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Chapter 20

The Formation ofSales and Lease Contracts

INTRODUCTION

The Uniform Commercial Code (UCC) is probably the most important piece of commercial legislation in the history of the United States. The drafters of the UCC comprised a group of legal scholars—Karl Llewellyn, Grant Gilmore, Homer Kripke, and Soia Mentschikoff. The UCC created a nearly uniform body of law in each state, greatly facilitating interstate commerce.

Because of its nearly uniform applicability, your students may be confused about whether the UCC is a state or federal law. As discussed in Chapter 1, the UCC was (and remains) a joint effort of the National Conference of Commissioners on Uniform State Laws and The American Law Institute. All its articles have been adopted with few changes by every state (except Louisiana, which has adopted only part of it) and the District of Columbia. The UCC contains many similarities to the common law contract principles discussed in the previous chapters. Indeed, such similarities should be expected, because the UCC represents the codification of much of the common law of contracts.

This chapter introduces some of the key concepts under the UCC. The chapter also briefly reviews the United Nations Convention on Contracts for the International Sale of Goods (CISG).

CHAPTER OUTLINE

I. The Scope of Articles 2 and 2AThe UCC covers all of the phases of an ordinary sale or lease of goods, including the formation of the contract for a sale (Article 2) and a lease (Article 2A).

ADDITIONAL BACKGROUND—

The Uniform Commercial CodeOf all the attempts in the United States to produce a uniform body of laws relating to commercial

transactions, none has been as comprehensive or successful as the Uniform Commercial Code (UCC). The

1

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2 UNIT THREE: COMMERCIAL TRANSACTIONS

UCC was the brainchild of William Schnader, president of the National Conference of Commissioners on Uniform State Laws (NCC).

The UCC was not the first effort to create more uniformity in the law. Since its founding in 1892, the NCC drafted a number of uniform acts, many of which were accepted in whole or in part by various states. The first was the Uniform Negotiable Instruments Law in 1896, followed by the Uniform Sales Act in 1906 and a number of others—the Uniform Bills of Lading Act (1909), the Uniform Warehouse Receipts Act (1906), the Uniform Stock Transfer Act (1909), the Uniform Conditional Sales Act (1918), and the Uniform Trust Receipts Act (1933). In the early 1920s, the NCC was joined in its efforts by the American Law Institute, which was formed to compile the Restatements.

When the drafting of the UCC began in 1945, its chief reporter was Karl Llewellyn of the Columbia University Law School. Llewellyn was instrumental in shaping the final format of the UCC and was responsible for reviewing and revising all of its provisions, as well as establishing its scope, objectives, and style. According to Schnader, in a 1967 article discussing the preparation and enactment of the UCC, Llewellyn was “the outstanding man in the United States to undertake this task” because he was “the type of law professor who was never satisfied unless he knew exactly how commercial transactions were carried on in the market place. He insisted that provisions of the Code should be drafted from the standpoint of what actually takes place from day to day in the commercial world rather than from the standpoint of what appeared in statutes and decisions.”a Yale scholar Grant Gilmore said of Llewellyn:

It was, I believe, Karl’s non-systematic, particularizing cast of mind and his case-law orientation which gave to the statutes he drafted . . . their profound originality. His instinct appeared to be to draft in a loose, opened-ended style; his preferred solutions turned on ques-tions of fact (reasonableness, good faith, usage of trade) rather than on rules of law. He had clearly in mind the idea of a case-law Code: one that would furnish guide-lines for a fresh start, would accommodate itself to changing circumstances, would not so much contain the law as free it for a new growth.b

Soia Mentschikoff—a legal scholar, a practicing attorney, the first woman partner at a major Wall Street law firm, Harvard Law School’s first woman faculty member, dean of the University of Miami Law School, and Llewellyn’s wife—was the Associate Chief Reporter for the UCC.

The first draft of the UCC was issued with the endorsement of the American Bar Association in 1952 and was revised in 1957 and 1958 to incorporate a number of changes that had been recommended by the New York Law Revision Commission. Between 1958 and 1964, the UCC was reviewed and substantially enacted in every state (except Louisiana, which accepted only parts of it) and the District of Columbia. The UCC attempts to provide a consistent and integrated framework of rules to deal with all phases ordinarily arising in a commercial sales transaction from start to finish. As amendments and revisions of articles and sections of the UCC in 1962, 1966, 1972, 1977, 1987, 1988, and the 1990s have shown, the UCC has always been meant to reflect, as Llewellyn insisted, “what actually takes place from day to day in the commercial world.”

a. William Schnader, “A Short History of the Preparation and Enactment of the Uniform Commercial Code,” 22 University of Miami Law Review 1 (1967), p. 4.b. Grant Gilmore, “In Memoriam: Karl Llewellyn,” 71 Yale Law Journal (1962), p. 813.


CHAPTER 17: THE FORMATION OF SALES AND LEASE CONTRACTS 3

A. ARTICLE 2—SALES

• When the UCC speaks, its principles apply. When the UCC is silent, other state statutes and the common law apply.

• Article 2 deals with sales of goods—not real property, services, or intangible property (stocks and bonds).

1. What Is a Sale?A sale is “the passing of title from the seller to the buyer for a price” [UCC 2–106(1)]. The price may be payable in money, goods, or services.

CASE SYNOPSIS—

Case 20.1: Nautilus Insurance Co. v. Cheran Investments LLC

Nautilus Insurance Co. provided commercial property insurance to Blasini Inc., doing business as the Attic Bar & Grill in Omaha, Nebraska. Following a fire at the bar, Nautilus filed an action in a Nebraska state court against several defendants, including Cheran Investments LLC, to determine who was entitled to the insurance proceeds for the personal property damage. Under an agreement with Cheran, Blasini had agreed to buy the Attic’s business assets but had failed to pay the price. The court declared Cheran the owner of the personal property. Blasini appealed.

A state intermediate appellate court reversed. Under UCC 2–401, title to the assets passed to Blasini at the time Blasini contracted with Cheran and, irrespective of whether the purchase price was paid, Blasini became the owner.

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Notes and Questions

The UCC defines a sale as “the passing of title from the seller to the buyer for a price.” What determines “the passing of title”? Before any interest in goods can pass from the seller to the buyer, the goods must exist and they must be identified as the specific goods designated in the contract. Whether the goods exist can be obvious—a car can be identified by its vehicle identification number (VIN), for instance. Future goods, such as unborn livestock or unplanted crops, however, are not identifiable until conception or the inception of their growth. Other future goods require that the seller ship, mark, or otherwise designate the goods to which the contract refers.

Title to these goods then passes at the time and place of their delivery from the seller to the buyer. Of course, the seller and buyer can agree otherwise. Delivery arrangements can affect when title passes. Under a shipment contract, for example, a seller is required only to deliver the goods into the hands of a carrier. Once this occurs, title has passed to the buyer. When delivery is affected without movement of the goods (when they are located in a warehouse, for example), title generally passes when the buyer is given the appropriate documents to obtain the goods.

2. What Are Goods?Goods are tangible and movable.



a. Goods Associated with Real EstateWith respect to goods associated with real estate, a contract for a sale of minerals, oil, or gas is a contract for a sale of goods if severance is to be made by the seller. A sale of growing crops or timber to be cut is a sale of goods regardless of who severs them.

b. Goods and Services CombinedWhen goods and services are combined, courts determine which is predominant—the good or the service. If the contract is primarily for goods, UCC applies to all disputes.

3. Who Is a Merchant?In some cases, special standards apply to merchants. A merchant for one type of goods is not necessarily a merchant for another type. A merchant is—

• A person who deals in goods of the kind involved in the contract.

• A person who by occupation, holds himself or herself out as having knowledge and skill peculiar to the practices or goods involved in the transaction.

• A person who employs a merchant as a broker, agent, or other intermediary [UCC 2–104].

B. ARTICLE 2A—LEASESArticle 2A covers any transaction that creates a lease of goods, as well as subleases of goods [UCC 2A–102, 2A–103(k)]. Article 2A echoes the principles of Article 2, but varies to reflect differences be-tween sale and lease transactions.

1. Definition of a Lease AgreementA lease agreement is a lessor and a lessee’s bargain with respect to a lease of goods as found in their language and as implied by other circumstances, including course of dealing and usage of trade or course of performance [UCC 2A–103(1)(k)].

2. Consumer LeasesSome provisions of Article 2A apply only to consumer leases, which require—

• A lessor who regularly engages in the business of leasing or selling.• A lessee who lease goods “primarily for a personal, family, or household purpose.”• Total lease payments that are less than $25,000 [UCC 2A–103(1)(e)].

II. The Formation of Sales and Lease ContractsThe following sections summarize how the UCC changes the effect of the common law of contracts.

A. OFFER

1. Open TermsA sales or lease contract will not fail for indefiniteness even if one or more terms are left open, as long as—

• The parties intended to make a contract.



• There is a reasonably certain basis for the court to grant an appropriate remedy [UCC 2–204(3), 2A–204((3)].

a. Open Price TermIf the parties have not included a price term, a court will set a reasonable price at the time for delivery [UCC 2–305(1)]. If, through the fault of one of the parties, a price is not fixed, the other party can fix a reasonable price or treat the contract as canceled [UCC 2–205(3)].

b. Open Payment TermIf the payment is not specified, payment is due at the time and place at which the buyer will receive the goods [UCC 2–310(a)].

c. Open Delivery TermIf a delivery term is not specified, delivery is at the seller’s place of business (or, if no place of business, the seller’s residence) [UCC 2–308(a)].

d. Duration of an Ongoing ContractIf unspecified successive performances are due, either party can terminate the relationship on reasonable notice [UCC 2–309(2), (3)]

e. Options and Cooperation Regarding PerformanceIf the contract specifies shipment, but the arrangements are unspecified, the seller has the right to make them [UCC 2–311]. If terms relating to an assortment of goods are omitted, the buyer can specify them [UCC 2–311].

f. Open Quantity Terms

• If the quantity term is left open, a court will have no basis for determining a remedy [UCC 2–306].

• Requirements and output contracts are exceptions—the quantity is the amount that occurs during a normal production year, and the actual quantity cannot be unreasonably disproportionate.

2. Merchant’s Firm OfferIf a merchant gives assurances in a signed writing that an offer will remain open, the offer is irrevocable, without consideration for the stated period of time, or, if no definite period is specified, a reasonable period (neither period to exceed three months) [UCC 2–205, 2A–205].

B. ACCEPTANCEGenerally, acceptance of an offer to buy or sell goods may be made in any reasonable manner and by any reasonable means. Acceptance may be by a prompt shipment of goods or a promise to ship [UCC 2–206(1)(b)].

1. Shipment of Nonconforming GoodsA shipment of nonconforming goods is both an acceptance and a breach, unless the seller seasonably notifies the buyer that the shipment is offered only as an accommodation.



2. Communication of Acceptance RequiredWhen acceptance by performance is reasonable, “an offeror who is not notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance” [UCC 2–206(2), 2A–206(20].

3. Additional TermsIf an offeree’s response indicates a definite acceptance, a contract is formed, even if the ac-ceptance includes terms in addition to or different from the offer [UCC 2–207(1)].

a. Rules When One Party or Both Parties Are NonmerchantsIf the modifications are not conditional, and one of the parties is a merchant, the contract is formed according to the terms of the original offer.

b. Rules When Both Parties Are MerchantsIf the modifications are not conditional, and both parties are merchants, the additional terms are part of the contract unless—

• The original offer requires the acceptance of its terms.• The new or changed terms materially alter the contract.• The offeror rejects the new terms within a reasonable time.

CASE SYNOPSIS—

Case 20.2: C. Mahendra (N.Y.), LLC v. National Gold & Diamond Center, Inc.

C. Mahendra (N.Y.), LLC, is a New York wholesaler of loose diamonds. National Gold & Diamond Center, Inc., is a California seller of jewelry. Over a ten-year period, National placed orders, totaling millions of dollars, with Mahendra by phoning and negotiating the terms. Mahendra shipped diamonds “on memorandum” for National to examine and decide whether to keep. Mahendra then sent invoices for the selected diamonds. Both the memoranda and invoices stated, “You consent to the exclusive jurisdiction of the * * * courts situated in New York County.” When two orders totaling $64,000 went unpaid, Mahendra filed a suit in a New York state court against National, alleging breach of contract. National filed a motion to dismiss for lack of personal jurisdiction, contending that the forum-selection clause was not binding. The court granted the motion. Mahendra appealed.

A state intermediate appellate court agreed that “the forum selection clause is an additional term that materially altered the parties' * * * contracts, and defendant did not give its consent to that additional term” (but reversed on other grounds).

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Notes and Questions

In allowing a party to condition its acceptance on additional terms, does contract law make negotiations more or less efficient? Explain your answer. Conditional acceptances make negotiations more efficient because they allow the parties to reach an agreement more quickly. A conditional acceptance acts as a counteroffer. Thus, to reach an agreement, the original offeror need only accept the terms of the



conditional acceptance. That requires one less step than making another offer and then waiting for it to be accepted.

Why would a business like Mahendra want its purchase orders to include terms such as those at issue in this case? Why would a business like National want to exclude such terms? A business would want such terms included in a purchase order so that if the order were canceled, or unpaid, or any other dispute arose, a suit could be brought against the other party more conveniently at less expense. A business would want such terms excluded from a purchase order so that the forum for the resolution of a dispute would not be inconvenient or distant.

c. Prior Dealings between MerchantsCourts also consider the parties’ prior dealings in contracts between merchants.

d. Conditioned on Offeror’s AssentA response is not an acceptance if the modifications are conditional on the offeror’s assent.

e. Additional Terms May Be StrickenAlso, if conduct by both parties recognizes the existence of a contract, this is sufficient to establish a contract, even without a writing, which means in practice that a court can strike any terms on which the parties do not agree [UCC 2–207(3)].

ADDITIONAL CASES ADDRESSING THIS ISSUE—

Additional TermsCases involving terms added to an offer after its acceptance include the following.

• Office Supply Store.com v. Kansas City School Board, 334 S.W.3d 574 (Kan. 2011) (in a seller’s suit to collect from a school district for nonpayment of contract for office supplies, district’s employees who ordered supplies did not likely fit definition of ‘”merchant” under the UCC, and thus seller’s forum-selection clause could only be construed as a proposal for addition to the contract).

• WPS, Inc. v. Expro Americas, LLC, 369 S.W.3d 384 (Tex.App. 2012) (a contract for the manufacture of certain equipment included the buyer’s subsequent agreement to pay costs “associated with any order cancellation”).

C. CONSIDERATIONThe UCC requires no consideration for an agreement modifying a contract [UCC 2–209(1), 2A–208(1)].

• Of course, modification must be sought in good faith [UCC 1–203].• If a sales or lease contract requires that a modification be in writing [UCC 2–209(2), 2A–208(2)], or

if a modification brings a contract under the Statute of Frauds, it must usually be in writing [UCC 2–209(3)].



D. THE STATUTE OF FRAUDSThe UCC requires a writing for a contract for a sale of goods to be enforceable when the price of the goods is $500 or more [UCC 2–201]—a lease requires a writing for payments of $1,000 or more [UCC 2A–201(1)]—signed by the party against whom enforcement is sought.


$500

Under the UCC’s statute of frauds [UCC 2–201], a contract for a sale of goods for the price of $500 or more is not enforceable unless it is in writing and signed by the party against whom enforcement is sought. The price—$500—is the amount designated in all states that have adopted UCC 2–201. For example, the following is the text of Michigan Statutes Section 440.2201(1) (Mi. St. § 440.2201(1)):

440.2201 Formal requirements; statute of frauds

Sec. 2201. (1) Except as otherwise provided in this section a contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his authorized agent or broker. A writing is not insufficient because it omits or incorrectly states a term agreed upon but the contract is not enforceable under this paragraph beyond the quantity of goods stated.

Five hundred dollars was the amount designated in UCC 2-201 when the UCC was issued in 1952. This provision was based on Section 4 of the Uniform Sales Act (USA). The following is the text of USA 4(1), as it appeared in Section 33-105(1) of the Indiana Statutes (Ind. St. § 33-105(1)):

Goods and Choses in Action—Contract to sell or sale—1) A contract to sell or a sale of any goods or choses in action of the value of five hundred dollars ($500) or upwards shall not be enforceable by action unless the buyer shall accept part of the goods or choses in action so contracted to be sold or sold, and actually receive the same, or give something in earnest to bind the contract, or in part payment, or unless some note or memorandum in writing of the contract of sale be signed by the party to be charged or his agent in that behalf.

To be enforceable under this statute, a contract for a sale of goods had to be in writing if the price of the goods was, again, at least $500. The Uniform Sales Act was issued in 1896.

Will $500 buy today what it would buy in 1896? Will it buy today what it would buy in 1952? Obviously, the answer to both questions is no. Between 1896 and 1980, the price level has increased five times; between 1890 and today, the level has increased six times. Today, $500 is equivalent to one-sixth of the value of goods transacted for at the time of the Uniform Sales Act. In other words, it would take $3,000 today to buy what $500 would buy in 1896.

USA 4 was based on part of a seventeenth-century English statute: Section 17 of the Statute of 29 Charles II (Statute of Frauds: An Act for the Prevention of Frauds and Perjuries). The following is the text of Section 17 of the Statute of 29 Charles II (Statute of Frauds: An Act for the Prevention of Frauds and Perjuries):



And be it further enacted by the authority aforesaid, that from and after the said four-and-twentieth-day of June, no contract for the sale of any goods, wares, or merchandises for the price of ten pounds sterling or upwards shall be allowed to be good, except the buyer shall accept part of the goods so sold and actually receive the same or give something in earnest to bind the bargain or in part of payment, or that some note or memorandum in writing of the said bargain be made and signed by the parties to be charged by such contract or their agents thereunto lawfully authorized.

1. Sufficiency of the WritingA writing is sufficient if it indicates that a contract was intended and it is signed by the party against whom enforcement is sought. A contract is not enforceable beyond the quantity of goods shown in the writing. Other terms can be proved by oral testimony.

2. Special Rules for Contracts between MerchantsIn a transaction between merchants, the requirement of a writing is satisfied if one of them sends a signed, written confirmation to the other. If the recipient does not object in writing within ten days, the confirmation will be enforceable against him or her.

ENHANCING YOUR LECTURE—

CAN AN EMPLOYEE’S E-MAIL

CONSTITUTE A WAIVER OF CONTRACT TERMS? Under UCC 2–209, an agreement that excludes modification except by a signed writing cannot be

otherwise modified. If the written-modification requirement is contained in a form supplied by one merchant to another, the other party must separately sign the form for it to be binding. This rule has an exception, though, which can be significant in the online environment. Under the UCC, an attempt at modification that does not meet the writing requirement may operate as a waiver [UCC 2–209(4)]. In other words, the parties can waive, or give up, the right to require that contract modifications be in a signed writing. Can an employee’s e-mail communications form a waiver of a contract’s written modification requirement? This issue arose in Cloud Corp. v. Hasbro, Inc.a

THE CONTRACT TERMS AND THE PARTIES’ RELATIONSHIP

Cloud Corp. contracted to supply packets of a special powder to Hasbro, Inc., for use in Hasbro’s new “Wonder World Aquarium.” At the time of their initial agreement, Hasbro sent a letter to Cloud containing a “terms and conditions” form, which stated that Cloud, the supplier, could not deviate from a purchase order without Hasbro’s written consent. Cloud signed and returned that form to Hasbro as requested, and Hasbro began placing orders. Each time Hasbro ordered packets, Cloud sent back an “order acknowledgment” form confirming the quantity ordered.

After placing several orders, Hasbro told Cloud to change the formula in the packets. As a result, Cloud was able to produce three times as many packets using the same amount of material that it already had on hand to fill Hasbro’s previous orders. Although Hasbro had not ordered any additional packets, Cloud sent



Hasbro an order acknowledgment for extra packets at a lower price. Hasbro did not explicitly respond to Cloud’s acknowledgment form. One of Hasbro’s employees, however, referred to the additional quantities of packets at some point in her e-mail exchanges with Cloud. Several months later, after Cloud had produced the additional packets, Hasbro quit making the Wonder World Aquarium and refused to pay for the packets that it did not order. Cloud then sued Hasbro for breach of contract.

WAS THE EMPLOYEE’S E-MAIL A WAIVER?

Ultimately, a federal appellate court held that because Hasbro’s employee had referred to the additional packets in at least one e-mail, Hasbro must pay for them. According to the court, the employee’s e-mail alone could be sufficient to satisfy the requirement of written consent to modify the contract. Even if it did not, however, the court held that it operated as a waiver. The court stated that for the e-mail to operate as a waiver, Cloud “must show either that it reasonably relied on the other party’s having waived the requirement of a writing, or that the waiver was clear and unequivocal.” Here, the employee’s e-mail had not clearly waived the writing requirement but there was reasonable reliance. According to the court, Hasbro should have advised Cloud if it did not want to be committed to buying the additional quantity rather than “leading Cloud down the primrose path.”

FOR CRITICAL ANALYSIS

How might the parties to a sales contract prevent their subsequent e-mail communications from waiving the contract’s explicit modification requirements? (Hint: How can the parties prevent contract disputes generally?)

a. 314 F.3d 289 (7th Cir. 2002).

3. ExceptionsA contract otherwise subject to the Statute of Frauds will be enforceable despite the absence of a writing if—

a. Specially Manufactured GoodsThe contract is for—

• Specially manufactured goods for a particular buyer.• The goods are not suitable for resale to others in the ordinary course of the seller’s

business.• The seller has substantially started to manufacture the goods or made commitments for

their manufacture.

b. AdmissionsThe party against whom enforcement of a contract is sought admits in pleadings, testimony, or other court proceedings that a contract for sale was made.

c. Partial PerformanceIf payment has been made and accepted or goods have been received and accepted, an oral contract for a sale or lease of goods is enforceable at least to the extent of the performance.



E. PAROL EVIDENCEGenerally, if the parties to a contract set forth its terms in writing, the terms cannot be contradicted by evidence of prior agreements or contemporaneous oral agreements. If the writing is not fully integrated—i.e., some terms are missing—it can be explained or supplemented by consistent additional terms.

1. Course of Dealing and Usage of TradeThe terms can be explained or supplemented by course of dealing and usage of trade [UCC 2–202, 2A–202]. If the course of dealing or usage of trade is not consistent with the writing, the latter prevails.

2. Course of PerformanceThe terms can also be explained or supplemented by the parties’ course of performance [UCC 2–208(1), 2A–207(1)].

3. Rules of ConstructionIf these factors contradict each other, the order of priority is—

• Express terms.• Course of performance.• Course of dealing.• Usage of trade [UCC 1–205(4), 2–208(2), 2A–207(2)].

F. UNCONSCIONABILITYIf a court finds a contract or clause to be unconscionable at the time it was made, it can—

• Refuse to enforce the contract.• Enforce the contract without the clause.• Limit the application of the clause to avoid an unconscionable result [UCC 2–302, 2A–108].

CASE SYNOPSIS—

Case 20.3: Jones v. Star Credit Corp.

The Joneses, welfare recipients, agreed to buy a freezer for $900 as the result of a salesperson’s visit to their home. Sales taxes and financing charges raised the total price to $1,234.80. The freezer’s retail value was about $300. Through a novation, the parties replaced the seller with Star Credit Corp. After paying about $620 on the contract, the Joneses filed a suit in a New York state court against Star to have the contract declared unconscionable and reformed. Star claimed that about $820 remained due.

The court ruled in favor of the Joneses. The contract was reformed so that they were required to make no further payments. The court considered the disparity between the purchase price and the retail value, the credit charges that alone exceeded the retail value, and the sellers’ knowledge of the buyers’ limited resources.

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Notes and Questions



This is one of the most frequently cited and quoted cases in consumer law. The case is unusual only because the holding was contrary to older case law. What made the contract unconscionable? Under the circumstances described here (the known economic condition of the buyers), selling an item for $1,200 that retailed for $300. What is the remedy? Letting the buyer keep the refrigerator for the payments already made (which also exceeded the retail price).

Why didn’t the court rule that the buyers, as adults, had made a decision of their own free will and therefore were bound by the terms of the contract, regardless of the difference between the freezer’s contract price and its retail value? The court’s decision in this case represents an exception to the rule that people will be bound by contracts into which they voluntarily enter. Over time, the courts have carved out several exceptions to the doctrine of freedom of contract when the terms of a contract are so oppressive and one sided as to “shock the conscience” of the court. The unconscionability provisions of the Uniform Commercial Code reflect the assumption that sometimes freedom from contract is necessary to promote fairness and justice.

III. Contracts for the International Sale of GoodsThe 1980 United Nations Convention on Contracts for the International Sale of Goods (CISG) governs contracts for the international sale of goods between firms or individuals located in different countries—if the countries of the parties to the contract have ratified the CISG (and if the parties have not agreed that some other law will govern their contract).

A. APPLICABILITY OF THE CISGEssentially, the CISG is to international sales contracts what Article 2 of the UCC is to domestic sales contracts.

B. A COMPARISON OF CISG AND UCC PROVISIONSDifferences between the CISG and the UCC in regard to contract formation include the following.

1. Statute of FraudsThe CISG does not include the formal requirements of the Statute of Frauds. This accords with the legal customs of most nations, in which contracts no longer need to meet certain formal or writing requirements to be enforceable.

2. Offers

• Under Article 16 of the CISG, an offer can be irrevocable without a signed writing if the offeror says that it is or the offeree reasonably relies on it as irrevocable.

• The price term must be specified, or provisions for its determination must be in the agreement; otherwise, there is no contract.

3. AcceptancesThe definition of “material alteration” covers virtually any differences in terms between an offer and acceptance, in effect imposing a mirror-image rule. An acceptance is effective only on the offeror’s receipt (not on its dispatch, as at common law and under the UCC).




Contracts for the International Sale of Goods

The United Nations Convention on Contracts for the International Sale of Goods (CISG) is an authoritative source for some of the principles discussed in this chapter. The following is Article 19.

Article 19

(1) A reply to an offer which purports to be an acceptance but contains additions, limitations or other modifications is a rejection of the offer and constitutes a counter-offer.

(2) However, a reply to an offer which purports to be an acceptance but contains additional or different terms which do not materially alter the terms of the offer constitutes an acceptance, unless the of feror, without undue delay, objects orally to the discrepancy or dispatches a notice to that effect. If he does not so object, the terms of the contract are the terms of the offer with the modifications contained in the acceptance.

(3) Additional or different terms relating, among other things, to the price, payment, quality and quantity of the goods, place and time of delivery, extent of one party’s liability to the other or the set tlement of disputes are considered to alter the terms of the offer materially.

TEACHING SUGGESTIONS

1. Discuss the need to modernize common law contract rules in commercial settings. It is this need that served as the background for drafting the UCC and that continues to serve as the impetus for its revision. In discussing this need, emphasize the flexibility of the UCC (for example, that it permits acceptance of an offer by any reasonable means).

2. Emphasize at the beginning of the discussion of sales contracts that students must know the definitions of goods and of merchants (that is, what is included within the definitions and what is not). (Article 2 applies only to sales of goods, and merchants are treated specially in a number of instances.) This should put sales in perspective and help students to grasp the material.

3. Students should be reminded that a contract for a sale of goods is governed by the same common law that applies to other contracts. That is, the law that was studied in the previous unit also applies to contracts for sales of goods. The law concerning sales of goods has developed specialized aspects, however. It is these aspects that they should emphasize in their study of the UCC.

4. Students have difficulty understanding that title is relatively unimportant under the UCC. Before ex-plaining that title is important to individuals, but it is of only small importance in determin ing rights under a contract for a sale of goods, ask students what they think title means and how they think it affects who bears the risk of a loss of goods. Emphasize the importance that possession has in this context.



5. Despite the difficulty, students should be encouraged to learn the UCC rules governing identification, risk of loss, and insurable interest. These rules are indispensable to anyone selling or buying goods under con-tracts subject to the UCC, and this includes virtually everyone doing business. A businessperson may be at a serious disadvantage if he or she is not aware of these rules when a competitor is, and it would do little good to learn the rules after a problem has arisen.

6. Parties can agree to many things in their contracts, but some of the principles imposed by the UCC cannot be avoided or changed. Parties cannot agree not to follow the duty of good faith and fair dealing, for example. Many of the obligations apply only in the absence of an agreement to the contrary, however. That is, if the contract is silent, the UCC rules apply. In this way, the UCC is comparable to the rules of a game—the rules are the rules, unless the players agree to make their own.

Cyberlaw Link

Would the electronic delivery of software, in exchange for payment, be considered a sale of goods?

Are the UCC’s principles regarding the topics discussed in this chapter changed when a contract for a sale of goods is entered into in cyberspace? If so, in what ways?

Should a choice-of-law or a forum-selection clause be given the same consideration in a contract entered into over the Internet as if it were part of a contract agreed to through more traditional means?

DISCUSSION QUESTIONS

1. What difference does it make whether UCC Article 2 applies to a contract? At common law, if an offeror makes an offer that the offeree accepts with modifications to the terms, there is no contract. This is the mirror-image rule. Under Article 2, however, a contract exists, despite the added terms, and the question is whether those terms are also part of the contract. Thus, to determine whether the UCC applies to a contract is also to determine which rules will apply to its terms. Projecting conclusions based on those rules suggests to the parties the claims that would be to their benefit.

2. Is a contract in which a sale of services and goods combined subject to the UCC? Under some interpretations, yes. Serving food or drink to be consumed either on or off restaurant premises involves a sale of goods, at least for the purpose of an implied warranty of merchantabil ity. But courts have disagreed over whether other mixed transactions are subject to the UCC. (For instance, some courts say blood furnished to a patient during an operation is goods; some say a medical service.) The UCC does not provide the answer. Generally, courts try to determine which factor is predominant—the good or the service.

3. Who, for the purposes of UCC Article 2, is a merchant? A merchant is a person who acts in a mercantile capacity, possessing or using an expertise specifically related to the goods being sold. That is, a merchant is: (1) a person who deals in goods of the kind involved in the contract (a retailer, a wholesaler, a manufacturer); (2) a person who, by occupation, holds himself or herself out as having knowledge and skill peculiar to the practices or goods in-volved in the transaction; or (3) a person who employs a merchant as a broker, agent, or other intermediary (for example, a “gentleman farmer” who ordinarily does not run the farm but who hires a broker to purchase livestock is a



merchant in the livestock transaction). A merchant for one type of goods is not necessarily a merchant for another type (for example, an appliance dealer is a merchant when buying appliances but not when buying camping equip-ment). Whether a farmer is a merchant depends on the goods involved, the transaction, and whether the farmer has special knowledge concerning those goods.

4. What conditions must be satisfied in order for a contract to be formed when certain terms are left open? What terms (in addition to price) can be left open? The UCC states that a sales or lease contract will not fail for indefiniteness even if one or more terms are left open as long as (1) the parties intended to make a contract, and (2) there is a reasonably certain basis for the court to grant an appropriate remedy [UCC 2–204(3), 2A–204(3)]. Thus, if one party can prove that the parties intended a to make a contract (through e-mail messages, correspondence, verbal exchanges, and the actions of the parties, for example), certain terms can be left open. If too many terms are left open, however, or the court is not reasonably certain of the basis for recovery, the court will find that no contract exists. (For example, if it is not clear what quantity the buyer intended to purchase from the seller, the court would have no basis for determining a remedy.) The terms that the contract can leave open include the price, the timing and method of payment [UCC 2–310(a), 2–511(2)], the time and place of delivery [UCC 2–308(a), 2–309(1)], the duration of an ongoing contract [UCC 2–309(2), (3)], and the specific shipping arrangements [UCC 2–311].

5. How does the UCC change the effect of the common law of contracts regarding the requirement of definiteness? At common law, when a definite offer is met by an unqualified acceptance, a binding contract is formed. Under the UCC, an agreement sufficient to constitute a contract exists even if the moment of its making is undetermined (because the conversations, communications, and acts involved in a transaction may not reveal exactly when a binding contract arises). At common law, an offer must be definite enough for the parties to ascertain its essential terms when it is accepted. Under the UCC, a contract will not fail for indefiniteness even if one or more terms are left open, as long as: (1) the parties intended to make a contract and (2) there is a reasonably certain basis for the court to grant an appropriate remedy. (Of course, a contract must be definite enough for a court to iden tify the agreement so as to enforce it or award damages on its breach. The more terms left open, the less likely a court will find that the parties intended to form a contract.)

6. How do the common law and the UCC differ regarding an offeree’s acceptance that includes terms in addition to or different from the offer? At common law, acceptance must exactly mirror the offer—any difference in terms constitutes a rejection and a counteroffer. Under the UCC, if an offeree’s response indicates a definite acceptance, a contract is formed, even if the acceptance includes terms in addition to or different from the offer. The response does not constitute an acceptance if the modifications are conditional on the offeror’s assent. (For example, accepting an offer to sell 1,000 pounds of beef by saying, “I accept, and I want that evidenced by a city scale weight certificate,” would make a contract, but responding by saying, “I accept on condition that the weight is evidenced by a city scale weight certificate” would not, unless the offeror agreed.)

7. How does the UCC’s obligation of good faith relate to the application of the principles concerning additional terms? The parties to a contract have an obligation to perform in good faith [UCC 1–203]. Similar to the application of this duty in the context of a contract’s modification, a party’s presentation of additional terms in the context of the principles cited in the Sun case should only be done in good faith.

8. How do UCC provisions differ from the common law regarding modification of contracts? Unlike the common law rule that contract modification must be supported by new consideration, the UCC requires no consideration for an agreement modifying a contract. Modification must be sought in good faith (a shift in the market making a seller unable to sell goods without suffering a loss would be a good faith reason for modification). Under some circumstances, a writing may be required. The contract may prohibit its modifica tion except by signed writing.



(If a nonmerchant is dealing with a merchant who supplies the form that contains this prohibition, the nonmerchant must sign a separate acknowledgment.) A modification that brings a contract under the Statute of Frauds must usually be in writing to be enforceable (an oral contract for a sale of goods originally priced at $450 modified so that the price is $550 would have to be in writing to be enforceable, for example—if the buyer accepts delivery after the modification, however, he or she is bound to the $550 price).

9. How do Article 2A’s provisions differ from Article 2’s? Article 2A applies to leases of goods. Article 2A does not provide for acceptance by shipment of goods or for additional terms in an acceptance or confirmation. Under Article 2A, an oral lease is enforceable if the lease payments are less than $1,000. Article 2A does not say whether a lease as modified needs to satisfy the Statute of Frauds. Article 2A replaces Article 2’s implied warranty of title with an implied warranty of quiet possession. Article 2A extends protection against unconscionability to leases and expands it in cases concerning consumer leases. (A consumer lease involves a lessor who regularly engages in the business of leasing or selling, a lessee who leases the goods “primarily for a personal, family, or household purpose,” and total lease payments that are less than $25,000.) If unconscionable conduct induced the consumer to enter the lease or occurred in the collection of a claim under it, courts can grant relief, even if the lease itself is not unconscionable. Many leases are based on the parties’ ability to provide for the measure of damages if there is a de -fault or other act or omission. Article 2A allows greater flexibility in liquidation of damages with respect to leases than Article 2 does with respect to sales.

10. What is the United Nations Convention on Contracts for the International Sale of Goods (CISG)? The CISG is the international version of Article 2 of the Uniform Commercial Code and governs international sales transactions. If the parties involved in an international sales transaction fail to specify in writ ing the terms of a con-tract (price, delivery, form of payment, etc.), the CISG will be applied. Although the CISG and UCC share many common features, there are also significant differences between them. In the event the CISG and the UCC conflict, the CISG will apply because it is a treaty of the national government and is therefore supreme.

ACTIVITY AND RESEARCH ASSIGNMENTS

1. Have students research the differences between the UCC and the version of the UCC that their state has adopted.

2. The UCC permits courts to find contracts or contract clauses unconscionable, but the term unconscionability is not defined in the UCC. Its interpretation is left to the courts. Have students research how the courts of their state have interpreted the term. What contracts have been held to be unconscionable in their state?

EXPLANATIONS OF SELECTED FOOTNOTES IN THE TEXT

Footnote 4: Firm offers for sales of goods by merchants may be irrevocable under the UCC. If a merchant gives assurances in a signed writing that an offer will remain open, the merchant’s firm offer is irrevocable, without consideration for the stated period of time or, if no time is specified, a reasonable period (neither to exceed three months). The offer must be written and signed by the offeror. Signed includes any symbol executed or adopted by a party with present intention to authenticate a writing. As explained in the Official Comments to UCC 1–201(39), “[t]he inclusion of authentication in the definition of ‘signed’ is to make clear that as the term is used in [the UCC] a complete signature is not necessary. Authentication may be printed, stamped, or written; it may be by initials or by thumbprint. It may be on any part of the document and in appropriate cases may be found in a billhead or letterhead. No catalog of possible authentications can by complete and the court must use common sense and commercial experience in



passing upon these matters. The question is always whether the symbol was executed or adopted by the party with present intention to authenticate the writing.”

Footnote 7: Expro Americas, LLC and Surface Production Systems, Inc. (collectively SPS), submitted two purchase orders to WPS, Inc., to make certain equipment. WPS accepted the orders subject to SPS’s “full release to proceed” and agreement to pay the costs “associated with any order cancellation.” As negotiations continued, SPS submitted another order that gave WPS full permission to proceed and agreed that SPS would pay all cancellation costs. After WPS began work, SPS canceled the orders. When SPS did not pay the associated costs, WPS filed a suit against the two firms. A jury found in WPS’s favor. SPS appealed. In WPS, Inc. v. Expro Americas, LLC, a state intermediate appellate court affirmed. The parties had a contract that included WPS’s conditions. With the third purchase order, SPS had given WPS “full release to proceed” and had agreed “to pay all valid costs associated with any order cancellation.” A jury could have reasonably concluded that thus the parties were in agreement, that by beginning the work WPS only did what it was obligated to do, and that now SPS was obligated to pay for its cancellation of the orders.

Suppose that SPS had given WPS “full release to proceed” but rejected its request to “pay all costs associated with any order cancellation.” Would SPS have been liable for those costs when it cancelled its orders? Probably not. Assuming that SPS would have rejected WPS’s additional term within a reasonable time, SPS could have avoided liability for the cancellation costs. But this also assumes that WPS would have proceeded with the work without SPS’s agreement to the term. Considering the other facts in this case, it does not seem likely that WPS would have gone ahead under those circumstances.

In allowing a party to condition its acceptance on additional terms, does contract law make negotiations more or less efficient? Conditional acceptances make negotiations more efficient because they allow the parties to reach an agreement more quickly. A conditional acceptance acts as a counteroffer. Thus, to reach an agreement, the original offeror need only accept the terms of the conditional acceptance. That requires one less step than making another offer and then waiting for it to be accepted.

Why would a manufacturer like WPS want its purchase orders to include terms such as those at issue in this case? Why would a buyer like Expro or SPS want to exclude such terms? A manufacturer would want such terms included in a purchase order so that if the order were canceled, the manufacturer could recover its costs . A buyer would want such terms excluded from a purchase order so that if necessary, the order could be canceled without liability.


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