41-01-01. (1-101) Short titles.

1. This title may be cited as the Uniform Commercial Code.
2. This chapter may be cited as Uniform Commercial Code — General Provisions.

Source: S.L. 2007, ch. 354, § 6.

Official Comments.

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.

41-01-02. (1-102) Scope of chapter.

This chapter applies to a transaction to the extent that the transaction is governed by another chapter of this title.

Source: S.L. 2007, ch. 354, § 6.

Official Comments.

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.

41-01-03. (1-103) Construction of title to promote the title’s purposes and policies — Applicability of supplemental principles of law.

1. This title must be liberally construed and applied to promote the title’s underlying purposes and policies, which are:
   1. To simplify, clarify, and modernize the law governing commercial transactions;
   2. To permit the continued expansion of commercial practices through custom, usage, and agreement of the parties; and
   3. To make uniform the law among the various jurisdictions.
2. Unless displaced by the particular provisions of this title, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, and other validating or invalidating cause supplement this title.
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.

Source: S.L. 2007, ch. 354, § 6.

Official Comments.

Source:

Former Section 1-101.

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.

41-01-04. (1-104) Construction against implied repeal.

This title is a general act intended as a unified coverage of its subject matter. A part of this title may not be deemed to be impliedly repealed by subsequent legislation if such construction can reasonably be avoided.

Source: S.L. 2007, ch. 354, § 6.

Official Comments.

Source:

Former Section 1-101.

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.

41-01-05. (1-105) Severability.

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

Source: S.L. 2007, ch. 354, § 6.

Official Comments.

Source:

Former Section 1-101.

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.

41-01-06. (1-106) Use of singular and plural — Gender.

In this title, unless the statutory context otherwise requires:

1. Words in the singular number include the plural, and those in the plural include the singular; and
2. Words of any gender also refer to any other gender.

Source: S.L. 2007, ch. 354, § 6.

Official Comments.

Source:

Former Section 1-101.

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.

41-01-07. (1-107) Section captions.

Section captions are part of this title.

Source: S.L. 2007, ch. 354, § 6.

Official Comments.

Source:

Former Section 1-101.

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.”).

41-01-08. (1-108) Relation to Electronic Signatures in Global and National Commerce Act.

This chapter modifies, limits, and supersedes the federal Electronic Signatures in Global and National Commerce Act [Pub. L. 106-229; 114 Stat. 464; 15 U.S.C. 7001 et seq.] but does not modify, limit, or supersede section 101(c) of that Act [15 U.S.C. 7001(c)] or authorize electronic delivery of any of the notices described in section 103(b) of that Act [15 U.S.C. 103(b)].

Source: S.L. 2007, ch. 354, § 6.

Official Comments.

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.

41-01-09. (1-201) General definitions.

1. Unless the context otherwise requires, words or phrases defined in this section, or in additional definitions contained in other chapters of this title which apply to particular chapters or parts of chapters, have the meanings stated.
2. Subject to definitions contained in other chapters of this title which apply to particular chapters or parts of chapters:
   1. “Action”, in the sense of a judicial proceeding, includes recoupment, counterclaim, setoff, suit in equity, and any other proceeding in which rights are determined.
   2. “Aggrieved party” means a party entitled to pursue a remedy.
   3. “Agreement”, as distinguished from “contract”, means the bargain of the parties in fact, as found in their language or inferred from other circumstances, including course of performance, course of dealing, or usage of trade as provided under section 41-09-17.
   4. “Bank” means a person engaged in the business of banking and includes a savings bank, savings and loan association, credit union, and trust company.
   5. “Bearer” means a person in control of a negotiable electronic document of title or a person in possession of a negotiable instrument, negotiable tangible document of title, or certificated security that is payable to bearer or indorsed in blank.
   6. “Bill of lading” means a document of title evidencing the receipt of goods for shipment issued by a person engaged in the business of directly or indirectly transporting or forwarding goods. The term does not include a warehouse receipt.
   7. “Branch” includes a separately incorporated foreign branch of a bank.
   8. “Burden of establishing” a fact means the burden of persuading the trier of fact that the existence of the fact is more probable than its nonexistence.
   9. “Buyer in ordinary course of business” means a person that buys goods in good faith, without knowledge that the sale violates the rights of another person in the goods, and in the ordinary course from a person, other than a pawnbroker, in the business of selling goods of that kind. A person buys goods in the ordinary course if the sale to the person comports with the usual or customary practices in the kind of business in which the seller is engaged or with the seller’s own usual or customary practices. A person that sells oil, gas, or other minerals at the wellhead or minehead is a person in the business of selling goods of that kind. A buyer in ordinary course of business may buy for cash, by exchange of other property, or on secured or unsecured credit, and may acquire goods or documents of title under a pre-existing contract for sale. Only a buyer that takes possession of the goods or has a right to recover the goods from the seller under chapter 41-02 may be a buyer in ordinary course of business. “Buyer in ordinary course of business” does not include a person that acquires goods in a transfer in bulk or as security for or in total or partial satisfaction of a money debt.
   10. “Conspicuous”, with reference to a term, means so written, displayed, or presented that a reasonable person against which it is to operate ought to have noticed it. Whether a term is “conspicuous” or not is a decision for the court. Conspicuous terms include the following:
       1. A heading in capitals equal to or greater in size than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same or lesser size; and
       2. Language in the body of a record or display in larger type than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same size, or set off from surrounding text of the same size by symbols or other marks that call attention to the language.
   11. “Consumer” means an individual who enters into a transaction primarily for personal, family, or household purposes.
   12. “Contract”, as distinguished from “agreement”, means the total legal obligation that results from the parties’ agreement as determined by this title as supplemented by any other applicable laws.
   13. “Creditor” includes a general creditor, a secured creditor, a lien creditor, and any representative of creditors, including an assignee for the benefit of creditors, a trustee in bankruptcy, a receiver in equity, and an executor or administrator of an insolvent debtor’s or assignor’s estate.
   14. “Defendant” includes a person in the position of defendant in a counterclaim, cross-claim, or third-party claim.
   15. “Delivery”, with respect to an electronic document of title means voluntary transfer of control and with respect to an instrument, a tangible document of title, or chattel paper, means voluntary transfer of possession.
   16. “Document of title” means a record that in the regular course of business or financing is treated as adequately evidencing that the person in possession or control of the record is entitled to receive, control, hold, and dispose of the record and the goods the record covers and that purports to be issued by or addressed to a bailee and to cover goods in the bailee’s possession which are either identified or are fungible portions of an identified mass. The term includes a bill of lading, transport document, dock warrant, dock receipt, warehouse receipt, and order for delivery of goods. An electronic document of title means a document of title evidenced by a record consisting of information stored in an electronic medium. A tangible document of title means a document of title evidenced by a record consisting of information that is inscribed on a tangible medium.
   17. “Fault” means a default, breach, or wrongful act or omission.
   18. “Fungible goods” means:
       1. Goods of which any unit, by nature or usage of trade, is the equivalent of any other like unit; or
       2. Goods that by agreement are treated as equivalent.
   19. “Genuine” means free of forgery or counterfeiting.
   20. “Good faith”, except as otherwise provided in chapter 41-05, means honesty in fact and the observance of reasonable commercial standards of fair dealing.
   21. “Holder” means:
       1. The person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession;
       2. The person in possession of a document of title if the goods are deliverable either to bearer or to the order of the person in possession; or
       3. The person in control of a negotiable electronic document of title.
   22. “Insolvency proceeding” includes an assignment for the benefit of creditors or other proceeding intended to liquidate or rehabilitate the estate of the person involved.
   23. “Insolvent” means:
       1. Having generally ceased to pay debts in the ordinary course of business other than as a result of bona fide dispute;
       2. Being unable to pay debts as they become due; or
       3. Being insolvent within the meaning of federal bankruptcy law.
   24. “Money” means a medium of exchange currently authorized or adopted by a domestic or foreign government. The term includes a monetary unit of account established by an intergovernmental organization or by agreement between two or more countries.
   25. “Organization” means a person other than an individual.
   26. “Party”, as distinguished from “third party”, means a person that has engaged in a transaction or made an agreement subject to this title.
   27. “Person” means an individual, a corporation, a business trust, an estate, a trust, a partnership, a limited liability company, an association, a joint venture, a government, a governmental subdivision, an agency, or an instrumentality, a public corporation, or any other legal or commercial entity.
   28. “Present value” means the amount as of a date certain of one or more sums payable in the future, discounted to the date certain by use of either an interest rate specified by the parties if that rate is not manifestly unreasonable at the time the transaction is entered or, if an interest rate is not so specified, a commercially reasonable rate that takes into account the facts and circumstances at the time the transaction is entered.
   29. “Purchase” means taking by sale, lease, discount, negotiation, mortgage, pledge, lien, security interest, issue or reissue, gift, or any other voluntary transaction creating an interest in property.
   30. “Purchaser” means a person that takes by purchase.
   31. “Record” means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.
   32. “Remedy” means any remedial right to which an aggrieved party is entitled with or without resort to a tribunal.
   33. “Representative” means a person empowered to act for another, including an agent, an officer of a corporation or association, and a trustee, executor, or administrator of an estate.
   34. “Right” includes remedy.
   35. “Security interest” means an interest in personal property or fixtures which secures payment or performance of an obligation. “Security interest” includes any interest of a consignor and a buyer of accounts, chattel paper, a payment intangible, or a promissory note in a transaction that is subject to chapter 41-09. “Security interest” does not include the special property interest of a buyer of goods on identification of those goods to a contract for sale under section 41-02-46, but a buyer may also acquire a “security interest” by complying with chapter 41-09. Except as otherwise provided in section 41-02-53, the right of a seller or lessor of goods under chapter 41-02 or 41-02.1 to retain or acquire possession of the goods is not a “security interest”, but a seller or lessor may also acquire a “security interest” by complying with chapter 41-09. The retention or reservation of title by a seller of goods notwithstanding shipment or delivery to the buyer under section 41-02-46 is limited in effect to a reservation of a “security interest”. Whether a transaction in the form of a lease creates a “security interest” is determined under section 41-01-11.
   36. “Send” in connection with a writing, record, or notice means:
       1. To deposit in the mail or deliver for transmission by any other usual means of communication with postage or cost of transmission provided for and properly addressed and, in the case of an instrument, to an address specified on the instrument or otherwise agreed, or if there be none to any address reasonable under the circumstances; or
       2. In any other way to cause to be received any record or notice within the time it would have arrived if properly sent.
   37. “Signed” includes using any symbol executed or adopted with present intention to adopt or accept a writing.
   38. “State” means a state of the United States, the District of Columbia, Puerto Rico, the United States Virgin Islands, or any territory or insular possession subject to the jurisdiction of the United States.
   39. “Surety” includes a guarantor or other secondary obligor.
   40. “Term” means a portion of an agreement that relates to a particular matter.
   41. “Unauthorized signature” means a signature made without actual, implied, or apparent authority. The term includes a forgery.
   42. “Warehouse receipt” means a document of title issued by a person engaged in the business of storing goods for hire.
   43. “Writing” includes printing, typewriting, or any other intentional reduction to tangible form. “Written” has a corresponding meaning.
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 someday 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 Section1 (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.

Source: S.L. 2007, ch. 354, § 6.

Official Comments.

Source:

Former Section 1-101.

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, Sections3-103(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.

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.

41-01-10. (1-202) Notice — Knowledge.

1. Subject to subsection 6, a person has “notice” of a fact if the person:
   1. Has actual knowledge of that fact;
   2. Has received a notice or notification of that fact; or
   3. From all the facts and circumstances known to the person at the time in question, has reason to know that that fact exists.
2. “Knowledge” means actual knowledge. “Knows” has a corresponding meaning.
3. “Discover”, “learn”, or words of similar import refer to knowledge rather than to reason to know.
4. A person “notifies” or “gives” a notice or notification to another person by taking such steps as may be reasonably required to inform the other person in ordinary course, whether or not the other person actually comes to know of it.
5. Subject to subsection 6, a person “receives” a notice or notification when:
   1. It comes to that person’s attention; or
   2. It is duly delivered in a form reasonable under the circumstances at the place of business through which the contract was made or at another location held out by that person as the place for receipt of such communications.
6. Notice, knowledge, or a notice or notification received by an organization is effective for a particular transaction from the time it is brought to the attention of the individual conducting that transaction and, in any event, from the time it would have been brought to the individual’s attention if the organization had exercised due diligence. An organization exercises due diligence if the organization maintains reasonable routines for communicating significant information to the person conducting the transaction and there is reasonable compliance with the routines. Due diligence does not require an individual acting for the organization to communicate information unless the communication is part of the individual’s regular duties or the individual has reason to know of the transaction and that the transaction would be materially affected by the information.

Source: S.L. 2007, ch. 354, § 6.

Official Comments.

Source:

Former Section 1-101.

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.

41-01-11. (1-203) Lease distinguished from security interest.

1. Whether a transaction in the form of a lease creates a lease or security interest is determined by the facts of each case.
2. A transaction in the form of a lease creates a security interest if the consideration that the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease and is not subject to termination by the lessee, and:
   1. The original term of the lease is equal to or greater than the remaining economic life of the goods;
   2. The lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the goods;
   3. The lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement; or
   4. The lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement.
3. A transaction in the form of a lease does not create a security interest merely because:
   1. The present value of the consideration the lessee is obligated to pay the lessor for the right to possession and use of the goods is substantially equal to or is greater than the fair market value of the goods at the time the lease is entered;
   2. The lessee assumes risk of loss of the goods;
   3. The lessee agrees to pay, with respect to the goods, taxes, insurance, filing, recording, or registration fees, or service or maintenance costs;
   4. The lessee has an option to renew the lease or to become the owner of the goods;
   5. The lessee has an option to renew the lease for a fixed rent that is equal to or greater than the reasonably predictable fair market rent for the use of the goods for the term of the renewal at the time the option is to be performed; or
   6. The lessee has an option to become the owner of the goods for a fixed price that is equal to or greater than the reasonably predictable fair market value of the goods at the time the option is to be performed.
4. Additional consideration is nominal if that consideration is less than the lessee’s reasonably predictable cost of performing under the lease agreement if the option is not exercised. Additional consideration is not nominal if:
   1. When the option to renew the lease is granted to the lessee, the rent is stated to be the fair market rent for the use of the goods for the term of the renewal determined at the time the option is to be performed; or
   2. When the option to become the owner of the goods is granted to the lessee, the price is stated to be the fair market value of the goods determined at the time the option is to be performed.
5. The “remaining economic life of the goods” and “reasonably predictable” fair market rent, fair market value, or cost of performing under the lease agreement must be determined with reference to the facts and circumstances at the time the transaction is entered.

Source: S.L. 2007, ch. 354, § 6.

Official Comments.

Source:

Former Section 1-101.

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 Section3.6, 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.

41-01-12. (1-204) Value.

Except as otherwise provided in chapters 41-03, 41-04, and 41-05, a person gives value for rights if the person acquires the rights:

1. In return for a binding commitment to extend credit or for the extension of immediately available credit, whether or not drawn upon and whether or not a chargeback is provided for in the event of difficulties in collection;
2. As security for, or in total or partial satisfaction of, a pre-existing claim;
3. By accepting delivery under a pre-existing contract for purchase; or
4. In return for any consideration sufficient to support a simple contract.

Source: S.L. 2007, ch. 354, § 6.

Official Comments.

Source:

Former Section 1-101.

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.

41-01-13. (1-205) Reasonable time — Seasonableness.

1. Whether a time for taking an action required under this title is reasonable depends on the nature, purpose, and circumstances of the action.
2. An action is taken seasonably if the action is taken at or within the time agreed or, if no time is agreed, at or within a reasonable time.

Source: S.L. 2007, ch. 354, § 6.

Official Comments.

Source:

Former Section 1-101.

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.

41-01-14. (1-206) Presumptions.

If this title creates a “presumption” with respect to a fact or provides that a fact is “presumed”, the trier of fact shall find the existence of the fact unless and until evidence is introduced that supports a finding of the fact’s nonexistence.

Source: S.L. 2007, ch. 354, § 6.

Official Comments.

Source:

Former Section 1-101.

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.

41-01-15. (1–301) Territorial applicability — Parties’ power to choose applicable law.

1. Except as provided hereafter in this section, when a transaction bears a reasonable relation to this state and also to another state or nation the parties may agree that the law either of this state or of such other state or nation shall govern their rights and duties. Failing such agreement, this title applies to transactions bearing an appropriate relation to this state.
2. If one of the following provisions of this title specifies the applicable law, that provision governs and a contrary agreement is effective only to the extent permitted by the law, including the conflict of laws rules, so specified:
   1. Rights of creditors against sold goods. Section 41-02-47.
   2. Applicability of the chapter on leases. Sections 41-02.1-05 and 41-02.1-06.
   3. Applicability of the chapter on bank deposits and collections. Section 41-04-02.
   4. Governing law in the chapter on funds transfers. Section 41-04.1-38.
   5. Letters of credit. Section 41-05-16.
   6. Applicability of the chapter on investment securities. Section 41-08-10.
   7. Law governing perfection, the effect of perfection or nonperfection, and the priority of security interests and agricultural liens. Sections 41-09-21 through 41-09-27.
3. Consumer transactions.  If one of the parties is a consumer (as defined in Section 1-201(b)(11)), subsection (e) provides the parties less autonomy to designate the State or country whose law will govern.
4. Wholly domestic transactions.  While this Section provides parties broad autonomy to select governing law, that autonomy is limited in the case of wholly domestic transactions. In a “domestic transaction,” subsection (c)(1) validates only the designation of the law of a State. A “domestic transaction” is a transaction that does not bear a reasonable relation to a country other than the United States. (See subsection (a)). Thus, in a wholly domestic non-consumer transaction, parties may (subject to the limitations set out in subsections (f) and (g)) designate the law of any State but not the law of a foreign country.
5. International transactions.  This section provides greater autonomy in the context of international transactions. As defined in subsection (a)(2), a transaction is an “international transaction” if it bears a reasonable relation to a country other than the United States. In a non-consumer international transaction, subsection (c)(2) provides that a designation of the law of any State or country is effective (subject, of course, to the limitations set out in subsections (f) and (g)). It is important to note that the transaction need not bear a relation to the State or country designated if the transaction is international. Thus, for example, in a non-consumer lease of goods in which the lessor is located in Mexico and the lessee is located in Louisiana, a designation of the law of Ireland to govern the transaction would be given effect under this section even though the transaction bears no relation to Ireland. The ability to designate the law of any country in non-consumer international transactions is important in light of the common practice in many commercial contexts of designating the law of a “neutral” jurisdiction or of a jurisdiction whose law is well-developed. If a country has two or more territorial units in which different systems of law relating to matters within the scope of this section are applicable (as is the case, for example, in Canada and the United Kingdom), subsection (c)(2) should be applied to designation by the parties of the law of one of those territorial units. Thus, for example, subsection (c)(2) should be applied if the parties to a non-consumer international transaction designate the laws of Ontario or Scotland as governing their transaction.
6. Fundamental policy.  Subsection (f) provides that an agreement designating the governing law will not be given effect to the extent that application of the designated law would be contrary to a fundamental policy of the State or country whose law would otherwise govern. This rule provides a narrow exception to the broad autonomy afforded to parties in subsection (c). One of the prime objectives of contract law is to protect the justified expectations of the parties and to make it possible for them to foretell with accuracy what will be their rights and liabilities under the contract. In this way, certainty and predictability of result are most likely to be secured. See Restatement (Second) Conflict of Laws, Section 187, comment e.
7. Choice of law in the absence of contractual designation.  Subsection (d), which replaces the second sentence of former Section 1-105(1), determines which jurisdiction’s law governs a transaction in the absence of an effective contractual choice by the parties. Former Section 1-105(1) provided that the law of the forum (i.e., the Uniform Commercial Code) applied if the transaction bore “an appropriate relation to this state.” By using an “appropriate relation” test, rather than, for example, a “most significant relationship” test, Section 1-105(1) expressed a bias in favor of applying the forum’s law. This bias, while not universally respected by the courts, was justifiable in light of the uncertainty that existed at the time of drafting as to whether the Uniform Commercial Code would be adopted by all the states; the pro-forum bias would assure that the Uniform Commercial Code would be applied so long as the transaction bore an “appropriate” relation to the forum. Inasmuch as the Uniform Commercial Code has been adopted, at least in part, in all U.S. jurisdictions, the vitality of this point is minimal in the domestic context, and international comity concerns militate against continuing the pro-forum, pro-UCC bias in transnational transactions. Whether the choice is between the law of two jurisdictions that have adopted the Uniform Commercial Code, but whose law differs (because of differences in enacted language or differing judicial interpretations), or between the Uniform Commercial Code and the law of another country, there is no strong justification for directing a court to apply different choice of law principles to that determination than it would apply if the matter were not governed by the Uniform Commercial Code. Similarly, given the variety of choice of law principles applied by the states, it would not be prudent to designate only one such principle as the proper one for transactions governed by the Uniform Commercial Code. Accordingly, in cases in which the parties have not made an effective choice of law, Section 1-301(d) simply directs the forum to apply its ordinary choice of law principles to determine which jurisdiction’s law governs, subject to the special rules of Section 1-301(e)(2) with regard to consumer transactions.
8. Primacy of other Uniform Commercial Code choice of law rules.  Subsection (g), which is essentially identical to former Section 1-105(2), indicates that choice of law rules provided in the other Articles govern when applicable.
9. Matters not addressed by this section.  As noted in Comment 1, this section is not a complete statement of conflict of laws doctrines applicable in commercial cases. Among the issues this section does not address, and leaves to other law, three in particular deserve mention. First, a forum will occasionally decline to apply the law of a different jurisdiction selected by the parties when application of that law would be contrary to a fundamental policy of the forum jurisdiction, even if it would not be contrary to a fundamental policy of the State or country whose law would govern in the absence of contractual designation. Standards for application of this doctrine relate primarily to concepts of sovereignty rather than commercial law and are thus left to the courts. Second, in determining whether to give effect to the parties’ agreement that the law of a particular State or country will govern their relationship, courts must, of necessity, address some issues as to the basic validity of that agreement. These issues might relate, for example, to capacity to contract and absence of duress. This section does not address these issues. Third, this section leaves to other choice of law principles of the forum the issues of whether, and to what extent, the forum will apply the same law to the non-UCC aspects of a transaction that it applies to the aspects of the transaction governed by the Uniform Commercial Code.

Source: S.L. 2007, ch. 354, § 6.

Official Comments.

Source:

Former Section 1-101.

Summary of changes from former law:

Section 1-301, which replaces former Section 1-105, represents a significant rethinking of choice of law issues addressed in that section. The new section reexamines both the power of parties to select the jurisdiction whose law will govern their transaction and the determination of the governing law in the absence of such selection by the parties. With respect to the power to select governing law, the draft affords greater party autonomy than former Section 1-105, but with important safeguards protecting consumer interests and fundamental policies.

Section 1-301 addresses contractual designation of governing law somewhat differently than does former Section 1-105. Former law allowed the parties to any transaction to designate a jurisdiction whose law governs if the transaction bears a “reasonable relation” to that jurisdiction. Section 1-301 deviates from this approach by providing different rules for transactions involving a consumer than for non-consumer transactions, such as “business to business” transactions.

In the context of consumer transactions, the language of Section 1-301, unlike that of former Section 1-105, protects consumers against the possibility of losing the protection of consumer protection rules applicable to the aspects of the transaction governed by the Uniform Commercial Code. In most situations, the relevant consumer protection rules will be those of the consumer’s home jurisdiction. A special rule, however, is provided for certain face-to-face sales transactions. (See Comment 3.)

In the context of business-to-business transactions, Section 1-301 generally provides the parties with greater autonomy to designate a jurisdiction whose law will govern than did former Section 1-105, but also provides safeguards against abuse that did not appear in former Section 1-105. In the non-consumer context, following emerging international norms, greater autonomy is provided in subsections (c)(1) and (c)(2) by deleting the former requirement that the transaction bear a “reasonable relation” to the jurisdiction. In the case of wholly domestic transactions, however, the jurisdiction designated must be a State. (See Comment 4.)

An important safeguard not present in former Section 1-105 is found in subsection (f). Subsection (f) provides that the designation of a jurisdiction’s law is not effective (even if the transaction bears a reasonable relation to that jurisdiction) to the extent that application of that law would be contrary to a fundamental policy of the jurisdiction whose law would govern in the absence of contractual designation. Application of the law designated may be contrary to a fundamental policy of the State or country whose law would otherwise govern either because of the nature of the law designated or because of the “mandatory” nature of the law that would otherwise apply. (See Comment 6.)

In the absence of an effective contractual designation of governing law, former Section 1-105(1) directed the forum to apply its own law if the transaction bore “an appropriate relation to this state.” This direction, however, was frequently ignored by courts. Section 1-301(d) provides that, in the absence of an effective contractual designation, the forum should apply the forum’s general choice of law principles, subject to certain special rules in consumer transactions. (See Comments 3 and 7).

1. Applicability of section. This section is neither a complete restatement of choice of law principles nor a free-standing choice of law statute. Rather, it is a provision of Article 1 of the Uniform Commercial Code. As such, the scope of its application is limited in two significant ways.

First, this section is subject to Section 1-102, which states the scope of Article 1. As that section indicates, Article 1, and the rules contained therein, apply to transactions to the extent that they are governed by one of the other Articles of the Uniform Commercial Code. Thus, this section does not apply to matters outside the scope of the Uniform Commercial Code, such as a services contract, a credit card agreement, or a contract for the sale of real estate. This limitation was implicit in former Section 1-105, and is made explicit in Section 1-301(b).

Second, subsection (g) provides that this section is subject to the specific choice of law provisions contained in other Articles of the Uniform Commercial Code. Thus, to the extent that a transaction otherwise within the scope of this section also is within the scope of one of those provisions, the rules of that specific provision, rather than of this section, apply.

The following cases illustrate these two limitations on the scope of Section 1-301:

Example 1: A, a resident of Indiana, enters into an agreement with Credit Card Company, a Delaware corporation with its chief executive office located in New York, pursuant to which A agrees to pay Credit Card Company for purchases charged to A’s credit card. The agreement contains a provision stating that it is governed by the law of South Dakota. The choice of law rules in Section 1-301 do not apply to this agreement because the agreement is not governed by any of the other Articles of the Uniform Commercial Code.

Example 2: A, a resident of Indiana, maintains a checking account with Bank B, an Ohio banking corporation located in Ohio. At the time that the account was established, Bank B and A entered into a “Bank-Customer Agreement” governing their relationship with respect to the account. The Bank-Customer Agreement contains some provisions that purport to limit the liability of Bank B with respect to its decisions whether to honor or dishonor checks purporting to be drawn on A’s account. The Bank-Customer Agreement also contains a provision stating that it is governed by the law of Ohio. The provisions purporting to limit the liability of Bank B deal with issues governed by Article 4. Therefore, determination of the law applicable to those issues (including determination of the effectiveness of the choice of law clause as it applies to those issues) is within the scope of Section 1-301 as provided in subsection (b). Nonetheless, the rules of Section 1-301 would not apply to that determination because of subsection (g), which states that the choice of law rules in Section 4-102 govern instead.

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

There are three important limitations on this party autonomy to select governing law. First, a different, and more protective, rule applies in the context of consumer transactions. (See Comment 3). Second, in an entirely domestic transaction, this section does not validate the selection of foreign law. (See Comment 4.) Third, contractual choice of law will not be given effect to the extent that application of the law designated would be contrary to a fundamental policy of the State or country whose law would be applied in the absence of such contractual designation. (See Comment 6).

This Section does not address the ability of parties to designate non-legal codes such as trade codes as the set of rules governing their transaction. The power of parties to make such a designation as part of their agreement is found in the principles of Section 1-302. That Section, allowing parties broad freedom of contract to structure their relations, is adequate for this purpose. This is also the case with respect to the ability of the parties to designate recognized bodies of rules or principles applicable to commercial transactions that are promulgated by intergovernmental organizations such as UNCITRAL or Unidroit. See, e.g., Unidroit Principles of International Commercial Contracts.

First, in the case of a consumer transaction, subsection (e)(1) provides that the transaction must bear a reasonable relation to the State or country designated. Thus, the rules of subsection (c) allowing the parties to choose the law of a jurisdiction to which the transaction bears no relation do not apply to consumer transactions.

Second, subsection (e)(2) provides that application of the law of the State or country determined by the rules of this section (whether or not that State or country was designated by the parties) cannot deprive the consumer of the protection of rules of law which govern matters within the scope of Section 1-301, are protective of consumers, and are not variable by agreement. The phrase “rule of law” is intended to refer to case law as well as statutes and administrative regulations. The requirement that the rule of law be one “governing a matter within the scope of this section” means that, consistent with the scope of Section 1-301, which governs choice of law only with regard to the aspects of a transaction governed by the Uniform Commercial Code, the relevant consumer rules are those that govern those aspects of the transaction. Such rules may be found in the Uniform Commercial Code itself, as are the consumer-protective rules in Part 6 of Article 9, or in other law if that other law governs the UCC aspects of the transaction. See, for example, the rule in Section 2.403 of the Uniform Consumer Credit Code which prohibits certain sellers and lessors from taking negotiable instruments other than checks and provides that a holder is not in good faith if the holder takes a negotiable instrument with notice that it is issued in violation of that section.

With one exception (explained in the next paragraph), the rules of law the protection of which the consumer may not be deprived are those of the jurisdiction in which the consumer principally resides. The jurisdiction in which the consumer principally resides is determined at the time relevant to the particular issue involved. Thus, for example, if the issue is one related to formation of a contract, the relevant consumer protective rules are rules of the jurisdiction in which the consumer principally resided at the time the facts relevant to contract formation occurred, even if the consumer no longer principally resides in that jurisdiction at the time the dispute arises or is litigated. If, on the other hand, the issue is one relating to enforcement of obligations, then the relevant consumer protective rules are those of the jurisdiction in which the consumer principally resides at the time enforcement is sought, even if the consumer did not principally reside in that jurisdiction at the time the transaction was entered into.

In the case of a sale of goods to a consumer, in which the consumer both makes the contract and takes possession of the goods in the same jurisdiction and that jurisdiction is not the consumer’s principal residence, the rule in subsection (e)(2)(B) applies. In that situation, the relevant consumer protective rules, the protection of which the consumer may not be deprived by the choice of law rules of subsections (c) and (d), are those of the State or country in which both the contract is made and the consumer takes delivery of the goods. This rule, adapted from Section 2A-106 and Article 5 of the EC Convention on the Law Applicable to Contractual Obligations, enables a seller of goods engaging in face-to-face transactions to ascertain the consumer protection rules to which those sales are subject, without the necessity of determining the principal residence of each buyer. The reference in subsection (e)(2)(B) to the State or country in which the consumer makes the contract should not be read to incorporate formalistic concepts of where the last event necessary to conclude the contract took place; rather, the intent is to identify the state in which all material steps necessary to enter into the contract were taken by the consumer.

The following examples illustrate the application of Section 1-301(e)(2) in the context of a contractual choice of law provision:

Example 3: Seller, located in State A, agrees to sell goods to Consumer, whose principal residence is in State B. The parties agree that the law of State A would govern this transaction. Seller ships the goods to Consumer in State B. An issue related to contract formation subsequently arises. Under the law of State A, that issue is governed by State A’s uniform version of Article 2. Under the law of State B, that issue is governed by a non-uniform rule, protective of consumers and not variable by agreement, that brings about a different result than would occur under the uniform version of Article 2. Under Section 1-301(e)(2)(A), the parties’ agreement that the law of State A would govern their transaction cannot deprive Consumer of the protection of State B’s consumer protective rule. This is the case whether State B’s rule is codified in Article 2 of its Uniform Commercial Code or is found elsewhere in the law of State B.

Example 4: Same facts as Example 3, except that (i) Consumer takes all material steps necessary to enter into the agreement to purchase the goods from Seller, and takes delivery of those goods, while on vacation in State A and (ii) the parties agree that the law of State C (in which Seller’s chief executive office is located) would govern their transaction. Under subsections (c)(1) and (e)(1), the designation of the law of State C as governing will be effective so long as the transaction is found to bear a reasonable relation to State C (assuming that the relevant law of State C is not contrary to a fundamental policy of the State whose law would govern in the absence of agreement), but that designation cannot deprive Consumer of the protection of any rule of State A that is within the scope of this section and is both protective of consumers and not variable by agreement. State B’s consumer protective rule is not relevant because, under Section 1-301(e)(2)(B), the relevant consumer protective rules are those of the jurisdiction in which the consumer both made the contract and took delivery of the goods - here, State A - rather than those of the jurisdiction in which the consumer principally resides.

It is important to note that subsection (e)(2) applies to all determinations of applicable law in transactions in which one party is a consumer, whether that determination is made under subsection (c) (in cases in which the parties have designated the governing law in their agreement) or subsection (d) (in cases in which the parties have not made such a designation). In the latter situation, application of the otherwise-applicable conflict of laws principles of the forum might lead to application of the laws of a State or country other than that of the consumer’s principal residence. In such a case, however, subsection (e)(2) applies to preserve the applicability of consumer protection rules for the benefit of the consumer as described above.

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

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

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

***

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

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

Application of the designated law may be contrary to a fundamental policy of the State or country whose law would otherwise govern either (i) because the substance of the designated law violates a fundamental principle of justice of that State or country or (ii) because it differs from a rule of that State or country that is “mandatory” in that it must be applied in the courts of that State or country without regard to otherwise-applicable choice of law rules of that State or country and without regard to whether the designated law is otherwise offensive. The mandatory rules concept appears in international conventions in this field, e.g., EC Convention on the Law Applicable to Contractual Obligations, although in some cases the concept is applied to authorize the forum state to apply its mandatory rules, rather than those of the State or country whose law would otherwise govern. The latter situation is not addressed by this section. (See Comment 9.)

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

Collateral References.

Permissive or Mandatory Nature of Forum Selection Clauses Under State Law, 32 A.L.R.6th 419.

41-01-16. (1-302) Variation by agreement.

1. Except as otherwise provided in subsection 2 or elsewhere under this title, the effect of provisions of this title may be varied by agreement.
2. The obligations of good faith, diligence, reasonableness, and care prescribed under this title may not be disclaimed by agreement. The parties, by agreement, may determine the standards by which the performance of those obligations is to be measured if those standards are not manifestly unreasonable. If this title requires an action to be taken within a reasonable time, a time that is not manifestly unreasonable may be fixed by agreement.
3. The presence in certain provisions of this title of the phrase “unless otherwise agreed”, or words of similar import, does not imply that the effect of other provisions may not be varied by agreement under this section.

Source: S.L. 2007, ch. 354, § 6.

Official Comments.

Source:

Former Section 1-101.

Changes:

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

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

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

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

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

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

41-01-17. (1-303) Course of performance — Course of dealing — Usage of trade.

1. A “course of performance” is a sequence of conduct between the parties to a particular transaction that exists if:
   1. The agreement of the parties with respect to the transaction involves repeated occasions for performance by a party; and
   2. The other party, with knowledge of the nature of the performance and opportunity for objection to it, accepts the performance or acquiesces in the performance without objection.
2. A “course of dealing” is a sequence of conduct concerning previous transactions between the parties to a particular transaction that is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.
3. A “usage of trade” is any practice or method of dealing having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question. The existence and scope of such a usage must be proved as facts. If it is established that such a usage is embodied in a trade code or similar record, the interpretation of the record is a question of law.
4. A course of performance or course of dealing between the parties or usage of trade in the vocation or trade in which the parties are engaged or of which the parties are or should be aware is relevant in ascertaining the meaning of the parties’ agreement, may give particular meaning to specific terms of the agreement, and may supplement or qualify the terms of the agreement. A usage of trade applicable in the place in which part of the performance under the agreement is to occur may be so utilized as to that part of the performance.
5. Except as otherwise provided in subsection 6, the express terms of an agreement and any applicable course of performance, course of dealing, or usage of trade must be construed whenever reasonable as consistent with each other. If such a construction is unreasonable:
   1. Express terms prevail over course of performance, course of dealing, and usage of trade;
   2. Course of performance prevails over course of dealing and usage of trade; and
   3. Course of dealing prevails over usage of trade.
6. Subject to section 41-02-16, a course of performance is relevant to show a waiver or modification of any term inconsistent with the course of performance.
7. Evidence of a relevant usage of trade offered by one party is not admissible unless that party has given the other party notice that the court finds sufficient to prevent unfair surprise to the other party.
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.

Source: S.L. 2007, ch. 354, § 6.

Official Comments.

Source:

Former Section 1-101.

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).

41-01-18. (1-304) Obligation of good faith.

Every contract or duty within this title imposes an obligation of good faith in its performance and enforcement. This section does not support an independent claim for relief for failure to perform or enforce in good faith and does not create a separate duty of fairness and reasonableness which can be independently breached.

Source: S.L. 2007, ch. 354, § 6.

Official Comments.

Source:

Former Section 1-101.

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. [Editorial note: The second sentence of North Dakota’s provision is not contained in the current UCC section.]

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.

41-01-19. (1-305) Remedies to be liberally administered.

1. The remedies provided under this title must be liberally administered to the end that the aggrieved party may be put in as good a position as if the other party had fully performed but neither consequential or special damages nor penal damages may be had except as specifically provided under this title or by other rule of law.
2. Any right or obligation declared under this title is enforceable by action unless the provision declaring the right or obligation specifies a different and limited effect.
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.

Source: S.L. 2007, ch. 354, § 6.

Official Comments.

Source:

Former Section 1-101.

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.

41-01-20. (1-306) Waiver or renunciation of claim or right after breach.

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

Source: S.L. 2007, ch. 354, § 6.

Official Comments.

Source:

Former Section 1-101.

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).

41-01-21. (1-307) Prima facie evidence by third-party documents.

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

Source: S.L. 2007, ch. 354, § 6.

Official Comments.

Source:

Former Section 1-101.

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.

41-01-22. (1-308) Performance or acceptance under reservation of rights.

1. A party that with explicit reservation of rights performs or promises performance or assents to performance in a manner demanded or offered by the other party does not thereby prejudice the rights reserved. Such words as “without prejudice”, “under protest”, or the like are sufficient.
2. Subsection 1 does not apply to an accord and satisfaction.
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.

Source: S.L. 2007, ch. 354, § 6.

Official Comments.

Source:

Former Section 1-101.

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.

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.

41-01-23. (1-309) Option to accelerate at will.

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

Source: S.L. 2007, ch. 354, § 6.

Official Comments.

Source:

Former Section 1-101.

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.

41-01-24. (1-310) Subordinated obligations.

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

Source: S.L. 2007, ch. 354, § 6.

Official Comments.

Source:

Former Section 1-101.

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.

41-02-01. (2-101) Short title.

This chapter shall be known and may be cited as the Uniform Commercial Code — Sales.

Source: S.L. 1965, ch. 296, § 1.

Official Comment

Former Section 1-101.

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.

41-02-02. (2-102) Scope — Certain security and other transactions excluded from this chapter.

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

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Changes:

Former Section 1-101.

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-References:

Definitional Cross References:

Cross-References.

Secured transactions, sales of accounts, contract rights and chattel paper, see N.D.C.C. ch. 41-09.

41-02-03. (2-103) Definitions and index of definitions.

1. In this chapter, unless the context otherwise requires:
   1. “Buyer” means a person who buys or contracts to buy goods.
   2. Reserved.
   3. “Receipt” of goods means taking physical possession of them.
   4. “Seller” means a person who sells or contracts to sell goods.
2. Other definitions applying to this chapter or to specified parts thereof, and the sections in which they appear are:
   1. “Acceptance”. Section 41-02-69.
   2. “Banker’s credit”. Section 41-02-42.
   3. “Between merchants”. Section 41-02-04.
   4. “Cancellation”. Subsection 2 of section 41-02-06.
   5. “Commercial unit”. Section 41-02-05.
   6. “Confirmed credit”. Section 41-02-42.
   7. “Conforming to contract”. Section 41-02-06.
   8. “Contract for sale”. Section 41-02-06.
   9. “Cover”. Section 41-02-91.
   10. “Entrusting”. Section 41-02-48.
   11. “Financing agency”. Section 41-02-04.
   12. “Future goods”. Section 41-02-05.
   13. “Goods”. Section 41-02-05.
   14. “Identification”. Section 41-02-49.
   15. “Installment contract”. Section 41-02-75.
   16. “Letter of credit”. Section 41-02-42.
   17. “Lot”. Section 41-02-05.
   18. “Merchant”. Section 41-02-04.
   19. “Overseas”. Section 41-02-40.
   20. “Person in position of seller”. Section 41-02-86.
   21. “Present sale”. Section 41-02-06.
   22. “Sale”. Section 41-02-06.
   23. “Sale on approval”. Section 41-02-43.
   24. “Sale or return”. Section 41-02-43.
   25. “Termination”. Section 41-02-06.
3. “Control” as provided under section 41-07-06 and the following definitions in other chapters apply to this chapter:
   1. “Check”. Section 41-03-04.
   2. “Consignee”. Section 41-07-02.
   3. “Consignor”. Section 41-07-02.
   4. “Consumer goods”. Section 41-09-02.
   5. “Dishonor”. Section 41-03-59.
   6. “Draft”. Section 41-03-04.
4. In addition, chapter 41-01 contains general definitions and principles of construction and interpretation applicable throughout this chapter.
5. The electronic contracting provisions, including the definitions of “electronic,” “electronic agent,” “electronic record,” and “record” are based on the provisions of the Uniform Electronic Transactions Act and are consistent with the federal Electronic Signatures in Global and National Commerce Act (15 U.S.C. § 7001 et seq.).
6. The term “foreign exchange transaction” is used in the definition of goods in Section 2-103(1)(k). That definition excludes “the subject matter of foreign exchange transactions.”
7. The definition of “goods” in this article has been amended to exclude information not associated with goods. Thus, this article does not directly apply to an electronic transfer of information, such as the transaction involved in Specht v. Netscape, 150 F. Supp. 2d 585 (S.D.N.Y. 2001), aff’d, 306 F.3d 17 (2d. Cir. 2002). However, transactions often include both goods and information: some are transactions in goods as that term is used in Section 2-102, and some are not. For example, the sale of “smart goods” such as an automobile is a transaction in goods fully within this article even though the automobile contains many computer programs. On the other hand, an architect’s provision of architectural plans on a computer disk would not be a transaction in goods. When a transaction includes both the sale of goods and the transfer of rights in information, it is up to the courts to determine whether the transaction is entirely within or outside of this article, or whether or to what extent this article should be applied to a portion of the transaction. While this article may apply to a transaction including information, nothing in this Article alters, creates, or diminishes intellectual property rights.
8. Section 1-202(e) provides rules for determining whether a notice or notification has been received. This Article by contrast defines “receipt of goods” to mean the taking of physical possession of the goods.
9. A “remedial promise” is a promise by the seller to take a certain remedial action upon the happening of a specified event. The types of remedies contemplated by this term as used in this Article are specified in the definition - repair or replacement of the goods, or refund of all or part of the price. No other promise by a seller qualifies as a remedial promise. Furthermore, the seller is entitled to specify precisely the event that will precipitate the obligation. Typical examples include a commitment to repair any parts of the goods that are defective, or a commitment to refund the purchase price if the goods fail to perform in a certain manner. A post-sale promise to correct a problem with the goods that the seller is not obligated to correct that is made to placate a dissatisfied customer is not within the definition of remedial promise. Whether the promised remedy is exclusive, and if so whether it has failed its essential purpose, is determined under Section 2-719.
10. The definition of “sign” is broad enough to cover any record that is signed within the meaning of Article 1 or that contains an electronic signature within the meaning of the Uniform Electronic Transactions Act. It is consistent with the federal Electronic Signatures in Global and National Commerce Act (15 U.S.C. § 7001 et seq.).

Source: S.L. 1965, ch. 296, § 1; 1991, ch. 448, § 6; 2001, ch. 361, § 11; 2005, ch. 354, § 2; 2007, ch. 354, § 7.

Official Comments.

1. The first sentence of the definition of “conspicuous” is based on Section 1-201(10) but the concept is expanded to include terms in electronic records. The general standard is, that to be conspicuous, a term ought to be noticed by a reasonable person. The second sentence states a special rule for situations where the sender of an electronic record intends to evoke a response from an electronic agent. In that case, the presentation of the term must be capable of evoking a response from a reasonably configured electronic agent. Whether a term is conspicuous is an issue for the court.

Paragraphs (i) and (ii) set out several methods for making a term conspicuous. The requirement that a term be conspicuous functions both as notice (the term ought to be noticed) and as a basis for planning (giving guidance to the party that relies on the term about how that result can be achieved).

Paragraph (i), which relates to the general standard for conspicuousness, is based on original Section 1-201(10) but it is intended to give more guidance than was given in the prior version of this definition. Paragraph (ii) is new and it relates to the special standard for electronic records that are intended to evoke a response from an electronic agent. Although these paragraphs indicate some of the methods for calling attention to a term, the test is whether notice of the term can reasonably be expected. The statutory language should not be construed to permit a result that is inconsistent with that test.

2. A “consumer” is a natural person (cf. Section 1-201(27)) who enters into a transaction for a purpose typically associated with consumers - i.e., a personal, family or household purpose. The requirement that the buyer intend that the goods be used “primarily” for personal, family or household purposes is generally consistent with the definition of consumer goods in revised Article 9. See Section 9-102(a)(23).

3. The term “consumer contract” is limited to a contract for sale between a seller that is a “merchant” and a buyer that is a “consumer”. Thus, neither a sale by a consumer to a consumer nor a sale by a merchant to an individual who intends that the goods be used primarily in a home business qualify as a consumer contract.

4. “Delivery” with respect to documents of title is defined in Section 1-201(15) as the voluntary transfer of possession of the document. This Article defines “delivery” with respect to goods to mean the voluntary transfer of physical possession or control of the goods.

The definition has also been amended to exclude the subject matter of “foreign exchange transactions.” See Section 2-103(1)(i). Although a contract in which currency in the commodity exchanged is a sale of goods, an exchange in which delivery is “through funds transfer, book entry accounting, or other form of payment order, or other agreed means to transfer a credit balance” is not a sale of goods and is not governed by this article. In the latter case, Article 4A or other law applies. On the other hand, if the parties agree to a forward transaction where dollars are to be physically delivered in exchange for the delivery of another currency, the transaction is not within the “foreign exchange” exclusion and this article applies.

The distinction between a remedial promise and a warranty that is made in this Article resolves a statute-of-limitations problem. Under original Section 2-725, a right of action for breach of an express warranty accrued at the time the goods were tendered unless the warranty explicitly extended to the future performance of the goods. In that case, the statute of limitations began to run at the time of the discovery of the breach. By contrast, a right of action for breach of an ordinary (non-warranty) promise accrued when the promise was breached. A number of courts held that commitments by sellers to take remedial action in the event the goods proved to be defective during a specified period of time constituted a warranty, and in these cases the courts determined that the statute of limitations began to run at the time that the goods were tendered. Other courts used strained reasoning that allowed them to apply the discovery rule even though the promise referred to the future performance of the seller and not the future performance of the goods.

Under this Article, a promise by the seller to take remedial action is not a warranty at all and therefore the statute of limitations for a breach of a remedial promise does not begin to run at either the time the goods are tendered or at the time the breach is discovered. Section 2-725(2)(c) separately addresses the accrual of a right of action for a remedial promise. See Official Comment 3 to Section 2-725.

Cross-References.

Assignment of rights, see N.D.C.C. § 41-02-17.

Delegation of performance, see N.D.C.C. § 41-02-17.

“Good faith” defined, see N.D.C.C. § 1-01-21.

“Valuable consideration” defined, see N.D.C.C. § 1-01-20.

41-02-04. (2-104) Between merchants, financing agency, and merchant defined.

1. “Between merchants” means in any transaction with respect to which both parties are chargeable with the knowledge or skill of merchants.
2. “Financing agency” means a bank, finance company, or other person who in the ordinary course of business makes advances against goods or documents of title or who by arrangement with either the seller or the buyer intervenes in ordinary course to make or collect payment due or claimed under the contract for sale, as by purchasing or paying the seller’s draft or making advances against it or by merely taking it for collection whether or not documents of title accompany or are associated with the draft. “Financing agency” includes also a bank or other person who similarly intervenes between persons who are in the position of seller and buyer in respect to the goods (section 41-02-86).
3. “Merchant” means a person who deals in goods of the kind or otherwise by the person’s occupation holds out as having knowledge or skill peculiar to the practices or goods involved in the transaction or to whom such knowledge or skill may be attributed by the person’s employment of an agent or broker or other intermediary who by the employed person’s occupation holds out as having such knowledge or skill.

Source: S.L. 1965, ch. 296, § 1; 2005, ch. 354, § 3.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Purposes:

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

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

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

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

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

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

Cross References:

Definitional Cross References:

Cross-References.

Delivery terms, see N.D.C.C. §§ 41-02-36 to 41-02-42.

Implied warranties, see N.D.C.C. §§ 41-02-31, 41-02-32.

Obligation of good faith in performance or enforcement of contract, see N.D.C.C. § 41-01-18.

Rules of construction, variation by agreement, see N.D.C.C. § 41-01-16.

Secured transactions, see N.D.C.C. §§ 41-09-01 to 41-09-131.

41-02-05. (2-105) Commercial unit, goods, and lot defined — Transferability.

1. “Commercial unit” means such a unit of goods as by commercial usage is a single whole for purposes of sale and division of which materially impairs its character or value on the market or in use. A commercial unit may be a single article (as a machine) or a set of articles (as a suite of furniture or an assortment of sizes) or a quantity (as a bale, gross, or carload) or any other unit treated in use or in the relevant market as a single whole.
2. “Goods” means all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities (chapter 41-08), and things in action. “Goods” also includes the unborn young of animals and growing crops and other identified things attached to realty as described in the section on goods to be severed from realty (section 41-02-07).
3. Goods must be both existing and identified before any interest in them can pass. Goods which are not both existing and identified are “future” goods. A purported present sale of future goods or of any interest therein operates as a contract to sell.
4. There may be a sale of a part interest in existing identified goods.
5. An undivided share in an identified bulk of fungible goods is sufficiently identified to be sold although the quantity of the bulk is not determined. Any agreed proportion of such a bulk or any quantity thereof agreed upon by number, weight, or other measure may to the extent of the seller’s interest in the bulk be sold to the buyer who then becomes an owner in common.
6. “Lot” means a parcel or a single article which is the subject matter of a separate sale or delivery, whether or not it is sufficient to perform the contract.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Changes:

Former Section 1-101.

Purposes of Changes and New Matter:

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

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

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

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

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

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

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

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

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

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

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

Cross References:

Definitional Cross References:

Cross-References.

Formal requirements, statute of frauds, see N.D.C.C. § 41-02-08.

“Fungible” goods defined, see N.D.C.C. § 41-01-09(2)(r).

Goods to be severed from realty, recording, see N.D.C.C. § 41-02-07.

Identification of goods, insurable interest, see N.D.C.C. § 41-02-49.

Investment securities, see N.D.C.C. §§ 41-08-01 to 41-08-52.

Personal property transfers, see N.D.C.C. ch. 47-11.

Sale of assets of corporation, see N.D.C.C. § 10-19.1-96.

41-02-06. (2-106) Definitions.

1. In this chapter, unless the context otherwise requires:
   1. “Agreement” and “contract” are limited to those relating to the present or future sale of goods.
   2. “Contract for sale” includes both a present sale of goods and a contract to sell goods at a future time.
   3. “Present sale” means a sale that is accomplished by the making of the contract.
   4. “Sale” consists in the passing of title from the seller to the buyer for a price (section 41-02-46).
2. “Cancellation” occurs when either party puts an end to the contract for breach by the other and its effect is the same as that of “termination” except that the canceling party also retains any remedy for breach of the whole contract or any unperformed balance.
3. Goods or conduct including any part of a performance are “conforming” or conform to the contract when they are in accordance with the obligations under the contract.
4. “Termination” occurs when either party pursuant to a power created by agreement or law puts an end to the contract otherwise than for its breach. On “termination” all obligations which are still executory on both sides are discharged but any right based on prior breach or performance survives.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Changes:

Former Section 1-101.

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:

Definitional Cross References:

Cross-References.

Course of dealing and usage of trade, see N.D.C.C. § 41-01-17.

Course of performance or practical construction, see N.D.C.C. § 41-01-17.

Improper tender or delivery, cure by seller, see N.D.C.C. § 41-02-56.

Obligation of good faith in performance or enforcement of contract, see N.D.C.C. § 41-01-18.

Collateral References.

Sales 1.

67 Am. Jur. 2d, Sales, §§ 20-43.

77A C.J.S. Sales, §§ 1-5.

What constitutes a contract for sale under Uniform Commercial Code § 2-314, 78 A.L.R.3d 696.

Law Reviews.

Some Thoughts About Warranty Law: Express and Implied Warranties, 56 N.D. L. Rev. 509, 553.

41-02-07. (2-107) Goods to be severed from realty — Recording.

1. A contract for the sale of minerals or the like (including oil and gas) or a structure or its materials to be removed from realty is a contract for the sale of goods within this chapter if they are to be severed by the seller but until severance a purported present sale thereof which is not effective as a transfer of an interest in land is effective only as a contract to sell.
2. A contract for the sale apart from the land of growing crops or other things attached to realty and capable of severance without material harm thereto but not described in subsection 1 or of timber to be cut is a contract for the sale of goods within this chapter whether the subject matter is to be severed by the buyer or by the seller even though it forms part of the realty at the time of contracting, and the parties can by identification effect a present sale before severance.
3. The provisions of this section are subject to any third-party rights provided by the law relating to realty records, and the contract for sale may be executed and recorded as a document transferring an interest in land and shall then constitute notice to third parties of the buyer’s rights under the contract for sale.

Source: S.L. 1965, ch. 296, § 1; 1973, ch. 343, § 3.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Purposes:

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

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

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

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

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

Cross References:

Definitional Cross References:

Cross-References.

“Goods” defined, see N.D.C.C. §§ 41-02-05, 41-09-02.

Secured transactions, N.D.C.C. ch. 41-09.

Statute of frauds, see N.D.C.C. § 41-02-08.

41-02-08. (2-201) Formal requirements — Statute of frauds.

1. Except as otherwise provided in this section, a contract for the sale of goods for the price of five hundred dollars or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by that party’s authorized agent or broker. A writing is not insufficient because it omits or incorrectly states a term agreed upon but the contract is not enforceable under this subsection beyond the quantity of goods shown in such writing.
2. Between merchants if within a reasonable time a writing in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know its contents, it satisfies the requirements of subsection 1 against such party unless written notice of objection to its contents is given within ten days after it is received.
3. A contract which does not satisfy the requirements of subsection 1 but which is valid in other respects is enforceable:
   1. If the goods are to be specially manufactured for the buyer and are not suitable for sale to others in the ordinary course of the seller’s business and the seller, before notice of repudiation is received and under circumstances which reasonably indicate that the goods are for the buyer, has made either a substantial beginning of their manufacture or commitments for their procurement;
   2. If the party against whom enforcement is sought admits in that party’s pleading, testimony, or otherwise in court that a contract for sale was made, but the contract is not enforceable under this provision beyond the quantity of goods admitted; or
   3. With respect to goods for which payment has been made and accepted or which have been received and accepted (section 41-02-69).
4. Between merchants, failure to answer a confirmation of a contract in a record that satisfies the requirements of subsection (1) against the sender within ten days of receipt renders the record sufficient against the recipient. The only effect, however, is to take away from the party that 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 record confirmation is unaffected.
5. 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 that takes possession of goods provided for 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 that 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 that refuses to perform.
6. It is not necessary that the record be delivered to anybody, nor is this section intended to displace decisions that have given effect to lost records. It need not be signed by both parties, but except as stated in subsection (2), it is not sufficient against a party that has not signed it. Prior to a dispute, no one can determine which party’s signature may be necessary, but from the time of contracting each party should be aware that it is the signature of the other which is important.
7. If the making of a contract is admitted in court, either in a written pleading, by stipulation or by oral statement before the court, or is admitted under oath but not in court, as by testimony in a deposition or an affidavit filed with a motion, no additional record is necessary. Subsection (3)(b) makes it impossible to admit the contract in these contexts, and assert that the Statute of Frauds is still a defense. However, in these circumstances, the contract is not conclusively established. The admission is evidential only against the maker and only for the facts admitted. As against the other party, it is not evidential at all.
8. Subsection (4), which was not in prior versions of this Article, repeals the “one year” provision of the Statute of Frauds for contracts for the sale of goods. The phrase “any other applicable period” recognizes that some state statutes apply to periods longer than one year. The confused and contradictory interpretations under the so-called “one year” clause are illustrated by  C.R. Klewin, Inc. v. Flagship Properties, Inc., 600 A.2d 772 (Conn. 1991).

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

1. The record required by subsection (1) need not contain all of the material terms of the contract, and the material terms that are stated need not be precise or accurate. All that is required is that the record afford a reasonable basis to determine that the offered oral evidence rests on a real transaction. The record may be written on a piece of paper or entered into a computer. It need not indicate which party is the buyer and which party is the seller. The only term which must appear is the quantity term. A term indicating the manner by which the quantity is determined is sufficient. Thus, for example, a term indicating that the quantity is based on the output of the seller or the requirements of the buyer satisfies the requirement. See e.g., Advent Systems v. Unisys, 925 F.2d 670 (3rd Cir. 1991); Gestetner Corp. v. Case Equip. Co., 815 F.2d 806 (1st Cir. 1987). The same reasoning can be extended to a term that indicates that the contract is similar to, but does not qualify as, an output or requirement contract. See e.g., PMC Corp. v. Houston Wire and Cable Co. 797 A.2d 125 (N.H. 2002). Similarly, a term that refers to a master contract that provides a basis for determining a quantity satisfies this requirement. See e.g., Reigel Fiber Corp. v. Anderson Gin Co., 512 F.2d 784 (5th Cir.1975). If a specific amount is stated in the record, even if not accurately stated, recovery is limited to the stated amount. However, the price, time and place of payment or delivery, the general quality of the goods, or any particular warranties need not be included.

Special emphasis must be placed on the permissibility of omitting the price term. In many valid contracts for sale the parties do not mention the price in express terms. The buyer is bound to pay and the seller to accept a reasonable price, which the trier of the fact will determine. Frequently the price is not mentioned at all since the parties have based their agreement on a price list or catalogue known to both of them, and the list or catalogue serves as an efficient safeguard against perjury. Also, “market” prices and valuations that are current in the vicinity constitute a similar check. Of course, if the “price” consists of goods rather than money, the quantity of goods must be stated.

There are only three definite and invariable requirements for the memorandum made by subsection (1). First, the memorandum must evidence a contract for the sale of goods; second, the memorandum must be signed; and third, the memorandum must have a quantity term or a method to determine the quantity.

2. The prior version of subsection (1) began with the phrase “Except as otherwise provided in this section.” This language has been deleted. This change was made to provide that the statement of the three statutory exceptions in subsection (3) should not be read as limiting under subsection (1) the possibility that a promisor will be rogram to raise the statute-of-frauds defense in appropriate cases.

3. “Partial performance” as a substitute for the required record can validate the contract only for the goods which have been accepted or for which payment has been made and accepted.

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

Part performance by the buyer requires that the buyer deliver something that is accepted by the seller as the 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. When the seller accepts partial payment for a single item the statute is satisfied as to that item. See Lockwood v. Smigel, 18 Cal App.3d 800, 99 Cal Rept. 289 (1971).

A merchant includes a person “that by occupation purports to have knowledge or skill peculiar to the practices or goods involved in the transaction.” Section 2-104(1)(emphasis supplied). Thus, a professional or a farmer should be considered a merchant because the practice of objecting to an improper confirmation ought to be familiar to any person in business.

Cross References:

Definitional Cross References:

Cross-References.

“Action” defined, see N.D.C.C. § 41-01-09(2)(a).

Additional terms in acceptance or confirmation, see N.D.C.C. § 41-02-14.

“Contract” defined, see N.D.C.C. § 41-01-09(2)( l ).

Modification, rescission and waiver, see N.D.C.C. § 41-02-16.

Parol or extrinsic evidence, see N.D.C.C. § 41-02-09.

Price payable in money, goods, realty, or otherwise, see N.D.C.C. § 41-02-21.

41-02-09. (2-202) Final written expression — Parol or extrinsic evidence.

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

1. By course of performance, course of dealing, or usage of trade (section 41-01-17); and
2. By evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.
3. Whether a writing is final, and whether a final writing is also complete, are issues for the court. This section rejects any assumption that because a record has been worked out which is final on some matters, it is to be taken as including all the matters agreed upon. If the additional terms are those that, if agreed upon, 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. This section is not intended to suggest what should be the evidentiary strength of a merger clause as evidence of the mutual intent that the record be final and complete. That determination depends upon the particular circumstances of each case.
4. This section does not exclude evidence introduced to show that the contract is avoidable for misrepresentation, mistake, or duress, or that the contract or a term is unenforceable because of unconscionability. This section also does not operate to exclude evidence of a subsequent modification or evidence that, for the purpose of claiming excuse, both parties assumed that a certain event would not occur.
5. Issues of interpretation are generally left to the courts. In interpreting terms in a record, subsection (2) permits either party to introduce evidence drawn from a course of performance, a course of dealing, or a usage of trade without any preliminary determination by the court that the term at issue is ambiguous. This article takes no position on whether a preliminary determination of ambiguity is a condition to the admissibility of evidence drawn from any other source or on whether a contract clause can exclude an otherwise applicable implied-in-fact source.

Source: S.L. 1965, ch. 296, § 1; 2007, ch. 354, § 8.

Official Comments.

1. Subsection (1) codifies the parol evidence rule. The operation of this rule depends on the intention of both parties that the terms in a record are the “final expression of their agreement with respect to the included terms.” Without this mutual intention to integrate the record, the parol evidence rule does not apply to exclude evidence of other terms allegedly agreed to prior to or contemporaneously with the record. Unless there is a final record, these alleged terms are provable as part of the agreement by relevant evidence from any credible source. When each party sends a confirmatory record, mutual intention to integrate the agreement is presumed for terms “with respect to which the confirmatory records of the parties agree.”

2. Because a record is final for the included terms (an integration), this does not mean that the parties intended that the record contain all the terms of their agreement (a total integration). If a record is final but not complete and exclusive, it cannot be contradicted by evidence of prior agreements reflected in a record or prior or contemporaneous oral agreements, but it can be supplemented by other evidence, drawn from any source, of consistent additional terms. Even if the record is final, complete and exclusive, it can be supplemented by evidence of noncontradictory terms drawn from an applicable course of performance, course of dealing, or usage of trade unless those sources are carefully negated by a term in the record. If the record is final, complete and exclusive it cannot be supplemented by evidence of terms drawn from other sources, even terms that are consistent with the record.

Cross References:

Definitional Cross References:

Cross-References.

Additional terms in acceptance or confirmation, see N.D.C.C. § 41-02-14.

Course of dealing and usage of trade, see N.D.C.C. § 41-01-17.

Exclusion or modification of warranties, see N.D.C.C. § 41-02-33.

Unconscionable contract or clause, see N.D.C.C. § 41-02-19.

41-02-10. (2-203) Seals inoperative.

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

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Changes:

Former Section 1-101.

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-References:

Definitional Cross References:

Cross-References.

Firm offers, see N.D.C.C. § 41-02-12.

Collateral References.

67 Am. Jur. 2d, Sales, § 104.

41-02-11. (2-204) Formation in general.

1. A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.
2. An agreement sufficient to constitute a contract for sale may be found even though the moment of its making is undetermined.
3. Even though one or more terms are left open, a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.
4. Subsections (4)(a) and (b) are derived from Sections 14(a) and (b) of the Uniform Electronic Transactions Act. Subsection (4)(a) confirms that contracts may be formed by machines functioning as electronic agents for the parties to a transaction. This subsection is intended to negate any claim that lack of human intent, at the time of contract formation, prevents contract formation. When machines are involved, the requisite intention to contract flows from the programming and use of the machine. This provision, along with sections 2-211, 2-212, and 2-213, is intended to remove barriers to electronic contract formation.
5. When the requisite intent to enter into a contract exists, subsection (4)(b) validates contracts formed by an individual and an electronic agent. This subsection validates an anonymous click-through transaction. As with subsection (4)(a), the intent to contract by means of an electronic agent comes from the rogramming and use of the machine. The requisite intent to contract by the individual is found by the acts of the individual that the individual has reason to know will be interpreted by the machine as allowing the machine to complete the transaction or performance, or that will be interpreted by the machine as signifying acceptance on the part of the individual. This intent is only found, though, when the individual is free to refuse to take the actions that the machine will interpret as acceptance or allowance to complete the transaction. For example, if A goes to a website that provides for purchasing goods over the Internet, and after choosing items to be purchased is confronted by a screen which advises her that the transaction will be completed if A clicks “I agree,” then A will be bound by the click if A knew or had reason to know that the click would be interpreted as signifying acceptance and A was also free to refuse to take the final action. This provision does not, however, provide for a determination of what terms exist in the agreement. That question is governed by Section 2-207.
6. Nothing in this section is intended to restrict equitable defenses, such as fraud or mistake, in electronic contract formation. However, because the law of electronic mistake is not well developed, and because factual issues may arise that are not easily resolved by legal standards developed for nonelectronic transactions, courts should not automatically apply standards developed in other contexts. The specific differences between electronic and nonelectronic transactions should also be factored in to resolve equitable claims in electronic contracts.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

1. Subsection (1) sets forth the basic policy to recognize any manner of expression of agreement. In addition to traditional contract formation by oral or written agreement, or by performance, subsection (1) provides that an agreement may be made by electronic means. Regardless of how the agreement is formed under this section, the legal effect of the agreement is subject to the other provisions of this Article.

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

3. Subsection (3) states the principle for “open terms” which underlies later sections of this Article. If the parties intend to enter into a binding agreement, this subsection recognizes the agreement as valid in law, despite missing terms, if there is any reasonably certain basis for granting a remedy based on commercial standards of indefiniteness. Neither certainty for what the parties were to do nor a finding of the exact amount of damages is required. Neither is the fact that one or more terms are left to be agreed upon enough by itself to defeat an otherwise adequate agreement. This Act makes 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 the parties have intended to conclude a binding agreement, but their actions may be conclusive on the matter despite the omissions.

Cross References:

Definitional Cross References:

Cross-References.

Additional terms in acceptance or confirmation, see N.D.C.C. § 41-02-14.

Bill of sale, filing, see N.D.C.C. § 47-19-50.

Course of performance or practical construction, see N.D.C.C. § 41-02-17.

Formal requirements, statute of frauds, see N.D.C.C. § 41-02-08.

Modification, rescission and waiver, see N.D.C.C. § 41-02-16.

Offer and acceptance, see N.D.C.C. §§ 41-02-12, 41-02-13.

Open terms, see N.D.C.C. §§ 41-02-22 to 41-02-28.

Personal property transfers, see N.D.C.C. ch. 47-11.

Supplementary general principles of law applicable, see N.D.C.C. § 41-01-03.

Unconscionable contract or clause, see N.D.C.C. § 41-02-19.

41-02-12. (2-205) Firm offers.

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

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Changes:

Former Section 1-101.

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:

Definitional Cross References:

Cross-References.

Formal requirements, statute of frauds, see N.D.C.C. § 41-02-08.

Rules of construction, variation by agreement, see N.D.C.C. § 41-01-16.

Unconscionable contract or clause, see N.D.C.C. § 41-02-19.

Collateral References.

Sales 22, 23.

67 Am. Jur. 2d, Sales, § 132.

77A C.J.S. Sales, § 41.

41-02-13. (2-206) Offer and acceptance in formation of contract.

1. Unless otherwise unambiguously indicated by the language or circumstances:
   1. An offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances.
   2. An order or other offer to buy goods for prompt or current shipment shall be construed as inviting acceptance either by a prompt promise to ship or by the prompt or current shipment of conforming or nonconforming goods but such a shipment of nonconforming goods does not constitute an acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer.
2. If the beginning of a requested performance is a reasonable mode of acceptance, an offeror who is not notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance.
3. Subsection (3) makes it clear that an expression of acceptance can operate as an acceptance (i.e., create a contract) even though it contains terms that are not identical to those in the offer. This rule applies, however, only to an expression of acceptance that is not only seasonable but also “definite.” A purported expression of acceptance containing additional or different terms would not be a “definite” acceptance when the offeree’s expression clearly communicates to the offeror the offeree’s unwillingness to do business unless the offeror assents to those additional or different terms. This is not a definite acceptance since the offeree’s expression makes it clear that the offeree is not “accepting” anything; but rather that the offeree is indicating a willingness to do business only on the offeree’s terms and that the offeree is awaiting the offeror’s assent to those terms. (This result is consistent with the final clause of former Section 2-207(1).) In a situation in which the offer clearly indicates that the offeror is unwilling to do business on any terms other than those contained in the offer, and the offeree responds with an expression of acceptance that contains additional or different terms, a court could also conclude that the offeree’s response does not constitute a definite expression of acceptance.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

1. Subsection (1)(b) deals with a shipment that contains defective goods which is made following an order for the goods. The nonconforming shipment is normally understood as intended to close the bargain even though it constitutes a breach. However, the seller by stating that the shipment is nonconforming and is offered only as an accommodation to the buyer keeps the shipment of from operating as an acceptance.

2. The mirror image rule is rejected in subsection (3), but any responsive record must still be reasonably understood as an “acceptance” and not as a proposal for a different transaction. See Official Comment 2 to Section 2-207.

Definitional Cross References:

41-02-14. (2-207) Additional terms in acceptance or confirmation.

1. A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.
2. The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:
   1. The offer expressly limits acceptance to the terms of the offer;
   2. They materially alter it; or
   3. Notification of objection to them has already been given or is given within a reasonable time after notice of them is received.
3. Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this title.
4. An “agreement” may include terms derived from a course of performance, a course of dealing, and usage of trade. See Sections 1-201(a)(2) and 1-303. If the members of a trade, or if the contracting parties, expect to be bound by a term that appears in the record of only one of the contracting parties, that term is part of the agreement. However, repeated use of a particular term or repeated failure to object to a term on another’s record is not normally sufficient in itself to establish a course of performance, a course of dealing or a trade usage.
5. The section omits any specific treatment of terms attached to the goods, or in or on the container in which the goods are delivered. This article takes no position on whether a court should follow the reasoning in Step-Saver Data Systems, Inc. v. Wyse Technology, 939 F.2d 91 (3d Cir. 1991) and Klocek v. Gateway, Inc. 104 F. Supp. 2d 1332 (D. Kan. 2000) (original 2-207 governs) or the contrary reasoning in Hill v. Gateway 2000, 105 F.3d 1147(7th Cir. 1997) (original 2-207 inapplicable).

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

1. This section applies to all contracts for the sale of goods, and it is not limited only to those contracts where there has been a “battle of the forms.”

2. This section applies only when a contract has been created under another section of this Article. The purpose of this section is solely to determine the terms of the contract. When forms are exchanged before or during performance, the result from the application of this section differs from the prior Section 2-207 of this Article and the common law in that this section gives no preference to either the first or the last form; the same test is applied to the terms in each. Terms in a record that insist on all of that record’s terms and no other terms as a condition of contract formation have no effect on the operation of this section. When one party insists in that party’s record that its own terms are a condition to contract formation, if that party does not subsequently perform or otherwise acknowledge the existence of a contract, if the other party does not agree to those terms, the record’s insistence on its own terms will keep a contract from being formed under Sections 2-204 or 2-206, and this section is not applicable. As with original Section 2-207, the courts will have to distinguish between “confirmations” that are addressed in this section and “modifications” that are addressed in Section 2-209.

3. Terms of a contract may be found not only in the consistent terms of records of the parties but also from a straightforward acceptance of an offer, and an expression of acceptance accompanied by one or more additional terms might demonstrate the offeree’s agreement to the terms of the offer. If, for example, a buyer sent a purchase order with technical specifications and the seller responded with a record stating “Thank you for your order. We will fill it promptly. Note that we do not make deliveries after 3:00 p.m. on Fridays.” It might be reasonable to conclude that both parties agreed to the technical specifications.

Similarly, an offeree’s performance is sometimes the acceptance of an offer. If, for example, a buyer sends a purchase order, there is no oral or other agreement, and the seller delivers the goods in response to the purchase order – but the seller does not send the seller’s own acknowledgment or acceptance – the seller should normally be treated as having agreed to the terms of the purchase order.

If, however, parties exchange records with conflicting or inconsistent terms, but conduct by both parties recognizes the existence of a contract, subsection (a) provides that the terms of the contract are terms that appear in the records of both parties. But even when both parties send records, there could be nonverbal agreement to additional or different terms that appear in only one of two records. If, for example, both parties’ forms called for the sale of 700,000 nuts and bolts but the purchase order or another record of the buyer conditioned the sale on a test of a sample to see if the nuts and bolts would perform properly, the seller’s sending a small sample to the buyer might be construed to be an agreement to the buyer’s condition. It might also be found that the contract called for arbitration when both forms provided for arbitration but each contained immaterially different arbitration provisions.

In a rare case the terms in the records of both parties might not become part of the contract. This could be the case, for example, when the parties contemplated an agreement to a single negotiated record, and each party submitted to the other party similar proposals and then commenced performance, but the parties never reached a negotiated agreement because of the differences over crucial terms. There is a variety of verbal and nonverbal behavior that may be suggest agreement to another’s record. This section leaves the interpretation of that behavior to the discretion of the courts.

Cross References:

Definitional Cross References:

Cross-References.

Acceptance of goods by buyer, effect, see N.D.C.C. § 41-02-70.

Adequate assurance of performance, right to, see N.D.C.C. § 41-02-72.

Contractual modification or limitation of remedy, see N.D.C.C. § 41-02-98.

Excuse by failure of presupposed conditions, see N.D.C.C. § 41-02-78.

Excuse, procedure on notice claiming, see N.D.C.C. § 41-02-79.

Inspection of goods, buyer’s right to, see N.D.C.C. § 41-02-61.

Installment contracts, see N.D.C.C. § 41-02-75.

Liquidation or limitation of damages, see N.D.C.C. § 41-02-97.

Rightful rejection of goods, manner and effect of, see N.D.C.C. § 41-02-65.

Rules of construction, variation by agreement, see N.D.C.C. § 41-01-16.

Substituted performance, see N.D.C.C. § 41-02-77.

Transactions between merchants, see N.D.C.C. § 41-02-04.

Unconscionable contract or clause, see N.D.C.C. § 41-02-19.

41-02-15. (2-208) Course of performance or practical construction. [Repealed]

Repealed by S.L. 2007, ch. 354, § 29.

41-02-16. (2-209) Modification, rescission, and waiver.

1. An agreement modifying a contract within this chapter needs no consideration to be binding.
2. A signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded, but except as between merchants such a requirement on a form supplied by the merchant must be separately signed by the other party.
3. The requirements of the statute of frauds section of this chapter (section 41-02-08) must be satisfied if the contract as modified is within its provisions.
4. Although an attempt at modification or rescission does not satisfy the requirements of subsection 2 or 3, it can operate as a waiver.
5. A party who has made a waiver affecting an executory portion of the contract may retract the waiver by reasonable notification received by the other party that strict performance will be required of any term waived, unless the retraction would be unjust in view of a material change of position in reliance on the waiver.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Purposes of Changes and New Matter:

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

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

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

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

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

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

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

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

Cross References:

Definitional Cross References:

Cross-References.

“Agreement” defined, see N.D.C.C. §§ 41-01-09, 41-02-06.

“Cancellation” and “termination” distinguished, see N.D.C.C. § 41-02-06.

Course of performance or practical construction, see N.D.C.C. § 41-01-17.

Excuse by failure of presupposed conditions, see N.D.C.C. § 41-02-78.

Excuse, procedure on notice claiming, see N.D.C.C. § 41-02-79.

Formal requirements, statute of frauds, see N.D.C.C. § 41-02-08.

Obligation of good faith, see N.D.C.C. § 41-01-18.

Parol or extrinsic evidence, see N.D.C.C. § 41-02-09.

41-02-17. (2-210) Delegation of performance — Assignment of rights.

1. A party may perform that party’s duty through a delegate unless otherwise agreed or unless the other party has a substantial interest in having the other party’s original promisor perform or control the acts required by the contract. No delegation of performance relieves the party delegating of any duty to perform or any liability for breach.
2. Except as otherwise provided in section 41-09-68, unless otherwise agreed, all rights of either seller or buyer can be assigned except when the assignment would materially change the duty of the other party, or increase materially the burden or risk imposed on the other party by that party’s contract, or impair materially that party’s chance of obtaining return performance. A right to damages for breach of the whole contract or a right arising out of the assignor’s due performance of the assignor’s entire obligation can be assigned despite agreement otherwise.
3. The creation, attachment, perfection, or enforcement of a security interest in the seller’s interest under a contract is not a transfer that materially changes the duty of or increases materially the burden or risk imposed on the buyer or impairs materially the buyer’s chance of obtaining return performance within the purview of subsection 2 unless, and then only to the extent that, enforcement actually results in a delegation of material performance of the seller. Even in that event, the creation, attachment, perfection, and enforcement of the security interest remain effective, but:
   1. The seller is liable to the buyer for damages caused by the delegation to the extent that the damages could not reasonably be prevented by the buyer; and
   2. A court having jurisdiction may grant other appropriate relief, including cancellation of the contract for sale or an injunction against enforcement of the security interest or consummation of the enforcement.
4. Unless the circumstances indicate the contrary, a prohibition of assignment of the contract is to be construed as barring only the delegation to the assignee of the assignor’s performance.
5. An assignment of the contract or of all my rights under the contract or an assignment in similar general terms is an assignment of rights and unless the language or the circumstances (as in an assignment for security) indicate the contrary, it is a delegation of performance of the duties of the assignor and its acceptance by the assignee constitutes a promise by the assignee to perform those duties. This promise is enforceable by either the assignor or the other party to the original contract.
6. The other party may treat any assignment which delegates performance as creating reasonable grounds for insecurity and may without prejudice to that party’s rights against the assignor demand assurances from the assignee (section 41-02-72).
7. This section is not intended as a complete statement of the law of delegation and assignment but is limited to clarifying a few points doubtful under the case law. In particular, neither this section nor this Article touches directly on the questions as the need or effect of notice of the assignment, the rights of successive assignees, or any question of the form of an assignment, either as between the parties or as against any third parties. Some of these questions are dealt with in Article 9.

Source: S.L. 1965, ch. 296, § 1; 2001, ch. 361, § 12.

Official Comments.

1. This section conforms with revised Article 9.

2. The principles in this section are consistent with the recognition that both the assignment of rights and the delegation of duties are generally normal and permissible incidents of a contract for the sale of goods.

3. Subsection (1)(a) sets out the effect of an assignment by either the seller or the buyer of the rights but not the duties arising under the contract for sale. These rights may effectively be assigned to a third party unless the assignment materially increases the duty, burden or risk, or materially impairs expected performance to the other party, or, subject to subsection (1)(b) and Section 9-406, unless the parties have agreed otherwise. Even then, a right to damages for breach of the whole contract or a right arising out of the assignor’s due performance of the assignor’s entire obligation can be assigned despite contrary agreement.

An assignment, however, is not effective if it would “materially change the duty of the other party, increase materially the burden or risk imposed on that party by the contract, or increase materially that party’s likelihood of obtaining return performance.” Subsection (1)(a). The cases where these limitations apply are rare. For example, a seller that has fully performed the contract should always be able to assign the right to payment. This is the basis for most accounts receivable financing. If, however, the contract is still executory, the assignment of the right to payment to a third person might decrease the seller’s incentive to perform and, thus, increase the buyer’s risk. Similarly, the buyer’s assignment of the right to receive a fixed quantity of goods should not usually be objectionable but if the parties have a “requirements” contract, the assignment could increase materially the seller’s risk.

Subsection (1)(a) is subject to Section 9-406 of revised Article 9. That provision makes rights to payment for goods sold (“accounts”), whether or not earned, freely alienable notwithstanding a contrary agreement or rule of law.

4. Subsection (1)(a) is subject to subsection (1)(b), which conforms with revised Article 9. If an assignment of rights creates a security interest in the seller’s interest under the contract, including a right to future payments, subsection (1)(b) states that there is no material impairment under subsection (1)(a) unless the creation, attachment, perfection and enforcement “results in a delegation of material performance of the seller.” This is unlikely in most assignments, and the buyer’s basic protection is to demand adequate assurance of due performance from the seller if the assignment creates reasonable grounds for insecurity.

5. Occasionally a seller or buyer will delegate duties under the contract without also assigning rights. For example, a dealer might delegate its duty to procure and deliver a fixed quantity of goods to the buyer to a third party. In these cases, subsection (2) sets the limitations on that power. A contract term prohibiting the delegation of duties renders an attempted delegation ineffective. Subsection (2)(d).

If the third person accepts the delegation, an enforceable promise is made both to the delegator and the person entitled under the contract to perform those duties. Subsection (2)(b). In short, as to the person entitled under the contract a third party beneficiary contract is created. However, the delegator’s duty to perform under the contract is not discharged unless the person entitled to performance agrees to substitute the delegatee for the delegator (a novation). See subsection (2)(a), last sentence.

The person entitled under the contract may treat any delegation of duties as reasonable grounds for insecurity and may demand adequate assurance of due performance for the assignee-delegatee. Subsection (2)(c).

In any event, a delegation of duties is not effective if the person entitled under the contract has a “substantial interest in having the original promisor perform or control the performance required by the contract.” Subsection (2)(a).

6. In the case of ambiguity, subsection (3) provides a rule of interpretation to determine when an assignment of rights should also be considered a delegation of duties. The preference is to construe the language as both a delegation of duties as well as an assignment of rights.

Cross References:

Definitional Cross References:

Cross-References.

Adequate assurance of performance, right to, see N.D.C.C. § 41-02-72.

Rights and title of consignee, see N.D.C.C. § 41-09-39.

Letters of credit, see N.D.C.C. §§ 41-05-01 to 41-05-18.

Output, requirements and exclusive dealings, see N.D.C.C. § 41-02-23.

Secured transactions, see N.D.C.C. ch. 41-09.

41-02-18. (2-301) General obligations of parties.

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

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Changes:

Rewritten.

Purposes of Changes:

Former Section 1-101.

Cross References:

Definitional Cross References:

Cross-References.

Course of dealing and usage of trade, see N.D.C.C. § 41-01-17.

Course of performance or practical construction, see N.D.C.C. § 41-01-17.

Improper tender or delivery, cure by seller, see N.D.C.C. § 41-02-56.

Installment contracts, see N.D.C.C. § 41-02-75.

Modification, rescission and waiver, see N.D.C.C. § 41-02-16.

Remedies liberally administered, see N.D.C.C. § 41-01-19.

41-02-19. (2-302) Unconscionable contract or clause.

1. If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made, the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.
2. When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable, the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose, and effect to aid the court in making the determination.
3. This section is addressed to the court, and the decision is to be made by the court. The evidence referred to in subsection (2) is for the court’s consideration, not the trier of fact. Only the agreement which results from the court’s action on these matters is to be submitted to the general trier of the facts.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

1. This section makes it possible for a court to police explicitly against the contracts or terms which the court finds to be unconscionable instead of attempting to achieve the result by an adverse construction of language, by manipulation of the rules of offer and acceptance, or by a determination that the term is contrary to public policy or to the dominant purpose of the contract. The section allows a court to pass directly on the unconscionability of the contract or a particular term of the contract and to make a conclusion of law as to its unconscionability. Courts have been particularly vigilant when the contract at issue is set forth in a standard form. The principle is one of prevention of oppression and unfair surprise and not of disturbance of allocation of risks because of superior bargaining power. The basic test is whether, in the light of the general commercial background and the commercial needs of the particular trade or case, the term or contract involved is so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract.

2. Under this section, the court, in its discretion, may refuse to enforce the contract as a whole if the whole contract is determined to be unconscionable, or the court may strike any single term or group of terms which are unconscionable or which are contrary to the essential purpose of the agreement or to material terms to which the parties have expressly agreed, or the court may simply limits the unconscionable results.

Definitional Cross References:

41-02-20. (2-303) Allocation or division of risks.

When this chapter allocates a risk or a burden as between the parties “unless otherwise agreed”, the agreement may not only shift the allocation but may also divide the risk or burden.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

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.
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.

Compare Section 1-102(4).

Cross References:

Definitional Cross References:

Cross-References.

“Agreement” defined, see N.D.C.C. §§ 41-01-09, 41-02-06.

Rules of construction, variation by agreement, see N.D.C.C. § 41-01-16.

Unconscionable contract or clause, see N.D.C.C. § 41-02-19.

Collateral References.

67 Am. Jur. 2d, Sales, §§ 378-394.

Who bears risk of loss of goods under UCC §§ 2-509, 2-510, 66 A.L.R.3d 145.

Risk of loss of goods in “sale or return” transaction under UCC § 2-327, 66 A.L.R.3d 190.

41-02-21. (2-304) Price payable in money, goods, realty, or otherwise.

1. The price may be made payable in money or otherwise. If it is payable in whole or in part in goods, each party is a seller of the goods which that party is to transfer.
2. Even though all or part of the price is payable in an interest in realty, the transfer of the goods and the seller’s obligations with reference to them are subject to this chapter, but not the transfer of the interest in realty or the transferor’s obligations in connection therewith.
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.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

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.

Cross References:

Definitional Cross References:

Cross-References.

Authority of agent to receive price, see N.D.C.C. § 3-02-11.

Contract for sale of goods to be severed from realty, recording, see N.D.C.C. § 41-02-07.

Rules of construction, variation by agreement, see N.D.C.C. § 41-01-16.

Supplementary general principles of law applicable, see N.D.C.C. § 41-01-03.

41-02-22. (2-305) Open price term.

1. The parties if they so intend can conclude a contract for sale even though the price is not settled. In such a case, the price is a reasonable price at the time for delivery if:
   1. Nothing is said as to price;
   2. The price is left to be agreed by the parties and they fail to agree; or
   3. The price is to be fixed in terms of some agreed market or other standard as set or recorded by a third person or agency and it is not so set or recorded.
2. A price to be fixed by the seller or by the buyer means a price for that party to fix in good faith.
3. When a price left to be fixed otherwise than by agreement of the parties fails to be fixed through fault of one party, the other party may, at that party’s option, treat the contract as canceled or fix a reasonable price.
4. If, however, the parties intend not to be bound unless the price be fixed or agreed and it is not fixed or agreed, there is no contract. In such a case, the buyer must return any goods already received or, if unable so to do, must pay their reasonable value at the time of delivery and the seller must return any portion of the price paid on account.
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).

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

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.

Cross References:

Definitional Cross References:

Cross-References.

Anticipatory repudiation, see N.D.C.C. § 41-02-73.

Breach of contract, buyer’s procurement of substitute, see N.D.C.C. § 41-02-91.

Breach of contract, seller’s resale, see N.D.C.C. § 41-02-85.

Buyer’s right to specific performance, see N.D.C.C. § 41-02-95.

Contract not indefinite, see N.D.C.C. § 41-02-11, subs. 3.

Obligation of good faith, see N.D.C.C. §§ 41-01-18, 41-02-03.

Options and cooperation respecting performance, see N.D.C.C. § 41-02-28.

41-02-23. (2-306) Output, requirements, and exclusive dealings.

1. A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded.
2. A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes, unless otherwise agreed, an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.
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.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

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.

Cross References:

Definitional Cross References:

Cross-References.

Adequate assurance of performance, right to, see N.D.C.C. § 41-02-72.

Delegation of performance, assignment of rights, see N.D.C.C. § 41-02-17.

Obligation of good faith, see N.D.C.C. § 41-01-18.

41-02-24. (2-307) Delivery in single lot or several lots.

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

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Changes:

Former Section 1-101.

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.
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.

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.

Cross References:

Definitional Cross References:

Cross-References.

Adequate assurance of performance, right to, see N.D.C.C. § 41-02-72.

Improper delivery, buyer’s rights, see N.D.C.C. § 41-02-64.

“Party” defined, see N.D.C.C. § 41-01-09(2)(z).

Tender of delivery, see N.D.C.C. §§ 41-02-51, 41-02-56.

Collateral References.

Sales 163, 183, 192.

67 Am. Jur. 2d, Sales, §§ 502 et seq.

77A C.J.S. Sales, §§ 263-271, 368-371.

Buyer’s acceptance of delayed or defective installment of goods as waiver of similar default as to later installments, 32 A.L.R.2d 1117.

41-02-25. (2-308) Absence of specified place for delivery.

Unless otherwise agreed:

1. The place for delivery of goods is the seller’s place of business or, if the seller has none, the seller’s residence; but
2. In a contract for sale of identified goods which to the knowledge of the parties at the time of contracting are in some other place, that place is the place for their delivery; and
3. Documents of title may be delivered through customary banking channels.
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”.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Changes:

Former Section 1-101.

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.

Cross References:

Definitional Cross References:

Cross-References.

Letters of credit, see N.D.C.C. §§ 41-05-01 to 41-05-18.

Payment by buyer before inspection, see N.D.C.C. § 41-02-60.

Shipment by seller, see N.D.C.C. §§ 41-02-52, 41-02-53.

Tender of delivery, see N.D.C.C. § 41-02-51.

Collateral References.

Sales 79, 150(1).

67 Am. Jur. 2d, Sales, § 270.

77A C.J.S. Sales, § 279.

41-02-26. (2-309) Absence of specific time provisions — Notice of termination.

1. The time for shipment or delivery or any other action under a contract if not provided in this chapter or agreed upon shall be a reasonable time.
2. If the contract provides for successive performances but is indefinite in duration, it is valid for a reasonable time but unless otherwise agreed may be terminated at any time by either party.
3. Termination of a contract by one party except on the happening of an agreed event requires that reasonable notification be received by the other party and an agreement dispensing with notification is invalid if its operation would be unconscionable.
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.
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.
11. The last sentence of subsection (3) is new and is based on Section 1-302(b). It provides for greater party autonomy. In an appropriate circumstance, the parties may agree that the standard for notice is no notice at all.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Changes:

Former Section 1-101.

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.

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.

Cross References:

Definitional Cross References:

Cross-References.

Adequate assurance of performance, right to, see N.D.C.C. § 41-02-72.

Anticipatory repudiation, see N.D.C.C. § 41-02-73.

“Cancellation” and “termination” distinguished, see N.D.C.C. § 41-02-06.

C.I.F. and C. & F. terms, see N.D.C.C. §§ 41-02-37, 41-02-38.

Contract not indefinite, see N.D.C.C. § 41-02-11.

Documents, delivery on acceptance or payment of draft, see N.D.C.C. § 41-02-62.

Inspection of goods, buyer’s right to, see N.D.C.C. § 41-02-61.

Obligation of good faith, see N.D.C.C. §§ 41-01-18, 41-02-03.

Payment by buyer, see N.D.C.C. §§ 41-02-59, 41-02-60.

Reasonable time, see N.D.C.C. § 41-01-13.

Seller’s remedies in general, see N.D.C.C. § 41-02-82.

Shipment by seller, see N.D.C.C. § 41-02-52.

Third-party beneficiaries of warranties, see N.D.C.C. § 41-02-35.

41-02-27. (2-310) Open time for payment or running of credit — Authority to ship under reservation.

Unless otherwise agreed:

1. Payment is due at the time and place at which the buyer is to receive the goods even though the place of shipment is the place of delivery.
2. If the seller is authorized to send the goods, the seller may ship them under reservation, and may tender the documents of title, but the buyer may inspect the goods after their arrival before payment is due unless such inspection is inconsistent with the terms of the contract (section 41-02-61).
3. If delivery is authorized and made by way of documents of title otherwise than by subsection 2, then payment is due regardless of where the goods are to be received:
   1. At the time and place at which the buyer is to receive delivery of the tangible documents; or
   2. At the time the buyer is to receive delivery of the electronic documents and at the seller’s place of business or if none, the seller’s residence.
4. If the seller is required or authorized to ship the goods on credit, the credit period runs from the time of shipment but postdating the invoice or delaying its dispatch will correspondingly delay the starting of the credit period.
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.

Source: S.L. 1965, ch. 296, § 1; 2005, ch. 354, § 4.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Changes:

Former Section 1-101.

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.

Cross References:

Definitional Cross References:

Cross-References.

Absence of specified place for delivery, see N.D.C.C. § 41-02-25.

Buyer’s right to inspection of goods, see N.D.C.C. § 41-02-61.

Payment by buyer before inspection, see N.D.C.C. § 41-02-60.

Risk of loss in absence of breach, see N.D.C.C. § 41-02-57.

Shipment under reservation, see N.D.C.C. § 41-02-53.

Tender of payment by buyer, see N.D.C.C. § 41-02-59.

Collateral References.

Sales 82, 168(2), 183.

67 Am. Jur. 2d, Sales, § 281.

77A C.J.S. Sales, §§ 368-371.

Validity and enforceability of contract which expressly leaves open for future agreement or negotiation the terms of payment for property, 68 A.L.R.2d 1221.

41-02-28. (2-311) Options and cooperation respecting performance.

1. An agreement for sale which is otherwise sufficiently definite (subsection 3 of section 41-02-11) to be a contract is not made invalid by the fact that it leaves particulars of performance to be specified by one of the parties. Any such specification must be made in good faith and within limits set by commercial reasonableness.
2. Unless otherwise agreed, specifications relating to assortment of the goods are at the buyer’s option and except as otherwise provided in subdivision c of subsection 1 and subsection 3 of section 41-02-36 specifications or arrangements relating to shipment are at the seller’s option.
3. If such specification would materially affect the other party’s performance but is not seasonably made or if one party’s cooperation is necessary to the agreed performance of the other but is not seasonably forthcoming, the other party in addition to all other remedies:
   1. Is excused for any resulting delay in that party’s own performance; and
   2. May also either proceed to perform in any reasonable manner or after the time for a material part of that party’s own performance treat the failure to specify or to cooperate as a breach by failure to deliver or accept the goods.
4. The remedy provided in subsection (3) is one which does not operate in the situation which falls within the scope of Section 2-614 on substituted performance. Where the failure to cooperate results from circumstances set forth in that Section, the other party is under a duty to proffer or demand (as the case may be) substitute performance as a condition to claiming rights against the noncooperating party.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

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.

Cross References:

Definitional Cross References:

Cross-References.

Adequate assurance of performance, right to, see N.D.C.C. § 41-02-72.

“Agreement” defined, see N.D.C.C. § 41-01-09.

Contract not indefinite, see N.D.C.C. § 41-02-11, subs. 3.

Obligation of good faith, see N.D.C.C. § 41-01-18.

Substituted performance, see N.D.C.C. § 41-02-77.

Collateral References.

Sales 83, 154.

67 Am. Jur. 2d, Sales, § 479.

77A C.J.S. Sales, §§ 236, 237, 379.

Construction and effect of contract for sale of commodity or goods wherein quantity is described as “about” or “more or less” than an amount specified, 58 A.L.R.2d 377.

41-02-29. (2-312) Warranty of title and against infringement — Buyer’s obligation against infringement.

1. Subject to subsection 2, there is in a contract for sale a warranty by the seller that:
   1. The title conveyed shall be good, and its transfer rightful; and
   2. The goods shall be delivered free from any security interest or other lien or encumbrance of which the buyer at the time of contracting has no knowledge.
2. A warranty under subsection 1 will be excluded or modified only by specific language or by circumstances which give the buyer reason to know that the person selling does not claim title in the person selling or that the person selling is purporting to sell only such right or title as the person selling or a third person may have.
3. Unless otherwise agreed, a seller who is a merchant regularly dealing in goods of the kind warrants that the goods shall be delivered free of the rightful claim of any third person by way of infringement or the like but a buyer who furnishes specifications to the seller must hold the seller harmless against any such claim which arises out of compliance with the specifications.
4. This section rejects the cases which recognize the principle that infringements violate the warranty of title but deny the buyer a remedy unless he has been expressly prevented from using the goods. Under this Article “eviction” is not a necessary condition to the buyer’s remedy since the buyer’s remedy arises immediately upon receipt of notice of infringement; it is merely one way of establishing the fact of breach.
5. Subsection (2) recognizes that sales by sheriffs, executors, foreclosing lienors and persons similarly situated are so out of the ordinary commercial course that their peculiar character is immediately apparent to the buyer and therefore no personal obligation is imposed upon the seller who is purporting to sell only an unknown or limited right. This subsection does not touch upon and leaves open all questions of restitution arising in such cases, when a unique article so sold is reclaimed by a third party as the rightful owner.
6. The warranty of subsection (1) is not designated as an “implied” warranty, and hence is not subject to Section 2-316(3). Disclaimer of the warranty of title is governed instead by subsection (2), which requires either specific language or the described circumstances.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Changes:

Former Section 1-101.

Purposes of Changes:

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

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

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

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

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

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

Cross References:

Definitional Cross References:

Cross-References.

Acceptance of goods by buyer, effect of, see N.D.C.C. § 41-02-70.

Adequate assurance of performance, right to, see N.D.C.C. § 41-02-72.

Exclusion or modification of warranties, see N.D.C.C. § 41-02-33.

Good faith purchase of goods, see N.D.C.C. § 41-02-48.

Limitation of actions, see N.D.C.C. § 41-02-104.

Obligation of good faith, see N.D.C.C. § 41-01-18.

41-02-30. (2-313) Express warranties by affirmation, promise, description, sample.

1. Express warranties by the seller are created as follows:
   1. Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.
   2. Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.
   3. Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model.
2. It is not necessary to the creation of an express warranty that the seller use formal words such as “warrant” or “guarantee” or that the seller have a specific intention to make a warranty, but an affirmation merely of the value of the goods or a statement purporting to be merely the seller’s opinion or commendation of the goods does not create a warranty.
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).
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.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Changes:

Former Section 1-101.

Purposes of Changes:

To consolidate and systematize basic principles with the result that:

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

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

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

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.

Cross References:

Definitional Cross References:

Cross-References.

Authority of agent to warrant property sold, see N.D.C.C. § 3-02-10.

Course of dealing and usage of trade, see N.D.C.C. § 41-01-17.

Exclusion or modification of warranties, see N.D.C.C. § 41-02-33.

Implied warranty of merchantability, see N.D.C.C. § 41-02-31.

Modification, rescission and waiver, see N.D.C.C. § 41-02-16.

Rules of construction, variation by agreement, see N.D.C.C. § 41-01-16.

Supplementary general principles of law applicable, see N.D.C.C. § 41-01-03.

Third-party beneficiaries of warranties, see N.D.C.C. § 41-02-35.

41-02-31. (2-314) Implied warranty — Merchantability — Usage of trade.

1. Unless excluded or modified (section 41-02-33), a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind. Under this section, the serving for value of food or drink to be consumed either on the premises or elsewhere is a sale.
2. Goods to be merchantable must be at least such as:
   1. Pass without objection in the trade under the contract description;
   2. In the case of fungible goods, are of fair average quality within the description;
   3. Are fit for the ordinary purposes for which such goods are used;
   4. Run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved;
   5. Are adequately contained, packaged, and labeled as the agreement may require; and
   6. Conform to the promises or affirmations of fact made on the container or label if any.
3. Unless excluded or modified (section 41-02-33), other implied warranties may arise from course of dealing or usage of trade.
4. 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 the goods. A contract for the sale of second-hand goods, however, involves only an obligation as is appropriate to the goods according to 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. The seller’s 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.
5. Although a seller may not be a “merchant” for the goods in question, if the seller states generally that the goods 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.”
6. The second sentence of subsection (1) covers the warranty for food and drink. The serving for value of food or drink for consumption on the premises or elsewhere is treated as a sale.
7. Suppose that an unmerchantable lawn mower causes personal injury to the buyer, who is operating the mower. Without more, the buyer can sue the seller for breach of the implied warranty of merchantability and recover for injury to person “proximately resulting” from the breach. Section 2-715(2)(b).
8. 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 that arise 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.
9. Paragraphs (a) and (b) of subsection (2) are to be read together. Both refer 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 about what quality is intended, the price at which a merchant closes a contract is an excellent indication of the nature and scope of the merchant’s obligation under the present section.
10. 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 (2)(c). As stated above, merchantability is also a part of the obligation owing to the buyer 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.
11. Paragraph (2)(d) on evenness of kind, quality and quantity follows case law. But precautionary language has been added as a remainder of the frequent usages of trade which permit substantial variations both with and without an allowance or an obligation to replace the varying units.
12. Paragraph (2)(e) applies only where the nature of the goods and of the transaction require a certain type of container, package or label. Paragraph (2)(f) applies, on the other hand, wherever there is a label or container on which representations are made, even though the original contract, either by express terms or usage of trade, may not have required either the labeling or the representation. This follows from the general obligation of good faith which requires that a buyer should not be placed in the position of reselling or using goods delivered under false representations appearing on the package or container. No problem of extra consideration arises in this connection since, under this Article, an obligation is imposed by the original contract not to deliver mislabeled articles, and the obligation is imposed where mercantile good faith so requires and without reference to the doctrine of consideration.
13. Exclusion or modification of the warranty of merchantability, or of any part of it, is dealt with in Section 2-316. That section must be read with particular reference to 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.
14. 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.
15. 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. An affirmative showing by the seller that the loss resulted from some action or event following the seller’s delivery of the goods can operate as a defense. Equally, evidence indicating that the seller exercised care in the manufacture, processing or selection of the goods is relevant to the issue of whether the warranty was in fact broken. An 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.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

1. The phrase “goods of that description” rather than the language from the original Article 2 “for which such goods are used” is used in subsection (2)(c). This change emphasizes the importance of the agreed description in determining fitness for ordinary purposes.

2. 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. See Section 2-316(3)(b). The warranty of merchantability also applies to sales for use as well as to sales for resale.

3. 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.

This opportunity does not resolve the tension between warranty law and tort law where goods cause personal injury or property damage. The primary source of that tension arises from disagreement over whether the concept of defect in tort and the concept of merchantability in Article 2 are coextensive where personal injuries are involved, i.e., if goods are merchantable under warranty law, can they still be defective under tort law, and if goods are not defective under tort law, can they be unmerchantable under warranty law? The answer to both questions should be no, and the tension between merchantability in warranty and defect in tort where personal injury or property damage is involved should be resolved as follows:

When recovery is sought for injury to person or property, whether goods are merchantable is to be determined by applicable state products liability law. When, however, a claim for injury to person or property is based on an implied warranty of fitness under Section 2-315 or an express warranty under Section 2-313 or an obligation arising under Section 2-313A or 2-313B, this Article determines whether an implied warranty of fitness or an express warranty was made and breached, as well as what damages are recoverable under Section 2-715.

To illustrate, suppose that the seller makes a representation about the safety of a lawn mower that becomes part of the basis of the buyer’s bargain. The buyer is injured when the gas tank cracks and a fire breaks out. If the lawnmower without the representation is not defective under applicable tort law, it is not unmerchantable under this section. On the other hand, if the lawnmower did not conform to the representation about safety, the seller made and breached an express warranty and the buyer may sue under Article 2.

Cross References:

Definitional Cross References:

Cross-References.

Course of dealing and usage of trade, see N.D.C.C. § 41-01-17.

Exclusion or modification of warranties, see N.D.C.C. § 41-02-33.

Implied warranty of fitness for particular purpose, see N.D.C.C. § 41-02-32.

“Merchant” defined, see N.D.C.C. § 41-02-04.

Obligation of good faith, see N.D.C.C. § 41-01-18.

41-02-32. (2-315) Implied warranty — Fitness for particular purpose.

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

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

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.
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.

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.

Cross References:

Definitional Cross References:

Cross-References.

Allocation or division of risks, see N.D.C.C. § 41-02-20.

Cumulation and conflict of warranties, see N.D.C.C. § 41-02-34.

Exclusion or modification of warranties, see N.D.C.C. § 41-02-33.

Implied warranty of merchantability, see N.D.C.C. § 41-02-31.

41-02-33. (2-316) Exclusion or modification of warranties.

1. Words or conduct relevant to the creation of an express warranty and words or conduct tending to negate or limit warranty shall be construed whenever reasonable as consistent with each other; but subject to the provisions of this chapter on parol or extrinsic evidence (section 41-02-09), negation or limitation is inoperative to the extent that such construction is unreasonable.
2. Subject to subsection 3, to exclude or modify the implied warranty of merchantability or any part of it the language must mention merchantability and in case of a writing must be conspicuous, and to exclude or modify any implied warranty of fitness the exclusion must be by a writing and conspicuous. Language to exclude all implied warranties of fitness is sufficient if it states, for example, that “There are no warranties which extend beyond the description on the face hereof”.
3. Notwithstanding subsection 2:
   1. Unless the circumstances indicate otherwise, all implied warranties are excluded by expressions like “as is”, “with all faults”, or other language which in common understanding calls the buyer’s attention to the exclusion of warranties and makes plain that there is no implied warranty.
   2. When the buyer before entering into the contract has examined the goods or the sample or model as fully as the buyer desired or has refused to examine the goods, there is no implied warranty with regard to defects which an examination ought in the circumstances to have revealed to the buyer.
   3. An implied warranty can also be excluded or modified by course of dealing or course of performance or usage of trade.
   4. The implied warranties of merchantability and fitness shall not be applicable to a contract for the sale of human blood, blood plasma, or other human tissue or organs from a blood bank or reservoir of such other tissues or organs. Such blood, blood plasma, or tissue or organs shall not for the purposes of this chapter be considered commodities subject to sale or barter, but shall be considered as medical services.
   5. With respect to the sale of cattle, hogs, sheep, and horses, there shall be no implied warranty that cattle, hogs, sheep, and horses are free from sickness or disease at the time the sale is consummated, conditioned upon reasonable showing by the seller that all state and federal regulations pertaining to animal health were complied with.
4. Remedies for breach of warranty can be limited in accordance with the provisions of this chapter on liquidation or limitation of damages and on contractual modification of remedy (sections 41-02-97 and 41-02-98).
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.
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.

Source: S.L. 1965, ch. 296, § 1; 1969, ch. 388, § 1; 1979, ch. 457, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

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.

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.

Cross References:

Definitional Cross References:

Cross-References.

Contractual modification or limitation of remedy, see N.D.C.C. § 41-02-98.

Course of dealing and usage of trade, see N.D.C.C. § 41-01-17.

Course of performance or practical construction, see N.D.C.C. § 41-01-17.

Farm equipment nonconformity remedies, see N.D.C.C. ch. 51-26.

Liquidation or limitation of damages, see N.D.C.C. § 41-02-97.

Parol or extrinsic evidence, see N.D.C.C. § 41-02-09.

Waiver, release or bar of cause of action arising from sale of personalty void, see N.D.C.C. § 51-07-09.

41-02-34. (2-317) Cumulation and conflict of warranties express or implied.

Warranties whether express or implied shall be construed as consistent with each other as cumulative, but if such construction is unreasonable, the intention of the parties shall determine which warranty is dominant. In ascertaining that intention, the following rules apply:

1. Exact or technical specifications displace an inconsistent sample or model or general language of description.
2. A sample from an existing bulk displaces inconsistent general language of description.
3. Express warranties displace inconsistent implied warranties other than an implied warranty of fitness for a particular purpose.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Changes:

Former Section 1-101.

Purposes of Changes:

1. The present section rests on the basic policy of this Article that no warranty is created except by some conduct (either affirmative action or failure to disclose) on the part of the seller. Therefore, all warranties are made cumulative unless this construction of the contract is impossible or unreasonable.

This Article thus follows the general policy of the Uniform Sales Act except that in case of the sale of an article by its patent or trade name the elimination of the warranty of fitness depends solely on whether the buyer has relied on the seller’s skill and judgment; the use of the patent or trade name is but one factor in making this determination.

2. The rules of this section are designed to aid in determining the intention of the parties as to which of inconsistent warranties which have arisen from the circumstances of their transaction shall prevail. These rules of intention are to be applied only where factors making for an equitable estoppel of the seller do not exist and where he has in perfect good faith made warranties which later turn out to be inconsistent. To the extent that the seller has led the buyer to believe that all of the warranties can be performed, he is estopped from setting up any essential inconsistency as a defense.

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

Cross-References:

Definitional Cross References:

Cross-References.

Implied warranty of fitness for particular purpose, see N.D.C.C. § 41-02-32.

41-02-35. (2-318) Third-party beneficiaries of warranties express or implied.

A seller’s warranty, whether express or implied, extends to any person who may reasonably be expected to use, consume, or be affected by the goods and who is injured by breach of the warranty. A seller may not exclude or limit the operation of this section with respect to injury to the person of an individual to whom the warranty extends.

Source: S.L. 1965, ch. 296, § 1; 1967, ch. 345, § 2.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Purposes:

1. The last sentence of this section does not mean that a seller is precluded from excluding or disclaiming a warranty which might otherwise arise in connection with the sale provided such exclusion or modification is permitted by Section 2-316. Nor does that sentence preclude the seller from limiting the remedies of his own buyer and of any beneficiaries, in any manner provided in Sections 2-718 or 2-719. To the extent that the contract of sale contains provisions under which warranties are excluded or modified, or remedies for breach are limited, such provisions are equally operative against beneficiaries of warranties under this section. What this last sentence forbids is exclusion of liability by the seller to the persons to whom the warranties which he has made to his buyer would extend under this section.
2. The purpose of this section is to give certain beneficiaries the benefit of the same warranty which the buyer received in the contract of sale, thereby freeing any such beneficiaries from any technical rules as to “privity.” It seeks to accomplish this purpose without any derogation of any right or remedy resting on negligence. It rests primarily upon the merchant-seller’s warranty under this Article that the goods sold are merchantable and fit for the ordinary purposes for which such goods are used rather than the warranty of fitness for a particular purpose. Implicit in the section is that any beneficiary of a warranty may bring a direct action for breach of warranty against the seller whose warranty extends to him [As amended in 1966].
3. The first alternative expressly includes as beneficiaries within its provisions the family, household and guests of the purchaser. Beyond this, the section in this form is neutral and is not intended to enlarge or restrict the developing case law on whether the seller’s warranties, given to his buyer who resells, extend to other persons in the distributive chain.

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

Cross References:

Definitional Cross References:

Cross-References.

Contractual modification or limitation of remedy, see N.D.C.C. § 41-02-98.

Exclusion or modification of warranties, see N.D.C.C. § 41-02-33.

Implied warranty of merchantability, see N.D.C.C. § 41-02-31.

Liquidation or limitation of damages, see N.D.C.C. § 41-02-97.

41-02-36. (2-319) F.O.B. and F.A.S. terms.

1. Unless otherwise agreed, the term F.O.B. (which means “free on board”) at a named place, even though used only in connection with the stated price, is a delivery term under which:
   1. When the term is F.O.B. the place of shipment, the seller must at that place ship the goods in the manner provided in this chapter (section 41-02-52) and bear the expense and risk of putting them into the possession of the carrier.
   2. When the term is F.O.B. the place of destination, the seller must at the seller’s own expense and risk transport the goods to that place and there tender delivery of them in the manner provided in this chapter (section 41-02-51).
   3. When under either subdivision a or b the term is also F.O.B. vessel, car, or other vehicle, the seller must in addition at the seller’s own expense and risk load the goods on board. If the term is F.O.B. vessel, the buyer must name the vessel and in an appropriate case the seller must comply with the provisions of this chapter on the form of bill of lading (section 41-02-40).
2. Unless otherwise agreed, the term F.A.S. vessel (which means “free alongside”) at a named port, even though used only in connection with the stated price, is a delivery term under which the seller must:
   1. At the seller’s own expense and risk deliver the goods alongside the vessel in the manner usual in that port or on a dock designated and provided by the buyer; and
   2. Obtain and tender a receipt for the goods in exchange for which the carrier is under a duty to issue a bill of lading.
3. Unless otherwise agreed in any case falling within subdivision a or c of subsection 1 or subsection 2, the buyer must seasonably give any needed instructions for making delivery, including when the term is F.A.S. or F.O.B. the loading berth of the vessel and in an appropriate case its name and sailing date. The seller may treat the failure of needed instructions as a failure of cooperation under this chapter (section 41-02-28). The seller may also at the seller’s option move the goods in any reasonable manner preparatory to delivery or shipment.
4. Under the term F.O.B. vessel or F.A.S. unless otherwise agreed, the buyer must make payment against tender of the required documents and the seller may not tender nor the buyer demand delivery of the goods in substitution for the documents.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

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:

Definitional Cross References:

Cross-References.

Options and cooperation respecting performance, see N.D.C.C. § 41-02-28.

Overseas shipment, form of bill of lading required, see N.D.C.C. § 41-02-40.

Shipment by seller, see N.D.C.C. § 41-02-52.

Tender of delivery by seller, see N.D.C.C. § 41-02-51.

Collateral References.

Sales 77, 79.

67 Am. Jur. 2d, Sales, §§ 524, 525.

77A C.J.S. Sales, §§ 155, 275, 291, 368-371.

41-02-37. (2-320) C.I.F. and C. & F. terms.

1. The term C.I.F. means that the price includes in a lump sum the cost of the goods and the insurance and freight to the named destination. The term C. & F. or C.F. means that the price so includes cost and freight to the named destination.
2. Unless otherwise agreed and even though used only in connection with the stated price and destination, the term C.I.F. destination or its equivalent requires the seller at the seller’s own expense and risk to:
   1. Put the goods into the possession of a carrier at the port for shipment and obtain a negotiable bill or bills of lading covering the entire transportation to the named destination;
   2. Load the goods and obtain a receipt from the carrier (which may be contained in the bill of lading) showing that the freight has been paid or provided for;
   3. Obtain a policy or certificate of insurance, including any war risk insurance, of a kind and on terms then current at the port of shipment in the usual amount, in the currency of the contract, shown to cover the same goods covered by the bill of lading and providing for payment of loss to the order of the buyer or for the account of whom it may concern, but the seller may add to the price the amount of the premium for any such war risk insurance;
   4. Prepare an invoice of the goods and procure any other documents required to effect shipment or to comply with the contract; and
   5. Forward and tender with commercial promptness all the documents in due form and with any endorsement necessary to perfect the buyer’s rights.
3. Unless otherwise agreed, the term C. & F. or its equivalent has the same effect and imposes upon the seller the same obligations and risks as a C.I.F. term except the obligation as to insurance.
4. Under the term C.I.F. or C. & F. unless otherwise agreed, the buyer must make payment against tender of the required documents and the seller may not tender nor the buyer demand delivery of the goods in substitution for the documents.
5. The seller is given the option of paying or providing for the payment of freight. He has no option to ship “freight collect” unless the agreement so provides. The rule of the common law that the buyer need not pay the freight if the goods do not arrive is preserved.
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 form designed for some other type of contract, the C.I.F. terms must prevail over printed clauses repugnant to them.
15. Under subsection (4) the fact that the seller knows at the time of the tender of the documents that the goods have been lost in transit does not affect his rights if he has performed his contractual obligations. Similarly, the seller cannot perform under a C.I.F. term by purchasing and tendering landed goods.
16. Under the C. & F. term, as under the C.I.F. term, title and risk of loss are intended to pass to the buyer on shipment. A stipulation in a C. & F. contract that the seller shall effect insurance on the goods and charge the buyer with the premium (in effect that he shall act as the buyer’s agent for that purpose) is entirely in keeping with the pattern. On the other hand, it often happens that the buyer is in a more advantageous position than the seller to effect insurance on the goods or that he has in force an “open” or “floating” policy covering all shipments made by him or to him, in either of which events the C. & F. term is adequate without mention of insurance.
17. It is to be remembered that in a French contract the term “C.A.F.” does not mean “Cost and Freight” but has exactly the same meaning as the term “C.I.F.” since it is merely the French equivalent of that term. The “A” does not stand for “and” but for “assurance” which means insurance.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

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.

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 again at an increased price fixed in the new contract or to cover the increase in price by additional insurance, and his buyer may not reject the documents on the ground that the original policy does not cover such higher price. If such a sub-buyer desires additional insurance he must procure it for himself.

Where the seller exercises an option to ship “freight collect” and to credit the buyer with the freight against the C.I.F. price, the insurance need not cover the freight since the freight is not at the buyer’s risk. On the other hand, where the seller prepays the freight upon shipping under a bill of lading requiring prepayment and providing that the freight shall be deemed earned and shall be retained by the carrier “ship and/or cargo lost or not lost,” or using words of similar import, he must procure insurance that will cover the freight, because notwithstanding that the goods are lost in transit the buyer is bound to pay the freight as part of the C.I.F. price and will be unable to recover it back from the carrier.

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.

Cross References:

Definitional Cross References:

Cross-References.

Improper tender or delivery, cure by seller, see N.D.C.C. § 41-02-56.

Inspection of goods by buyer, see N.D.C.C. §§ 41-02-38, 41-02-60, 41-02-61.

Letters of credit, see N.D.C.C. §§ 41-05-01 to 41-05-18.

Overseas shipment, form of bill of lading required, see N.D.C.C. § 41-02-40.

Payment by buyer, see N.D.C.C. §§ 41-02-38, 41-02-60, 41-02-61.

Risk of loss, see N.D.C.C. § 41-02-57.

Waiver of buyer’s objections by failure to particularize, see N.D.C.C. § 41-02-68.

Collateral References.

Sales 77(2).

67 Am. Jur. 2d, Sales, § 516.

77A C.J.S. Sales, §§ 154, 155, 375, 368-371.

41-02-38. (2-321) C.I.F. or C. & F. — Net landed weights — Payment on arrival — Warranty of condition on arrival.

Under a contract containing a term C.I.F. or C. & F.:

1. If the price is based on or is to be adjusted according to “net landed weights”, “delivered weights”, “outturn” quantity or quality, or the like, unless otherwise agreed the seller must reasonably estimate the price. The payment due on tender of the documents called for by the contract is the amount so estimated, but after final adjustment of the price a settlement must be made with commercial promptness.
2. An agreement described in subsection 1 or any warranty of quality or condition of the goods on arrival places upon the seller the risk of ordinary deterioration, shrinkage, and the like in transportation but has no effect on the place or time of identification to the contract for sale or delivery or on the passing of the risk of loss.
3. Unless otherwise agreed, if the contract provides for payment on or after arrival of the goods, the seller must before payment allow such preliminary inspection as is feasible but, if the goods are lost, delivery of the documents and payment are due when the goods should have arrived.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

None. [Note: This section is repealed under the current UCC. The official comment from this section prior to its repeal is set out below.]

Purposes:

Former Section 1-101.

Cross-References:

Definitional Cross References:

Cross-References.

“No arrival, no sale”, construction of term, see N.D.C.C. § 41-02-41.

Collateral References.

Sales 168, 183, 201(4).

67 Am. Jur. 2d, Sales, § 516.

77A C.J.S. Sales, §§ 317-319, 368-371.

41-02-39. (2-322) Delivery ex-ship.

1. Unless otherwise agreed, a term for delivery of goods “ex-ship” (which means from the carrying vessel) or in equivalent language is not restricted to a particular ship and requires delivery from a ship which has reached a place at the named port of destination where goods of the kind are usually discharged.
2. Under such a term unless otherwise agreed:
   1. The seller must discharge all liens arising out of the carriage and furnish the buyer with a direction which puts the carrier under a duty to deliver the goods; and
   2. The risk of loss does not pass to the buyer until the goods leave the ship’s tackle or are otherwise properly unloaded.
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.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

None. [Note: This section is repealed under the current UCC. The official comment from this section prior to its repeal is set out below.]

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.

Cross-References:

Definitional Cross References:

Cross-References.

Delivery alongside vessel, see N.D.C.C. § 41-02-36, subs. 2.

Collateral References.

Sales 77(2), 201(4).

67 Am. Jur. 2d, Sales, § 520.

77A C.J.S. Sales, §§ 279, 280, 407, 408.

41-02-40. (2-323) Form of bill of lading required in overseas shipment — Overseas.

1. If the contract contemplates overseas shipment and contains a term C.I.F. or C. & F. or F.O.B. vessel, the seller unless otherwise agreed must obtain a negotiable bill of lading stating that the goods have been loaded on board or, in the case of a term C.I.F. or C. & F., received for shipment.
2. If in a case within subsection 1 a tangible bill of lading has been issued in a set of parts, unless otherwise agreed if the documents are not to be sent from abroad the buyer may demand tender of the full set; otherwise only one part of the bill of lading need be tendered. Even if the agreement expressly requires a full set:
   1. Due tender of a single part is acceptable within the provisions of this chapter on cure of improper delivery (subsection 1 of section 41-02-56); and
   2. Even though the full set is demanded, if the documents are sent from abroad the person tendering an incomplete set may nevertheless require payment upon furnishing an indemnity which the buyer in good faith deems adequate.
3. A shipment by water or by air or a contract contemplating such shipment is “overseas” insofar as by usage of trade or agreement it is subject to the commercial, financing, or shipping practices characteristic of international deep water commerce.

Source: S.L. 1965, ch. 296, § 1; 2005, ch. 354, § 5.

Official Comments.

Prior Uniform Statutory Provisions:

None. [Note: This section is repealed under the current UCC. The official comment from this section prior to its repeal is set out below.]

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:

Definitional Cross References:

Cross-References.

Improper tender or delivery, cure by seller, see N.D.C.C. § 41-02-56.

Collateral References.

Sales 161, 162; Shipping 106.

67 Am. Jur. 2d, Sales, § 521.

80 C.J.S. Shipping, §§ 168-175.

41-02-41. (2-324) No arrival, no sale term.

Under a term “no arrival, no sale” or terms of like meaning, unless otherwise agreed:

1. The seller must properly ship conforming goods and if they arrive by any means the seller must tender them on arrival but the seller assumes no obligation that the goods will arrive unless the seller has caused the nonarrival; and
2. If without fault of the seller the goods are in part lost or have so deteriorated as no longer to conform to the contract or arrive after the contract time, the buyer may proceed as if there had been casualty to identified goods (section 41-02-76).
3. The seller’s duty to tender the agreed or declared goods if they do arrive is not impaired because of their delay in arrival or by their arrival after transshipment.
4. The phrase “to arrive” is often employed in the same sense as “no arrival, no sale” and may then be given the same effect. But a “to arrive” term, added to a C.I.F. or C. & F. contract, does not have the full meaning given by this section to “no arrival, no sale”. Such a “to arrive” term is usually intended to operate only to the extent that the risks are not covered by the agreed insurance and the loss or casualty is due to such uncovered hazards. In some instances the “to arrive” term may be regarded as a time of payment term, or, in the case of the reselling seller discussed in point 1 above, as negating responsibility for conformity of the goods, if they arrive, to any description which was based on his good faith belief of the quality. Whether this is the intention of the parties is a question of fact based on all the circumstances surrounding the resale and in case of ambiguity the rules of Sections 2-316 and 2-317 apply to preclude dishonor.
5. Paragraph (b) applies where goods arrive impaired by damage or partial loss during transportation and makes the policy of this Article on casualty to identified goods applicable to such a situation. For the term cannot be regarded as intending to give the seller an unforeseen profit through casualty; it is intended only to protect him from loss due to causes beyond his control.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

None. [Note: This section is repealed under the current UCC. The official comment from this section prior to its repeal is set out below.]

Purposes:

1. The “no arrival, no sale” term in a “destination” overseas contract leaves risk of loss on the seller but gives him an exemption from liability for non-delivery. Both the nature of the case and the duty of good faith require that the seller must not interfere with the arrival of the goods in any way. If the circumstances impose upon him the responsibility for making or arranging the shipment, he must have a shipment made despite the exemption clause. Further, the shipment made must be a conforming one, for the exemption under a “no arrival, no sale” term applies only to the hazards of transportation and the goods must be proper in all other respects.

The reason of this section is that where the seller is reselling goods bought by him as shipped by another and this fact is known to the buyer, so that the seller is not under any obligation to make the shipment himself, the seller is entitled under the “no arrival, no sale” clause to exemption from payment of damages for non-delivery if the goods do not arrive or if the goods which actually arrive are non-conforming. This does not extend to sellers who arrange shipment by their own agents, in which case the clause is limited to casualty due to marine hazards. But sellers who make known that they are contracting only with respect to what will be delivered to them by parties over whom they assume no control are entitled to the full quantum of the exemption.

2. The provisions of this Article on identification must be read together with the present section in order to bring the exemption into application. Until there is some designation of the goods in a particular shipment or on a particular ship as being those to which the contract refers there can be no application of an exemption for their non-arrival.

Cross References:

Definitional Cross References:

Cross-References.

Casualty to identified goods, see N.D.C.C. § 41-02-76.

Identification of goods, see N.D.C.C. §§ 41-02-49, 41-02-76.

Insurable interest in goods, see N.D.C.C. § 41-02-49.

Obligation of good faith, see N.D.C.C. § 41-01-18.

Collateral References.

67 Am. Jur. 2d, Sales, § 522.

41-02-42. (2-325) Letter of credit term — Confirmed credit.

1. Failure of the buyer seasonably to furnish an agreed letter of credit is a breach of the contract for sale.
2. The delivery to seller of a proper letter of credit suspends the buyer’s obligation to pay. If the letter of credit is dishonored, the seller may on seasonable notification to the buyer require payment directly from the buyer.
3. Unless otherwise agreed, the term “letter of credit” or “banker’s credit” in a contract for sale means an irrevocable credit issued by a financing agency of good repute and, if the shipment is overseas, of good international repute. The term “confirmed credit” means that the credit must also carry the direct obligation of such an agency which does business in the seller’s financial market.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Purposes:

To express the established commercial and banking understanding as to the meaning and effects of terms calling for “letters of credit” or “confirmed credit”:

1. Subsection (2) follows the general policy of this Article and Article 3 (Section 3-802) on conditional payment, under which payment by check or other short-term instrument is not ordinarily final as between the parties if the recipient duly presents the instrument and honor is refused. Thus the furnishing of a letter of credit does not substitute the financing agency’s obligation for the buyer’s, but the seller must first give the buyer reasonable notice of his intention to demand direct payment from him.

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

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

Cross References:

Definitional Cross References:

Cross-References.

Effect of instrument on obligation for which it is given, see N.D.C.C. § 41-03-36.

Good faith purchase of goods, see N.D.C.C. § 41-02-48.

Letters of credit, see N.D.C.C. §§ 41-05-01 to 41-05-18.

Payment by check conditional, see N.D.C.C. § 41-02-59, subs. 3.

Collateral References.

Banks and Banking 191; Sales 191.

67 Am. Jur. 2d, Sales, § 611.

77A C.J.S. Sales, §§ 368-371.

41-02-43. (2-326) Sale on approval and sale or return — Rights of creditors.

1. Unless otherwise agreed, if delivered goods may be returned by the buyer even though they conform to the contract, the transaction is:
   1. A “sale on approval” if the goods are delivered primarily for use.
   2. A “sale or return” if the goods are delivered primarily for resale.
2. Goods held on approval are not subject to the claims of the buyer’s creditors until acceptance. Goods held on sale or return are subject to such claims while in the buyer’s possession.
3. Any “or return” term of a contract for sale is to be treated as a separate contract for sale within the statute of frauds section of this chapter (section 41-02-08) and as contradicting the sale aspect of the contract within the provisions of this chapter on parol or extrinsic evidence (section 41-02-09).
4. Certain true consignments transactions were dealt with in former Sections 2-326(3) and 9-114. These provisions have been deleted and have been replaced by new provisions of Article 9. See e.g., Sections 9-109(a)(4); 9-103(d); 9-319.

Source: S.L. 1965, ch. 296, § 1; 2001, ch. 361, § 13.

Official Comments.

1. Both a “sale on approval” and a “sale or return” should be distinguished from other types of transactions with which they frequently have been confused. A “sale on approval,” sometimes also called a “sale on trial” or “on satisfaction,” deals with a contract under which the seller undertakes a risk in order to satisfy its prospective buyer with the appearance or performance of the goods that are sold. The goods are delivered to the prospective purchaser but they remain the property of the seller until the buyer accepts them. The price has already been agreed. The buyer’s willingness to receive and test the goods is the consideration for the seller’s engagement to deliver and sell. A “sale or return,” on the other hand, typically is a sale to a merchant whose unwillingness to buy is overcome by the seller’s engagement to take back the goods (or any commercial unit of goods) in lieu of payment if they fail to be resold. A “sale or return” is a present sale of goods which may be undone at the buyer’s option. Accordingly, subsection (2) provides that goods delivered on approval are not subject to the prospective buyer’s creditors until acceptance, and goods delivered in a sale or return are subject to the buyer’s creditors while in the buyer’s possession.

These two transactions are so strongly delineated in practice and in general understanding that every presumption runs against a delivery to a consumer being a “sale or return” and against a delivery to a merchant for resale being a “sale on approval.”

2. The right to return goods for failure to conform to the contract of sale does not make the transaction a “sale on approval” or “sale or return” and has nothing to do with this section or Section 2-327. This section is not concerned with remedies for breach of contract. It deals instead with a power given by the contract to turn back the goods even though they are wholly as warranted. This section nevertheless presupposes that a contract for sale is contemplated by the parties, although that contract may be of the particular character that this section addresses (i.e., a sale on approval or a sale or return).

If a buyer’s obligation as a buyer is conditioned not on its personal approval but on the article’s passing a described objective test, the risk of loss by casualty pending the test is properly the seller’s and proper return is at its expense. On the point of “satisfaction” as meaning “reasonable satisfaction” when an industrial machine is involved, this Article takes no position.

3. Subsection (3) resolves a conflict in the pre-UCC case law by recognizing that an “or return” provision is so definitely at odds with any ordinary contract for sale of goods that if written agreement is involved the “return” term must be contained in a written memorandum. The “or return” aspect of a sales contract must be treated as a separate contract under the statute of frauds section and as contradicting the sale insofar as questions of parol or extrinsic evidence are concerned.

Cross References:

Definitional Cross References:

Collateral References.

Sales 204-206.

67 Am. Jur. 2d, Sales, §§ 434 et seq.

77A C.J.S. Sales, §§ 1-9, 276, 395.

Duty of consignee as to valuation of goods on reshipment to consignor, 16 A.L.R.2d 866.

Reasonableness or personal judgment of buyer as test where goods are sold subject to being satisfactory to the buyer, 86 A.L.R.2d 200.

Time for return of goods sold on “sale or return” absent specific time provision in contract, 93 A.L.R.2d 342.

Conclusiveness of determination of third party whose approval is provided for by, contract for sale of goods, 7 A.L.R.3d 555.

“Sale on Approval” and “Sale or Return” Contracts under Uniform Commercial Code § 2-326. 44 A.L.R.6th 441.

Law Reviews.

“Sale Or Return” and “Delivery On Approval”, The Business Background for Dealing in These Terms, 2 Dak. L. Rev. 280 (1928).

Sales Distinguished from Other Transactions, 3 Dak. L. Rev. 3 (1930).

Sales Under C.O.D., F.O.B., and C.I.F. Terms, 2 Dak. L. Rev. 415 (1928).

41-02-44. (2-327) Special incidents of sale on approval and sale or return.

1. Under a sale on approval, unless otherwise agreed:
   1. Although the goods are identified to the contract the risk of loss and the title do not pass to the buyer until acceptance.
   2. Use of the goods consistent with the purpose of trial is not acceptance but failure seasonably to notify the seller of election to return the goods is acceptance, and if the goods conform to the contract, acceptance of any part is acceptance of the whole.
   3. After due notification of election to return, the return is at the seller’s risk and expense but a merchant buyer must follow any reasonable instructions.
2. Under a sale or return, unless otherwise agreed:
   1. The option to return extends to the whole or any commercial unit of the goods while in substantially their original condition, but must be exercised seasonably.
   2. The return is at the buyer’s risk and expense.
3. In the case of a sale on approval the risk rests on the seller until acceptance of the goods by the buyer, while in a sale or return the risk remains throughout on the buyer.
4. Notice of election to return given by the buyer in a sale on approval is sufficient to relieve him of any further liability. Actual return by the buyer to the seller is required in the case of a sale or return contract. What constitutes due “giving” of notice, as required in “on approval” sales, is governed by the provisions on good faith and notice. “Seasonable” is used here as defined in Section 1-204. Nevertheless, the provisions of both this Article and of the contract on this point must be read with commercial reason and with full attention to good faith.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Changes:

Former Section 1-101.

Purposes of Changes:

To make it clear that:

1. In the case of a sale on approval:

If all of the goods involved conform to the contract, the buyer’s acceptance of part of the goods constitutes acceptance of the whole. Acceptance of part falls outside the normal intent of the parties in the “on approval” situation and the policy of this Article allowing partial acceptance of a defective delivery has no application here. A case where a buyer takes home two dresses to select one commonly involves two distinct contracts; if not, it is covered by the words “unless otherwise agreed”.

2. In the case of a sale or return, the return of any unsold unit merely because it is unsold is the normal intent of the “sale or return” provision, and therefore the right to return for this reason alone is independent of any other action under the contract which would turn on wholly different considerations. On the other hand, where the return of goods is for breach, including return of items resold by the buyer and returned by the ultimate purchasers because of defects, the return procedure is governed not by the present section but by the provisions on the effects and revocation of acceptance.

Cross References:

Definitional Cross References:

Cross-References.

Acceptance of goods, revocation in whole or in part, see N.D.C.C. § 41-02-71.

Buyer’s acceptance of goods, effect, see N.D.C.C. § 41-02-70.

“Good faith” and “notice” defined, see N.D.C.C. § 41-01-09.

Improper delivery, buyer’s rights, see N.D.C.C. § 41-02-64.

Insurable interest in goods, see N.D.C.C. § 41-02-49.

Merchant buyer’s duties as to rightfully rejected goods, see N.D.C.C. § 41-02-66.

Reasonable time, see N.D.C.C. § 41-01-14.

Collateral References.

Risk of loss of goods in “sale or return” transaction under § 2-327, 66 A.L.R.3d 190.

41-02-45. (2-328) Sale by auction.

1. In a sale by auction, if goods are put up in lots, each lot is the subject of a separate sale.
2. A sale by auction is complete when the auctioneer so announces by the fall of the hammer or in other customary manner. If a bid is made while the hammer is falling in acceptance of a prior bid, the auctioneer may in the auctioneer’s discretion reopen the bidding or declare the goods sold under the bid on which the hammer was falling.
3. Such a sale is with reserve unless the goods are in explicit terms put up without reserve. In an auction with reserve the auctioneer may withdraw the goods at any time until the auctioneer announces completion of the sale. In an auction without reserve, after the auctioneer calls for bids on an article or lot, that article or lot cannot be withdrawn unless no bid is made within a reasonable time. In either case a bidder may retract the bidder’s bid until the auctioneer’s announcement of completion of the sale, but a bidder’s retraction does not revive any previous bid.
4. If the auctioneer knowingly receives a bid on the seller’s behalf or the seller makes or procures such a bid, and notice has not been given that liberty for such bidding is reserved, the buyer may at the buyer’s option avoid the sale or take the goods at the price of the last good-faith bid prior to the completion of the sale. This subsection shall not apply to any bid at a forced sale.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Changes:

Former Section 1-101.

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-References:

Definitional Cross References:

Cross-References.

Authority of auctioneer, see N.D.C.C. ch. 3-05.

Licensing auctioneers, see N.D.C.C. ch. 51-05.1.

Livestock auction markets, see N.D.C.C. ch. 36-05.

Memorandum of auctioneer satisfying statute of frauds, see N.D.C.C. § 9-06-06.

Municipal regulation of auctioneers, see N.D.C.C. § 40-05-01.

41-02-46. (2-401) Passing of title — Reservation for security — Limited application of section.

Each provision of this chapter with regard to the rights, obligations, and remedies of the seller, the buyer, purchasers, or other third parties applies irrespective of title to the goods except when the provision refers to such title. Insofar as situations are not covered by the other provisions of this chapter and matters concerning title become material, the following rules apply:

1. Title to goods cannot pass under a contract for sale prior to their identification to the contract (section 41-02-49) and, unless otherwise explicitly agreed, the buyer acquires by their identification a special property as limited by this title. Any retention or reservation by the seller of the title (property) in goods shipped or delivered to the buyer is limited in effect to a reservation of a security interest. Subject to these provisions and to the provisions of the chapter on secured transactions (chapter 41-09), title to goods passes from the seller to the buyer in any manner and on any conditions explicitly agreed on by the parties.
2. Unless otherwise explicitly agreed, title passes to the buyer at the time and place at which the seller completes the seller’s performance with reference to the physical delivery of the goods, despite any reservation of a security interest and even though a document of title is to be delivered at a different time or place and in particular and despite any reservation of a security interest by the bill of lading:
   1. If the contract requires or authorizes the seller to send the goods to the buyer but does not require the seller to deliver them at destination, title passes to the buyer at the time and place of shipment; but
   2. If the contract requires delivery at destination, title passes on tender there.
3. Unless otherwise explicitly agreed, if delivery is to be made without moving the goods:
   1. If the seller is to deliver a tangible document of title, title passes at the time when and the place where the seller delivers such documents and, if the seller is to deliver an electronic document of title, title passes when the seller delivers the document; or
   2. If the goods are at the time of contracting already identified and no documents of title are to be delivered, title passes at the time and place of contracting.
4. A rejection or other refusal by the buyer to receive or retain the goods, whether or not justified, or a justified revocation of acceptance revests title to the goods in the seller. Such revesting occurs by operation of law and is not a “sale”.

Source: S.L. 1965, ch. 296, § 1; 2005, ch. 354, § 6.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

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:

Definitional Cross References:

Cross-References.

Buyer’s right to specific performance or replevin, see N.D.C.C. § 41-02-95.

Insolvency of seller, buyer’s right to goods, see N.D.C.C. § 41-02-50.

Insurable interest in goods, see N.D.C.C. § 41-02-49.

Risk of loss, see N.D.C.C. § 41-02-57.

“Security interest” defined, see N.D.C.C. § 41-01-09(2)(ii).

Transactions excluded, see N.D.C.C. § 41-02-02.

41-02-47. (2-402) Rights of seller’s creditors against sold goods.

1. Except as provided in subsections 2 and 3, rights of unsecured creditors of the seller with respect to goods which have been identified to a contract for sale are subject to the buyer’s rights to recover the goods under this chapter (sections 41-02-50 and 41-02-95).
2. A creditor of the seller may treat a sale or an identification of goods to a contract for sale as void if as against that creditor a retention of possession by the seller is fraudulent under any rule of law of the state where the goods are situated, except that retention of possession in good faith and current course of trade by a merchant-seller for a commercially reasonable time after a sale or identification is not fraudulent.
3. Nothing in this chapter shall be deemed to impair the rights of creditors of the seller:
   1. Under the provisions of the chapter on secured transactions (chapter 41-09); or
   2. If identification to the contract or delivery is made not in current course of trade but in satisfaction of or as security for a pre-existing claim for money, security, or the like and is made under circumstances which under any rule of law of the state where the goods are situated would apart from this chapter constitute the transaction a fraudulent transfer or voidable preference.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Changes:

Former Section 1-101.

Purposes of Changes and New Matter:

To avoid confusion on ordinary issues between current sellers and buyers and issues in the field of preference and hindrance by making it clear that:

1. Local law on questions of hindrance of creditors by the seller’s retention of possession of the goods are outside the scope of this Article, but retention of possession in the current course of trade is legitimate. Transactions which fall within the law’s policy against improper preferences are reserved from the protection of this Article.

2. The retention of possession of the goods by a merchant seller for a commercially reasonable time after a sale or identification in current course is exempted from attack as fraudulent. Similarly, the provisions of subsection (3) have no application to identification or delivery made in the current course of trade, as measured against general commercial understanding of what a “current” transaction is.

Definitional Cross References:

Collateral References.

Sales 230.

67 Am. Jur. 2d, Sales, §§ 430-433.

41-02-48. (2-403) Power to transfer — Good-faith purchase of goods — Entrusting.

1. A purchaser of goods acquires all title which the purchaser’s transferor had or had power to transfer except that a purchaser of a limited interest acquires rights only to the extent of the interest purchased. A person with voidable title has power to transfer a good title to a good-faith purchaser for value. When goods have been delivered under a transaction of purchase, the purchaser has such power even though:
   1. The transferor was deceived as to the identity of the purchaser;
   2. The delivery was in exchange for a check which is later dishonored;
   3. It was agreed that the transaction was to be a “cash sale”; or
   4. The delivery was procured through fraud punishable as theft under chapter 12.1-23.
2. Any entrusting of possession of goods to a merchant who deals in goods of that kind gives the merchant power to transfer all rights of the entruster to a buyer in ordinary course of business.
3. “Entrusting” includes any delivery and any acquiescence in retention of possession regardless of any condition expressed between the parties to the delivery of acquiescence and regardless of whether the procurement of the entrusting or the possessor’s disposition of the goods have been such as to be theft under chapter 12.1-23.
4. The rights of other purchasers of goods and of lien creditors are governed by the chapters on secured transactions (chapter 41-09) and documents of title (chapter 41-07).

Source: S.L. 1965, ch. 296, § 1; 1975, ch. 106, § 459; 1991, ch. 448, § 7.

Official Comments.

1. The basic policy that allows the transfer of such title as the transferor has is recognized 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. (Section 1-201(a)(29)). Moreover the policy of this Act expressly providing for the application of supplementary general principles of law to sales transactions wherever appropriate (Section 1-103) joins with the present section to continue unimpaired all rights acquired under the law of agency or of apparent agency or ownership or other estoppel, whether based on statutory provisions or on case law. 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 were troublesome under prior law.

On the other hand, the contract of purchase is of course limited by its own terms, as in a case of pledge for a limited amount, or of sale of a fractional interest in goods.

2. The many particular situations in which a buyer in ordinary course of business has been protected against a reservation of a property right or other interest are gathered by subsections (2) and (3) into a single principle protecting persons that buy in ordinary course of business. 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. (Section 9-109, which provides that a consignment is within the scope of Article 9; Section 9-315(a), which provides that Article 9 security interests are defeated by the rights of a buyer in ordinary course of business under Section 2-403(2).).

The principle is extended in subsection (3) to fit with the abolition of the old law of “cash sale” by subsection (1)(c). It is freed from any local or specific technicalities, and it extends law to any criminal fraud or conduct punishable under criminal law. The policy is extended, in the interest of simplicity and sense, to any entrusting by a bailor. This is in consonance with the explicit provisions of Section 7-205 on the powers of a warehouse that is also in the business of buying and selling goods of the kind that are warehoused. As to entrusting by a secured party, subsection (2) provides that a buyer in ordinary course of business takes free of the security interest. (See Section 9-315(a)).

3. Except as provided in subsection (1), the rights of purchasers other than buyers in ordinary course are left to the Articles on Secured Transactions (Article 9) and Documents of Title (Article 7).

Cross References:

Definitional Cross References:

Cross-References.

“Buyer in ordinary course of business” defined, see N.D.C.C. § 41-01-09(2)(i).

Buyers of goods, see N.D.C.C. § 41-09-40.

Factors, powers as to sale of goods, see N.D.C.C. ch. 3-06.

“Merchant” defined, see N.D.C.C. § 41-02-04.

“Person in the position of a seller” defined, see N.D.C.C. § 41-02-86.

“Purchase” defined, see N.D.C.C. § 41-01-11, subs. 32.

Rules of construction, see N.D.C.C. §§ 41-01-03, 41-01-04.

Supplementary general principles of law applicable, see N.D.C.C. § 41-01-03.

Title under warehouse receipt, when defeated, see N.D.C.C. § 41-07-11.

41-02-49. (2-501) Insurable interest in goods — Manner of identification of goods.

1. The buyer obtains a special property and an insurable interest in goods by identification of existing goods as goods to which the contract refers even though the goods so identified are nonconforming and the buyer has an option to return or reject them. Such identification can be made at any time and in any manner explicitly agreed to by the parties. In the absence of explicit agreement, identification occurs:
   1. When the contract is made if it is for the sale of goods already existing and identified.
   2. If the contract is for the sale of future goods other than those described in subdivision c, when goods are shipped, marked, or otherwise designated by the seller as goods to which the contract refers.
   3. When the crops are planted or otherwise become growing crops or the young are conceived if the contract is for the sale of unborn young to be born within twelve months after contracting or for the sale of crops to be harvested within twelve months or the next normal harvest season after contracting, whichever is longer.
2. The seller retains an insurable interest in goods so long as title to or any security interest in the goods remains in the seller and, if the identification is by the seller alone, the seller may, until default or insolvency or notification to the buyer that the identification is final, substitute other goods for those identified.
3. Nothing in this section impairs any insurable interest recognized under any other statute or rule of law.
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.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

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.

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:

Definitional Cross References:

Cross-References.

Absence of specific place for delivery, see N.D.C.C. § 41-02-25.

Contract for sale of goods to be severed from realty, see N.D.C.C. § 41-02-07.

“Goods” defined, see N.D.C.C. § 41-02-05.

Insurable interest, see N.D.C.C. §§ 26.1-29-04 to 26.1-29-12.

Seller’s creditors, rights against sold goods, see N.D.C.C. § 41-02-47.

Seller’s remedies in general, see N.D.C.C. § 41-02-82.

41-02-50. (2-502) Buyer’s right to goods on seller’s repudiation, failure to deliver, or insolvency.

1. Subject to subsections 2 and 3 and even though the goods have not been shipped, a buyer who has paid a part or all of the price of goods in which the buyer has a special property under the provisions of section 41-02-49 may on making and keeping good a tender of any unpaid portion of their price recover them from the seller if:
   1. In the case of goods bought for personal, family, or household purposes, the seller repudiates or fails to deliver as required by the contract; or
   2. In all cases, the seller becomes insolvent within ten days after receipt of the first installment on their price.
2. The buyer’s right to recover the goods under subdivision a of subsection 1 vests upon acquisition of a special property, even if the seller had not then repudiated or failed to deliver.
3. If the identification creating the buyer’s special property has been made by the buyer, the buyer acquires the right to recover the goods only if they conform to the contract for sale.
4. Subsection (3) is included to preclude the possibility of unjust enrichment which would exist if the buyer were permitted to recover goods even though they were greatly superior in quality or quantity to that called for by the contract for sale.

Source: S.L. 1965, ch. 296, § 1; 2001, ch. 361, § 14.

Official Comments.

1. This section gives an additional right to the buyer as a result of identification of the goods to the contract in the manner provided in Section 2-501. The buyer is given a right to recover the goods, conditioned upon making and keeping good a tender of any unpaid portion of the price, in two limited circumstances. First, a consumer buyer may recover the goods if the seller repudiates the contract or fails to deliver the goods. Second, in any case, the buyer may recover the goods if the seller becomes insolvent within 10 days after the seller receives the first installment on their price. The buyer’s right to recover the goods under this section is an exception to the usual rule, under which the disappointed buyer must resort to an action to recover damages.

2. The question of whether the buyer also acquires a security interest in identified goods and has rights to the goods when insolvency takes place after the ten day period provided in this section depends upon compliance with the provisions of the Article on Secured Transactions (Article 9).

3. Under subsection (2), the buyer’s right to recover goods under subsection (1) vests upon acquisition of a special property, which occurs upon identification of the goods to the contract. See Section 2-501. Inasmuch as a secured party normally acquires no greater rights in its collateral than its debtor had or had power to convey, see Section 2-403(1) (first sentence), a buyer who acquires a right to recover under this section will take free of a security interest created by the seller if it attaches to the goods after the goods have been identified to the contract. The buyer will take free, even if the buyer does not buy in ordinary course and even if the security interest is perfected. Of course, to the extent that the buyer pays the price after the security interest attaches, the payments will constitute proceeds of the security interest.

Cross References:

Definitional Cross References:

Cross-References.

Insolvency proceedings, see N.D.C.C. § 41-01-09(2)(v).

Seller’s remedies on discovery of buyer’s insolvency, see N.D.C.C. § 41-02-81.

Collateral References.

Sales 230.

67A Am. Jur. 2d, Sales, §§ 1053 et seq.

77A C.J.S. Sales, § 594.

41-02-51. (2-503) Manner of seller’s tender of delivery.

1. Tender of delivery requires that the seller put and hold conforming goods at the buyer’s disposition and give the buyer any notification reasonably necessary to enable the buyer to take delivery. The manner, time, and place for tender are determined by the agreement and this chapter, and in particular:
   1. Tender must be at a reasonable hour and, if it is of goods, they must be kept available for the period reasonably necessary to enable the buyer to take possession; but
   2. Unless otherwise agreed, the buyer must furnish facilities reasonably suited to the receipt of the goods.
2. If the case is within section 41-02-52 respecting shipment, tender requires that the seller comply with its provisions.
3. If the seller is required to deliver at a particular destination, tender requires that the seller comply with subsection 1 and also in any appropriate case tender documents as described in subsections 4 and 5.
4. If goods are in the possession of a bailee and are to be delivered without being moved:
   1. Tender requires that the seller either tender a negotiable document of title covering such goods or procure acknowledgment by the bailee of the buyer’s right to possession of the goods; but
   2. Tender to the buyer of a non-negotiable document of title or of a record directing the bailee to deliver is sufficient tender unless the buyer seasonably objects and, except as otherwise provided under chapter 41-09, receipt by the bailee of notification of the buyer’s rights fixes those rights as against the bailee and all third persons but risk of loss of the goods and of any failure by the bailee to honor the non-negotiable document of title or to obey the direction remains on the seller until the buyer has had a reasonable time to present the document or direction and a refusal by the bailee to honor the document or to obey the direction defeats the tender.
5. If the contract requires the seller to deliver documents:
   1. The seller must tender all such documents in correct form, except as provided in this chapter with respect to bills of lading in a set (subsection 2 of section 41-02-40); and
   2. Tender through customary banking channels is sufficient and dishonor of a draft accompanying or associated with the documents constitutes nonacceptance or rejection.
6. Under Subsection (4)(a) the bailee’s acknowledgment must be made to the buyer. See Jason’s Foods, Inc. V. Peter Eckrick & Sons, Inc., 774 F.2d 214 (7th Cir. 1985) Paragraph (b) of subsection (4) adopts the rule, subject to Article 9, 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 these 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.

Source: S.L. 1965, ch. 296, § 1; 2005, ch. 354, § 7.

Official Comments.

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 that rest on the tendering party, and it must be followed by actual performance if the other party shows readiness 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 performance by the tendering party that the other party in default if the other party fails to proceed in some manner.

2. The seller’s general duty to tender and deliver is set out in Section 2-301 and more particularly in Section 2-507. The seller’s right to a receipt if the seller demands one, if receipts are customary, is governed by Section 1-303.

Subsection (1) of this section sets forth two primary requirements of tender: first, that the seller “put and hold conforming goods at the buyer’s disposition” and, second, that the seller“ give the buyer any notice reasonably necessary to enable the buyer to take delivery.”

In cases in which payment is due and demanded upon delivery, the “buyer’s disposition” is qualified by the seller’s right to reclaim the goods under Section 2-507(2). However, where the seller is demanding payment on delivery the seller must first allow the buyer to inspect the goods to avoid impairing the tender unless the contract contains standard shipping terms or other terms that would negate the right of inspection before payment. (See Section 2-513(3)).

In the case of contracts of sale 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.

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 not 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 a “shipment” contract is regarded as the normal one and a “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 the seller has specifically agreed to deliver or the commercial understanding of the terms used by the parties contemplates a destination contract.

When a prescribed document cannot be procured, a question of fact arises under the provision of this Article on substituted performance about whether the agreed manner of delivery is actually commercially impracticable and whether the substitute is commercially reasonable.

Cross References:

Definitional Cross References:

Cross-References.

Absence of specific time or place for delivery, see N.D.C.C. §§ 41-02-25, 41-02-26.

Authority to ship under reservation, see N.D.C.C. § 41-02-27.

Course of dealing and usage of trade, see N.D.C.C. § 41-01-17.

Delivery in single or several lots, see N.D.C.C. § 41-02-24.

General obligation of parties, see N.D.C.C. § 41-02-18.

Installment contract, see N.D.C.C. § 41-02-75.

Open time for payment or running of credit, see N.D.C.C. § 41-02-27.

Options and cooperation respecting performance, see N.D.C.C. § 41-02-28.

Output, requirements and exclusive dealings, see N.D.C.C. § 41-02-23.

Substituted performance, see N.D.C.C. § 41-02-77.

Warehouse receipts, bills of lading and other documents of title, see N.D.C.C. ch. 41-07.

Warranties, express or implied, see N.D.C.C. §§ 41-02-29 to 41-02-35, 41-02-38.

41-02-52. (2-504) Shipment by seller.

If the seller is required or authorized to send the goods to the buyer and the contract does not require the seller to deliver them at a particular destination, then unless otherwise agreed the seller must:

1. Put the goods in the possession of such a carrier and make such a contract for their transportation as may be reasonable having regard to the nature of the goods and other circumstances of the case;
2. Obtain and promptly deliver or tender in due form any document necessary to enable the buyer to obtain possession of the goods or otherwise required by the agreement or by usage of trade; and
3. Promptly notify the buyer of the shipment.
4. Both the language of paragraph (b) and the nature of the situation it concerns indicate that the requirement that the seller must obtain and deliver promptly to the buyer in due form any document necessary to enable him to obtain possession of the goods is intended to cumulate with the other duties of the seller such as those covered in paragraph (a).
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.
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.

Failure to notify the buyer under subsection 3 or to make a proper contract under subsection 1 is a ground for rejection only if material delay or loss ensues.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Changes:

Rewritten.

Purposes of Changes:

To continue the general policy of the prior uniform statutory provision while incorporating certain modifications with respect to the requirement that the contract with the carrier be made expressly on behalf of the buyer and as to the necessity of giving notice of the shipment to the buyer, so that:

1. The section is limited to “shipment” contracts as contrasted with “destination” contracts or contracts for delivery at the place where the goods are located. The general principles embodied in this section cover the special cases of F.O.B. point of shipment contracts and C.I.F. and C. & F. contracts. Under the preceding section on manner of tender of delivery, due tender by the seller requires that he comply with the requirements of this section in appropriate cases.

2. The contract to be made with the carrier under paragraph (a) must conform to all express terms of the agreement, subject to any substitution necessary because of failure of agreed facilities as provided in the later provision on substituted performance. However, under the policies of this Article on good faith and commercial standards and on buyer’s rights on improper delivery, the requirements of explicit provisions must be read in terms of their commercial and not their literal meaning. This policy is made express with respect to bills of lading in a set in the provision of this Article on form of bills of lading required in overseas shipment.

3. In the absence of agreement, the provision of this Article on options and cooperation respecting performance gives the seller the choice of any reasonable carrier, routing and other arrangements. Whether or not the shipment is at the buyer’s expense the seller must see to any arrangements, reasonable in the circumstances, such as refrigeration, watering of live stock, protection against cold, the sending along of any necessary help, selection of specialized cars and the like for paragraph (a) is intended to cover all necessary arrangements whether made by contract with the carrier or otherwise. There is, however, a proper relaxation of such requirements if the buyer is himself in a position to make the appropriate arrangements and the seller gives him reasonable notice of the need to do so. It is an improper contract under paragraph (a) for the seller to agree with the carrier to a limited valuation below the true value and thus cut off the buyer’s opportunity to recover from the carrier in the event of loss, when the risk of shipment is placed on the buyer by his contract with the seller.

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.

Cross References:

Definitional Cross References:

Cross-References.

C.I.F. and C. & F. terms, see N.D.C.C. § 41-02-37.

F.O.B. and F.A.S. terms, see N.D.C.C. § 41-02-36.

Improper delivery, buyer’s rights, see N.D.C.C. § 41-02-64.

Obligation of good faith, see N.D.C.C. § 41-01-18.

Options and cooperation respecting performance, see N.D.C.C. § 41-02-28.

Overseas shipment, form of bill of lading required, see N.D.C.C. § 41-02-40.

Substituted performance, see N.D.C.C. § 41-02-77.

Collateral References.

Sales 83, 161.

67 Am. Jur. 2d, Sales, §§ 507 et seq.

77A C.J.S. Sales, §§ 275, 349, 350.

41-02-53. (2-505) Seller’s shipment under reservation.

1. If the seller has identified goods to the contract by or before shipment:
   1. The seller’s procurement of a negotiable bill of lading to the seller’s own order or otherwise reserves in the seller a security interest in the goods. The seller’s procurement of the bill to the order of a financing agency or of the buyer indicates in addition only the seller’s expectation of transferring that interest to the person named.
   2. A non-negotiable bill of lading to the seller or the seller’s nominee reserves possession of the goods as security but except in a case of conditional delivery (subsection 2 of section 41-02-55) a non-negotiable bill of lading naming the buyer as consignee reserves no security interest even though the seller retains possession or control of the bill of lading.
2. When shipment by the seller with reservation of a security interest is in violation of the contract for sale, it constitutes an improper contract for transportation within section 41-02-52 but impairs neither the rights given to the buyer by shipment and identification of the goods to the contract nor the seller’s powers as a holder of a negotiable document of title.
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 the seller 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 the seller de facto loses control as against the carrier except where he rightfully and effectively stops delivery in transit. (Section 2-705) In cases in which the contract gives the seller the right to payment against delivery, the seller, in appropriate cases, has a right to reclaim the goods under Section 2-507(2), although this right is subject to the claims of a good faith purchaser for value under Section 2-403.
5. Under subsection (2) an improper reservation by the seller which would constitute a breach in no way impairs any of the buyer’s rights created from identification of the goods.

Source: S.L. 1965, ch. 296, § 1; 2005, ch. 354, § 8.

Official Comments.

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 the seller’s disposition and control of the goods as against the buyer and third parties. Under this Article, the provision as to the passing of a property 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 the seller’s 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 presumptions about the location of title.

This Article does not attempt to regulate local procedure for the effective maintenance of the seller’s security interest when the action is in replevin by the buyer against the carrier.

2. Every shipment of identified goods under a negotiable bill of lading reserves a security interest in the seller under subsection (1) paragraph (a).

It is frequently convenient for the seller to make the bill of lading to the order of a nominee such as the seller’s agent at destination, the financing agency to which the seller expects to negotiate the document or the bank issuing a credit to the seller. 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 the carrier’s 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).

Cross References:

Definitional Cross References:

Cross-References.

Authority to ship under reservation, see N.D.C.C. § 41-02-27.

Bills of lading and other documents of title, see N.D.C.C. ch. 41-07.

C.I.F. and C. & F. terms, see N.D.C.C. § 41-02-37.

F.O.B. and F.A.S. terms, see N.D.C.C. § 41-02-36.

Good faith purchase of goods, see N.D.C.C. § 41-02-48.

“Security interest” defined, see N.D.C.C. § 41-01-09(2)(ii).

Seller’s stoppage of delivery, see N.D.C.C. § 41-02-84.

Collateral References.

67 Am. Jur. 2d, Sales, § 513.

41-02-54. (2-506) Rights of financing agency.

1. A financing agency by paying or purchasing for value a draft which relates to a shipment of goods acquires to the extent of the payment or purchase and, in addition to its own rights under the draft and any document of title securing it, any rights of the shipper in the goods including the right to stop delivery and the shipper’s right to have the draft honored by the buyer.
2. The right to reimbursement of a financing agency which has in good faith honored or purchased the draft under commitment to or authority from the buyer is not impaired by subsequent discovery of defects with reference to any relevant document which was apparently regular.
3. Subsection (1) is made applicable to payments or advances against a draft which “relates to” a shipment of goods and this has been chosen as a term of maximum breadth. In particular the term is intended to cover the case of a draft against an invoice or against a delivery order. Further, it is unnecessary that there be an explicit assignment of the invoice attached to the draft to bring the transaction within the reason of this subsection.
4. After shipment, “the rights of the shipper in the goods” are merely security rights and are subject to the buyer’s right to force delivery upon tender of the price. The rights acquired by the financing agency are similarly limited and, moreover, if the agency fails to procure any outstanding negotiable document of title, it may find its exercise of these rights hampered or even defeated by the seller’s disposition of the document to a third party. This section does not attempt to create any new rights in the financing agency against the carrier which would force the latter to honor a stop order from the agency, a stranger to the shipment, or any new rights against a holder to whom a document of title has been duly negotiated under Article 7.
5. The deletion of the language “on its face” from prior subsection (2) is designed to accommodate electronic documents of title without changing the requirement of regularity of the document.

Source: S.L. 1965, ch. 296, § 1; 2005, ch. 354, § 9.

Official Comments.

Prior Uniform Statutory Provisions:

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.

Cross References:

Definitional Cross References:

Cross-References.

“Financing agency” defined, see N.D.C.C. § 41-02-04, subs. 2.

Letters of credit, see N.D.C.C. ch. 41-05.

Warehouse receipts, bills of lading and other documents of title, see N.D.C.C. ch. 41-07.

Collateral References.

67 Am. Jur. 2d, Sales, § 514.

41-02-55. (2-507) Effect of seller’s tender — Delivery on condition.

1. Tender of delivery is a condition to the buyer’s duty to accept the goods and, unless otherwise agreed, to the buyer’s duty to pay for them. Tender entitles the seller to acceptance of the goods and to payment according to the contract.
2. If payment is due and demanded on the delivery to the buyer of goods or documents of title, the buyer’s right as against the seller to retain or dispose of them is conditional upon the buyer making the payment due.
3. Subsection (2) deals with the effect of a conditional delivery by the seller and in such a situation makes the buyer’s “right as against the seller” conditional upon payment. These words are used as words of limitation to conform with the policy set forth in the bona fide purchase sections of this Article. Should the seller after making such a conditional delivery fail to follow up his rights, the condition is waived. This subsection (2) codifies the cash seller’s right of reclamation which is in the nature of a lien. There is no specific time limit for a cash seller to exercise the right of reclamation. However, the right will be defeated by delay causing prejudice to the buyer, waiver, estoppel, or ratification of the buyer’s right to retain possession. Common law rules and precedents governing such principles are applicable (Section 1-103). If third parties are involved, Section 2-403(1) protects good faith purchasers. See PEB Commentary No. 1, dated March 10, 1990 [Appendix V, infra].

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

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.

Cross References:

Definitional Cross References:

Cross-References.

Authority to ship under reservation, see N.D.C.C. § 41-02-27.

Buyer’s remedies for nondelivery or repudiation, see N.D.C.C. §§ 41-02-90 to 41-02-92.

“Contract” defined, see N.D.C.C. § 41-01-09(2)( l ).

Good faith purchase of goods, see N.D.C.C. § 41-02-48.

Improper delivery, buyer’s rights, see N.D.C.C. § 41-02-64.

Passing of title, reservation for security, see N.D.C.C. § 41-02-46.

Seller’s remedies on discovery of buyer’s insolvency, see N.D.C.C. § 41-02-81.

Substituted performance, see N.D.C.C. § 41-02-77.

41-02-56. (2-508) Cure by seller of improper tender or delivery — Replacement.

1. If any tender or delivery by the seller is rejected because nonconforming and the time for performance has not yet expired, the seller may seasonably notify the buyer of the seller’s intention to cure and may then within the contract time make a conforming delivery.
2. If the buyer rejects a nonconforming tender which the seller had reasonable grounds to believe would be acceptable with or without money allowance, the seller may, if the seller seasonably notifies the buyer, have a further reasonable time to substitute a conforming tender.
3. The words “a further reasonable time to substitute a conforming tender” are intended as words of limitation to protect the buyer. What is a “reasonable time” depends upon the attending circumstances. Compare Section 2-511 on the comparable case of a seller’s surprise demand for legal tender.
4. Existing trade usages permitting variations without rejection but with price allowance enter into the agreement itself as contractual limitations of remedy and are not covered by this section.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Purposes:

1. Subsection (1) permits a seller who has made a non-conforming tender in any case to make a conforming delivery within the contract time upon seasonable notification to the buyer. It applies even where the seller has taken back the non-conforming goods and refunded the purchase price. He may still make a good tender within the contract period. The closer, however, it is to the contract date, the greater is the necessity for extreme promptness on the seller’s part in notifying of his intention to cure, if such notification is to be “seasonable” under this subsection.

The rule of this subsection, moreover, is qualified by its underlying reasons. Thus if, after contracting for June delivery, a buyer later makes known to the seller his need for shipment early in the month and the seller ships accordingly, the “contract time” has been cut down by the supervening modification and the time for cure of tender must be referred to this modified time term.

2. Subsection (2) seeks to avoid injustice to the seller by reason of a surprise rejection by the buyer. However, the seller is not protected unless he had “reasonable grounds to believe” that the tender would be acceptable. Such reasonable grounds can lie in prior course of dealing, course of performance or usage of trade as well as in the particular circumstances surrounding the making of the contract. The seller is charged with commercial knowledge of any factors in a particular sales situation which require him to comply strictly with his obligations under the contract as, for example, strict conformity of documents in an overseas shipment or the sale of precision parts or chemicals for use in manufacture. Further, if the buyer gives notice either implicitly, as by a prior course of dealing involving rigorous inspections, or expressly, as by the deliberate inclusion of a “no replacement” clause in the contract, the seller is to be held to rigid compliance. If the clause appears in a “form” contract evidence that it is out of line with trade usage or the prior course of dealing and was not called to the seller’s attention may be sufficient to show that the seller had reasonable grounds to believe that the tender would be acceptable.

Cross References:

Definitional Cross References:

Cross-References.

Course of dealing and usage of trade, see N.D.C.C. § 41-01-17.

Collateral References.

Sales 153.

67 Am. Jur. 2d, Sales, §§ 578-584.

77A C.J.S. Sales, §§ 308-311, 478.

Seller’s cure of improper tender or delivery under UCC § 2-508, 36 A.L.R.4th 544.

41-02-57. (2-509) Risk of loss in the absence of breach.

1. If the contract requires or authorizes the seller to ship the goods by carrier:
   1. If it does not require the seller to deliver them at a particular destination, the risk of loss passes to the buyer when the goods are duly delivered to the carrier even though the shipment is under reservation (section 41-02-53).
   2. If it does require the seller to deliver them at a particular destination and the goods are there duly tendered while in the possession of the carrier, the risk of loss passes to the buyer when the goods are there duly so tendered as to enable the buyer to take delivery.
2. If the goods are held by a bailee to be delivered without being moved, the risk of loss passes to the buyer:
   1. On the buyer’s receipt of possession or control of a negotiable document of title covering the goods;
   2. On acknowledgment by the bailee of the buyer’s right to possession of the goods; or
   3. After the buyer’s receipt of possession or control of a non-negotiable document of title or other direction to deliver in a record, as provided in subdivision b of subsection 4 of section 41-02-51.
3. In any case not within subsection 1 or 2, the risk of loss passes to the buyer on the buyer’s receipt of the goods if the seller is a merchant; otherwise the risk passes to the buyer on tender of delivery.
4. The provisions of this section are subject to contrary agreement of the parties and to the provisions of this chapter on sale on approval (section 41-02-44) and on effect of breach on risk of loss (section 41-02-58).
5. Subsections (1) through (3) are subject to subsection (4) which provides for a “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 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 course of performance.

Source: S.L. 1965, ch. 296, § 1; 2005, ch. 354, § 10.

Official Comments.

1. The underlying theory of this section on risk of loss is in conformity with common commercial and insurance practice, to base the risk of loss on the physical location of the goods and not by shifting of the risk with the “property” in the goods.

The scope of the section is limited to those cases where there has been no breach by the seller. When there has been a breach by either party, the risk of loss may be shifted to the breaching party under Section 2-510 if the breaching party did not already bear the risk for any reason the party’s 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. In a shipment contract, the risk of loss shifts to the buyer when the goods are delivered to the carrier as required by Section 2-504; in a destination contract, the risk of loss shifts when the goods are tendered to the buyer as required by Section 2-503(3).

3. Unlike prior law, subsection (3) makes no distinction between merchant and non-merchant sellers. In a case not governed by subsection (1) or subsection (2) and not subject to a contrary result under subsection (4), the risk of loss passes to the buyer upon the buyer’s receipt of the goods. Receipt requires taking the physical possession of the goods, Section 2-103(1)(l).

4. When the agreement provides for delivery of the goods from seller to the buyer without removal from the physical possession of a bailee, risk of loss passes to the buyer upon receipt of the negotiable document of title, acknowledgment made by the bailee of the buyer’s right of possession or the buyer’s receipt of a non-negotiable document of title or other direction to deliver in a record as provided in Section 2-503.

Cross References:

Definitional Cross References:

Cross-References.

“Agreement” defined, see N.D.C.C. § 41-01-09(2)(c).

“Merchant” defined, see N.D.C.C. § 41-02-04.

41-02-58. (2-510) Effect of breach on risk of loss.

1. If a tender or delivery of goods so fails to conform to the contract as to give a right of rejection, the risk of their loss remains on the seller until cure or acceptance.
2. If the buyer rightfully revokes acceptance, the buyer may to the extent of any deficiency in the buyer’s effective insurance coverage treat the risk of loss as having rested on the seller from the beginning.
3. If the buyer as to conforming goods already identified to the contract for sale repudiates or is otherwise in breach before risk of their loss has passed to the buyer, the seller may to the extent of any deficiency in the seller’s effective insurance coverage treat the risk of loss as resting on the buyer for a commercially reasonable time.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

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-References:

Definitional Cross References:

Collateral References.

Bills and Notes 24-27.

11 Am. Jur. 2d, Bills and Notes, §§ 351-360; 67 Am. Jur. 2d, Sales, §§ 391-394.

77A C.J.S. Sales, § 404.

Who bears risk of loss of goods under UCC §§ 2-509, 2-510, 66 A.L.R.3d 145.

41-02-59. (2-511) Tender of payment by buyer — Payment by check.

1. Unless otherwise agreed, tender of payment is a condition to the seller’s duty to tender and complete any delivery.
2. Tender of payment is sufficient when made by any means or in any manner current in the ordinary course of business unless the seller demands payment in legal tender and gives any extension of time reasonably necessary to procure it.
3. Subject to the provisions of this title on the effect of an instrument on an obligation (section 41-03-36), payment by check is conditional and is defeated as between the parties by dishonor of the check on due presentment.
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 article on Commercial Paper. (Section 3-802). But if the seller procures certification of the check instead of cashing it, the buyer is discharged. (Section 3-411).
6. Where the instrument offered by the buyer is not a payment but a credit instrument such as a note or a check post-dated by even one day, the seller’s acceptance of the instrument insofar as third parties are concerned, amounts to a delivery on credit and his remedies are set forth in the section on buyer’s insolvency. As between the buyer and the seller, however, the matter turns on the present subsection and the section on conditional delivery and subsequent dishonor of the instrument gives the seller rights on it as well as for breach of the contract for sale.

Source: S.L. 1965, ch. 296, § 1; 1991, ch. 448, § 8.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Changes:

Former Section 1-101.

Purposes of Changes:

1. The requirement of payment against delivery in subsection (1) is applicable to non-commercial sales generally and to ordinary sales at retail although it has no application to the great body of commercial contracts which carry credit terms. Subsection (1) applies also to documentary contracts in general and to contracts which look to shipment by the seller but contain no term on time and manner of payment, in which situations the payment may, in proper case, be demanded against delivery of appropriate documents.

In the case of specific transactions such as C.O.D. sales or agreements providing for payment against documents, the provisions of this subsection must be considered in conjunction with the special sections of the Article dealing with such terms. The provision that tender of payment is a condition to the seller’s duty to tender and complete “any delivery” integrates this section with the language and policy of the section on delivery in several lots which call for separate payment. Finally, attention should be directed to the provision on right to adequate assurance of performance which recognizes, even before the time for tender, an obligation on the buyer not to impair the seller’s expectation of receiving payment in due course.

2. Unless there is agreement otherwise the concurrence of the conditions as to tender of payment and tender of delivery requires their performance at a single place or time. This Article determines that place and time by determining in various other sections the place and time for tender of delivery under various circumstances and in particular types of transactions. The sections dealing with time and place of delivery together with the section on right to inspection of goods answer the subsidiary question as to when payment may be demanded before inspection by the buyer.

3. The essence of the principle involved in subsection (2) is avoidance of commercial surprise at the time of performance. The section on substituted performance covers the peculiar case in which legal tender is not available to the commercial community.

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.

Cross References:

Definitional Cross References:

Cross-References.

Certification of a check, see N.D.C.C. § 41-03-46.

Delivery in single or several lots, see N.D.C.C. § 41-02-24.

Effect of letter of credit, see N.D.C.C. § 41-02-42, subs. 2.

Negotiable instruments, see N.D.C.C. ch. 41-03.

Open time for payment or running of credit, see N.D.C.C. § 41-02-27.

Right to adequate assurance of performance, see N.D.C.C. § 41-02-72.

Seller’s remedies on discovery of buyer’s insolvency, see N.D.C.C. § 41-02-81.

Substituted performance, see N.D.C.C. § 41-02-77.

41-02-60. (2-512) Payment by buyer before inspection.

1. If the contract requires payment before inspection, nonconformity of the goods does not excuse the buyer from so making payment unless:
   1. The nonconformity appears without inspection; or
   2. Despite tender of the required documents the circumstances would justify injunction against honor under this title (section 41-05-09).
2. Payment pursuant to subsection 1 does not constitute an acceptance of goods or impair the buyer’s right to inspect or any of the buyer’s remedies.
3. Clause (a) of this subsection states an exception to the general rule based on common sense and normal commercial practice. The apparent non-conformity referred to is one which is evident in the mere process of taking delivery.
4. Clause (b) is concerned with contracts for payment against documents and incorporates the general clarification and modification of the case law contained in the section on excuse of a financing agency. Section 5-114.
5. Subsection (2) makes explicit the general policy of the Uniform Sales Act that the payment required before inspection in no way impairs the buyer’s remedies or rights in the event of a default by the seller. The remedies preserved to the buyer are all of his remedies, which include as a matter of reason the remedy for total non-delivery after payment in advance.
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.

Source: S.L. 1965, ch. 296, § 1; 1997, ch. 358, § 2.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

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.

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.

Cross References:

Definitional Cross References:

Cross-References.

Letters of credit, see N.D.C.C. ch. 41-05.

Performance or acceptance under reservation of rights, see N.D.C.C. § 41-01-22.

Collateral References.

Sales 168(2), 195.

67 Am. Jur. 2d, Sales, §§ 560 et seq.

77A C.J.S. Sales, §§ 316, 317, 323, 372-374.

41-02-61. (2-513) Buyer’s right to inspection of goods.

1. Unless otherwise agreed and subject to subsection 3, where goods are tendered or delivered or identified to the contract for sale, the buyer has a right before payment or acceptance to inspect them at any reasonable place and time and in any reasonable manner. When the seller is required or authorized to send the goods to the buyer, the inspection may be after their arrival.
2. Expenses of inspection must be borne by the buyer but may be recovered from the seller if the goods do not conform and are rejected.
3. Unless otherwise agreed and subject to the provisions of this chapter on C.I.F. contracts (subsection 3 of section 41-02-38), the buyer is not entitled to inspect the goods before payment of the price when the contract provides:
   1. For delivery “C.O.D.” or on other like terms; or
   2. For payment against documents of title, except where such payment is due only after the goods are to become available for inspection.
4. A place or method of inspection fixed by the parties is presumed to be exclusive but unless otherwise expressly agreed it does not postpone identification or shift the place for delivery or for passing the risk of loss. If compliance becomes impossible, inspection shall be as provided in this section unless the place or method fixed was clearly intended as an indispensable condition failure of which avoids the contract.
5. In the case of payment against documents, subsection (3) requires payment before inspection, since shipping documents against which payment is to be made will commonly arrive and be tendered while the goods are still in transit. This Article recognizes no exception in any peculiar case in which the goods happen to arrive before the documents. However, whereby the agreement payment is to await the arrival of the goods, inspection before payment becomes proper since the goods are then “available for inspection.”
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.
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.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Changes:

Former Section 1-101.

Purposes of Changes and New Matter:

To correspond in substance with the prior uniform statutory provision and to incorporate in addition some of the results of the better case law so that:

1. The buyer is entitled to inspect goods as provided in subsection (1) unless it has been otherwise agreed by the parties. The phrase “unless otherwise agreed” is intended principally to cover such situations as those outlined in subsections (3) and (4) and those in which the agreement of the parties negates inspection before tender of delivery. However, no agreement by the parties can displace the entire right of inspection except where the contract is simply for the sale of “this thing.” Even in a sale of boxed goods “as is” inspection is a right of the buyer, since if the boxes prove to contain some other merchandise altogether the price can be recovered back; nor do the limitations of the provision on effect of acceptance apply in such a case.

2. The buyer’s right of inspection is available to him upon tender, delivery or appropriation of the goods with notice to him. Since inspection is available to him on tender, where payment is due against delivery he may, unless otherwise agreed, make his inspection before payment of the price. It is also available to him after receipt of the goods and so may be postponed after receipt for a reasonable time. Failure to inspect before payment does not impair the right to inspect after receipt of the goods unless the case falls within subsection (4) on agreed and exclusive inspection provisions. The right to inspect goods which have been appropriated with notice to the buyer holds whether or not the sale was by sample.

3. The buyer may exercise his right of inspection at any reasonable time or place and in any reasonable manner. It is not necessary that he select the most appropriate time, place or manner to inspect or that his selection be the customary one in the trade or locality. Any reasonable time, place or manner is available to him and the reasonableness will be determined by trade usages, past practices between the parties and the other circumstances of the case.

The last sentence of subsection (1) makes it clear that the place of arrival of shipped goods is a reasonable place for their inspection.

4. Expenses of an inspection made to satisfy the buyer of the seller’s performance must be assumed by the buyer in the first instance. Since the rule provides merely for an allocation of expense there is no policy to prevent the parties from providing otherwise in the agreement. Where the buyer would normally bear the expenses of the inspection but the goods are rightly rejected because of what the inspection reveals, demonstrable and reasonable costs of the inspection are part of his incidental damage caused by the seller’s breach.

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.”

Cross References:

Definitional Cross References:

Cross-References.

Acceptance of goods, see N.D.C.C. §§ 41-02-69 to 41-02-71.

Buyer’s incidental and consequential damages, see N.D.C.C. § 41-02-94.

Payment on or after arrival, see N.D.C.C. § 41-02-38, subs. 3.

Reasonable time, see N.D.C.C. § 41-01-13.

Shipment under reservation, see N.D.C.C. § 41-02-27.

Collateral References.

Sales 168.

67 Am. Jur. 2d, Sales, § 567.

77A C.J.S. Sales, §§ 316, 317, 322, 323.

Time within which buyer must make inspection, trial, or test to determine whether goods are of requisite quality, 52 A.L.R.2d 900.

Time, place and manner of buyer’s inspection of goods under UCC § 2-513, 36 A.L.R.4th 726.

41-02-62. (2-514) When documents deliverable on acceptance — When on payment.

Unless otherwise agreed, documents against which a draft is drawn are to be delivered to the drawee on acceptance of the draft if it is payable more than three days after presentment; otherwise, only on payment.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

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:

Definitional Cross References:

Cross-References.

Acceptance of goods, effect, see N.D.C.C. § 41-02-70.

Letters of credit, honor or dishonor, see N.D.C.C. § 41-05-08.

Collateral References.

67 Am. Jur. 2d, Sales, § 513.

41-02-63. (2-515) Preserving evidence of goods in dispute.

In furtherance of the adjustment of any claim or dispute:

1. Either party on reasonable notification to the other and for the purpose of ascertaining the facts and preserving evidence has the right to inspect, test, and sample the goods, including such of them as may be in the possession or control of the other; and
2. The parties may agree to a third-party inspection or survey to determine the conformity or condition of the goods and may agree that the findings shall be binding upon them in any subsequent litigation or adjustment.
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.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

None.

Purposes:

1. To meet certain serious problems which arise when there is a dispute as to the quality of the goods and thereby perhaps to aid the parties in reaching a settlement, and to further the use of devices which will promote certainty as to the condition of the goods, or at least aid in preserving evidence of their condition.

2. Under paragraph (a), to afford either party an opportunity for preserving evidence, whether or not agreement has been reached, and thereby to reduce uncertainty in any litigation and, in turn perhaps, to promote agreement.

Paragraph (a) does not conflict with the provisions on the seller’s right to resell rejected goods or the buyer’s similar right. Apparent conflict between these provisions which will be suggested in certain circumstances is to be resolved by requiring prompt action by the parties. Nor does paragraph (a) impair the effect of a term for payment before inspection. Short of such defects as amount to fraud or substantial failure of consideration, non-conformity is neither an excuse nor a defense to an action for non-acceptance of documents. Normally, therefore, until the buyer has made payment, inspected and rejected the goods, there is no occasion or use for the rights under paragraph (a).

The use of the phrase “conformity or condition” makes it clear that the parties’ agreement may range from a complete settlement of all aspects of the dispute by a third party to the use of a third party merely to determine and record the condition of the goods so that they can be resold or used to reduce the stake in controversy. “Conformity”, at one end of the scale of possible issues, includes the whole question of interpretation of the agreement and its legal effect, the state of the goods in regard to quality and condition, whether any defects are due to factors which operate at the risk of the buyer, and the degree of non-conformity where that may be material. “Condition”, at the other end of the scale, includes nothing but the degree of damage or deterioration which the goods show. Paragraph (b) is intended to reach any point in the gamut which the parties may agree upon.

The principle of the section on reservation of rights reinforces this paragraph in simplifying such adjustments as the parties wish to make in partial settlement while reserving their rights as to any further points. Paragraph (b) also suggests the use of arbitration, where desired, of any points left open, but nothing in this section is intended to repeal or amend any statute governing arbitration. Where any question arises as to the extent of the parties’ agreement under the paragraph, the presumption should be that it was meant to extend only to the relation between the contract description and the goods as delivered, since that is what a craftsman in the trade would normally be expected to report upon. Finally, a written and authenticated report of inspection or tests by a third party, whether or not sampling has been practicable, is entitled to be admitted as evidence under this Act, for it is a third party document.

Cross References:

Definitional Cross References:

Collateral References.

67 Am. Jur. 2d, Sales, §§ 569 et seq.

77A C.J.S. Sales, § 188.

41-02-64. (2-601) Buyer’s rights on improper delivery.

Subject to the provisions of this chapter on breach in installment contracts (section 41-02-75) and unless otherwise agreed under the sections on contractual limitations of remedy (sections 41-02-97 and 41-02-98), if the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may:

1. Reject the whole;
2. Accept the whole; or
3. Accept any commercial unit or units and reject the rest.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Changes:

Former Section 1-101.

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.

3. The right to rejection under this section is subject to the limitations on the right of rejection in installment contracts (Section 2-612) and the standard for rejection in a shipment contract when the seller fails to notify the buyer of the shipment or fails to make a proper contract. (Section 2-504). The right of rejection in this section is also subject to the seller’s right to cure (Section 2-508) in appropriate circumstances.

Cross References:

Definitional Cross References:

41-02-65. (2-602) Manner and effect of rightful rejection.

1. Rejection of goods must be within a reasonable time after their delivery or tender. It is ineffective unless the buyer seasonably notifies the seller.
2. Subject to the provisions of the two following sections on rejected goods (sections 41-02-66 and 41-02-67):
   1. After rejection any exercise of ownership by the buyer with respect to any commercial unit is wrongful as against the seller; and
   2. If the buyer has before rejection taken physical possession of goods in which the buyer does not have a security interest under the provisions of this chapter (subsection 3 of section 41-02-90), the buyer is under a duty after rejection to hold them with reasonable care at the seller’s disposition for a time sufficient to permit the seller to remove them; but
   3. The buyer has no further obligations with regard to goods rightfully rejected.
3. The seller’s rights with respect to goods wrongfully rejected are governed by the provisions of this chapter on seller’s remedies in general (section 41-02-82).
4. The provisions of this section are to be appropriately limited or modified when a negotiation is in process.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

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) sets forth the duties of the buyer upon rejection. In addition to the duty to hold the goods with reasonable care for the seller’s disposition, the buyer also has those duties specified in Sections 2-603, 2-604 and 2-608(4).

3. Elimination of the word “rightful” in the title makes it clear that a buyer can effectively reject goods even though the rejection is wrongful and constitutes a breach. See Section 2-703(1). The word “rightful” has also been deleted from the titles to Section 2-603 and 2-604. See Official Comments to those sections.

Cross References:

Definitional Cross References:

Cross-References.

Buyer’s right to inspection of goods, see N.D.C.C. § 41-02-61.

Notice or notification, see N.D.C.C. § 41-01-09.

Payment by buyer before inspection, see N.D.C.C. § 41-02-60.

Reasonable time, see N.D.C.C. § 41-01-13.

41-02-66. (2-603) Merchant buyer’s duties as to rightfully rejected goods.

1. Subject to any security interest in the buyer (subsection 3 of section 41-02-90), when the seller has no agent or place of business at the market of rejection a merchant buyer is under a duty after rejection of goods in the merchant buyer’s possession or control to follow any reasonable instructions received from the seller with respect to the goods and in the absence of such instructions to make reasonable efforts to sell them for the seller’s account if they are perishable or threaten to decline in value speedily. Instructions are not reasonable if on demand indemnity for expenses is not forthcoming.
2. When the buyer sells goods under subsection 1, the buyer is entitled to reimbursement from the seller or out of the proceeds for reasonable expenses of caring for and selling them and, if the expenses include no selling commission, then to such commission as is usual in the trade or, if there is none, to a reasonable sum not exceeding ten percent on the gross proceeds.
3. In complying with this section, the buyer is held only to good faith and good-faith conduct hereunder is neither acceptance nor conversion nor the basis of an action for damages.
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.
6. Except as otherwise stated in this section, its provisions apply to all effective rejections, including rejections that are wrongful. Thus, any merchant buyer whose rejection is effective is subject to the duties set forth in the first sentence of subsection (1), and a merchant buyer that complies with those duties is entitled to the protection provided by subsection (3). However, the right to indemnity for expenses on demand under the second sentence of subsection (1) and the right to reimbursement for expenses and a commission under subsection (2) are limited to buyers whose rejections are rightful.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

None.

Purposes:

1. This section recognizes the duty imposed upon the merchant buyer by good faith and commercial practice to follow any reasonable instructions of the seller as to reshipping, storing, delivery to a third party, reselling or the like. Subsection (1) goes further and extends the duty to include the making of reasonable efforts to effect a salvage sale where the value of the goods is threatened and the seller’s instructions do not arrive in time to prevent serious loss.

2. The limitations on the buyer’s duty to resell under subsection (1) are to be liberally construed. The buyer’s duty to resell under this section arises from commercial necessity and thus is present only when the seller has “no agent or place of business at the market of rejection”. A financing agency which is acting in behalf of the seller in handling the documents rejected by the buyer is sufficiently the seller’s agent to lift the burden of salvage resale from the buyer. (See provisions of Sections 4-503 and 5-112 on bank’s duties with respect to rejected documents.) The buyer’s duty to resell is extended only to goods in his “possession or control”, but these are intended as words of wide, rather than narrow, import. In effect, the measure of the buyer’s “control” is whether he can practicably effect control without undue commercial burden.

3. The explicit provisions for reimbursement and compensation to the buyer in subsection (2) are applicable and necessary only where he is not acting under instructions from the seller. As provided in subsection (1) the seller’s instructions to be “reasonable” must on demand of the buyer include indemnity for expenses.

Cross References:

Definitional Cross References:

Collateral References.

67 Am. Jur. 2d, Sales, §§ 598-600.

77A C.J.S. Sales, § 351.

41-02-67. (2-604) Buyer’s options as to salvage of rightfully rejected goods.

Subject to the provisions of section 41-02-66 on perishables, if the seller gives no instructions within a reasonable time after notification of rejection, the buyer may store the rejected goods for the seller’s account or reship them to the seller or resell them for the seller’s account with reimbursement as provided in section 41-02-66. Such action is not acceptance or conversion.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

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:

Definitional Cross References:

41-02-68. (2-605) Waiver of buyer’s objections by failure to particularize.

1. The buyer’s failure to state in connection with rejection a particular defect which is ascertainable by reasonable inspection precludes the buyer from relying on the unstated defect to justify rejection or to establish breach:
   1. If the seller could have cured it if stated seasonably; or
   2. Between merchants when the seller has after rejection made a request in writing for a full and final written statement of all defects on which the buyer proposes to rely.
2. Payment against documents made without reservation of rights precludes recovery of the payment for defects apparent in the documents.
3. Subsection (2) has been amended to make clear that a buyer that makes payment upon presentation of the documents to the buyer may waive defects, but that a person that is not the buyer, such as the issuer of a letter of credit that pays as against documents, is not waiving the buyer’s right to assert defects in the documents as against the seller.

Source: S.L. 1965, ch. 296, § 1; 2005, ch. 354, § 11.

Official Comments.

1. This section rests upon a policy of permitting the buyer to give a quick and informal notice of defects in a tender without penalizing the buyer for omissions, while at the same time protecting a seller that is reasonably misled by the buyer’s failure to state curable defects. When the defect in a tender is one which could have been cured by the seller, a buyer that merely rejects the delivery without stating any objections to the tender is probably acting in commercial bad faith and is seeking to get out of a agreement which has become unprofitable. Following the general policy of this Article to preserve the deal wherever possible, subsection (1)(a) requires that the seller’s right to correct the tender in the circumstances be protected.

Subsection (1) as amended makes three substantive changes. First, the failure to particularize affects only the buyer’s right to reject or revoke acceptance. It does not affect the buyer’s right to establish a breach of the agreement. Waiver of a right to damages for breach because of a failure properly to notify the seller is governed by Section 2-607(3).

Second, subsection (1) now requires the seller to have had a right to cure under Section 2-508 in addition to having the ability to cure. This point was perhaps implicit in the original provision, but it is now expressly stated to avoid any question of whether this section creates a seller’s right to cure independent of the right enumerated in Section 2-508. Thus, if the defect is one that could be cured under Section 2-508, the buyer will have waived that defect as a basis for rejecting the goods or revoking acceptance if the buyer fails to state the defect with sufficient particularity to facilitate the seller’s exercise of its right to cure as provided in Section 2-508.

Subsection (1) as revised has been extended to include a notice requirement not only as to rejection but also as to revocation of acceptance. This is necessitated by the expansion of the right to cure (Section 2-508) to cover revocation of acceptance in nonconsumer contracts. The application of the subsection to revocation cases is limited in the following ways: 1) because a revocation under Section 2-608(1)(a) does not activate a right to cure under Section 2-508, the revocation does not activate subsection (1); 2) because Section 2-608(1)(b) involves defects that are by definition difficult to discover, there is no waiver under subsection (1) unless the defect justifies the revocation and the buyer has notice of it; and 3) because the right to cure following revocation of acceptance is restricted under Section 2-508 to nonconsumer contracts, this notice requirement does not apply to a consumer who is seeking to revoke acceptance.

2. When the time for cure has passed, subsection (1)(b) provides that a merchant seller is entitled upon request to a final statement of objections by a merchant buyer upon which the seller can rely. What is needed is a clear statement to the buyer of exactly what is being sought. A formal demand will be sufficient in the case of a merchant-buyer.

Subsection (2) applies to documents the same principle contained in Section 2-606(1)(a) for the acceptance of goods; that is, if the buyer accepts documents that have apparent defects, the buyer is presumed to have waived the defects as a basis for rejecting the documents. Subsection (2) is limited to defects which are apparent on the face of the documents. When payment is required against documents, the documents must be inspected before the payment, and the payment constitutes acceptance of the documents. When the documents are delivered without requiring a contemporary payment by the buyer, the acceptance of the documents by non-objection is postponed until after a reasonable time for the buyer to inspect the documents. In either situation, however, the buyer “waives” only what is apparent on the face of the documents. Moreover, in either case, the acceptance of the documents does not constitute an acceptance of the goods and does not impair any options or remedies of the buyer for improper delivery of the goods. See Section 2-512(2).

Cross References:

Definitional Cross References:

Cross-References.

Cure by seller of improper tender or delivery, see N.D.C.C. § 41-02-56.

Payment by buyer before inspection, see N.D.C.C. § 41-02-60.

41-02-69. (2-606) What constitutes acceptance of goods.

1. Acceptance of goods occurs when the buyer:
   1. After a reasonable opportunity to inspect the goods signifies to the seller that the goods are conforming or that the buyer will take or retain them in spite of their nonconformity;
   2. Fails to make an effective rejection (subsection 1 of section 41-02-65), but such acceptance does not occur until the buyer has had a reasonable opportunity to inspect them; or
   3. Does any act inconsistent with the seller’s ownership but, if such act is wrongful as against the seller, it is an acceptance only if ratified by the seller.
2. Acceptance of a part of any commercial unit is acceptance of that entire unit.
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.
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.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Changes:

Former Section 1-101.

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.

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.

Cross References:

Definitional Cross References:

41-02-70. (2-607) Effect of acceptance — Notice of breach — Burden of establishing breach after acceptance — Notice of claim or litigation to person answerable over.

1. The buyer must pay at the contract rate for any goods accepted.
2. Acceptance of goods by the buyer precludes rejection of the goods accepted and, if made with knowledge of a nonconformity, cannot be revoked because of it unless the acceptance was on the reasonable assumption that the nonconformity would be seasonably cured but acceptance does not of itself impair any other remedy provided by this chapter for nonconformity.
3. If a tender has been accepted:
   1. The buyer must within a reasonable time after the buyer discovers or should have discovered any breach notify the seller of breach or be barred from any remedy.
   2. If the claim is one for infringement or the like (subsection 3 of section 41-02-29) and the buyer is sued as a result of such a breach, the buyer must so notify the seller within a reasonable time after the buyer receives notice of the litigation or be barred from any remedy over for liability established by the litigation.
4. The burden is on the buyer to establish any breach with respect to the goods accepted.
5. If the buyer is sued for breach of a warranty or other obligation for which the buyer’s seller is answerable over:
   1. The buyer may give the buyer’s seller written notice of the litigation. If the notice states that the seller may come in and defend and that if the seller does not do so the seller will be bound in any action against the seller by the seller’s buyer by any determination of fact common to the two litigations, then unless the seller after seasonable receipt of the notice does come in and defend the seller is so bound.
   2. If the claim is one for infringement or the like (subsection 3 of section 41-02-29) the original seller may demand in writing that the original seller’s buyer turn over to the original seller control of the litigation including settlement or else be barred from any remedy over and if the original seller also agrees to bear all expense and to satisfy any adverse judgment, then unless the buyer after seasonable receipt of the demand does turn over control the buyer is so barred.
6. The provisions of subsections 3, 4, and 5 apply to any obligation of a buyer to hold the seller harmless against infringement or the like (subsection 3 of section 41-02-29).
7. The vouching-in procedure in subsection (5) includes indemnity actions, and it includes any other party that is answerable over, not just the immediate seller.
8. Subsections (3)(b) and (5)(b) give a warrantor against infringement an opportunity to defend or compromise third-party claims or be relieved of liability. Subsection (5)(a) codifies for all warranties the practice of voucher to defend. Subsection (6) makes these provisions applicable to the buyer’s liability for infringement under Section 2-312.
9. All of the provisions of this section are subject to any explicit reservation of rights. Section 1-308.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

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. Usually this is to be determined in terms of “the contract rate,” which is the rate determined from the agreement based on the rules and policies of this Article.

2. Under subsection (2) acceptance of goods precludes their subsequent rejection of the goods. Any return of the goods thereafter must be by way of revocation of acceptance under Section 2-608. 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 for future installments despite the buyer’s acceptance of any earlier non-conforming installment.

4. Subsection (3)(a) provides that the buyer must, within a reasonable time of the discovery, or when the buyer should have discovered any breach, give the seller notification of the breach. A failure to give this notice to the seller bars the buyer from a remedy for breach of contract if the seller suffers prejudice due to the failure to notify. See Restatement (Second) of Contracts § 229, which provides for an excuse of a condition where the failure is not material and implementation would result in a disproportionate forfeiture.

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 that case it could be extended beyond what would be a “commercially” reasonable time’ in appropriate circumstances because the requirement of notification is meant to defeat commercial bad faith, not to deprive a good faith consumer of a remedy.

The content of the notification need merely be sufficient to let the seller know that the transaction is still troublesome and must be watched. There is no reason to require that the notification which saves the buyer’s rights under this section must include a clear statement of all the objections that will be relied on by the buyer, as is required for statements of defects upon rejection (Section 2-605). Nor is there reason to require the notification to be a claim for damages or of any threatened litigation or other resort to a remedy. The notification which preserves the buyer’s rights under this Article need only be one that informs the seller that the transaction is claimed to involve a breach, and thus opens the way for normal settlement through negotiation.

5. Under this Article various beneficiaries are given rights for injuries sustained by them because of the seller’s breach of warranty. Such a beneficiary does not fall within the reason of the present section in regard to discovery of defects and the giving of notice within a reasonable time after acceptance, since he has nothing to do with acceptance. However, the reason of this section does extend to requiring the beneficiary to notify the seller that an injury has occurred. What is said above, with regard to the extended time for reasonable notification from the lay consumer after the injury is also applicable here; but even a beneficiary can be properly held to the use of good faith in notifying, once he has had time to become aware of the legal situation.

6. Subsection (4) unambiguously places the burden of proof to establish breach on the buyer after acceptance. However, this rule becomes one purely of procedure when the tender accepted was non-conforming and the buyer has given the seller notice of breach under subsection (3). For subsection (2) makes it clear that acceptance leaves unimpaired the buyer’s right to be made whole, and that right can be exercised by the buyer not only by way of cross-claim for damages, but also by way of recoupment in diminution or extinction of the price.

Vouching-in does not confer on the notified seller a right to intervene, does not confer jurisdiction of any kind on the court over the seller, and does not create a duty to defend on the part of the seller. Those matters continue to be governed by the applicable rules of civil procedure and substantive law outside this section. Vouching in is based upon the principle that the seller is liable for its contractual obligations for quality or title to the goods which the buyer is being forced to defend.

Cross References:

Definitional Cross References:

Cross-References.

Deduction of damages from the price, see N.D.C.C. § 41-02-96.

Notice and notification, see N.D.C.C. § 41-01-09.

Performance or acceptance under reservation of rights, see N.D.C.C. § 41-01-22.

Reasonable time, see N.D.C.C. § 41-01-13.

Third-party beneficiaries of warranties, see N.D.C.C. § 41-02-35.

41-02-71. (2-608) Revocation of acceptance in whole or in part.

1. The buyer may revoke the buyer’s acceptance of a lot or commercial unit whose nonconformity substantially impairs its value to the buyer if the buyer has accepted it:
   1. On the reasonable assumption that its nonconformity would be cured and it has not been seasonably cured; or
   2. Without discovery of such nonconformity if the buyer’s acceptance was reasonably induced either by the difficulty of discovery before acceptance or by the seller’s assurances.
2. Revocation of acceptance must occur within a reasonable time after the buyer discovers or should have discovered the ground for it and before any substantial change in condition of the goods which is not caused by their own defects. It is not effective until the buyer notifies the seller of it.
3. A buyer who so revokes has the same rights and duties with regard to the goods involved as if the buyer had rejected them.
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.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

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.

Cross References:

Definitional Cross References:

Cross-References.

Reasonable time, see N.D.C.C. § 41-01-13.

41-02-72. (2-609) Right to adequate assurance of performance.

1. A contract for sale imposes an obligation on each party that the other’s expectation of receiving due performance will not be impaired. When reasonable grounds for insecurity arise with respect to the performance of either party, the other party may in writing demand adequate assurance of due performance and until the demanding party receives such assurance may if commercially reasonable suspend any performance for which the demanding party has not already received the agreed return.
2. Between merchants the reasonableness of grounds for insecurity and the adequacy of any assurance offered shall be determined according to commercial standards.
3. Acceptance of any improper delivery or payment does not prejudice the aggrieved party’s right to demand adequate assurance of future performance.
4. After receipt of a justified demand, failure to provide within a reasonable time not exceeding thirty days such assurance of due performance as is adequate under the circumstances of the particular case is a repudiation of the contract.
5. A failure to provide adequate assurance of performance and thereby to re-establish the security of expectation, results in a breach only “by repudiation” under subsection (4). Therefore, the possibility is continued of retraction of the repudiation under the section dealing with that problem, unless the aggrieved party has acted on the breach in some manner.
6. Clauses seeking to give the protected party exceedingly wide powers to cancel or readjust the contract when ground for insecurity arises must be read against the fact that good faith is a part of the obligation of the contract and not subject to modification by agreement and includes, in the case of a merchant, the reasonable observance of commercial standards of fair dealing in the trade. Such clauses can thus be effective to enlarge the protection given by the present section to a certain extent, to fix the reasonable time within which requested assurance must be given, or to define adequacy of the assurance in any commercially reasonable fashion. But any clause seeking to set up arbitrary standards for action is ineffective under this Article. Acceleration clauses are treated similarly in the Articles on Commercial Paper and Secured Transactions.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Purposes:

1. The section rests on the recognition of the fact that the essential purpose of a contract between commercial men is actual performance and they do not bargain merely for a promise, or for a promise plus the right to win a lawsuit and that a continuing sense of reliance and security that the promised performance will be forthcoming when due, is an important feature of the bargain. If either the willingness or the ability of a party to perform declines materially between the time of contracting and the time for performance, the other party is threatened with the loss of a substantial part of what he has bargained for. A seller needs protection not merely against having to deliver on credit to a shaky buyer, but also against having to procure and manufacture the goods, perhaps turning down other customers. Once he has been given reason to believe that the buyer’s performance has become uncertain, it is an undue hardship to force him to continue his own performance. Similarly, a buyer who believes that the seller’s deliveries have become uncertain cannot safely wait for the due date of performance when he has been buying to assure himself of materials for his current manufacturing or to replenish his stock of merchandise.

2. Three measures have been adopted to meet the needs of commercial men in such situations. First, the aggrieved party is permitted to suspend his own performance and any preparation therefor, with excuse for any resulting necessary delay, until the situation has been clarified. “Suspend performance” under this section means to hold up performance pending the outcome of the demand, and includes also the holding up of any preparatory action. This is the same principle which governs the ancient law of stoppage and seller’s lien, and also of excuse of a buyer from prepayment if the seller’s actions manifest that he cannot or will not perform. (Original Act, Section 63(2).)

Secondly, the aggrieved party is given the right to require adequate assurance that the other party’s performance will be duly forthcoming. This principle is reflected in the familiar clauses permitting the seller to curtail deliveries if the buyer’s credit becomes impaired, which when held within the limits of reasonableness and good faith actually express no more than the fair business meaning of any commercial contract.

Third, and finally, this section provides the means by which the aggrieved party may treat the contract as broken if his reasonable grounds for insecurity are not cleared up within a reasonable time. This is the principle underlying the law of anticipatory breach, whether by way of defective part performance or by repudiation. The present section merges these three principles of law and commercial practice into a single theory of general application to all sales agreements looking to future performance.

3. Subsection (2) of the present section requires that “reasonable” grounds and “adequate” assurance as used in subsection (1) be defined by commercial rather than legal standards. The express reference to commercial standards carries no connotation that the obligation of good faith is not equally applicable here.

Under commercial standards and in accord with commercial practice, a ground for insecurity need not arise from or be directly related to the contract in question. The law as to “dependence” or “independence” of promises within a single contract does not control the application of the present section.

Thus a buyer who falls behind in “his account” with the seller, even though the items involved have to do with separate and legally distinct contracts, impairs the seller’s expectation of due performance. Again, under the same test, a buyer who requires precision parts which he intends to use immediately upon delivery, may have reasonable grounds for insecurity if he discovers that his seller is making defective deliveries of such parts to other buyers with similar needs. Thus, too, in a situation such as arose in Jay Dreher Corporation v. Delco Appliance Corporation, 93 F.2d 275 (C.C.A. 2, 1937), where a manufacturer gave a dealer an exclusive franchise for the sale of his product but on two or three occasions breached the exclusive dealing clause, although there was no default in orders, deliveries or payments under the separate sales contract between the parties, the aggrieved dealer would be entitled to suspend his performance of the contract for sale under the present section and to demand assurance that the exclusive dealing contract would be lived up to. There is no need for an explicit clause tying the exclusive franchise into the contract for the sale of goods since the situation itself ties the agreements together.

The nature of the sales contract enters also into the question of reasonableness. For example, a report from an apparently trustworthy source that the seller had shipped defective goods or was planning to ship them would normally give the buyer reasonable grounds for insecurity. But when the buyer has assumed the risk of payment before inspection of the goods, as in a sales contract on C.I.F. or similar cash against documents terms, that risk is not to be evaded by a demand for assurance. Therefore no ground for insecurity would exist under this section unless the report went to a ground which would excuse payment by the buyer.

4. What constitutes “adequate” assurance of due performance is subject to the same test of factual conditions. For example, where the buyer can make use of a defective delivery, a mere promise by a seller of good repute that he is giving the matter his attention and that the defect will not be repeated, is normally sufficient. Under the same circumstances, however, a similar statement by a known corner-cutter might well be considered insufficient without the posting of a guaranty or, if so demanded by the buyer, a speedy replacement of the delivery involved. By the same token where a delivery has defects, even though easily curable, which interfere with easy use by the buyer, no verbal assurance can be deemed adequate which is not accompanied by replacement, repair, money-allowance, or other commercially reasonable cure.

A fact situation such as arose in Corn Products Refining Co. v. Fasola, 94 N.J.L. 181, 109 A. 505 (1920) offers illustration both of reasonable grounds for insecurity and “adequate” assurance. In that case a contract for the sale of oils on 30 days’ credit, 2% off for payment within 10 days, provided that credit was to be extended to the buyer only if his financial responsibility was satisfactory to the seller. The buyer had been in the habit of taking advantage of the discount but at the same time that he failed to make his customary 10 day payment, the seller heard rumors, in fact false, that the buyer’s financial condition was shaky. Thereupon, the seller demanded cash before shipment or security satisfactory to him. The buyer sent a good credit report from his banker, expressed willingness to make payments when due on the 30 day terms and insisted on further deliveries under the contract. Under this Article the rumors, although false, were enough to make the buyer’s financial condition “unsatisfactory” to the seller under the contract clause. Moreover, the buyer’s practice of taking the cash discounts is enough, apart from the contract clause, to lay a commercial foundation for suspicion when the practice is suddenly stopped. These matters, however, go only to the justification of the seller’s demand for security, or his “reasonable grounds for insecurity”.

The adequacy of the assurance given is not measured as in the type of “satisfaction” situation affected with intangibles, such as in personal service cases, cases involving a third party’s judgment as final, or cases in which the whole contract is dependent on one party’s satisfaction, as in a sale on approval. Here, the seller must exercise good faith and observe commercial standards. This Article thus approves the statement of the court in James B. Berry’s Sons Co. of Illinois v. Monark Gasoline & Oil Co., Inc., 32 F.2d 74 (C.C.A. 8, 1929), that the seller’s satisfaction under such a clause must be based upon reason and must not be arbitrary or capricious; and rejects the purely personal “good faith” test of the Corn Products Refining Co. case, which held that in the seller’s sole judgment, if for any reason he was dissatisfied, he was entitled to revoke the credit. In the absence of the buyer’s failure to take the 2% discount as was his custom, the banker’s report given in that case would have been “adequate” assurance under this Act, regardless of the language of the “satisfaction” clause. However, the seller is reasonably entitled to feel insecure at a sudden expansion of the buyer’s use of a credit term, and should be entitled either to security or to a satisfactory explanation.

The entire foregoing discussion as to adequacy of assurance by way of explanation is subject to qualification when repeated occasions for the application of this section arise. This Act recognizes that repeated delinquencies must be viewed as cumulative. On the other hand, commercial sense also requires that if repeated claims for assurance are made under this section, the basis for these claims must be increasingly obvious.

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.

Cross References:

Definitional Cross References:

Cross-References.

Obligation of good faith, see N.D.C.C. § 41-01-18.

Option to accelerate at will, see N.D.C.C. § 41-01-23.

41-02-73. (2-610) Anticipatory repudiation.

When either party repudiates the contract with respect to a performance not yet due, the loss of which will substantially impair the value of the contract to the other, the aggrieved party may:

1. For a commercially reasonable time await performance by the repudiating party; or
2. Resort to any remedy for breach (section 41-02-82 or section 41-02-90), even though the aggrieved party has notified the repudiating party that the aggrieved party would await the latter’s performance and has urged retraction; and
3. In either case suspend the aggrieved party’s own performance or proceed in accordance with the provisions of this chapter on the seller’s right to identify goods to the contract notwithstanding breach or to salvage unfinished goods (section 41-02-83).
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.

Source: S.L. 1965, ch. 296, § 1.

Note.

Section 41-02-43 is set out above to reflect changes in the paragraph numbering scheme made by the state revisor since the publication of the 2010 replacement volume.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Purposes:

To make it clear that:

1. With the problem of insecurity taken care of by the preceding section and with provision being made in this Article as to the effect of a defective delivery under an installment contract, anticipatory repudiation centers upon an overt communication of intention or an action which renders performance impossible or demonstrates a clear determination not to continue with performance.

Under the present section when such a repudiation substantially impairs the value of the contract, the aggrieved party may at any time resort to his remedies for breach, or he may suspend his own performance while he negotiates with, or awaits performance by, the other party. But if he awaits performance beyond a commercially reasonable time he cannot recover resulting damages which he should have avoided.

2. It is not necessary for repudiation that performance be made literally and utterly impossible. Repudiation can result from action which reasonably indicates a rejection of the continuing obligation. And, a repudiation automatically results under the preceding section on insecurity when a party fails to provide adequate assurance of due future performance within thirty days after a justifiable demand therefor has been made. Under the language of this section, a demand by one or both parties for more than the contract calls for in the way of counter-performance is not in itself a repudiation nor does it invalidate a plain expression of desire for future performance. However, when under a fair reading it amounts to a statement of intention not to perform except on conditions which go beyond the contract, it becomes a repudiation.

3. The test chosen to justify an aggrieved party’s action under this section is the same as that in the section on breach in installment contracts-namely the substantial value of the contract. The most useful test of substantial value is to determine whether material inconvenience or injustice will result if the aggrieved party is forced to wait and receive an ultimate tender minus the part or aspect repudiated.

Cross References:

Definitional Cross References:

Cross-References.

Obligation of good faith, see N.D.C.C. § 41-01-18.

41-02-74. (2-611) Retraction of anticipatory repudiation.

1. Until the repudiating party’s next performance is due, the repudiating party can retract the party’s repudiation unless the aggrieved party has since the repudiation canceled or materially changed the aggrieved party’s position or otherwise indicated that the aggrieved party considers the repudiation final.
2. Retraction may be by any method which clearly indicates to the aggrieved party that the repudiating party intends to perform, but must include any assurance justifiably demanded under the provisions of this chapter (section 41-02-72).
3. Retraction reinstates the repudiating party’s rights under the contract with due excuse and allowance to the aggrieved party for any delay occasioned by the repudiation.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

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-References:

Definitional Cross References:

41-02-75. (2-612) Installment contract — Breach.

1. An “installment contract” is one which requires or authorizes the delivery of goods in separate lots to be separately accepted, even though the contract contains a clause “each delivery is a separate contract” or its equivalent.
2. The buyer may reject any installment that is nonconforming if the nonconformity substantially impairs the value of that installment and cannot be cured or if the nonconformity is a defect in the required documents but, if the nonconformity does not fall within subsection 3 and the seller gives adequate assurance of its cure, the buyer must accept that installment.
3. Whenever nonconformity or default with respect to one or more installments substantially impairs the value of the whole contract, there is a breach of the whole. But the aggrieved party reinstates the contract if the aggrieved party accepts a nonconforming installment without seasonably notifying of cancellation or if the aggrieved party brings an action with respect only to past installments or demands performance as to future installments.
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 the conformity is made clear either by express provision or by the circumstances. In this case the effect of the agreement is to define explicitly what amounts to substantial impairment of value. A clause that requires accurate compliance as a condition to the right to acceptance must, however, have some basis in reason, must avoid imposing hardship by surprise, and it is subject to waiver or to displacement by practical construction.
5. 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 contract that requires these documents, falsity of a bill of lading, or one failing to show shipment within the contract period or to the contract destination. Even in these cases, however, the provisions on cure of tender may apply if appropriate documents are readily procurable.
6. Subsection (3) is designed to further the continuance of the contract in the absence of an overt cancellation. The question arising when an action is brought as to a single installment only is resolved by making such action waive the right to cancellation. This involves merely a defect in one or more installments, as contrasted with the situation where there is a true repudiation within the section on anticipatory repudiation. Whether the non-conformity in any given installment justifies cancellation as to the future depends, not on whether such non-conformity indicates an intent or likelihood that the future deliveries will also be defective, but whether the non-conformity substantially impairs the value of the whole contract. If only the seller’s security in regard to future installments is impaired, he has the right to demand adequate assurances of proper future performance but has not an immediate right to cancel the entire contract. It is clear under this Article, however, that defects in prior installments are cumulative in effect, so that acceptance does not wash out the defect “waived.” Prior policy is continued, putting the rule as to buyer’s default on the same footing as that in regard to seller’s default.
7. Under the requirement of seasonable notification of cancellation under subsection (3), a buyer who accepts a non-conforming installment which substantially impairs the value of the entire contract should properly be permitted to withhold his decision as to whether or not to cancel pending a response from the seller as to his claim for cure or adjustment. Similarly, a seller may withhold a delivery pending payment for prior ones, at the same time delaying his decision as to cancellation. A reasonable time for notifying of cancellation, judged by commercial standard under the section on good faith, extends of course to include the time covered by any reasonable negotiation in good faith. However, during this period the defaulting party is entitled, on request, to know whether the contract is still in effect, before he can be required to perform further.
8. Subsection (2) makes it clear that the buyer’s right in the first instance to reject an installment depends upon whether there has been a substantial impairment of the value of the installment to the buyer and not on the seller’s ability to cure the nonconformity. The seller can prevent a rightful rejection by giving adequate assurances of cure. Subsection (2) uses the words “to the buyer” to clarify that the standard for rejecting an installment consistent is the same standard for revoking acceptance under Section 2-608. Therefore, the test is not what the seller had reason to know at the time of contracting; the question is whether the non-conformity is one that will cause a substantial impairment of value to the buyer even though the seller had no knowledge about the buyer’s particular circumstances at the time of contracting.

Source: S.L. 1965, ch. 296, § 1; 1967, ch. 345, § 3.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Changes:

Rewritten.

Purposes of Changes:

To continue prior law but to make explicit the more mercantile interpretation of many of the rules involved, so that:

1. The definition of an installment contract is phrased more broadly in this Article so as to cover installment deliveries tacitly authorized by the circumstances or by the option of either party.

2. In regard to the apportionment of the price for separate payment this Article applies the more liberal test of what can be apportioned rather than the test of what is clearly apportioned by the agreement. This Article also recognizes approximate calculation or apportionment of price subject to subsequent adjustment. A provision for separate payment for each lot delivered ordinarily means that the price is at least roughly calculable by units of quantity, but such a provision is not essential to an “installment contract.” If separate acceptance of separate deliveries is contemplated, no generalized contrast between wholly “entire” and wholly “divisible” contracts has any standing under this Article.

3. This Article rejects any approach which gives clauses such as “each delivery is a separate contract” their legalistically literal effect. Such contracts nonetheless call for installment deliveries. Even where a clause speaks of “a separate contract for all purposes”, a commercial reading of the language under the section on good faith and commercial standards requires that the singleness of the document and the negotiation, together with the sense of the situation, prevail over any uncommercial and legalistic interpretation.

Cross References:

Definitional Cross References:

Cross-References.

Course of performance or practical construction, see N.D.C.C. § 41-01-17.

Delivery in single or several lots, see N.D.C.C. § 41-02-24.

Obligation of good faith, see N.D.C.C. § 41-01-18.

Collateral References.

Sales 62, 163.

67 Am. Jur. 2d, Sales, §§ 617-624.

77A C.J.S. Sales, §§ 298, 349, 350.

Sales: construction and application of UCC § 2-612(2), dealing with rejection of goods under installment contracts, 61 A.L.R.5th 611.

41-02-76. (2-613) Casualty to identified goods.

If the contract requires for its performance goods identified when the contract is made, and the goods suffer casualty without fault of either party before the risk of loss passes to the buyer, or in a proper case under a “no arrival, no sale” term (section 41-02-41) then:

1. If the loss is total, the contract is avoided.
2. If the loss is partial or the goods have so deteriorated as no longer to conform to the contract, the buyer may nevertheless demand inspection and at the buyer’s option either treat the contract as avoided or accept the goods with due allowance from the contract price for the deterioration or the deficiency in quantity but without further right against the seller.
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.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Changes:

Former Section 1-101.

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 willful 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.

Cross-References:

Definitional Cross References:

41-02-77. (2-614) Substituted performance.

1. If without fault of either party the agreed berthing, loading, or unloading facilities fail or an agreed type of carrier becomes unavailable or the agreed manner of delivery otherwise becomes commercially impracticable but a commercially reasonable substitute is available, such substitute performance must be tendered and accepted.
2. If the agreed means or manner of payment fails because of domestic or foreign governmental regulation, the seller may withhold or stop delivery unless the buyer provides a means or manner of payment which is commercially a substantial equivalent. If delivery has already been taken, payment by the means or in the manner provided by the regulation discharges the buyer’s obligation unless the regulation is discriminatory, oppressive, or predatory.
3. Under subsection (2), when the contract is still executory on both sides, the seller is permitted to withdraw unless the buyer can provide the seller with a commercially equivalent performance despite the governmental regulation. When, 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 a commercially equivalent performance, provided that the regulation is not “discriminatory, oppressive or predatory.”

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

1. Subsection (1) requires the tender of a commercially reasonable substituted performance where agreed to facilities have failed or have become commercially impracticable. Under this Article, in the absence of a specific agreement, the normal or usual facilities enter into the agreement either through the circumstances of the transaction, a usage of trade or a prior course of dealing between the parties.

This section appears between Section 2-613 on casualty to identified goods and Section 2-615 on excuse by failure of presupposed conditions. Those two sections deal with excuse and complete avoidance of the contract when 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 is 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 that party from strict compliance with the contract terms which do not go to the essence of the agreement.

2. The substitution provided for 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 the financing 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 Section 5-108.

Cross-References:

Definitional Cross References:

Cross-References.

Letters of credit, see ch. 41-05.

Collateral References.

67 Am. Jur. 2d, Sales, § 542.

Impracticality of performance of sales contract under UCC § 2-615, 55 A.L.R.5th 1.

41-02-78. (2-615) Excuse by failure of presupposed conditions.

Except so far as a seller may have assumed a greater obligation and subject to section 41-02-77 on substituted performance:

1. Delay in delivery or nondelivery in whole or in part by a seller who complies with subsections 2 and 3 is not a breach of the seller’s duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the nonoccurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.
2. If the causes mentioned in subsection 1 affect only a part of the seller’s capacity to perform, the seller must allocate production and deliveries among the seller’s customers but may at the seller’s option include regular customers not then under contract as well as the seller’s own requirements for further manufacture. The seller may so allocate in any manner which is fair and reasonable.
3. The seller must notify the buyer seasonably that there will be delay or nondelivery and, when allocation is required under subsection 2, of the estimated quota thus made available for the buyer.
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.
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.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

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.

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 subcontract known to be based on a prime contract which is subject to termination, or a supply contract for a particular construction venture, the reason of the present section may well apply and entitle the buyer to the exemption.

Cross References:

Definitional Cross References:

Cross-References.

Notice and notification, see N.D.C.C. § 41-01-09.

Obligation of good faith, see N.D.C.C. § 41-01-18.

Output, requirements and exclusive dealings, see N.D.C.C. § 41-02-23.

Rules of construction, variation by agreement, see N.D.C.C. § 41-01-16.

Unconscionable contract or clause, see N.D.C.C. § 41-02-19.

41-02-79. (2-616) Procedure on notice claiming excuse.

1. If the buyer receives notification of a material or indefinite delay or an allocation justified under section 41-02-78 the buyer may by written notification to the seller as to any delivery concerned, and if the prospective deficiency substantially impairs the value of the whole contract under the provisions of this chapter relating to breach of installment contracts (section 41-02-75), then also as to the whole:
   1. Terminate and thereby discharge any unexecuted portion of the contract; or
   2. Modify the contract by agreeing to take the buyer’s available quota in substitution.
2. If after receipt of such notification from the seller the buyer fails so to modify the contract within a reasonable time not exceeding thirty days, the contract lapses with respect to any deliveries affected.
3. The provisions of this section may not be negated by agreement except insofar as the seller has assumed a greater obligation under section 41-02-78.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

None. [Note: North Dakota has not adopted the most current version of this section of the UCC—therefore, the official comment to the former version has been set out below.]

Purposes:

Former Section 1-101.

Cross References:

Definitional Cross References:

Cross-References.

Modification, rescission and waiver, see N.D.C.C. § 41-02-16.

41-02-80. (2-701) Remedies for breach of collateral contracts not impaired.

Remedies for breach of any obligation or promise collateral or ancillary to a contract for sale are not impaired by the provisions of this chapter.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

None.

Purposes:

Former Section 1-101.

Definitional Cross References:

Cross-References.

Measure of damages for breach of contract, see N.D.C.C. § 32-03-09.

Collateral References.

67A Am. Jur. 2d, Sales, §§ 797 et seq.

41-02-81. (2-702) Seller’s remedies on discovery of buyer’s insolvency.

1. When the seller discovers the buyer to be insolvent, the seller may refuse delivery except for cash including payment for all goods theretofore delivered under the contract, and stop delivery under this chapter (section 41-02-84).
2. If the seller discovers that the buyer has received goods on credit while insolvent the seller may reclaim the goods upon demand made within ten days after the receipt, but if misrepresentation of solvency has been made to the particular seller in writing within three months before delivery, the ten-day limitation does not apply. Except as provided in this subsection, the seller may not base a right to reclaim goods on the buyer’s fraudulent or innocent misrepresentation of solvency or of intent to pay.
3. The seller’s right to reclaim under subsection 2 is subject to the rights of a buyer in ordinary course or other good-faith purchaser under this chapter (section 41-02-48). Successful reclamation of goods excludes all other remedies with respect to them.
4. Notwithstanding any other provision of this section, a producer of agricultural products, upon discovery of the buyer’s insolvency, may reclaim the products within ten days after the receipt, but if misrepresentation of solvency has been made to the producer in writing within three months before delivery, the ten-day limitation does not apply. The producer’s right to reclaim is not subject to the rights of a buyer in the ordinary course of business or other good-faith purchaser.

Source: S.L. 1965, ch. 296, § 1; 1967, ch. 345, § 4; 1977, ch. 395, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Changes:

Former Section 1-101.

Purposes of Changes and New Matter:

To make it clear that:

1. The seller’s right to withhold the goods or to stop delivery except for cash when he discovers the buyer’s insolvency is made explicit in subsection (1) regardless of the passage of title, and the concept of stoppage has been extended to include goods in the possession of any bailee who has not yet attorned to the buyer.

2. Subsection (2) takes as its base line the proposition that any receipt of goods on credit by an insolvent buyer amounts to a tacit business misrepresentation of solvency and therefore is fraudulent as against the particular seller. This Article makes discovery of the buyer’s insolvency and demand within a ten day period a condition of the right to reclaim goods on this ground. The ten day limitation period operates from the time of receipt of the goods.

An exception to this time limitation is made when a written misrepresentation of solvency has been made to the particular seller within three months prior to the delivery. To fall within the exception the statement of solvency must be in writing, addressed to the particular seller and dated within three months of the delivery.

3. Because the right of the seller to reclaim goods under this section constitutes preferential treatment as against the buyer’s other creditors, subsection (3) provides that such reclamation bars all his other remedies as to the goods involved. As amended 1966.

Cross References:

Definitional Cross References:

Cross-References.

Buyer’s right to goods on seller’s insolvency, see N.D.C.C. § 41-02-50.

Passing of title, reservation for security, see N.D.C.C. § 41-02-46.

Collateral References.

Sales 291.

67A Am. Jur. 2d, Sales, §§ 927-948.

77A C.J.S. Sales, §§ 325, 339-342.

Law Reviews.

Credit Seller’s Reclamation Right When Third Parties Intervene, 62 N.D. L. Rev. 223 (1986).

41-02-82. (2-703) Seller’s remedies in general.

If the buyer wrongfully rejects or revokes acceptance of goods or fails to make a payment due on or before delivery or repudiates with respect to a part or the whole, then with respect to any goods directly affected and, if the breach is of the whole contract (section 41-02-75), then also with respect to the whole undelivered balance, the aggrieved seller may:

1. Withhold delivery of such goods.
2. Stop delivery by any bailee as hereafter provided (section 41-02-84).
3. Proceed under the next section respecting goods still unidentified to the contract.
4. Resell and recover damages as hereinafter provided (section 41-02-85).
5. Recover damages for nonacceptance (section 41-02-87) or in a proper case the price (section 41-02-88).
6. Cancel.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

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:

Definitional Cross References:

Cross-References.

Installment contract, breach, see N.D.C.C. § 41-02-75.

Letter of credit, failure to furnish, see N.D.C.C. § 41-02-42.

Remedies liberally administered, see N.D.C.C. § 41-01-19.

Vendor’s lien on personalty, see N.D.C.C. § 35-20-05.

41-02-83. (2-704) Seller’s right to identify goods to the contract notwithstanding breach or to salvage unfinished goods.

1. An aggrieved seller under section 41-02-82 may:
   1. Identify to the contract conforming goods not already identified if at the time the seller learned of the breach they are in the seller’s possession or control.
   2. Treat as the subject of resale goods which have demonstrably been intended for the particular contract even though those goods are unfinished.
2. If the goods are unfinished, an aggrieved seller may in the exercise of reasonable commercial judgment for the purposes of avoiding loss and of effective realization either complete the manufacture and wholly identify the goods to the contract or cease manufacture and resell for scrap or salvage value or proceed in any other reasonable manner.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Changes:

Former Section 1-101.

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:

Definitional Cross References:

Collateral References.

Sales 332 et seq.

67A Am. Jur. 2d, Sales, §§ 989-991.

77A C.J.S. Sales, § 557.

41-02-84. (2-705) Seller’s stoppage of delivery in transit or otherwise.

1. The seller may stop delivery of goods in the possession of a carrier or other bailee when the seller discovers the buyer to be insolvent (section 41-02-81) and may stop delivery of carload, truckload, planeload, or larger shipments of express or freight when the buyer repudiates or fails to make a payment due before delivery or if for any other reason the seller has a right to withhold or reclaim the goods.
2. As against such buyer, the seller may stop delivery until:
   1. Receipt of the goods by the buyer;
   2. Acknowledgment to the buyer by any bailee of the goods except a carrier that the bailee holds the goods for the buyer;
   3. Such acknowledgment to the buyer by a carrier by reshipment or as a warehouse; or
   4. Negotiation to the buyer of any negotiable document of title covering the goods.
3. 1. To stop delivery, the seller must so notify as to enable the bailee by reasonable diligence to prevent delivery of the goods.
   2. After such notification the bailee must hold and deliver the goods according to the directions of the seller but the seller is liable to the bailee for any ensuing charges or damages.
   3. If a negotiable document of title has been issued for goods, the bailee is not obliged to obey a notification to stop until surrender of possession or control of the document.
   4. A carrier who has issued a non-negotiable bill of lading is not obliged to obey a notification to stop received from a person other than the consignor.
4. Subsection (3)(c) makes the bailee’s obedience of a notification to stop conditional upon the surrender of any outstanding negotiable document.
5. The seller is responsible for any charges or losses incurred by the carrier in following the seller’s orders, whether or not the carrier was obligated to do so.
6. After an effective stoppage under this section the seller’s rights in the goods are the same as if the seller had never made a delivery.

Source: S.L. 1965, ch. 296, § 1; 2005, ch. 354, § 12.

Official Comments.

1. Subsection (1) applies when goods are in the possession of a carrier or other bailee. It applies, in addition to a buyer’s insolvency, also to any case where the buyer repudiates or fails to make a payment due before delivery or for any other reason the seller has the right to withhold or reclaim the goods. 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 the bailee may also be liable to the buyer. The measure of the obligation is dependent on the provisions of the Documents of Title Article (Section 7-303). Subsection 3(b) therefore gives the bailee a right of indemnity as against the seller in this case.

2. “Receipt by the buyer” includes receipt by the buyer’s designated representative, the subpurchaser, when shipment is made direct to the subpurchaser and the buyer never receives the goods. As between the buyer and the seller, the seller’s right to stop the goods at any time until they reach the place of final delivery is recognized by this section.

Under subsection (3)(c) and (d), the carrier is under no duty to recognize the stop order of a person who is a stranger to the carrier’s contract. But the seller’s right as against the buyer to stop delivery remains, whether or not the carrier is obligated to recognize the stop order. If the carrier does obey it, the buyer cannot complain merely because of that circumstance; and the seller becomes obligated under subsection (3)(b) to pay the carrier any ensuing damages or charges.

3. A diversion of a shipment is not a “reshipment” under subsection (2)(c) when it is merely an incident to the original contract of transportation, nor is the procurement of “exchange bills” of lading which change only the name of the consignee to that of the buyer’s local agent but do not alter the destination of a reshipment.

Acknowledgment by the carrier as a “warehouse” within the meaning of this Article requires a contract of a truly different character from the original shipment, a contract not in extension of transit but as a warehouse.

Cross References:

Definitional Cross References:

Cross-References.

Manner of seller’s tender of delivery, see N.D.C.C. § 41-02-51.

Receipt of goods by buyer, see N.D.C.C. § 41-02-03.

Right to adequate assurance of performance, see N.D.C.C. § 41-02-72.

Warehouse receipts, bills of lading and other documents of title, see N.D.C.C. ch. 41-07.

41-02-85. (2-706) Seller’s resale including contract for resale.

1. Under the conditions stated in section 41-02-82 on seller’s remedies, the seller may resell the goods concerned or the undelivered balance thereof. If the resale is made in good faith and in a commercially reasonable manner, the seller may recover the difference between the resale price and the contract price together with any incidental damages allowed under the provisions of this chapter (section 41-02-89), but less expenses saved in consequence of the buyer’s breach.
2. Except as otherwise provided in subsection 3 or unless otherwise agreed, resale may be at public or private sale including sale by way of one or more contracts to sell or of identification to an existing contract of the seller. Sale may be as a unit or in parcels and at any time and place and on any terms but every aspect of the sale including the method, manner, time, place, and terms must be commercially reasonable. The resale must be reasonably identified as referring to the broken contract, but it is not necessary that the goods be in existence or that any or all of them have been identified to the contract before the breach.
3. If the resale is at private sale, the seller must give the buyer reasonable notification of the seller’s intention to resell.
4. If the resale is at public sale:
   1. Only identified goods may be sold except when there is a recognized market for a public sale of futures in goods of the kind;
   2. It must be made at a usual place or market for public sale if one is reasonably available and, except in the case of goods which are perishable or threaten to decline in value speedily, the seller must give the buyer reasonable notice of the time and place of the resale;
   3. If the goods are not to be within the view of those attending the sale, the notification of sale must state the place where the goods are located and provide for their reasonable inspection by prospective bidders; and
   4. The seller may buy.
5. A purchaser who buys in good faith at a resale takes the goods free of any rights of the original buyer even though the seller fails to comply with one or more of the requirements of this section.
6. The seller is not accountable to the buyer for any profit made on any resale. A person in the position of a seller (section 41-02-86) or a buyer who has rightfully rejected or justifiably revoked acceptance must account for any excess over the amount of the person’s security interest, as hereinafter defined (subsection 3 of section 41-02-90).
7. The provision of subsection (2) that the goods need not be in existence to be resold applies when the buyer is guilty of anticipatory repudiation of a contract for future goods, before the goods or some of them have come into existence. In such a case the seller may exercise the right of resale and fix his damages by “one or more contracts to sell” the quantity of conforming future goods affected by the repudiation. The companion provision of subsection (2) that resale may be made although the goods were not identified to the contract prior to the buyer’s breach, likewise contemplates an anticipatory repudiation by the buyer but occurring after the goods are in existence. If the goods so identified conform to the contract, their resale will fix the seller’s damages quite as satisfactorily as if they had been identified before the breach.
8. Where the resale is to be by private sale, subsection (3) requires that reasonable notification of the seller’s intention to resell must be given to the buyer. The length of notification of a private sale depends upon the urgency of the matter. Notification of the time and place of this type of sale is not required.
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.
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).

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Changes:

Former Section 1-101.

Purposes of Changes:

To simplify the prior statutory provision and to make it clear that:

1. The only condition precedent to the seller’s right of resale under subsection (1) is a breach by the buyer within the section on the seller’s remedies in general or insolvency. Other meticulous conditions and restrictions of the prior uniform statutory provision are disapproved by this Article and are replaced by standards of commercial reasonableness. Under this section the seller may resell the goods after any breach by the buyer. Thus, an anticipatory repudiation by the buyer gives rise to any of the seller’s remedies for breach, and to the right of resale. This principle is supplemented by subsection (2) which authorizes a resale of goods which are not in existence or were not identified to the contract before the breach.

2. In order to recover the damages prescribed in subsection (1) the seller must act “in good faith and in a commercially reasonable manner” in making the resale. This standard is intended to be more comprehensive than that of “reasonable care and judgment” established by the prior uniform statutory provision. Failure to act properly under this section deprives the seller of the measure of damages here provided and relegates him to that provided in Section 2-708.

Under this Article the seller resells by authority of law, in his own behalf, for his own benefit and for the purpose of fixing his damages. The theory of a seller’s agency is thus rejected.

3. If the seller complies with the prescribed standard of duty in making the resale, he may recover from the buyer the damages provided for in subsection (1). Evidence of market or current prices at any particular time or place is relevant only on the question of whether the seller acted in a commercially reasonable manner in making the resale.

The distinction drawn by some courts between cases where the title had not passed to the buyer and the seller had resold as owner, and cases where the title had passed and the seller had resold by virtue of his lien on the goods, is rejected.

4. Subsection (2) frees the remedy of resale from legalistic restrictions and enables the seller to resell in accordance with reasonable commercial practices so as to realize as high a price as possible in the circumstances. By “public” sale is meant a sale by auction. A “private” sale may be effected by solicitation and negotiation conducted either directly or through a broker. In choosing between a public and private sale the character of the goods must be considered and relevant trade practices and usages must be observed.

5. Subsection (2) merely clarifies the common law rule that the time for resale is a reasonable time after the buyer’s breach, by using the language “commercially reasonable.” What is such a reasonable time depends upon the nature of the goods, the condition of the market and the other circumstances of the case; its length cannot be measured by any legal yardstick or divided into degrees. Where a seller contemplating resale receives a demand from the buyer for inspection under the section of preserving evidence of goods in dispute, the time for resale may be appropriately lengthened.

On the question of the place for resale, subsection (2) goes to the ultimate test, the commercial reasonableness of the seller’s choice as to the place for an advantageous resale. This Article rejects the theory that the seller is required to resell at the agreed place for delivery and that a resale elsewhere can be permitted only in exceptional cases.

6. The purpose of subsection (2) being to enable the seller to dispose of the goods to the best advantage, he is permitted in making the resale to depart from the terms and conditions of the original contract for sale to any extent “commercially reasonable” in the circumstances.

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.

Cross References:

Definitional Cross References:

Cross-References.

Anticipatory repudiation, see N.D.C.C. § 41-02-73.

“Good faith” defined, see N.D.C.C. § 41-01-09(2)(t).

Notice and notification, see N.D.C.C. § 41-01-09.

Passing of title, see N.D.C.C. § 41-02-46.

Sale by auction, see N.D.C.C. § 41-02-45.

41-02-86. (2-707) Person in the position of a seller.

1. A “person in the position of a seller” includes as against a principal an agent who has paid or becomes responsible for the price of goods on behalf of the agent’s principal or anyone who otherwise holds a security interest or other right in goods similar to that of a seller.
2. A person in the position of a seller may as provided in this chapter withhold or stop delivery (section 41-02-84) and resell (section 41-02-85) and recover incidental damages (section 41-02-89).

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Changes:

Rewritten. [Note: North Dakota has not adopted the most current version of this section of the UCC—therefore, the official comment to the former version has been set out below.]

Purposes of Changes:

To make it clear that:

In addition to following in general the prior uniform statutory provision, the case of a financing agency which has acquired documents by honoring a letter of credit for the buyer or by discounting a draft for the seller has been included in the term “a person in the position of a seller.”

Cross-References:

Definitional Cross References:

Cross-References.

Letters of credit, see N.D.C.C. ch. 41-05.

Rights of financing agency, see N.D.C.C. § 41-02-54.

41-02-87. (2-708) Seller’s damages for nonacceptance or repudiation.

1. Subject to subsection 2 and to the provisions of this chapter with respect to proof of market price (section 41-02-102), the measure of damages for nonacceptance or repudiation by the buyer is the difference between the market price at the time and place for tender and the unpaid contract price together with any incidental damages provided in this chapter (section 41-02-89), but less expenses saved in consequence of the buyer’s breach.
2. If the measure of damages provided in subsection 1 is inadequate to put the seller in as good a position as performance would have done, then the measure of damages is the profit (including reasonable overhead) which the seller would have made from full performance by the buyer, together with any incidental damages provided in this chapter (section 41-02-89), due allowance for costs reasonably incurred and due credit for payments or proceeds of resale.
3. In all cases the seller may recover incidental damages.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Changes:

Rewritten. [Note: North Dakota has not adopted the most current version of this section of the UCC—therefore, the official comment to the former version has been set out below.]

Purposes of Changes:

To make it clear that:

1. The prior uniform statutory provision is followed generally in setting the current market price at the time and place for tender as the standard by which damages for non-acceptance are to be determined. The time and place of tender is determined by reference to the section on manner of tender of delivery, and to the sections on the effect of such terms as FOB, FAS, CIF, C & F, Ex Ship and No Arrival, No Sale.

In the event that there is no evidence available of the current market price at the time and place of tender, proof of a substitute market may be made under the section on determination and proof of market price. Furthermore, the section on the admissibility of market quotations is intended to ease materially the problem of providing competent evidence.

2. The provision of this section permitting recovery of expected profit including reasonable overhead where the standard measure of damages is inadequate, together with the new requirement that price actions may be sustained only where resale is impractical, are designed to eliminate the unfair and economically wasteful results arising under the older law when fixed price articles were involved. This section permits the recovery of lost profits in all appropriate cases, which would include all standard priced goods. The normal measure there would be list price less cost to the dealer or list price less manufacturing cost to the manufacturer. It is not necessary to a recovery of “profit” to show a history of earnings, especially of a new venture is involved.

Cross References:

Definitional Cross References:

Cross-References.

Delivery terms, effect, see N.D.C.C. §§ 41-02-36 to 41-02-41.

Manner of seller’s tender of delivery, see N.D.C.C. § 41-02-51.

41-02-88. (2-709) Action for the price.

1. When the buyer fails to pay the price as it becomes due, the seller may recover, together with any incidental damages under section 41-02-89, the price:
   1. Of goods accepted or of conforming goods lost or damaged within a commercially reasonable time after risk of their loss has passed to the buyer; and
   2. Of goods identified to the contract if the seller is unable after reasonable effort to resell them at a reasonable price or the circumstances reasonably indicate that such effort will be unavailing.
2. When the seller sues for the price, the seller must hold for the buyer any goods which have been identified to the contract and are still in the seller’s control except that if resale becomes possible the seller may resell them at any time prior to the collection of the judgment. The net proceeds of any such resale must be credited to the buyer and payment of the judgment entitles the buyer to any goods not resold.
3. After the buyer has wrongfully rejected or revoked acceptance of the goods or has failed to make a payment due or has repudiated (section 41-02-73), a seller who is held not entitled to the price under this section shall nevertheless be awarded damages for nonacceptance under section 41-02-87.
4. If a buyer is in default not with respect to the price, but on an obligation to make an advance, the seller should recover not under this section for the price as such, but for the default in the collateral (though coincident) obligation to finance the seller. If the agreement between the parties contemplates that the buyer will acquire, on making the advance, a security interest in the goods, the buyer on making the advance has such an interest as soon as the seller has rights in the agreed collateral. See Section 9-204.
5. “Goods accepted” by the buyer under subsection (1)(a) include only goods as to which there has been no justified revocation of acceptance, for such a revocation means that there has been a default by the seller which bars his rights under this section. “Goods lost or damaged” are covered by the section on risk of loss. “Goods identified to the contract” under subsection (1)(b) are covered by the section on identification and the section on identification notwithstanding breach.
6. This section is intended to be exhaustive in its enumeration of cases where an action for the price lies.
7. If the action for the price fails, the seller may nonetheless have proved a case entitling him to damages for non-acceptance. In such a situation, subsection (3) permits recovery of those damages in the same action.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Changes:

Former Section 1-101.

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.

Cross References:

Definitional Cross References:

Cross-References.

Insurable interest in goods, see N.D.C.C. § 41-02-49.

Remedies liberally administered, see N.D.C.C. § 41-01-19.

Risk of loss, see N.D.C.C. §§ 41-02-57, 41-02-58.

41-02-89. (2-710) Seller’s incidental damages.

Incidental damages to an aggrieved seller include any commercially reasonable charges, expenses, or commissions incurred in stopping delivery, in the transportation, care, and custody of goods after the buyer’s breach, in connection with return or resale of the goods, or otherwise resulting from the breach.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Purposes:

Former Section 1-101.

Definitional Cross References:

41-02-90. (2-711) Buyer’s remedies in general — Buyer’s security interest in rejected goods.

1. If the seller fails to make delivery or repudiates or the buyer rightfully rejects or justifiably revokes acceptance then with respect to any goods involved, and with respect to the whole if the breach goes to the whole contract (section 41-02-75), the buyer may cancel and whether or not the buyer has done so may in addition to recovering so much of the price as has been paid:
   1. “Cover” and have damages under the next section as to all the goods affected whether or not they have been identified to the contract; or
   2. Recover damages for nondelivery as provided in this chapter (section 41-02-92).
2. If the seller fails to deliver or repudiates, the buyer may also:
   1. If the goods have been identified, recover them as provided in this chapter (section 41-02-50); or
   2. In a proper case, obtain specific performance or replevy the goods as provided in this chapter (section 41-02-95).
3. On rightful rejection or justifiable revocation of acceptance, a buyer has a security interest in goods in the buyer’s possession or control for any payments made on their price and any expenses reasonably incurred in their inspection, receipt, transportation, care, and custody and may hold such goods and resell them in like manner as an aggrieved seller (section 41-02-85).

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Changes:

Former Section 1-101.

Purposes of Changes and New Matter:

1. To index in this section the buyer’s remedies, subsection (1) covering those remedies permitting the recovery of money damages, and subsection (2) covering those which permit reaching the goods themselves. The remedies listed here are those available to a buyer who has not accepted the goods or who has justifiably revoked his acceptance. The remedies available to a buyer with regard to goods finally accepted appear in the section dealing with breach in regard to accepted goods. The buyer’s right to proceed as to all goods when the breach is as to only some of the goods is determined by the section on breach in installment contracts and by the section on partial acceptance.

Despite the seller’s breach, proper retender of delivery under the section on cure of improper tender or replacement can effectively preclude the buyer’s remedies under this section, except for any delay involved.

2. To make it clear in subsection (3) that the buyer may hold and resell rejected goods if he has paid a part of the price or incurred expenses of the type specified. “Paid” as used here includes acceptance of a draft or other time negotiable instrument or the signing of a negotiable note. His freedom of resale is coextensive with that of a seller under this Article except that the buyer may not keep any profit resulting from the resale and is limited to retaining only the amount of the price paid and the costs involved in the inspection and handling of the goods. The buyer’s security interest in the goods is intended to be limited to the items listed in subsection (3), and the buyer is not permitted to retain such funds as he might believe adequate for his damages. The buyer’s right to cover, or to have damages for non-delivery, is not impaired by his exercise of his right of resale.

3. It should also be noted that this Act requires its remedies to be liberally administered and provides that any right or obligation which it declares is enforceable by action unless a different effect is specifically prescribed (Section 1-106).

Cross References:

Definitional Cross References:

Cross-References.

Buyer’s rights on improper delivery, see N.D.C.C. § 41-02-64.

Cure by seller of improper tender or delivery, see N.D.C.C. § 41-02-56.

Installment contract, see N.D.C.C. § 41-02-75.

Remedies liberally administered, see N.D.C.C. § 41-01-19.

Revocation of acceptance in whole or in part, see N.D.C.C. § 41-02-71.

41-02-91. (2-712) Cover — Buyer’s procurement of substitute goods.

1. After a breach within section 41-02-90, the buyer may “cover” by making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller.
2. The buyer may recover from the seller as damages the difference between the cost of cover and the contract price together with any incidental or consequential damages as hereinafter defined (section 41-02-94), but less expenses saved in consequence of the seller’s breach.
3. Failure of the buyer to effect cover within this section does not bar the buyer from any other remedy.
4. This section does not limit cover to merchants, in the first instance. It is the vital and important remedy for the consumer buyer as well. Both are free to use cover: the domestic or non-merchant consumer is required only to act in normal good faith while the merchant buyer must also observe all reasonable commercial standards of fair dealing in the trade, since this falls within the definition of good faith on his part.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

None. [Note: North Dakota has not adopted the most current version of this section of the UCC—therefore, the official comment to the former version has been set out below.]

Purposes:

1. This section provides the buyer with a remedy aimed at enabling him to obtain the goods he needs thus meeting his essential need. This remedy is the buyer’s equivalent of the seller’s right to resell.

2. The definition of “cover” under subsection (1) envisages a series of contracts or sales, as well as a single contract or sale; goods not identical with those involved but commercially usable as reasonable substitutes under the circumstances of the particular case; and contracts on credit or delivery terms differing from the contract in breach, but again reasonable under the circumstances. The test of proper cover is whether at the time and place the buyer acted in good faith and in a reasonable manner, and it is immaterial that hindsight may later prove that the method of cover used was not the cheapest or most effective.

The requirement that the buyer must cover “without unreasonable delay” is not intended to limit the time necessary for him to look around and decide as to how he may best effect cover. The test here is similar to that generally used in this Article as to reasonable time and seasonable action.

3. Subsection (3) expresses the policy that cover is not a mandatory remedy for the buyer. The buyer is always free to choose between cover and damages for non-delivery under the next section.

However, this subsection must be read in conjunction with the section which limits the recovery of consequential damages to such as could not have been obviated by cover. Moreover, the operation of the section on specific performance of contracts for “unique” goods must be considered in this connection for availability of the goods to the particular buyer for his particular needs is the test for that remedy and inability to cover is made an express condition to the right of the buyer to replevy the goods.

Cross References:

Definitional Cross References:

Cross-References.

Obligation of good faith, see N.D.C.C. § 41-01-18.

Reasonable time, see N.D.C.C. § 41-01-13.

41-02-92. (2-713) Buyer’s damages for nondelivery or repudiation.

1. Subject to the provisions of this chapter with respect to proof of market price (section 41-02-102), the measure of damages for nondelivery or repudiation by the seller is the difference between the market price at the time when the buyer learned of the breach and the contract price together with any incidental and consequential damages provided in this chapter (section 41-02-94), but less expenses saved in consequence of the seller’s breach.
2. Market price is to be determined as of the place for tender or, in cases of rejection after arrival or revocation of acceptance, as of the place of arrival.
3. When the current market price under this section is difficult to prove the section on determination and proof of market price is available to permit a showing of a comparable market price or, where no market price is available, evidence of spot sale prices is proper. Where the unavailability of a market price is caused by a scarcity of goods of the type involved, a good case is normally made for specific performance under this Article. Such scarcity conditions, moreover, indicate that the price has risen and under the section providing for liberal administration of remedies, opinion evidence as to the value of the goods would be admissible in the absence of a market price and a liberal construction of allowable consequential damages should also result.
4. This section carries forward the standard rule that the buyer must deduct from his damages any expenses saved as a result of the breach.
5. The present section provides a remedy which is completely alternative to cover under the preceding section and applies only when and to the extent that the buyer has not covered.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Changes:

Rewritten.

Purposes of Changes:

To clarify the former rule so that:

1. The general baseline adopted in this section uses as a yardstick the market in which the buyer would have obtained cover had he sought that relief. So the place for measuring damages is the place of tender (or the place of arrival if the goods are rejected or their acceptance is revoked after reaching their destination) and the crucial time is the time at which the buyer learns of the breach.

2. The market or current price to be used in comparison with the contract price under this section is the price for goods of the same kind and in the same branch of trade.

Cross References:

Definitional Cross References:

Cross-References.

Remedies liberally administered, see N.D.C.C. § 41-01-19.

41-02-93. (2-714) Buyer’s damages for breach in regard to accepted goods.

1. When the buyer has accepted goods and given notification (subsection 3 of section 41-02-70), the buyer may recover as damages for any nonconformity of tender the loss resulting in the ordinary course of events from the seller’s breach as determined in any manner which is reasonable.
2. The measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount.
3. In a proper case, any incidental and consequential damages under section 41-02-94 may also be recovered.
4. The incidental and consequential damages referred to in subsection (3), which will usually accompany an action brought under this section, are discussed in detail in the comment on the next section.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Changes:

Rewritten.

Purposes of Changes:

1. This section deals with the remedies available to the buyer after the goods have been accepted and the time for revocation of acceptance has gone by. In general this section adopts the rule of the prior uniform statutory provision for measuring damages where there has been a breach of warranty as to goods accepted, but goes further to lay down an explicit provision as to the time and place for determining the loss.

The section on deduction of damages from price provides an additional remedy for a buyer who still owes part of the purchase price, and frequently the two remedies will be available concurrently. The buyer’s failure to notify of his claim under the section on effects of acceptance, however, operates to bar his remedies under either that section or the present section.

2. The “non-conformity” referred to in subsection (1) includes not only breaches of warranties but also any failure of the seller to perform according to his obligations under the contract. In the case of such non-conformity, the buyer is permitted to recover for his loss “in any manner which is reasonable.”

3. Subsection (2) describes the usual, standard and reasonable method of ascertaining damages in the case of breach of warranty but it is not intended as an exclusive measure. It departs from the measure of damages for non-delivery in utilizing the place of acceptance rather than the place of tender. In some cases the two may coincide, as where the buyer signifies his acceptance upon the tender. If, however, the non-conformity is such as would justify revocation of acceptance, the time and place of acceptance under this section is determined as of the buyer’s decision not to revoke.

Cross References:

Definitional Cross References:

Cross-References.

Burden of establishing breach after acceptance, see N.D.C.C. § 41-02-70.

Goods or conduct “conforming” to contract, see N.D.C.C. § 41-02-06, subs. 3.

Revocation of acceptance in whole or in part, see N.D.C.C. § 41-02-71.

41-02-94. (2-715) Buyer’s incidental and consequential damages.

1. Incidental damages resulting from the seller’s breach include expenses reasonably incurred in inspection, receipt, transportation, and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses, or commissions in connection with effecting cover, and any other reasonable expense incident to the delay or other breach.
2. Consequential damages resulting from the seller’s breach include:
   1. Any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and
   2. Injury to person or property proximately resulting from any breach of warranty.
3. In the absence of excuse under the section on merchant’s excuse by failure of presupposed conditions, the seller is liable for consequential damages in all cases where he had reason to know of the buyer’s general or particular requirements at the time of contracting. It is not necessary that there be a conscious acceptance of an insurer’s liability on the seller’s part, nor is his obligation for consequential damages limited to cases in which he fails to use due effort in good faith.
4. The burden of proving the extent of loss incurred by way of consequential damage is on the buyer, but the section on liberal administration of remedies rejects any doctrine of certainty which requires almost mathematical precision in the proof of loss. Loss may be determined in any manner which is reasonable under the circumstances.
5. Subsection (2)(b) states the usual rule as to breach of warranty, allowing recovery for injuries “proximately” resulting from the breach. Where the injury involved follows the use of goods without discovery of the defect causing the damage, the question of “proximate” cause turns on whether it was reasonable for the buyer to use the goods without such inspection as would have revealed the defects. If it was not reasonable for him to do so, or if he did in fact discover the defect prior to his use, the injury would not proximately result from the breach of warranty.
6. In the case of sale of wares to one in the business of reselling them, resale is one of the requirements of which the seller has reason to know within the meaning of subsection (2)(a).

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Changes:

Rewritten.

Purposes of Changes and New Matter:

1. Subsection (1) is intended to provide reimbursement for the buyer who incurs reasonable expenses in connection with the handling of rightfully rejected goods or goods whose acceptance may be justifiably revoked, or in connection with effecting cover where the breach of the contract lies in non-conformity or non-delivery of the goods. The incidental damages listed are not intended to be exhaustive but are merely illustrative of the typical kinds of incidental damage.

2. Subsection (2) operates to allow the buyer, in an appropriate case, any consequential damages which are the result of the seller’s breach. The “tacit agreement” test for the recovery of consequential damages is rejected. Although the older rule at common law which made the seller liable for all consequential damages of which he had “reason to know” in advance is followed, the liberality of that rule is modified by refusing to permit recovery unless the buyer could not reasonably have prevented the loss by cover or otherwise. Subparagraph (2) carries forward the provisions of the prior uniform statutory provision as to consequential damages resulting from breach of warranty, but modifies the rule by requiring first that the buyer attempt to minimize his damages in good faith, either by cover or otherwise.

Particular needs of the buyer must generally be made known to the seller while general needs must rarely be made known to charge the seller with knowledge.

Any seller who does not wish to take the risk of consequential damages has available the section on contractual limitation of remedy.

Cross References:

Definitional Cross References:

Cross-References.

Excuse by failure of presupposed conditions, see N.D.C.C. § 41-02-78.

Obligation of good faith, see N.D.C.C. § 41-01-18.

Remedies liberally administered, see N.D.C.C. § 41-01-19.

Revocation of acceptance in whole or in part, see N.D.C.C. § 41-02-71.

41-02-95. (2-716) Buyer’s right to specific performance or replevin.

1. Specific performance may be decreed if the goods are unique or in other proper circumstances.
2. The decree for specific performance may include such terms and conditions as to payment of the price, damages, or other relief as the court may deem just.
3. The buyer has a right of replevin for goods identified to the contract if after reasonable effort the buyer is unable to effect cover for such goods or the circumstances reasonably indicate that such effort will be unavailing or if the goods have been shipped under reservation and satisfaction of the security interest in them has been made or tendered. In the case of goods bought for personal, family, or household purposes, the buyer’s right of replevin vests upon acquisition of a special property, even if the seller had not then repudiated or failed to deliver.
4. The legal remedy of replevin or a similar remedy is also available for cases in which cover is unavailable and where the goods have been identified to the contract. This is in addition to the prepaying buyer’s right to recover identified goods upon the seller’s insolvency or, when the goods have been bought for a consumer purpose, upon the seller’s repudiation or failure to deliver (Section 2-502). If a negotiable document of title is outstanding, the buyer’s right of replevin relates to the document and does not directly relate to the goods. See Article 7, especially Section 7-602.
5. Subsection (4) provides that a buyer’s right to replevin or a similar remedy vests upon the buyer’s acquisition of a special property in the goods (Section 2-501) even if the seller has not at that time repudiated or failed to make a required delivery. This vesting rule assumes application of a “first in time” priority rule. In other words, if the buyer’s rights vest under this rule before a creditor acquires an in rem right to the goods, including an Article 9 security interest and a lien created by levy, the buyer should prevail.

Source: S.L. 1965, ch. 296, § 1; 2001, ch. 361, § 15.

Official Comments.

1. This section contains the following changes from original Section 2-716: [Note: North Dakota has not adopted all of the amendments described in the comment below but has amended the original version to include the vesting rule.]

a) The caption has been amended to make it clear that either party may be entitled to specific performance.

b) The second sentence of subsection (1) explicitly permits parties to bind themselves to specific performance even where it would not otherwise be available.

c) In subsection (3), the phrase “or similar remedy” has been added after “replevin” to reflect the fact that under the governing state law the right may be called “detinue,” “sequestration,” “claim and delivery,” or something else.

d) Subsection (4) corresponds with Section 2-502(2), which in turn is derived from (but broader than) the conforming amendments to Article 9. It provides a vesting rule for cases in which there is a right of replevin.

2. Uniqueness should be determined in light of the total circumstances surrounding the contract and is not limited to goods identified when the contract is formed. The typical specific performance situation today involves an output or requirements contract rather than a contract for the sale of an heirloom or priceless work of art. A buyer’s inability to cover is evidence of “other proper circumstances.”

3. Subsection (1) provides that a court may decree specific performance if the parties have agreed to that remedy. The parties’ agreement to specific performance can be enforced even if legal remedies are entirely adequate. Even in a commercial contract, the third sentence of subsection (1) prevents the aggrieved party from obtaining specific performance if the only obligation of the party in breach is the payment of money. Whether a buyer is obligated to pay the price is determined by Section 2-709, not by this section.

Nothing in this section constrains the court’s exercise of its equitable discretion to decide whether to enter a decree for specific performance or to determine the conditions or terms of the decree. This section assumes that the decree for specific performance is conditioned on a tender of full performance by the party that seeks the remedy.

Cross References:

Definitional Cross References:

Cross-References.

Buyer’s right to goods on seller’s insolvency, see N.D.C.C. § 41-02-50.

41-02-96. (2-717) Deduction of damages from the price.

The buyer on notifying the seller of the buyer’s intention to do so may deduct all or any part of the damages resulting from any breach of the contract from any part of the price still due under the same contract.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

Former Section 1-101.

Purposes:

1. This section permits the buyer to deduct from the price damages resulting from any breach by the seller and does not limit the relief to cases of breach of warranty as did the prior uniform statutory provision. To bring this provision into application the breach involved must be of the same contract under which the price in question is claimed to have been earned.
2. The buyer, however, must give notice of his intention to withhold all or part of the price if he wishes to avoid a default within the meaning of the section on insecurity and right to assurances. In conformity with the general policies of this Article, no formality of notice is required and any language which reasonably indicates the buyer’s reason for holding up his payment is sufficient.

Cross-References:

Definitional Cross References:

Cross-References.

Right to adequate assurance of performance, see N.D.C.C. § 41-02-72.

Collateral References.

67A Am. Jur. 2d, Sales, §§ 1122-1125.

41-02-97. (2-718) Liquidation or limitation of damages — Deposits.

1. Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty.
2. When the seller justifiably withholds delivery of goods because of the buyer’s breach, the buyer is entitled to restitution of any amount by which the sum of the buyer’s payments exceeds:
   1. The amount to which the seller is entitled by virtue of terms liquidating the seller’s damages in accordance with subsection 1; or
   2. In the absence of such terms, twenty percent of the value of the total performance for which the buyer is obligated under the contract or five hundred dollars, whichever is smaller.
3. The buyer’s right to restitution under subsection 2 is subject to offset to the extent that the seller establishes:
   1. A right to recover damages under the provisions of this chapter other than subsection 1; and
   2. The amount or value of any benefits received by the buyer directly or indirectly by reason of the contract.
4. When a seller has received payment in goods, their reasonable value or the proceeds of their resale shall be treated as payments for the purposes of subsection 2 but if the seller has notice of the buyer’s breach before reselling goods received in part performance, the seller’s resale is subject to the conditions laid down in this chapter on resale by an aggrieved seller (section 41-02-85).

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

None. [Note: North Dakota has not adopted the most current version of this section of the UCC—therefore, the official comment to the former version has been set out below.]

Purposes:

1. Under subsection (1) liquidated damage clauses are allowed where the amount involved is reasonable in the light of the circumstances of the case. The subsection sets forth explicitly the elements to be considered in determining the reasonableness of a liquidated damage clause. A term fixing unreasonably large liquidated damages is expressly made void as a penalty. An unreasonably small amount would be subject to similar criticism and might be stricken under the section on unconscionable contracts or clauses.

2. Subsection (2) refuses to recognize a forfeiture unless the amount of the payment so forfeited represents a reasonable liquidation of damages as determined under subsection (1). A special exception is made in the case of small amounts (20% of the price or $500, whichever is smaller) deposited as security. No distinction is made between cases in which the payment is to be applied on the price and those in which it is intended as security for performance. Subsection (2) is applicable to any deposit or down or part payment. In the case of a deposit or turn in of goods resold before the breach, the amount actually received on the resale is to be viewed as the deposit rather than the amount allowed the buyer for the trade in. However, if the seller knows of the breach prior to the resale of the goods turned in, he must make reasonable efforts to realize their true value, and this is assured by requiring him to comply with the conditions laid down in the section on resale by an aggrieved seller.

Cross References:

Definitional Cross References:

Cross-References.

Unconscionable contract or clause, see N.D.C.C. § 41-02-19.

41-02-98. (2-719) Contractual modification or limitation of remedy.

1. Subject to the provisions of subsections 2 and 3 of this section and of section 41-02-97 on liquidation and limitation of damages:
   1. The agreement may provide for remedies in addition to or in substitution for those provided in this chapter and may limit or alter the measure of damages recoverable under this chapter, as by limiting the buyer’s remedies to return of the goods and repayment of the price or to repair and replacement of nonconforming goods or parts; and
   2. Resort to a remedy as provided is optional unless the remedy is expressly agreed to be exclusive, in which case it is the sole remedy.
2. If circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this title.
3. Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

None.

Purposes:

1. Under this section parties are left free to shape their remedies to their particular requirements and reasonable agreements limiting or modifying remedies are to be given effect.

However, it is of the very essence of a sales contract that at least minimum adequate remedies be available. If the parties intend to conclude a contract for sale within this Article they must accept the legal consequence that there be at least a fair quantum of remedy for breach of the obligations or duties outlined in the contract. Thus any clause purporting to modify or limit the remedial provisions of this Article in an unconscionable manner is subject to deletion and in that event the remedies made available by this Article are applicable as if the stricken clause had never existed. Similarly, under subsection (2), where an apparently fair and reasonable clause because of circumstances fails in its purpose or operates to deprive either party of the substantial value of the bargain, it must give way to the general remedy provisions of this Article.

2. Subsection (1)(b) creates a presumption that clauses prescribing remedies are cumulative rather than exclusive. If the parties intend the term to describe the sole remedy under the contract, this must be clearly expressed.

3. Subsection (3) recognizes the validity of clauses limiting or excluding consequential damages but makes it clear that they may not operate in an unconscionable manner. Actually such terms are merely an allocation of unknown or undeterminable risks. The seller in all cases is free to disclaim warranties in the manner provided in Section 2-316.

Cross References:

Definitional Cross References:

Cross-References.

Exclusion or modification of warranties, see N.D.C.C. § 41-02-33.

Unconscionable contract or clause, see N.D.C.C. § 41-02-19.

41-02-99. (2-720) Effect of cancellation or rescission on claims for antecedent breach.

Unless the contrary intention clearly appears, expressions of “cancellation” or “rescission” of the contract or the like shall not be construed as a renunciation or discharge of any claim in damages for an antecedent breach.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

None.

Purposes:

Former Section 1-101.

Cross-References:

Definitional Cross References:

Cross-References.

Waiver or renunciation of claim or right after breach, see N.D.C.C. § 41-01-20.

41-02-100. (2-721) Remedies for fraud.

Remedies for material misrepresentation or fraud include all remedies available under this chapter for nonfraudulent breach. Neither rescission or a claim for rescission of the contract for sale nor rejection or return of the goods shall bar or be deemed inconsistent with a claim for damages or other remedy.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

None.

Purposes:

Former Section 1-101.

Definitional Cross References:

Collateral References.

Sales 38(9), 43(6).

67A Am. Jur. 2d, Sales, § 799.

77A C.J.S. Sales, §§ 325, 374.

Computer sales and leases: breach of warranty, misrepresentation, or failure of consideration as defense or ground for affirmative relief, 37 A.L.R.4th 110.

41-02-101. (2-722) Who can sue third parties for injury to goods.

When a third party so deals with goods which have been identified to a contract for sale as to cause actionable injury to a party to that contract:

1. A claim for relief against the third party is in either party to the contract for sale who has title to or a security interest or a special property or an insurable interest in the goods and, if the goods have been destroyed or converted, a claim for relief is also in the party who either bore the risk of loss under the contract for sale or has since the injury assumed that risk as against the other.
2. If, at the time of the injury, the party plaintiff did not bear the risk of loss as against the other party to the contract for sale and there is no arrangement between them for disposition of the recovery, the party plaintiff’s suit or settlement is, subject to the party plaintiff’s own interest, as a fiduciary for the other party to the contract.
3. Either party may with the consent of the other sue for the benefit of whom it may concern.

Source: S.L. 1965, ch. 296, § 1; 1985, ch. 82, § 106.

Official Comments.

Prior Uniform Statutory Provisions:

None.

Purposes:

Former Section 1-101.

Definitional Cross References:

Collateral References.

Sales 224, 232.

67 Am. Jur. 2d, Sales, § 377.

77A C.J.S. Sales, § 396.

41-02-102. (2-723) Proof of market price — Time and place.

1. If an action based on anticipatory repudiation comes to trial before the time for performance with respect to some or all of the goods, any damages based on market price (section 41-02-87 or 41-02-92) shall be determined according to the price of such goods prevailing at the time when the aggrieved party learned of the repudiation.
2. If evidence of a price prevailing at the times or places described in this chapter is not readily available, the price prevailing within any reasonable time before or after the time described or at any other place which in commercial judgment or under usage of trade would serve as a reasonable substitute for the one described may be used, making any proper allowance for the cost of transporting the goods to or from such other place.
3. Evidence of a relevant price prevailing at a time or place other than the one described in this chapter offered by one party is not admissible unless and until the offering party has given the other party such notice as the court finds sufficient to prevent unfair surprise.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

None. [Note: North Dakota has not adopted the most current version of this section of the UCC—therefore, the official comment to the former version has been set out below.]

Purposes:

To eliminate the most obvious difficulties arising in connection with the determination of market price, when that is stipulated as a measure of damages by some provision of this Article. Where the appropriate market price is not readily available the court is here granted reasonable leeway in receiving evidence of prices current in other comparable markets or at other times comparable to the one in question. In accordance with the general principle of this Article against surprise, however, a party intending to offer evidence of such a substitute price must give suitable notice to the other party.

This section is not intended to exclude the use of any other reasonable method of determining market price or of measuring damages if the circumstances of the case make this necessary.

Definitional Cross References:

Collateral References.

Sales 384(2), 418(2).

67A Am. Jur. 2d, Sales, §§ 819-822.

77A C.J.S. Sales, §§ 576, 602, 603, 618.

41-02-103. (2-724) Admissibility of market quotations.

Whenever the prevailing price or value of any goods regularly bought and sold in any established commodity market is in issue, reports in official publications or trade journals or in newspapers or periodicals of general circulation published as the reports of such market shall be admissible in evidence. The circumstances of the preparation of such a report may be shown to affect its weight but not its admissibility.

Source: S.L. 1965, ch. 296, § 1.

Official Comments.

Prior Uniform Statutory Provisions:

None.

Purposes:

To make market quotations admissible in evidence while providing for a challenge of the material by showing the circumstances of its preparation.

No explicit provision as to the weight to be given to market quotations is contained in this section, but such quotations, in the absence of compelling challenge, offer an adequate basis for a verdict.

Market quotations are made admissible when the price or value of goods traded “in any established market” is in issue. The reason of the section does not require that the market be closely organized in the manner of a produce exchange. It is sufficient if transactions in the commodity are frequent and open enough to make a market established by usage in which one price can be expected to affect another and in which an informed report of the range and trend of prices can be assumed to be reasonably accurate.

This section does not in any way intend to limit or negate the application of similar rules of admissibility to other material, whether by action of the courts or by statute. The purpose of the present section is to assure a minimum of mercantile administration in this important situation and not to limit any liberalizing trend in modern law.

Definitional Cross References:

Collateral References.

Evidence 323.

67A Am. Jur. 2d, Sales, § 819.

32A C.J.S. Evidence, §§ 1046, 1047.

41-02-104. (2-725) Statute of limitations in contracts for sale.

1. An action for breach of any contract for sale must be commenced within four years after the claim for relief has accrued. By the original agreement the parties may reduce the period of limitation to not less than one year but may not extend it.
2. A claim for relief accrues when the breach occurs, regardless of the aggrieved party’s lack of knowledge of the breach. A breach of warranty occurs when tender of delivery is made, except that if a warranty explicitly extends to future performance of the goods and discovery of the breach must await the time of such performance the claim for relief accrues when the breach is or should have been discovered.
3. When an action commenced within the time limited by subsection 1 is so terminated as to leave available a remedy by another action for the same breach, such other action may be commenced after the expiration of the time limited and within six months after the termination of the first action unless the termination resulted from voluntary discontinuance or from dismissal for failure or neglect to prosecute.
4. This section does not alter the law on tolling of the statute of limitations nor does it apply to claims for relief which have accrued before this title becomes effective.

Source: S.L. 1965, ch. 296, § 1; 1985, ch. 82, § 107.

Official Comments.

Prior Uniform Statutory Provisions:

None. [Note: North Dakota has not adopted the most current version of this section of the UCC—therefore, the official comment to the former version has been set out below.]

Purposes:

To introduce a uniform statute of limitations for sales contracts, thus eliminating the jurisdictional variations and providing needed relief for concerns doing business on a nationwide scale whose contracts have heretofore been governed by several different periods of limitation depending upon the state in which the transaction occurred. This Article takes sales contracts out of the general laws limiting the time for commencing contractual actions and selects a four year period as the most appropriate to modern business practice. This is within the normal commercial record keeping period.

Subsection (1) permits the parties to reduce the period of limitation. The minimum period is set at one year. The parties may not, however, extend the statutory period.

Subsection (2), providing that the cause of action accrues when the breach occurs, states an exception where the warranty extends to future performance.

Subsection (3) states the saving provision included in many state statutes and permits an additional short period for bringing new actions, where suits begun within the four year period have been terminated so as to leave a remedy still available for the same breach.

Subsection (4) makes it clear that this Article does not purport to alter or modify in any respect the law on tolling of the Statute of Limitations as it now prevails in the various jurisdictions.

Definitional Cross References:

41-02.1-01. (2A-101) Short title.

This chapter may be cited as the Uniform Commercial Code — Leases.

Source: S.L. 1991, ch. 448, § 9.

Official Comments.

Rationale for Codification:

There are several reasons for codifying the law with respect to leases of goods. An analysis of the case law as it applies to leases of goods suggests at least three significant issues to be resolved by codification. First, what is a lease? It is necessary to define lease to determine whether a transaction creates a lease or a security interest disguised as a lease. If the transaction creates a security interest disguised as a lease, the lessor will be required to file a financing statement or take other action to perfect its interest in the goods against third parties. There is no such requirement with respect to leases. Yet the distinction between a lease and a security interest disguised as a lease is not clear. Second, will the lessor be deemed to have made warranties to the lessee? If the transaction is a sale the express and implied warranties of Article 2 of the Uniform Commercial Code apply. However, the warranty law with respect to leases is uncertain. Third, what remedies are available to the lessor upon the lessee’s default? If the transaction is a security interest disguised as a lease, the answer is stated in Part 5 of the Article on Secured Transactions (Article 9). There is no clear answer with respect to leases.

There are reasons to codify the law with respect to leases of goods in addition to those suggested by a review of the reported cases. The answer to this important question should not be limited to the issues raised in these cases. Is it not also proper to determine the remedies available to the lessee upon the lessor’s default? It is, but that issue is not reached through a review of the reported cases. This is only one of the many issues presented in structuring, negotiating and documenting a lease of goods.

Statutory Analogue:

After it was decided to proceed with the codification project, the drafting committee of the National Conference of Commissioners on Uniform State Laws looked for a statutory analogue, gradually narrowing the focus to the Article on Sales (Article 2) and the Article on Secured Transactions (Article 9). A review of the literature with respect to the sale of goods reveals that Article 2 is predicated upon certain assumptions: Parties to the sales transaction frequently are without counsel; the agreement of the parties often is oral or evidenced by scant writings; obligations between the parties are bilateral; applicable law is influenced by the need to preserve freedom of contract. A review of the literature with respect to personal property security law reveals that Article 9 is predicated upon very different assumptions: Parties to a secured transaction regularly are represented by counsel; the agreement of the parties frequently is reduced to a writing, extensive in scope; the obligations between the parties are essentially unilateral; and applicable law seriously limits freedom of contract.

The lease is closer in spirit and form to the sale of goods than to the creation of a security interest. While parties to a lease are sometimes represented by counsel and their agreement is often reduced to a writing, the obligations of the parties are bilateral and the common law of leasing is dominated by the need to preserve freedom of contract. Thus the drafting committee concluded that Article 2 was the appropriate statutory analogue.

Issues:

Former Section 1-101.

Scope:

Former Section 1-101.

Definition of Lease:

Former Section 1-101.

Filing:

Former Section 1-101.

Warranties:

Former Section 1-101.

Certificate of Title Laws:

Former Section 1-101.

Consumer Leases:

Former Section 1-101.

Finance Leases:

Former Section 1-101.

Sale and Leaseback:

Former Section 1-101.

Remedies:

Former Section 1-101.

Damages:

Former Section 1-101.

History:

This Article is a revision of the Uniform Personal Property Leasing Act, which was approved by the National Conference of Commissioners on Uniform State Laws in August, 1985. However, it was believed that the subject matter of the Uniform Personal Property Leasing Act would be better treated as an article of this Act. Thus, although the Conference promulgated the Uniform Personal Property Leasing Act as a Uniform Law, activity was held in abeyance to allow time to restate the Uniform Personal Property Leasing Act as Article 2A.

In August, 1986 the Conference approved and recommended this Article (including conforming amendments to Article 1 and Article 9) for promulgation as an amendment to this Act. In December, 1986 the Council of the American Law Institute approved and recommended this Article (including conforming amendments to Article 1 and Article 9), with official comments, for promulgation as an amendment to this Act. In March, 1987 the Permanent Editorial Board for the Uniform Commercial Code approved and recommended this Article (including conforming amendments to Article 1 and Article 9), with official comments, for promulgation as an amendment to this Act. In May, 1987 the American Law Institute approved and recommended this Article (including conforming amendments to Article 1 and Article 9), with official comments, for promulgation as an amendment to this Act. In August, 1987 the Conference confirmed its approval of the final text of this Article.

Upon its initial promulgation, Article 2A was rapidly enacted in several states, was introduced in a number of other states, and underwent bar association, law revision commission and legislative study in still further states. In that process debate emerged, principally sparked by the study of Article 2A by the California Bar Association, California’s non-uniform amendments to Article 2A, and articles appearing in a symposium on Article 2A published after its promulgation in the Alabama Law Review. The debate chiefly centered on whether Article 2A had struck the proper balance or was clear enough concerning the ability of a lessor to grant a security interest in its leasehold interest and in the residual, priority between a secured party and the lessee, and the lessor’s remedy structure under Article 2A.

This debate over issues on which reasonable minds could and did differ began to affect the enactment effort for Article 2A in a deleterious manner. Consequently, the Standby Committee for Article 2A, composed predominantly of the former members of the drafting committee, reviewed the legislative actions and studies in the various states, and opened a dialogue with the principal proponents of the non-uniform amendments. Negotiations were conducted in conjunction with, and were facilitated by, a study of the uniform Article and the non-uniform Amendments by the New York Law Revision Commission. Ultimately, a consensus was reached, which has been approved by the membership of the Conference, the Permanent Editorial Board, and the Council of the Institute. Rapid and uniform enactment of Article 2A is expected as a result of the completed amendments. The Article 2A experience reaffirms the essential viability of the procedures of the Conference and the Institute for creating and updating uniform state law in the commercial law area.

Relationship of Article 2A to Other Articles:

The Article on Sales provided a useful point of reference for codifying the law of leases. Many of the provisions of that Article were carried over, changed to reflect differences in style, leasing terminology or leasing practices. Thus, the official comments to those sections of Article 2 whose provisions were carried over are incorporated by reference in Article 2A, as well; further, any case law interpreting those provisions should be viewed as persuasive but not binding on a court when deciding a similar issue with respect to leases. Any change in the sequence that has been made when carrying over a provision from Article 2 should be viewed as a matter of style, not substance. This is not to suggest that in other instances Article 2A did not also incorporate substantially revised provisions of Article 2, Article 9 or otherwise where the revision was driven by a concern over the substance; but for the lack of a mandate, the drafting committee might well have made the same or a similar change in the statutory analogue. Those sections in Article 2A include Sections 2A-104, 2A-105, 2A-106, 2A-108(2) and (4), 2A-109(2), 2A-208, 2A-214(2) and (3)(a), 2A-216, 2A-303, 2A-306, 2A-503, 2A-504(3)(b), 2A-506(2), and 2A-515. For lack of relevance or significance not all of the provisions of Article 2 were incorporated in Article 2A.

This codification was greatly influenced by the fundamental tenet of the common law as it has developed with respect to leases of goods: freedom of the parties to contract. Note that, like all other Articles of this Act, the principles of construction and interpretation contained in Article 1 are applicable throughout Article 2A (Section 2A-103(4)). These principles include the ability of the parties to vary the effect of the provisions of Article 2A, subject to certain limitations including those that relate to the obligations of good faith, diligence, reasonableness and care (Section 1-102(3)). Consistent with those principles no negative inference is to be drawn by the episodic use of the phrase “unless otherwise agreed” in certain provisions of Article 2A. Section 1-102(4). Indeed, the contrary is true, as the general rule in the Act, including this Article, is that the effect of the Act’s provisions may be varied by agreement. Section 1-102(3). This conclusion follows even where the statutory analogue contains the phrase and the correlative provision in Article 2A does not.

2003 Amendments To Uniform Commercial Code Article 2a – Leases:

Former Section 1-101.

Leasing Is Distinctive From Other Commercial Transactions:

Former Section 1-101.

Lease Contract Formation:

Former Section 1-101.

Warranties:

Former Section 1-101.

Damages:

Former Section 1-101.

41-02.1-02. (2A-102) Scope.

This chapter applies to any transaction, regardless of form, that creates a lease.

Source: S.L. 1991, ch. 448, § 9.

Official Comments.

Uniform Statutory Source:

Former Section 1-101.

Changes:

Former Section 1-101.

Purposes:

This Article governs transactions as diverse as the lease of a hand tool to an individual for a few hours and the leveraged lease of a complex line of industrial equipment to a multi-national organization for a number of years.

To achieve that end it was necessary to provide that this Article applies to any transaction, regardless of form, that creates a lease. Since lease is defined as a transfer of an interest in goods (Section 2A-103(1)(j)) and goods is defined to include fixtures (Section 2A-103(1)(h)), application is limited to the extent the transaction relates to goods, including fixtures. Further, since the definition of lease does not include a sale (Section 2-106(1)) or retention or creation of a security interest (Section 1-201(37)), application is further limited; sales and security interests are governed by other Articles of this Act.

Finally, in recognition of the diversity of the transactions to be governed, the sophistication of many of the parties to these transactions, and the common law tradition as it applies to the bailment for hire or lease, freedom of contract has been preserved. DeKoven, Proceedings After Default by the Lessee Under a True Lease of Equipment, in 1C P. Coogan, W. Hogan, D. Vagts, Secured Transactions Under the Uniform Commercial Code, § 29B.02[2] (1986). Thus, despite the extensive regulatory scheme established by this Article, the parties to a lease will be able to create private rules to govern their transaction. Sections 2A-103(4) and 1-102(3). However, there are special rules in this Article governing consumer leases, as well as other state and federal statutes, that may further limit freedom of contract with respect to consumer leases.

A court may apply this Article by analogy to any transaction, regardless of form, that creates a lease of personal property other than goods, taking into account the expressed intentions of the parties to the transaction and any differences between a lease of goods and a lease of other property. Such application has precedent as the provisions of the Article on Sales (Article 2) have been applied by analogy to leases of goods. E.g., Hawkland, The Impact of the Uniform Commercial Code on Equipment Leasing, 1972 Ill.L.F. 446; Murray, Under the Spreading Analogy of Article 2 of the Uniform Commercial Code, 39 Fordham L.Rev. 447 (1971). Whether such application would be appropriate for other bailments of personal property, gratuitous or for hire, should be determined by the facts of each case. See Mieske v. Bartell Drug Co., 92 Wash.2d 40, 46-48, 593 P.2d 1308, 1312 (1979).

Further, parties to a transaction creating a lease of personal property other than goods, or a bailment of personal property may provide by agreement that this Article applies. Upholding the parties’ choice is consistent with the spirit of this Article.

Definitional Cross References:

41-02.1-03. (2A-103) Definitions and index of definitions.

1. In this chapter unless the context otherwise requires:
   1. “Buyer in ordinary course of business” means a person who in good faith and without knowledge that the sale is in violation of the ownership rights or security interest or leasehold interest of a third party in the goods buys in ordinary course from a person in the business of selling goods of that kind but does not include a pawnbroker. “Buying” may be for cash or by exchange of other property or on secured or unsecured credit and includes acquiring goods or documents of title under a pre-existing contract for sale but does not include a transfer in bulk or as security for or in total or partial satisfaction of a money debt.
   2. “Cancellation” occurs when either party puts an end to the lease contract for default by the other party.
   3. “Commercial unit” means such a unit of goods as by commercial usage is a single whole for purposes of lease and division of which materially impairs its character or value on the market or in use. A commercial unit may be a single article, as a machine, or a set of articles, as a suite of furniture or a line of machinery, or a quantity, as a gross or carload, or any other unit treated in use or in the relevant market as a single whole.
   4. “Conforming” goods or performance under a lease contract means goods or performance that is in accordance with the obligations under the lease contract.
   5. “Consumer lease” means a lease that a lessor regularly engaged in the business of leasing or selling makes to a lessee who is an individual and who takes under the lease primarily for a personal, family, or household purpose if the total payments to be made under the lease contract, excluding payments for options to renew or buy, do not exceed twenty-five thousand dollars.
   6. “Fault” means wrongful act, omission, breach, or default.
   7. “Finance lease” means a lease in which:
      1. The lessor does not select, manufacture, or supply the goods;
      2. The lessor acquires the goods or the right to possession and use of the goods in connection with the lease; and
      3. 1. The lessee receives a copy of the contract by which the lessor acquired the goods or the right to possession and use of the goods before signing the lease contract;
         2. The lessee’s approval of the contract by which the lessor acquired the goods or the right to possession and use of the goods is a condition to effectiveness of the lease contract;
         3. The lessee, before signing the lease contract, receives an accurate and complete statement designating the promises and warranties, and any disclaimers of warranties, limitations, or modifications of remedies, or liquidated damages, including those of any third party such as the manufacturer of the goods, provided to the lessor by the person supplying the goods in connection with or as part of the contract by which the lessor acquired the goods or the right to possession and use of the goods; or
         4. Only if the lease is not a consumer lease, before the lessee signs the lease contract the lessor informs the lessee in writing of the identity of the person supplying the goods to the lessor, unless the lessee has selected that person and directed the lessor to acquire the goods or the right to possession and use of the goods from that person, that the lessee is entitled under this chapter to the promises and warranties, including those of any third party, provided to the lessor by the person supplying the goods in connection with or as part of the contract by which the lessor acquired the goods or the right to possession and use of the goods, and that the lessee may contact the person supplying the goods to the lessor and receive an accurate and complete statement of those promises and warranties, including any disclaimers and limitations of them or of remedies.
         5. “Consumer lease”. New. This Article includes a subset of rules that applies only to consumer leases. Sections 2A-106, 2A-108(2), 2A-108(4), 2A-109(2), 2A-221, 2A-309, 2A-406, 2A-407, 2A-504(3)(b), and 2A-516(3)(b).
         6. “Fault”. Section 1-201(16).
         7. For a transaction to qualify as a finance lease it must first qualify as a lease. Unless the lessor is comfortable that the transaction will qualify as a finance lease, the lease agreement should include provisions giving the lessor the benefits created by the subset of rules applicable to the transaction that qualifies as a finance lease under this Article.
         8. “Goods”. Section 9-105(1)(h). See Section 2A-103(3) for reference to the definition of “Account”, “Chattel paper”, “Document”, “General intangibles” and “Instrument”. See Section 2A-217 for determination of the time and manner of identification.
         9. “Installment lease contract”. Section 2-612(1).
         10. “Lease”. New. There are several reasons to codify the law with respect to leases of goods. An analysis of the case law as it applies to leases of goods suggests at least several significant issues to be resolved by codification. First and foremost is the definition of a lease. It is necessary to define lease to determine whether a transaction creates a lease or a security interest disguised as a lease. If the transaction creates a security interest disguised as a lease, the transaction will be governed by the Article on Secured Transactions (Article 9) and the lessor will be required to file a financing statement or take other action to perfect its interest in the goods against third parties. There is no such requirement with respect to leases under the common law and, except with respect to leases of fixtures (Section 2A-309), this Article imposes no such requirement. Yet the distinction between a lease and a security interest disguised as a lease is not clear from the case law at the time of the promulgation of this Article. DeKoven,  Leases of Equipment: Puritan Leasing Company v. August, A Dangerous Decision,12 U.S.F. L.Rev. 257 (1978).
         11. “Lease agreement”. This definition is derived from the first sentence of Section 1-201(3). Because the definition of lease is broad enough to cover future transfers, lease agreement includes an agreement contemplating a current or subsequent transfer. Thus it was not necessary to make an express reference to an agreement for the future lease of goods (Section 2-106(1)). This concept is also incorporated in the definition of lease contract. Note that the definition of lease does not include transactions in ordinary building materials that are incorporated into an improvement on land. Section 2A-309(2).
         12. “Lease contract”. This definition is derived from the definition of contract in Section 1-201(11). Note that a lease contract may be for the future lease of goods, since this notion is included in the definition of lease.
         13. “Leasehold interest”. New.
         14. “Lessee”. New.
         15. The definition of “Lessee in ordinary course of business” conforms with amendments to Section 1-201(9)(buyer in ordinary course of business) that were part of the Article 9 revision process (with the omission of the reference to sales of minerals).
         16. “Lessor”. New.
         17. “Lessor’s residual interest”. New.
         18. “Lien”. New. This term is used in Section 2A-307 (Priority of Liens Arising by Attachment or Levy on, Security Interests in, and Other Claims to Goods).
         19. “Lot”. Section 2-105(5).
         20. “Merchant lessee”. New. This term is used in Section 2A-511 (Merchant Lessee’s Duties as to Rightfully Rejected Goods). A person may satisfy the requirement of dealing in goods of the kind subject to the lease as lessor, lessee, seller, or buyer.
         21. “Present value”. New. Authorities agree that present value should be used to determine fairly the damages payable by the lessor or the lessee on default.  E.g., Taylor v. Commercial Credit Equip. Corp., 170 Ga.App. 322, 316 S.E.2d 788 (1984). Present value is defined to mean an amount that represents the discounted value as of a date certain of one or more sums payable in the future. This is a function of the economic principle that a dollar today is more valuable to the holder than a dollar payable in two years. While there is no question as to the principle, reasonable people would differ as to the rate of discount to apply in determining the value of that future dollar today. To minimize litigation, this Article allows the parties to specify the discount or interest rate, if the rate was not manifestly unreasonable at the time the transaction was entered into. In all other cases, the interest rate will be a commercially reasonable rate that takes into account the facts and circumstances of each case, as of the time the transaction was entered into.
         22. “Purchase”. Section 1-201(32). This definition omits the reference to lien contained in the definition of purchase in Article 1 (Section 1-201(32)). This should not be construed to exclude consensual liens from the definition of purchase in this Article; the exclusion was mandated by the scope of the definition of lien in Section 2A-103(1)(r). Further, the definition of purchaser in this Article adds a reference to lease; as purchase is defined in Section 1-201(32) to include any other voluntary transaction creating an interest in property, this addition is not substantive.
         23. “Sublease”. New.
         24. “Supplier”. New.
         25. “Supply contract”. New.
         26. “Termination”. Section 2-106(3). The effect of a termination is provided in Section 2A-505(2).
   8. “Goods” means all things that are movable at the time of identification to the lease contract, or are fixtures (section 41-02.1-39), but the term does not include money, documents, instruments, accounts, chattel paper, general intangibles, or minerals or the like, including oil and gas, before extraction. The term also includes the unborn young of animals.
   9. “Installment lease contract” means a lease contract that authorizes or requires the delivery of goods in separate lots to be separately accepted, even though the lease contract contains a clause “each delivery is a separate lease” or its equivalent.
   10. “Lease” means a transfer of the right to possession and use of goods for a term in return for consideration, but a sale, including a sale on approval or a sale or return, or retention or creation of a security interest is not a lease. Unless the context clearly indicates otherwise, the term includes a sublease.
   11. “Lease agreement” means the bargain, with respect to the lease, of the lessor and the lessee in fact as found in their language or by implication from other circumstances, including course of dealing or usage of trade or course of performance (as provided in this chapter). Unless the context clearly indicates otherwise, the term includes a sublease agreement.
   12. “Lease contract” means the total legal obligation that results from the lease agreement as affected by this chapter and any other applicable rules of law. Unless the context clearly indicates otherwise, the term includes a sublease contract.
   13. “Leasehold interest” means the interest of the lessor or the lessee under a lease contract.
   14. “Lessee” means a person who acquires the right to possession and use of goods under a lease. Unless the context clearly indicates otherwise, the term includes a sublessee.
   15. “Lessee in ordinary course of business” means a person who, in good faith and without knowledge that the lease is in violation of the ownership rights or security interest or leasehold interest of a third party in the goods, leases in ordinary course from a person in the business of selling or leasing goods of that kind, but does not include a pawnbroker. “Leasing” may be for cash or by exchange of other property or on secured or unsecured credit and includes acquiring goods or documents of title under a pre-existing lease contract but does not include a transfer in bulk or as security for or in total or partial satisfaction of a money debt.
   16. “Lessor” means a person who transfers the right to possession and use of goods under a lease. Unless the context clearly indicates otherwise, the term includes a sublessor.
   17. “Lessor’s residual interest” means the lessor’s interest in the goods after expiration, termination, or cancellation of the lease contract.
   18. “Lien” means a charge against or interest in goods to secure payment of a debt or performance of an obligation, but the term does not include a security interest.
   19. “Lot” means a parcel or a single article that is the subject matter of a separate lease or delivery, regardless of whether it is sufficient to perform the lease contract.
   20. “Merchant lessee” means a lessee that is a merchant with respect to goods of the kind subject to the lease.
   21. “Present value” means the amount as of a date certain of one or more sums payable in the future, discounted to the date certain. The discount is determined by the interest rate specified by the parties if the rate was not manifestly unreasonable at the time the transaction was entered into; otherwise, the discount is determined by a commercially reasonable rate that takes into account the facts and circumstances of each case at the time the transaction was entered into.
   22. “Purchase” includes taking by sale, lease, mortgage, security interest, pledge, gift, or any other voluntary transaction creating an interest in goods.
   23. “Sublease” means a lease of goods the right to possession and use of which was acquired by the lessor as a lessee under an existing lease.
   24. “Supplier” means a person from whom a lessor buys or leases goods to be leased under a finance lease.
   25. “Supply contract” means a contract under which a lessor buys or leases goods to be leased.
   26. “Termination” occurs when either party under a power created by agreement or law puts an end to the lease contract otherwise than for default.
2. Other definitions applying to this chapter and the sections in which they appear are:
   1. “Accessions”. Subsection 1 of section 41-02.1-40.
   2. “Construction mortgage”. Subdivision d of subsection 1 of section 41-02.1-39.
   3. “Encumbrance”. Subdivision e of subsection 1 of section 41-02.1-39.
   4. “Fixture filing”. Subdivision b of subsection 1 of section 41-02.1-39.
   5. “Fixtures”. Subdivision a of subsection 1 of section 41-02.1-39.
   6. “Purchase money lease”. Subdivision c of subsection 1 of section 41-02.1-39.
3. The following definitions also apply to this chapter:
   1. “Account”. Section 41-09-02.
   2. “Between merchants”. Subsection 1 of section 41-02-04.
   3. “Buyer”. Subdivision a of subsection 1 of section 41-02-03.
   4. “Chattel paper”. Section 41-09-02.
   5. “Consumer goods”. Section 41-09-02.
   6. “Document”. Section 41-09-02.
   7. “Entrusting”. Subsection 3 of section 41-02-48.
   8. “General intangible”. Section 41-09-02.
   9. “Instrument”. Section 41-09-02.
   10. “Merchant”. Subsection 3 of section 41-02-04.
   11. “Mortgage”. Section 41-09-02.
   12. “Pursuant to commitment”. Section 41-09-02.
   13. “Receipt”. Subdivision c of subsection 1 of section 41-02-03.
   14. “Sale”. Subdivision d of subsection 1 of section 41-02-06.
   15. “Sale on approval”. Subdivision a of subsection 1 of section 41-02-43.
   16. “Sale or return”. Subdivision b of subsection 1 of section 41-02-43.
   17. “Seller”. Subdivision d of subsection 1 of section 41-02-03.
4. In addition, chapter 41-01 contains general definitions and principles of construction and interpretation applicable throughout this chapter.

Source: S.L. 1991, ch. 448, § 9; 2001, ch. 361, § 16; 2005, ch. 354, § 13; 2005, ch. 354, § 13; 2007, ch. 354, § 9.

Official Comments.

(a) The definition of “Buyer in ordinary course of business” is in Article 1 (Section 1-201(9)). It was amended as part of the Article 9 revision process, and revised Article 1 is consistent with the Article 9 amendment.

(b) “Cancellation”. Section 2-106(4). The effect of a cancellation is provided in Section 2A-505(1).

(c) “Commercial unit”. Section 2-105(6).

(d) “Conforming”. Section 2-106(2).

For a transaction to qualify as a consumer lease it must first qualify as a lease. Section 2A-103(1)(j). Note that this Article regulates the transactional elements of a lease, including a consumer lease; consumer protection statutes, present and future, and existing consumer protection decisions are unaffected by this Article. Section 2A-104(1)(c) and (2). Of course, Article 2A as state law also is subject to federal consumer protection law.

This definition is modeled after the definition of consumer lease in the Consumer Leasing Act, 15 U.S.C. § 1667 (1982), and in the Unif. Consumer Credit Code § 1.301(14), 7A U.L.A. 43 (1974). However, this definition of consumer lease differs from its models in several respects: the lessor can be a person regularly engaged either in the business of leasing or of selling goods, the lease need not be for a term exceeding four months, a lease primarily for an agricultural purpose is not covered, and whether there should be a limitation by dollar amount and its amount is left up to the individual states.

This definition focuses on the parties as well as the transaction. If a lease is within this definition, the lessor must be regularly engaged in the business of leasing or selling, and the lessee must be an individual, not an organization; note that a lease to two or more individuals having a common interest through marriage or the like is not excluded as a lease to an organization under Section 1-201(28). The lessee must take the interest primarily for a personal, family or household purpose. If required by the enacting state, total payments under the lease contract, excluding payments for options to renew or buy, cannot exceed the figure designated.

A finance lease is the product of a three party transaction. The supplier manufactures or supplies the goods pursuant to the lessee’s specification, perhaps even pursuant to a purchase order, sales agreement or lease agreement between the supplier and the lessee. After the prospective finance lease is negotiated, a purchase order, sales agreement, or lease agreement is entered into by the lessor (as buyer or prime lessee) or an existing order, agreement or lease is assigned by the lessee to the lessor, and the lessor and the lessee then enter into a lease or sublease of the goods. Due to the limited function usually performed by the lessor, the lessee looks almost entirely to the supplier for representations, covenants and warranties. If a manufacturer’s warranty carries through, the lessee may also look to that. Yet, this definition does not restrict the lessor’s function solely to the supply of funds; if the lessor undertakes or performs other functions, express warranties, covenants and the common law will protect the lessee.

This definition focuses on the transaction, not the status of the parties; to avoid confusion it is important to note that in other contexts, e.g., tax and accounting, the term finance lease has been used to connote different types of lease transactions, including leases that are disguised secured transactions. M. Rice, Equipment Financing, 62-71 (1981). A lessor who is a merchant with respect to goods of the kind subject to the lease may be a lessor under a finance lease. Many leases that are leases back to the seller of goods (Section 2A-308(3)) will be finance leases. This conclusion is easily demonstrated by a hypothetical. Assume that B has bought goods from C pursuant to a sales contract. After delivery to and acceptance of the goods by B, B negotiates to sell the goods to A and simultaneously to lease the goods back from A, on terms and conditions that, we assume, will qualify the transaction as a lease. In documenting the sale and lease back, B assigns the original sales contract between B, as buyer, and C, as seller, to A. A review of these facts leads to the conclusion that the lease from A to B qualifies as a finance lease, as all three conditions of the definition are satisfied. Subparagraph (A) is satisfied as A, the lessor, had nothing to do with the selection, manufacture, or supply of the equipment. Subparagraph (B) is satisfied as A, the lessor, bought the equipment at the same time that A leased the equipment to B, which certainly is in connection with the lease. Finally, subparagraph (C)(i) is satisfied as A entered into the sales contract with B at the same time that A leased the equipment back to B. B, the lessee, will have received a copy of the sales contract in a timely fashion.

Subsection (A) requires the lessor to remain outside the selection, manufacture and supply of the goods; that is the rationale for releasing the lessor from most of its traditional liability. The lessor is not prohibited from possession, maintenance or operation of the goods, as policy does not require such prohibition. To insure the lessee’s reliance on the supplier, and not on the lessor, subsection (B) requires that the goods (where the lessor is the buyer of the goods) or that the right to possession and use of the goods (where the lessor is the prime lessee and the sublessor of the goods) be acquired in connection with the lease (or sublease) to qualify as a finance lease. The scope of the phrase “in connection with” is to be developed by the courts, case by case. Finally, as the lessee generally relies almost entirely upon the supplier for representations and covenants, and upon the supplier or a manufacturer, or both, for warranties with respect to the goods, subsection (C) requires that one of the following occur: (A) the lessee receive a copy of the supply contract before signing the lease contract; (B) the lessee’s approval of the supply contract is a condition to the effectiveness of the lease contract; (C) the lessee receive a statement describing the promises and warranties and any limitations relevant to the lessee before signing the lease contract; or (D) before signing the lease contract and except in a consumer lease, the lessee receive a writing identifying the supplier (unless the supplier was selected and required by the lessee) and the rights of the lessee under Section 2A-303, and advising the lessee a statement of promises and warranties is available from the supplier. Thus, even where oral supply orders or computer placed supply orders are compelled by custom and usage the transaction may still qualify as a finance lease if the lessee approves the supply contract before the lease contract is effective and such approval was a condition to the effectiveness of the lease contract. Moreover, where the lessor does not want the lessee to see the entire supply contract, including price information, the lessee may be provided with a separate statement of the terms of the supply contract relevant to the lessee; promises between the supplier and the lessor that do not affect the lessee need not be included. The statement can be a restatement of those terms or a copy of portions of the supply contract with the relevant terms clearly designated. Any implied warranties need not be designated, but a disclaimer or modification of remedy must be designated. A copy of any manufacturer’s warranty is sufficient if that is the warranty provided. However, a copy of any Regulation M disclosure given pursuant to 12 C.F.R. § 213.4(g) concerning warranties in itself is not sufficient since those disclosures need only briefly identify express warranties and need not include any disclaimer of warranty.

Under subsections (B) and (C), except when the new lease is to a consumer lessee, a finance lessor can have that status on re-leasing the property after it is returned from an original lease. However, in that case, the other elements required for the lease to be a finance lessee must be complied with.

If a transaction does not qualify as a finance lease, the parties may achieve the same result by agreement; no negative implications are to be drawn if the transaction does not qualify. Further, absent the application of special rules (fraud, duress, and the like), a lease that qualifies as a finance lease and is assigned by the lessor or the lessee to a third party does not lose its status as a finance lease under this Article. Finally, this Article creates no special rule where the lessor is an affiliate of the supplier; whether the transaction qualifies as a finance lease will be determined by the facts of each case.

At common law a lease of personal property is a bailment for hire. While there are several definitions of bailment for hire, all require a thing to be let and a price for the letting. Thus, in modern terms and as provided in this definition, a lease is created when the lessee agrees to furnish consideration for the right to the possession and use of goods over a specified period of time. Mooney, Personal Property Leasing: A Challenge, 36 Bus.Law. 1605, 1607 (1981). Further, a lease is neither a sale (Section 2-106(1)) nor a retention or creation of a security interest (Section 1-201(37)). Due to extensive litigation to distinguish true leases from security interests, an amendment to Section 1-201(37) has been promulgated with this Article to create a sharper distinction.

This section as well as Section 1-201(37) must be examined to determine whether the transaction in question creates a lease or a security interest. The following hypotheticals indicate the perimeters of the issue. Assume that A has purchased a number of copying machines, new, for $ 1,000 each; the machines have an estimated useful economic life of three years. A advertises that the machines are available to rent for a minimum of one month and that the monthly rental is $ 100.00. A intends to enter into leases where A provides all maintenance, without charge to the lessee. Further, the lessee will rent the machine, month to month, with no obligation to renew. At the end of the lease term the lessee will be obligated to return the machine to A’s place of business. This transaction qualifies as a lease under the first half of the definition, for the transaction includes a transfer by A to a prospective lessee of possession and use of the machine for a stated term, month to month. The machines are goods (Section 2A-103(1)(h)). The lessee is obligated to pay consideration in return, $ 100.00 for each month of the term.

However, the second half of the definition provides that a sale or a security interest is not a lease. Since there is no passing of title, there is no sale. Sections 2A-103(3) and 2-106(1). Under pre-Act security law this transaction would have created a bailment for hire or a true lease and not a conditional sale. Da Rocha v. Macomber, 330 Mass. 611, 614-15, 116 N.E.2d 139, 142 (1953). Under Section 1-201(37), as amended with the promulgation of this Article, the same result would follow. While the lessee is obligated to pay rent for the one month term of the lease, one of the other four conditions of the second paragraph of Section 1-201(37) must be met and none is. The term of the lease is one month and the economic life of the machine is 36 months; thus, subparagraph (a) of Section 1-201(37) is not now satisfied. Considering the amount of the monthly rent, absent economic duress or coercion, the lessee is not bound either to renew the lease for the remaining economic life of the goods or to become the owner. If the lessee did lease the machine for 36 months, the lessee would have paid the lessor $ 3,600 for a machine that could have been purchased for $ 1,000; thus, subparagraph (b) of Section 1-201(37) is not satisfied. Finally, there are no options; thus, subparagraphs (c) and (d) of Section 1-201(37) are not satisfied. This transaction creates a lease, not a security interest. However, with each renewal of the lease the facts and circumstances at the time of each renewal must be examined to determine if that conclusion remains accurate, as it is possible that a transaction that first creates a lease, later creates a security interest.

Assume that the facts are changed and that A requires each lessee to lease the goods for 36 months, with no right to terminate. Under pre-Act security law this transaction would have created a conditional sale, and not a bailment for hire or true lease. Hervey v. Rhode Island Locomotive Works, 93 U.S. 664, 672-73 (1876). Under this subsection, and Section 1-201(37), as amended with the inclusion of this Article in the Act, the same result would follow. The lessee’s obligation for the term is not subject to termination by the lessee and the term is equal to the economic life of the machine.

Between these extremes there are many transactions that can be created. Some of the transactions have not been properly categorized by the courts in applying the 1978 and earlier Official Texts of Section 1-201(37). This subsection, together with Section 1-201(37), as amended with the promulgation of this Article, draws a brighter line, which should create a clearer signal to the professional lessor and lessee.

The provisions of this Article, if applicable, determine whether a lease agreement has legal consequences; otherwise the law of bailments and other applicable law determine the same. Sections 2A-103(4) and 1-103.

41-02.1-04. (2A-104) Leases subject to other laws.

1. A lease, although subject to this chapter, is also subject to any applicable:
   1. Certificate of title statute of this state;
   2. Certificate of title statute of another jurisdiction (section 41-02.1-05); or
   3. Consumer protection law of this state, both decisional and statutory.
2. In case of conflict between the provisions of this chapter, other than section 41-02.1-05 or subsection 3 of section 41-02.1-34 or subsection 3 of section 41-02.1-35, and any statute or decision referred to in subsection 1, the provisions of that statute control.
3. Failure to comply with any applicable law has only the effect specified therein.
4. Consumer protection in lease transactions is primarily left to other law. However, several provisions of this Article do contain special rules that may not be varied by agreement in the case of a consumer lease. E.g., Sections 2A-106, 2A-108, and 2A-109(2). Were that not so, the ability of the parties to govern their relationship by agreement together with the position of the lessor in a consumer lease too often could result in a one-sided lease agreement.
5. In construing this provision the reference to statute should be deemed to include applicable regulations. A consumer protection decision is “final” on the effective date of this Article if it is not subject to appeal on that date or, if subject to appeal, is not later reversed on appeal. Of course, such a decision can be overruled by a later decision or superseded by a later statute.

Source: S.L. 1991, ch. 448, § 9.

Official Comments.

Uniform Statutory Source:

Former Section 1-101.

Changes:

Former Section 1-101.

Purposes:

1. This Article creates a comprehensive scheme for the regulation of transactions that create leases. Section 2A-102. Thus, the Article supersedes all prior legislation dealing with leases, except to the extent set forth in this Section.

2. Subsection (1) states the general rule that a lease, although governed by the scheme of this Article, also may be governed by certain other applicable laws. This may occur in the case of a consumer lease. Section 2A-103(1)(e). Those laws may be state statutes existing prior to enactment of Article 2A or passed afterward. In this case, it is desirable for this Article to specify which statute controls. Or the law may be a pre-existing consumer protection decision. This Article preserves such decisions. Or the law may be a statute of the United States. Such a law controls without any statement in this Article under applicable principles of preemption.

An illustration of a statute of the United States that governs consumer leases is the Consumer Leasing Act, 15 U.S.C. §§ 1667-1667(e) (1982) and its implementing regulation, Regulation M, 12 C.F.R. § 213 (1986); the statute mandates disclosures of certain lease terms, delimits the liability of a lessee in leasing personal property, and regulates the advertising of lease terms. An illustration of a state statute that governs consumer leases and which if adopted in the enacting state prevails over this Article is the Unif. Consumer Credit Code, which includes many provisions similar to those of the Consumer Leasing Act, e.g. Unif. Consumer Credit Code §§ 3.202, 3.209, 3.401, 7A U.L.A. 108-09, 115, 125 (1974), as well as provisions in addition to those of the Consumer Leasing Act, e.g., Unif. Consumer Credit Code §§ 5.109-.111, 7A U.L.A. 171-76 (1974) (the right to cure a default). Such statutes may define consumer lease so as to govern transactions within and without the definition of consumer lease under this Article.

3. Under subsection (2), subject to certain limited exclusions, in case of conflict a statute or a decision described in subsection (1) prevails over this Article. For example, a provision like Unif. Consumer Credit Code § 5.112, 7A U.L.A. 176 (1974), limiting self-help repossession, prevails over Section 2A-525(3). A consumer protection decision rendered after the effective date of this Article may supplement its provisions. For example, in relation to Article 9 a court might conclude that an acceleration clause may not be enforced against an individual debtor after late payments have been accepted unless a prior notice of default is given. To the extent the decision establishes a general principle applicable to transactions other than secured transactions, it may supplement Section 2A-502.

Cross References:

Definitional Cross References:

41-02.1-05. (2A-105) Territorial application of article to goods covered by certificate of title.