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Chapter 13: Formation of Sales and Lease Contracts1

Chapter 1: Legal Ethics1Learning ObjectivesHow do Article 2 and 2A of the UCC differ? What types of transactions does each article cover?What is a merchants 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?2 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.2Learning ObjectivesRisk 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?3 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.3The 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.

4 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.4Article 2Sales Only applies to goods. The common law of contracts governs real estate, services or intangible property. Mixed Goods-Services: The Predominant-Factor Test.5 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.5Ex. 13-1 Law Governing Contracts

6 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.6Article 2Sales 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).

7 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7Article 2Sales 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.8 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.8Article 2Sales 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.

9 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.9Article 2Sales 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.

10 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.10Article 2Sales Goods and Services Combined: what law governs?Predominant Factor Test if goods, then UCC governs, if services then common law governs entire contract.11 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.11Article 2Sales 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.

12 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.12Article 2Sales 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.

13 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.13Article 2ALeases 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. 14 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.14Article 2ALeases 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).15 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.15Offer.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.Formation of Sales and Lease Contracts16 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.16Offer. 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.

Formation of Sales and Lease Contracts17 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.17Offer.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.

Formation of Sales and Lease Contracts18 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.18Offer.Open Terms.Open Delivery term: Unless otherwise agreed, buyer takes delivery at the Sellers place of business. UCC2-308(a). Seller has duty to make arrangements in good faith.

Formation of Sales and Lease Contracts19 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.19Offer.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.

Formation of Sales and Lease Contracts20 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.20Offer.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 sellers production or output.

Formation of Sales and Lease Contracts21 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.21Offer.Merchants 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.

Formation of Sales and Lease Contracts22 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.22Acceptance.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.

Formation of Sales and Lease Contracts23 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.23Acceptance.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?Formation of Sales and Lease Contracts24 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.24Acceptance.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.

Formation of Sales and Lease Contracts25 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.25Consideration.UCC adopts common law rule requiring consideration. However, modifications do not need consideration. Modifications Must be Made in Good Faith.

Formation of Sales and Lease Contracts26 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.26The 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.

Formation of Sales and Lease Contracts27 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.27The 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.

Formation of Sales and Lease Contracts28 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.28The 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.

Formation of Sales and Lease Contracts29 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.29Formation of Sales andLease ContractsParol 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.

30 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.30Formation of Sales andLease ContractsUnconscionability.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?

31 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.31Title and Risk of Loss32Sale 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 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.32Title and Risk of Loss33Identification.For any interest to pass to buyer, goods must be (1) in existence and (2) identified as specific goods in sales contract. 33 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.33Title and Risk of Loss34Identification.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 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.34Title and Risk of Loss35Identification.Existing Goods: if contact calls for ascertainable goods in existence, identification takes place at the time contract is made. 35 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.35Title and Risk of Loss36Identification.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 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.36Title and Risk of Loss37Identification.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 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.37Title and Risk of Loss38Passage 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 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.38Title and Risk of Loss39Passage of Title.Title can pass:Upon physical delivery, orWhen agreed to by the parties. 39 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.39Title and Risk of LossPassage of Title.Shipment and Destination Contracts. If no agreement, title passes based on whether contract is shipment or destination contract.Shipment: title passes at time and place of shipment. 4040 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.40Title and Risk of LossPassage 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. 4141 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.41Title and Risk of LossPassage 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.

4242 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.42Title and Risk of LossPassage 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.

4343 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.43Title and Risk of LossPassage 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.

4444 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.44Ex. 13-2 Void and Voidable Titles

4545 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.45Title and Risk of LossRisk 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. 4646 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.46Title and Risk of Loss47Risk 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, Buyers bears risk of loss. 47 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.47Title and Risk of Loss48Risk of Loss.Delivery With Movement of the Goods-Carrier Cases.Destination Contracts. ROL passes to Buyer when goods tendered at contractually specified destination.48 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.48Title and Risk of Loss49Risk 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 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.49Title and Risk of Loss50Risk 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 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.50Title and Risk of Loss51Risk of Loss.Delivery Without Movement of the Goods.Goods Held by a Bailee (Warehouse). Risk of loss passes to buyer when:Buyer receives document of title; bailee acknowledges Buyers right to goods and buyer receives title and has reasonable time to pick up.

51 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.51Title and Risk of Loss52Risk of Loss.When the Contract is Breached: generally breaching party bears risk of loss.When Seller or Lessor Breaches.Rejection - risk stays with seller.Revocation of acceptance - risk passes back to seller to the extent that buyers insurance does not cover the loss.52 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.52Title and Risk of Loss53Risk of Loss.When the Contract is Breached: generally breaching party bears risk of loss.When the Buyer or Lessee Breaches. Goods are identified, risk passes to buyer for a commercially reasonable amount of time after seller learns of the breach, to the extent that sellers insurance does not cover loss.

53 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.53Title and Risk of Loss54Insurable 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.54 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.54Contracts for the International Sale of GoodsApplicability.Comparison of CISG and UCC.Mirror Image Rule.Irrevocable Offers.Statute of Frauds.Necessity of a Price Term.Time of Contract Formation.55 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.55