BUL3310 - Chapter 17

Learning Outcome 3: Explain the UCC's treatment of additional terms.

A contract is formed if an offeree makes a definite expression of acceptance, even though the terms of the acceptance modify or add to the terms of the original offer. If at least one of the parties is a nonmerchant, the contract is formed according to the terms of the offer and does not include the additional terms of the acceptance. If both parties are merchants, the additional terms become part of the contract unless: 1. The original offer expressly required acceptance of its terms. 2. The new terms materially alter the contract. 3. The offeror rejects the new terms within a reasonable time. Regardless of merchant status, an offeree's expression is not an acceptance if the new terms are expressly conditioned on the offeror's consent.

sales contract

A contract to sell goods.

Course of Performance

A course of performance is the conduct that occurs under the terms of a particular agreement. The parties know best what they meant by their words, and the course of performance actually undertaken is the best indication of what they meant.

Sufficiency of the Writing

A writing, including an e-mail or other electronic record, will be sufficient as long as 1. it indicates that the parties intended to form a contract and 2. it is signed by the party against whom enforcement is sought. The contract will not be enforceable beyond the quantity of goods shown in the writing, but all other terms can be proved in court by oral testimony. For leases, the writing must reasonably identify and describe the goods leased and the lease term.

Acceptance

Acceptance of an offer to buy, sell, or lease goods generally may be made in any reasonable manner and by any reasonable means. The UCC permits acceptance of an offer to buy goods by either a promise to ship or the prompt shipment of conforming or nonconforming goods to the buyer. *Conforming goods accord with the contract's terms, whereas nonconforming goods do not.*

Open Terms

According to general contract law, an offer must be definite enough for the parties (and the courts) to understand its essential terms when it is accepted. In contrast, the UCC states that *a sales or lease contract will not fail for indefiniteness even if one or more terms are left open*, as long as both of the following factors are true: *1.* The parties intended to make a contract. *2.* There is a reasonably certain basis for the court to grant an appropriate remedy. The UCC provides numerous open-term provisions that can be used to fill the gaps in a contract. Thus, in the case of a dispute, all that is necessary to prove the existence of a contract is an indication (such as a purchase order) that there is a contract. Missing terms can be proved by evidence, or the courts will presume that what the parties intended was whatever is reasonable. The quantity of goods involved must be expressly stated, however. If the quantity term is left open, the courts will have no basis for determining a remedy.

Who Is a Merchant?

Article 2 applies to sales transactions between all buyers and sellers. In certain situations, however, the UCC imposes special rules on merchants because of their commercial expertise. Under the UCC, *a merchant is a person who deals in goods of the kind involved in the sales contract*. In addition, a merchant is someone who *holds himself or herself out as having knowledge and skill unique to the practices or goods involved in the transaction*.

Article 2 of the UCC

Article 2 of the UCC *governs sales contract*, or contracts for the sale of goods. Article 2 modifies some of the common law contract requirements discussed in previous chapters. To the extent that it has not been modified by the UCC, however, the common law also applies to sales contracts. Article 2A of the UCC covers *leases of goods*. Article 2A is essentially a repetition of Article 2, but it varies to reflect the difference between sales and lease transactions.

Learning Outcome 1: State the scope of Article 2 of the UCC.

Article 2 of the UCC governs contracts for sales of goods. Under the UCC, a sale is "the passing of title"—the formal right of ownership—"from the seller to the buyer for a price." To be characterized as a good, an item of property must be tangible and movable.

Goods Associated with Real Estate

Goods associated with real estate can fall within the scope of Article 2. For instance, a contract for the sale of minerals (including oil and gas) is a contract for a sale of goods if they are to be severed, or detached, from the land by the seller. A sale of growing crops or timber to be cut is a contract for a sale of goods regardless of who severs them. Other "things attached" to real estate but capable of severance without material harm to the real estate (such as a window air conditioner) are considered goods regardless of who severs them from the land.

Shipment of Nonconforming Goods

If the seller promptly ships nonconforming goods, this shipment constitutes both an acceptance of an *offer (a contract) and a breach*. This rule does not apply, however, if the seller notifies the buyer within a reasonable amount of time that the nonconforming shipment is offered only as an accommodation. The notice of accommodation must clearly indicate that the shipment does not constitute an acceptance and that, therefore, no contract has been formed.

Offer

In general contract law, the moment a definite offer is met by an unqualified acceptance, a binding contract is formed. In commercial sales transactions, the verbal exchanges, the correspondence, and the actions of the parties may not reveal exactly when a binding contract arises. The UCC states that an agreement sufficient to constitute a contract can exist even if the moment of its making is undetermined.

When Modification without Consideration Requires a Writing

In some situations, modification without consideration must be written to be enforceable. The contract may prohibit any changes unless they are in a signed writing. Also, any modification that brings a sales contract under the UCC's Statute of Frauds will require that the modification be written.

What Is a Lease?

Leases of goods—such as automobiles and industrial equipment—have become increasingly common in today's business world. In this context, a *lease is a transfer of the right to possess and use goods for a period of time in exchange for payment*. The UCC's Article 2A covers these lease agreements. Article 2A defines a lease agreement as the lessor's and lessee's bargain, as found in their language and as implied by other circumstance. A *lessor* is one who transfers the right to the possession and use of goods under a lease. A *lessee* is one who acquires the right to the possession and use of goods under a lease.

Written Confirmation between Merchants

Merchants can satisfy the requirements of a writing for the Statute of Frauds if, after they have agreed orally, one of the merchants sends a signed written confirmation to the other. If the merchant who receives the confirmation objects to its contents, he or she must give written notice of objection within ten days of receipt. Otherwise, the writing is sufficient against the receiving merchant, even though he or she has not signed anything.

Modifications Must Be Made in Good Faith

Of course, contract modification must be sought in good faith. Good faith in the case of a merchant means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade. Modifications extorted from the other party are in bad faith and unenforceable.

The Parol Evidence Rule

Often, a contract completely sets forth all the terms and conditions agreed to by the parties that are intended as a final statement of their agreement. Such a contract cannot be contradicted by evidence of any other agreements between the parties. This is the parol evidence rule. If, however, the writing contains some of the terms the parties agreed on but not others, a court might allow evidence to explain or supplement the terms in the contract. Such evidence may include consistent additional terms or information about course of dealing, usage of trade, or course of performance.

Notice of Acceptance

Recall that a unilateral offer invites acceptance by performance. Under the common law, the offeree need not notify the offeror (a person who makes an offer) of the performance unless the offeror would not otherwise know about it. Under the UCC, however, the offeror must be notified of the offeree's performance (acceptance) within a reasonable time. Otherwise, the offeror can treat the offer as having lapsed.

Additional Terms

Recall that under the common law, the mirror image rule requires that the terms of the acceptance exactly match those of the offer. To avoid these types of voided contracts, the UCC dispenses with the mirror image rule. Under the UCC, a contract is formed if the offeree makes a definite expression of acceptance, such as signing the form in the appropriate location. This is true even if the terms of the acceptance either modify or add to the terms of the original offer. What happens to these new terms? The answer depends on whether the parties are nonmerchants or merchants. 1. When at least one of the parties is a nonmerchant—If one of the parties is a nonmerchant (or if both are nonmerchants), the contract is formed according to the terms of the original offer and not according to the new terms of the acceptance. 2. When both parties are merchants—When both parties to the contract are merchants, the additional terms automatically become part of the contract. There are, however, three exceptions to this rule. The terms do not become part of the contract if *a.* the original offer expressly required acceptance of its terms, *b.* the new terms materially alter the contract, or *c.* the offeror rejects the new terms within a reasonable time. Terms subject to the offeror's consent—Regardless of merchant status, the offeree's expression is not an acceptance if the new terms are expressly conditioned on the offeror's consent.

Consistent Additional Terms

Sometimes, a court finds an ambiguity in a writing that is supposed to be a complete statement of the agreement between the parties. The court may accept evidence of consistent additional terms to clarify or remove the ambiguity. The court will not, however, accept evidence of contradictory terms.

The UCC's Statute of Frauds

The UCC contains a Statute of Frauds provision that applies to contracts for the sale or lease of goods. A contract for the sale of goods priced at $500 or more or the lease of goods involving total payments of $1,000 or more must be in writing to be enforceable. The parties can initially agree orally, so long as the agreement is evidenced by a later writing.

Consideration

The UCC radically changes the common law rule that contract modification must be supported by new consideration. Under the UCC, an agreement modifying a contract needs no consideration to be binding.

Goods and Services Combined

The majority of courts treat contracts for services as being excluded from Article 2 of the UCC. In cases in which goods and services are combined, however, courts disagree. For instance, is the blood furnished to a patient during an operation a sale of goods or the performance of a medical service? Some courts say it is a good, but others say it is a service. Because the UCC does not provide the answer, the courts generally use the *predominant-factor test* to determine whether a contract is primarily for the sale of goods or for the sale of services. If a court decides that a mixed contract is primarily a goods contract, any dispute, even a dispute over the services portion, will be decided under the UCC.

Exceptions to the UCC's Statute of Frauds

There are three exceptions to the UCC's Statute of Frauds requirement. An oral contract subject to the Statute of Frauds will be enforceable despite the absence of a writing in the following circumstances: *1. Specially manufactured goods*—An oral contract is enforceable if *a.* it is for goods that are specially manufactured for a particular buyer or specially manufactured or obtained for a particular lessee, *b.* these goods are not suitable for resale or lease to others in the ordinary course of the seller's or lessor's business, and *c.* the seller or lessor has substantially started to manufacture the goods or has made commitments to manufacture or obtain the goods. In this situation, the buyer or lessee cannot reject the agreement claiming the Statute of Frauds as a defense. *2. Admissions*—An oral contract is enforceable if the party against whom enforcement is sought admits under oath that a contract was made. The contract will be enforceable even though it was oral, but enforceability will be limited to the quantity of goods admitted. *3. Partial performance*—An oral contract is enforceable if payment has been made and accepted or goods have been received and accepted. This is the "partial performance" exception. The oral contract will be enforced at least to the extent of the performance that actually took place.

What Are Goods?

To be characterized as a good, an item of property must be tangible. *Tangible property* has physical existence—it can be touched or seen and carried from place to place. *Intangible property*—such as corporate stocks and bonds, patents and copyrights, and ordinary contract rights—has only conceptual existence and thus does not come under Article 2. In addition, a good must be *movable*. A movable item can be carried from place to place. Because it is not movable, real estate is excluded from Article 2. Real estate includes land, interests in land, and things permanently attached to the land.

What Is a Sale?

Under Article 2 of the UCC, a sale is defined as "*the passing of title from the seller to the buyer for a price*." Here, title refers to the formal right of ownership of property. The price may be payable in cash (or its equivalent) or in other goods or services.

Merchant's Firm Offer

Under regular contract principles, an offer can be revoked at any time before acceptance. The UCC has an exception that applies only to firm offer for the sale or lease of goods made by a merchant (regardless of whether the offeree is a merchant). A firm offer exists if a merchant gives assurances in a signed writing that the offer will remain open. A firm offer is irrevocable for the stated period or, if no definite period is stated, for a reasonable period (neither to exceed three months).

Learning Outcome 4: Discuss the UCC's Statute of Frauds.

Under the UCC, a contract for a sale of goods priced at $500 or more or a lease of goods involving total payments of $1,000 or more must be in writing to be enforceable. A writing is sufficient if it indicates that the parties intended to form a contract and is signed by the party against whom enforcement is sought. An oral contract may be enforceable despite the absence of a writing if 1. it involves specially manufactured goods 2. the party against whom enforcement is sought admits under oath that a contract was made 3. partial performance has occurred

Learning Outcome 2: Identify how the UCC deals with open contract terms.

Under the UCC, a sales or lease contract will not fail for indefiniteness even if one or more terms are left open as long as 1. the parties intended to make a contract 2. there is a reasonably certain basis for the court to grant an appropriate remedy. The UCC offers numerous open-term provisions that can be used to fill the gaps in a contract. The quantity of goods must be expressly stated, however.

Course of Dealing and Usage of Trade

Under the UCC, the meaning of any agreement, evidenced by the language of the parties and by their actions, must be interpreted in light of commercial practices and other surrounding circumstances. In interpreting an agreement, the court will assume that the course of dealing between the parties and the usage of trade were taken into account when the agreement was phrased. A *course of dealing* is a sequence of previous actions and communications between the parties to a transaction that establishes a common basis for their understanding. A *usage of trade* is a more generally observed practice or method of dealing. Specifically, it is a practice or method of dealing observed so regularly in a place, vocation, or trade as to justify an expectation that it was observed in the transaction in question. A court will interpret the express terms of an agreement and an applicable course of dealing or usage of trade to be consistent with each other whenever reasonable. When such an interpretation is unreasonable, the express terms in the agreement will prevail.