Measuring Damages After Buyer’s Affirmation of an Article 2 Sales Contract Induced by Fraud: A Study of Code Jurisprudence in Light of Section 2-721 and Pre-Code Conflicts in Remedial Theory

Monday, January 1st, 1996 at 12:00 am by Gart L. Monserud
Gart L. Monserud, Measuring Damages After Buyer’s Affirmation of an Article 2 Sales Contract Induced by Fraud: A Study of Code Jurisprudence in Light of Section 2-721 and Pre-Code Conflicts in Remedial Theory, 1996 Colum. Bus. L. Rev. 423

The consequences of a seller’s fraud in a sale covered by Article 2 of the Uniform Commercial Code are unpredictable. The Code furnishes minimal guidance in this area. Courts have often decided cases involving fraud in sales of goods without any reference to the few guideposts that the Code provides. The case law is confusing and contradictory. Commentary on the subject of fraud in Article 2 sales is sparse and often by-passes significant issues. Consequently, a lawyer or judge pondering a case involving a seller’s fraud in an Article 2 sale may have doubts about the Code’s usefulness at the border of contract and tort. This article is a criticism of post-Code case law fixing damages when a defrauded buyer affirms the contract and sues in deceit. Criticism is developed on two levels: on the level of statutory construction, and on the level of jurisprudential style. On the first level, this article defends the proposition that in transactions covered by Article 2, courts should effect the statute’s objectives by applying a flexible rule, giving preference to the aggrieved buyer’s lost expectancy. On the second level, this article argues that post-Code case law on damages in affirmation cases shows an unfortunate judicial captivity to pre-Code categorizations at variance with the structure and objectives of Article 2. Throughout this article, the focus is not on rescission and restitution following a fraudulent inducement to purchase, but rather on the situation where a buyer discovers actionable fraud but elects to affirm the contract, thereby keeping the goods and preserving a right to damages by timely notice. Moreover, this article is not about incidental or consequential or punitive damages -each important in its own right. The subject under discussion is the measure for direct damages when a buyer elects to affirm a fraudulently induced sale and sues for deceit. The cases selected for discussion are nearly all cases arising from intentional misrepresentation. Cases arising from negligent or innocent misrepresentation play no significant role in this article because the lesser degrees of culpability give rise to different torts and raise different concerns in choosing appropriate rules for damages.

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Professor of Law, New England School of Law