E.2d 183 (1978).

Inapplicable to Lease. - Agreement between the parties providing for the lease of golf carts, which agreement was designated a lease on its face and was for a fixed term of 48 months, also provided the lessee with the option to purchase the golf carts. This purchase option indicated that the parties intended to engage in a true lease, not a disguised sale because the option price was the equipment's fair market value, and the purchase option was intended to approximate the depreciated fair market value of the golf carts. The agreement was therefore a true lease, making Article 2 inapplicable. Beau Rivage Plantation, Inc. v. Melex USA, Inc., 112 N.C. App. 446, 436 S.E.2d 152 (1993).

Distributor Must Disclose Limitation on Warranty. - Where the manufacturer gave ample warning to the distributor who failed to pass it on to the consumer, and the distributor selected the product, unqualifiedly recommended it, and sold it for immediate use, then in the absence of express warranty on the part of the manufacturer, the implied warranty of limited fitness between the manufacturer and the distributor placed the primary responsibility on the distributor to notify the user of the limitation on fitness. Wilson v. E-Z Flo Chem. Co., 281 N.C. 506, 189 S.E.2d 221 (1972).

Abrogation of Privity Requirement in Certain Claims. - Chapter 99B (products liability) expressly abrogates the privity requirement in certain claims based upon implied warranty. However, outside the exceptions created by Chapter 99B, the general rule is that privity is required to assert a claim for breach of an implied warranty involving only economic loss. Sharrard, McGee & Co. v. Suz's Software, Inc., 100 N.C. App. 428, 396 S.E.2d 815 (1990).

Writing Must Be Conspicuous to Exclude Warranty. - To exclude implied warranty of fitness for particular purpose, writing must be conspicuous. To exclude warranty of merchantability, language must mention merchantability and be conspicuous. Muther-Ballenger v. Giffin Elec. Consultants, Inc., 100 N.C. App. 505, 397 S.E.2d 247 (1990).

Disclaimer and Substitution of G.S. 25-2-719(1)(a) Limitations. - A merchant seller may disclaim all liability under G.S. 25-2-316(2) stemming from any breach of warranties of merchantability and fitness under G.S. 25-2-314 and this section, substituting in place thereof the limitations of G.S. 25-2-719(1)(a). Billings v. Joseph Harris Co., 27 N.C. App. 689, 220 S.E.2d 361 (1975), aff'd, 290 N.C. 502, 226 S.E.2d 321 (1976).

Acceptance of Product Held Not to Bar Action. - While the purchaser of a mobile home was obligated to pay the contract price when she paid the loan on the home and released the lender, thereby accepting the home and barring rejection, she could still maintain an action for breach of warranty. Lyon v. Shelter Resources Corp., 40 N.C. App. 557, 253 S.E.2d 277 (1979).

Defect Must Have Existed at Time of Sale. - The seller's warranty is not his personal guarantee regarding the continuous and future operation of the goods which he has sold. To establish a breach of warranty, there must be evidence sufficient to show that the defect existed at the time of the sale. Bailey v. LeBeau, 79 N.C. App. 345, 339 S.E.2d 460, modified and aff'd, 318 N.C. 411, 348 S.E.2d 524 (1986).

Where no evidence was introduced to show that car's breakdown was caused by any defect that existed at the time of its sale, the issue of breach of implied warranty of fitness for the particular purpose of long distance driving should not have been submitted to the jury. Bailey v. LeBeau, 79 N.C. App. 345, 339 S.E.2d 460, modified and aff'd, 318 N.C. 411, 348 S.E.2d 524 (1986).

Ordinary use of product precludes recovery. - Ordinary use of a product forecloses recovery under the implied warranty of fitness for a particular purpose; therefore, a retailer of building products and materials was unable to proceed on its claim against a supplier of lumber products for breach of the implied warranty of fitness for a particular purpose because the finger-jointed trim boards for use in home construction that formed the basis of the complaint had been put to their ordinary use. McDonald Bros., Inc. v. Tinder Wholesale, LLC, 395 F. Supp. 2d 255 (M.D.N.C. 2005).

Retailer Liable for Breach May Recover from Manufacturer. - Where the retailer purchases personal property from the manufacturer or wholesaler for resale with implied or express warranty of fitness and the retailer resells to the consumer with the same warranty and the retailer has been compelled to pay for breach of warranty, he may recover his entire loss from the manufacturer. This rule is not applicable between the manufacturer who gave warning and the distributor who has been warned, but fails to pass on the warning to the user. Wilson v. E-Z Flo Chem. Co., 281 N.C. 506, 189 S.E.2d 221 (1972).

Where the retailer purchases personal property from the manufacturer for resale with implied or express warranty of fitness and the retailer resells to the consumer with the same warranty and the retailer has been compelled to pay for breach of warranty, he may recover his entire loss from the manufacturer. Lyon v. Shelter Resources Corp., 40 N.C. App. 557, 253 S.E.2d 277 (1979).

Warranties Based on Contractual Theory. - Where plaintiff buyer brought an action to recover for a defective boat manufactured by defendant, there was no basis for plaintiff's claims of breach of implied warranty of merchantability and breach of implied warranty of fitness for a particular purpose, since those implied warranties are based on contractual theory, and there was no privity of contract between plaintiff buyer and defendant manufacturer. Richard W. Cooper Agency, Inc. v. Irwin Yacht & Marine Corp., 46 N.C. App. 248, 264 S.E.2d 768 (1980).

Question of Fact. - The plaintiff's evidence was held to have made out a prima facie case that the defendant contracted or expressly warranted to provide the plaintiff with Number 2 milling wheat, a commodity with few defective kernels, and breached its obligation by supplying wheat of an inferior standard that contained a high percentage of defective kernels, breaching the implied warranty of merchantability and the implied warranty of fitness for a particular purpose; under the circumstances, whether these warranties were made or breached were questions of fact, not law. W.A. Davis Realty, Inc. v. Wakelon Agri-Products, Inc., 84 N.C. App. 97, 351 S.E.2d 816 (1987).

Sale of Vehicle. - Dismissal was improperly granted on the breach of the implied warranty of fitness for a particular purpose counterclaim given the allegation that the buyers informed the seller's agents that they were looking for a vehicle that could transport them both at the same time. Ford Motor Credit Co. LLC v. McBride, 257 N.C. App. 590, 811 S.E.2d 640 (2018).

Sale of Camper with Defective Motor Held Breach. - Defendants made and breached the implied warranty of fitness, where they sold a camper to plaintiffs with a motor which was warranted as a new motor but failed to perform and had to be replaced one month after purchase. Whitehurst v. Crisp R.V. Ctr., Inc., 86 N.C. App. 521, 358 S.E.2d 542 (1987).

Purpose of Vaccine. - DPT vaccine had the ordinary purpose of preventing the contraction of disease. There was no particular purpose, native to the plaintiff's position, that would implicate an implied warranty for a particular purpose. Foyle ex rel. McMillan v. Lederle Labs., 674 F. Supp. 530 (E.D.N.C. 1987). As to vaccine-related injury, see now G.S. 130A-422 et seq.

Evidence Held to Show Implied Warranty. - Evidence was sufficient for jury to find that salesman, consulted by farmer with regard to the no-till cultivation of soybeans, made an implied warranty relating to the fitness of a certain herbicide for plaintiff's purpose and that this warranty was breached. Tyson v. Ciba-Geigy Corp., 82 N.C. App. 626, 347 S.E.2d 473 (1986).

Evidence of Damages Insufficient. - A warranty action failed for lack of evidence of damages proximately resulting from defects at the time of sale some 17 months and 30,000 miles earlier. Cooper v. Mason, 14 N.C. App. 472, 188 S.E.2d 653 (1972).

No Implied Warranty of Fitness for Particular Purpose Applied When Manufactured to Buyer's Specifications. - Since plaintiff properly manufactured the urea resin to defendant's specifications, no implied warranty of fitness for a particular purpose arises. Though no implied warranty of fitness for a particular purpose arises here because defendant provided plaintiff with the specifications to manufacture the resin, the implied warranty of merchantability exists in any sales contract where the seller is a "merchant with respect to [the] goods" sold. Southeastern Adhesives Co. v. Funder Am., Inc., 89 N.C. App. 438, 366 S.E.2d 505 (1988).

Supplier Not Liable Where Owner Relied on Manufacturer. - There was no genuine issue of material fact as to breach of implied warranty of particular purpose where owner did not rely in any way upon supplier's advice in owner's selection of the roofing system, but rather, it was manufacturer whom owner relied upon. Westover Prods., Inc. v. Gateway Roofing Co., 94 N.C. App. 63, 380 S.E.2d 375 (1989).

For case involving the sale of prescription drugs, i.e., birth control pills, as it relates to this section, see Batiste v. American Home Prods. Corp., 32 N.C. App. 1, 231 S.E.2d 269, cert. denied, 292 N.C. 466, 233 S.E.2d 921 (1977).

Interlocutory Appeal of Discovery Order. - When a homeowners' association sued a manufacturer for product liability under G.S. 99B-1 et seq., and a trial court ordered the association to return documents to the manufacturer that were inadvertently released to the association in discovery, the association could not immediately appeal the order under G.S. 1-277 or G.S. 7A-27(d)(1) on the theory that the order affected the association's substantial right, because: (1) the association did not identify a right that was affected or show how such a right would be jeopardized without immediate review; (2) unsupported opinions in a memo the association was ordered to return to the manufacturer did not affect a substantial right, as the memo did not show what the manufacturer's employees, outside testers and experts, knew about the product's adequacy and when the employees knew the information, and such prior knowledge was not critical to claims against the manufacturer; and (3), if such knowledge were critical, the memo did not contribute significantly to a determination of the issue. Harbour Point Homeowners' Ass'n v. DJF Enters., 206 N.C. App. 152, 697 S.E.2d 439 (2010).

Applied in Trio Estates, Ltd. v. Dyson, 10 N.C. App. 375, 178 S.E.2d 778 (1971); Hobson Constr. Co. v. Hajoca Corp., 28 N.C. App. 684, 222 S.E.2d 709 (1976); Angola Farm Supply & Equip. Co. v. FMC Corp., 59 N.C. App. 272, 296 S.E.2d 503 (1982).

Cited in Styron v. Loman-Garrett Supply Co., 6 N.C. App. 675, 171 S.E.2d 41 (1969); Maybank v. S.S. Kresge Co., 46 N.C. App. 687, 266 S.E.2d 409 (1980); Preston v. Thompson, 53 N.C. App. 290, 280 S.E.2d 780 (1981); Arrington v. Brad Ragan, Inc., 56 N.C. App. 416, 289 S.E.2d 122 (1982); Warren v. Joseph Harris Co., 67 N.C. App. 686, 313 S.E.2d 901 (1984); Ramsey Prods. Corp. v. Morbark Indus., Inc., 823 F.2d 798 (4th Cir. 1987); Ferguson v. Williams, 92 N.C. App. 336, 374 S.E.2d 438 (1988); Gregory v. Atrium Door & Window Co., 106 N.C. App. 142, 415 S.E.2d 574 (1992); Driver v. Burlington Aviation, Inc., 110 N.C. App. 519, 430 S.E.2d 476 (1993); McCorkle v. Aeroglide Corp., 115 N.C. App. 651, 446 S.E.2d 145 (1994); DeWitt v. Eveready Battery Co., 144 N.C. App. 143, 550 S.E.2d 511 (2001), cert. denied, 354 N.C. 216, 553 S.E.2d 398 (2001), aff'd, 355 N.C. 672, 565 S.E.2d 140 (2002).

OFFICIAL COMMENT

Prior Uniform Statutory Provision: None. 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 2-202, 2-718 and 2-719.

Point 7: Sections 1-205 and 2-208. Definitional Cross References:

"Agreement". Section 1-201.

"Buyer". Section 2-103.

"Contract". Section 1-201.

"Course of dealing". Section 1-205.

"Goods". Section 2-105.

"Remedy". Section 1-201.

"Seller". Section 2-103.

"Usage of trade". Section 1-205.

NORTH CAROLINA COMMENT

Subsection (1) seems to accord with Case Threshing Mach. Co. v. McClamrock, 152 N.C. 405, 67 S.E. 991 (1910), that personal property may be sold with or without warranty if there is an express stipulation that the property is not warranted. See also Swift & Co. v. Etheridge, 190 N.C. 162, 129 S.E. 453 (1925). The intent to warrant is a matter which must appear in the form of the expression, aided in proper cases by the circumstances surrounding the transaction. Walston v. R. B. Whitley & Co., 226 N.C. 537, 39 S.E.2d 375 (1946). The whole contract should be examined.

Subsection (2) treats a subject that was cloaked in uncertainty in North Carolina. Could implied warranties be disclaimed by the seller? If so, what terms of disclaimer were required?

In Swift & Co. v. Etheridge, 190 N.C. 162, 129 S.E. 453 (1925), the seller sold goods and the instrument evidencing the sale said "without warranty as to results of its use, or otherwise." It was contended that this disclaimer negated all implied as well as express warranties. The court held the implied warranty "that the goods sold and delivered were merchantable, or salable, and fit for the purpose for which they were bought" was not effectively disclaimed or negated. See Hall Furniture Co. v. Crane Mfg. Co., 169 N.C. 41, 85 S.E. 35 (1915).

Yet, in Primrose Petroleum Co. v. Allen, 219 N.C. 461, 14 S.E.2d 402 (1941), where a special express warranty limited the liability of the seller to those express warranties stated in the special warranty, the court held that all other warranties ordinarily implied in sales contracts were excluded.

The UCC, by this section, attempts to spell out and to render certain a determination of when implied warranties have been effectively disclaimed. After having defined the implied warranty of merchantability, it states that to exclude this warranty, the disclaimer must mention merchantability and must be conspicuous. To disclaim the implied warranty of fitness, the exclusion must be by a writing and conspicuous.

Subsection (3)(a) allows all implied warranties to be excluded by "as is" or "with all faults" provisions that are clear to the buyer. This subsection accords with general commercial understanding.

Subsection (3)(b) accords with Driver v. Snow, 245 N.C. 223, 95 S.E.2d 519 (1956); Southern Box & Lumber Co. v. Home Chair Co., 250 N.C. 71, 108 S.E.2d 70 (1959): "There is no implied warranty where the buyer has knowledge equal to that of the seller . . . the presence of the goods at the time of the sale open and available for inspection . . . prevents the implication of warranties."

Subsection (3)(c) applies to nonmerchants and evinces what is left of the doctrine of caveat emptor.

Subsection (3)(c) has no apparent parallel in prior North Carolina law.

Subsection (4): See North Carolina Comments in connection with GS 25-2-718 and 25-2-719 for a discussion of the principles that govern subsection (4) of this section. See especially Allen v. Tompkins, 136 N.C. 208, 48 S.E. 655 (1904), that warranty provisions to a contract can limit liability to the making of repairs or the replacement of other goods in lieu of damages. See also Charles Hackley Piano Co. v. Kennedy, 152 N.C. 196, 67 S.E. 488 (1910).

Legal Periodicals. - For note on strict liability for breach of warranty, see 50 N.C.L. Rev. 697 (1972).

For survey of 1972 case law on recovery for personal injury under implied warranty, see 51 N.C.L. Rev. 1159 (1973).

For comment on the liability of the bailor for hire for personal injuries caused by defective goods, see 51 N.C.L. Rev. 786 (1973).

For survey of 1976 case law on commercial law, see 55 N.C.L. Rev. 943 (1977).

For article, "North Carolina's New Products Liability Act: A Critical Analysis," see 16 Wake Forest L. Rev. 171 (1980).

For note on requirement of privity and express warranties, see 16 Wake Forest L. Rev. 857 (1980).

For survey of 1980 commercial law, see 59 N.C.L. Rev. 1084 (1981).

For comment, "The Crashworthy Vehicle: Heading for a Collision in the North Carolina Courts," see 18 Wake Forest L. Rev. 711 (1982).

For article, "Damages and Problems of Proof with Planted Nonconforming Seeds," see 9 Campbell L. Rev. 63 (1986).

For article, "Drawing the Boundary Between Copyright and Contract: Copyright Preemption of Software License Terms," see 45 Duke L.J. 479 (1995).

For casenote: "Brevorka v. Wolfe Construction, Inc.: Did I Just Waive My Rights to the Implied Warranty of Workmanlike Construction?," see 26 N.C. Cent. L.J. 59 (2003).

CASE NOTES

This section is not in conflict with the provisions of the North Carolina Seed Law relating to labeled seed. Billings v. Joseph Harris Co., 290 N.C. 502, 226 S.E.2d 321 (1976).

To be valid under this section, a disclaimer provision must be stated in express terms, mention "merchantability" in order to disclaim the implied warranty of merchantability, and be conspicuously displayed. Billings v. Joseph Harris Co., 27 N.C. App. 689, 220 S.E.2d 361 (1975), aff'd, 290 N.C. 502, 226 S.E.2d 321 (1976).

Buyer's Inspection is Not Limited to Goods on Seller's Premises. - The principle in subsection (3)(b) of this section is not applicable where the contract of sale imposed on the seller the obligation to deliver a mobile home and block it on buyer's lot. Until that was properly done, fitness or unfitness for use as a home could not be ascertained by the buyer's examination and inspection of the goods on the seller's premises. Performance Motors, Inc. v. Allen, 280 N.C. 385, 186 S.E.2d 161 (1972).

Writing Must Be Conspicuous to Exclude Warranty. - To exclude implied warranty of fitness for particular purpose, writing must be conspicuous. To exclude warranty of merchantability, language must mention merchantability and be conspicuous. Muther-Ballenger v. Giffin Elec. Consultants, Inc., 100 N.C. App. 505, 397 S.E.2d 247 (1990).

Provision Meeting Requirements of Subsection (2). - A provision which disclaims all other warranties, express and implied meets the requirements of subsection (2) where it was in writing, the implied warranty of merchantability was mentioned, and the exclusion was conspicuous as defined in G.S. 25-1-201(10). Bulliner v. GMC, 54 F.R.D. 479 (E.D.N.C. 1971).

Fact that exclusion of warranty raised by parties' course of performance is oral does not vitiate its utility or relevance. Robinson v. Branch Moving & Storage Co., 28 N.C. App. 244, 221 S.E.2d 81 (1976).

Disclaimer and Substitution of G.S. 25-2-719(1)(a) Limitations. - A merchant seller may disclaim all liability under subsection (2) stemming from any breach of warranties of merchantability and fitness under G.S. 25-2-314 and G.S. 25-2-315, substituting in place thereof the limitations of G.S. 25-2-719(1)(a). Billings v. Joseph Harris Co., 27 N.C. App. 689, 220 S.E.2d 361 (1975), aff'd, 290 N.C. 502, 226 S.E.2d 321 (1976).

This Section and G.S. 25-2-719 Distinguished. - Although this section and G.S. 25-2-719 are closely related, the former is directed to the creation of a limited duty under the warranty, whereas the latter is directed to the limitation of the remedy available in the event of a breach of that duty. Williams v. Hyatt Chrysler-Plymouth, Inc., 48 N.C. App. 308, 269 S.E.2d 184, cert. denied, 301 N.C. 406, 273 S.E.2d 451 (1980).

Rejection of Express Warranty Did Not Act as Waiver. - Manufacturer's offer and owner's rejection of a five-year express warranty of the roof installed for owner did not fall within the exclusion provisions of this section; therefore, the offer and rejection of the express warranty did not automatically waive the implied warranty of merchantability. Westover Prods., Inc. v. Gateway Roofing Co., 94 N.C. App. 63, 380 S.E.2d 369 (1989).

Clause Generally Disclaiming All Warranties Cannot Reduce Seller's Obligation. - Basic obligation created by description of goods cannot be retracted. A clause generally disclaiming all warranties, express or implied, cannot reduce seller's obligation with respect to such description. Muther-Ballenger v. Giffin Elec. Consultants, Inc., 100 N.C. App. 505, 397 S.E.2d 247 (1990).

Covenants to Repair and Replace Defective Parts. - Although limited warranties are valid, compliance with their covenants to repair and to replace defective parts requires that the warrantor do more than make good faith attempts to repair defects when requested to do so, and a manufacturer or other warrantor may be liable for breach of warranty when it repeatedly fails within a reasonable time to correct a defect as promised; moreover, a party seeking to recover for breach of a limited warranty is not required to give the warrantor unlimited opportunities to attempt to bring the item into compliance with the warranty. Stutts v. Green Ford, Inc., 47 N.C. App. 503, 267 S.E.2d 919 (1980).

A defendant is entitled to have his counterclaim, based upon a breach of implied warranty of merchantability, submitted to a jury unless the contract contains an exclusion or modification of the implied warranty. Trio Estates, Ltd. v. Dyson, 10 N.C. App. 375, 178 S.E.2d 778 (1971).

Defendant's subsequent verbal warranties may modify prior written contract and written disclaimer. Muther-Ballenger v. Giffin Elec. Consultants, Inc., 100 N.C. App. 505, 397 S.E.2d 247 (1990).

Seller's post-sale agreement with buyer to do major engine repairs without charge constituted an oral modification of original written agreement that there were no warranties, and was not subject to the parol evidence rule. Further, under G.S. 25-2-209(1), this agreement needed no consideration to be binding. Bone Int'l, Inc. v. Johnson, 74 N.C. App. 703, 329 S.E.2d 714 (1985).

Material Question of Fact Whether Quotation and Service Agreement Were One or Two Contracts. - Quotation and service agreement were on separate pieces of paper; each document contained a separate executory section, and each document could be read as an entire agreement in itself. There was no language of disclaimer in quotation; the only disclaimer appeared on service agreement. Thus there was a material question of fact as to whether the quotation and the service contract constituted either one contract for sale of goods or two contracts, one for sale of goods and one for sale of services. Muther-Ballenger v. Giffin Elec. Consultants, Inc., 100 N.C. App. 505, 397 S.E.2d 247 (1990).

Language Held Effective Disclaimer. - Language on herbicide to the effect that seller made "no other express or implied warranty of fitness or merchantability or any other express or implied warranty," which was in darker and larger type than the other language on the label, was "conspicuous," as defined by G.S. 25-1-201(10), and served to effectively disclaim any implied warranties of merchantability or fitness. Tyson v. Ciba-Geigy Corp., 82 N.C. App. 626, 347 S.E.2d 473 (1986).

Since plaintiff properly manufactured the urea resin to defendant's specifications, no implied warranty of fitness for a particular purpose arises. Though no implied warranty of fitness for a particular purpose arises here because defendant provided plaintiff with the specifications to manufacture the resin, the implied warranty of merchantability exists in any sales contract where the seller is a "merchant with respect to [the] goods" sold. Southeastern Adhesives Co. v. Funder Am., Inc., 89 N.C. App. 438, 366 S.E.2d 505 (1988).

Applied in Performance Motors, Inc. v. Allen, 280 N.C. 385, 186 S.E.2d 161 (1972); Rose v. Epley Motor Sales, 288 N.C. 53, 215 S.E.2d 573 (1975); General Elec. Co. v. Pennell, 31 N.C. App. 510, 229 S.E.2d 713 (1976); Bentley Mach., Inc. v. Pons Hosiery, Inc., 33 N.C. App. 482, 235 S.E.2d 790 (1977); Sealey v. Ford Motor Co., 499 F. Supp. 475 (E.D.N.C. 1980); Strong v. Johnson, 53 N.C. App. 54, 280 S.E.2d 37 (1981); Angola Farm Supply & Equip. Co. v. FMC Corp., 59 N.C. App. 272, 296 S.E.2d 503 (1982); Warren v. Guttanit, Inc., 69 N.C. App. 103, 317 S.E.2d 5 (1984); Wright v. T & B Auto Sales, Inc., 72 N.C. App. 449, 325 S.E.2d 493 (1985); Cato Equip. Co. v. Matthews, 91 N.C. App. 546, 372 S.E.2d 872 (1988); Coastal Leasing Corp. v. O'Neal, 103 N.C. App. 230, 405 S.E.2d 208 (1991); Ace, Inc. v. Maynard, 108 N.C. App. 241, 423 S.E.2d 504 (1992).

Cited in Gillispie v. Great Atl. & Pac. Tea Co., 14 N.C. App. 1, 187 S.E.2d 441 (1972); Griffin v. Wheeler-Leonard & Co., 290 N.C. 185, 225 S.E.2d 557 (1976); Coffer v. Standard Brands, Inc., 30 N.C. App. 134, 226 S.E.2d 534 (1976); Rodd v. W.H. King Drug Co., 30 N.C. App. 564, 228 S.E.2d 35 (1976); Isaacson v. Toyota Motor Sales, U.S.A., Inc., 438 F. Supp. 1 (E.D.N.C. 1976); Batiste v. American Home Prods. Corp., 32 N.C. App. 1, 231 S.E.2d 269 (1977); Stone v. Paradise Park Homes, Inc., 37 N.C. App. 97, 245 S.E.2d 801 (1978); Lyon v. Shelter Resources Corp., 40 N.C. App. 557, 253 S.E.2d 277 (1979); Maybank v. S.S. Kresge Co., 46 N.C. App. 687, 266 S.E.2d 409 (1980); Southern of Rocky Mount, Inc. v. Woodward Specialty Sales, Inc., 52 N.C. App. 549, 279 S.E.2d 32 (1981); Simmons v. C.W. Myers Trading Post, Inc., 68 N.C. App. 511, 315 S.E.2d 75 (1984); Ramsey Prods. Corp. v. Morbark Indus., Inc., 823 F.2d 798 (4th Cir. 1987); Goodman v. Wenco Mgt., 100 N.C. App. 108, 394 S.E.2d 832 (1990); Ismael v. Goodman Toyota, 106 N.C. App. 421, 417 S.E.2d 290 (1992); Torrance v. AS & L Motors, Ltd., 119 N.C. App. 552, 459 S.E.2d 67 (1995); DeWitt v. Eveready Battery Co., 355 N.C. 672, 565 S.E.2d 140 (2002); RD&J Props. v. Lauralea-Dilton Enters., LLC, 165 N.C. App. 737, 600 S.E.2d 492 (2004).

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.
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.

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.

3. The rules in subsections (a), (b) and (c) are designed to ascertain the intention of the parties by reference to the factor which probably claimed the attention of the parties in the first instance. These rules are not absolute but may be changed by evidence showing that the conditions which existed at the time of contracting make the construction called for by the section inconsistent or unreasonable. Cross Reference:

Point 1: Section 2-315. Definitional Cross Reference:

"Party". Section 1-201.

NORTH CAROLINA COMMENT

The first sentence of this section establishes the rule of construction that warranties, both express and implied, shall be construed as consistent unless such construction is unreasonable or contrary to the intention of the parties.

The first sentence also makes all warranties cumulative if consistent. This seems to conflict with Charles Hackley Piano Co. v. Kennedy, 152 N.C. 196, 67 S.E. 488 (1910); Farquhar Co. v. Hardy Hardware Co., 174 N.C. 369, 93 S.E. 922 (1917); Case Threshing Mach. Co. v. McClamrock, 152 N.C. 405, 67 S.E. 991 (1910); Armour Fertilizer Works v. Aiken, 175 N.C. 398, 95 S.E. 657 (1918), that an express warranty excludes an implied warranty as to closely related subjects or qualities in a thing sold. In other words, in North Carolina if there was an express warranty in connection with a matter, there was no implied warranty in connection with that matter which could coexist. Warranties were not cumulative, at least in all cases, in North Carolina. But see Hyman v. Broughton, 197 N.C. 1, 147 S.E. 434 (1929), that they were cumulative if they related to different matters.

Paragraph (a) is consistent with Pickrell & Craig Co. v. Wilson Wholesale Co., 169 N.C. 381, 86 S.E. 187 (1915), that every sale where a sample is shown is not a sale by sample where there are other exact or technical descriptive specifications. The intention of the parties governs.

There is no exact parallel to paragraph (b) but that subsection merely says that a specific description by sample will displace a description by general language.

Paragraph (c) changes prior North Carolina law. There was no implied warranty of fitness of purpose if there was an express warranty of quality. Hyman v. Broughton, 197 N.C. 1, 147 S.E. 434 (1929).

CASE NOTES

Express Warranty by Manufacturer Does Not Exclude Implied Warranty by Retailer. - This section provides that warranties, express and implied, should be construed as consistent with each other and as cumulative. Thus, if the manufacturer of a mobile home had given an express warranty, it would not necessarily exclude an implied warranty given by the retailer. Lyon v. Shelter Resources Corp., 40 N.C. App. 557, 253 S.E.2d 277 (1979).

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.

3. This section 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. Cross References:

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

Point 2: Section 2-314. Definitional Cross References:

"Buyer". Section 2-103.

"Goods". Section 2-105.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

North Carolina, in the absence of a warranty expressly directed to an ultimate consumer, required privity of contract between the parties to a warranty action before recovery was allowed. Wyatt v. North Carolina Equip. Co., 253 N.C. 355, 117 S.E.2d 21 (1960); Prince v. Smith, 254 N.C. 768, 119 S.E.2d 923 (1961). A warranting seller was liable only to the immediate buyer with whom there is a contractual relation. An employee of the buyer could not sue on the seller's warranty as the employee was a stranger to the contract. A purchaser from a retailer could not sue a manufacturer of defective goods with whom he has no contractual relation for breach of warranty. See Thomason v. Ballard & Ballard Co., 208 N.C. 1, 179 S.E. 30 (1935).

In such cases, the purchaser had to sue his immediate seller and in turn his immediate seller might sue his supplier and his supplier might ultimately reach the manufacturer. Prince v. Smith, 254 N.C. 768, 119 S.E.2d 923 (1961). But there could be no direct suit by an ultimate purchaser or consumer against a manufacturer or remote seller unless he had made an express warranty intended to attach to an item sold and intended to run to the ultimate consumer. See Simpson v. American Oil Co., 217 N.C. 542, 8 S.E.2d 813 (1940), to the effect that a warranty can be so stated that it will run from a manufacturer to an ultimate consumer.

Therefore, in North Carolina, if a mother purchased a product for consumption by her children or by a guest, if the product injured or poisoned her child or guest, the mother-purchaser only had an action for her damages due to breach of the retailer's warranty. No one had an action for breach of warranty against any wholesaler, jobber or manufacturer of the product as there was not the requisite privity.

Nor was the theory that a negligence action was permitted an adequate solution, especially in North Carolina, where the doctrine of res ipsa loquitur is not applicable to any appreciable degree. See Enloe v. Charlotte Coca-Cola Bottling Co., 208 N.C. 305, 180 S.E. 582 (1935), and cases there cited. Evidence of negligence other than mere injury from a product must be established.

The damages for the child's own injury or the damages for the guest's own injury would likely not be recovered by any method in North Carolina. Recovery on warranty was not allowed because of lack of privity; recovery on negligence would not likely be available, either from lack of any negligence, or because of difficulty of proof, especially in light of North Carolina's law on res ipsa loquitur.

The UCC provision allows the seller's warranty, express or implied, to run to persons other than the immediate buyer who are in the family or household of the buyer or who is a guest of the buyer, if it is reasonable that these persons should use or consume or be affected by the goods.

The UCC does away with the doctrine of privity in extending coverage of warranty to a buyer's family, household and guests. The UCC does not abolish North Carolina's requirement of privity with reference to strangers to the contract such as employees. See Wyatt v. North Carolina Equip. Co., 253 N.C. 355, 117 S.E.2d 21 (1960). Nor does it affect the requirement of privity that prevents a cause of action by any ultimate consumer or buyer against a remote seller or manufacturer. See Thomason v. Ballard & Ballard Co., 208 N.C. 1, 179 S.E. 30 (1935); Perfecting Serv. Co. v. Product Dev. & Sales Co., 261 N.C. 660, 136 S.E.2d 56 (1964); Murray v. Benson Aircraft Corp., 259 N.C. 638, 131 S.E.2d 367 (1963); Prince v. Smith, 254 N.C. 768, 119 S.E.2d 923 (1961).

Legal Periodicals. - For comment on implied warranty of fitness, see 4 Wake Forest Intra. L. Rev. 169 (1968).

For comment on the liability of the bailor for hire for personal injuries caused by defective goods, see 51 N.C.L. Rev. 786 (1973).

For survey of 1972 case law on recovery for personal injury under implied warranty, see 51 N.C.L. Rev. 1159 (1973).

For survey of 1979 commercial law, see 58 N.C.L. Rev. 1290 (1980).

For article, "North Carolina's New Products Liability Act: A Critical Analysis," see 16 Wake Forest L. Rev. 171 (1980).

For note on requirement of privity and express warranties, see 16 Wake Forest L. Rev. 857 (1980).

For article, "Products Liability - Emerging Consensus and Persisting Problems: An Analytical Review Presenting Some Options," see 25 Campbell L. Rev. 1 (2002).

CASE NOTES

General Rule Is That Only Person in Privity May Recover. - Subject to some exceptions, it is the general rule that only a person in privity with the warrantor may recover on the warranty. Williams v. GMC, 19 N.C. App. 337, 198 S.E.2d 766, cert. denied, 284 N.C. 258, 200 S.E.2d 659 (1973).

Plaintiff Must Be Person to Whom Section Extends Warranties. - There can be no recovery by implied warranty where the plaintiff is not one of those persons to whom the implied warranties extend by this section. Williams v. GMC, 19 N.C. App. 337, 198 S.E.2d 766, cert. denied, 284 N.C. 258, 200 S.E.2d 659 (1973).

Plaintiff could not take advantage of any warranties implied by the Uniform Commercial Code where her evidence showed that she was not a member of the family or household or a guest in the home of the buyer so as to escape the privity requirement. Williams v. GMC, 19 N.C. App. 337, 198 S.E.2d 766, cert. denied, 284 N.C. 258, 200 S.E.2d 659 (1973).

Church Member Not in Privity of Contract. - Church member, who was trapped inside the church's walk-in freezer and suffered severe frostbite, could not be considered as a member of the church's "family" or "household" or a guest in the church's "home," for the purpose of maintaining a products liability action based on a breach of seller's express and implied warranties without establishing privity of contract. Crews v. W.A. Brown & Son, 106 N.C. App. 324, 416 S.E.2d 924 (1992).

Privity Requirement Relaxed as to Sale of Goods. - As a general rule, one seeking to recover on an implied warranty is still required to prove privity of contract. This privity requirement has been relaxed in cases involving the sale of goods by this section. However, this relaxation of the privity requirement has not yet been extended to services. Jones v. Clark, 36 N.C. App. 327, 244 S.E.2d 183 (1978).

Privity Requirement Governed by Case Law. - Whether there exists a requirement of privity or contractual relationship is not governed by the UCC, but by developing case law. Bernick v. Jurden, 306 N.C. 435, 293 S.E.2d 405 (1982).

This section eliminates the need for privity when a natural person is suing to recover for personal injuries, but is silent as to whether privity is required in other contexts. Courts will turn to case law to determine whether privity is required between buyers and sellers. Sharrard, McGee & Co. v. Suz's Software, Inc., 100 N.C. App. 428, 396 S.E.2d 815 (1990).

When Absence of Privity Not Fatal. - Where a plaintiff alleges an express warranty running directly to him, breach of that warranty, and damages caused by the breach, the absence of an allegation of privity between plaintiff and the warrantor in the sale of the warranted item is not fatal to the claim. Bernick v. Jurden, 306 N.C. 435, 293 S.E.2d 405 (1982).

Element of reliance can often be inferred from allegations of mere purchase or use if the natural tendency of the representations made is such as to induce such purchase or use. Bernick v. Jurden, 306 N.C. 435, 293 S.E.2d 405 (1982).

An individual partner may sue to recover damages for his personal injuries which proximately result from the breach of warranty on goods purchased by the partnership with partnership funds. Barnes v. Campbell Chain Co., 47 N.C. App. 488, 267 S.E.2d 388 (1980).

A partner is not an employee of the partnership entity; rather, the partner is a tenant in partnership in the entity itself, and as such, the partner is a purchaser of goods purchased with partnership funds by the partnership, not an employee of the purchaser and the partner has direct contractual privity. Barnes v. Campbell Chain Co., 47 N.C. App. 488, 267 S.E.2d 388 (1980).

Applied in Reid v. Eckerds Drugs, Inc., 40 N.C. App. 476, 253 S.E.2d 344 (1979); Davis v. Siloo Inc., 47 N.C. App. 237, 267 S.E.2d 354 (1980).

Cited in Boudreau v. Baughman, 86 N.C. App. 165, 356 S.E.2d 907 (1987); Driver v. Burlington Aviation, Inc., 110 N.C. App. 519, 430 S.E.2d 476 (1993).

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 2-311(3), 2-323, 2-503 and 2-504. Definitional Cross References:

"Agreed". Section 1-201.

"Bill of lading". Section 1-201.

"Buyer". Section 2-103.

"Goods". Section 2-105.

"Seasonably". Section 1-204.

"Seller". Section 2-103.

"Term". Section 1-201.

NORTH CAROLINA COMMENT

Subsections (1)(a) and (b) are in accord with prior North Carolina law as to F.O.B. shipments. See Peed v. Burleson's, Inc., 244 N.C. 437, 94 S.E.2d 351 (1956): "Where the contract of sale provides for a sale F.O.B. the point of shipment, the title is generally held to pass, in the absence of a contrary intention between the parties, at the time of the delivery of the goods for shipment at the point designated . . .. If the seller by his contract undertakes to make the delivery himself at the point of destination, thus assuming the risk in the carriage, the delivery to a carrier is not a delivery to the buyer." See also Acme Paper Box Factory v. Atlantic Coast Line R.R., 148 N.C. 421, 62 S.E. 557 (1908). That this rule could be changed according to the intention of the parties, see Gulf Ref. Co. v. Charlotte Constr. Co., 157 N.C. 277, 72 S.E. 1003 (1911).

The remainder of GS 25-2-319 is new in North Carolina, and the detailed obligations set out under F.O.B. and F.A.S. contracts fill gaps not treated in decisional law.

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 playing 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.
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.
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.
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.
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 from 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.

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.

Insurance secured in compliance with a C.I.F. term must cover the entire transportation of the goods to the named destination.

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 against 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.

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.

17. It is to be remembered that in a French contract the term "C.A.F." does not mean "Cost and Freight" but has exactly the same meaning as the term "C.I.F." since it is merely the French equivalent of that term. The "A" does not stand for "and" but for "assurance" which means insurance. Cross References:

Point 4: Section 2-323.

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

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

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

"Bill of lading". Section 1-201.

"Buyer". Section 2-103.

"Contract". Section 1-201.

"Goods". Section 2-105.

"Rights". Section 1-201.

"Seller". Section 2-103.

"Term". Section 1-201.

NORTH CAROLINA COMMENT

No North Carolina cases or statutes were found dealing with C.I.F. or C. & F. terms in sales contracts. This provision codifies for the most part case law developed over the country concerning the C.I.F. contract. See Official Comment. See Vold, Sales 199 et seq. (2d ed.).

This is entirely new material.

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 2-324. Definitional Cross References:

"Agreement". Section 1-201.

"Contract". Section 1-201.

"Delivery". Section 1-201.

"Goods". Section 2-105.

"Seller". Section 2-103.

"Term". Section 1-201.

NORTH CAROLINA COMMENT

As previously stated, there were no C.I.F. or C. & F. cases or statutes in North Carolina.

This is entirely new material.

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 2-319(2). Definitional Cross References:

"Buyer". Section 2-103.

"Goods". Section 2-105.

"Seller". Section 2-103.

"Term". Section 1-201.

NORTH CAROLINA COMMENT

There were no cases or statutes dealing with "ex-ship" provisions found in North Carolina. This provision is somewhat the overseas shipment parallel to the "F.O.B. destination" contract on an overland shipment wherein the risk remains with the seller until they reach their destination. Compare Peed v. Burleson's, Inc., 244 N.C. 437, 94 S.E.2d 351 (1956). See GS 25-2-319. The difference, however, is that this provision shifts the risk and expenses to the buyer at the unloading from the vessel, while in the F.O.B. contract the risk normally passes upon tender of the goods at the destination even though they may still be in the possession of the carrier.

This section is entirely new and has no statutory or decisional parallel in prior North Carolina law.

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 2-508(2), 5-113. Definitional Cross References:

"Bill of lading". Section 1-201.

"Buyer". Section 2-103.

"Contract". Section 1-201.

"Delivery". Section 1-201.

"Financing agency". Section 2-104.

"Person". Section 1-201.

"Seller". Section 2-103.

"Send". Section 1-201.

"Term". Section 1-201.

NORTH CAROLINA COMMENT

There is neither decisional nor case law bearing upon the subject matter of this section. This section is entirely new in North Carolina law.

Effect of Amendments. - Session Laws 2006-112, s. 30, effective October 1, 2006, substituted "subsection (1) of this section a tangible bill of lading" for "subsection (1) a bill of lading" in the introductory paragraph of subsection (2); and made a minor stylistic change in subdivision (2)(a).

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 out 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.
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.

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.

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 1-203.

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

Point 5: Section 2-613. Definitional Cross References:

"Buyer". Section 2-103.

"Conforming". Section 2-106.

"Contract". Section 1-201.

"Fault". Section 1-201.

"Goods". Section 2-105.

"Sale". Section 2-106.

"Seller". Section 2-103.

"Term". Section 1-201.

NORTH CAROLINA COMMENT

There is no North Carolina authority on the subject matter of this section. It allocates risks in regard to shipments where seller bears risk of loss during shipment, but negates any liability to buyer where shipment does not arrive and seller is not responsible for its failure to arrive.

This is entirely new to North Carolina law.

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 (3) requires that the credit be irrevocable and be a prime credit as determined by the standing of the issuer. It is not necessary, unless otherwise agreed, that the credit be a negotiation credit; the seller can finance himself by an assignment of the proceeds under Section 5-116(2).

3. The definition of "confirmed credit" is drawn on the supposition that the credit is issued by a bank which is not doing direct business in the seller's financial market; there is no intention to require the obligation of two banks both local to the seller. Cross References:

Sections 2-403, 2-511(3) and 3-802 and Article 5. Definitional Cross References:

"Buyer". Section 2-103.

"Contract for sale". Section 2-106.

"Draft". Section 3-104.

"Financing agency". Section 2-104.

"Notifies". Section 1-201.

"Overseas". Section 2-323.

"Purchaser". Section 1-201.

"Seasonably". Section 1-204.

"Seller". Section 2-103.

"Term". Section 1-201.

NORTH CAROLINA COMMENT

North Carolina has no prior statutory or decisional law on the matters covered by this section. This section, as other sections starting with GS 25-2-319, continues to define and fix the meanings of numerous commercial terms and abbreviations.

This section is new to North Carolina law.

CASE NOTES

This section is to be liberally interpreted. BFC Chems., Inc. v. Smith-Douglass, Inc., 46 Bankr. 1009 (E.D.N.C. 1985).

Purpose. - The purpose of this section is to protect innocent creditors from deception by ostensible ownership. Nasco Equip. Co. v. Mason, 291 N.C. 145, 229 S.E.2d 278 (1976); BFC Chems., Inc. v. Smith-Douglass, Inc., 46 Bankr. 1009 (E.D.N.C. 1985).

This section is intended for the benefit of secured creditors of the consignee as well as unsecured creditors. BFC Chems., Inc. v. Smith-Douglass, Inc., 46 Bankr. 1009 (E.D.N.C. 1985).

Subdivision (3)(a) was not designed to give public notice of which particular person or organization claimed ownership in the goods. Rather, it was designed to be consistent with subdivision (3)(b), which focuses upon the concept of general notice. BFC Chems., Inc. v. Smith-Douglass, Inc., 46 Bankr. 1009 (E.D.N.C. 1985).

The purpose of subdivision (3)(a) is to provide public notice that the person in possession of the goods is not the owner. It alerts creditors to the fact that certain property in the possession the debtor is encumbered. BFC Chems., Inc. v. Smith-Douglass, Inc., 46 Bankr. 1009 (E.D.N.C. 1985).

The hallmark of consignment is the absence of an absolute obligation on the part of the consignee to pay for the goods. American Clipper Corp. v. Howerton, 311 N.C. 151, 316 S.E.2d 186 (1984).

All consignment agreements are subject to the requirements of this section. BFC Chems., Inc. v. Smith-Douglass, Inc., 46 Bankr. 1009 (E.D.N.C. 1985).

Transactions Formerly Considered Consignments May Now Be Treated as Sales. - Under the UCC, many transactions that might have been regarded as consignments creating a principal-agent relationship under pre-Code law will be regarded as sales, at least in instances where claims by creditors of the consignee are at issue, or as "sale or return" transactions. BFC Chems., Inc. v. Smith-Douglass, Inc., 46 Bankr. 1009 (E.D.N.C. 1985).

This statute does not contemplate that a consignor's interest in goods be known to the community of creditors, but only that the consignee is generally known by such creditors to be selling the goods of others. BFC Chems., Inc. v. Smith-Douglass, Inc., 46 Bankr. 1009 (E.D.N.C. 1985).

The special priority rule (G.S. 25-9-114) does not apply to true consignors engaged in deemed sales or returns that comply with Article 2 by satisfying the requirements of a non-Code sign statute or by bearing the heavy burden of showing that a consignor generally is known by creditors substantially to be engaged in selling the goods of others. The special priority rule applies only if a consignor either elects to comply with Article 2 by filing under Article 9 or is required to do so in order to preserve priority under Article 2. BFC Chems., Inc. v. Smith-Douglass, Inc., 46 Bankr. 1009 (E.D.N.C. 1985).

Parol evidence cannot be introduced to engraft an "or return" consignment provision onto a paper writing. Recreatives, Inc. v. Travel-On Motorcycles Co., 29 N.C. App. 727, 225 S.E.2d 637 (1976).

Applied in Equitable Factors Co. v. Chapman-Harkey Co., 43 N.C. App. 189, 258 S.E.2d 376 (1979).

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:
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.

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".

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 2-501, 2-601 and 2-603.

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

Point 4: Sections 1-201 and 1-204. Definitional Cross References:

"Agreed". Section 1-201.

"Buyer". Section 2-103.

"Commercial unit". Section 2-105.

"Conform". Section 2-106.

"Contract". Section 1-201.

"Goods". Section 2-105.

"Merchant". Section 2-104.

"Notifies". Section 1-201.

"Notification". Section 1-201.

"Sale on approval". Section 2-326.

"Sale or return". Section 2-326.

"Seasonably". Section 1-204.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

Subsection (1)(a) accords with United States v. One 1955 Model Ford, 157 F. Supp. 798 (E.D.N.C. 1957) and Glascock v. Hazell, 109 N.C. 145, 13 S.E. 789 (1891).

Subsection (1)(b) would seem to accord with North Carolina cases that a right of inspection must be exercised within a reasonable time or the buyer will become owner and the right to reject is waived. Fountain v. Jones, 181 N.C. 27, 106 S.E. 26 (1921). A use of the item purchased, however, which is consistent with purpose of trial is not acceptance. See Parker v. Fenwick, 138 N.C. 209, 50 S.E. 627 (1905).

Subsection (1)(c) has no statutory or decisional parallel in prior North Carolina law but seems reasonable as to what the law would probably have been in North carolina as pieced together from previously cited cases wherein title determines such crucial matters as the risk of loss and creditors' rights.

Subsection (2)(a) is in substantial accord with prior North Carolina law. See Fountain v. Jones, 181 N.C. 27, 106 S.E. 26 (1921). The addition of the provision for return of "any commercial unit of goods" is new to North Carolina law.

Subsection (2)(b): There is no statutory or decisional parallel to subsection (2)(b) in prior North Carolina law, but since under such law title passed to a buyer on a "sale or return" contract, subject to being revested in the seller upon redelivery, it would appear that until such redelivery the expenses of redelivery and the risk of loss should be on the buyer. See again Fountain v. Jones, 181 N.C. 27, 106 S.E. 26 (1921).

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 2-205. Definitional Cross References:

"Buyer". Section 2-103.

"Good faith". Section 1-201.

"Goods". Section 2-105.

"Lot". Section 2-105.

"Notice". Section 1-201.

"Sale". Section 2-106.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

Subsection (1) accords with the general understanding of the law of sales by auction. It is practically a verbatim copy of G.S. 21(1) of the Uniform Sales Act, which is generally thought of as a codification of the common law of sales in most particulars.

Subsection (2): The first sentence of subsection (2) follows the Uniform Sales Act, G.S. 21(2), which is the general law as to when title passes in auction sales. Compare Love v. Harris, 156 N.C. 88, 72 S.E. 828 (1911). There are apparently no cases in North Carolina relating to reopening bids when a bid is made while the hammer is falling. This is covered by the second sentence of subsection (2).

Subsection (3): While no cases have been found in connection with the reserve rights of a seller at an auction which are covered by subsection (3), this provision accords with the Restatement, Contracts, G.S. 27 (1932), that a sale by auction is with reserve unless otherwise indicated, entitling the seller to withdraw the goods at any time before the bid is accepted. It also accords with the Uniform Sales Act, G.S. 21 (2). It is believed that this also accords with prior North Carolina law.

Subsection (4) follows prior North Carolina law in permitting a buyer to avoid an auction sale at which the seller or his agent bid. See Morehead v. Hunt, 16 N.C. 35 (1826); Woods v. Hall, 16 N.C. 411 (1830); McDowell v. Simms, 41 N.C. 278 (1849). That by-bidding may be permissible if notice is given to the vendee, see McDowell v. Simms, 41 N.C. 278 (1849). This section of the UCC adds, however, a provision not in the prior North Carolina law that the buyer has the option of taking at the last bona fide bid made where by-bidding by the seller or his agent is present. Another innovation is that at forced sales unannounced bidding on behalf of the seller is permitted.

For the most part this section of the UCC restates and amplifies generally accepted rules relating to auction sales. There are few innovations.

PART 4. TITLE, CREDITORS AND GOOD FAITH PURCHASERS.

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 2-102, 2-501 and 2-502.

Point 3: Sections 1-201, 2-402, 2-403, 2-502 and 2-716. Definitional Cross References:

"Agreement". Section 1-201.

"Bill of lading". Section 1-201.

"Buyer". Section 2-103.

"Contract". Section 1-201.

"Contract for sale". Section 2-106.

"Delivery". Section 1-201.

"Document of title". Section 1-201.

"Good faith". Section 2-103.

"Goods". Section 2-105.

"Party". Section 1-201.

"Purchaser". Section 1-201.

"Receipt" of goods. Section 2-103.

"Remedy". Section 1-201.

"Rights". Section 1-201.

"Sale". Section 2-106.

"Security interest". Section 1-201.

"Seller". Section 2-103.

"Send". Section 1-201.

NORTH CAROLINA COMMENT

The UCC abandons "lump concept thinking," that made rights, obligations and remedies of sellers, buyers and third parties dependent on the location of the title of goods at a particular time. It substitutes therefor "narrow issue thinking" by providing specific provisions with respect to the various rights and duties of the buyer and seller which are not predicated on location of title.

For the most part, the same results will be obtained in North Carolina under the UCC as under prior law although the "search for title" theory of deciding many sales cases is abandoned.

Subsection (1): The first sentence of subsection (1) accords with Blakely v. Patrick, 67 N.C. 45 (1872); Waldo v. Belcher, 33 N.C. 609 (1850), that title cannot pass until goods are identified or appropriated to the contract.

The second sentence of subsection (1) is contrary to prior North Carolina law. See Early & Daniels Co. v. Aulander Flour Mills, 187 N.C. 344, 121 S.E. 539 (1924), that where, by form of bill of lading, seller retains title to goods shipped for security purposes, other incidents such as risk of loss follows the title. See also Penniman v. Winder, 180 N.C. 73, 103 S.E. 908 (1920). The buyer and seller, of course, can provide by their contract when title to goods shall pass.

Subsection (2) accords with Richardson v. Insurance Co. of North America, 136 N.C. 314, 48 S.E. 733 (1904); Teague v. Howard Grocery Co., 175 N.C. 195, 95 S.E. 173 (1918); Jenkins v. Jarrett, 70 N.C. 255 (1874), except that if goods are shipped and seller retains shipping documents such as the bill of lading made out to "order of seller," the seller retains title and the risk of loss is on the seller. See Early & Daniels Co. v. Aulander Flour Mills, 187 N.C. 344, 121 S.E. 539 (1924). See also Peed v. Burleson's, Inc., 244 N.C. 437, 94 S.E.2d 351 (1956), that title and risk of loss remain in the seller if by the contract the seller agrees to deliver to the buyer at the destination. This accords with subsection (2)(b).

Subsection (3) accords with prior North Carolina law. See above paragraph. Title passes upon making contract if goods are in a deliverable state.

Subsection (4) accords with prior North Carolina law that title revests in the seller upon a rescission by the buyer. See Hutchins v. Davis, 230 N.C. 67, 52 S.E.2d 210 (1949). The part of the subsection which places the title in the seller even if the buyer makes a wrongful repudiation of the contract is new.

Effect of Amendments. - Session Laws 2006-112, s. 31, effective October 1, 2006, in subdivision (3)(a), inserted "tangible" preceding "document of title," near the beginning, and added "and if the seller is to deliver an electronic document of title, title passes when the seller delivers the document" at the end; and inserted "of title" following "documents" in subdivision (3)(b).

Legal Periodicals. - For 1984 survey, "The Application of the North Carolina Motor Vehicle Act and the Uniform Commercial Code to the Sale of Motor Vehicles by Consignment," see 63 N.C.L. Rev. 1105 (1985).

For note on the conflict between the North Carolina Motor Vehicle Act and the UCC, see 65 N.C.L. Rev. 1156 (1987).

CASE NOTES

Concept of Title Abandoned. - The most basic departure from previous law is found in the Uniform Commercial Code is the abandonment of the concept of title as a tool for resolving sales problems. Nationwide Mut. Ins. Co. v. Hayes, 276 N.C. 620, 174 S.E.2d 511 (1970); Gillispie v. Great Atl. & Pac. Tea Co., 14 N.C. App. 1, 187 S.E.2d 441 (1972).

Completed Delivery Consummates Sale. - If there has been a completed delivery by the seller, the sale has been consummated and implied warranties arise under G.S. 25-2-314. Gillispie v. Great Atl. & Pac. Tea Co., 14 N.C. App. 1, 187 S.E.2d 441 (1972).

Time of Payment Does Not Determine Time of Sale. - Under subdivision (2) the time of payment is not determinative of the question of when a sale takes place. Gillispie v. Great Atl. & Pac. Tea Co., 14 N.C. App. 1, 187 S.E.2d 441 (1972).

Possession of Product in Self-Service Store Constitutes Sale. - The presence of soft drinks on the shelves of a self-service store constituted an offer for sale and delivery at a stated price; a sale occurred when the purchaser took the drinks into his possession with the intention of paying for them at the cashier's counter. Gillispie v. Great Atl. & Pac. Tea Co., 14 N.C. App. 1, 187 S.E.2d 441 (1972).

Seller Retains a Security Interest. - As long as a purchaser in a self-service store has a product in his possession, intending to pay for it, he has title to the product, and the seller's interest at that point is not "title" but a security interest to enforce payment; when the purchaser changes his mind and returns to the shelf a product which he has picked up with the intention of buying it, title is revested in the seller. Gillispie v. Great Atl. & Pac. Tea Co., 14 N.C. App. 1, 187 S.E.2d 441 (1972).

Effect of Right to Return. - Under subdivision (4) a right to return delivered goods to the seller does not necessarily delay passage of title until that right has expired. Gillispie v. Great Atl. & Pac. Tea Co., 14 N.C. App. 1, 187 S.E.2d 441 (1972).

Effect of Reservation of Title by Seller. - Where there has been delivery to the buyer, a reservation of title by the seller, by express provision of the Code, is limited in effect to a reservation of a security interest. Toyomenka, Inc. v. Mount Hope Fin. Co., 432 F.2d 722 (4th Cir. 1970).

Creditor's corn delivered to the creditor's leased bins at a bankruptcy debtor's ethanol plan was property of the bankruptcy estate since delivery of the corn was complete under the contracts when the creditor delivered the corn to the debtor's plant, and under G.S. 25-2-401(1) the creditor's reservation of title until the corn crossed a weighbelt was limited to a reservation of a security interest in the corn. Clean Burn Fuels, LLC v. Perdue BioEnergy, LLC (In re Clean Burn Fuels, LLC), 492 B.R. 445 (Bankr. M.D.N.C. 2013).

Interpretation of UCC Where Public Regulation Involved. - The official comment to this section seems to say that the UCC makes no attempt to set out a specific line of interpretation where a public regulation is involved, but that in case a court should decide to apply this private law definition and reasoning to its public regulation, that there should be a clear and concise definitional basis for so doing. Such comment leads to the conclusion that the sales act, a private law, is not necessarily applicable to public regulations unless the court chooses to make it so. Nationwide Mut. Ins. Co. v. Hayes, 276 N.C. 620, 174 S.E.2d 511 (1970).

Transfer of Ownership of Motor Vehicle. - The provisions of G.S. 20-72(b) contain specific, definite and comprehensive terms concerning the transfer of ownership of a motor vehicle. Conversely, the UCC does not refer to transfer of ownership of motor vehicles, but only refers to the passing of title to property generally described as "goods." Although the word "automobile" comes within the general term of "goods," automobiles are a special class of goods which have long been heavily regulated by public regulatory acts. Section 20-72(b) is a special statute and the UCC is a general statute. Thus, the special statute, even though earlier in point of time, must prevail. Nationwide Mut. Ins. Co. v. Hayes, 276 N.C. 620, 174 S.E.2d 511 (1970).

The documents of title referred to in this section do not include certificates of title to motor vehicles. Nationwide Mut. Ins. Co. v. Hayes, 276 N.C. 620, 174 S.E.2d 511 (1970).

The provisions of the UCC do not override the earlier motor vehicle statutes relating to the transfer of ownership of motor vehicles for the purpose of tort law and liability insurance coverage. Nationwide Mut. Ins. Co. v. Hayes, 276 N.C. 620, 174 S.E.2d 511 (1970).

Where the transaction at issue in the adversary proceeding involved the sale and financing of the motor vehicle at issue, the provisions of G.S. 25-2-401 controlled the transfer of title for the car, rather than the titling and registration provisions of the North Carolina Motor Vehicle Act. Ivey v. Wilson (In re Payne), - Bankr. - (Bankr. M.D.N.C. Dec. 6, 2006).

Passing of Title Upon Delivery. - Seller's motion to amend a complaint to add a claim to recover possession of a new tractor that the seller sold to the buyer, based upon the seller's assertion that title to the tractor never passed from the seller to the buyer, was denied because the seller failed to state a claim as, pursuant to G.S. 25-2-401, the title to the tractor passed to the buyer when the seller delivered the tractor to the buyer. Riddle Farm Equip., Inc. v. Boles (In re Boles), - Bankr. - (Bankr. M.D.N.C. Oct. 26, 2004).

Debtor was the owner of the automobile at issue and the creditor did not retain an ownership interest, only a security interest in the vehicle, when the debtor and the creditor entered into a promissory note and security agreement whereby the debtor agreed to purchase the automobile. Ivey v. Wilson (In re Payne), - Bankr. - (Bankr. M.D.N.C. Dec. 6, 2006).

As to controlling effect of UCC with regard to security interests and priorities, see North Carolina Nat'l Bank v. Robinson, 78 N.C. App. 1, 336 S.E.2d 666 (1985).

Section Controls as to Aircraft. - There is no statute applicable particularly to aircraft, but this section, which is applicable to sales of "goods" generally, is controlling. Norris v. Insurance Co. of N. Am., 26 N.C. App. 91, 215 S.E.2d 379, cert. denied, 288 N.C. 242, 217 S.E.2d 666 (1975).

Effect of Wrongful Transfer of Property by Bailee in Possession. - In the absence of grounds for an estoppel and except as provided in G.S. 25-2-403(2) or this section, no right, title, or interest may be acquired as the result of an unauthorized or wrongful sale, gift, exchange, pledge, mortgage, or other transfer of property by a bailee in possession, even though to an innocent purchaser. The bailor is not divested of his title by such an unauthorized act and may recover the property or its value from the vendee or transferee in any appropriate form of action. Toyomenka, Inc. v. Mount Hope Fin. Co., 432 F.2d 722 (4th Cir. 1970).

Customers who ordered wine from a wine company before the company declared Chapter 7 bankruptcy did not have title under G.S. 25-2-401 to wine the company stored in its warehouses, and the wine was part of the company's bankruptcy estate. Although customers paid for the wine in advance, they were allowed to cancel their orders any time prior to delivery, and the fact that the customers could have pursued a refund from the wine company had the company not declared bankruptcy showed that they had an adequate remedy at law which precluded their claim that the Chapter 7 trustee had to turn over the wine; although the customers did not have title to the wine, claims they filed against the company's bankruptcy estate were eligible for priority over other unsecured claims, pursuant to 11 U.S.C.S. § 507(a)(7). In re Carolina Wine Co., - Bankr. - (Bankr. E.D.N.C. July 31, 2009).

Applied in Nasco Equip. Co. v. Mason, 291 N.C. 145, 229 S.E.2d 278 (1976); North Carolina Nat'l Bank v. Holshouser, 38 N.C. App. 165, 247 S.E.2d 645 (1978); Abbott v. Blackwelder Furn. Co., 33 Bankr. 399 (W.D.N.C. 1983); American Clipper Corp. v. Howerton, 311 N.C. 151, 316 S.E.2d 186 (1984).

Cited in Fisher v. Elmore, 610 F. Supp. 123 (E.D.N.C. 1985); North Carolina Nat'l Bank v. Robinson, 78 N.C. App. 1, 336 S.E.2d 666 (1985); Fisher v. Elmore, 802 F.2d 771 (4th Cir. 1986); In re Surplus Furn. Liquidators, Inc., 199 Bankr. 136 (Bankr. M.D.N.C. 1995); Singletary v. P & A Invs., Inc., 212 N.C. App. 469, 712 S.E.2d 681 (2011).

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 hinderance by making it clear that:

1. Local law on questions of hindrance of creditors by the seller's retention of possession of the goods are outside the scope of this Article, but retention of possession in the current course of trade is legitimate. Transactions which fall within the law's policy against improper preferences are reserved from the protection of this Article.

2. The retention of possession of the goods by a merchant seller for a commercially reasonable time after a sale or identification in current course is exempted from attack as fraudulent. Similarly, the provisions of subsection (3) have no application to identification or delivery made in the current course of trade, as measured against general commercial understanding of what a "current" transaction is. Definitional Cross References:

"Contract for sale". Section 2-106.

"Creditor". Section 1-201.

"Good faith". Section 2-103.

"Goods". Section 2-105.

"Merchant". Section 2-104.

"Money". Section 1-201.

"Reasonable time". Section 1-204.

"Rights". Section 1-201.

"Sale". Section 2-106.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

This section, the intent of which is to preserve local law except where local law would make retention of possession of goods by a merchant-seller fraudulent as against creditors if such retention is in the ordinary course of business, does not affect North Carolina law.

Legal Periodicals. - For note on choice of law rules in North Carolina, see 48 N.C.L. Rev. 243 (1970).

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 or 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.
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 buys 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.
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.

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.

The principle is extended in subsection (3) to fit with the abolition of the old law of "cash sale" by subsection (1) (c). It it 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.

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 1-103 and 1-201.

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

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

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

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

"Goods". Section 2-105.

"Person". Section 1-201.

"Purchaser". Section 1-201.

"Signed". Section 1-201.

"Term". Section 1-201.

"Value". Section 1-201.

NORTH CAROLINA COMMENT

Subsection (1): The first sentence of subsection (1), which relates to persons who are not "merchants," accords with prior North Carolina law that the fact that the owner has entrusted the mere possession and control of personal property to another is ordinarily insufficient to estop him from asserting his title against a person who has dealt with the possessor on the faith of his apparent ownership or authority to sell. But if the seller, in addition to mere possession, is given indicia of title by the true owner or the true owner by his conduct clothes the possessor with apparent title or apparent power of disposition, third parties who are induced to deal with the possessor shall be protected. See Handley Motor Co. v. Wood, 237 N.C. 318, 75 S.E.2d 312 (1953); Wilson v. Commercial Fin. Co., 239 N.C. 349, 79 S.E.2d 908 (1953).

The second provision of this subsection changes North Carolina law. While subsection (1)(a) has no case or statutory parallel in North Carolina, subsection (1)(b) is contrary to prior North Carolina law. In North Carolina if a buyer gave a bad check which was dishonored, the buyer took no title and could not convey a good title to a bona fide purchaser. See Wilson v. Commercial Fin. Co., 239 N.C. 349, 79 S.E.2d 908 (1953). If the seller who took a bad check, however, gave to the buyer an indicium of title upon which a bona fide purchaser subsequently relies, the seller would be estopped to asset his title as against the bona fide purchaser. Wilson v. Commercial Fin. Co., 239 N.C. 349, 79 S.E.2d 908 (1953); Handley Motor Co. v. Wood, 237 N.C. 318, 75 S.E.2d 312 (1953).

This UCC provision, subsection (1)(b), permits a buyer, who has procured delivery of goods by a check that is later dishonored, to transfer good title to a good faith purchaser for value. The result of the UCC provision is to make the title procured on a bad or worthless check a "voidable" title; before the seller avoids the transaction, the holder of such "avoidable" title can convert it into a "good" title by selling it to a bona fide purchaser for value from whom it cannot be recovered. North Carolina law is materially changed.

Subsection (1)(c) also changes North Carolina law. In North Carolina if a sales contract contemplated a "cash sale," that payment of cash and delivery of goods were to be simultaneous as a condition precedent to the passage of title, mere delivery passed no title but passed only possession if the buyer did not pay. The case of Green River Land Co. v. Bostic, 168 N.C. 99, 83 S.E. 747 (1914) held that a buyer in a "cash sale" gets no title and getting none has only possession of the goods and can pass no title to another purchaser. Compare Millhiser v. Endman, 98 N.C. 292, 3 S.E. 521 (1887).

Subsection (1)(d) is likewise probably contrary to prior North Carolina law. Compare Ellison v. Hunsinger, 237 N.C. 619, 75 S.E.2d 884 (1953), which indicates approval of the law of South Carolina that a defrauded owner can recover goods from a bona fide purchaser from one who has obtained them from the true owner by false pretense punishable as a crime. While the case cited applied South Carolina law, the North Carolina court indicated approval. The UCC protects a bona fide purchaser who has bought from one who obtained delivery through fraud even though such fraud is punishable as larcenous under the criminal law. Compare former GS 27-51 of the Uniform Warehouse Receipts Act which is like the UCC in principle on this point.

Subsection (2) which relates to persons who are "merchants" changes North Carolina law. Prior North Carolina law provided that the fact that an owner has entrusted someone with mere possession and control of personal property would not, without more, estop the owner from asserting his title against one who had bought from such possessor (in the absence of some estoppel factor). The UCC, however, protects any purchaser who has bought in the ordinary curse of business any item entrusted to a "merchant" who deals in goods of the kind entrusted, whether the merchant had any apparent authority to sell or whether or not there was any indicium of title.

Caveat: Subsection (2) changes North Carolina law. Will it be safe to leave an item, say a watch or used car, to be repaired if the jeweler or car repairer deals in the sale of used watches or cars in the ordinary course of business?

The UCC specifies different rules for merchants.

Subsection (3) defines entrusting and allows no conditions to defeat the other rules.

Subsection (4) states that creditors' rights are found in other sections, e.g., GS 25-2-403, relating only to purchasers.

Effect of Amendments. - Session Laws 2004-190, s. 3, effective January 1, 2005, deleted "bulk transfers (article 6)" following "(article 9)" in subdivision (4).

Legal Periodicals. - For article, "The Contracts of Minors Viewed from the Perspective of Fair Exchange," see 50 N.C.L. Rev. 517 (1972).

For note on the conflict between the North Carolina Motor Vehicle Act and the UCC, see 65 N.C.L. Rev. 1156 (1987).

For comment, "Entrustment Under U.C.C. Section 2-403 and Its Implications for Article 9," see 9 Campbell L. Rev. 407 (1987).

For note, "Stolen Artwork: Deciding Ownership is no Pretty Picture," see 1993 Duke L.J. 337 (1993).

CASE NOTES

"Good faith" in the context of this section means "honesty in fact" in the transaction involved. Landrum v. Armbruster, 28 N.C. App. 250, 220 S.E.2d 842 (1976).

Three essential elements must be present to make this section operative: (1) an entrustment of goods to (2) a merchant dealing in goods of that kind, followed by a sale by that merchant to (3) a buyer in the ordinary course of business. North Carolina Nat'l Bank v. Robinson, 78 N.C. App. 1, 336 S.E.2d 666 (1985).

The basic predicate for the operation of subsection (1) of this section is title, either actual or voidable, in the transferee. Toyomenka, Inc. v. Mount Hope Fin. Co., 432 F.2d 722 (4th Cir. 1970).

Unauthorized Transfer by Bailee Will Not Divest Bailor of Title. - In the absence of grounds for an estoppel and except as provided in subsection (2) of this section or G.S. 25-2-401, no right, title, or interest may be acquired as the result of an unauthorized or wrongful sale, gift, exchange, pledge, mortgage, or other transfer of property by a bailee in possession, even though to an innocent purchaser. The bailor is not divested of his title by such an unauthorized act and may recover the property or its value from the vendee or transferee in any appropriate form of action. Toyomenka, Inc. v. Mount Hope Fin. Co., 432 F.2d 722 (4th Cir. 1970).

Where an entrustment does not qualify under subsection (2) of this section, pre-code law will be applicable in determining the rights of the parties. Toyomenka, Inc. v. Mount Hope Fin. Co., 432 F.2d 722 (4th Cir. 1970).

For subsection (2) to be applicable, there must be three essential steps: (1) an entrustment of goods to (2) a merchant who deals in goods of that kind followed by a sale by such merchant to (3) a buyer in ordinary course of business. Toyomenka, Inc. v. Mount Hope Fin. Co., 432 F.2d 722 (4th Cir. 1970); American Clipper Corp. v. Howerton, 311 N.C. 151, 316 S.E.2d 186 (1984).

The phrase "deals in goods" in subsection (2) of this section is to be construed as one who is engaged regularly in selling goods of the kind. Toyomenka, Inc. v. Mount Hope Fin. Co., 432 F.2d 722 (4th Cir. 1970).

"Buyer in Ordinary Course of Business". - A company is not a "buyer in ordinary course of business," a purchaser who bought goods in the open market, if it did not acquire possession of the goods as a purchaser in the ordinary course of business, but received those goods in its capacity as a textile finisher, for the specific purpose of processing them on behalf of the owner. Toyomenka, Inc. v. Mount Hope Fin. Co., 432 F.2d 722 (4th Cir. 1970).

Power of Entrustee. - Where all the essential elements of subsection (2) of this section were satisfied, the entrustee had the power, under the statute, to transfer such title as the entruster possessed. American Clipper Corp. v. Howerton, 311 N.C. 151, 316 S.E.2d 186 (1984).

Sale by the entrustee makes a definitive transfer of the entruster's title. North Carolina Nat'l Bank v. Robinson, 78 N.C. App. 1, 336 S.E.2d 666 (1985).

Title passes once a sale has been made by the entrustee to a buyer in ordinary course of business, from the entruster to the buyer. The entruster no longer has title. The buyer then has the power to transfer to another the interest he received in the goods. American Clipper Corp. v. Howerton, 311 N.C. 151, 316 S.E.2d 186 (1984).

Buyer with Voidable Title Can Transfer Better Title Than He Had. - While the buyer might have had a voidable title if he had made fraudulent representations of solvency, one with voidable title can transfer better title than he had under this section. First-Citizens Bank & Trust Co. v. Academic Archives, Inc., 10 N.C. App. 619, 179 S.E.2d 850, cert. denied, 278 N.C. 703, 181 S.E.2d 601 (1971).

The holder of a perfected security interest in after acquired property is a "good faith purchaser" whose rights are superior to a seller of the after acquired goods under G.S. 25-2-702(2), several commentators have concluded. First-Citizens Bank & Trust Co. v. Academic Archives, Inc., 10 N.C. App. 619, 179 S.E.2d 850, cert. denied, 278 N.C. 703, 181 S.E.2d 601 (1971).

Vendee Who Paid with Forged Check May Transfer Good Title. - Whether a check was a forgery, the transaction a cash sale or whether delivery was procured through fraud punishable as larcenous under the criminal law, contrary to the law as it may have been prior to the enactment of this section, the vendee in such a transaction may transfer a good title to a "good faith purchaser for value." Lane v. Honeycutt, 14 N.C. App. 436, 188 S.E.2d 604, cert. denied, 281 N.C. 622, 190 S.E.2d 466 (1972).

Dishonored checks. - This section allows a person who has obtained delivery of goods under a transaction of purchase to transfer a good title to a "good faith purchaser for value" even though such person obtained delivery in exchange for a check which is later dishonored or procured the delivery through criminal fraud. Landrum v. Armbruster, 28 N.C. App. 250, 220 S.E.2d 842 (1976).

A vehicle dealer who sold a vehicle to a private consumer, who paid with a dishonored check, effectively placed the car into the stream of commerce to the extent that a second car dealer, who purchased the car from the buyer, could be construed as a good-faith purchaser of the car in spite of the fact that the first dealer never provided the consumer with a certificate of title. Sale Chevrolet, Buick, BMW, Inc. v. Peterbilt of Florence, Inc., 133 N.C. App. 177, 514 S.E.2d 747 (1999).

Original Transferor Held Entitled to Follow Proceeds of Resale. - Where the trial court found upon supporting evidence that original defendant paid for pigs purchased from plaintiff with a draft which was returned for insufficient funds, that additional defendants knew that original defendant had not paid plaintiff for the pigs and would not be able to do so and that plaintiff was seeking recovery of the purchase price or the pigs, and that the additional defendants were not purchasers of the pigs but acted as agent for the original defendant when they thereafter sold the pigs to third parties and applied the proceeds of the sale to debts owed by the original defendant to the additional defendants, the trial court properly held that title to the pigs remained in plaintiff, that plaintiff was entitled to follow the proceeds of the sale of the pigs, and that additional defendants were secondarily liable to plaintiff for the value of the pigs disposed of up to the balance of the purchase price due for the pigs. Gus Z. Lancaster's Stock Yards, Inc. v. Williams, 37 N.C. App. 698, 246 S.E.2d 823, cert. denied, 295 N.C. 738, 248 S.E.2d 863 (1978).

UCC Controls Issues of Security Interests and Priorities Involving Motor Vehicles. - Notwithstanding the title transfer provisions of the Motor Vehicle Act, an automobile purchaser may be a "buyer in the ordinary course of business" as that term is used in this section and G.S. 25-9-307, even though the certificate of title has not yet been reassigned. Moreover, it was the Legislature's intent to have the UCC control issues of security interests and priorities. North Carolina Nat'l Bank v. Robinson, 78 N.C. App. 1, 336 S.E.2d 666 (1985).

The UCC should control over the Motor Vehicle Act when automobiles are used as collateral and are held in inventory for sale. North Carolina Nat'l Bank v. Robinson, 78 N.C. App. 1, 336 S.E.2d 666 (1985).

Buyers who gave value for a used car displayed on dealer's lot and received a 20-day temporary marker in June, 1983, which car was covered by a dealer inventory security agreement in effect since April 1, 1970, and on which the credit company retained the title certificate, which was in the name of the dealer, had a superior right to possession of the car when the credit company's agent came to repossess it on June 19, 1983, as it was no longer part of the dealer's inventory; and buyers were entitled to possession of the car in their action for wrongful conversion. North Carolina Nat'l Bank v. Robinson, 78 N.C. App. 1, 336 S.E.2d 666 (1985).

Burden of proof of transfer of good title rests upon party making later purchase. Landrum v. Armbruster, 28 N.C. App. 250, 220 S.E.2d 842 (1976).

To prevail the subsequent purchaser must prove (1) that he was a purchaser, (2) that he purchased in good faith and (3) that he gave value. Landrum v. Armbruster, 28 N.C. App. 250, 220 S.E.2d 842 (1976).

Failure to Raise Question of Applicability of Section in Trial Court. - The fact that the applicability of this section of the Uniform Commercial Code to a proceeding has not been brought to the attention of the district court on motion for judgment n.o.v. does not in all instances preclude appellate review. Toyomenka, Inc. v. Mount Hope Fin. Co., 432 F.2d 722 (4th Cir. 1970).

Cited in North Carolina Nat'l Bank v. Robinson, 78 N.C. App. 1, 336 S.E.2d 666 (1985); Pillsbury Co. v. FCX, Inc., 62 Bankr. 315 (Bankr. E.D.N.C. 1986); Bartlett Milling Co., L.P. v. Walnut Grove Auction & Realty Co., 192 N.C. App. 74, 665 S.E.2d 478, review denied, 362 N.C. 679, 669 S.E.2d 741 (2008).

PART 5. PERFORMANCE.

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 2-502.

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

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

Point 6: Sections 2-105(1), 2-107(1) and 2-402. Definitional Cross References:

"Agreement". Section 1-201.

"Contract for sale". Section 2-106.

"Future goods". Section 2-105.

"Goods". Section 2-105.

"Notification". Section 1-201.

"Party". Section 1-201.

"Sale". Section 2-106.

"Security interest". Section 1-201.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

Subsection (1): It is believed that subsection (1) accords with prior North Carolina law although there are neither cases nor decisions exactly in point.

North Carolina law stated that a person had an insurable interest in subject matter if he had such a relation to, connection with or concern in such subject matter that he would derive pecuniary benefits or advantage from its preservation or would suffer pecuniary loss from its destruction or injury. See King v. National Union Fire Ins. Co., 258 N.C. 432, 128 S.E.2d 849 (1962).

North Carolina law also stated that where a bargain was made for the purchase of goods and nothing was said about payment or delivery, the property passed immediately, so as to cast on the purchaser all future risk, if nothing remained to be done to the goods, although he could not take them away without paying the price. Richardson v. Insurance Co. of North America, 136 N.C. 314, 48 S.E. 733 (1904). If the goods were on hand at the time the contract was made, title passed upon the making of the contract. Teague v. Howard Grocery Co., 175 N.C. 195, 95 S.E. 173 (1918). Neither delivery nor payment of the price was necessary to pass title. Winborne v. McMahon, 206 N.C. 31, 173 S.E. 1 (1934); Jenkins v. Jarrett, 70 N.C. 255 (1874).

It followed that a buyer under a contract of sale of ascertained specified goods had an insurable interest in the goods in North Carolina under prior law.

If something remained to be done to the goods, or they were not specifically identified or ascertained, title remained in the seller. See Blakely v. Patrick, 67 N.C. 40 (1872). In such case the seller, and not the buyer, would have had the insurable interest in the goods. Richardson v. Insurance Co. of North America, 136 N.C. 314, 48 S.E. 733 (1904). A separation or marking of the goods would sufficiently identify them. See Pitts v. Curtis, 152 N.C. 615, 68 S.E. 189 (1910).

Subsection (2), giving seller insurable interest, also accords with King v. National Union Fire Ins. Co., 258 N.C. 432, 128 S.E.2d 849 (1962). So long as the seller has a pecuniary interest in the goods, such as his seller's lien for the price, possible liability for negligence in their destruction, etc., he should have an insurable interest in the goods.

There is no real difference in results as to insurable interest as a consequence of adoption of the UCC. Under the UCC, as under prior insurance theory, the question of whether title has or has not passed from the seller to the buyer need not be determined.

CASE NOTES

Sale of Lumber or Growing Timber. - The comments to this section plainly state that lumber or growing timber is not a crop, and further state that where the "buyer (has the power) to select the goods," this is an explicit agreement which displaces the rules of subdivisions (1)(a), (1)(b) and (1)(c) of this section. Fisher v. Elmore, 610 F. Supp. 123 (E.D.N.C. 1985), aff'd, 802 F.2d 771 (4th Cir. 1986).

For discussion of identification of goods when buyer has contract to enter, cut, harvest and remove pulpwood or logs, see Fisher v. Elmore, 610 F. Supp. 123 (E.D.N.C. 1985), aff'd, 802 F.2d 771 (4th Cir. 1986).

Applied in Abbott v. Blackwelder Furn. Co., 33 Bankr. 399 (W.D.N.C. 1983).

Cited in Fisher v. Elmore, 802 F.2d 771 (4th Cir. 1986); In re Surplus Furn. Liquidators, Inc., 199 Bankr. 136 (Bankr. M.D.N.C. 1995).

CASE NOTES

Seller Must Become Insolvent Within 10 Days after Receipt of First Installment of Purchase Price. - Presumably, a seller cannot become insolvent prior to the receipt of the first installment of the purchase price or 11 days after receipt of the first installment of the purchase price or on the very date of its receipt. He has to become insolvent within the given 10-day period. First-Citizens Bank & Trust Co. v. Academic Archives, Inc., 10 N.C. App. 619, 179 S.E.2d 850, cert. denied, 278 N.C. 703, 181 S.E.2d 601 (1971).

Applied in Abbott v. Blackwelder Furn. Co., 33 Bankr. 399 (W.D.N.C. 1983).

Cited in In re Surplus Furn. Liquidators, Inc., 199 Bankr. 136 (Bankr. M.D.N.C. 1995).

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."
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 acknowledgement by the bailee. Paragraph (b) of subsection (4) adopts the rule that between the buyer and the seller the risk of loss remains on the seller during a period reasonable for securing 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.

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.

When a prescribed document cannot be procured, a question of fact arises under the provision of this Article on substituted performance as to whether the agreed manner of delivery is actually commercially impracticable and whether the substitute is commercially reasonable. Cross References:

Point 2: Sections 1-205, 2-301, 2-310, 2-507 and 2-513 and Article 7.

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

Point 7: section 2-614(1).

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

"Agreement". Section 1-201.

"Bill of lading". Section 1-201.

"Buyer". Section 2-103.

"Conforming". Section 2-106.

"Contract". Section 1-201.

"Delivery". Section 1-201.

"Dishonor". Section 3-508.

"Document of title". Section 1-201.

"Draft". Section 3-104.

"Goods". Section 2-105.

"Notification". Section 1-201.

"Reasonable time". Section 1-204.

"Receipt" of goods. Section 2-103.

"Rights". Section 1-201.

"Seasonably". Section 1-204.

"Seller". Section 2-103.

"Written". Section 1-201.

NORTH CAROLINA COMMENT

The first sentence of subsection (1) apparently accords with prior North Carolina law. See Williams v. Johnston, 26 N.C. 233 (1844), that the seller has the duty to notify the buyer when delivery will take place when the time for delivery is not set out in the contract.

Subsections (1)(a) and (b), defining the time and place for tender have no North Carolina parallels, although proper tender for purposes of the NIL was set out in GS 25-78 et seq.

The remaining subsections setting out the details required for valid tender have no counterparts in prior North Carolina law and are therefore new.

Effect of Amendments. - Session Laws 2006-112, s. 32, effective October 1, 2006, in subdivision (4)(b), substituted "record directing" for "written direction to" near the beginning, and inserted "except as otherwise provided in Article 9 of this Chapter"; and inserted "or associated with" in subdivision (5)(b).

CASE NOTES

Applied in Bernick v. Jurden, 306 N.C. 435, 293 S.E.2d 405 (1982).

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 case 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 co-operation respecting performance gives the seller the choice of any reasonable carrier, routing and other arrangements. Whether or not the shipment is at the buyer's expense the seller must see to any arrangements, reasonable in the circumstances, such as refrigeration, watering of livestock, protection against cold, the sending along of any necessary help, selection of specialized cars and the like for paragraph (a) is intended to cover all necessary arrangements whether made by contract with the carrier or otherwise. There is, however, a proper relaxation of such requirements if the buyer is himself 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 delivery 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).
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.

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.

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 2-319, 2-320 and 2-503(2).

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

Point 3: Section 2-311(2).

Point 5: Section 1-203. Definitional Cross References:

"Agreement". Section 1-201.

"Buyer". Section 2-103.

"Contract". Section 1-201.

"Delivery". Section 1-201.

"Goods". Section 2-105.

"Notifies". Section 1-201.

"Seller". Section 2-103.

"Send". Section 1-201.

"Usage of trade". Section 1-205.

NORTH CAROLINA COMMENT

Subsection (a) accords with prior North Carolina law that if seller is to ship goods but no carrier is designated, it is the duty of the seller to ship in a reasonable course of transit. See G. Ober & Son v. Smith, 78 N.C. 313 (1878).

Subsection (b), however, does not accord with G. Ober & Son v. Smith, 78 N.C. 313 (1878), which states that bills of lading or other documentary indicia of title need not be sent by the seller to the purchaser.

Subsection (c) also does not accord with prior North Carolina law as set out in G. Ober & Son v. Smith, 78 N.C. 313 (1878). That case held that it was not necessary for the seller to give notice of the shipment in order to shift title and the risk of loss to the buyer.

This section changes North Carolina law but not in any significant way that will vary commercial practice.

Legal Periodicals. - For survey of 1981 commercial law, see 60 N.C.L. Rev. 1238 (1982).

CASE NOTES

"Prompt Notice" Generally. - The requirement of prompt notification by the seller, as used in this section, must be construed as taking into consideration the need of a buyer to be informed of the shipment in sufficient time for him to take action to protect himself from the risk of damage to or loss of the goods while in transit. Rheinberg-Kellerei GMBH v. Vineyard Wine Co., 53 N.C. App. 560, 281 S.E.2d 425, cert. denied, 304 N.C. 588, 289 S.E.2d 564 (1981).

Relationship Between Prompt Notice and Risk of Loss. - Seller's failure to notify the buyer of shipment of wine from Germany until after the sailing of the ship and the ensuing loss was not "prompt notice" within the meaning of this section, and therefore the risk of loss did not pass to the buyer upon the delivery of the wine to the carrier pursuant to the provisions of G.S. 25-2-509(1)(a). Rheinberg-Kellerei GMBH v. Vineyard Wine Co., 53 N.C. App. 560, 281 S.E.2d 425, cert. denied, 304 N.C. 588, 289 S.E.2d 564 (1981).

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.
2. Every shipment of identified goods under a negotiable bill of lading reserves a security interest in the seller under subsection (1) paragraph (a).
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.

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.

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).

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 1-201.

Point 2: Article 7.

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

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

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

"Bill of lading". Section 1-201.

"Buyer". Section 2-103.

"Consignee". Section 7-102.

"Contract". Section 1-201.

"Contract for sale". Section 2-106.

"Delivery". Section 1-201.

"Financing agency". Section 2-104.

"Goods". Section 2-105.

"Holder". Section 1-201.

"Person". Section 1-201.

"Security interest". Section 1-201.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

Under prior North Carolina law procurement by seller of a bill of lading in his own name or to his own order reserved title in the seller until the draft attached thereto was paid. Early & Daniels Co. v. Aulander Flour Mills, 187 N.C. 344, 121 S.E. 539 (1924). Title was not merely for security purposes but included risk of loss which followed title. See Perriman v. Winder, 180 N.C. 73, 103 S.E. 908 (1920).

This section therefore changes North Carolina law. If seller shipped and had bill of lading made to himself or to his own order, legal title did not pass to the buyer for any purpose (such as risk of loss). Under the UCC, however, by making the bill of lading to his own order, or to the order of one other than the buyer, the seller does not retain legal title to goods shipped, but retains only a "security interest." If goods are destroyed, the risk of loss falls on buyer if the goods conformed. In North Carolina the risk of loss formerly would have fallen on the seller if the bill of lading was to his own order.

Subsection (2) accords with Riley v. Carpenter, 143 N.C. 215, 55 S.E. 628 (1906), that if shipment with reservation of title in seller violates terms of contract, because bill of lading is made out to the order of the seller and not the buyer, it constitutes a breach.

Effect of Amendments. - Session Laws 2006-112, s. 33, effective October 1, 2006, inserted "or control" near the end of subdivision (1)(b); in subsection (2), substituted "G.S. 25-2-504" for "the preceding section" in the middle, and added "of title" at the end.

OFFICIAL COMMENT

Prior Uniform Statutory Provision: None. Purposes:

1. "Financing agency" is broadly defined in this Article to cover every normal instance in which a party aids or intervenes in the financing of a sales transaction. The term as used in subsection (1) is not in any sense intended as a limitation and covers any other appropriate situation which may arise outside the scope of the definition.
2. "Paying" as used in subsection (1) is typified by the letter of credit, or "authority to pay" situation in which a banker, by arrangement with the buyer or other consignee, pays on his 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 2-104(2) and Article 4.

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

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

"Buyer". Section 2-103.

"Document of title". Section 1-201.

"Draft". Section 3-104.

"Financing agency". Section 2-104.

"Good faith". Section 2-103.

"Goods". Section 2-105.

"Honor". Section 1-201.

"Purchase". Section 1-201.

"Rights". Section 1-201.

"Value". Section 1-201.

NORTH CAROLINA COMMENT

There is no statutory or case law exactly in point. While under prior North Carolina law a bank or financing agency could purchase a bill of lading by discounting draft attached and receive seller's title, the UCC by subsection (1) of this section gives the financing agency in such case only a "security interest."

Subsection (2) follows the policy of the Uniform Bills of Lading Act, GS 21-37, in freeing a person who enters transaction merely as a financer from responsibility for defects in the documents of title or the merchandise therein described. See Mason v. A. E. Nelson Cotton Co., 148 N.C. 492, 62 S.E. 625 (1908).

Effect of Amendments. - Session Laws 2006-112, s. 34, effective October 1, 2006, substituted "regular" for "regular on its face" in subsection (2).

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. The provision of this Article for a ten day limit within which the seller may reclaim goods delivered on credit to an insolvent buyer is also applicable here. Cross References:

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

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

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

"Buyer". Section 2-103.

"Contract". Section 1-201.

"Delivery". Section 1-201.

"Document of title". Section 1-201.

"Goods". Section 2-105.

"Rights". Section 1-201.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

Subsection (1) accords with the general law of contracts that in the absence of contrary agreement, payment and delivery are concurrent conditions. See McAden v. Craig, 222 N.C. 497, 24 S.E.2d 1 (1942); Wessel v. Seminole Phosphate Co., 13 F.2d 999 (4th Cir. 1926).

Subsection (2) has no statutory or decisional parallel in the prior law of sales.

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.
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.

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.

4. Existing trade usages permitting variations without rejection but with price allowance enter into the agreement itself as contractual limitations of remedy and are not covered by this section. Cross References:

Point 2: Section 2-302.

Point 3: Section 2-511.

Point 4: Sections 1-205 and 2-721. Definitional Cross References:

"Buyer". Section 2-103.

"Conforming". Section 2-106.

"Contract". Section 1-201.

"Money". Section 1-201.

"Notifies". Section 1-201.

"Reasonable time". Section 1-204.

"Seasonably". Section 1-204.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

This section has no counterpart in prior North Carolina statutory or decisional law.

CASE NOTES

Applicability. - Assuming arguendo that the printer at issue was a nonconforming good, G.S. 25-2-508(1) did not apply because the limited liability corporation (LLC) was not the seller of the printer; the equipment supplier-seller was a third party. The lessee was not entitled to summary judgment on the LLC's counterclaim. Moore Printing, Inc. v. Automated Print Solutions, LLC, 216 N.C. App. 549, 718 S.E.2d 167 (2011).

Seller May Make Conforming Delivery Regardless of Prior Nonconforming Delivery. - It is clear from this section that the seller may at any time before the expiration of the time for performance make a conforming delivery regardless of a prior nonconforming delivery. Meads v. Davis, 22 N.C. App. 479, 206 S.E.2d 868 (1974).

Even Though Seller Knew Prior to Delivery that Goods Were Not in Conformity. - This section deals with the situation in which the seller knows prior to delivery that the goods are not in conformity, but has reason to believe that the buyer will accept. An example of such a situation might be where the buyer orders goods no longer carried by the seller, but the seller has goods which will perform the same function. Meads v. Davis, 22 N.C. App. 479, 206 S.E.2d 868 (1974).

Buyer's Obligation Abrogated after "Reasonable Time". - Where defendants were not able to and did not make a conforming delivery within a "reasonable time" or within the "contract time," the plaintiff buyer had no further obligation to purchase or accept any mobile home from defendants, whether the original unit was in a repaired condition or was a replacement. Davis v. Colonial Mobile Homes, 28 N.C. App. 13, 220 S.E.2d 802 (1975), cert. denied, 289 N.C. 613, 223 S.E.2d 391 (1976).

Cited in Performance Motors, Inc. v. Allen, 280 N.C. 385, 186 S.E.2d 161 (1972).

OFFICIAL COMMENT

Prior Uniform Statutory Provision: Section 22, Uniform Sales Act.

Changes: Rewritten, subsection (3) of this section modifying prior law.

Purposes of Changes: To make it clear that:

1. The underlying theory of these sections on risk of loss is the adoption of the contractual approach rather than an arbitrary shifting of the risk with the "property" in the goods. The scope of the present section, 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.
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.

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.

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 2-510(1).

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

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

Point 4: Section 2-503(4).

Point 5: Section 1-201. Definitional Cross References:

"Agreement". Section 1-201.

"Buyer". Section 2-103.

"Contract". Section 1-201.

"Delivery". Section 1-201.

"Document of title". Section 1-201.

"Goods". Section 2-105.

"Merchant". Section 2-104.

"Party". Section 1-201.

"Receipt" of goods. Section 2-103.

"Sale on approval". Section 2-326.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

The prior law provided that risk of loss followed the title. Penniman v. Winder, 180 N.C. 73, 103 S.E. 908 (1920); Early & Daniels Co. v. Aulander Flour Mills, 187 N.C. 344, 121 S.E. 539 (1924); Richardson v. Insurance Co. of North America, 136 N.C. 314, 48 S.E. 733 (1904).

This section of the UCC abolishes the traditional "property passage" or "title" approach as regards the question of who bears the risk of loss. Under the Code it is not necessary to make a broad and circuitous search to locate title to determine risk of loss. This Code section provides a direct mode of determining who has the risk of loss by short and concise statements. In most cases the results are the same under both methods.

Subsection (1)(a) provides that if the contract does not require the seller to deliver to a particular destination, risk of loss passes to the buyer when the goods are delivered to the carrier. This accords with the prior North Carolina rule. See Hunter v. Randolph, 128 N.C. 91, 38 S.E. 288 (1901).

But subsection (1)(a) provides that the risk of loss passes to the buyer even if the shipment is under reservation (by reservation of security via bill of lading made to order of seller). This does not accord with prior North Carolina law which held that if seller had procured a bill of lading to seller's order, no title passed by shipment of the goods until the draft accompanying the bill of lading was paid. Thus, if the bill of lading, upon shipment, was made "to seller's order" risk of loss was on the seller. See Early & Daniels Co. v. Aulander Flour Mills, 187 N.C. 344, 121 S.E. 539 (1924). Contra, Uniform Sales Act, G.S. 20 (2) but North Carolina never adopted the Uniform Sales Act.

Subsection (1)(b) provides that if the contract requires seller to deliver to a particular destination, the goods remain at the seller's risk until they reach their destination. Mere delivery to the carrier does not shift the risk of loss to the buyer. This accords with Peed v. Burleson's, Inc., 244 N.C. 437, 94 S.E.2d 351 (1956). Title remains in the seller until delivery (or tender of delivery) at the rightful place to the buyer. Acme Paper Box Factory v. Atlantic Coast Line R.R., 148 N.C. 421, 62 S.E. 557 (1908). Subsection (1) (b) thus accords with the North Carolina cases in result.

Subsections (2)(a) and (b) provide that risk of loss shall shift if goods are held by bailee and buyer receives documents of title covering goods or bailee acknowledges buyer's right to possess the goods. Compare Williams v. Hodges, 113 N.C. 36, 18 S.E. 83 (1893); Waldo v. Belcher, 33 N.C. 609 (1850); on contract for sale of specific goods, property was transferred unless different intention appears, when contract was made. See Winborne v. McMahon, 206 N.C. 30, 173 S.E. 278 (1934); Teague v. Howard Grocery Store, 175 N.C. 195, 95 S.E. 173 (1918). This would appear to put prior North Carolina law substantially in accord with subsections (2) (a) and (b).

Subsection (3) provides that if seller is "merchant," risk of loss does not pass to buyer until receipt of the goods. If seller is not merchant, risk passes to buyer only upon tender of delivery. This constitutes a basic change in North Carolina law, differentiating merchant sellers from others.

Under prior North Carolina law, risk followed title. On a contract for sale of specific goods title passed when the contract was made. Winborne v. McMahon, 206 N.C. 30, 173 S.E. 278 (1934). On making a contract for specific goods, identified without more for the seller to do, the buyer then had the risk of loss after the contract. This Code provision shifts risk of loss to seller until either receipt of the goods by the buyer or until tender of delivery by the seller. It is thought that this accords more with lay understanding and practice. In addition the seller is likely to be better covered with insurance. The search for title is entirely obviated.

Subsection (4) allows the parties to contract to change risk of loss.

Effect of Amendments. - Session Laws 2006-112, s. 35, effective October 1, 2006, inserted "possession or control of" in subdivisions (2)(a) and (2)(c); in subdivision (2)(c), deleted "written" preceding "direction to," and substituted "deliver in a record" for "deliver."

Legal Periodicals. - For survey of 1981 commercial law, see 60 N.C.L. Rev. 1238 (1982).

CASE NOTES

Buyer Must Have Reasonable Opportunity to Guard Against Risks. - Where buyer, upon shipment by seller, assumes the perils involved in carriage, he must have a reasonable opportunity to guard against these risks by independent arrangements with the carrier. Rheinberg-Kellerei GMBH v. Vineyard Wine Co., 53 N.C. App. 560, 281 S.E.2d 425, cert. denied, 304 N.C. 588, 289 S.E.2d 564 (1981).

Buyer Bore Risk of Loss. - Under G.S. 25-2-509(3), a buyer bore the risk of loss of a mobile home that was destroyed by fire for G.S. 20-4.01(26) purposes as: (1) Nationwide Mutual Insurance Co. v. Hayes, 174 S.E.2d 511 (N.C. 1970), did not apply to the breach of contract case; (2) the risk of loss passed to the buyer on the buyer's receipt of the mobile home; and (3) when the sales agreement was executed, the buyer accepted the mobile home and the seller made tender of delivery due to an as is, where is clause in the agreement. Singletary v. P & A Invs., Inc., 212 N.C. App. 469, 712 S.E.2d 681 (2011).

Relationship Between Prompt Notice and Risk of Loss. - Seller's failure to notify buyer of shipment of wine from Germany until after sailing of ship and ensuing loss was not "prompt notice" within the meaning of G.S. 25-2-504, and therefore the risk of loss did not pass to the buyer upon the delivery of the wine to the carrier pursuant to the provisions of subdivision (1)(a) of this section. Rheinberg-Kellerei GMBH v. Vineyard Wine Co., 53 N.C. App. 560, 281 S.E.2d 425, cert. denied, 304 N.C. 588, 289 S.E.2d 564 (1981).

Applied in Roseboro Ford, Inc. v. Bass, 77 N.C. App. 363, 335 S.E.2d 214 (1985).

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 2-509. Definitional Cross References:

"Buyer". Section 2-103.

"Conform". Section 2-106.

"Contract for sale". Section 2-106.

"Goods". Section 2-105.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

Subsection (1) placing the risk of loss on the seller if goods do not conform accords in result with prior North Carolina law which allowed a right of rescission or rejection for noncompliance of the goods to the contract. See Hendrix v. B & L Motors, Inc., 241 N.C. 644, 86 S.E.2d 448 (1955). This would seem to have entitled the buyer to reshift the risk of loss if the goods did not conform to contract as is the effect of this UCC provision.

Subsections (2) and (3) have no statutory or decisional parallels in North Carolina, except that in North Carolina the risk of loss would have been on the buyer if the buyer repudiated contract even though the goods conformed to the terms of the contract.

Legal Periodicals. - For article, "It's All About the Principal: Preserving Consumers' Right of Rescission Under the Truth in Lending Act," 89 N.C.L. Rev. 171 (2010).

CASE NOTES

Buyer Held Not Liable for Loss of Nonconforming Cable. - In an action to recover the sales price of nonconforming cable which was rejected by the buyer and which was stolen from the buyer's storage space three months after the buyer gave notice of rejection, where the buyer did not contract to return the cable and was not negligent in storing it, the trial court properly concluded that the buyer was not liable for the resulting loss. Graybar Elec. Co. v. Shook, 283 N.C. 213, 195 S.E.2d 514 (1973).

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 noncommercial sales generally and to ordinary sales at retail although it has no application to the great body of commercial contracts which carry credit terms. Subsection (1) applies also to documentary contracts in general and to contracts which look to shipment by the seller but contain no term on time and manner of payment, in which situations the payment may, in proper case, be demanded against delivery of appropriate documents.
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.
5. Under subsection (3) payment by check is defeated if it is not honored upon due presentment. This corresponds to the provisions of the Article on 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).

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 langauge 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.

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.

6. Where the instrument offered by the buyer is not a payment but a credit instrument such as a note or a check postdated by even one day, the seller's acceptance of the instrument insofar as third parties are concerned, amounts to a delivery on credit and his remedies are set forth in the section on buyer's insolvency. As between the buyer and the seller, however, the matter turns on the present subsection and the section on conditional delivery and subsequent dishonor of the instrument gives the seller rights on it as well as for breach of the contract for sale. Cross References:

Point 1: Sections 2-307, 2-310, 2-320, 2-325, 2-503, 2-513 and 2-609.

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

Point 3: Section 2-614.

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

Point 6: Sections 2-507, 2-702, and Article 3. Definitional Cross References:

"Buyer". Section 2-103.

"Check". Section 3-104.

"Dishonor". Section 3-508.

"Party". Section 1-201.

"Reasonable time". Section 1-204.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

Subsection (1) makes tender of payment by the buyer a condition precedent to seller's duty to deliver. The Code requires the buyer to do the first act. Prior North Carolina law made the payment of money and the delivery of property simultaneous or concurrent acts. See McAden v. Craig, 222 N.C. 497, 24 S.E.2d 1 (1942). Hughes v. Knott, 138 N.C. 105, 50 S.E. 586 (1905), said that payment of the price must be either precedent or concurrent to delivery.

Subsection (2) is in accord with Hughes v. Knott, 138 N.C. 105, 50 S.E. 586 (1905), which says that a custom of accepting checks as payment for goods in particular trades can be shown and if the check is refused as payment the buyer shall have a reasonable time to convert his funds into currency and that this will be a valid tender of performance by the buyer.

Subsection (3), which states that payment by check is only conditional, accords with prior North Carolina law. See Weddington v. Boshamer, 237 N.C. 556, 75 S.E.2d 530 (1953); Central Nat'l Bank v. Rich, 256 N.C. 324, 123 S.E.2d 811 (1961); Carrow v. Weston, 247 N.C. 735, 102 S.E.2d 134 (1958); Wilson v. Commercial Fin. Co., 239 N.C. 349, 79 S.E.2d 908 (1953); Handley Motor Co. v. Wood, 237 N.C. 318, 75 S.E.2d 312 (1953), which hold that title does not pass by acceptance of check until it is paid by the bank on which it is drawn. The seller may reclaim goods sold to the buyer in case the check is not paid on due presentation.

CASE NOTES

Applied in Berube v. Mobile Homes Sales & Serv., 28 N.C. App. 160, 220 S.E.2d 636 (1975).

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 [5-109].
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 1-207.

Point 6: Section 2-513(3). Definitional Cross References:

"Buyer". Section 2-103.

"Conform". Section 2-106.

"Contract". Section 1-201.

"Financing agency". Section 2-104.

"Goods". Section 2-105.

"Remedy". Section 1-201.

"Rights". Section 1-201.

NORTH CAROLINA COMMENT

There is apparently no statutory or decisional law in North Carolina in relation to this section, but it seems to accord with "common sense and normal commercial practice" and would probably have been the law in North Carolina.

CASE NOTES

Mere fact that plaintiff paid before delivery does not constitute acceptance of goods or impair buyer's right to inspect or any of his remedies. Davis v. Colonial Mobile Homes, 28 N.C. App. 13, 220 S.E.2d 802 (1975), cert. denied, 289 N.C. 613, 223 S.E.2d 391 (1976).

A buyer's down payment on goods does not impair his right to inspect following delivery. Performance Motors, Inc. v. Allen, 280 N.C. 385, 186 S.E.2d 161 (1972).

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 to 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.
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.
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.
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.

The last sentence of subsection (1) makes it clear that the place of arrival of shipped goods is a reasonable place for their inspection.

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.

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."

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 2-310 (b), 2-321(3) and 2-606(1) (b).

Point 1: Section 2-607.

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

Point 4: Section 2-715.

Point 5: Section 2-321(3).

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

Point 7: Section 1-204.

Point 8: Comment to Section 2-401.

Point 9: Section 2-316(2) (b). Definitional Cross References:

"Buyer". Section 2-103.

"Conform". Section 2-106.

"Contract". Section 1-201.

"Contract for sale". Section 2-106.

"Document of title". Section 1-201.

"Goods". Section 2-105.

"Party". Section 1-201.

"Presumed". Section 1-201.

"Reasonable time". Section 1-204.

"Rights". Section 1-201.

"Seller". Section 2-103.

"Send". Section 1-201.

"Term". Section 1-201.

NORTH CAROLINA COMMENT

Subsection (1), giving buyer right to inspect goods, is in accord with Parker v. Fenwick, 138 N.C. 209, 50 S.E. 630 (1905), and Standard Paint & Lead Works v. Spruill, 186 N.C. 68, 118 S.E. 891 (1923). The latter case states: "Under an executory contract for the sale and delivery of goods of a specified quality, the quality is a part of the description, and the seller is bound to furnish goods actually complying with such description. If he tenders articles of inferior quality, the vendee is not bound to accept them, and unless he does so, he is not liable therefor. This necessarily gives to the vendee the right of inspection, and he must be given an opportunity to make such inspection before becoming liable for the purchase price, unless the contract otherwise provides." "A vendee of merchandise shipped from a distant point, under a contract specifying the quality of the merchandise and providing for its delivery F.O.B. at the point of shipment, but which contains no provisions as to the time or place of payment, inspection or acceptance, is entitled to a reasonable time after the merchandise arrives at its destination in which to inspect it at that point, and to reject it if it does not comply with the contract."

Subsections (2) to (4): There are apparently no direct parallels in prior North Carolina law, either by statutes or decision, to subsections (2), (3) and (4).

CASE NOTES

Buyer Has Reasonable Time After Arrival to Inspect. - Unless otherwise agreed, when the seller is required to send the goods to the buyer, the inspection may be after their arrival, and the buyer is entitled to a reasonable time after the goods arrive at their final destination to inspect and reject them if they do not comply with the contract. Performance Motors, Inc. v. Allen, 280 N.C. 385, 186 S.E.2d 161 (1972).

Applied in Graybar Elec. Co. v. Shook, 17 N.C. App. 81, 193 S.E.2d 392 (1972).

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

"Delivery". Section 1-201.

"Draft". Section 3-104.

NORTH CAROLINA COMMENT

North Carolina had no statute or case law corresponding to this section. Although North Carolina adopted the Uniform Bills of Lading Act in 1919, G.S. 41 of the act was omitted. Its terms are set out below:

" § 41. Demand, presentation or sight draft must be paid, but draft on more than three days time merely accepted before buyer is entitled to the accompanying bill. - Where the seller of goods draws on the buyer for the price of the goods and transmits the draft and a bill of lading for the goods whether directly to the buyer or through a bank or other agency, unless a different intention on the part of the seller appears, the buyer and all other parties interested shall be justified in assuming:

"(a) If the draft is by its terms or legal effect payable on demand or presentation or at sight, or not more than three days thereafter (whether such three days be termed days of grace or not), that the seller intended to require payment of the draft before the buyer should be entitled to receive or retain the bill.

"(b) If the draft is by its terms payable on time, extending beyond three days after demand, presentation or sight (whether such days be termed days of grace or not), that the seller intended to require acceptance, but not payment of the draft before the buyer should be entitled to receive or retain the bill.

"The provisions of this section are applicable whether by the terms of the bill the goods are consigned to the seller, or to his order, or to the buyer, or to his order, or to a third person, or to his order."

The effect of this UCC modification of the Uniform Bills of Lading Act is to compel a document of title with draft attached to be delivered to the drawee upon his acceptance of the draft if by its terms it is payable more than three days after presentment; if it is payable within three days of presentment, the documents of title shall be delivered only upon payment being made.

In North Carolina where seller of goods shipped them by carrier, with a bill of lading sent with a draft attached for the purchase price, title remained in the seller until the draft was paid. Neither documents of title nor title passed until the draft was paid. See Early & Daniels Co. v. Aulander Flour Mills, 187 N.C. 344, 121 S.E. 539 (1924).

There is a change in North Carolina law by this addition.

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.
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.

Paragraph (a) does not conflict with the provisions on the seller's right to resell rejected goods or the buyer's similar right. Apparent conflict between these provisions which will be suggested in certain circumstances is to be resolved by requiring prompt action by the parties. Nor does paragraph (a) impair the effect of a term for payment before inspection. Short of such defects as amount to fraud or substantial failure of consideration, nonconformity is neither an excuse nor a defense to an action for 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).

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 of 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 2-513(3), 2-706 and 2-711(2) and Article 5.

Point 3: Sections 1-202 and 1-207. Definitional Cross References:

"Conform". Section 2-106.

"Goods". Section 2-105.

"Notification". Section 1-201.

"Party". Section 1-201.

NORTH CAROLINA COMMENT

There is no counterpart to this section in prior North Carolina law, either statutory or decisional.

PART 6. BREACH, REPUDIATION AND EXCUSE.

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 2-602(2) (a), 2-612, 2-718 and 2-719. Definitional Cross References:

"Buyer". Section 2-103.

"Commercial unit". Section 2-105.

"Conform". Section 2-106.

"Contract". Section 1-201.

"Goods". Section 2-105.

"Installment contract". Section 2-612.

"Rights". Section 1-201.

NORTH CAROLINA COMMENT

The law in North Carolina was that if the contract for the purchase of goods was divisible, a buyer's acceptance of a part of a shipment of goods did not obligate the buyer to receive the remainder of nonconforming goods which did not come up to the contract. See Indian Mountain Jellico Coal Co. v. Asheville Ice & Coal Co., 134 N.C. 574, 47 S.E. 116 (1904); Freeman v. Skinner, 31 N.C. 32 (1848). In other words, the prior North Carolina law recognized a buyer's right to accept part of a shipment of a divisible contract and reject the balance of shipment if it did not conform to the contract; such partial acceptance of goods did not constitute a waiver of defects as to the quality or quantity of the remainder of the goods.

But see J. W. Sanders Cotton Mill v. Capps, 104 F. Supp. 617 (E.D.N.C. 1952), that where there is a "single order and only one transaction" purchaser may not accept part of a shipment and reject the remainder, but must either affirm or repudiate.

Thus under prior North Carolina law whether a buyer might accept part of the goods contracted for and reject nonconforming goods would appear to have been based on whether the contract was divisible. The UCC section here involved bases the buyer's right of acceptance or rejection on commercial units rather than upon the test of divisibility or indivisibility of the contract of sale. (A commercial unit is a unit of goods by commercial usage whose division impairs its character or value on the market or in use.)

The results of the cases under the prior law and under the UCC will probably be the same with reference to this section. The results should, however, be more predictable than under prior law.

CASE NOTES

Applied in Performance Motors, Inc. v. Allen, 280 N.C. 385, 186 S.E.2d 161 (1972); Graybar Elec. Co. v. Shook, 17 N.C. App. 81, 193 S.E.2d 392 (1972); Rose v. Epley Motor Sales, 288 N.C. 53, 215 S.E.2d 573 (1975).

Cited in Watson v. Graf Bae Farm, Inc., 99 N.C. App. 210, 392 S.E.2d 651 (1990).

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 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 1-201, 1-204(1) and (3), 2-512(2), 2-513(1) and 2-606(1) (b).

Point 2: Section 2-603(1).

Point 3: Section 2-703. Definitional Cross References:

"Buyer". Section 2-103.

"Commercial unit". Section 2-105.

"Goods". Section 2-105.

"Merchant". Section 2-104.

"Notifies". Section 1-201.

"Reasonable time". Section 1-204.

"Remedy". Section 1-201.

"Rights". Section 1-201.

"Seasonably". Section 1-204.

"Security interest". Section 1-201.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

Subsection (1) accords with the cases of Hajoca Corp. v. Brooks, 249 N.C. 10, 105 S.E.2d 123 (1958); Hendrix v. B & L Motors, Inc., 241 N.C. 644, 86 S.E.2d 448 (1955); Hutchins v. Davis, 230 N.C. 67, 52 S.E.2d 210 (1949); May v. Loomis, 140 N.C. 350, 52 S.E. 728 (1905); Huyett & Smith Mfg. Co. v. Gray, 124 N.C. 322, 32 S.E. 718 (1899); Waldo v. Halsey, 48 N.C. 107 (1855) and McEntyre v. McEntyre, 34 N.C. 302 (1851). The latter case states: "If one, not having seen them, orders goods of a certain description, at a certain price, and the goods sent do not answer the description, he may return them, within a reasonable time, and rescind the contract . . . ."

Subsection (2) also accords with prior North Carolina law. Huyett & Smith Mfg. Co. v. Gray, 124 N.C. 322, 32 S.E. 718 (1899) states: "The purchaser is not compelled in all cases to reject the property, at once, upon its receipt; if it is machinery, he has a reasonable time to operate the machinery for the purpose of testing it. But when this is done, and it is found that the machine or the machinery does not fill the specifications of the contract and warranty, he must then abandon the contract and refuse to accept and use the property; and if he does not do this, but continues the possession and use of the property, he will be deemed in law to have accepted the property, and his relief then will be an action for damages upon the breach of the warranty." See Nationwide Mut. Ins. Co. v. Don Allen Chevrolet Co., 253 N.C. 243, 116 S.E.2d 780 (1960); Bruton v. Bland, 260 N.C. 429, 132 S.E.2d 910 (1963).

Legal Periodicals. - For note on North Carolina's automobile warranty legislation, see 66 N.C.L. Rev. 1080 (1988).

CASE NOTES

The Uniform Commercial Code emphasizes promptness and good faith. Graybar Elec. Co. v. Shook, 283 N.C. 213, 195 S.E.2d 514 (1973).

A prospective purchaser may exercise a valid right to reject. Graybar Elec. Co. v. Shook, 283 N.C. 213, 195 S.E.2d 514 (1973).

Even if the purchaser takes possession, responsibility expires after a reasonable time in which the owner has opportunity to repossess. Graybar Elec. Co. v. Shook, 283 N.C. 213, 195 S.E.2d 514 (1973).

Acceptance precludes rejection of the goods accepted and, if made with knowledge of a nonconformity, cannot be revoked because of it unless the acceptance was on the reasonable assumption that the nonconformity would be seasonably cured. HPS, Inc. v. All Wood Turning Corp., 21 N.C. App. 321, 204 S.E.2d 188 (1974).

What Constitutes Effective Rejection. - Effective rejection means (1) rejection within a reasonable time after delivery or tender, and (2) seasonable notice to the seller. HPS, Inc. v. All Wood Turning Corp., 21 N.C. App. 321, 204 S.E.2d 188 (1974).

Buyer Not Liable for Rejected Goods Which Were Later Stolen. - In an action to recover the sales price of nonconforming cable which was rejected by the buyer and which was stolen from the buyer's storage space three months after the buyer gave notice of rejection, where the buyer did not contract to return the cable and was not negligent in storing it, the trial court properly concluded that the buyer was not liable for the resulting loss. Graybar Elec. Co. v. Shook, 283 N.C. 213, 195 S.E.2d 514 (1973).

Remaining in Mobile Home after Revocation or Rejection. - The fact that plaintiff stayed in a mobile home unit after allegedly revoking or rejecting the unit does not alone necessarily vitiate any of the buyer's rights. Davis v. Colonial Mobile Homes, 28 N.C. App. 13, 220 S.E.2d 802 (1975), cert. denied, 289 N.C. 613, 223 S.E.2d 391 (1976).

Finding of Revocation or Rejection Warrants Same Relief. - Any error committed by the district court in finding a rejection instead of a revocation of acceptance would be deemed harmless, since evidence warranted a finding of revocation. In either case the plaintiff's relief would be the same. Davis v. Colonial Mobile Homes, 28 N.C. App. 13, 220 S.E.2d 802 (1975), cert. denied, 289 N.C. 613, 223 S.E.2d 391 (1976).

Recovery upon Revocation or Rejection. - If the buyer makes an effective rejection of a mobile home, or justifiably revokes his acceptance of it, he has a right to recover "so much of the price as had been paid" plus any incidental and consequential damages he is able to prove. Davis v. Colonial Mobile Homes, 28 N.C. App. 13, 220 S.E.2d 802 (1975), cert. denied, 289 N.C. 613, 223 S.E.2d 391 (1976).

Evidence of Rejection Insufficient. - Buyer's evidence was insufficient to support a finding that she rejected a mobile home where it showed that, after telling seller when the mobile home was installed that "this is not right and I do not want it," buyer moved into the mobile home and made three monthly payments under the terms of the contract. Performance Motors, Inc. v. Allen, 280 N.C. 385, 186 S.E.2d 161 (1972).

The buyer first properly rejected the goods by notifying seller of nonconformities and in the interim, repaired and sold some of the defective goods with the promise that they would be replaced; however buyer excercised ownership by donating the rest of the goods to charity; this ultimately constituted an acceptance. Design Plus Store Fixtures, Inc. v. Citro Corp., 131 N.C. App. 581, 508 S.E.2d 825 (1998).

Company that ordered telephone equipment accepted the equipment because it did not reject it, pursuant to a contract it signed to purchase the equipment, within three weeks after the equipment was installed, and because the general notice which the company gave that the equipment did not conform to its requirements did not revoke its acceptance, the trial court properly granted summary judgment for a company that sold the equipment on its claim that the company which bought the equipment wrongfully failed to pay for it. Business Communs., Inc. v. Ki Networks, Inc., 157 N.C. App. 710, 580 S.E.2d 77 (2003).

Applied in Graybar Elec. Co. v. Shook, 17 N.C. App. 81, 193 S.E.2d 392 (1972); Rose v. Epley Motor Sales, 288 N.C. 53, 215 S.E.2d 573 (1975).

Cited in Trio Estates, Ltd. v. Dyson, 10 N.C. App. 375, 178 S.E.2d 778 (1971); Williams v. Hyatt Chrysler-Plymouth, Inc., 48 N.C. App. 308, 269 S.E.2d 184 (1980); Watson v. Graf Bae Farm, Inc., 99 N.C. App. 210, 392 S.E.2d 651 (1990).

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 practically 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 1-106. Compare generally Section 2-706. Definitional Cross References:

"Buyer". Section 2-103.

"Good faith". Section 1-201.

"Goods". Section 2-105.

"Merchant". Section 2-104.

"Security interest". Section 1-201.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

There are no prior North Carolina statutes or cases which bear on the subject matter of this section.

CASE NOTES

Continued Use of Rejected Goods. - As a merchant dealing in tables, it was buyer's duty, upon rejection of defective tables, to follow seller's reasonable instructions with respect to the tables; when no instructions were forthcoming, it was proper for merchant to repair and see the goods in the interim, while promising to replace the defective product. Design Plus Store Fixtures, Inc. v. Citro Corp., 131 N.C. App. 581, 508 S.E.2d 825 (1998).

Cited in Alberti v. Manufactured Homes, Inc., 329 N.C. 727, 407 S.E.2d 819 (1991).

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 2-602(1), 2-603(1) and 2-706. Definitional Cross References:

"Buyer". Section 2-103.

"Notification". Section 1-201.

"Reasonable time". Section 1-204.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

There are no prior North Carolina statutes or decisions relating to this section.

CASE NOTES

Use of Tables Consistent with Rejection. - The buyer's actions constituted acceptance of tables for which it had contracted, where it first properly rejected the defective tables by providing reasonable notice of nonconformities to the seller, and its repair and sale of the tables to a customer as an interim measure was reasonable, but its ultimate disposal of the tables to charity was inconsistent with the seller's ownership. Design Plus Store Fixtures, Inc. v. Citro Corp., 131 N.C. App. 581, 508 S.E.2d 825 (1998).

Cited in Alberti v. Manufactured Homes, Inc., 329 N.C. 727, 407 S.E.2d 819 (1991).

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 2-508.

Point 4: Sections 2-512(2), 2-606(1) (b) and 2-607(2). Definitional Cross References:

"Between merchants". Section 2-104.

"Buyer". Section 2-103.

"Seasonably". Section 1-204.

"Seller". Section 2-103.

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

NORTH CAROLINA COMMENT

There are no prior North Carolina statutes or decisions relating to this section.

Effect of Amendments. - Session Laws 2006-112, s. 36, effective October 1, 2006, substituted "in" for "on the face of" in subsection (2).

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 2-401, 2-509, 2-510, 2-607, 2-608 and Part 7.

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

Point 5: Section 2-601. Definitional Cross References:

"Buyer". Section 2-103.

"Commercial unit". Section 2-105.

"Goods". Section 2-105.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

Subsections (1)(a) and (b) are in accord with Richardson v. Woodruff, 178 N.C. 46, 100 S.E. 173 (1919), which holds that there is no acceptance of goods by the buyer until he has had an opportunity to inspect the goods. Continued use, however, after discovery of nonconformity, or after a reasonable opportunity to discover nonconformity, constitutes an acceptance. Hajoca Corp. v. Brooks, 249 N.C. 10, 105 S.E.2d 123 (1958).

Subsection (1)(c) accords with Ritchie v. Ritchie, 192 N.C. 538, 135 S.E. 458 (1926), which holds that if a buyer sells part of the goods and keeps the proceeds of the sale and applies them to his own use, there is an acceptance. See Hajoca Corp. v. Brooks, 249 N.C. 10, 105 S.E.2d 123 (1958), which holds, however, that retention of goods for the purpose of testing it for a reasonable time or at the request of the seller in order that he may endeavor to remedy the defects does not constitute an acceptance or waiver of the buyer's right to rescind.

Subsection (2) has no statutory or decisional parallel in prior North Carolina law.

CASE NOTES

What Constitutes Acceptance. - Acceptance is ordinarily signified by language or conduct of the buyer that he will take the goods, but this does not necessarily indicate that the goods conform to the contract. Performance Motors, Inc. v. Allen, 280 N.C. 385, 186 S.E.2d 161 (1972); HPS, Inc. v. All Wood Turning Corp., 21 N.C. App. 321, 204 S.E.2d 188 (1974).

Acceptance may occur by failure of the buyer "to make an effective rejection" after a reasonable opportunity to inspect. Performance Motors, Inc. v. Allen, 280 N.C. 385, 186 S.E.2d 161 (1972); HPS, Inc. v. All Wood Turning Corp., 21 N.C. App. 321, 204 S.E.2d 188 (1974).

Acceptance in Code terminology is a term of art which is unrelated to the question of passage of title from seller to buyer and is only tangentially related to buyer's possession of goods. HPS, Inc. v. All Wood Turning Corp., 21 N.C. App. 321, 204 S.E.2d 188 (1974).

Donation of Goods to Charity Inconsistent with Seller's Ownership. - The buyer first properly rejected the defective goods by notifying seller of nonconformities and in the interim, repaired and sold the goods with the promise they would be replaced; however the buyer ultimately accepted the goods when he donated the rest of the defective to charity. Design Plus Store Fixtures, Inc. v. Citro Corp., 131 N.C. App. 581, 508 S.E.2d 825 (1998).

What Constitutes Rejection. - Effective rejection means (1) rejection within a reasonable time after delivery or tender, and (2) seasonable notice to the seller. HPS, Inc. v. All Wood Turning Corp., 21 N.C. App. 321, 204 S.E.2d 188 (1974).

Revocation of Acceptance. - Acceptance precludes rejection of the goods accepted and, if made with knowledge of a nonconformity, cannot be revoked because of it unless the acceptance was on the reasonable assumption that the nonconformity would be seasonably cured. HPS, Inc. v. All Wood Turning Corp., 21 N.C. App. 321, 204 S.E.2d 188 (1974).

The buyer may revoke his acceptance if (1) the acceptance was on the reasonable assumption that the nonconformity would be seasonably cured, and (2) the nonconformity substantially impairs the value of the goods. HPS, Inc. v. All Wood Turning Corp., 21 N.C. App. 321, 204 S.E.2d 188 (1974).

Revocation of acceptance must be made within a reasonable time after the buyer discovers, or should have discovered, the ground for it, and it is not effective until the buyer notifies the seller of it. HPS, Inc. v. All Wood Turning Corp., 21 N.C. App. 321, 204 S.E.2d 188 (1974).

Acceptance Entitles Seller to Recover Contract Price and Expenses. - An acceptance of the goods entitles the aggrieved seller to recover the contract price of the goods as well as any expenses reasonably incurred as a result of the breach. HPS, Inc. v. All Wood Turning Corp., 21 N.C. App. 321, 204 S.E.2d 188 (1974).

Evidence of Acceptance Sufficient. - Buyer's evidence was sufficient to permit a jury finding that she initially accepted a mobile home on the reasonable assumption that plaintiff would correct the nonconforming defects where it showed that after telling seller when the mobile home was installed that "this is not right and I do not want it," buyer moved into the mobile home and made three monthly payments under the terms of the contract. Performance Motors, Inc. v. Allen, 280 N.C. 385, 186 S.E.2d 161 (1972).

Buyer's actions in delivering checks, signing paperwork, and taking delivery of car were so inconsistent with the seller's ownership as to preclude any other interpretation than that she accepted the car. American Imports, Inc. v. G.E. Employees W. Region Fed. Credit Union, 37 N.C. App. 121, 245 S.E.2d 798 (1978).

In an action to recover for breach of contract in the sale of the typesetting equipment, where the record clearly shows that plaintiff retained the machines in question, had possession of them at the time of trial, and had ample time to reject them, particularly since the condition of the goods was fully known to plaintiff, the acts of plaintiff were inconsistent with the seller's (defendant's) ownership and constituted acceptance under subsection (1)(c) of this section. Danjee, Inc. v. Addressograph Multigraph Corp., 44 N.C. App. 626, 262 S.E.2d 665, cert. denied, 300 N.C. 196, 269 S.E.2d 623 (1980).

Company that ordered telephone equipment accepted the equipment because it did not reject it, pursuant to a contract it signed to purchase the equipment, within three weeks after the equipment was installed, and because the general notice which the company gave that the equipment did not conform to its requirements did not revoke its acceptance, the trial court properly granted summary judgment for a company that sold the equipment on its claim that the company which bought the equipment wrongfully failed to pay for it. Business Communs., Inc. v. Ki Networks, Inc., 157 N.C. App. 710, 580 S.E.2d 77 (2003).

Denial of Indebtedness by Defendant Raised Issue of Acceptance. - In an action to recover the balance allegedly due on a contract of sale of a machine wherein the defendant admitted that he purchased and received the machine, that he made no payments under the contract except a down payment, and that plaintiff repossessed the machine, defendant's denial of any indebtedness to the plaintiff raised an issue for the jury as to whether defendant accepted the machine within the meaning of this section; if the jury determines that the defendant accepted the machine, it must then determine what amount, if any, plaintiff is entitled to recover from defendant under the terms of the contract. Trio Estates, Ltd. v. Dyson, 10 N.C. App. 375, 178 S.E.2d 778 (1971).

Applied in Ace Chem. Corp. v. Atomic Paint Co., 31 N.C. App. 221, 229 S.E.2d 55 (1976); ITT-Industrial Credit Co. v. Milo Concrete Co., 31 N.C. App. 450, 229 S.E.2d 814 (1976); Stutts v. Green Ford, Inc., 47 N.C. App. 503, 267 S.E.2d 919 (1980); Williams v. Hyatt Chrysler-Plymouth, Inc., 48 N.C. App. 308, 269 S.E.2d 184 (1980).

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.
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.

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.

8. All of the provisions of the present section are subject to any explicit reservation of rights. Cross References:

Point 1: Section 1-201.

Point 2: Section 2-608.

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

Point 5: Section 2-318.

Point 6: Section 2-717.

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

Point 8: Section 1-207. Definitional Cross References:

"Burden of establishing". Section 1-201.

"Buyer". Section 2-103.

"Conform". Section 2-106.

"Contract". Section 1-201.

"Goods". Section 2-105.

"Notifies". Section 1-201.

"Reasonable time". Section 1-204.

"Remedy". Section 1-201.

"Seasonably". Section 1-204.

NORTH CAROLINA COMMENT

Subsection (1) accords with Parker v. Fenwick, 138 N.C. 209, 50 S.E. 627 (1905), which requires payment of price upon acceptance. See also Dodson v. Moore, 64 N.C. 512 (1870).

Subsection (2) accords with Spiers v. Halsted, 74 N.C. 620 (1876), that mere acceptance of a purchased article does not itself constitute a waiver of damages for a delay in performance of the contract. Cox v. Long, 69 N.C. 7 (1873), Thomas v. Simpson, 80 N.C. 4 (1899), and Potter v. National Supply Co., 230 N.C. 1, 51 S.E.2d 908 (1949), hold that a purchaser does not waive his right to sue a seller for damages because of the inferior quality of articles purchased or for breach of warranty by the mere acceptance and retention of goods not fulfilling the terms of the contract.

Subsection (3)(a) accords with Main v. Field, 144 N.C. 307, 56 S.E. 943 (1907), that a buyer of goods has a reasonable time within which to give the seller notice of a breach of warranty after acceptance of the goods.

Subsection (3)(b) has no prior North Carolina statutory or decisional parallel.

Subsection (4) accords with Furst v. Taylor, 204 N.C. 603, 169 S.E. 185 (1933); Parker v. Fenwick, 138 N.C. 209, 50 S.E. 627 (1905).

Subsections (5) and (6) have no prior North Carolina statutory or decisional equivalents.

Legal Periodicals. - For note on requirement of privity and express warranties, see 16 Wake Forest L. Rev. 857 (1980).

For article on contract modification under Article 2, see 59 N.C.L. Rev. 335 (1981).

For discussion of the "reasonable notice" aspect of warranty law, in light of Maybank v. S.S. Kresge, 302 N.C. 129, 273 S.E.2d 681 (1981), see 61 N.C.L. Rev. 177 (1982).

For article on notice of breach in nonprivity contexts, see 66 N.C.L. Rev. 107 (1987).

CASE NOTES

Acceptance Limits Buyer's Remedy to Damages for Breach. - If buyer accepted a mobile home and did not revoke such acceptance, he was obligated to pay the balance due on the contract price and was limited on his counterclaim to recovery of damages for breach of implied warranty of fitness. Performance Motors, Inc. v. Allen, 280 N.C. 385, 186 S.E.2d 161 (1972).

Acceptance of goods by the buyer required that the buyer pay the contract price for the goods accepted, retaining, however, the right to counterclaim for breach of warranty by the seller, and the burden of establishing such breach shifted to the buyer. HPS, Inc. v. All Wood Turning Corp., 21 N.C. App. 321, 204 S.E.2d 188 (1974).

Acceptance Does Not Bar Action for Breach of Warranty. - While the purchaser of a mobile home was obligated to pay the contract price when she paid the loan on the home and released the lender, thereby accepting the home and barring rejection, she could still maintain an action for breach of warranty. Lyon v. Shelter Resources Corp., 40 N.C. App. 557, 253 S.E.2d 277 (1979).

A buyer who accepts goods must pay the seller the contract price, but can sue the seller for breach of warranty. Stimpson Hosiery Mills, Inc. v. Pam Trading Corp., 98 N.C. App. 543, 392 S.E.2d 128 (1990).

What Aggrieved Party Must Show. - Where an aggrieved party seeks to recover damages for breach of an express warranty, limited or otherwise, he must demonstrate both that he has fulfilled his own obligations under it and that he has taken the steps required by this article. Stutts v. Green Ford, Inc., 47 N.C. App. 503, 267 S.E.2d 919 (1980).

Covenants to Repair and Replace Defective Parts. - Although limited warranties are valid, compliance with their covenants to repair and to replace defective parts requires that the warrantor do more than make good faith attempts to repair defects when requested to do so, and a manufacturer or other warrantor may be liable for breach of warranty when it repeatedly fails within a reasonable time to correct a defect as promised; moreover, a party seeking to recover for breach of a limited warranty is not required to give the warrantor unlimited opportunities to attempt to bring the item into compliance with the warranty. Stutts v. Green Ford, Inc., 47 N.C. App. 503, 267 S.E.2d 919 (1980).

The burden is upon the buyer to establish a breach by the seller of the warranty of merchantability; that is, to show that the defect existed at the time of the sale. Rose v. Epley Motor Sales, 288 N.C. 53, 215 S.E.2d 573 (1975).

Policy Behind Subsection (3)(a) Notice Requirement. - Perhaps the most important policy behind the notice requirement of this section is enabling the seller to make efforts to cure the breach by making adjustments or replacements in order to minimize the buyer's damages and the seller's liability; however, in cases where the defective goods have caused personal injury, this policy has no application because the damage has already occurred and is irreversible. Maybank v. S.S. Kresge Co., 302 N.C. 129, 273 S.E.2d 681 (1981).

The most important policy behind the notice requirement of this section is to allow the seller the opportunity to cure the breach and minimize its damages. Riley v. Ken Wilson Ford, Inc., 109 N.C. App. 163, 426 S.E.2d 717 (1993).

Notice under Subdivision (3)(a) Condition Precedent to Recovery. - The notice "within a reasonable time" required by subdivision (3)(a) of this section in an action for breach of warranty against the immediate seller is a condition precedent to recovery which must be pled and proved by plaintiff rather than an affirmative defense which must be raised by defendant seller. Maybank v. S.S. Kresge Co., 302 N.C. 129, 273 S.E.2d 681 (1981).

What Constitutes Notice "Within a Reasonable Time". - If a delay in giving the notice required by subdivision (3)(a) operates to deprive the seller of a reasonable opportunity to discover facts which might provide a defense or which might lessen his liability, thus defeating the policy behind the notice requirement, the notice might be said not to have been given within a reasonable time. Maybank v. S.S. Kresge Co., 302 N.C. 129, 273 S.E.2d 681 (1981).

Jury Issue as to Seasonable Notice. - When the plaintiff in an action for breach of warranty is a lay consumer and notification is given to the defendant seller by the filing of an action within the period of the statute of limitations, and when the applicable policies behind the requirement of notice to the seller have been fulfilled, the plaintiff is entitled to go to the jury on the issue of seasonable notice to the seller. Maybank v. S.S. Kresge Co., 302 N.C. 129, 273 S.E.2d 681 (1981).

In an action to recover on the theory of breach of warranty of merchantability for injuries resulting from the explosion of a flashcube sold to plaintiff by defendant, plaintiff's evidence was sufficient to go to the jury on the issue of whether plaintiff gave defendant notice "within a reasonable time", where it tended to show that the filing of the suit and accompanying service upon defendant some three years after the explosion was defendant's first notice that the flashcube was defective and had caused injury, that plaintiff was a lay consumer, and that the flashcube which exploded and the carton in which it was purchased were available as evidence at the trial. Maybank v. S.S. Kresge Co., 302 N.C. 129, 273 S.E.2d 681 (1981).

The question of whether adequate notice of breach was given was one for the jury. Management Sys. Assocs. v. McDonnell Douglas Corp., 762 F.2d 1161 (4th Cir. 1985).

Waiver of Defense. - Where defendant does not assert failure to give notice as an affirmative defense, it is deemed waived. Maybank v. S.S. Kresge Co., 46 N.C. App. 687, 266 S.E.2d 409 (1980), aff'd in part and rev'd in part, 302 N.C. 129, 273 S.E.2d 681 (1981).

Evidence Sufficient to Make Out Case for Seller. - Seller's proof of the sale and delivery of a car at an agreed price and buyer's admission that she took the car, executed the papers connected with the sale and then refused to pay the purchase price makes out a case entitling seller to recover the amount due on the purchase price, nothing else appearing. American Imports, Inc. v. G.E. Employees W. Region Fed. Credit Union, 37 N.C. App. 121, 245 S.E.2d 798 (1978).

Defendant breached its express warranty to plaintiffs when it refused to further repair plaintiffs' car only 10 months after purchase and within the 12 month warranty period. Riley v. Ken Wilson Ford, Inc., 109 N.C. App. 163, 426 S.E.2d 717 (1993).

Security Interest. - Bankruptcy court concluded that the claimant's motion for summary judgment, made pursuant to Fed. R. Civ. P. 56; Fed. R. Bankr. P. 7056, should be granted based upon the undisputed facts of record and that the debtor's motion for summary judgment should be denied; the court found that the claimant was entitled to invoke the equitable doctrine of recoupment after the court found that the evidence failed to establish a security interest in the showroom furniture in issue in favor of the claimant, as the claimant asserted pursuant to G.S. 25-2-607 and G.S. 25-2-711. In re Lincoln-Gerard USA, Inc., - Bankr. - (Bankr. M.D.N.C. July 18, 2002).

Applied in Ace Chem. Corp. v. Atomic Paint Co., 31 N.C. App. 221, 229 S.E.2d 55 (1976); ITT-Industrial Credit Co. v. Milo Concrete Co., 31 N.C. App. 450, 229 S.E.2d 814 (1976); Harrington Mfg. Co. v. Logan Tontz Co., 40 N.C. App. 496, 253 S.E.2d 282 (1979); Danjee, Inc. v. Addressograph Multigraph Corp., 44 N.C. App. 626, 262 S.E.2d 665 (1980).

Cited in Reid v. Eckerds Drugs, Inc., 40 N.C. App. 476, 253 S.E.2d 344 (1979); Southern of Rocky Mount, Inc. v. Woodward Specialty Sales, Inc., 52 N.C. App. 549, 279 S.E.2d 32 (1981); Warren v. Guttanit, Inc., 69 N.C. App. 103, 317 S.E.2d 5 (1984); Whitehurst v. Crisp R.V. Ctr., Inc., 86 N.C. App. 521, 358 S.E.2d 542 (1987); Halprin v. Ford Motor Co., 107 N.C. App. 423, 420 S.E.2d 686 (1992); Bryant v. Adams, 116 N.C. App. 448, 448 S.E.2d 832 (1994); Design Plus Store Fixtures, Inc. v. Citro Corp., 131 N.C. App. 581, 508 S.E.2d 825 (1998).

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 2-721.

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

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

Point 7: Section 2-601. Definitional Cross References:

"Buyer". Section 2-103.

"Commercial unit". Section 2-105.

"Conform". Section 2-106.

"Goods". Section 2-105.

"Lot". Section 2-106.

"Notifies". Section 1-201.

"Reasonable time". Section 1-204.

"Rights". Section 1-201.

"Seasonably". Section 1-204.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

Subsection (1)(a) accords with Hajoca Corp. v. Brooks, 249 N.C. 10, 105 S.E.2d 123 (1958), that a buyer's retention of goods during a period in which seller makes efforts to remedy defects does not bar buyer from thereafter electing to rescind contract.

Subsection (1)(b) accords with Case Threshing Mach. Co. v. McKay, 161 N.C. 584, 77 S.E. 848 (1913), that retention of a machine at seller's request to try to make it perform the service it was represented as capable of performing does not prevent the purchaser from rescinding the purchase. See also Thomas v. Simpson, 80 N.C. 4 (1879), that acceptance of goods in ignorance of defect therein is not a waiver of implied warranty of quality.

Subsection (2) accords with Huyett & Smith Mfg. Co. v. Gray, 124 N.C. 322, 32 S.E. 718 (1899), that a purchaser has reasonable time to operate machinery for the purpose of testing it; if machinery does not come up to contract, he may abandon the contract and refuse to receive and use the property. See also Hendrix v. B & L Motors, Inc., 241 N.C. 644, 86 S.E.2d 448 (1955).

Subsection (3) accords with Hendrix v. B & L Motors, Inc., 241 N.C. 644, 86 S.E.2d 448 (1955), and Curtis v. White Cadillac-Olds, Inc., 248 N.C. 717, 104 S.E.2d 877 (1958).

Legal Periodicals. - For survey of 1972 case law on revocation of acceptance, see 51 N.C.L. Rev. 1170 (1973).

For note on North Carolina's automobile warranty legislation, see 66 N.C.L. Rev. 1080 (1988).

CASE NOTES

Subsection (2) of this statute is for the protection of sellers where the buyer allows the goods to deteriorate, creating the risk that the alleged defect was caused or aggravated by the buyer's action or inaction. Roy Burt Enters., Inc. v. Marsh, 328 N.C. 262, 400 S.E.2d 425 (1991).

Acceptance of goods without discovery of nonconformities must be judged in the light of whether such acceptance was reasonably induced either by the difficulty of discovery before acceptance or by the seller's assurances. Wright v. O'Neal Motors, Inc., 57 N.C. App. 49, 291 S.E.2d 165, cert. denied, 306 N.C. 393, 294 S.E.2d 221 (1982).

Significant nonavailability of goods may relate to the question of substantial impairment of value. Wright v. O'Neal Motors, Inc., 57 N.C. App. 49, 291 S.E.2d 165, cert. denied, 306 N.C. 393, 294 S.E.2d 221 (1982).

Grounds for Revocation. - The buyer may revoke his acceptance if (1) "the acceptance was on the reasonable assumption that the nonconformity would be seasonably cured," and (2) the nonconformity substantially impairs the value of the goods. HPS, Inc. v. All Wood Turning Corp., 21 N.C. App. 321, 204 S.E.2d 188 (1974).

A tender of the goods to the seller is not required in order to revoke acceptance. Roy Burt Enters., Inc. v. Marsh, 328 N.C. 262, 400 S.E.2d 425 (1991).

Subsection (2) of this section does not apply to goods that are defective before a change is made in them by the buyer. Warren v. Guttanit, Inc., 69 N.C. App. 103, 317 S.E.2d 5 (1984).

Issue Is Whether Goods Have Nonconformity Which Substantially Impairs Value to Buyer. - The threshold issue is whether the goods have a nonconformity which substantially impairs their value to the buyer. Resolution of this factual issue requires the application of a two-part test which considers both the buyer's subjective reaction to the alleged defect (taking into account the buyer's needs, circumstances, and reaction to the nonconformity) and the objective reasonableness of this reaction (taking into account the goods' market value, reliability, safety, and usefulness for purposes for which similar goods are used, including efficiency of operation, cost of repair of nonconformities, and the seller's ability or willingness to seasonably cure the nonconformity). Allen v. Rouse Toyota Jeep, Inc., 100 N.C. App. 737, 398 S.E.2d 64 (1990).

What Buyer Must Show. - In order for the buyer to show that his revocation was justifiable, the following four elements must be proved: (1) that the goods contained a nonconformity that substantially impaired their value to him; (2) that he either accepted the goods knowing of the nonconformity but reasonably assuming that it would be cured, or that he accepted the goods not knowing of the nonconformity due to the difficulty of discovery or reasonable assurances from the seller that the goods were conforming; (3) that revocation occurred within a reasonable time after he discovered or should have discovered the defect; and (4) that he has notified the seller of his revocation. Harrington Mfg. Co. v. Logan Tontz Co., 40 N.C. App. 496, 253 S.E.2d 282, cert. denied, 297 N.C. 454, 256 S.E.2d 806 (1979); Warren v. Guttanit, Inc., 69 N.C. App. 103, 317 S.E.2d 5 (1984); Cato Equip. Co. v. Matthews, 91 N.C. App. 546, 372 S.E.2d 872 (1988).

The proper test for buyer reaction to be applied is a "personalized objective test," or how a reasonable person would react if in the buyer's position. Allen v. Rouse Toyota Jeep, Inc., 100 N.C. App. 737, 398 S.E.2d 64 (1990).

Manufacturers of products other than self-propelled motor vehicles who are not in a direct contractual relationship with ultimate purchasers are, by implication, not "sellers" against whom purchasers may revoke acceptance. Alberti v. Manufactured Homes, Inc., 329 N.C. 727, 407 S.E.2d 819 (1991).

Manufacturers of Mobile Homes. - Except in the case of self-propelled vehicles for which the statute expressly provides otherwise, the existence of a direct contractual relationship between buyer and seller is generally a prerequisite to the right of a buyer to revoke acceptance against the seller; therefore, plaintiff mobile home buyers were not entitled to revoke acceptance of the mobile home against defendant manufacturer. Alberti v. Manufactured Homes, Inc., 329 N.C. 727, 407 S.E.2d 819 (1991).

Compliance with Statutory Prerequisites Involves Questions of Fact. - Compliance with each of the statutory prerequisites to revocation involves questions of fact, not matters of law for the trial court. Allen v. Rouse Toyota Jeep, Inc., 100 N.C. App. 737, 398 S.E.2d 64 (1990).

What Constitutes Notice to Revoke. - Any conduct clearly manifesting a desire of the buyer to get his money back is a sufficient notice to revoke. Performance Motors, Inc. v. Allen, 280 N.C. 385, 186 S.E.2d 161 (1972).

Formal notice that acceptance is being revoked is not necessary; any conduct by the buyer manifesting to the seller that he is seriously dissatisfied with the goods and expects redress or satisfaction is sufficient. Warren v. Guttanit, Inc., 69 N.C. App. 103, 317 S.E.2d 5 (1984).

Plaintiffs never notified defendant of their revocation of acceptance of defective automobile; therefore, plaintiffs were not entitled to damages under G.S. 25-2-711. Instead, plaintiffs were only entitled to damages for breach of warranty as set forth in G.S. 25-2-714. Riley v. Ken Wilson Ford, Inc., 109 N.C. App. 163, 426 S.E.2d 717 (1993).

Tender of goods by the buyer to the seller is not an essential element of a revocation of acceptance. All that is required is a notification of revocation. Performance Motors, Inc. v. Allen, 280 N.C. 385, 186 S.E.2d 161 (1972).

Waiver of Right to Rescind. - The purchaser waives his right to rescind if, after discovery of the defect or fraud, he ratifies the sale by continuing to use the chattel for his own purposes. Cooper v. Mason, 14 N.C. App. 472, 188 S.E.2d 653 (1972).

Rescission Treated as Revocation of Acceptance. - Assuming without deciding that rescission remains available to a buyer as a remedy by virtue of G.S. 25-1-103, the Supreme Court gave effect to a buyer's allegation of "rescission" as an allegation of "revocation of acceptance", since that Code concept more nearly reflected the claims asserted by the buyer. Performance Motors, Inc. v. Allen, 280 N.C. 385, 186 S.E.2d 161 (1972).

Delay in Revocation to See If Assurances Have Been Met Is Not Per Se Unreasonable. - When the seller has made repeated assurances that the defect can be and will be cured, a delay in revocation to see if these assurances are met and use of the product is not per se unreasonable. Allen v. Rouse Toyota Jeep, Inc., 100 N.C. App. 737, 398 S.E.2d 64 (1990).

Reasonable Time Is Question for Jury. - What is a reasonable time for a buyer to revoke his acceptance is ordinarily a question of fact for the jury. Harrington Mfg. Co. v. Logan Tontz Co., 40 N.C. App. 496, 253 S.E.2d 282, cert. denied, 297 N.C. 454, 256 S.E.2d 806 (1979); Warren v. Guttanit, Inc., 69 N.C. App. 103, 317 S.E.2d 5 (1984).

Timeliness of Revocation Is Question of Law When Facts Undisputed. - Although whether the acceptance of a purchase has been timely revoked is usually a question of fact, when the facts are undisputed and only one inference can be drawn from them it is a question of law for the court. Whitehurst v. Crisp R.V. Ctr., Inc., 86 N.C. App. 521, 358 S.E.2d 542 (1987).

The existence of any express or implied warranties would be relevant to show the standard to which the goods were supposed to conform. Harrington Mfg. Co. v. Logan Tontz Co., 40 N.C. App. 496, 253 S.E.2d 282, cert. denied, 297 N.C. 454, 256 S.E.2d 806 (1979).

All Surrounding Circumstances May Be Considered. - In determining whether revocation was made within a reasonable time after the buyer discovered or should have discovered the nonconformity, it is proper to consider all the surrounding circumstances, including the nature of the defect, the complexity of the goods involved, the sophistication of the buyer, and the difficulty of its discovery. Indeed the reasonable time period may extend in certain cases beyond the time in which notice of the nonconformity has been given, as for example where the parties make attempts at adjustment. Harrington Mfg. Co. v. Logan Tontz Co., 40 N.C. App. 496, 253 S.E.2d 282, cert. denied, 297 N.C. 454, 256 S.E.2d 806 (1979).

Reasonable Time Exceeded. - Seventeen months and 30,000 miles were held to exceed a reasonable time for revocation of the purchase of an automobile. Cooper v. Mason, 14 N.C. App. 472, 188 S.E.2d 653 (1972).

Airplane seller was entitled to summary judgment on a buyer's revocation claim under G.S. 25-2-608(1) because the buyer waited approximately one year after discovering the alleged defects in the airplane before demanding revocation of the purchase and the one-year delay was unreasonable. Prichard Enters. v. Adkins, - F. Supp. 2d - (E.D.N.C. Mar. 14, 2012).

Remaining in Mobile Home After Revocation or Rejection. - The fact that plaintiff stayed in a mobile home unit after allegedly revoking or rejecting the unit does not alone necessarily vitiate any of the buyer's rights. Davis v. Colonial Mobile Homes, 28 N.C. App. 13, 220 S.E.2d 802 (1975), cert. denied, 289 N.C. 613, 223 S.E.2d 391 (1976).

Burden Is on Buyer to Show That Revocation Was Justifiable. - When the buyer revokes his acceptance, the burden is on him to show that such revocation was justifiable before he will be allowed to recover. Harrington Mfg. Co. v. Logan Tontz Co., 40 N.C. App. 496, 253 S.E.2d 282, cert. denied, 297 N.C. 454, 256 S.E.2d 806 (1979).

Facts Sufficient to Justify Revocation. - A crankshaft which was cracked and caused damage to other parts of the engine substantially impaired the crankshaft's value to buyer and his revocation was justifiable. Cato Equip. Co. v. Matthews, 91 N.C. App. 546, 372 S.E.2d 872 (1988).

Defects existing in an automobile substantially impaired its value to the plaintiffs so that they were entitled to revoke acceptance. Riley v. Ken Wilson Ford, Inc., 109 N.C. App. 163, 426 S.E.2d 717 (1993).

Facts Insufficient to Justify Revocation. - An automobile buyer had no right under this section to revoke her acceptance of automobile because (1) the odometer was not working when the car was delivered to her or (2) the fan belt broke two days after the delivery, since there was no evidence that the mileage shown on the odometer was not the actual mileage or that she was prevented from discovery of the actual mileage by the seller's assurances, and since the breaking of the fan belt was insufficient to show such nonconformity as would allow her to revoke her acceptance. American Imports, Inc. v. G.E. Employees W. Region Fed. Credit Union, 37 N.C. App. 121, 245 S.E.2d 798 (1978).

Company that ordered telephone equipment accepted the equipment because it did not reject it, pursuant to a contract it signed to purchase the equipment, within three weeks after the equipment was installed, and because the general notice which the company gave that the equipment did not conform to its requirements did not revoke its acceptance, the trial court properly granted summary judgment for a company that sold the equipment on its claim that the company which bought the equipment wrongfully failed to pay for it. Business Communs., Inc. v. Ki Networks, Inc., 157 N.C. App. 710, 580 S.E.2d 77 (2003).

Mere malfunction does not prove existence of defective material or workmanship. Massey-Ferguson Credit Corp. v. Webber, 841 F.2d 1245 (4th Cir. 1988), aff'd, 885 F.2d 865 (4th Cir. 1989).

Evidence of Revocation Sufficient. - Buyer's evidence was sufficient to permit a jury to find that she revoked her acceptance of a mobile home by reason of seller's failure to correct nonconforming defects where buyer continually complained to seller of the defects from September to December and thereafter ceased making payments under the contract. Performance Motors, Inc. v. Allen, 280 N.C. 385, 186 S.E.2d 161 (1972).

Buyers' claim that they revoked their acceptance of the nonconforming vehicle should have survived a motion to dismiss where the defect was not apparent at the time of purchase, the seller's agents had assured the buyers that the vehicle was suitable to transport both of them, the buyers revoked acceptance of the vehicle by returning it to seller and informing the creditor that they no longer wanted the vehicle, and revocation was within a reasonable time after they discovered or should have discovered the non-conformity and there was no substantial change in the condition of the vehicle not caused by its own defects in its entirety. Ford Motor Credit Co. LLC v. McBride, 257 N.C. App. 590, 811 S.E.2d 640 (2018).

Finding of Revocation or Rejection Warrants Same Relief. - Any error committed by the district court in finding a rejection instead of a revocation of acceptance would be deemed harmless, since evidence warranted a finding of revocation. In either case the plaintiff's relief would be the same. Davis v. Colonial Mobile Homes, 28 N.C. App. 13, 220 S.E.2d 802 (1975), cert. denied, 289 N.C. 613, 223 S.E.2d 391 (1976).

Buyer Need Not Elect Remedies. - A buyer who revokes his acceptance is not required to elect between revocation of acceptance on the one hand and recovery of damages for breach of implied warranty of fitness on the other; both remedies are then available to him. Performance Motors, Inc. v. Allen, 280 N.C. 385, 186 S.E.2d 161 (1972).

Recovery upon Revocation or Rejection. - If the buyer made an effective rejection of a mobile home, or justifiably revoked his acceptance of it, he has a right to recover "so much of the price as had been paid" plus any incidental and consequential damages he is able to prove. Davis v. Colonial Mobile Homes, 28 N.C. App. 13, 220 S.E.2d 802 (1975), cert. denied, 289 N.C. 613, 223 S.E.2d 391 (1976).

A buyer who revokes his acceptance has the same rights and duties with regard to the goods involved as if he had rejected them. Cato Equip. Co. v. Mathews, 91 N.C. App. 546, 372 S.E.2d 872 (1988).

Applied in Rose v. Epley Motor Sales, 288 N.C. 53, 215 S.E.2d 573 (1975); Ace Chem. Corp. v. Atomic Paint Co., 31 N.C. App. 221, 229 S.E.2d 55 (1976); ITT-Industrial Credit Co. v. Milo Concrete Co., 31 N.C. App. 450, 229 S.E.2d 814 (1976); Danjee, Inc. v. Addressograph Multigraph Corp., 44 N.C. App. 626, 262 S.E.2d 665 (1980).

Cited in Wachovia Bank & Trust Co. v. Smith, 24 N.C. App. 133, 210 S.E.2d 212 (1974); Harrington Mfg. Co. v. Logan Tontz Co., 53 N.C. App. 625, 281 S.E.2d 423 (1981); Wohlfahrt v. Schneider, 82 N.C. App. 69, 345 S.E.2d 448 (1986); Morris v. Bailey, 86 N.C. App. 378, 358 S.E.2d 120 (1987).

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).)
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.
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.
5. A failure to provide adequate assurance of performance and thereby to reestablish the security of expectation, results in a breach only "by repudiation" under subsection (4). 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.

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.

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.

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.

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 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 1-203.

Point 5: Section 2-611.

Point 6: Sections 1-203 and 1-208 and Articles 3 and 9. Definitional Cross References:

"Aggrieved party". Section 1-201.

"Between merchants". Section 2-104.

"Contract". Section 1-201.

"Contract for sale". Section 2-106.

"Party". Section 1-201.

"Reasonable time". Section 1-204.

"Rights". Section 1-201.

"Writing". Section 1-201.

NORTH CAROLINA COMMENT

There was no statutory or case law in North Carolina as to security for performance to be applicable in anticipation of nonperformance, repudiation or insecurity on the part of either of the contracting parties. This is entirely new.

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.
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.

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.

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 2-609 and 2-612.

Point 2: Section 2-609.

Point 3: Section 2-612.

Point 4: Section 1-203. Definitional Cross References:

"Aggrieved party". Section 1-201.

"Contract". Section 1-201.

"Party". Section 1-201.

"Remedy". Section 1-201.

NORTH CAROLINA COMMENT

An anticipatory breach of contracts was apparently actionable in North Carolina before the date fixed by a contract for performance. If one party renounced the contract before the date fixed by contract for performance, the other party might treat the renunciation as a "breach" and sue for his damages at once provided the renunciation covered the entire performance to which the contract bound the promisor. See Pappas v. Crist, 223 N.C. 265, 25 S.E.2d 850 (1943); Tillis v. Calvine Cotton Mills, 251 N.C. 359, 111 S.E.2d 606 (1959). In North Carolina, however, for the breach of an executory contract the plaintiff might recover only such substantial damages as could be ascertained and measured with reasonable certainty. While absolute certainty was not required, evidence of damages had to be sufficiently specific and complete to permit the jury to arrive at a reasonable conclusion. A witness was not permitted to give a mere guess or opinion, unsupported by facts, as to the amount of damages arising upon a breach of contract. See Tillis v. Calvine Cotton Mills, 251 N.C. 359, 111 S.E.2d 606 (1959). In addition, the contractor against whom the contract was breached was normally under an obligation to exercise reasonable diligence to minimize the damages caused to him by the breach. Tillis v. Calvine Cotton Mills, 251 N.C. 359, 111 S.E.2d 606 (1959). The result was that in North Carolina, notwithstanding statements of the court that anticipatory breaches of contract were actionable, the court did not favor such actions. In most cases, due to the requirements of certainty and mitigation of damages by the party against whom the contract had been breached, for practical purposes, damages could not be adequately measured prior to the date when the contract by its terms should have been performed. Compare: McJunkin Corp. v. North Carolina Natural Gas Corp., 300 F.2d 794 (4th Cir. 1961); Tillis v. Calvine Cotton Mills, 251 N.C. 359, 111 S.E.2d 606 (1959).

The UCC, GS 25-2-610, provides for immediate relief for an aggrieved party upon a repudiation of the contract by the other party by an overt communication of intention or action which renders performance of the contract impossible or demonstrates clearly an intention not to continue with the performance. It gives the aggrieved party (a) the right to wait a commercially reasonable time for performance by the repudiating party; (b) the right to resort to any remedy set out in GS 25-2-703 (if the seller) and GS 25-2-711 (if the buyer) for breach; or (c) the right to suspend his own performance. (Subsection (c) accords with prior North Carolina law on this point. See Wade v. Lutterloh, 196 N.C. 116, 144 S.E. 694 (1928), that renunciation by one party to contract excuses other from any further offer to perform.)

While North Carolina recognized the doctrine of anticipatory breach of contracts, the limits of the doctrine, especially as to damages recoverable, were uncertain. The UCC not only gives either aggrieved party the right to sue as for breach or to suspend performance in case of repudiation of a contract, but it also establishes the date for the determination of damages. (The date of the anticipatory repudiation of the contract.)

Under the Restatement, Contracts G.S. 338 (1932), and in most states recognizing the doctrine of anticipatory breach in connection with sales, the measure of damages recoverable was the difference between the price as specified in the contract and the market price at the date and place when delivery or performance was to have been made. This formula is complicated as it is often well nigh impossible to determine the price of goods at a future date, especially when the duty to mitigate damages is considered which might very well result in no damages at all.

This section of the UCC and GS 25-2-723 make damages less speculative, providing that if the action comes to trial by reason of anticipatory breach before the date of performance specified in the contract, the damages shall be the difference between the contract price specified and the market price as of "the time the aggrieved party learned of the repudiation." This apparently changes the law of North Carolina. See McJunkin Corp. v. North Carolina Natural Gas Corp., 300 F.2d 794 (4th Cir. 1961), which held that damages for anticipatory breach of contract were to be assessed on the basis of profit factors existent at the time of performance fixed by contract, and not at the time of repudiation.

Legal Periodicals. - For note discussing the measure of buyer's damages upon anticipatory repudiation, see 56 N.C.L. Rev. 370 (1978).

For article on contract modification under Article 2, see 59 N.C.L. Rev. 335 (1981).

For article, " The Seller's Election of Remedies Under the Uniform Commercial Code: An Expectation Theory," see 23 Wake Forest L. Rev. 429 (1988).

CASE NOTES

Applied in Superior Foods, Inc. v. Harris-Teeter Super Mkts., Inc., 288 N.C. 213, 217 S.E.2d 566 (1975).

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 2-609. Definitional Cross References:

"Aggrieved party". Section 1-201.

"Cancellation". Section 2-106.

"Contract". Section 1-201.

"Party". Section 1-201.

"Rights". Section 1-201.

NORTH CAROLINA COMMENT

There is no prior case or statutory law in connection with this section.

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 contract 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.
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 of cancellation. This involves merely a defect in one or more installments, as contrasted with the situation where there is a true repudiation within the section on anticipatory repudiation. Whether the non-conformity in any given installment justifies cancellation as to the future depends, not on whether such non-conformity indicates an intent or 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.

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.

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 standards under the section on good faith, extends of course to include the time covered by any reasonable negotiation in good faith. However, during this period the defaulting party is entitled, on request, to know whether the contract is still in effect, before he can be required to perform further. Cross References:

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

Point 3: Section 1-203.

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

Point 6: Section 2-610. Definitional Cross References:

"Action". Section 1-201.

"Aggrieved party". Section 1-201.

"Buyer". Section 2-103.

"Cancellation". Section 2-106.

"Conform". Section 2-106.

"Contract". Section 1-201.

"Lot". Section 2-105.

"Notifies". Section 1-201.

"Seasonably". Section 1-204.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

In accord with LaVallette v. Booth, 131 N.C. 36, 42 S.E. 446 (1902), that buyer may reject installment which is nonconforming or may reject further performance if nonconformity substantially impairs whole contract. But compare Statesville Flour Mills Co. v. Wayne Distrib. Co., 171 N.C. 708, 88 S.E. 771 (1916), that breach of a minor and subsidiary covenant may give rise to an action for damages, but it cannot operate as a discharge.

Legal Periodicals. - For article, " The Seller's Election of Remedies Under the Uniform Commercial Code: An Expectation Theory," see 23 Wake Forest L. Rev. 429 (1988).

CASE NOTES

Defects in Prior Installment are Cumulative in Effect. - The trial court should not have considered the ease of remedying defects of future installments of a contract to purchase custom tables when determining whether past installments substantially impaired the contract as a whole, so as to justify cancellation of a future installment of the contract. Design Plus Store Fixtures, Inc. v. Citro Corp., 131 N.C. App. 581, 508 S.E.2d 825 (1998).

Cancellation of Entire Contract Proper. - Nonconformities in the first two installments of a contract to supply custom tables substantially impaired the contract as a whole, where the tables were impossible to assemble, were delivered late, and were not usable as delivered; furthermore, the seller offered no cure of the defects, and the buyer bore the expense of repairing the tables to meet a deadline known to both parties. Design Plus Store Fixtures, Inc. v. Citro Corp., 131 N.C. App. 581, 508 S.E.2d 825 (1998).

Contract Not an Installment Contract. - Contract between the ophthalmologist and the consultant was not an installment contract, as the terms of the agreement demonstrated a mutual dependency between the promises provided by the parties as consideration, inextricably tying the ophthalmologist's assignment of rights in an enhancement to the consultant's promised performance. Christenbury Eye Ctr., P.A. v. Medflow, Inc., 370 N.C. 1, 802 S.E.2d 888 (2017).

Cited in Rental Towel & Uniform Serv. v. Bynum Int'l, Inc., 304 N.C. 174, 282 S.E.2d 426 (1981).

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 2-324. Definitional Cross References:

"Buyer". Section 2-103.

"Conform". Section 2-106.

"Contract". Section 1-201.

"Fault". Section 1-201.

"Goods". Section 2-105.

"Party". Section 1-201.

"Rights". Section 1-201.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

There is neither prior statutory nor case law in North Carolina exactly in point with this section. But compare Stagg v. Spray Water Power & Land Co., 171 N.C. 583, 89 S.E. 47 (1916). See North Carolina Comment to GS 25-2-615.

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.
2. The substitution provided in this section as between buyer and seller does not carry over into the obligation of a financing agency under a letter of credit, since such an agency is entitled to performance which is plainly adequate on its face and without need to look into commercial evidence outside of the documents. See Article 5, especially Sections 5-102, 5-103, 5-109, 5-110 and 5-114.

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.

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 2-103.

"Fault". Section 1-201.

"Party". Section 1-201.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

There is no prior statutory or case law equivalent in North Carolina.

This section seems to accord, however, with the reasoning behind G. Ober & Son v. Smith, 78 N.C. 313 (1878), that when a purchaser designates no particular route or carrier by which goods are to be shipped, it is the duty of the seller to ship the goods in a reasonable course of transit.

Legal Periodicals. - For article on contract modification under Article 2, see 59 N.C.L. Rev. 335 (1981).

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).)
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.
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.
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.

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.

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.

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 sub-contract 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.

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 2-613 and 2-614.

Point 2: Section 1-102.

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

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

Point 7: Section 2-614.

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

Point 9: Sections 1-102, 2-306 and 2-613. Definitional Cross References:

"Between merchants". Section 2-104.

"Buyer". Section 2-103.

"Contract". Section 1-201.

"Contract for sale". Section 2-106.

"Good faith". Section 1-201.

"Merchant". Section 2-104.

"Notifies". Section 1-201.

"Seasonably". Section 1-204.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

Subsection (a) seems to accord with prior North Carolina contracts principles that if a party by contract charges himself with an obligation possible to be performed, he must make it good, unless its performance be rendered impossible by an act of God, the law, or the other party, and unforeseen difficulties will not excuse him. However, if the parties contract with reference to specific property, the continued existence of which is clearly contemplated by the obligations assumed, the parties are relieved from further obligations concerning property when it is accidentally lost or destroyed by fire or otherwise, rendering performance of the contract impossible. But in order for a party to avail himself of such position, he must show that the destruction of the specific thing was without his fault. See Stagg v. Spray Water Power & Land Co., 171 N.C. 583, 89 S.E. 47 (1916); Sale v. State Highway & Pub. Works Comm'n, 242 N.C. 612, 89 S.E.2d 290 (1955); Blount-Midyette & Co. v. Aeroglide Corp., 254 N.C. 484, 119 S.E.2d 225 (1961). This is also the rule set out in Taylor v. Caldwell, 3 Best & S. 826 (1863), a widely followed English case.

Subsection (b) is entirely new. There is no statutory or decisional parallel to this subsection in prior North Carolina law which allows seller to make prorata distribution to customers in the event of partial impossibility of performance. Compare Indian Mountain Jellico Coal Co. v. Asheville Ice & Coal Co., 134 N.C. 574, 47 S.E. 116 (1904).

Subsection (c) has no prior North Carolina statutory or decisional parallel. New.

Legal Periodicals. - For article discussing judicial reallocation of contractual risks under this section, see 54 N.C.L. Rev. 545 (1976).

For article on contract modification under Article 2, see 59 N.C.L. Rev. 335 (1981).

For note, "Check Kiting: The Inadequacy of the Uniform Commercial Code," see 1986 Duke L.J. 728 (1986).

For article, "Court Adjustment of Long-Term Contracts: An Analysis Under Modern Contract Law," see 1987 Duke L.J. 1 (1987).

CASE NOTES

A seller of goods may limit its liability by inclusion of a single source clause. Alamance County Bd. of Educ. v. Bobby Murray Chevrolet, Inc., 121 N.C. App. 222, 465 S.E.2d 306 (1996).

Burden of Loss on Seller. - Failure to make express provision for a foreseeable contingency in a sales contract implicitly places the burden of loss on the seller when the contingency comes to fruition. Alamance County Bd. of Educ. v. Bobby Murray Chevrolet, Inc., 121 N.C. App. 222, 465 S.E.2d 306 (1996).

Risk of Governmental Regulation. - Generally, governmental regulations do not excuse performance under a contract where a party has assumed the risk of such regulation. Thus, defendant, by terms of the parties' agreement, accepted responsibility for keeping abreast of governmental regulations bearing upon the contract. Alamance County Bd. of Educ. v. Bobby Murray Chevrolet, Inc., 121 N.C. App. 222, 465 S.E.2d 306 (1996).

Defense of Impracticability Was Not Applicable. - Seller was prevented from proving the defense of impracticability under G.S. 25-2-615 because (1) the seller had not produced any facts which would have indicated that the parties expressly or impliedly agreed that a significant rise in the price of steel would have discharged the seller's performance; (2) the seller failed to demonstrate that the rise in steel prices was due to an unforeseen contingency; (3) it appeared that mere fluctuation in the market was the reason behind the price increase; and (4) the seller failed to ensure that the contract provided price protection. D.S. Simmons, Inc. v. Steel Group, LLC, - F. Supp. 2d - (E.D.N.C. Feb. 19, 2008).

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 2-209 and 2-615. Definitional Cross References:

"Buyer". Section 2-103.

"Contract". Section 1-201.

"Installment contract". Section 2-612.

"Notification". Section 1-201.

"Reasonable time". Section 1-204.

"Seller". Section 2-103.

"Termination". Section 2-106.

"Written". Section 1-201.

NORTH CAROLINA COMMENT

The procedures established by this section implement the rules established under GS 25-2-614 and 25-2-615. There is no comparable prior statute or case law in North Carolina.

PART 7. REMEDIES.

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 insofar as cross-claims or defenses are concerned. Definitional Cross References:

"Contract for sale". Section 2-106.

"Remedy". Section 1-201.

NORTH CAROLINA COMMENT

This section appears to limit the scope of the sales article to parts of a contract related to the sale of goods and would seem to require no comment.

CASE NOTES

Cited in SAS Inst., Inc. v. World Programming Ltd., - F. Supp. 2d - (E.D.N.C. June 17, 2016).

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.
3. Subsection (3) subjects the right of reclamation to certain rights of third parties "under this Article (Section 2-403)." The rights so given priority of course include the rights given to purchasers from the buyer by Section 2-403(1) and (2). They also include other rights arising under Article 2, such as the rights of lien creditors of the buyer under Section 2-326(3) on consignment sales. Moreover, since Section 2-403(4) incorporates by reference rights given to other purchasers and to lien creditors by Articles 6, 7 and 9, such rights have the same priority. "Lien creditor" here has the same meaning as in Section 9-301(3). Thus if a seller retains an unperfected security interest, subordinate under Section 9-301(1) (b) to the rights of a levying creditor of the buyer, his right of reclamation under this section is also subject to the creditor's rights. Purchasers or lien creditors may also have rights not arising under this Article; under Section 1-103 such rights may have priority by virtue of supplementary principles not displaced by this section. See In re Kravitz, 278 F.2d 820 (3d Cir. 1960).

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.

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. Cross References:

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

Compare Section 2-502. Definitional Cross References:

"Buyer". Section 2-103.

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

"Contract". Section 1-201.

"Good faith". Section 1-201.

"Goods". Section 2-105.

"Insolvent". Section 1-201.

"Person". Section 1-201.

"Purchaser". Section 1-201.

"Receipt" of goods. Section 2-103.

"Remedy". Section 1-201.

"Rights". Section 1-201.

"Seller". Section 2-103.

"Writing". Section 1-201.

NORTH CAROLINA COMMENT

Subsection (1) accords with principle applicable in right of stoppage in transitu given to seller who learns of buyer's insolvency before goods are delivered to buyer based on "the plain reason of justice and equity, that one man's goods shall not be applied to the payment of another man's debts." See Farrell v. Richmond & D.R.R., 102 N.C. 390, 9 S.E. 302 (1889).

Subsection (2), which gives a right to the seller to assert a lien on undelivered goods already delivered, is new and changes North Carolina law. If the goods were delivered to the buyer or the carrier had agreed to hold the goods for the buyer, the seller's right of stoppage in transitu, under prior North Carolina law, was lost. See Williams v. Hodges, 113 N.C. 36, 18 S.E. 83 (1893). It was also the law in North Carolina that a vendor of personal property had no lien for the purchase money. See Bafarrah v. Spell, 178 N.C. 231, 100 S.E. 321 (1919). An insolvent buyer did not have to disclose his insolvency. If, however, the insolvent buyer misrepresented his solvency and thereafter went into bankruptcy, even under prior North Carolina law, the seller could recover the property. On a sale of goods, induced by fraud on the part of the vendee, the vendor was authorized to reclaim the property, and the title thereto revested in him. See Wilson v. White, 80 N.C. 280 (1878).

Change: While insolvency of buyer alone did not allow a seller to reclaim goods under prior law (requiring a misrepresentation that equaled fraud), this section allows the buyer to reclaim, even after delivery, from a buyer who received goods while insolvent. It extends the theory behind stoppage in transitu. Subsection (3) protects purchasers in ordinary course of business, purchasers for value and lien creditors of buyer.

Legal Periodicals. - For discussion of the constructive trust as a remedy for the seller, see 45 N.C.L. Rev. 424 (1967).

For note on the aggrieved seller's remedies and damages under the UCC, see 12 Wake Forest L. Rev. 495 (1976).

CASE NOTES

The holder of a perfected security interest in after acquired property qualifies as a "good faith purchaser." First-Citizens Bank & Trust Co. v. Academic Archives, Inc., 10 N.C. App. 619, 179 S.E.2d 850, cert. denied, 278 N.C. 703, 181 S.E.2d 601 (1971).

The holder of a perfected security interest in after acquired property was a "good faith purchaser" whose rights were superior to a seller of the after acquired goods under subsection (2), several commentators have concluded. First-Citizens Bank & Trust Co. v. Academic Archives, Inc., 10 N.C. App. 619, 179 S.E.2d 850, cert. denied, 278 N.C. 703, 181 S.E.2d 601 (1977).

Priority of Floating Lien over Rights of Reclaiming Sellers. - A floating lien on inventory, assuming the lienholder is a "good faith purchaser," has priority over the rights of reclaiming sellers. Pillsbury Co. v. FCX, Inc., 62 Bankr. 315 (Bankr. E.D.N.C. 1986).

The rights of a reclaiming seller under this section have a lower status than those of a junior lien creditor, and consequently a reclaiming seller's rights have no value if the floating lien, to which those rights are inferior, exceeds the value of the lienholder's collateral. Pillsbury Co. v. FCX, Inc., 62 Bankr. 315 (Bankr. E.D.N.C. 1986).

In bankruptcy proceedings, reclaiming sellers are not automatically entitled to an administrative priority or substitute lien if their reclamation rights are frustrated by the presence of a prior lien. The right to an administrative priority or substitute lien exists only if there also exists a right to reclaim. Pillsbury Co. v. FCX, Inc., 62 Bankr. 315 (Bankr. E.D.N.C. 1986).

Rights of reclaiming sellers are not automatically extinguished simply because those rights may be subject to the rights of a secured creditor. Pillsbury Co. v. FCX, Inc., 62 Bankr. 315 (Bankr. E.D.N.C. 1986).

Buyer with Voidable Title Can Transfer Better Title Than He Had. - While the buyer might have had a voidable title, if he had made fraudulent representations of solvency, one with voidable title can transfer better title than he had. First-Citizens Bank & Trust Co. v. Academic Archives, Inc., 10 N.C. App. 619, 179 S.E.2d 850, cert. denied, 278 N.C. 703, 181 S.E.2d 601 (1971).

Determination of Misrepresentation of Solvency Unnecessary. - A determination of whether written proposals of exchange made by the buyer to the various sellers was a misrepresentation of solvency was not necessary where, even if the conditions to bring sellers within subsection (2) were present, it was clear that the rights of third parties have intervened to cut off their right to reclaim the property. First-Citizens Bank & Trust Co. v. Academic Archives, Inc., 10 N.C. App. 619, 179 S.E.2d 850, cert. denied, 278 N.C. 703, 181 S.E.2d 601 (1971).

Remedy of Reclamation Is Exception to Rule. - Normally, after the seller has delivered the goods to an accepting buyer, the remedy is an action for the price, and it is too late to retrieve the goods. The remedy of reclamation provided by subsection (2) is an exception to this rule. First-Citizens Bank & Trust Co. v. Academic Archives, Inc., 10 N.C. App. 619, 179 S.E.2d 850, cert. denied, 278 N.C. 703, 181 S.E.2d 601 (1971).

OFFICIAL COMMENT

Prior Uniform Statutory Provision: No comparable index section. 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 2-612.

Point 3: Section 2-325.

Point 4: Section 1-106. Definitional Cross References:

"Aggrieved party". Section 1-201.

"Buyer". Section 2-103.

"Cancellation". Section 2-106.

"Contract". Section 1-201.

"Goods". Section 2-105.

"Remedy". Section 1-201.

"Seller". Section 2-103.

Legal Periodicals. - For note on the aggrieved seller's remedies and damages under the UCC, see 12 Wake Forest L. Rev. 495 (1976).

For article, "The Seller's Election of Remedies Under the Uniform Commercial Code: An Expectation Theory," see 23 Wake Forest L. Rev. 429 (1988).

CASE NOTES

The seller's remedies under this section are cumulative, are to be liberally administered, and depend entirely upon the facts of the individual case. Southern Utils., Inc. v. Jerry Mandel Mach. Corp., 71 N.C. App. 188, 321 S.E.2d 508 (1984), cert. denied, 313 N.C. 510, 329 S.E.2d 395 (1985).

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 2-703 and 2-706. Definitional Cross References:

"Aggrieved party". Section 1-201.

"Conforming". Section 2-106.

"Contract". Section 1-201.

"Goods". Section 2-105.

"Rights". Section 1-201.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

Subsections (1)(a) and (b) allow an aggrieved seller to identify any conforming goods under his control to the contract and to resell the goods intended for particular contract even though unfinished. It was doubtful under prior law whether goods not previously identified or segregated to the contract could, after a repudiation by the buyer, be identified or segregated to lay foundation for a resale for the account of the buyer.

Subsection (2) permits the seller to complete goods in manufacture where the completion is commercially reasonable and to resell them so as to fix the damages payable by the buyer where, in a contract calling for the manufacture of goods, the buyer has breached the contract. This subsection apparently changes prior North Carolina law, which in such instances required the seller-manufacturer to stop manufacture and sue only for the labor expended and expense incurred in the past performance before repudiation, plus the profit that would have accrued had full performance not been prevented by the buyer. See Novelty Advertising Co. v. Farmer's Mut. Tobacco Warehouse, 186 N.C. 197, 119 S.E. 196 (1923); Heiser v. Mears, 120 N.C. 443, 27 S.E. 117 (1897).

The principal thrust of this UCC provision is that when a contract is repudiated while goods are in an incomplete state in the process of manufacture, the seller-manufacturer should be permitted to act in good faith in determining by reasonable commercial standards whether to complete manufacture of the goods in process, after buyer's repudiation.

Legal Periodicals. - For note on the aggrieved seller's remedies and damages under the UCC, see 12 Wake Forest L. Rev. 495 (1976).

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.
2. "Receipt by the buyer" includes receipt by the buyer's designated representative, the sub-purchaser, 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.
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.
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.

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.

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.

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.

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 2-702 and 2-703.

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

Point 2: Section 2-103 and Article 7. Definitional Cross References:

"Buyer". Section 2-103.

"Contract for sale". Section 2-106.

"Document of title". Section 1-201.

"Goods". Section 2-105.

"Insolvent". Section 1-201.

"Notification". Section 1-201.

"Receipt" of goods. Section 2-103.

"Rights". Section 1-201.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

North Carolina has recognized stoppage in transitu by a seller in the event of a buyer's insolvency. Farrell v. Richmond & D.R.R., 102 N.C. 390, 9 S.E. 302 (1889). If they reached their terminals, however, and were thereafter held by the carrier in storage and the carrier acknowledged to the buyer that it holds the goods for the buyer, the vendor's right to stoppage in transitu was terminated. See Williams v. Hodges, 113 N.C. 36, 18 S.E. 83 (1893).

Neither of these principles seems to be affected by this UCC section. However, it should be noted that under this UCC section, the right of stoppage in transitu is broadened. Stoppage in transitu is available not only when the buyer is insolvent but also upon repudiation by buyer, when a payment is missed, or in any other case the seller has a right to withhold or reclaim the goods.

There are no prior statutes or decisions in North Carolina concerning the further details and procedures relating to stoppages in transit set out in this section of the UCC.

Effect of Amendments. - Session Laws 2006-112, s. 37, effective October 1, 2006, substituted "a warehouse" for "warehouseman" in subdivision (2)(c); and inserted "of possession or control" in subdivision (3)(c).

Legal Periodicals. - For note on the aggrieved seller's remedies and damages under the UCC, see 12 Wake Forest L. Rev. 495 (1976).

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.
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.
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.
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 or a private sale depends upon the urgency of the matter. Notification of the time and place of this type of sale is not required.
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.
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.

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.

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.

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.

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."

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.

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 2-610, 2-702 and 2-703.

Point 2: Section 1-201.

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

Point 4: Section 2-328.

Point 8: Section 2-104.

Point 9: Section 2-710.

Point 11: Sections 2-401, 2-707 and 2-711(3). Definitional Cross References:

"Buyer". Section 2-103.

"Contract". Section 1-201.

"Contract for sale". Section 2-106.

"Good faith". Section 2-103.

"Goods". Section 2-105.

"Merchant". Section 2-104.

"Notification". Section 1-201.

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

"Purchase". Section 1-201.

"Rights". Section 1-201.

"Sale". Section 2-106.

"Security interest". Section 1-201.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

Subsection (1) accords with prior North Carolina law that where a vendee refuses to receive goods, his vendor may resell the goods and hold the original vendee liable for any difference in prices in the first and second sale. See Hurlburt v. Simpson, 25 N.C. 233 (1842). The seller in such cases is also entitled to recover for incidental costs of storage, interest and an allowance for time spent acting as buyer's agent in reselling the goods. See Vanstory Clothing Co. v. Stadiem, 149 N.C. 6, 62 S.E. 778 (1908). See Merrill v. Tew, 183 N.C. 172, 110 S.E. 850 (1922), which indicates that in North Carolina the vendor needed only to exercise reasonable care, skill, and prudence in effecting a resale when the buyer had breached his contract to receive the goods contracted for. This section of the UCC accords generally with North Carolina law which previously allowed the seller to resell upon a buyer's breach, such sale to be in accordance with reasonable commercial practices so as to realize the best price practicable under the circumstances and so as to fix damages.

The remaining subsections allow both private and public sales and set out details of notice and requirements if public sale is held. The section of the UCC is new to this extent.

Subsection (6) may conflict with prior North Carolina law in that it provides that a seller making a resale need not account to the buyer for any profit made on resale. Under prior law if the seller resold, it was for the account of the buyer as agent if title had passed with the making of the contract. It would seem that in North Carolina under the prior law the buyer as titleholder was entitled to any profits made on resale. He was, of course, under prior law liable for any deficiency. See Vanstory Clothing Co. v. Stadiem, 149 N.C. 6, 62 S.E. 778 (1908). This subsection illustrates the basic rejection by the UCC of the necessity of determining the location of title at any given time.

Legal Periodicals. - For note on the aggrieved seller's remedies and damages under the UCC, see 12 Wake Forest L. Rev. 495 (1976).

For note on commercial reasonableness and the public sale in North Carolina, see 17 Wake Forest L. Rev. 153 (1981).

For article, " The Seller's Election of Remedies Under the Uniform Commercial Code: An Expectation Theory," see 23 Wake Forest L. Rev. 429 (1988).

CASE NOTES

Cited in Equitable Leasing Corp. v. Myers, 46 N.C. App. 162, 265 S.E.2d 240 (1980); Varnell v. Henry M. Milgrom, Inc., 78 N.C. App. 451, 337 S.E.2d 616 (1985); Tom Togs, Inc. v. Ben Elias Indus. Corp., 318 N.C. 361, 348 S.E.2d 782 (1986); Alberti v. Manufactured Homes, Inc., 329 N.C. 727, 407 S.E.2d 819 (1991).

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 2-506. Definitional Cross References:

"Consignee". Section 7-102.

"Consignor". Section 7-102.

"Goods". Section 2-105.

"Security interest". Section 1-201.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

This section is designed primarily to allow a financing agency which has acquired documents from the seller to exercise the same rights as the seller in stopping the goods in transit and reselling the goods upon repudiation and recovering incidental damages. There is no prior North Carolina parallel, either statutory or decisional.

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.
2. The provision of this section permitting recovery of expected profit including reasonable overhead where the standard measure of damages is inadequate, together with the new requirement that price actions may be sustained only where resale is impractical, are designed to eliminate the unfair and economically wasteful results arising under the older law when fixed price articles were involved. This section permits the recovery of lost profits in all appropriate cases, which would include all standard priced goods. The normal measure there would be list price less cost to the dealer or list price less manufacturing cost to the manufacturer. It is not necessary to a recovery of "profit" to show a history of earnings, especially if a new venture is involved.

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.

3. In all cases the seller may recover incidental damages. Cross References:

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

Point 2: Section 2-709.

Point 3: Section 2-710. Definitional Cross References:

"Buyer". Section 2-103.

"Contract". Section 1-201.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

Subsection (1) accords with prior North Carolina cases in allowing the seller to recover the difference between the contract price and the market price at the time and place of the breach. See Cherry v. Upton Co., 180 N.C. 1, 103 S.E. 912 (1920); Bryant v. Southern Box & Lumber Co., 192 N.C. 607, 135 S.E. 531 (1926); Heise v. Mears, 120 N.C. 443, 27 S.E. 117 (1897).

Subsection (2) also accords with prior North Carolina law where there is a breach of contract and the rule announced in subsection (1) is inadequate (e.g., if the goods are to be manufactured and the buyer repudiates before they are manufactured or before they have value). This subsection, as in prior North Carolina law, allows the seller to recover any profit he would make by full performance after deducting the sum that it would have cost the seller to fully perform. See Bryant v. Southern Box & Lumber Co., 192 N.C. 607, 135 S.E. 531 (1926); Cleveland-Canton Springs Co. v. Goldsboro Buggy Co., 148 N.C. 533, 62 S.E. 637 (1908).

Incidental damages were recoverable in North Carolina by seller upon buyer's breach. See Vanstory Clothing Co. v. Stadiem, 149 N.C. 6, 62 S.E. 778 (1908), where storage changed before resale was approved; Cole & Sons v. Standard Lumber Co., 150 N.C. 183, 63 S.E. 736 (1909).

This section does not materially change prior North Carolina law.

(Another example of when subsection (1) would not allow recovery of adequate damages would be a situation where dealer is in business having and selling an unlimited supply of standard priced goods. If a dealer sold a car to buyer, for instance, for $2,000 list price, and buyer repudiated, under subsection (1) if the seller kept the car he could not recover from the buyer because the contract price and the value of the car would be the same. Resale will not prove adequate as, by reselling, the seller just makes one sale, whereas, if the buyer had not repudiated, seller could have made two sales. Subsection (2) cures this defect by allowing the seller to recover the profit on the repudiated sale that he would have obtained had no repudiation occurred.)

Legal Periodicals. - For note on the aggrieved seller's remedies and damages under the UCC, see 12 Wake Forest L. Rev. 495 (1976).

For article, " The Seller's Election of Remedies Under the Uniform Commercial Code: An Expectation Theory," see 23 Wake Forest L. Rev. 429 (1988).

CASE NOTES

Applied in Industrial Circuits Co. v. Terminal Communications, Inc., 26 N.C. App. 536, 216 S.E.2d 919 (1975); Martin v. Sheffer, 102 N.C. App. 802, 403 S.E.2d 555 (1991).

Cited in First Value Homes, Inc. v. Morse, 86 N.C. App. 613, 359 S.E.2d 42 (1987); Thermal Design, Inc. v. M&M Builders, Inc., 207 N.C. App. 79, 698 S.E.2d 516 (2010).

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 a recovery of those damages in the same action. Cross References:

Point 4: Section 1-106.

Point 5: Sections 2-501, 2-509, 2-510 and 2-704.

Point 7: Section 2-708. Definitional Cross References:

"Action". Section 1-201.

"Buyer". Section 2-103.

"Conforming". Section 2-106.

"Contract". Section 1-201.

"Goods". Section 2-105.

"Seller". Section 2-103.

NORTH CAROLINA COMMENT

In North Carolina an action for price could not be maintained unless title had passed to the vendee. Waldo v. Belcher, 33 N.C. 609 (1850); Hendricks v. Mocksville Furniture Co., 156 N.C. 569, 72 S.E. 592 (1911). This is the common-law rule. See Williston G.S. 560 (a) and 561.

The UCC in this section specifies on an enumerated basis the instances in which an action for price can be maintained. Location of title is no longer determinative under the Code, which makes it necessary only to determine if one of the enumerated situations has occurred.

Another important matter is a change of emphasis. An action for "price" seems to be rendered secondary to "efforts to resell." Under prior North Carolina law, a seller upon a breach had an option (1) to treat goods as property of buyer and sue for price or (2) to treat the goods as property of the buyer and resell for him and sue for the difference between the contract price and what the goods have brought upon resale. Vanstory Clothing Co. v. Stadiem, 149 N.C. 6, 62 S.E. 778 (1908). Under this section of the UCC (subsection (1)(b)), the seller may recover the price only after he is unable to resell them after a reasonable effort. It seems that the Code makes it obligatory to attempt resale whereas heretofore it has been held optional with the seller in North Carolina.

Legal Periodicals. - For note on the aggrieved seller's remedies and damages under the UCC, see 12 Wake Forest L. Rev. 495 (1976).

CASE NOTES

Seller May Recover Contract Price and Reasonable Expenses. - An acceptance of the goods entitles the aggrieved seller to recover the contract price of the goods as well as any expenses reasonably incurred as a result of the breach. HPS, Inc. v. All Wood Turning Corp., 21 N.C. App. 321, 204 S.E.2d 188 (1974).

A buyer who accepts goods must pay the seller the contract price, but can sue the seller for breach of warranty. Stimpson Hosiery Mills, Inc. v. Pam Trading Corp., 98 N.C. App. 543, 392 S.E.2d 128 (1990).

What Seller Must Prove. - In an action under subsection (1) of this section for the price of goods sold, the seller must carry the burden of proof as to four elements: (1) acceptance by the buyer of the goods; (2) the price of the goods accepted; (3) the past due date of the price; and (4) the failure of the buyer to pay. Leviton Mfg. Co. v. Butch Mfg. Co., 37 N.C. App. 726, 247 S.E.2d 1, appeal dismissed, 295 N.C. 734, 248 S.E.2d 864 (1978); Roy Burt Enters., Inc. v. Marsh, 328 N.C. 262, 400 S.E.2d 425 (1991).