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BUSINESS LAW TODAY Essentials 9 th Ed. Roger LeRoy Miller - Institute for University Studies, Arlington, Texas Gaylord A. Jentz - University of Texas at Austin, Emeritus. Chapter 11. Sales and Leases: Formation, Title, and Risk. Learning Objectives.

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BUSINESS LAW TODAYEssentials 9th Ed.Roger LeRoy Miller - Institute for University Studies, Arlington, TexasGaylord A. Jentz - University of Texas at Austin, Emeritus

Chapter 11

Sales and Leases: Formation, Title, and Risk

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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?

  • What exceptions to the writing requirements of the Statute of Frauds are provided in Article 2 and Article 2A of the UCC?

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Learning Objectives

  • Risk of loss does not necessarily pass with title. If the parties to a contract 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?

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Scope of UCC Article 2 (Sales) and 2A (Leases)

  • UCC:

    • Article 2/2A—sale or lease of goods.

    • Articles 3-5—negotiable instruments and banking.

    • Article 6—bulk transfers.

    • Article 7—warehousing and shipping.

    • Article 8—securities.

    • Article 9—secured transactions.

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Article 2—”Sale” of “Goods”

  • What is a “Sale”: passing title from seller to buyer for a price.

  • What are “Goods”: must be tangible and movable (not land, services or intangibles).

    • Goods Associated With Land.

    • Goods and Services Combined.

  • CASE 11.1Jannusch v. Naffziger (2008). Terms of oral contract were definite enough to form an enforceable contract for sale of business. Naffzigers made payment and breached it.

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Article 2— “Merchants”

  • Who is a “Merchant”?

    • Generally, Article 2 deals with sale of ALL goods. However certain higher standards apply to merchants as opposed to casual sellers or “consumers”.

    • A merchant is one who deals in goods of the kind sold, and is presumed to posses a high degree of expertise.

    • A merchant holds himself out as having special skill or knowledge.

    • A person who employs a merchant as a broker or agent has the status of merchant in that situation.

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Scope of Article 2A--Leases

  • Lease Agreement between Lessor and Lessee.

    • Lessor: sells the right to possession and use of goods.

    • Lessee: acquires right to possess and use goods under a lease.

  • Article 2A: applies to all commercial and consumer lease/financing of goods.

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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.

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Offer: Open Terms

  • OFFER: UCC valid offer may include “open” (missing) terms:

    • Open Price Term: court will determine a reasonable price at time of delivery and enforce the contract.

    • Open Payment Term: payment is due at the time and place at which buyer is to receive goods.

    • Open Delivery Term: buyer takes delivery at seller’s place of business.

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Offer: Open Quantity

  • Open Quantity. If no quantity is specified, there is NO contract, unless:

    • Requirements Contract: buyer has agreed to purchase all he needs from seller.

    • Output Contract: buyer has agreed to purchase all the products the seller manufactures or produces.

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Merchant’s ‘Firm Offer’

  • Under common law, an offer can be revoked at any time before acceptance, unless there is an option contract (offeree pays consideration for offeror’s irrevocable promise).

  • UCC creates a second exception:

    • Firm offer occurs when merchant-offeror gives assurances in a signed writing that the offer will remain open.

    • No consideration is necessary for a reasonable period (up to 3 months).

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  • Methods of Acceptance: Seller can specify manner of acceptance. If not, any reasonable means.

  • Promise to Ship/Prompt Shipment of conforming goods is acceptance.

  • Non-Conforming Goods: Prompt shipment of non-conforming 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.

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Additional Terms

  • Common Law: terms must be the same for contract or battle of the forms.

  • UCC: additional/different terms permitted, depending on the status of the parties:

    • Either Non-merchant: only original terms accepted.

    • Both Merchants: additional terms form contract unless there is prohibition or new terms or terms materially alter contract, or the party objects.

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  • Modifications must be made in good faith.

  • When modifications without consideration require a writing:

    • If contract itself prohibits changes without a writing.

    • If consumer is dealing with merchant, who supplies non-oral modification form, consumer must sign separate acknowledgment.

    • Any modification that brings contract under UCC 2 Statute of Frauds.

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Statute Of Frauds

  • Contracts for Sale of Goods over $500 or lease over $1,000 must be in writing.

  • Special Rules Between Merchants: written confirmation after oral agreement.

  • Exceptions:

    • Specially Manufactured Goods.

    • Admissions. CASE 11.2 Glacial Plains Cooperative v. Lindgren (2009). Unsigned contract is ordinarily not enforceable, unless defendant makes admissions that a contract existed.

    • Partial Performance.

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Major Differences between Contract and Sales Law

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Parol Evidence

  • Generally, terms of a written agreement or memo cannot be contradicted by prior, extrinsic evidence, unless the evidence is:

    • Consistent, Additional Terms.

    • A Course of Dealing and Usage.

    • A course of Performance, or

    • Rules of Construction or Interpretation.

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  • Contract that is so unfair and one-side that it would be unreasonable to enforce it. Court can:

    • Refuse to enforce it.

    • Enforce contract without unconscionable clause, or

    • Limit impact of contract to avoid unconscionable result.

  • CASE 11.3Jones v. Star Credit (1969). Jones contracted to pay $1,234 for a $300 freezer. Court held contract was unconscionable and reformed it, requiring no further payments.

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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

    • Insurable Interest

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  • Before title to goods can pass from seller to buyer, they must exist and be identified.

  • Identification: takes place when specific goods are designated as subject matter of contract. 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.

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  • 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.

  • Goods Part of a Larger Mass.

    • Identified when goods are shipped, marked or designated.

    • Exception: Fungible Goods.

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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.

    • Shipment and Destination Contracts. 

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Passage of Title: Shipment and Destination Contracts

  • If there is no agreement, passage of title to buyer depends on whether the contract is a shipment or destination contract:

    • Shipment: title passes at time and place of shipment.

    • Destination: title passes when goods are tendered at the destination.

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Title: Delivery Without Movement of Goods

  • Unless the parties have 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.

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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.

  • Entrustment Rule: entrusting goods to merchant who deals in those goods, gives her power to transfer all rights in the ordinary course of business.

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Risk of Loss (ROL) : Delivery With Movement of Goods

  • When contract calls for movement of goods without agreement 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.

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Risk of Loss- Delivery WithoutMovement of Goods

  • 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.

  • 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.

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Risk of Loss: When Seller Breaches Contract

  • Shipment of Non-Conforming Goods -- risk stays with seller. 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.

  • Buyer revocation of acceptance after discovery of latent defect -- risk passes back to seller to the extent that buyer’s insurance does not cover the loss.

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Risk of Loss: Buyer’s Breach

  • Generally, loss passes to buyer if buyer breaches, with following limitations:

    • Goods must be identified by seller or lessor.

    • Buyer bears risk for only a commercially reasonable time.

    • Buyer is liable for only deficiency in seller’s insurance coverage.

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Insurable Interest

  • Buyer has an insurable interest in goods that have been identified.

  • Seller has an insurable interest in goods as long as they retain title or a security interest.

  • Both buyers and sellers can have an insurable interest at the same time.

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Contracts for International Sale of Goods

  • Contracts for the International Sale of Goods (CISG-1980).

    • As of 2010, signed by 70 countries, including U.S., Mexico, Canada, and Europe.

  • CISG Applicability.

    • Applies to International sale of goods like UCC 2 applies to domestic sale of goods.

  • Comparison between CISG and UCC 2.

    • Offers can be irrevocable without writing.

    • Acceptances are required to be ‘mirrors’ of the offer.