A recent California appeals court decision highlighted some interesting issues concerning the interplay between arbitration and the Uniform Commercial Code.
The case is J.C. Gury Company v. Nippon Carbide Insurance (USA) Inc. (2007) 152 Cal. App. 4th 1300, 62 Cal. Rptr. 118. Here, a manufacturer brought an arbitration proceeding against its supplier (Nippon Carbide). Apparently the manufacturer had encountered problems with the supplier's product after the supplier moved its production operations from Japan to China. The contract contained an arbitration agreement. The arbitration clause provided that the arbitrator would not have the power to change, modify or alter any expressed term of the contract. The contract also contained a fairly standard limited warranty and a limited remedy providing that the buyer's sole recourse was the replacement of the defective product.
In the arbitration proceeding the buyer sought consequential damages greatly in excess of the replacement costs, and attacked the warranty and remedy limitations as unconscionable. The arbitrator concluded that the exclusion of consequential damages would be unconscionable, based upon the lengthy course of dealing between the parties, the absence of any discussion concerning a warranty disclaimer or damage limitation and Nippon Carbide's superior bargaining position.
Nippon Carbide sought to overturn the arbitration award based on a claim that it was in excess of the arbitrator's powers. Its argument was founded on the contract clause prohibiting the arbitrator from varying the terms of the contract.
The court ruled against the manufacturer, noting that Nippon Carbide had never raised this issue with the arbitrator. By failing to raise a claim of limited powers with the arbitrator, Nippon Carbide had waived its right. In so doing it unequivocally submitted the issue of unconscionably to the arbitrator, and could not thereafter complain about the result.
The obvious moral of the story: it is imperative to raise all issues directly concerning the arbitrator's powers at the actual hearing.
But the case raises some other interesting issues. For example, was the manufacturer best served by an arbitration clause in this commercial context? Would it have done better if it had been able to bring its claim before a court, especially a federal court sitting in diversity jurisdiction? In that context would it have obtained a more favorable forum for consideration of the concept of unconscionability?
A second interesting issue: the court stated, with virtually no analysis, that an arbitrator's determination of “unconscionability” would in fact violate the arbitration agreement’s prohibition on the arbitrator modifying or altering the contract. This implies or suggests that the parties are free to indirectly waive the unconscionability protections of the Uniform Commercial Code by their use of an arbitration clause of the type found here. Did the court fully intend this result? Under the analysis suggested by this court, a party using an arbitration agreement could be free to impose contractual terms that would otherwise be oppressive, burdensome and unconscionable under the standards of the Uniform Commercial Code.
Wednesday, April 9, 2008
Friday, March 21, 2008
When your Mercedes-Benz C320 lurches, smells and clanks, check your “implied warranty” under Sections 2-314 and 2-315
An interesting appellate case upheld a jury verdict in favor of a woman who bought a new Mercedez-Benz C320. Isip v. Mercedes-Benz USA, LLC, (Sept. 12, 2007; Review Denied Nov. 28, 2007) 155 Cal. App. 4th 19.
The buyer’s new car soon car began to issue headache-inducing smells, lurch like a slingshot when shifting gears, hesitate and pull when slowing down, besides tugging, clanking, leaking and emitting white smoke. Nobody seemed to be able to fix it even though the car could be driven.
The buyer claimed breach of the implied warranty of merchantability applicable to consumer goods under the Federal Magnuson-Moss Warranty Act and California Song-Beverly Consumer Warranty Act. The jury found for the buyer after being instructed that to meet the implied warranty of merchantability, the car must be “in a safe condition and substantially free of defects.” Pp. 23, 25-26. Mercedez-Benz USA argued that the verdict should be reversed because the proper test of merchantability was the lower standard of whether the car was “unfit for ordinary transportation.” P. 25.
The court relied on the Uniform Commercial Code Sections to uphold the jury instructions. UCC Section 2-314 (Ca. Commercial Code 2314) provides that goods must be “merchantable” and “fit for the ordinary purpose” for which they are intended. UCC Section 2-315 (Ca. Commercial Code 2315) establishes an implied statutory warranty of fitness for a particular purpose. The court held that the “core test of merchantability” is “fitness for the ordinary purpose for which goods are used.”
Mere transportation from point A to point B did not meet the warranty of merchantability. The court rejected the lower “fitness for ordinary transportation” language. The buyer did not have to settle for a vehicle that “smells, lurches, clanks, and emits white smoke over an extended period of time.” P. 27. Especially when the buyer paid more than $46,000 for the car!
The buyer’s new car soon car began to issue headache-inducing smells, lurch like a slingshot when shifting gears, hesitate and pull when slowing down, besides tugging, clanking, leaking and emitting white smoke. Nobody seemed to be able to fix it even though the car could be driven.
The buyer claimed breach of the implied warranty of merchantability applicable to consumer goods under the Federal Magnuson-Moss Warranty Act and California Song-Beverly Consumer Warranty Act. The jury found for the buyer after being instructed that to meet the implied warranty of merchantability, the car must be “in a safe condition and substantially free of defects.” Pp. 23, 25-26. Mercedez-Benz USA argued that the verdict should be reversed because the proper test of merchantability was the lower standard of whether the car was “unfit for ordinary transportation.” P. 25.
The court relied on the Uniform Commercial Code Sections to uphold the jury instructions. UCC Section 2-314 (Ca. Commercial Code 2314) provides that goods must be “merchantable” and “fit for the ordinary purpose” for which they are intended. UCC Section 2-315 (Ca. Commercial Code 2315) establishes an implied statutory warranty of fitness for a particular purpose. The court held that the “core test of merchantability” is “fitness for the ordinary purpose for which goods are used.”
Mere transportation from point A to point B did not meet the warranty of merchantability. The court rejected the lower “fitness for ordinary transportation” language. The buyer did not have to settle for a vehicle that “smells, lurches, clanks, and emits white smoke over an extended period of time.” P. 27. Especially when the buyer paid more than $46,000 for the car!
Friday, February 1, 2008
Judges Are Not Like Pigs: UCC 2-725 allows short 1-year statute of limitations for breach of warranty claim
What is the statute of limitations for breach of warranty claims? Under UCC 2-725 (1), the default limitations period is the later of four years from the breach, or one year from discovery. The parties can subsitute a shorter limitations period (at least in non-consumer settings).
California's version of UCC 2-725 (Ca. Comm. Code Section 2275(1)) provides a four year statute, but the statute accrues when the breach occurs regardless of knowledge of the breach. Ca. Comm. Code Section 2275(1), (2). This period can be shortened to one year by agreement of the parties (not restricted to non-consumer cases).
In a recently released unpublished opinion, Mendelson v. Country Coach, Inc., (Nov. 19, 2007) (U.S. D. Dt., Central Dist. of Ca., No. EDCV 06-00572-SGL (OPx), 2007 WL 4811927) the court came down on the side of the manufacturer of a motor home. Although the claim was to "enforce a warranty" under California's Magnuson-Moss Warranty Act, the court applied UCC 2-725 (California's version, Ca. Comm Code Section 2725). The court enforced a contract term that required "any action to enforce this express or any implied warranty" to one year of the "expiration of the warranty." The purchaser complained that the statute should have been tolled, or equitably estopped, while some forty attempts to repair the vehicle were undertaken. The court denied this argument, since the purchaser's evidence did not clearly establish that these involved the same or related problems. Judge Stephen G. Larson declined the purchaser's suggestion that he review the service record in evidence: "judges are not like pigs, hunting for truffles buried in the record" --quoting Albrechtsen v. Board of Regents of University of Wisconsin System, (7th Cir. 2002) 309 F. 3d 433, 476.
Interestingly, the opinion does not discuss a potential discrepancy between the one year limitations period contemplated by Section 2275(1) and the contract terms in the case. Section 2275 states the parties may reduce the limitations period to "not less than one year," presumably "after the cause of action has accrued." The Country Coach contract tied the one-year claims period to the "expiration of the warranty." The opinion appears to assume that, a breach of the warranty, if it occurs at all, would occur before the expiration of the warranty period. If the repair is unsuccessfully undertaken outside he warranty period, for a defect that first became apparent within the warranty period, one might argue that the breach ocurrred when the repair failed, and that the one-year period for a claim should accrue then. Under these circumstances, the contractual limitation of the period to one year from the expiration of the warranty might be unenforceable under California's Section 2275, as being less than one year from the date the breach accrued.
Take away for the manufacturer: make sure the contract includes a one-year limit on claims for breach of warranty.
Take away for the purchaser: (1) file a claim sooner, rather than later!; and (2) make sure you present a detailed explanation of all events that have any bearing on the occurrence of the breach, tolling while repairs of the same or related defect are underway, and any equitable estoppel, because "judges are not like pigs" and they don't want to root around in the record looking for evidence that may save your case.
California's version of UCC 2-725 (Ca. Comm. Code Section 2275(1)) provides a four year statute, but the statute accrues when the breach occurs regardless of knowledge of the breach. Ca. Comm. Code Section 2275(1), (2). This period can be shortened to one year by agreement of the parties (not restricted to non-consumer cases).
In a recently released unpublished opinion, Mendelson v. Country Coach, Inc., (Nov. 19, 2007) (U.S. D. Dt., Central Dist. of Ca., No. EDCV 06-00572-SGL (OPx), 2007 WL 4811927) the court came down on the side of the manufacturer of a motor home. Although the claim was to "enforce a warranty" under California's Magnuson-Moss Warranty Act, the court applied UCC 2-725 (California's version, Ca. Comm Code Section 2725). The court enforced a contract term that required "any action to enforce this express or any implied warranty" to one year of the "expiration of the warranty." The purchaser complained that the statute should have been tolled, or equitably estopped, while some forty attempts to repair the vehicle were undertaken. The court denied this argument, since the purchaser's evidence did not clearly establish that these involved the same or related problems. Judge Stephen G. Larson declined the purchaser's suggestion that he review the service record in evidence: "judges are not like pigs, hunting for truffles buried in the record" --quoting Albrechtsen v. Board of Regents of University of Wisconsin System, (7th Cir. 2002) 309 F. 3d 433, 476.
Interestingly, the opinion does not discuss a potential discrepancy between the one year limitations period contemplated by Section 2275(1) and the contract terms in the case. Section 2275 states the parties may reduce the limitations period to "not less than one year," presumably "after the cause of action has accrued." The Country Coach contract tied the one-year claims period to the "expiration of the warranty." The opinion appears to assume that, a breach of the warranty, if it occurs at all, would occur before the expiration of the warranty period. If the repair is unsuccessfully undertaken outside he warranty period, for a defect that first became apparent within the warranty period, one might argue that the breach ocurrred when the repair failed, and that the one-year period for a claim should accrue then. Under these circumstances, the contractual limitation of the period to one year from the expiration of the warranty might be unenforceable under California's Section 2275, as being less than one year from the date the breach accrued.
Take away for the manufacturer: make sure the contract includes a one-year limit on claims for breach of warranty.
Take away for the purchaser: (1) file a claim sooner, rather than later!; and (2) make sure you present a detailed explanation of all events that have any bearing on the occurrence of the breach, tolling while repairs of the same or related defect are underway, and any equitable estoppel, because "judges are not like pigs" and they don't want to root around in the record looking for evidence that may save your case.
Wednesday, January 2, 2008
UCC § 4A-505. Zengen is a Zinger! Recovering money taken with an unauthorized payment instruction.
UCC § 4A-505 requires a bank customer to “notify the bank of the customer’s objection” within one year.
Suppose your company employee forges the CEO’s name and faxes the bank payment instructions directing the bank to transfer funds into the employee’s own account. You want the bank to credit back the funds. Is it enough to tell the bank that the transfer was “fraudulent and unauthorized” like one defrauded bank customer did? In Zengen, Inc. v. Comerica Bank, 2007 WL 4424947 (Dec. 19, 2007), the court came down in favor of the bank and said, “NO.” The customer also should have informed the bank that it “objected” to the bank’s conduct in processing the transfer and should have specifically asked for the money to be transferred back into its account. The customer should also have notified the bank that it erred in following the established security procedures.
In other words, it is not enough to complain; you must ask for what you want. Don’t just notify the bank of the loss; ask for the money back or submit a claim. Since a bank is not necessarily liable for fraudulent or unauthorized funds transfers unless it fails to follow established security procedures, UCC § 4A-202(b), the court found that mere notification of a fraudulent or unauthorized transaction would not necessarily imply a claim against the bank.
Zenger is a Zinger for the customer. Most cases will not involve this situation because if a customer goes to the trouble of notifying the bank about an unauthorized funds transfer, the customer will also ask for the money to be credited back into the account.
The case was decided (in an unreported and uncitable decision) by the California Court of Appeal on remand from the California Supreme Court’s earlier decision in Zengen, Inc. v. Comerica Bank, (2007), 41 al. 4th 239, 59 Cal. Rptr. 3d 240. The case involved California’s UCC equivalent, California Commercial Code Section 11505.
Suppose your company employee forges the CEO’s name and faxes the bank payment instructions directing the bank to transfer funds into the employee’s own account. You want the bank to credit back the funds. Is it enough to tell the bank that the transfer was “fraudulent and unauthorized” like one defrauded bank customer did? In Zengen, Inc. v. Comerica Bank, 2007 WL 4424947 (Dec. 19, 2007), the court came down in favor of the bank and said, “NO.” The customer also should have informed the bank that it “objected” to the bank’s conduct in processing the transfer and should have specifically asked for the money to be transferred back into its account. The customer should also have notified the bank that it erred in following the established security procedures.
In other words, it is not enough to complain; you must ask for what you want. Don’t just notify the bank of the loss; ask for the money back or submit a claim. Since a bank is not necessarily liable for fraudulent or unauthorized funds transfers unless it fails to follow established security procedures, UCC § 4A-202(b), the court found that mere notification of a fraudulent or unauthorized transaction would not necessarily imply a claim against the bank.
Zenger is a Zinger for the customer. Most cases will not involve this situation because if a customer goes to the trouble of notifying the bank about an unauthorized funds transfer, the customer will also ask for the money to be credited back into the account.
The case was decided (in an unreported and uncitable decision) by the California Court of Appeal on remand from the California Supreme Court’s earlier decision in Zengen, Inc. v. Comerica Bank, (2007), 41 al. 4th 239, 59 Cal. Rptr. 3d 240. The case involved California’s UCC equivalent, California Commercial Code Section 11505.
Wednesday, December 12, 2007
UCC 2-312--"Rightful Claim" of Breach of Warranty Against Patent Infringement May Be Asserted At Outset of Lawsuit
What is a “rightful claim” of patent infringement, allowing the buyer to sue seller for breach of the UCC 2-312 statutory warranty against claim of infringement?
The 2-312 statutory warranty against infringement may be triggered when the purchaser is sued, even if the purchaser denies the infringement claim. Phoenix Solutions, Inc. v. Sony Electronics, Inc. (December 6, 2007), 2007 WL 4287546 (US D. Ct., N. Dist. CA; Judge Marilyn Hall Patel). Phoenix sued the buyer (Sony) for use of an infringing product (software products for an interactive voice response system). Buyer answered Phoenix’s complaint by denying liability and infringement. Buyer also filed a third-party complaint against the seller of the software (Intervoice), asserting that seller breached the statutory 2-312 breach of warranty against infringement. The seller moved to dismiss under Rule 12(b)(6), arguing that the statutory warranty only covered “rightful claims” of infringement, and that since the buyer had denied any infringement, no “rightful claim” had been asserted. Since the complaint against infringement cast a “substantial shadow” over the title to the product, the Court allowed the purchaser’s lawsuit to proceed. The Court held that the “rightful claim” standard of UCC 2-312 was satisfied because the buyer alleged that plaintiff’s lawsuit “gave rise to a colorable claim of patent infringement,” even though buyer was “denying the ultimate merits of the claim.”
The Court also held that the buyer need not wait until the ultimate infringement is adjudicated before asserting the breach of warranty under 2-312. Citing the UCC comments, the Court held that “the buyer’s remedy arises immediately upon receipt of notice of infringement.”
This was an unusual case because the seller and the plaintiff agreed that seller had not infringed the plaintiff’s patents. Seller presented a stipulation with plaintiff that the seller’s software (in the unmodified state in which buyer purchased it) was not infringing, and that the buyer’s modifications caused the infringement. However, the court found that these facts were disputed by buyer and could not be resolved in the context of a motion to dismiss—which only covers the pleadings.
Does UCC 2-312 impose a duty to defend or merely to indemnify? Presumably, a court would not ultimately find that the UCC 2-312 warranty had been breached (giving rise to damages) merely by the filing of plaintiff’s lawsuit, and if the buyer or seller ultimately proves no infringement, there would be no breach of the statutory warranty. (However, this was not discussed in the opinion and I have not checked into this point in other cases.)
How to avoid the lawsuit entirely? UCC 2-312 allows the parties to exclude the warranty at the time of sale with specific language. UCC 2-312(2), (3).
Note: The opinion (Phoenix Solutions, Inc. v. Sony Electronics, Inc. (December 6, 2007), 2007 WL 4287546) cites 2-312(3), which is the form of UCC adopted in California. This corresponds to the official UCC 2-312(2).
The 2-312 statutory warranty against infringement may be triggered when the purchaser is sued, even if the purchaser denies the infringement claim. Phoenix Solutions, Inc. v. Sony Electronics, Inc. (December 6, 2007), 2007 WL 4287546 (US D. Ct., N. Dist. CA; Judge Marilyn Hall Patel). Phoenix sued the buyer (Sony) for use of an infringing product (software products for an interactive voice response system). Buyer answered Phoenix’s complaint by denying liability and infringement. Buyer also filed a third-party complaint against the seller of the software (Intervoice), asserting that seller breached the statutory 2-312 breach of warranty against infringement. The seller moved to dismiss under Rule 12(b)(6), arguing that the statutory warranty only covered “rightful claims” of infringement, and that since the buyer had denied any infringement, no “rightful claim” had been asserted. Since the complaint against infringement cast a “substantial shadow” over the title to the product, the Court allowed the purchaser’s lawsuit to proceed. The Court held that the “rightful claim” standard of UCC 2-312 was satisfied because the buyer alleged that plaintiff’s lawsuit “gave rise to a colorable claim of patent infringement,” even though buyer was “denying the ultimate merits of the claim.”
The Court also held that the buyer need not wait until the ultimate infringement is adjudicated before asserting the breach of warranty under 2-312. Citing the UCC comments, the Court held that “the buyer’s remedy arises immediately upon receipt of notice of infringement.”
This was an unusual case because the seller and the plaintiff agreed that seller had not infringed the plaintiff’s patents. Seller presented a stipulation with plaintiff that the seller’s software (in the unmodified state in which buyer purchased it) was not infringing, and that the buyer’s modifications caused the infringement. However, the court found that these facts were disputed by buyer and could not be resolved in the context of a motion to dismiss—which only covers the pleadings.
Does UCC 2-312 impose a duty to defend or merely to indemnify? Presumably, a court would not ultimately find that the UCC 2-312 warranty had been breached (giving rise to damages) merely by the filing of plaintiff’s lawsuit, and if the buyer or seller ultimately proves no infringement, there would be no breach of the statutory warranty. (However, this was not discussed in the opinion and I have not checked into this point in other cases.)
How to avoid the lawsuit entirely? UCC 2-312 allows the parties to exclude the warranty at the time of sale with specific language. UCC 2-312(2), (3).
Note: The opinion (Phoenix Solutions, Inc. v. Sony Electronics, Inc. (December 6, 2007), 2007 WL 4287546) cites 2-312(3), which is the form of UCC adopted in California. This corresponds to the official UCC 2-312(2).
Thursday, November 29, 2007
Careful Advance Planning Helps Your Claim
Tip No. 1: Check the UCC before you draft your complaint. Look down the litigation freeway at the upcoming "exit" signs. Will you be forced off the road before you get to your destination? Carefully compare your contract documents with the code provisions, and the recent rulings in your court. In a sales case, does your claim involve a warranty? Express or implied? 2-313 vs. 2-314, 2-315. What defenses will be asserted? Is there a valid disclaimer of warranties? 2-316. A limitation on remedies? 2-719. Any exceptions to the limited remedies? 2-719(3). Careful planning--and careful drafting--will speed the way.
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Welcome to Uniform Commercial Code Litigation Blog. Our goal is to make this blog a great location for lawyers to exchange ideas about new developments in UCC Litigation. This blog is hosted by Robinson & Robinson, LLP, a business law firm in Orange County, California. We're new at this and would love to get your feedback.
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