Contract Obligations and Construction under the Commercial Code

Commercial Code Division 2, Chapter 3 deals with general obligations and construction of contracts involving sales. Section 2301 states that 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. Section 2303 says that, where this division 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.

Section 2304 specifies that the price can be made payable in money or otherwise. If it is payable in whole or in part in goods, then each party is a seller of the goods which he or she is to transfer.

Section 2305 says that 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 nothing is said as to price; or the price is left to be agreed by the parties and they fail to agree; or, 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.

When a price left to be fixed otherwise than by agreement of the parties fails to be fixed through fault of one party the other may at his option treat the contract as canceled or himself fix a reasonable price. Where, however, the parties intend not to be bound unless the price be fixed or agreed and it is not fixed or agreed, then there is no contract.

Section 2306 provides that a term which measures the quantity by the output of the seller or the requirements of the buyer means the 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.

Section 2307 says that, unless otherwise agreed, all goods called for by a contract for sale must be tendered in a single delivery and payment is due only on such tender, but where the circumstances give either party the right to make or demand delivery in lots the price if it can be apportioned may be demanded for each lot.

Section 2308 states that the place for delivery of goods is the seller’s place of business or if he has none his residence; but 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, documents of title may be delivered through customary banking channels.

Section 2309 provides that the time for shipment or delivery or any other action under a contract if not provided in this division or agreed upon shall be a reasonable time. Where the contract provides for successive performances, but is indefinite in duration, it is valid for a reasonable time but unless otherwise agreed may be terminated at any time by either party. 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.

Section 2310 states that, unless otherwise agreed, payment is due at the time and place at which the buyer is to receive the goods even though the place of shipment is the place of delivery; and, if the seller is authorized to send the goods, he may ship them under reservation. If delivery is authorized and made by way of documents of title otherwise, then payment is due regardless of where the goods are to be.

Section 2311 specifies that an agreement for sale which is otherwise sufficiently definite 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.

Section 2312 provides that there is in a contract for sale a warranty by the seller that the title conveyed is to be good, and its transfer rightful; and, that the goods must be delivered free from any security interest or other lien or encumbrance of which the buyer at the time of contracting has no knowledge. A warranty will be excluded or modified only by specific language or by circumstances which give the buyer reason to know.

Section 2313 says that express warranties by the seller are created in three specified instances. Section 2314 states that a warranty that the goods are 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. Goods to be merchantable must meet specific conditions,

Section 2315 provides that, where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods, there is unless excluded or modified under the next section an implied warranty that the goods are fit for the purpose.

Section 2316 says that words or conduct relevant to the creation of an express warranty and words or conduct tending to negate or limit warranty are to be construed wherever reasonable as consistent with each other. 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.”

Section 2317 states that warranties whether express or implied are construed as consistent with each other and as cumulative, but if construction is unreasonable, the intention of the parties determines which warranty is dominant. In ascertaining that intention, three specified conditions apply.

Section 2319 defines the term “free on board.” When the term is F.O.B. the place of shipment, the seller must at that place ship the goods in the manner provided and bear the expense and risk of putting them into the possession of the carrier. When the term is F.O.B. the place of destination, the seller must at his own expense and risk transport the goods to that place and tender delivery of them in the manner provided.

In addition, the term defines the term “free alongside.” At his own expense and risk deliver the goods alongside the vessel in the manner usual in that port or on a dock designated and provided by the buyer; and, obtain and tender a receipt for the goods in exchange for which the carrier is under a duty to issue a bill of lading.

Section 2320 the term “C.I.F.” is defined, along with the terms “C. & F.” or “C.F.” The term requires the seller at his own expense and risk in three specified instances. An invoice must be prepared of the goods and procured any other documents required to effect shipment or to comply with the contract; and, it must forward and tender with commercial promptness all the documents in due form and with any indorsement necessary to perfect the buyer’s rights.

Section 2321 says that, under a contract containing a term C.I.F. or C. & F, where the price is based on or is to be adjusted according to “net landed weights,” “delivered weights,” “out turn” quantity or quality or the like, unless otherwise agreed, the seller must reasonably estimate the price. 

Section 2322 provides a definition of “ex-ship.” In this case, unless otherwise agree, 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 the risk of loss does not pass to the buyer until the goods leave the ship’s tackle or are otherwise properly unloaded.

Section 2323 states that, where the contract contemplates overseas shipment and contains a term C.I.F. or C. & F. or F.O.B. vessel, the seller unless otherwise agreed must obtain a negotiable bill of lading stating that the goods have been loaded on board or, in the case of a term C.I.F. or C. & F., received for shipment. Due tender of a single part is acceptable within the provisions of this division on cure of improper delivery. 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.

Section 2324 defines the term “no arrival, no sale.” The seller must properly ship conforming goods and if they arrive by any means he must tender them on arrival but he assumes no obligation that the goods will arrive unless he has caused the nonarrival. Where without fault of the seller the goods are in part lost or have so deteriorated as no longer to conform to the contract or arrive after the contract time, the buyer may proceed as if there had been casualty to identified goods.

Section 2325 specifies that failure of the buyer seasonably to furnish an agreed letter of credit is a breach of the contract for sale. The delivery to seller of a proper letter of credit suspends the buyer’s obligation to pay. If the letter of credit is dishonored, the seller may on seasonable notification to the buyer require payment directly from him. The terms “letter of credit” and “banker’s credit” are defined.

Section 2326 says that, if delivered goods may be returned by the buyer even though they conform to the contract, the transaction is a “sale on approval” if the goods are delivered primarily for use, or a “sale or return” if the goods are delivered primarily for resale. 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.

In addition, 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 division and as contradicting the sale aspect of the contract within the provisions of this division on parol or extrinsic evidence. If a person delivers or consigns for sale goods which the person used or bought for use for personal, family, or household purposes, these goods do not become the property of the deliveree or consignee unless the deliveree or consignee purchases and fully pays for the goods. 

Section 2327 specifies that, under sale on approval unless otherwise agreed, although the goods are identified to the contract the risk of loss and the title do not pass to the buyer until acceptance and 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. 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.

Section 2328 provides that, in a sale by auction, if goods are put up in lots each lot is the subject of a separate sale. A sale by auction is complete when the auctioneer so announces by the fall of the hammer or in other customary manner. Where a bid is made while the hammer is falling in acceptance of a prior bid the auctioneer may in his discretion reopen the bidding or declare the goods sold under the bid on which the hammer was falling.

This is a sale is with reserve unless the goods are in explicit terms put up without reserve. In an auction with reserve the auctioneer may withdraw the goods at any time until he announces completion of the sale. In an auction without reserve, after the auctioneer calls for bids on an article or lot, that article or lot cannot be withdrawn unless no bid is made within a reasonable time.