chapter 10 sales and lease contracts

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CHAPTER 10 SALES ANDLEASE CONTRACTS


LEARNING OBJECTIVES

How do Article 2 and Article 2A of the UCC differ? What types of transactions does each article cover?

In a sales contract, if an offeree includes additional or different terms in an acceptance, will a contract result? If so, what happens to these terms?

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LEARNING OBJECTIVES

What exceptions to the writing requirements of the Statute of Frauds are provided in Article 2 and Article 2A of the UCC?

Risk of loss does not necessarily pass with title. If the parties to a contract

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LEARNING OBJECTIVES

. . . do not expressly agree when risk passes and the goods are to be delivered without movement by the seller, when does risk pass?

What law governs contracts for the international sale of goods?

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SCOPE OF ARTICLE 2 (SALES)AND ARTICLE 2A (LEASES)Article 2 applies to the sale of

goods over $500.• Does not apply to sale of land or

services.• Modifies the common law of contracts in

certain areas, especially if one of the parties is a merchant.

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ARTICLE 2—SALES

What is a “Sale”?• Passing title from seller to buyer for a

price.• Price may be in cash or in other goods or

services.

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ARTICLE 2—SALES

What are “Goods”?• Must be tangible and movable (not land,

services or intangibles).• Goods Associated With Land.• Goods and Services Combined:

Predominant Factor test. If primarily for goods, UCC applies.

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EXHIBIT 10.1

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ARTICLE 2—SALES

Who is a “Merchant”?• A merchant is one who deals in goods of

the kind sold, and is presumed to possess a high degree of expertise.

• A merchant holds himself out as having special skill or knowledge.

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ARTICLE 2—SALES

Who is a “Merchant”?• A person who employs a merchant as a

broker or agent has the status of merchant in that situation.

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ARTICLE 2A—LEASES

Article 2A.• Applies to all commercial and consumer

lease/financing of goods.Lease Agreement.

• Lessor: sells the right to possess and use goods.

• Lessee: acquires right to possess and use.11


FORMATION OF SALES AND LEASE CONTRACTS

UCC modifies the common law of contracts as follows: • Where UCC speaks, it preempts the

common law;• Where UCC is silent, the common law

governs.

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OFFER: OPEN TERMS

Under UCC Article 2, an offer may include “open” terms:• As long as the parties intended to form a

contract, and • There is a reasonably certain basis for

the court to grant a remedy.

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OFFER: OPEN TERMS

The only term the court will not create is the quantity.• If quantity is not specifically stated, a

court will deem the contract unenforceable because it cannot objectively determine the quantity.

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OFFER: OPEN TERMS

An open quantity contract is unenforceable, UNLESS the contract is either:

• Requirements Contract: buyer agrees to purchase what the buyer needs or requires.

• Output Contract: buyer agrees to buy all of seller’s production or output.

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OFFER: MERCHANTS

Merchant’s 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.

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ACCEPTANCE

Seller can specify manner of acceptance. • If none is specified, any reasonable

means.• A Promise to Ship or Prompt Shipment

of conforming goods is acceptance.

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ACCEPTANCE

Shipment of Nonconforming Goods.• Prompt shipment of nonconforming goods

is both an acceptance and a breach, unless the seller notifies the goods are only an accommodation.

• Notice of the accommodation must indicate no contract has been formed.

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ACCEPTANCE

Notice of Acceptance Required.• If a unilateral offer is not accepted

within a reasonable time with performance, the offeror can treat the offer as lapsed before acceptance.

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ACCEPTANCE

Additional Terms.• Common Law: under the “mirror image”

rule, the terms must be identical.• Article 2 dispenses with mirror image

rule. • CASE 10.1 WPS, Inc. v. Expro Americas, LLC

(2012). What facts did the court use to find a enforceable contract?

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ACCEPTANCE

Additional Terms (Article 2).• When One Party is Not a Merchant: only

original terms accepted. • When Both Parties are Merchants:

additional terms form contract unless there is prohibition or new terms or terms materially alter contract, or the party objects.

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ACCEPTANCE

Additional Terms (Article 2).• Conditioned on Offeror’s Assent: when

an offer contains additional or different terms expressly conditioned on the offeror’s assent, no contract is formed without that assent. (UCC 2-207(1)).

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ACCEPTANCE

Additional Terms (Article 2).• Additional Terms May Be Stricken:

conduct by both parties may be sufficient to create an enforceable contract. A court will simply strike the terms of the contract on which the parties do not agree (UCC 2-207(3)).

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CONSIDERATION

Modifications must be made in good faith.

Modifications without consideration must be written:• (1) If contract itself prohibits changes

without a writing.

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CONSIDERATION

Modifications without consideration must be written:• (2) If consumer is dealing with a

merchant, consumer must sign separate acknowledgment.

• (3) Any modification that brings the contract under UCC 2 Statute of Frauds.

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THE STATUTE OF FRAUDS

Contracts for Sale of Goods over $500 (or lease over $1,000) must be in writing.

Sufficiency of the Writing.• Sufficient if it is signed by one party and

indicates parties intended to form a contract.

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Special Rules Between Merchants.• Written confirmation after oral

agreement.• Confirmation must indicate the terms,

and merchant receiving must have knowledge of its contents.

• Receiver has 10 days to object. 27



Exceptions to Writing:• Specially Manufactured Goods.• Admissions.• Partial Performance.

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EXHIBIT 10.2 MAJOR DIFFERENCES BETWEEN CONTRACT AND SALES LAW

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PAROL EVIDENCE

Generally, terms of a written agreement or memo cannot be contradicted by prior, extrinsic evidence, unless the evidence is:• A Course of Dealing and Usage.• A Course of Performance.

Rules of Construction.30


UNCONSCIONABILITY

Contract so unfair and one-sided that it would be unreasonable to enforce it. • CASE 10.2 Jones v. Star Credit Corp.

(1969). English language contract that required a Spanish speaker to pay nearly 400% for a refrigerator was not enforceable.

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UNCONSCIONABILITY

Court can:• Refuse to enforce it.• Enforce contract without

unconscionable clause, or• Limit impact of contract to avoid

unconscionable result.

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TITLE AND RISK OF LOSS

Sale of goods requires different rules than real property transactions: risk should not always pass with title.

UCC replaces common law notions of title with identification, risk of loss, and insurable interest.

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Before title to goods can pass from seller to buyer, they must exist and be identified.

Identification.• Occurs when specific goods are

designated as subject matter of contract.

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Identification.• Gives buyer the right to obtain insurance

on the goods and to recover damages from third parties.

• Existing Goods: identification takes place at time contract is made.

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Identification.• Future Goods:

• If sale of unborn animals (or crops) within 12 months, identification occurs at conception (or planting).

• Any other goods, identification takes place when goods are shipped.

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Identification.• Goods That Are Part of a Larger Mass.

• Identification occurs when goods are marked, shipped, or otherwise designated.

• EXCEPTION: Fungible Goods (e.g., wheat) do not need separation.

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PASSAGE OF TITLE

Title passes when agreed to by the parties.

If there is no agreement, under Article 2-401 title of identified goods passes to the Buyer at the time and place the Seller physically delivers the goods.

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PASSAGE OF TITLE• CASE 10.3 United States v. 2007 Custom

Motorcycle (2011). Why did the court ‘strike’ Indy’s claim?

Shipment and Destination Contracts.• If there is no agreement, delivery

arrangements determine when title passes.

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PASSAGE OF TITLE

Shipment and Destination Contracts.• Shipment Contracts: title passes at time

and place of shipment.• Destination Contracts: title passes when

goods are tendered (Chapter 11) at the destination.

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PASSAGE OF TITLE

Delivery without Movement of the Goods. • Unless agreed otherwise, title passes:

• With document of title: when and where document delivered.

• Without document: when sales contract is made, if goods have been identified or when identification occurs if they have not been identified.

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PASSAGE OF TITLE

Sales or Leases by Nonowners.• Void Title (Theft): true owner gets goods

back.• Voidable Title: Seller has power to

transfer goods, so good faith purchaser (with no knowledge) has valid title to goods.

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PASSAGE OF TITLE

Entrustment Rule.• Entrusting goods to merchant who deals

in those goods, gives her power to transfer all rights in the ordinary course of business.

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VOID AND VOIDABLE TITLES

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RISK OF LOSS

Delivery with Movement of Goods—Carrier Cases.• When contract fails to agree on when

ROL passes, courts determine whether: • It is a shipment contract, and ROL passes when

seller tenders goods to carrier. • It is a destination contract, and ROL passes when

goods tendered at destination by carrier. 45


RISK OF LOSS

ROL: Delivery without Movement of Goods.• If Goods Held by Seller:

• Document of Title is generally not used.• If Seller is a merchant, ROL passes when

buyer takes actual possession of goods.

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RISK OF LOSS

ROL: Delivery without Movement of Goods.• Goods Held by Bailee (Warehouse): ROL

passes when buyer receives document of title; bailee acknowledges Buyer’s right to goods and buyer receives title and has reasonable time to pick up.

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RISK OF LOSS

ROL When Contract Breached.• When Seller or Lessor Breaches.

• Shipment of Non-Conforming Goods -- ROL does not pass to buyer until:

• Seller “cures” the defect (goods are replaced or repaired), or

• Buyer accepts non-conforming goods and waives right to reject.

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RISK OF LOSS

ROL When Contract Breached.• When Seller or Lessor Breaches.

• Buyer can revoke acceptance after discovery of latent defect – ROL passes back to seller to the extent that buyer’s insurance does not cover the loss.

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RISK OF LOSS

ROL When Contract Breached.• When Buyer or Lessee Breaches.

• After goods are identified, ROL passes to buyer for a reasonable amount of time after seller learns of the breach, to the extent that seller’s insurance does not cover loss.

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INSURABLE INTEREST

Buyer has an insurable interest in goods that have been identified.

Seller has an insurable interest in goods as long as they retain title or a security interest.

Both buyers and sellers can have an insurable interest at the same time.

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CONTRACTS FOR THE INTERNATIONAL SALE OF

GOODSApplicability of the CISG.Comparison of CISG and UCC.

• Mirror Image Rule.• Irrevocable Offers.• Statute of Frauds.• Necessity of a Price Term.• Time of Contract Formation.

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