Chapter 13: Formation of Sales and Lease Contracts

1. Chapter 13: Formation of Sales and Lease Contracts

2. Learning Objectives • How do Article 2 and 2A of the UCC differ? What types of transactions does each article cover? • What is a merchant’s firm offer? • In a sales contract, if an offeree includes additional or different terms in an acceptance, will a contract result? If so, what happens to those terms?

3. 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 the international sale of goods?

4. The Scope of the UCC and Articles 2 (Sales) and 2A (Leases) • Facilitates commercial transactions. • UCC Article 2: • Governs contracts for sale of goods. • UCC Article 2 preempts common law. • Where UCC Article 2 is silent, common law governs.

5. Article 2—Sales • Only applies to goods. • The common law of contracts governs real estate, services or intangible property. • Mixed Goods-Services: The Predominant-Factor Test.

6. Ex. 13-1 Law Governing Contracts

7. Article 2—Sales • What is a Sale? • Article 2 applies to the “sale of goods.” • A “sale” is the passing of title from seller to a buyer for a price (payable in cash, goods, services).

8. Article 2—Sales • Article 2 applies to the “sale of goods.” • What are Goods? • Must be tangible and movable. • Tangible: has physical existence. • Movable: carried from place to place.

9. Article 2—Sales • What are Goods? • Goods Associated with Real Estate can fall within Article 2 if: • (1) Contract for sale of minerals or a structure is a good IF severance is made by seller. If severance by buyer, sale is governed by common law. • (2) Sale of growing crops. 

10. Article 2—Sales • What are Goods? • Goods Associated with Real Estate can fall within Article 2 if: • (3) Other “things” attached to real property, capable of being severed without harm to land.

11. Article 2—Sales • Goods and Services Combined: what law governs? • “Predominant Factor” Test – if goods, then UCC governs, if services then common law governs entire contract.

12. Article 2—Sales • Who is a Merchant? • UCC Article 2 imposes special standards upon a “merchant” who has special business expertise and is not a casual buyer/seller. 

13. Article 2—Sales • Who is a Merchant? • UCC Article 2 defines merchant as someone who: • Deals in goods of the kind in the sale. • Holds herself out as having special expertise, knowledge, or skill. • Person who employs a merchant.

14. Article 2A—Leases • Definition of a Lease Agreement: contract for lease of personal goods between a lessor and a lessee. • Lessor transfers right to possess and use goods under lease. • Lessee acquires right to possess and use goods. 

15. Article 2A—Leases • Consumer Leases: lessor, lessee who leases for personal, family, or household use, and total payments less than $25,000. • Finance Leases (involves a 3rd party-supplier).

16. Formation of Sales and Lease Contracts • Offer. • At common law once a valid offer is unequivocally accepted, a binding contract is formed. • UCC is more flexible, and allows for open pricing, payment, and delivery terms.

17. Formation of Sales and Lease Contracts • Offer. • Open Terms. UCC 2-204: even if terms are undetermined, a contract may still exist. • “Indefiniteness” is OK as long as the parties intended to make a contract and there is a reasonable basis for a court to grant a remedy. 

18. Formation of Sales and Lease Contracts • Offer. • Open Terms. • Open Price term: If parties have not agreed on pricing, court can determine “reasonable price at the time of delivery.” • Open Payment term: payment is due at the time and place in which buyer receives goods.

19. Formation of Sales and Lease Contracts • Offer. • Open Terms. • Open Delivery term: Unless otherwise agreed, buyer takes delivery at the Seller’s place of business. UCC2-308(a). Seller has duty to make arrangements in good faith.

20. Formation of Sales and Lease Contracts • Offer. • Open Terms. • Open Quantity: generally courts will not impose a quantity and there is no remedy, unless the contract is either a requirements or output contract. 

21. Formation of Sales and Lease Contracts • Offer. • Open Terms. • Open Quantity (exceptions). • 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.

22. Formation of Sales and Lease Contracts • Offer. • 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.

23. Formation of Sales and Lease Contracts • Acceptance. • Either by prompt shipment of conforming or nonconforming goods. • Non-conforming Goods: is both an acceptance and a breach unless goods sent as an “accommodation” to buyer, with prompt notice by buyer.

24. Formation of Sales and Lease Contracts • Acceptance. • Communication of Acceptance. • Additional Terms. • If One Party is a Merchant: contract is formed according to original terms of the offer. • Case 13.1 Office Supply Store.com v. Kansas City School Board (2011). Is this a fair decision to the retailer?

25. Formation of Sales and Lease Contracts • Acceptance. • Additional Terms. • When Both Parties are Merchants, the contract incorporates new terms unless: • (1) original offer expressly limits terms, or • (2) material change, or • (3) offeror objects within reasonable time. 

26. Formation of Sales and Lease Contracts • Consideration. • UCC adopts common law rule requiring consideration. However, modifications do not need consideration. • Modifications Must be Made in Good Faith.

27. Formation of Sales and Lease Contracts • The Statute of Frauds. • Sale of goods over $500 must have a signed writing to be enforceable. • Sufficiency of the Writing: signed by party against whom enforcement is sought. Normally not enforceable beyond quantity of goods shown in the writing. 

28. Formation of Sales and Lease Contracts • The Statute of Frauds. • Special Rules for Contracts Between Merchants. After oral agreement, one of the merchants sends a signed, written memorandum containing essential terms to the other merchant within a reasonable time.

29. Formation of Sales and Lease Contracts • The Statute of Frauds. EXCEPTIONS: • Specially manufactured goods. • Admissions by breaching party. • Partial Performance: oral contract is enforceable IF payment has been made or goods have been accepted.

30. Formation of Sales andLease Contracts • Parol Evidence. • Terms of a written agreement intended to be the final expression of parties’ intentions, cannot be contradicted by prior or contemporaneous agreements. • Exceptions: consistent terms, course of dealing and trade, course of performance.

31. Formation of Sales andLease Contracts • Unconscionability. • Contract is one that is so unfair and one-sided it is unreasonable to enforce it. Court can: set it aside, refuse to enforce the unconscionable provision, limit the contract. • CASE 13.2 Jones v. Star Credit Corp. (1969). Was this a fair decision to the retailer?

32. Title and Risk of Loss • Sale of goods requires different rules than real property transactions: risk should not always pass with title. • UCC replaces title with identification, risk, and insurable interest. 32

33. Title and Risk of Loss • Identification. • For any interest to pass to buyer, goods must be (1) in existence and (2) identified as specific goods in sales contract.  33

34. Title and Risk of Loss • Identification. • Identification takes place when specific goods are designated as the subject matter of the contract. Gives buyer the right: • To obtain insurance on the goods. • To recover from third parties who damage the good. 34

35. Title and Risk of Loss • Identification. • Existing Goods: if contact calls for ascertainable goods in existence, identification takes place at the time contract is made.  35

36. Title and Risk of Loss • Identification. • Future Goods. • Animals born within 12 months of contract, identification takes place at conception. • For crops harvested within 12 months of contracting, identification takes place at time of planting (or when crops begin to grow). • All others, when goods shipped, or marked or designated by seller. 36

37. Title and Risk of Loss • Identification. • Goods Part of a Larger Mass. • Goods are identified when marked, shipped, or designated by seller. • Exception: fungible goods which are naturally alike (grades of wheat, oil, wine). 37

38. Title and Risk of Loss • Passage of Title. • Contract between seller and buyer usually determines when title passes. • CASE 13.3 United States v. 2007 Custom Motorcycle (2011). When did the seller give up possession of the goods to the buyer?  38

39. Title and Risk of Loss • Passage of Title. • Title can pass: • Upon physical delivery, or • When agreed to by the parties.  39

40. Title and Risk of Loss • Passage of Title. • Shipment and Destination Contracts. If no agreement, title passes based on whether contract is shipment or destinationcontract. • Shipment: title passes at time and place of shipment.  40

41. Title and Risk of Loss • Passage of Title. • Shipment and Destination Contracts. • Destination: title passes when goods are tendered at the destination. • Delivery Without Movement of Goods. • With document of title (bill of lading): title passes when and where document delivered.  41

42. Title and Risk of Loss • Passage of Title. • Delivery Without Movement of Goods. • Without document: title passes when sales contract is made, if goods have been identified, or when identification occurs if they have not been identified. 42

43. Title and Risk of Loss • Passage of Title. • Sales or Leases by Nonowners. • Void Title: true owner gets goods back. • Voidable Title. • Good Faith Purchaser keeps goods. • Voidable Title and Leases: good faith lessee retains possession.  43

44. Title and Risk of Loss • Passage of Title. • Sales or Leases by Nonowners. • The Entrustment Rule. • Merchant must deal in goods of that kind. • Gives power to transfer valid title to good faith purchaser in ordinary course of business. 44

45. Ex. 13-2 Void and Voidable Titles 45

46. Title and Risk of Loss • Risk of Loss. • ROL does not necessarily pass with title. ROL is important because of insurance concerns. • Unless agreed otherwise, ROL passes to Buyer depending on whether delivery is with or without movement of the goods. 46

47. Title and Risk of Loss • Risk of Loss. • Delivery With Movement of the Goods-Carrier Cases. • Shipment Contracts: Risk of loss passes to Buyer when goods tendered to Carrier. If goods damaged in transit, Buyer’s bears risk of loss.  47

48. Title and Risk of Loss • Risk of Loss. • Delivery With Movement of the Goods-Carrier Cases. • Destination Contracts. ROL passes to Buyer when goods tendered at contractually specified destination. 48

49. Title and Risk of Loss • Risk of Loss. • Delivery Without Movement of the Goods. • Often goods are held by a bailee on behalf of the seller in a bailment arrangement. • Documents of title give bailee possession of goods and/or contracts to deliver them. • Examples: warehouse, trucking company.  49

50. Title and Risk of Loss • Risk of Loss. • Delivery Without Movement of the Goods. • Goods Held by Seller: Document of Title is generally not used. • If Seller is a merchant, risk of loss passes when buyer takes physical possession of goods. (ROL remains with seller until buyer takes physical possession.) 50