19 - 1

Formation of Sales and Lease Contracts

Formation of Sales and Lease Contracts

19 - 2

Uniform Commercial Code (UCC)

• Comprehensive statutory scheme.

• Serves as a model act.• The UCC includes laws that

cover most aspects of commercial transactions.

• The common law of contracts governs if the UCC is silent.

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Overview of the Uniform Commercial Code

• Article 1 General provisions

• Article 2 Sales

• Article 2A Leases

• Article 3 Commercial paper

• Rev. Article 3 Negotiable instruments

• Article 4 Bank deposits & collections

• Article 4A Wire transfers

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Overview of the Uniform Commercial Code (continued)

• Article 5 Letters of credit

• Article 6 Bulk transfers

• Article 7 Documents of title

• Article 8 Investment securities

• Article 9 Secured transactions

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Article 2 (Sales)• All states except Louisiana have

adopted some version of Article 2 (Sales) of the UCC.

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

• Article 2 applies only to transactions in goods – i.e., tangible items.

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Article 2 (Sales) (continued)

• Article 2 does not apply to transactions in intangible items, real estate, or service.

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

seller to a buyer for a price.

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What are Goods?• Tangible things that are

movable at the time of their identification to the contract.

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

• Real estate and services are not tangible.

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Services

• Services are not covered by Article 2.

• Mixed sales involve both goods and services.

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

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Who Is a Merchant?

• A person who:1. Deals in the goods of the

kind involved in the transaction, or

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

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Article 2A (Leases)

• Article 2A applies only to leases involving goods.

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

• Many states have adopted Article 2A.

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What Is a Lease?

• A transfer of the right to the possession and use of the named goods for a set term in return for certain consideration.– Lessor – the person who

transfers the right of possession and use of goods under the lease.

– Lessee – the person who acquires the right to possession and use of goods under a lease.

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Finance Lease• A three-party transaction

consisting of the lessor, the lessee, and the supplier.

• The lessor does not select, manufacture, or supply the goods.

• The lessor acquires title to the goods or the right to their possession and use in connection with the terms of the lease.

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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.

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Open Terms• Sometimes the parties to a

sales or lease contract leave open a major term in the contract.

• Gap-filling rule allows open terms to be read into contract.– Open Price Term– Open Payment Term– Open Delivery Term– Open Time Term– Open Assortment Term

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Firm Offer Rule• A merchant who (1) offers to

buy, sell, or lease goods, and (2) gives a written and signed assurance on a separate form that the offer will be held open,– cannot revoke the offer for the time

stated or,– if no time is stated, for a reasonable

time.– Three months is the maximum

amount of time permitted under this rule.

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Consideration• The formation of a sales and

lease contract requires consideration.

• In common law, modifications to a contract need to be supported by new consideration.

• Under the UCC, modifications to sales and lease contracts require no consideration.

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Acceptance• Both common law and the

UCC provide that a contract is created when the offeree sends an acceptance to the offeror, not when the offeror receives the acceptance.

• The UCC permits acceptance by any reasonable manner or method of communication.

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Additional Terms• Under common law, the mirror

image rule applies, an additional terms are considered a counteroffer.

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

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

19 - 19

Accommodation Shipment• A shipment that is offered to

the buyer as a replacement for the original shipment when the original shipment cannot be filled.

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

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

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Statute of Frauds• A rule that requires all

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

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

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Exceptions to the Statute of Frauds

• Specially Manufactured Goods

• Admissions in Pleadings or Court

• Part Acceptance

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Written Modification• Oral modification is not

enforceable if the parties agree that any modification of the sales or lease contract must be in a signed writing.

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

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Parol Evidence Rule• A rule that states that when a

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:

1. A prior oral or written agreement, or

2. A contemporaneous oral agreement.

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Parol Evidence Rule, continued

• If the 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.

19 - 25© 2007 Prentice Hall, Business Law, sixth edition, Henry R.

Cheeseman

Comparison of Contract Law and the 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.

19 - 26© 2007 Prentice Hall, Business Law, sixth edition, Henry R.

Cheeseman

Comparison of Contract Law and the Law of Sales (2 of 3)

Topic Common Law Contracts

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.

19 - 27© 2007 Prentice Hall, Business Law, sixth edition, Henry R.

Cheeseman

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

Topic Common Law Contracts

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

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Performance of Sales and Lease Contracts

Performance of Sales and Lease Contracts

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Identification of Goods• Distinguishing goods named

in contract from seller’s or lessor’s other goods

• Seller or lessor retains risk of loss until goods identified

• Title cannot pass until goods identified

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Identification of Goods (continued)

• Parties can agree to time and manner of identification

• Existing goods are identified by naming specific goods

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

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Passage of Title• The passing of title from a

seller to a buyer for a price.• Title cannot be passed 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.

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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

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Shipment and Destination Contracts (continued)

• Delivery of Goods without Moving Them– Buyer is required to pick up

goods from seller– May require document of

title or bill of lading

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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

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Risk of Loss: No Breach of Sales Contract• 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’ of the goods: - When seller places or holds the

goods available for the buyer to take delivery and notifies the buyer of this fact

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Risk of Loss: No Breach of Sales Contract (continued)

• Goods in Possession of a Bailee - Risk of loss passes to buyer when:

- buyer receives a negotiable document of title covering the goods

- The Bailee acknowledges the buyer’s right to possession of the goods

or, - The buyer receives a nonnegotiable

document of title or other written direction to deliver and has a reasonable time to present the direction to the bailee and

demand the goods

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Risk of Loss: Conditional Sales

• Sale on Approval - There is no sale unless and

until the buyer accepts the goods

• Sale on Return - Sale is considered final only if

the buyer fails to return the goods within the specified time

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Risk of Loss: Conditional Sales

• Consignment - Seller (consignor) delivers

goods to buyer (consignee) to sell

- Consignor is paid a fee if he/she sells the goods on behalf of the consignor

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Risk of Loss: Breach of Sales Contract

• Seller in Breach - If seller delivers nonconforming

goods to the buyer

• Buyer in Breach

- If buyer refuses to take delivery of conforming goods, repudiates the contract or

otherwise breaches the contract

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Risk of Loss: Lease Contracts• Risk of loss is retained by

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

• If a tender of delivery of goods fails to conform to the lease contract, the risk of loss remains with the lessor or supplier until cure or acceptance

19 - 41

Sales by Nonowners

• Void Title and Lease: Stolen Goods - Purchase of lease of stolen

goods do not result in transfer of title of the goods and the lessee does not acquire any leasehold interest in the goods.

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Sales by Nonowners (continued)

• Voidable Title - Purchaser has voidable title if

goods were obtained by fraud, if a check is later dishonored, or if he/she impersonates another person

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Sales by Nonowners (continued)

• Entrustment Rule– If an 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

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Remedies for Breach of Sales and Lease

Contracts

Remedies for Breach of Sales and Lease

Contracts

19 - 45

Tender of Delivery• Transfer or delivery of goods to

the buyer or lessee in accordance with sales or lease contract

• Requires:– Conforming goods to be put aside

and held for buyer or lessee– Notification be made to buyer or

lessee– Goods must be tendered in single

delivery unless otherwise noted in contract

– Payment due upon delivery unless otherwise noted

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Place of Delivery

• Contract usually states place and time of delivery

• If contract silent, place is seller’s or buyer’s place of business

• If they have no place of business, it is their residence

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Place of Delivery (continued)

• If goods at warehouse and are to be delivered without being moved, delivery occurs when seller:– Tenders buyer negotiable

document of title– Produces acknowledgement

from bailee of buyer’s right of possession

– Tenders nonnegotiable document of title or written direction to bailee to deliver goods to buyer

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Delivery in Carrier Cases• Shipment Contracts

– Do not name destination• 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

• Destination Contracts– Names destination– Delivery must be made at

reasonable time and in reasonable manner

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Perfect Tender Rule

• If goods fail to conform, buyer/lessee may:– Reject entire shipment– Accept whole shipment, or– Reject part and accept part

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Exceptions• Agreement of Parties

– Parties may contract to limit perfect tender rule

• Defective or nonconforming goods may be rejected

• Seller/lessor may replace nonconforming goods

• Buyer/lessee accepts nonconforming goods with compensation

• Substitution of Carriers– Commercially reasonable carrier

may be substituted if agreed-upon delivery manner fails or becomes unavailable

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Cure

• UCC gives seller/lessor opportunity to cure– time has not expired – must notify buyer/lessee of

intentions

19 - 52

Installment Contract

– Goods delivered and accepted at different times

– Requires specific knowledge– Seller can only reject entire

contract if default impairs value of entire contract

– Seller can reject non-conforming shipments

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Destruction of Goods

• Contract void– If goods are totally destroyed

through no fault of either party before risk of loss passes

– Both parties excused from performance

• Contract voidable– If goods are partially destroyed

through no fault of either party before risk of loss passes

– Buyer may inspect goods and choose to void the contract

19 - 54

Buyer’s and Lessee’s Performance

• Once seller/lessee has tendered delivery, buyer/lessee is obligated to accept and pay as per sales/lease contract.

• If contract silent, UCC controls.

19 - 55

Right of Inspection

• Buyer has the right to inspect goods before paying for them

• 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

19 - 56

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

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Acceptance• Contract is created when the

offeree sends an acceptance to the offeror, not when the offeror receives the acceptance.

• The UCC permits acceptance by any reasonable manner or method of communication.

• Acceptance occurs if buyer acts inconsistently with seller’s ownership rights.

• Buyers/lessees must accept “commercial unit”.

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Revocation of Acceptance• Buyer can revoke acceptance

if:– Goods are non-conforming– The nonconformity substantially

impairs the value of the goods – The seller’s promise to timely cure is

not met– Goods were accepted before non-

conformity was discovered and the nonconformity was difficult to discover

– The goods were accepted before the nonconformity was discovered and the seller/lessor assured the buyer/lessee that the goods were conforming

19 - 59

Right to Withhold Delivery• Delivery of goods may be

withheld if:– Seller/lessor is in possession of

goods when buyer/lessee breaches contract

– Buyer/lessee fails to make payment when due

– Buyer/lessee repudiates contract

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

• If seller/lessor discovers that buyer/lessee is insolvent, they may require cash payment.

19 - 60

Right to Stop Goods in Transit

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

insolvency– Buyer/lessee repudiates

shipment– Buyer/lessee fails to make

payment when due

• Seller/lessor must give sufficient notice to allow bailee to prevent delivery

19 - 61

Right to Reclaim Goods• Seller/lessor may reclaim

goods if:– The buyer misrepresented

their solvency in writing within 3 months before delivery

– Paid for goods with a check that bounced

– If the lessee is in default of the contract

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Right to Dispose of Goods• Must be made in good faith• Seller/lessor must give notice

to buyer/lessee of intention – Notice not required with

perishable goods or goods that will quickly decline in value

• Seller/lessor may recover damages

• Profit does not revert to original buyer

19 - 63

Right to Recover the Purchase Price or Rent

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

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

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

19 - 64

Additional Rights• Seller/lessor may sue to

recover damages caused by buyer’s or lessee’s breach.

• Seller/lessor may recover lost profits.

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

19 - 65

Buyer’s and Lessee’s Remedies• Buyer may reject nonconforming goods

or improperly tendered goods.– May reject the whole, accept the whole, or

accept any commercial unit and reject the rest

– Must reject within a reasonable time period.– Must follow reasonable instructions for return

of goods.• If goods are perishable, must make

reasonable effort to sell them on seller’s behalf.

– Buyer entitled to reimbursement for shipping, holding, storage expenses.

19 - 66

Buyer’s and Lessee’s Remedies (continued)

• If buyer makes full or partial payment before goods are received and seller/lessor becomes insolvent within ten days of receiving payment, they can recover goods .

• If goods are unique, buyer can obtain specific performance

• Buyer/lessor may cover.• Buyer/lessee has right to replevy

goods, if they are wrongfully withheld.

19 - 67

Buyer’s and Lessee’s Remedies (continued)

• Buyer/lessee may cancel contract if seller/lessor fails to deliver conforming goods or repudiates contract– Buyer/lessee may recover damages

• Buyer/lessee may recover damages for accepted nonconforming goods

• Buyer/lessee may recover damages for loss from seller’s breach

19 - 68

Additional Performance Issues

• Assurance of Performance– An adequate assurance of due

performance may be demanded in writing by either party.

19 - 69

Anticipatory Repudiation– Occurs when a party

repudiates the contract before performance is required.

– 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.

19 - 70

Statute of Limitations

– The UCC provides that an action for breach of any written or oral sales or lease contract must commence within four years after the cause of the action accrues.

19 - 71

Agreements Affecting Remedies

• Parties may agree to remedies in addition to those available under the UCC.

• UCC allows for liquidated damages as a substitute for actual damages.