©2001 West Legal Studies in Business. All Rights Reserved. 1 Chapter 6: Sales and Leases.

©2001 West Legal Studies in Business. All Rights Reserved.1

Chapter 6:Chapter 6:Sales and LeasesSales and Leases

Chapter 6:Chapter 6:Sales and LeasesSales and Leases


IntroductionIntroductionIntroductionIntroduction

• The Uniform Commercial Code (UCC) facilitates commercial transactions.

• UCC Article 2 governs the Sale of Goods.– Modifies or preempts common law of contracts

in some areas.– Where UCC2 is silent, common law governs.


§1: The §1: The Scope of UCC 2Scope of UCC 2§1: The §1: The Scope of UCC 2Scope of UCC 2

• UCC 2 applies to the “sale of goods.”– A “sale” is the passing of title of “goods”

to/from a “merchant” (seller or buyer) for a price (money, goods, services,etc).

– “Goods” are tangible and movable. UCC2 does not govern real estate nor stocks or bonds.

– A “merchant” has special business expertise and is not a casual buyer/seller.


§2: §2: Scope of UCC 2A-LeasesScope of UCC 2A-Leases§2: §2: Scope of UCC 2A-LeasesScope of UCC 2A-Leases

• Contract for lease of personal goods between a lessor and a lessee.

• Consumer Leases (total payments less than $25,000).

• Finance Leases (involves a 3rd party-supplier).


§3: §3: Formation of Sales ContractsFormation of Sales Contracts§3: §3: Formation of Sales ContractsFormation of Sales Contracts

• 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.


Offer: Open Terms Offer: Open Terms [1][1]Offer: Open Terms Offer: Open Terms [1][1]

• UCC 2-204: even if terms of are undetermined, contract may still exist.– Open Terms: “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.

– Open Price Terms: If parties have not agreed on pricing, court can determine “reasonable price at the time of delivery.”


• Open Payment Terms: Unless otherwise agreed, payment is due on delivery (COD).

• Open Delivery Terms: Unless otherwise agreed, buyer takes delivery at the Seller’s place of business.

• Open Payment Terms: Unless otherwise agreed, payment is due on delivery (COD).

• Open Delivery Terms: Unless otherwise agreed, buyer takes delivery at the Seller’s place of business.




• Open Quantity Terms: generally courts will not impose a quantity. Exceptions: – 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.


Merchant’s Firm OfferMerchant’s Firm OfferMerchant’s Firm OfferMerchant’s Firm Offer

• At common law, an offer could be revoked any time prior to acceptance, unless there was some consideration.

• At UCC, offer made by merchant is irrevocable for reasonable period of time if writing assurance is given. No consideration necessary.


AcceptanceAcceptanceAcceptanceAcceptance

• Any reasonable means under the circumstances is permissible.

• Promise to ship or prompt shipment is acceptance.– Shipment of non-conforming goods is both an

acceptance and a breach unless goods sent as an “accommodation” to buyer (UCC2-206).


Additional TermsAdditional TermsAdditional TermsAdditional Terms

• If either party is a non-merchant, the contract is formed according to the original terms of the offer.

• If both parties are merchants, contract incorporates new terms unless: (1) original offer expressly limits terms or (2) material change or (3) Offeror objects within reasonable time.


§4: §4: ConsiderationConsideration§4: §4: ConsiderationConsideration

• UCC requires consideration and modifications must be made in good faith.

• Modification must be in writing if required by Statute of Frauds.


§5: §5: Statute of FraudsStatute of Frauds§5: §5: Statute of FraudsStatute of Frauds

Sale of goods over $500 must have a signed writing to be enforceable. Oral agreement is enforceable with a written memorialization. Exceptions to this rule:– Specially manufactured goods.– Admissions by breaching party.– Partial performance.– Merchant doesn’t object within 10 days.


§6: Title, Risk §6: Title, Risk and Insurable Interest and Insurable Interest

§6: Title, Risk §6: Title, Risk and Insurable Interest and Insurable Interest

• Sale 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.


IdentificationIdentificationIdentificationIdentification

For any interest to pass to buyer, goods must be:– In existence; and– Identified as specific goods in the sales contract

(by serial numbers and/or physically separated from others, except for fungible goods which do not need separation).


Identification Identification [2][2]Identification Identification [2][2]

• Gives the buyer the right:– To obtain insurance on the goods. – To recover from third parties who damage the

good.

• Identification occurs:– If goods are designated when contract is made.

If goods are not designated when contract is made, then identified at time of designation.


When Title Passes to BuyerWhen Title Passes to BuyerWhen Title Passes to BuyerWhen Title Passes to Buyer

• Title passes when agreed by the parties; or

• If no agreement, depends on whether contract is shipment or destination contract. – Shipment: title passes at time and place of

shipment.– Destination: title passes when goods are

tendered at the destination.


When Title Passes to Buyer When Title Passes to Buyer [2][2]When Title Passes to Buyer When Title Passes to Buyer [2][2]

• If delivery is “without movement” of the goods, title passes when agreed by the parties; or– 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.


Risk of Loss (ROL)Risk of Loss (ROL)Risk of Loss (ROL)Risk of Loss (ROL)

• 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.

• Delivery With Movement of the Goods.– Shipment vs. Destination Contracts.


ROL: Delivery ROL: Delivery withwith Movement of GoodsMovement of GoodsROL: Delivery ROL: Delivery withwith Movement of GoodsMovement of Goods

• In a shipment contract, ROL passes when seller tenders goods to carrier.

• In a destination contract, ROL passes when goods tendered at destination.

• Shipping terms.


ROL: Delivery ROL: Delivery WithoutWithout Movement of GoodsMovement of Goods

ROL: Delivery ROL: Delivery WithoutWithout Movement of GoodsMovement of Goods

• Goods Held by Seller:– Document of Title is generally not used.– If Seller is a merchant, ROL passes when buyer

takes physical possession 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.


Insurable InterestInsurable InterestInsurable InterestInsurable 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.


§7: Performance §7: Performance §7: Performance §7: Performance

• Seller has a duty to deliver conforming goods.

• Buyer’s duty is to accept and pay for conforming goods.

• In the absence of an agreement between Seller and Buyer, UCC 2 controls as set out below.


Good Faith RequirementGood Faith RequirementGood Faith RequirementGood Faith Requirement

• Good Faith (“honesty in fact”) is the foundation of every UCC commercial contract.

• For a merchant, “good faith” means honesty in fact and observance of reasonable commercial standards of fair dealing in the trade. Merchants are held to a higher standard of care than non-merchants.


Seller’s ObligationsSeller’s ObligationsSeller’s ObligationsSeller’s Obligations• Seller has a duty to “tender” delivery of

“conforming goods” to:– The agreed–upon place of delivery;– With reasonable notice;– At a reasonable hour; and– In a reasonable manner.

• Seller must tender exactly the goods ordered, unless otherwise agreed.


The “Perfect Tender” RuleThe “Perfect Tender” RuleThe “Perfect Tender” RuleThe “Perfect Tender” Rule

Seller has a duty to deliver “conforming goods.” If goods, or tender of delivery, fail in any respect to conform to the contract, the Buyer has the right to:– Accept the goods; – Reject the entire shipment; or– Accept part and reject part.


Buyer’s ObligationsBuyer’s ObligationsBuyer’s ObligationsBuyer’s Obligations

• Furnish facilities reasonably suited for receipt of the goods.

• Make payment at the time and place the Buyer receives the goods.– Credit has to be prearranged. Credit period begins on

the date of shipment.

– Pay with cash, credit card, check unless Seller asks for cash, then Seller has to give Buyer time to get cash.

• Buyer has right to inspect.


AcceptanceAcceptanceAcceptanceAcceptance

Buyer can accept goods:– By words or conduct.– If Buyer had reasonable amount of time and

failed to reject.– Buyer performs an act which indicates he

thinks he is the owner.


Buyer’s Revocation Buyer’s Revocation of Acceptanceof Acceptance

Buyer’s Revocation Buyer’s Revocation of Acceptanceof Acceptance

• Must notify Seller of breach.

• May revoke acceptance only if substantial nonconformity and: – Buyer accepted on the reasonable assumption

that the Seller would cure the non-conformity; OR

– Buyer did not discover the nonconformity because defect was latent or hard to discover.


Anticipatory RepudiationAnticipatory RepudiationAnticipatory RepudiationAnticipatory Repudiation

• Occurs when a party communicates she will not perform by time of contract performance.

• Non-breaching party may suspend performance and:– Treat the repudiation as material breach and

pursue a remedy; or– Wait a reasonable time.


Contractual Provisions Contractual Provisions Affecting RemediesAffecting Remedies


• Parties to a contract can vary their rights and duties that preempt UCC provisions.

• Parties can stipulate whether contractual provisions are “exclusive”. However, provisions limiting consumer rights may be unconscionable.




• Limitation of Damages.

• Limitation of Remedies.

• Waiver of Defenses.


§9: Warranties§9: Warranties§9: Warranties§9: Warranties

• A warranty is an assurance of fact upon which a party may rely. – Warranty of Title.– Express Warranty.– Implied Warranty of Merchantability.– Implied Warranty of Fitness for a Particular

Purpose.– Implied warranty arising from the course of

dealing or trade usage.


Warranty of TitleWarranty of TitleWarranty of TitleWarranty of Title

• Automatically arises in most commercial sales transactions.

• UCC-312 creates 3 warranties:– Good Title.

– No Liens.

– No Infringements.

• Warranty of title can generally be disclaimed only with specific language in contract.


Express WarrantiesExpress WarrantiesExpress WarrantiesExpress Warranties

• Can be oral or written-- don’t have to use the words “warrant” or “guarantee.”– Can be any affirmation or promise, description, sample

or model.

• Express warranty creates affirmation of a fact that becomes the “basis of the bargain” and Buyer must rely on warranty when he enters into contract.

• Statements of Opinion or Value are “puffery”, not warranties.


Implied WarrantiesImplied WarrantiesImplied WarrantiesImplied Warranties

• Warranty inferred at law based on the circumstances or nature of the transaction.

• Under the UCC, merchants warrant the goods they sell are “merchantable,” i.e., fit for the ordinary purpose for which such goods are sold.


Implied Warranty of Implied Warranty of MerchantabilityMerchantability

Implied Warranty of Implied Warranty of MerchantabilityMerchantability

• Automatically arises from merchants.

• Goods are of average, fair, or medium-grade.

• Adequately packaged and labeled.

• Conform to promises on label.

• Have a consistent quality and quantity among the commercial units.


Implied Warranty of Fitness Implied Warranty of Fitness for a Particular Purposefor a Particular Purpose

Implied Warranty of Fitness Implied Warranty of Fitness for a Particular Purposefor a Particular Purpose

• Arises by any Seller who: – Knows the particular purpose for which the

goods are being bought; and– Knows the Buyer is relying on Seller’s skill and

judgment to select suitable goods.


Implied Warranty Arising Implied Warranty Arising from Course of Dealing or from Course of Dealing or

Trade UsageTrade Usage

Implied Warranty Arising Implied Warranty Arising from Course of Dealing or from Course of Dealing or

Trade UsageTrade Usage• Arises when both parties to a contract have

knowledge of a well-recognized trade custom.

• Courts infer that both meant this custom to apply to their transaction.


Warranty DisclaimersWarranty DisclaimersWarranty DisclaimersWarranty Disclaimers

• Express Warranties can be disclaimed:– If they were never made (evidentiary matter).– If a clear written disclaimer in contract with

specific, unambiguous language and called to Buyer’s attention (e.g., BOLD CAPS UNDERLINED).


Warranty Disclaimers Warranty Disclaimers [2][2]Warranty Disclaimers Warranty Disclaimers [2][2]

• Implied Warranties:– Merchantability: “As Is,” “With All Faults”.– Fitness for a Particular Purpose: must be in

writing and conspicuous.– If Buyer has the right to fully inspect and

either: does so or refuses to do so, warranties are disclaimed as to defects that could reasonably be found.


Agreement of the Parties Agreement of the Parties Agreement of the Parties Agreement of the Parties

• Parties agree that some defective goods will be acceptable.

• Parties agree that defective goods can be replaced or repaired within a certain time.

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Seller’s CureSeller’s CureSeller’s CureSeller’s Cure• Seller has the right to “Cure” (ship

conforming goods to Buyer) if:– The agreed time of performance has not yet

expired; or– If Seller had reasonable grounds to expect that

Buyer would accept non-conforming goods, i.e., these goods are better than goods ordered, or Buyer has accepted non-conforming goods in the past.

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Substitution of CarriersSubstitution of Carriers

If a carrier becomes impracticable or unavailable through no fault of either party, a commercially reasonable substitute is acceptable.

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Commercial ImpracticabilityCommercial Impracticability

• Occurrence of an unforeseen contingency that makes performance impracticable.

• Nonoccurrence was a basic assumption on which the contract was made.

• If only partial impracticability, Seller must allocate what he has.

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Installment ContractsInstallment ContractsInstallment ContractsInstallment Contracts

• Installment Contracts can be rejected if:– Installment is substantially non-conforming and

can’t be cured; or– Non-conforming installment substantially

impairs the entire contract.

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Destruction of GoodsDestruction of GoodsDestruction of GoodsDestruction of Goods

• If no fault of either party and

• It occurs before risk passes to Buyer then

• Both Seller and Buyer are excused from performance.

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Partial PerformancePartial PerformancePartial PerformancePartial Performance

• Sometimes unforeseen event only partially affects Seller’s capacity to perform.

• In that event, Seller has duty to reasonably allocate any remaining production capacity to fulfilling contractual performance.

• Buyer has the right to reject.

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©2001 West Legal Studies in Business. All Rights Reserved. 1 Chapter 6: Sales and Leases.

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Transcript of ©2001 West Legal Studies in Business. All Rights Reserved. 1 Chapter 6: Sales and Leases.