Sales and Leases: Formation, Title, and Risk

1. 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

2. 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?

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 contracts for the international sale of goods?

4. 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.

5. Law Governing Contracts

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

11. 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.

12. 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).

13. Acceptance • 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.

14. 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.

15. Consideration • 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.

16. 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.

17. Major Differences between Contract and Sales Law

18. 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.

19. Unconscionability • 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.

20. 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

21. Identification • 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.

22. 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. • Goods Part of a Larger Mass. • Identified when goods are shipped, marked or designated. • Exception: Fungible Goods.

23. 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. 

24. 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.

25. 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.

26. 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.

27. 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.

28. 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.

29. 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.

30. 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.

31. 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.

32. 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.