Business Law I Final Preparation Chapter 18 - Formation of Sales and Lease Contracts
What is the UCC?
A comprehensive statutory scheme that includes laws that cover aspects of commercial transactions.
What is a finance lease?
A finance lease is a three-party transaction consisting of a lessor, a lessee, and a supplier (or vendor). The lessor does not select, manufacture, or supply the goods. Instead, the lessor acquires title to the goods or the right to their possession and use in connection with the terms of the lease [UCC 2A-103(1)(g)]. Example JetGreen Airways, a commercial air carrier, decides to lease a new airplane that is manufactured by Boeing. To finance the airplane acquisition, JetGreen goes to City Bank. City Bank purchases the airplane from Boeing, and City Bank then leases the airplane to JetGreen. Boeing is the supplier, City Bank is the lessor, and JetGreen is the lessee. City Bank does not take physical delivery of the airplane; the airplane is delivered by Boeing directly to JetGreen (see Exhibit 18.3).
What are leases?
A lease is a transfer of the right to the possession and use of named goods for a set term in return for certain consideration [UCC 2A-103(1)(i)(x)]. Leased goods can be anything from an automobile leased to an individual to a complex line of industrial equipment leased to a multinational corporation. In a lease contract, the lessor is the person who transfers the right of possession and use of goods under the lease [UCC 2A-103(1)(p)]. The lessee is the person who acquires the right to possession and use of goods under a lease [UCC 2A-103(1)(n)]. Example Ingersoll-Rand Corporation, which manufactures robotic equipment, enters into a contract to lease robotic equipment to Dow Chemical. This is a lease contract. Ingersoll-Rand is the lessor, and Dow Chemical is the lessee (see Exhibit 18.2).
What is an accommodation shipment?
A shipment of nonconforming goods does not constitute an acceptance if the seller reasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer [UCC 2-206(1)(b)]. Example A buyer offers to purchase 500 red umbrellas from a seller. The seller's red umbrellas are temporarily out of stock. The seller sends the buyer 500 green umbrellas and notifies the buyer that these umbrellas are being sent as an accommodation. The accommodation is a counteroffer from the seller to the buyer. The buyer is free either to accept or to reject the counteroffer.
What is the Uniform Sales Act?
A uniform law that was promulgated in the United States in 1906 to govern the sales of goods.
What is a sale?
Article 2 of the UCC applies to transactions in goods [UCC 2-102]. All states have held that Article 2 applies to a sales contract for the sale of goods. A sale consists of the passing of title of goods from a seller to a buyer for a price [UCC 2-106(1)]. Example The purchase of an automobile (costing $500 or more) is a sale of a good subject to Article 2, whether the automobile was paid for using cash, credit card, or another form of consideration
What is the method and manner of acceptance?
Both common law and the UCC provide that a contract is created when the offeree (i.e., the buyer or lessee) sends an acceptance to the offeror (seller or lessor), not when the offeror receives the acceptance. Examples A sales or lease contract is made when the acceptance letter is delivered to the post office. The contract remains valid even if the post office loses the letter. An e-contract is made when the offeree sends an email or another electronic document to the offeror. Unless otherwise unambiguously indicated by language or circumstance, an offer to make a sales or lease contract may be accepted in any manner and by any reasonable medium of acceptance [UCC 2-206(1)(a), 2A-206(1)]. Example A seller sends a telegram to a proposed buyer, offering to sell the buyer certain goods. The buyer responds by mailing a letter of acceptance to the seller. In most circumstances, mailing the letter of acceptance would be considered reasonable. If the goods were extremely perishable or if the market for the goods were very volatile, however, a faster means of acceptance (e.g., a telegram) might be warranted. If an order or other offer to buy goods requires prompt or current shipment, the offer is accepted if the seller (1) promptly promises to ship the goods or (2) promptly ships either conforming or nonconforming goods [UCC 2-206(1)(b)]. The shipment of conforming goods signals acceptance of the buyer's offer. Acceptance of goods occurs after the buyer or lessee has a reasonable opportunity to inspect them and signifies that (1) the goods are conforming, (2) the buyer will take or retain the goods despite their nonconformity, or (3) the buyer fails to reject the goods within a reasonable time after tender or delivery [UCC 2-513(1), 2A-515(1)].
What are e-sale and e-lease contracts?
Certain states have adopted provisions that recognize the importance of electronic contracting in sales and lease transactions. Most state laws recognize electronic sales contracts (e-sales contracts) and electronic lease contracts (e-lease contracts). Following are some of the definitions for electronic commerce and their implications: Electronic means relating to technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities. This term extends many of the provisions and rules of the UCC to cover electronic contracting of sales and lease contracts. Electronic agent means a computer program or an electronic or other automated means used independently to initiate an action or respond to electronic records or performances in whole or in part, without review or action by an individual. This definition allows for the contracting for the sale and lease of goods over the internet, using websites to order or lease goods. Electronic record (e-record) means a record created, generated, sent, communicated, received, or stored by electronic means. This term is often used in addition to the words writing and record and thus recognizes that UCC contracts and other information may be sent or stored by electronic means rather than in tangible writings. Electronic signature (e-signature) means the signature of a person that appears on an electronic record and is recognized as a lawful signature. An electronic signature may also be that of a person's electronic agent. These definitions expand the coverage of the provisions of UCC Article 2 and Article 2A to electronic contracting of sales and lease contracts.
What are open terms for an offer?
Sometimes the parties to a sales or lease contract leave open a major term in the contract. The UCC is tolerant of open terms. According to UCC 2-204(3) and 2A-204(3), a contract does not fail because of indefiniteness if (1) the parties intended to make a contract and (2) there is a reasonably certain basis for giving an appropriate remedy. In effect, certain open terms are permitted to be "read into" sales or lease contracts. This rule is commonly referred to as the gap-filling rule. Some examples of terms that are commonly left open are listed in Exhibit 18.4.
What is the difference between goods and services?
Contracts for the provision of services—including legal services, medical services, and dental services—are not covered by Article 2. Sometimes, however, a sale involves both the provision of a service and a good in the same transaction. This sale is referred to as a mixed sale. Article 2 applies to mixed sales only if the goods are the predominant part of the transaction. Whether the sale of goods is the predominant part of a mixed sale is decided by courts on a case-by-case basis. Example A dentist places a crown on a patient's tooth. Although the crown is a good, the predominant part of the transaction is the provision of services by the dentist. Therefore, the UCC would not apply to the transaction.
Who is a merchant?
Generally, Article 2 of the UCC applies to all sales contracts, whether they involve merchants or not. However, Article 2 contains several provisions that either apply only to merchants or impose a greater duty on merchants. UCC 2-104(1) defines a merchant as (1) a person who deals in the goods of the kind involved in the transaction or (2) a person who by occupation holds him- or herself out as having knowledge or skill peculiar to the goods involved in the transaction. Examples A sporting goods dealer is a merchant with respect to the sporting goods he or she sells. This sporting goods dealer is not a merchant concerning the sale of a personal lawn mower to a neighbor.
What are goods?
Goods are defined as tangible items that are movable at the time of their identification to a contract [UCC 2-105(1)]. Specially manufactured goods and the unborn young of animals are examples of goods. Certain items are not considered goods and are not subject to Article 2. They include the following: Money and intangible items are not tangible goods. Examples Stocks, bonds, and patents are not tangible goods. Real estate is not a tangible good because it is not movable [UCC 2-105(1)]. However, minerals, structures, growing crops, and other items that are severable from real estate may be classified as goods subject to Article 2. Examples The sale and removal of a chandelier in a house is a sale of goods subject to Article 2 because its removal would not materially harm the real estate. The sale and removal of the furnace, however, would be a sale of real property because its removal would cause material harm [UCC 2-107(2)].
What is the open price term?
If a sales contract does not contain a specific price (open price term), a "reasonable price" is implied at the time of delivery. Example A contract may provide that a price is to be fixed by a market rate, such as a commodities market rate. Example A contract may provide that a price will be set or recorded by a third person or an agency, such as a government agency. For example, the federal government sets minimum prices for some agricultural products. A contract may provide that the price will be set by another standard, either on delivery or on a set date. If the agreed-on standard is unavailable when the price is to be set, a reasonable price is implied at the time of delivery of the goods [UCC 2-305(1)]. A seller or buyer who reserves the right to fix a price must do so in good faith [UCC 2-305(2)]. When one of the parties fails to fix an open price term, the other party may opt either (1) to treat the contract as canceled or (2) to fix a reasonable price for the goods [UCC 2-305(3)].
What is the open assortment term?
If the assortment of goods to a sales contract is left open, the buyer is given the option of choosing those goods. The buyer must make the selection in good faith and within limits set by commercial reasonableness [UCC 2-311(2)].
What is the open payment term?
If the parties to a sales contract do not agree on payment terms, payment is due at the time and place at which the buyer is to receive the goods. If delivery is authorized and made by way of document of title, payment is due at the time and place at which the buyer is to receive the document of title, regardless of where the goods are to be received [UCC 2-310].
What is the open delivery term?
If the parties to a sales contract do not agree to the time, place, and manner of delivery of the goods, the place for delivery is the seller's place of business. If the seller does not have a place of business, delivery is to be made at the seller's residence. If identified goods are located at some other place, and both parties know of this fact at the time of contracting, that place is the place of delivery [UCC 2-308]. If goods are to be shipped but the shipper is not named, the seller is obligated to make the shipping arrangements. Such arrangements must be made in good faith and within limits of commercial reasonableness [UCC 2-311(2)].
What is the open time term?
If the parties to a sales contract do not set a specific time of performance for any obligation under the contract, the contract must be performed within a reasonable time. If a sales contract provides for successive performance over an unspecified period of time, the contract is valid for a reasonable time [UCC 2-309].
What are the exceptions to the UCC Statute of Frauds?
In three situations, a sales or lease contract that would otherwise be required to be in writing is enforceable even if it is not in writing [UCC 2-201(3), UCC 2A-201(4)]: Specially manufactured goods. Buyers and lessees often order specially manufactured goods. If a contract to purchase or lease such goods is oral, the buyer or lessee may not assert the Statute of Frauds against the enforcement of the contract if (1) the goods are not suitable for sale or lease to others in the ordinary course of the seller's or the lessor's business and (2) the seller or lessor has made either a substantial beginning of the manufacture of the goods or commitments for their procurement. Admissions in pleadings or court. If the party against whom enforcement of an oral sales or lease contract is sought admits in pleadings, testimony, or otherwise in court that a contract for the sale or lease of goods was made, the oral contract is enforceable against that party. However, the contract is enforceable only as to the quantity of goods admitted. Part acceptance. An oral sales or lease contract that should otherwise be in writing is enforceable to the extent to which the goods have been received and accepted by the buyer or lessee. The prince is not above the laws, but the laws above the prince. Pliny the Younger (Gaius Caecilius Secundus) (61-113 ad) Example A lessor orally contracts to lease 20 automobiles to a lessee. The lessee accepts the first eight automobiles tendered by the lessor. This action is part acceptance. The lessee refuses to take delivery of the remaining 12 automobiles. Here, the lessee must pay for the eight automobiles it originally received and accepted. The lessee does not have to accept or pay for the remaining 12 automobiles.
When is written modification required?
Oral modification of a contract is not enforceable if the parties agree that any modification of the sales or lease contract must be signed in writing [UCC 2-209(2), 2A-208(2)]. 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. If the oral modification brings the contract within the Statute of Frauds, it must be in writing to be enforceable. Example A lessor and lessee enter into an oral lease contract for the lease of goods at a rent of $450. Subsequently, the contract is modified by raising the rent to $550. Because the modified contract rent is more than $499.99, the contract comes under the UCC Statute of Frauds, and the modification must be in writing to be enforceable.
What is the UCC firm offer rule?
Recall that the common law of contracts allows the offeror to revoke an offer any time prior to its acceptance. The UCC recognizes an exception to this rule, which is called the firm offer rule. This rule states that 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. The maximum amount of time permitted under this rule is 3 months [UCC 2-205, 2A-205]. Example On June 1, Sophisticated LLC, a BMW automobile dealer, offers to sell a BMW M3 coupe to Mandy for $60,000. Sophisticated LLC signs a written assurance to keep that offer open to Mandy until July 15. On July 5, Sophisticated LLC sells the car to another buyer. On July 15, Mandy tenders $60,000 for the car. Sophisticated LLC is a merchant subject to the firm offer rule. Sophisticated LLC is liable to Mandy for breach of contract. Thus, if Mandy has to pay $70,000 for the car at another dealership, she can recover $10,000 from Sophisticated LLC.
What is the UCC Statute of Frauds?
The UCC includes Statute of Frauds provisions that apply to sales and lease contracts. The provisions of the UCC Statute of Frauds are as follows: All contracts for the sale of goods priced at $500 or more must be in writing [UCC 2-201(1)]. Lease contracts requiring payments of $1,000 or more must be in writing [UCC 2A-201(1)]. Future amendments to the UCC may increase these dollar amounts. The writing must be sufficient to indicate that a contract has been made between the parties. Except as discussed in the paragraphs that follow, the writing must be signed by the party against whom enforcement is sought or by an authorized agent or broker. If a contract falling within these parameters is not written, it is unenforceable. Example A seller orally agrees to sell her computer to a buyer for $550. When the buyer tenders the purchase price, the seller asserts the Statute of Frauds and refuses to sell the computer to him. The seller is correct. The contract must be in writing to be enforceable because the contract price for the computer exceeds $499.99.
What are the rules regarding consideration for sales and lease contracts?
The formation of sales and lease contracts requires consideration. However, the UCC changes the common law rule that requires the modification of a contract to be supported by new consideration. An agreement modifying a sales or lease contract needs no consideration to be binding [UCC 2-209(1), 2A-208(1)]. Modification of a sales or lease contract must be made in good faith [UCC 1-203]. As in the common law of contracts, modifications are not binding if they are obtained through fraud, duress, extortion, and so on.
What is the parol evidence rule?
The parol evidence rule 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 a 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 (i.e., parol evidence) [UCC 2-202, 2A-202]. This rule is intended to ensure certainty in written sales and lease contracts. Occasionally, the express terms of a written contract are not clear on their face and must be interpreted. In such cases, reference may be made to certain sources outside the contract. These sources are construed together when they are consistent with each other. If that is unreasonable, they are considered in descending order of priority [UCC 2-208(2), 2A-207(2)]: Course of performance. Conduct of the parties concerning the contract in question. Course of dealing. Conduct of the parties in prior transactions and contracts. Usage of trade. Any practice or method of dealing that is regularly observed or adhered to in a place, a vocation, a trade, or an industry. Example A cattle rancher contracts to purchase 3,000 bushels of "corn" from a farmer. The farmer delivers feed corn to the rancher. The rancher rejects this corn and demands delivery of corn that is fit for human consumption. If the parties did not have any prior course of performance or course of dealing that would indicate otherwise, usage of trade would be used to interpret the word corn. Thus, the delivery of feed corn would be assumed and become part of the contract.
Brandt v. Boston Scientific Corporation and Sarah Bush Lincoln Health Center
The supreme court of Illinois held that the provision of services, and not the sale of goods, was the predominant feature of the transaction between Brandt and Health Center and that Health Center was not liable under Article 2 (Sales) of the UCC. The supreme court of Illinois upheld the dismissal of the case against Health Center.
What are the additional terms?
Under common law's mirror image rule, an offeree's acceptance must be on the same terms as the offer. The inclusion of additional terms in the acceptance is considered a counteroffer rather than an acceptance. Thus, a counteroffer extinguishes the offeror's original offer. UCC 2-207(1) is more liberal than the mirror image rule. It permits definite and timely expression of acceptance or written confirmation to operate as an acceptance even though the contract contains terms that are additional to or different from the offered terms, unless the acceptance is expressly conditional on assent to such terms. If one or both parties to a sales contract are nonmerchants, any additional terms are considered proposed additions to the contract. The proposed additions do not constitute a counteroffer or extinguish the original offer. If the offeree's proposed additions are accepted by the original offeror, they become part of the contract. If they are not accepted, the sales contract is formed on the basis of the terms of the original offer [UCC 2-207(2)]. Example A salesperson at a Lexus dealership offers to sell an automobile to a buyer for $65,000. The buyer replies, "I accept your offer, but I would like to have a satellite radio in the car." The satellite radio is a proposed addition to the contract. If the salesperson agrees, the contract between the parties consists of the terms of the original offer plus the additional term regarding the satellite radio. If the salesperson rejects the proposed addition, the sales contract consists of the terms of the original offer because the buyer made a definite expression of acceptance.
What is the written confirmation rule?
Under the written confirmation rule, if both parties to an oral sales or lease contract are merchants, the Statute of Frauds writing requirement can be satisfied if (1) one of the parties to an oral agreement sends a written confirmation of the sale or lease within a reasonable time after contracting and (2) the other merchant does not give written notice of an objection to the contract within 10 days after receiving the confirmation. This situation is true even though the party receiving the written confirmation has not signed it. The only stipulations are that the confirmation is sufficient and that the party to whom it was sent has reason to know its contents [UCC 2-201(2)]. Example A merchant-seller in Chicago orally contracts by telephone to sell goods to a merchant-buyer in Phoenix for $100,000. Within a reasonable time after contracting, the seller sends a sufficient written confirmation to the buyer of the agreed-on transaction. The buyer, who has reason to know the contents of the written confirmation, fails to object to the contents of the confirmation in writing within 10 days after receiving it. Under the UCC, the Statute of Frauds has been met, and the buyer cannot thereafter raise it against enforcement of the contract.
What is battle of the forms?
When merchants negotiate sales contracts, they often exchange preprinted forms. These "boilerplate" forms usually contain terms that favor the drafter. Thus, an offeror who sends a standard form contract as an offer to the offeree may receive an acceptance drafted on the offeree's own form contract. This scenario— commonly called the battle of the forms—raises important questions: Is there a contract? If so, what are its terms? The UCC provides guidance in answering these questions. Under UCC 2-207(2), if both parties are merchants, any additional terms contained in an acceptance become part of the sales contract unless (1) the offer expressly limits acceptance to the terms of the offer, (2) the additional terms materially alter the terms of the original contract, or (3) the offeror notifies the offeree that he or she objects to the additional terms within a reasonable time after receiving the offeree's modified acceptance. In the battle of the forms, there is no contract if the additional terms so materially alter the terms of the original offer that the parties cannot agree on the contract. This fact-specific determination is made by the courts on a case-by-case basis.