Chapter 11 Sales, Leases, and E-Contracts

1. Chapter 11Sales, Leases, and E-Contracts

2. Introduction • 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. §1: The Scope of UCC 2—The Sale of Goods • 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. • What if Goods and Services combined?

4. Scope of Article 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. §2: 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. § 3: Amendments to Articles 2 and 2A • 2002 Amendments attempt to accommodate electronic commerce. • Article 2 consistent with UETA and E-SIGN. • “Writing” is now “record.”

7. §4: Formation of Sales and Lease 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.

8. Open Terms • UCC 2-204: even if terms of are undetermined, a 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.

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

10. Open Terms • Open Quantity: generally courts will not impose a quantity. UCC2-306. 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.

11. Merchant’s 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 in a signed writing is irrevocable for reasonable period of time. No consideration necessary.

12. Acceptance • Any reasonable means of acceptance 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).

13. 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.

14. § 5: Consideration • UCC requires consideration and modifications must be made in good faith. • Modification must be in writing if required by Statute of Frauds.

15. § 6: 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. • Oral agreement enforceable after written confirmation between merchants.

16. § 7: Title, Risk and Insurable Interest • 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.

17. Identification For any interest to pass to buyer, goods must be: • In existence. • Identified as specific goods in the sales contract (by serial numbers and/or physically separated from others. Except for fungible goods which do not need separation).

18. Identification [2] • Gives the buyer the right: • To obtain insurance on the goods. • To recover from third parties who damage the good. • Identification occurs: • If goods are designated when contract is made. If goods are not designated when contract is made, then identified at time of designation.

19. When Title Passes • Title can pass: • Upon physical delivery, or • When agreed to by the parties, or • If no agreement, depends on whether contract is shipment or destination contract: • Shipment: title passes at time and place of shipment. • Destination: title passes when goods are tendered at the destination. • Case 11.1:In re Stewart (2002).

20. Delivery Without Movement of Goods • Title passes when agreed by the parties, or • 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.

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

22. ROL: Delivery With Movement • Shipment Contracts. • ROL passes to Buyer when tendered to Carrier. If goods damaged in transit, Buyer’s loss. • Destination Contracts. • ROL passes to Buyer when goods tendered at particular Destination.

23. ROL: Delivery Without Movement of Goods • Goods Held by Seller: • Document of Title is generally not used. • If Seller is a merchant, ROL passes when buyer takes physical 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.

24. ROL: Shipping Terms

25. ROL: Conditional Sales • Sale on Approval. • ROL passes when buyer approves expressly or implicitly. • Sale or Return. (Consignment is sale or return unless it complies with Art. 9.) • ROL passes to buyer with possession.

26. ROL in Breach of Contract • Generally breaching party bears ROL. • Seller’s Breach. • Rejection - risk stays with seller. • Revocation of acceptance - risk passes back to seller to the extent that buyer’s insurance does not cover the loss. • Buyer’s Breach. Goods are identified, risk 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.

27. 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.

28. § 8: Performance of Sales and Lease Contracts • Seller must transfer and deliver conforming goods. • Buyer must accept and pay for conforming goods. • In the absence of an agreement between Seller and Buyer UCC Article 2 controls as set out below.

29. Good Faith Requirement • Good Faith is the foundation of every UCC commercial contract. • Good faith means honesty in fact. • For a merchant, it means honesty in fact and observance of reasonable commercial standards of fair dealing in the trade. Merchants are held to a higher standard of care than non-merchants.

30. Obligations of the Seller or Lessor • Seller has a duty to “tender” delivery of “conforming goods.” • Tender means “delivery” to agreed place: • With reasonable notice. • At a reasonable hour. • In a reasonable manner. • Exactly, unless otherwise agreed.

31. Place of Delivery • If no place designated, Buyer picks up at Seller’s place of business or, if Seller has no place of business, then Seller’s residence. • If contract involves identified goods, and the goods are located somewhere else (e.g., a warehouse), then the location of the goods is the place of delivery.

32. The Perfect Tender Rule If goods, or tender of delivery, fail in any respect to conform to the contract, the Buyer has the right to: • Accept the goods; • Reject the entire shipment; or • Accept part and reject part.

33. Exceptions to the Perfect Tender Rule • Agreement of the Parties. • Cure. • Substitution of Carriers. • Installment contracts. • Commercial Impracticability. • Destruction of Identified goods. • Cooperation and Assurance.

34. Exceptions: Agreement of the Parties • Parties agree that some defective goods will be acceptable. • Parties agree that defective goods can be replaced or repaired within a certain time.

35. Exceptions: Seller’s Cure • Seller has the right to “Cure” (ship conforming goods to Buyer) if: • Agreed time of performance has not yet expired; or • If Seller had reasonable grounds to expect that Buyer would accept non-conforming goods, i.e., these goods are better than goods ordered, or Buyer has accepted non-conforming goods in the past.

36. Exceptions: Substitution of Carriers If a carrier becomes impracticable or unavailable through no fault of either party, a commercially reasonable substitute is acceptable.

37. Exceptions: Commercial Impracticability • Occurrence of an unforeseen contingency that makes performance impracticable. • Nonoccurrence was a basic assumption on which the contract was made. • If only partial impracticability, Seller must allocate what he/she has.

38. Exceptions: Installment Contracts • Installment Contracts can be rejected if: • installment is substantially non-conforming and can’t be cured. • non-conforming installment substantially impairs the entire contract.

39. Exceptions: Destruction of Goods • If no fault of either party and it occurs • Before risk passes to Buyer then • Both Seller and Buyer are excused from performance.

40. Exceptions: Cooperation • Sometimes unforeseen event only partially affects Seller’s capacity to perform. • In that event, Seller has duty to reasonably allocate any remaining production capacity to fulfilling contractual performance. • Buyer has the right to reject. • Case 11.2:Koch Materials Co. v. Shore Slurry Seal, Inc. (2002).

41. Obligations of the Buyer or Lessee • Furnish facilities reasonably suited for receipt of the goods. • Make payment at the time and place the Buyer receives the goods. • Credit has to be prearranged. • Credit period begins on the date of shipment. • Pay with cash, credit card, check. • But if Seller asks for cash, Seller has to give Buyer time to get cash.

42. Buyer’s Obligations • Buyer has right to inspection before paying: • Costs of inspection borne by Buyer. • However, C.O.D., C.I.F. and C&F give Buyer no right to inspect.

43. Acceptance • Buyer can accept goods: • By words or conduct. • If Buyer had reasonable amount of time and failed to reject. • Buyer performs an act which indicates he thinks he is the owner. • Partial Acceptance.

44. Revocation of Acceptance • Notify Seller of breach. • Revoke only if substantial nonconformity; and • Buyer accepted on the reasonable assumption that the Seller would cure the non-conformity OR Buyer did not discover the nonconformity because defect was latent or hard to discover.

45. Anticipatory Repudiation • Party communicates he will not perform by time of contract performance. • Non-breaching party may suspend performance and: • Treat the A.R. as material breach and pursue a remedy; or • Wait a reasonable time.

46. Seller Buyer Goods in Seller’s Possession Goods in Seller’s Possession Goods are in Transit Seller delivers non-conforming goods Goods in Buyer’s Possession Proceed to § 10: Warranties § 9: Remedies for Breach Click on the Links Below

47. Seller- Goods in Seller’s Possession • Seller may withhold delivery of the goods: • If material breach by Buyer, Seller can withhold delivery of all goods. • If non-material breach, Seller can withhold delivery of this installment. • Seller can withhold delivery of all goods if Buyer is insolvent. Next

48. Seller- Goods in Seller’s Possession • Seller may rescind the contract. • Seller may identify the goods to the contract. • Seller may sell raw materials for scrap or finish production. Next

49. Seller-Goods in Seller’s Possession • Seller may resell the goods; and • Recover damages: the difference between the contract price and the resale price + incidental damages+ damages = the market price at the time & place of tender + incidental damages - expenses saved. • If No Damages, Seller can sue for lost profits. • Case 11.3:Brandeis Machinery v. Capital Crane Rental (2002). Next

50. Seller-Goods in Seller’s Possession • Seller may sue Buyer for breach of contract. • Recover Damages = the market price at the time & place of tender + incidental damages. • if there are no damages, Seller can sue for lost profits. Return