Commercial Law - Robert A. Weber, Jr.

• Publication year: 1999

Commercial Lawby Robert A. Weber, Jr.^*

I. Sales

Most issues arising under Article 2 of the Uniform Commercial Code during the survey period concerned warranties and the proper form and procedure for their exclusion. A precondition to consideration of Article 2 warranty rules, however, is the existence of a contract for the sale of goods within the scope of Article 2. In Willis Mining, Inc. v. Noggle,¹ plaintiff purchased granite blocks from defendant. Plaintiff cut monuments from the granite and sold the monuments to dealers for eventual sale to the public. The monuments began to show signs of discoloration within eighteen months of sale, and when defendant refused to reimburse plaintiff for its cost in replacing the monuments, plaintiff sued for breach of the implied warranty of merchantability.²

Defendant argued that Article 2 rules governing warranty did not apply. In particular, defendant claimed the granite blocks sold to plaintiff were not "goods." To constitute goods within the meaning of Article 2, defendant's argument proceeded, the goods must be "manufactured."³

The court rejected defendant's argument that goods covered by Article 2 must possess the characteristic of having been manufactured.⁴ First, the test for determining the existence of goods within the meaning of Article 2 is "whether the goods are 'movable at the time of identification to the contract.'"⁵ Second, commercial code provisions addressing goods severed from real estate explicitly cover minerals.⁶ Lastly, cases cited by defendant⁷ in support of its argument were inapposite and merely stood for the proposition that a defendant is not liable for warranty claims as to drugs that it neither manufactures nor prescribes.⁸

The court in Noggle, having determined Article 2 rules applied, also addressed the more common Article 2 issue of the survey period: implied warranties and disclaimer thereof.⁹ Defendant first argued that plaintiff's conduct—inspecting the blocks and using his own judgment to select the granite blocks—precluded implication of the warranty of merchantability.¹⁰ Although such a contention might have been relevant if plaintiff had claimed a breach of implied warranty of fitness for a particular purpose, it was irrelevant in the context of disclaiming the warranty of merchantability, which can be disclaimed only by written, conspicuous language.¹¹

Defendant also argued that the warranty of merchantability did not apply because the defects in this case were latent, not discoverable by buyer or seller.¹² The court summarily rejected this argument, stating that "[u]ndisclosed latent defects . . . are the very evil that the implied warranty of merchantability was designed to remedy."¹³ Only latent defects discoverable by the exercise of caution on the buyer's behalf are excluded from the warranty of merchantability, and because the evidence at trial showed the defect in the granite blocks was not discoverable by such efforts, the warranty still applied.¹⁴

The court in North Georgia Ready Mix Concrete Co. v. L & L Construction, Inc.¹⁵ explored the nature of express warranties under Article 2 in a fact—intensive opinion. Buyer and seller entered a contract for the sale of concrete, and the parties agreed to a particular mixture of ingredients for the concrete. Seller convinced buyer to allow it to alter the mix, and buyer agreed, but only upon seller's agreement to revert to the previous mix if buyer was dissatisfied. Buyer did, in fact, become dissatisfied and instructed seller to revert to the originally agreed upon specifications. Seller did so, but only briefly, and thereafter continued using the altered mix without notifying buyer.¹⁶

The originally agreed upon mixture constituted an express warranty as a '"description of the goods which is made a part of the basis of the bargain.'"¹⁷ In further support of its conclusion, the court stated:

"A warranty is a statement or representation made by the seller of goods, contemporaneously with and as part of the contract of sale, though collateral to the express object of it, having reference to the character, quality, or title of the goods, and by which he promises or undertakes to ensure that certain facts are or shall be as he then represents them. The warranty may be express or implied. It is the former when created by the apt and explicit statements of the seller; the latter, when the law derives it by implication or inference from the nature of the transaction, or the relative situation or circumstances of the parties."¹⁸

Although the agreement at issue in Bailey v. Tucker Equipment Sales, Inc.¹⁹ was a lease governed by Article 2A, the ruling therein on warranty disclaimers is equally applicable in the context of Article 2.²⁰ The lease contract in Bailey included the following pertinent language:

"Lessee acknowledges that he has examined the Equipment and that it is in good condition and repair. Lessee accepts the Equipment as is and agrees to use reasonable care in the operation of the Equipment. Upon termination of the rental, Lessee shall return the Equipment to the place of business of the Lessor in as good condition as when received by the Lessee, ordinary wear and tear excepted."²¹

The court stressed that the emphasized language in this quote "was not highlighted, bolded, in larger print, or otherwise set off."²²

To be effective, a disclaimer of a warranty implied by Article 2A must be '"in writing and conspicuous.'"²³ Conspicuous means that the clause or term '"is in larger or other contrasting type or color.'"²⁴ As drafted, the "as is" language was not conspicuous, nor was the phrase such that a "reasonable person ought to have noticed and understood" that its usage operated to preclude warranty rights.²⁵

II. Notes and Guarantees

Survey cases involving notes and guarantees provided practical guidance on several issues affecting daily practice, including representative capacity of a guarantor,²⁶ the consideration necessary to support a note,²⁷ and the import of "holder in due course" status for a client in commercial transactions.²⁸

In Dewberry Painting Centers, Inc. v. Duron, Inc.,²⁹ a corporate account debtor opened two accounts with plaintiff. The individual defendant, owner of the corporate account debtor, signed documents purporting to be individual guarantees on such accounts.³⁰ As to the first account, the guaranty stated, in relevant part: "[W]e ... do hereby jointly and severally guarantee the payment by said firm .... I/WE jointly and severally personally guarantee the performance of the applicant herein agreeing to the terms hereinabove stated."³¹ Beneath this language the name of a corporate account debtor was typed, with the individual defendant's signature, followed by the typed word "president."³² The second account guaranty contained the following similar, although not identical, language: "[W]e the undersigned do hereby jointly and severally guarantee the payment by said firm .... I/WE jointly and severally___________the performance of the applicant herein agreeing to the terms hereinabove stated."³³ Immediately beneath this language was the signature of the individual defendant, followed by the handwritten title "president." However, the name of the corporate account debtor appeared nowhere in the signature area.³⁴

Because these documents had been executed prior to the revision of Article 3, the court found the pre-revision version of the statute governing signatures in a representative capacity³⁵ controlled.³⁶ According to the pre-revision version of O.C.G.A. section 11-3-403, a signature is made in a representative capacity if '"the name of an organization [is] preceded or followed by the name of an authorized individual.'"³⁷ Unless the parties establish otherwise, "the representative is personally obligated 'if the instrument names the person represented but does not show that the representative signed in a representative capacity.'"³⁸

Applying these rules to the foregoing facts, the court found that the first guarantee was not made individually but rather in a representative capacity.³⁹ The second account guarantee, however, created a question of fact as to the parties' intent because the organization name was omitted.⁴⁰

The court in Ochs v. Hoerner⁴¹ explored the consideration necessary to support a note. The result reached in Ochs, combined with the court's holding in Tyson v. McPhail Properties⁴² should convince counsel that a recital of at least nominal consideration, in addition to the standard reference "for value received," should be included when drafting promissory notes. In Ochs maker and payee entered a contract whereby maker would purchase real property from a closely held corporation controlled by payee. Maker, apparently simultaneously with execution of the agreement, executed a $100,000 demand note to payee. Payee testified that he never paid any funds to maker and that the note was given as compensation for deferring closing on the referenced real property. Neither the note nor the real property sales contract referred to the other, and the sales contract contained a standard merger clause. When maker did not close on the real property, payee sued on the demand note.⁴³

The court first ruled that, due to the merger clause, the note was to be viewed separately from the sales contract for purposes of determining the existence of consideration sufficient to support the note.⁴⁴ Viewing the note in isolation, the court found that defendant had rebutted the presumption that the note was supported by consideration.⁴⁵ Because the note merely stated it was given for "value received," parol evidence was admissible on the issue of the existence of consideration.⁴⁶ Because the maker received no funds and deferral of the closing on the real property was something to which maker was entitled by reason of the sales contract, no consideration existed, and the note was invalid.⁴⁷

The court in Fedeli v. UAP/GA AG CHEM, Inc.⁴⁸...