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Chapter 18 Formation of Sales and Lease Contracts

Chapter 18 Formation of Sales and Lease Contracts. §1: The UCC. Facilitates commercial transactions. UCC Article 2: Sale of Goods. Modifies common law of contracts of some areas. UCC 2 preempts common law. Where UCC2 is silent, common law governs. §2: The Scope of UCC 2.

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Chapter 18 Formation of Sales and Lease Contracts

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  1. Chapter 18 Formation of Sales and Lease Contracts

  2. §1: The UCC • Facilitates commercial transactions. • UCC Article 2: Sale of Goods. • Modifies common law of contracts of some areas. • UCC 2 preempts common law. • Where UCC2 is silent, common law governs.

  3. §2: The Scope of UCC 2 • Does not apply to real estate unless there is a “good” that can be severed by the Seller. If the good is severed by the Buyer, then UCC2 does not apply. • Generally contracts for services are not governed by UCC2. • Goods and services combined?

  4. Scope of UCC2 [2] • UCC2 applies to the “sale of goods.” • A “sale” is the passing of title of “goods” to/from a “merchant” (seller or buyer) for a price (money, goods, services,etc). • “Goods” are tangible and movable. • A “merchant” has special business expertise and is not a casual buyer/seller.

  5. §3: Scope of UCC 2A-Leases • Contract for lease of personal goods between a lessor and a lessee. • Consumer Leases (total payments less than $25,000). • Finance Leases (involves a 3rd party-supplier).

  6. §4: Formation of Sales Contracts • 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.

  7. Offer-Open Terms [1] • UCC 2-204: even if terms of are undetermined, contract may still exist. • Open Terms: “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.

  8. Offer-Open Terms [2] • UCC2-305: If parties have not agreed on pricing, court can determine “reasonable price at the time of delivery.” • UCC2-308: Unless otherwise agreed, buyer takes delivery at the Seller’s place of business. • UCC2-310: Unless otherwise agreed, payment is due on delivery (COD).

  9. Offer-Open Terms [3] • UCC2-306 “Open Quantity”: generally courts will not impose a 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.

  10. Firm Offer • At common law, an offer could be revoked any time prior to acceptance, unless there was some consideration. • At UCC, offer made by merchant is irrevocable for reasonable period of time if writing assurance is given. No consideration necessary.

  11. Acceptance • Any reasonable means of under the circumstances is permissible. • Promise to ship or prompt shipment is acceptance. • Shipment of non-conforming goods is both an acceptance and a breach unless goods sent as an “accommodation” to buyer (UCC2-206).

  12. Additional Terms • If either party is a non-merchant, the contract is formed according to original terms of the offer. • If both parties are merchants, contract incorporates new terms unless: (1) original offer expressly limits terms or (2) material change or (3) offeror objects within reasonable time.

  13. Consideration • UCC requires consideration and modifications must be made in good faith. • Modification must be in writing if required by Statute of Frauds.

  14. Statute of Frauds • Sale of goods over $500 must have a signed writing to be enforceable. • Exceptions to this rule: • Specially manufactured goods. • Admissions by breaching party. • Partial performance. • Merchant doesn’t object within 10 days.

  15. 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.

  16. 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.

  17. §5: International Sales • Applicability of the CISG. • Comparison of CISG and UCC. • Mirror Image Rule. • Irrevocable Offers. • Statute of Frauds. • Necessity of a Price Term. • Time of Contract Formation.

  18. Case 18.1: Micro Data v. Dharma Systems(Goods and Services Combined) • FACTS: • Micro (MDBS) contracted with Dharma to adapt Dharma’s software program (known as SQL Access) for use in a system that MDBS was to provide to Unisys Government Systems, Inc. • After delivery, some defects were reported. Dharma refused to fix them until MDBS signed an agreement to limit the distribution of the adapted software (known as the RDMS Emulation), but MDBS did not sign. • MDBS sued Dharma for breach of contract. Dharma counterclaimed. • ISSUE: Was the contract for goods or services?

  19. Case 18.1: Micro Data v. Dharma Systems(Goods and Services Combined) • HELD: FOR DHARMA. • The court ruled that the contract was for a sale of goods, and that MDBS had violated it. • “A contract for a sale of customized software is subject to Article 2 of the UCC, because although both goods and services were involved, the goods component predominated.”

  20. Case 18.2: Wilson Fertilizer v. ADM Milling(Additional Terms) • FACTS: • Wilson agreed to sell grain to ADM Milling Co. ADM sent a confirmation stating that “[t]his contract is also subject to the Trade Rules of the National Grain and Feed Association [NGFA].” (The NGFA rules require the arbitration of disputes and limit the time for filing a complaint to one year). Wilson did not respond. • Later, in a dispute, Wilson filed suit against ADM. ADM moved to dismiss, claiming that the NGFA rules required arbitration.

  21. Case 18.2: Wilson Fertilizer v. ADM Milling(Additional Terms) • HELD: FOR ADM. • Wilson had argued that the confirmation materially altered the contract, because it imposed a hardship of arbitration. • The UCC “specifically permits parties to a contract for sale to reduce the time for filing claims to one year.” Also, “and even more significantly,” Wilson could have submitted a claim for arbitration within the one-year limit. The contract was formed in October 1992, and Wilson filed the complaint in September 1993.

  22. Case 18.3: Jones v. Star Credit(Unconscionability) • FACTS: • Jones, who had limited financial resources, agreed to purchase a freezer for $900, with financing for total price of $1,439.69. In fact, the freezer had a maximum retail value of about $300. • The Joneses sued Star on grounds of unconscionability. • HELD: FOR JONES. • Contract was reformed and Jones made no further payments. • Court considered the disparity between the purchase price and the retail value, the credit charges that alone exceeded the retail value, and the seller’s knowledge of the buyers’ limited resources

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