cheeseman7e_ch18-20

Chapter 18Formation of Sales

and Lease Contracts

Chapter 18Formation of Sales

and Lease ContractsFORMATION OF SALES

AND LEASE CONTRACTS

© 2010 Pearson Education, Inc., publishing as Prentice-Hall© 2010 Pearson Education, Inc., publishing as Prentice-Hall

CHAPTER 18 CHAPTER 18

Uniform Commercial Code (UCC)

• Model act

• Comprehensive statutory scheme to cover most aspects of commercial transactions

Overview of UCC

• Article 1 General provisions

• Article 2 Sale of goods

• Article 2A Leases of goods

• Article 3 Negotiable instruments

• Article 4 Bank deposits, collections

• Article 4A Wire transfers

Overview of UCC (continued)

• Article 5 Letters of credit

• Article 6 Bulk transfers

• Article 7 Documents of title

• Article 8 Investment securities

• Article 9 Secured transactions

Article 2 (Sale of goods)

• All states except Louisiana have adopted.

• Article 2 is also applied by federal courts to sales contracts governed by federal law.

• If Article 2 is silent on an issue, common law of contracts applies.

What is a Sale?

• What is a sale?– The passing of title from a seller to a

buyer for a price.

What are Goods?

• Tangible things that are movable at the time of their identification to the contract.– E.g., car, book, sweater, corn.

• Money and intangible items such as stocks, bonds, and patents are not tangible goods.

• Real estate and services are not goods.

Services

• Services not covered by Article 2.• Mixed sales involve both goods and

services.– E.g., contract to buy carpet and have it

installed; contract to have medical device implanted.

• Article 2 applies to mixed sales only if the goods are predominant part of the transaction.

Who is a Merchant?

• One who deals in the goods of the kind involved in the transaction, or

• By his or her occupation holds himself or herself out as having knowledge or skill peculiar to the goods involved in the transaction.

− E.g., appliance dealer is merchant with respect to refrigerators. Not a merchant when sells a car.

Article 2A (Leases)

• Article 2A applies only to leases involving goods.

• Article 2A does not apply to real estate or other leases.

What is a Lease?

• Transfer of right to possession and use of named goods for a set term, in return for certain consideration.– Lessor – person who transfers right of

possession and use of goods.– Lessee – person who acquires right to

possession and use of goods.

Finance Lease

• Three-party transaction consisting of lessor, lessee, and supplier.

• Lessor does not select, manufacture, or supply the goods.

• Lessor acquires title to goods or right to their possession and use.

Finance Lease (continued)

Offer

• A contract for the sale or lease of goods may be made in any manner sufficient to show agreement.

• This includes conduct by both parties that recognizes the existence of a contract.

• A contract may be found even though the moment of its making is undetermined.

Open Terms

• Open terms acceptable

• Gap-fillers– Price– Payment– Delivery – Time– Assortment

Firm Offer Rule

• A merchant who (1) offers to buy, sell, or lease goods, and (2) gives written and signed assurance on separate form that offer will be held open,– cannot revoke offer for time stated or,– if no time is stated, for a reasonable time.– Three months is the maximum amount of time

permitted under this rule.

Consideration

• Formation of a sales and lease contract requires consideration.

• Under the UCC, modifications to sales and lease contracts require no consideration.– Different from common law rule.– Modification must be made in good faith.

Acceptance

• Contract created when offeree sends acceptance to the offeror, not when offeror receives it.– Same as common law rule.

• The UCC permits acceptance by any reasonable manner or method of communication.– E.g., seller promises to ship or ships

conforming goods.

Additional Terms

• Under common law mirror image rule, additional terms are considered a counteroffer.

• Under UCC, additional terms are allowed unless acceptance is expressly conditional on assent to the stated terms.

• If either party is a nonmerchant, additional terms are treated as proposed additions.

• If both parties are merchants, additional terms may become part of the contract.

Accommodation Shipment

• Shipment that is offered to the buyer as substitution for the originally ordered goods when they are not available.

• The accommodation is a counteroffer from the seller to the buyer.

• The buyer is free either to accept or to reject the counteroffer.

Statute of Frauds

• All contracts for the sale of goods costing $500 or more, and lease contracts involving payments of $1,000 or more must be in writing.

• Writing must be sufficient to indicate that a contract has been made between the parties.

Exceptions to Statute of Frauds

• Specially Manufactured Goods

– E.g., custom-made machine, bowling shirts with team name embroidered.

• Admissions in Pleadings or Court

• Part Acceptance

Written Modification

• Oral modification not enforceable if the parties agree that any modification of the sales or lease contract must be in a signed writing.

• In absence of such agreement, oral modifications to sales and lease contracts are binding if they do not violate the Statute of Frauds.

Written Confirmation Rule

• If both parties are merchants, writing requirement satisfied if:– One party sends written confirmation, and– Other party fails to object in writing within 10

days.

Parol Evidence Rule

• When sales or lease contract is evidenced by a writing that is intended to be a final expression of the parties’ agreement or confirmatory memorandum, the terms of the writing may not be contradicted by evidence of:

• Prior oral or written agreement, or• Contemporaneous oral agreement.

Parol Evidence Rule (continued)

• If express terms are not clear on their face, reference may be made to certain outside sources:– Course of performance– Course of dealing– Usage of trade

Comparison of Contract Law and Law of Sales (1 of 3)

Topic Common Law Contracts

UCC Law of Sales

Definiteness Contract must contain all of the material terms of the parties’ agreement.

UCC gap-filling rules permit terms to be implied if the parties intended to make a contract.

Irrevocable offers Option contracts. Option contracts. Firm offers by merchants to keep an offer open are binding up to three months without any consideration.



UCC Law of Sales

Counteroffers Acceptance must be a mirror image of the offer. A counteroffer rejects and terminates the offer.

Additional terms of an acceptance become part of the contract if (1) they do not materially alter the terms of the offer and (2) the offeror does not object within a reasonable time after reviewing the acceptance.



UCC Law of Sales

Statute of Frauds

Writing must be signed by the party against whom enforcement is sought.

Writing may be enforced against a party who has not signed it.

Modification Consideration is required. Consideration is not required.

Proposed Revisions toArticles 2 and 2A

• New e-commerce definitions– Electronic– Electronic Agent– Electronic Record– Record

TITLE TO GOODS AND RISK OF LOSS



Identification of Goods

• Goods named in contract distinguished from seller/lessor’s other goods– E.g., carton marked with buyer’s name.

• Risk of loss cannot pass until goods identified.

• Title cannot pass until goods identified.

Identification of Goods (continued)

• Parties can agree to time and manner of identification.

• Existing goods identified when specific goods named.

• Future goods identified when born, planted, shipped, marked, or designated.

Passage of Title

• Title cannot pass until goods exist and have been identified.

• Title passes upon terms agreed to in contract.

• If no terms are stated, title passes when delivery is completed.

Shipment and Destination Contracts

• Shipment Contract– Seller should make proper shipping

arrangements.– Deliver the goods into the carrier’s hands.

• Destination Contract– Seller delivers goods either to buyer’s place of

business or another destination specified in sales contract.

Delivery of Goods Without Moving Them

– Buyer is required to pick up goods from seller

– If document of title or bill of lading is required, title passes when seller delivers the document.

– If no document of title and goods are identified, title passes at time of contracting.

Shipping Terms

Shipment Contracts• F.O.B. point of

shipment.• F.A.S.• C.I.F. or C.&F.

Destination Contracts• F.O.B. place of

destination.• Ex-ship.• No-arrival, no-sale.

Risk of Loss: No Breach of Sales Contract

• Carrier Cases: Movement of Goods– Shipment Contracts - Risk of loss passes to buyer when seller

delivers the conforming goods to the carrier.– Destination Contracts - Risk of loss passes to buyer when seller

delivers the conforming goods to the specified destination.

Risk of Loss: No Breach

Noncarrier Cases: No Movement of Goods– Merchant Seller

- Risk of loss passes to buyer when buyer receives the goods.

– Nonmerchant Seller

- Risk of loss passes to buyer upon tender of delivery.

Risk of Loss: No Breach (continued)

Goods in Possession of a Bailee:– Buyer receives negotiable document of

title or– Bailee acknowledges buyer’s right to

possession, or– Buyer receives a nonnegotiable document

of title and has reasonable time to demand goods.

Risk of Loss: Conditional Sales

Sale on Approval

• No sale unless and until the buyer accepts the goods.

• Risk of loss, title pass when goods are accepted.

Sale or Return

• Buyer may return goods unsold after a period of time.

• Risk of loss and title pass to buyer when buyer has possession of goods.

Risk of Loss: Conditional Sales (continued)

Risk of Loss: Conditional Sales (continued)

Consignment

• Seller (consignor) delivers goods to buyer (consignee) to sell.– Consignor paid a fee if he/she sells the

goods on behalf of the consignor.

• Treated as sale or return.

Risk of Loss: Breach

Seller in Breach - If seller delivers nonconforming goods to the

buyer, seller retains risk of loss.

Buyer in Breach

- If buyer refuses to take delivery of conforming goods, repudiates the contract or otherwise breaches the contract, buyer takes risk of loss of identified goods.

Risk of Loss: Lease Contracts

• In ordinary lease, risk of loss retained by lessor.

• In case of finance lease, risk of loss passes to lessee.

• If tendered goods nonconforming, risk of loss remains with lessor or supplier until cure or acceptance.

Insurable Interest

• Seller has insurable interest as long as seller retains title or has security interest.

• Lessor has insurable interest during term of lease.

• Buyer/lessee has insurable interest in identified goods.

• Both parties may have insurable interest simultaneously.

Sales by Nonowners

Void Title and Lease: Stolen Goods

• Buyer does not obtain good title to stolen goods.

• Lessee has no leasehold interest in stolen goods.

• Rightful owner can reclaim.

Sales by Nonowners (continued)

• Seller/lessor has voidable title if goods were obtained by fraud, if a check is later dishonored, or if he/she impersonates another person.

• Can transfer good title to good faith purchaser for value or good faith subsequent lessee.

Sales by Nonowners (continued)

Entrustment Rule– If owner entrusts the possession of his/her

goods to a merchant who deals in goods of that kind, the merchant has the power to transfer all rights/title in the goods to a buyer in the ordinary course of business.

– The real owner cannot reclaim the goods from this buyer.

Electronic Contracts and Signatures

• E-signatures effective.

• Electronic record or electronic signature is attributable to a person if it was act of that person or his or her electronic agent.

• Electronic communication is effective even if no individual aware of its receipt.

Letters of Credit

• To manage risk of nonpayment or nonreceipt of goods in international transactions.

• Substitutes credit of bank for that of buyer.

• Issuing bank agrees to pay upon delivery of documents from beneficiary (seller).

• Governed by Article 5 of UCC.

REMEDIES FOR BREACH OF SALES

AND LEASE CONTRACTS



Parties’ Obligations

• Seller/lessor must transfer and deliver conforming goods.

• Buyer/lessee must accept and pay for goods.

• Upon breach, non-breaching party entitled to remedy.– Give non-breaching party benefit of full

performance.

Tender of Delivery

• Transfer or delivery of goods to buyer/lessee in accordance with contract.

• Requires:– Conforming goods to be put aside and held

for buyer/lessee.– Notification be made to buyer/lessee.– Single delivery unless otherwise noted. – Payment due upon delivery unless otherwise

noted.

Place of Delivery

• Contract usually states place and time of delivery.

• If contract silent, place is seller/lessor’s place of business.

• If no place of business, seller/lessor’s residence.

Place of Delivery (continued)

• Goods to be delivered without being moved, delivery occurs when:– Seller tenders negotiable document of title, or– Bailee acknowledges buyer’s right of

possession, or– Seller tenders nonnegotiable document of

title or written direction to bailee to deliver goods to buyer.

Delivery in Carrier Cases

• Shipment Contracts• Seller must put goods in carrier’s

possession and contract for delivery.

• Obtain and deliver all documents necessary for buyer to obtain possession.

• Notify buyer of shipment.

Delivery in Carrier Cases (continued)

• Destination Contracts– Requires delivery to buyer’s location or

other destination.

– Delivery must be made at reasonable time and in reasonable manner.

Perfect Tender Rule

• If goods fail to conform in any respect, buyer/lessee may:– Reject entire shipment

– Accept whole shipment, or

– Reject part and accept part.

Exceptions to Perfect Tender Rule

• Agreement of Parties– E.g., parties agree that buyer will accept non-

conforming goods with compensation, or that buyer will reject only nonconforming goods.

• Substitution of Carriers– Commercially reasonable carrier may be

substituted if agreed-upon delivery manner fails or becomes unavailable.

Exceptions to Perfect Tender Rule (continued)

• Installment contracts– May reject entire contract only when value of

contract substantially impaired.– May reject installment only if value impaired

and defect cannot be cured.

• Destruction of goods– If identified goods destroyed without fault

before risk of loss passes, both parties discharged.

Cure

• Seller/lessor may repair or replace defective or nonconforming goods.– within time for contract performance, or

– within reasonable time, if seller/lessor had reason to believe delivery would be accepted.

Good Faith and Reasonableness

• All parties must act in good faith.– “Honesty in fact.”– Merchants must follow commercially

reasonable practices.

• Standard of “reasonableness” found throughout Code.– Defined by reference to course of dealing,

trade usage, etc.

Buyer/Lessee’s Performance

• Once seller/lessor has properly tendered delivery, buyer/lessee must accept and pay for goods.

• If contract silent, UCC controls.

Right of Inspection

• Buyer has the right to inspect goods before paying for them.– Except in COD and CIF contracts.

• Buyer may reject nonconforming goods.

• Parties may agree as to time and place of inspection.

• If contract silent, inspection must occur at reasonable time and place.

Payment

– Due from buyer when and where goods delivered.

– Contract may set terms.

– Can be paid in any manner acceptable in ordinary course of business.• If cash required, buyer must be given an

extension to secure cash.

Acceptance of Goods

• Acceptance occurs if:– Buyer indicates acceptance by words, or– Fails to reject goods within reasonable time,

or– Buyer acts inconsistently with seller’s

ownership rights.

• Buyers/lessee may accept only “commercial unit.”

Revocation of Acceptance

• Buyer can revoke acceptance if:– Goods are nonconforming, and – Nonconformity substantially impairs value of

goods, and• Seller’s promise to timely cure not met, or• Goods were accepted before nonconformity

discovered and nonconformity was difficult to discover, or

• Goods were accepted before nonconformity discovered and seller/lessor assured buyer/lessee that goods were conforming.

Right to Withhold Delivery

• Seller may withhold delivery if buyer/lessee fails to pay or repudiates contract.– If discovered that buyer/lessee is insolvent,

may require cash payment.

• If part of the shipment has been delivered at time of breach, seller/lessor may withhold delivery of remainder.

Right to Stop Goods in Transit

• Seller/lessor may stop carload, truckload in transit if:– Buyer/lessee repudiates.– Buyer/lessee fails to make payment when

due.

• Seller/lessor may stop any size shipment in transit if:– Seller/lessor discovers buyer/lessee’s

insolvency.

Right to Reclaim Goods

• Seller/lessor may reclaim goods if:– Was credit sale and seller discovers buyer’s

insolvency (must reclaim within 10 days of delivery), or

– Buyer misrepresented solvency in writing within 3 months before delivery, or

– Buyer paid for goods with bad check, or– Lessee is in default of contract.

Right to Dispose of Goods

• Seller/lessor may resell/release the goods.– Typically with notice to buyer/lessee.

• Seller/lessor may recover damages.– Difference between disposition price and

original contract price, plus incidental damages.

• Profit does not revert to original buyer.

Unfinished Goods

• Seller/lessor may cease manufacture and sell for scrap or salvage value, or

• Complete manufacture and resell or release, and recover damages.

Right to Recover Purchase Price or Rent

• Seller/lessor may sue to recover if:– Buyer/lessee fails to pay as due, or– Buyer/lessee breaches contract after goods

have been identified and seller/lessor cannot resell or dispose of them, or

– Goods are damaged or lost after risk passes to buyer/lessee.

Additional Rights

• Seller/lessor may sue to recover damages caused by buyer/lessee’s breach.– Difference between contract price and market

price.

• Seller/lessor may recover lost profits if lost volume seller.

• Seller/lessor may cancel contract if buyer/lessee breaches.

Buyer/Lessee’s Remedies

• Reject nonconforming or improperly tendered goods.– May reject all or part.– Must reject within reasonable time.– Must follow reasonable instructions for

return of goods.– Entitled to reimbursement for shipping,

holding, storing rejected goods.

Buyer/Lessee’s Remedies (continued)

• Cover– Purchase or rent substitute goods.– Obtain as damages difference between cover

price and contract price, plus incidental and consequential damages, less expenses saved.

– Buyer/lessee not required to cover.


• If buyer/lessor made payment before goods received and seller/lessor becomes insolvent within 10 days of receiving payment, buyer/lessor can recover goods.

• If goods are unique, buyer/lessee can obtain specific performance.

• If goods wrongfully withheld and cover unavailable, buyer/lessee can replevy.


• Cancel contract.• Recover damages for nondelivery or

repudiation.– Difference between contract price and market

price.

• Recover damages for accepted nonconforming goods.

• Recover damages for loss from seller’s breach.

Assurance of Performance

• Party with grounds to believe that the other party will not perform may demand written assurance of performance.

• If assurances not forthcoming, party may suspend performance.

Anticipatory Repudiation

– Party indicates before performance is required that it will not perform.• Wavering is not sufficient.

– Aggrieved party may:• Await performance for a commercially

reasonable time.• Treat contract as breached at time of

anticipatory repudiation.• Indicate repudiation is considered final.

Statute of Limitations

– Action for breach of sales or lease contract must commence within four years after the cause of the action accrues.

– Parties may reduce time but not extend it.

Agreements Affecting Remedies

• Parties may agree to remedies in addition to those available under the UCC, or agree to limit remedies.– E.g., limit to repair and replacement.

• Liquidated damages may be substituted.

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