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Chapter 10 Sales and Lease Contracts. Learning Objectives. How do Article 2 and Article 2A of the UCC differ? What types of transactions does each article cover?
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Learning Objectives • How do Article 2 and Article 2A of the UCC differ? What types of transactions does each article cover? • In a sales contract, if an offeree includes additional or different terms in an acceptance, will a contract result? If so, what happens to these terms?
Learning Objectives • What exceptions to the writing requirements of the Statute of Frauds are provided in Article 2 and Article 2A of the UCC? • Risk of loss does not necessarily pass with title. If the parties to a contract
Learning Objectives • . . . do not expressly agree when risk passes and the goods are to be delivered without movement by the seller, when does risk pass? • What law governs contracts for the international sale of goods?
Scope of Article 2 (Sales)and Article 2A (Leases) • Article 2 applies to the sale of goods over $500. • Does not apply to sale of land or services. • Modifies the common law of contracts in certain areas, especially if one of the parties is a merchant.
Article 2—Sales • What is a “Sale”? • Passing title from seller to buyer for a price. • Price may be in cash or in other goods or services.
Article 2—Sales • What are “Goods”? • Must be tangible and movable (not land, services or intangibles). • Goods Associated With Land. • Goods and Services Combined: Predominant Factor test. If primarily for goods, UCC applies.
Article 2—Sales • Who is a “Merchant”? • A merchant is one who deals in goods of the kind sold, and is presumed to possess a high degree of expertise. • A merchant holds himself out as having special skill or knowledge.
Article 2—Sales • Who is a “Merchant”? • A person who employs a merchant as a broker or agent has the status of merchant in that situation.
Article 2A—Leases • Article 2A. • Applies to all commercial and consumer lease/financing of goods. • Lease Agreement. • Lessor: sells the right to possess and use goods. • Lessee: acquires right to possess and use.
Formation of Sales and Lease Contracts • UCC modifies the common law of contracts as follows: • Where UCC speaks, it preempts the common law; • Where UCC is silent, the common law governs.
Offer: Open Terms • Under UCC Article 2, an offer may include “open” terms: • As long as the parties intended to form a contract, and • There is a reasonably certain basis for the court to grant a remedy.
Offer: Open Terms • The only term the court will not create is the quantity. • If quantity is not specifically stated, a court will deem the contract unenforceable because it cannot objectively determine the quantity.
Offer: Open Terms • An open quantity contract is unenforceable, UNLESS the contract is either: • Requirements Contract: buyer agrees to purchase what the buyer needs or requires. • Output Contract: buyer agrees to buy all of seller’s production or output.
Offer: Merchants • Merchant’s Firm Offer. • Offer made by merchant in a signed writing is irrevocable for reasonable period of time. No consideration necessary. • The Offer Must be in Writing and Signed by the Offeror.
Acceptance • Seller can specify manner of acceptance. • If none is specified, any reasonable means. • A Promise to Ship or Prompt Shipment of conforming goods is acceptance.
Acceptance • Shipment of Nonconforming Goods. • Prompt shipment of nonconforming goods is both an acceptance and a breach, unless the seller notifies the goods are only an accommodation. • Notice of the accommodation must indicate no contract has been formed.
Acceptance • Notice of Acceptance Required. • If a unilateral offer is not accepted within a reasonable time with performance, the offeror can treat the offer as lapsed before acceptance.
Acceptance • Additional Terms. • Common Law: under the “mirror image” rule, the terms must be identical. • Article 2 dispenses with mirror image rule. • CASE 10.1 WPS, Inc. v. Expro Americas, LLC (2012). What facts did the court use to find a enforceable contract?
Acceptance • Additional Terms (Article 2). • When One Party is Not a Merchant: only original terms accepted. • When Both Parties are Merchants: additional terms form contract unless there is prohibition or new terms or terms materially alter contract, or the party objects.
Acceptance • Additional Terms (Article 2). • Conditioned on Offeror’s Assent: when an offer contains additional or different terms expressly conditioned on the offeror’s assent, no contract is formed without that assent. (UCC 2-207(1)).
Acceptance • Additional Terms (Article 2). • Additional Terms May Be Stricken: conduct by both parties may be sufficient to create an enforceable contract. A court will simply strike the terms of the contract on which the parties do not agree (UCC 2-207(3)).
Consideration • Modifications must be made in good faith. • Modifications without consideration must be written: • (1) If contract itself prohibits changes without a writing.
Consideration • Modifications without consideration must be written: • (2) If consumer is dealing with a merchant, consumer must sign separate acknowledgment. • (3) Any modification that brings the contract under UCC 2 Statute of Frauds.
The Statute Of Frauds • Contracts for Sale of Goods over $500 (or lease over $1,000) must be in writing. • Sufficiency of the Writing. • Sufficient if it is signed by one party and indicates parties intended to form a contract.
The Statute Of Frauds • Special Rules Between Merchants. • Written confirmation after oral agreement. • Confirmation must indicate the terms, and merchant receiving must have knowledge of its contents. • Receiver has 10 days to object.
The Statute Of Frauds • Exceptions to Writing: • Specially Manufactured Goods. • Admissions. • Partial Performance.
Exhibit 10.2 Major Differences between Contract and Sales Law
Parol Evidence • Generally, terms of a written agreement or memo cannot be contradicted by prior, extrinsic evidence, unless the evidence is: • A Course of Dealing and Usage. • A Course of Performance. • Rules of Construction.
Unconscionability • Contract so unfair and one-sided that it would be unreasonable to enforce it. • CASE 10.2 Jones v. Star Credit Corp. (1969). English language contract that required a Spanish speaker to pay nearly 400% for a refrigerator was not enforceable.
Unconscionability • Court can: • Refuse to enforce it. • Enforce contract without unconscionable clause, or • Limit impact of contract to avoid unconscionable result.
Title and Risk of Loss • Sale of goods requires different rules than real property transactions: risk should not always pass with title. • UCC replaces common law notions of title with identification, risk of loss, and insurable interest.
Title and Risk of Loss • Before title to goods can pass from seller to buyer, they must exist and be identified. • Identification. • Occurs when specific goods are designated as subject matter of contract.
Title and Risk of Loss • Identification. • Gives buyer the right to obtain insurance on the goods and to recover damages from third parties. • Existing Goods: identification takes place at time contract is made.
Title and Risk of Loss • Identification. • Future Goods: • If sale of unborn animals (or crops) within 12 months, identification occurs at conception (or planting). • Any other goods, identification takes place when goods are shipped.
Title and Risk of Loss • Identification. • Goods That Are Part of a Larger Mass. • Identification occurs when goods are marked, shipped, or otherwise designated. • EXCEPTION: Fungible Goods (e.g., wheat) do not need separation.
Passage of Title • Title passes when agreed to by the parties. • If there is no agreement, under Article 2-401 title of identified goods passes to the Buyer at the time and place the Seller physically delivers the goods.
Passage of Title • CASE 10.3 United States v. 2007 Custom Motorcycle (2011). Why did the court ‘strike’ Indy’s claim? • Shipment and Destination Contracts. • If there is no agreement, delivery arrangements determine when title passes.
Passage of Title • Shipment and Destination Contracts. • Shipment Contracts: title passes at time and place of shipment. • Destination Contracts: title passes when goods are tendered (Chapter 11) at the destination.
Passage of Title • Delivery without Movement of the Goods. • Unless agreed otherwise, title passes: • With document of title: when and where document delivered. • Without document: when sales contract is made, if goods have been identified or when identification occurs if they have not been identified.
Passage of Title • Sales or Leases by Nonowners. • Void Title (Theft): true owner gets goods back. • Voidable Title: Seller has power to transfer goods, so good faith purchaser (with no knowledge) has valid title to goods.
Passage of Title • Entrustment Rule. • Entrusting goods to merchant who deals in those goods, gives her power to transfer all rights in the ordinary course of business.
Risk of Loss • Delivery with Movement of Goods—Carrier Cases. • When contract fails to agree on when ROL passes, courts determine whether: • It is a shipment contract, and ROL passes when seller tenders goods to carrier. • It is a destination contract, and ROL passes when goods tendered at destination by carrier.
Risk of Loss • ROL: Delivery without Movement of Goods. • If Goods Held by Seller: • Document of Title is generally not used. • If Seller is a merchant, ROL passes when buyer takes actual possession of goods.
Risk of Loss • ROL: Delivery without Movement of Goods. • Goods Held by Bailee (Warehouse): ROL passes when buyer receives document of title; bailee acknowledges Buyer’s right to goods and buyer receives title and has reasonable time to pick up.
Risk of Loss • ROL When Contract Breached. • When Seller or Lessor Breaches. • Shipment of Non-Conforming Goods -- ROL does not pass to buyer until: • Seller “cures” the defect (goods are replaced or repaired), or • Buyer accepts non-conforming goods and waives right to reject.
Risk of Loss • ROL When Contract Breached. • When Seller or Lessor Breaches. • Buyer can revoke acceptance after discovery of latent defect – ROL passes back to seller to the extent that buyer’s insurance does not cover the loss.
Risk of Loss • ROL When Contract Breached. • When Buyer or Lessee Breaches. • After goods are identified, ROL passes to buyer for a reasonable amount of time after seller learns of the breach, to the extent that seller’s insurance does not cover loss.
