Chapter 14: Sales and Lease Contracts
Express Warranty
Express Warranty: A seller's or lessor's oral or written promise, ancillary to an underlying sales or lease agreement, regarding the goods' quality, description, or performance. uThe following statements indicate express warranties: à §That the goods conform to any affirmation of fact or promise that the seller/lessor makes to the buyer/lessee about the goods. §That the goods conform to any description of them. §That the goods conform to any sample or model of the goods shown to the buyer or lessee.
Shipment and Destination Contracts: Shipment Contract: Seller is required (or authorized) to ship goods by carrier, the seller is required only to deliver the goods into the hands of the carrier, and title passes to the buyer at the time and place of shipment [UCC 2-401(2)(a)]. Destination Contract: Seller is required to deliver the goods to a particular destination. Title passes to the buyer when the goods are tendered at that destination [UCC 2-401(2)(b)].
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A lease is a transfer of the right to possess and use goods for a period of time in exchange for payment. §Lessor: One who transfers the right to the possession and use of goods under a lease [UCC 2A-103(1)(p)]. §Lessee: One who acquires the right to the possession and use of goods under a lease [UCC 2A-103(1)(o)].
Article 2A—Leases:
Contracts for the International Sale of Goods
International sales contracts between firms or individuals may be governed by the... -1980 United Nations Convention on Contracts for the International Sale of Goods (CISG). -The CISG governs contracts between parties in nations that have ratified it. -As of 2018, eighty-four nations have adopted the CISG. -Applicability of the CISG: The CISG does not apply to consumer contracts at all (unlike the UCC). -Neither the UCC nor CISG apply to contracts for services.
Performance and Breach - Obligations of the Seller/Lessor
Obligations of the Seller or Lessor: §Tender of delivery occurs when (the seller makes conforming goods available and gives the buyer notification to the buyer to take delivery [UCC 2-503(1), 2A-508(1)]. §Tender of delivery requires reasonable notice, reasonable hour, and manner. (Business hours) Generally, all goods must be tendered in one installment (unless agreed upon by parties)
Contracts for the International Sale of Goods
Remedies for Breach: §Article 74 of the CISG provides for monetary damages on a contract's breach. The measure of damages normally is the difference between the contract price and the market price of the goods. §Article 28 of the CISG also allows for specific performance as a remedy.
open terms
The UCC provides open-term provisions to fill the gaps in a contract - think of these as the "default settings..." Open Price Term: If parties have not agreed on pricing, court can determine "reasonable price at the time of delivery." Open Payment Term: Unless otherwise agreed, payment is due on delivery (COD). UCC2-310(a). Open Delivery Term: Unless otherwise agreed, buyer takes delivery at the seller's place of business. If no time or date specified, court will impose a reasonable time. Requirements Contract: Buyer agrees to purchase—and the seller agrees to sell—all or up to a stated amount of what the buyer requires. Example 14.4, pg. 292. Output Contract: Seller agrees to sell—and the buyer agrees to buy—all or up to a stated amount of what the seller produces.
Article 2 -- the sale of goods
VERY IMPORTANT! Parties to sales or lease contracts are free to agree to terms different from those stated in the UCC. §General rule is that whenever there is a conflict between a common law contract rule and the state statutory law based on the UCC, the UCC controls. PARTIES TO A CONTRACT CAN AGREE TO WHATEVER THEY WANT AS LONG AS IT IS LEGAL! THE UCC JUST PROVIDES "DEFAULT SETTINGS" IF YOU FORGET A TERM!
What is an Insurable Interest? A property interest sufficiently substantial to permit a party to insure against damage to the goods. Both buyers and sellers can have an insurable interest at the same time. uInsurable Interest of the Buyer/Lessee: Allows the buyer to obtain the necessary insurance coverage for identified goods before the risk of loss has passed. uInsurable Interest of the Seller/Lessor: A seller has an insurable interest in goods as long as she/he retains title to the goods. Even after title passes to a buyer, a seller who has a security interest in the goods still has an insurable interest. Example - auto lender.
What is an Insurable Interest?
Remedies for Breach of Contract - Buyers
When Seller or Lessor Delivers Nonconforming Goods: §Revocation of acceptance is not effective until notice is given to the seller or lessor. §This must occur within a reasonable time after the buyer or lessee either discovers or should have discovered the grounds for revocation. Right to Recover Damages for Accepted Goods: Seller/lessor of the breach must be notified within a reasonable time after the defect was/should have been discovered.
Identification: §Existing Goods: If the contract calls for the sale or lease of goods that already exist identification occurs at the time the contract is made. Ex. 14.11. §Future Goods: Any goods that are not in existence at the time of contracting. The following rules apply: §Unborn animals to be born within twelve months of contracting, identification takes place when the animals are conceived. §Crops that are to be harvested within twelve months, identification takes place when the crops are planted.
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Delivery without Movement of Goods: §Goods Held by a Bailee: When goods are held by bailee, ROL passes when •Buyer receives negotiable document of title for the goods. •Bailee acknowledges buyer's right to possess goods. •Buyer receives nonnegotiable title and has reasonable time to pick up goods.
insurable interest
warranties
uWarranty Disclaimers: A seller/lessor can disclaim all oral express warranties by a written disclaimer including in the contract. §The disclaimer must be in language that is clear and conspicuous and must be called to a buyer's or lessee's attention. §This allows the seller or lessor to avoid false allegations that oral warranties were made. §Note that a buyer or lessee must be made aware of any warranty disclaimers or modifications at the time the contract is formed.
Remedies for Breach of Contract - Buyers
uWhen Seller or Lessor Refuses to Deliver the Goods: §The Right to Replevy Goods: The buyer has the right to sue to obtain identified goods held by a third party (replevy goods). Under the UCC, a buyer or lessee can replevy goods identified to the contract if the seller or lessor has repudiated or breached the contract. §The Right to Recover Damages: Buyer has the right to sue for damages. Measure of recovery is the difference between the contract price and the market price of the goods at the time the buyer learned of the breach. Case in Point 14.23, pg. 308 - incidental damages.
Warranties of Title
1) Seller warrants that it has good and valid title to the goods being sold and may rightfully transfer title to the buyer. u2) Seller warrants no liens: this protects buyers/lessees who are unaware of any liens. This protects buyers who unknowingly purchase goods that are subject to a creditor's security interest. u3) Seller warrants no infringements: warrants that the buyer takes the goods free of infringements from any copyright, trademark, or patent claims of a third person
warranties
A warranty is a guarantee by the seller or lessor of certain facts concerning the goods being sold or leased. uThe Uniform Commercial Code (UCC) has numerous rules governing product warranties in sales and lease contracts. uThree Basic Warranties of Title: Articles 2 (on sales) and 2A (on leases) designate several types of warranties including warranties of title, express warranties, and implied warranties. uUnder the UCC, a seller gives 3 warranties: 1) good title, 2) no liens, and 3) no infringements...
Express Warranty
Basis of the Bargain: Seller does not have to use words like "warranty." It is only necessary that a reasonable buyer/lessee would regard the representation as being part of the basis of the bargain. Statements of Opinion and Value: See Case in Point 14.25, pg. 311 - medical device. §Only statements of fact create express warranties. §Exception for statements of opinion by experts.
consideration
Consideration: §The UCC states that an agreement modifying a contract for the sale or lease of goods "needs no consideration to be binding" [UCC 2-209(1), 2A-208(1)]. §Any contract modification must still be made in good faith (UCC 1-304). §In some situations, an agreement to modify a sales or lease contract without consideration must be in writing to be enforceable.
Goods That Are Part of a Larger Mass:
Goods That Are Part of a Larger Mass: -Identified when the goods are marked, shipped, or designated by the seller/lessor as the particular goods to pass under the contract. Example 14.12, pg. 298. Fungible Goods: Goods that are alike by physical nature, by agreement, or by trade usage (e.g., grains of wheat). Owners of fungible goods typically hold title as tenants in common and can pass title and risk of loss to the buyer without actually separating the goods.
Article 2A leases
Offer: In general contract law, a binding contract is formed at the moment when a definite offer is met by an unqualified acceptance. The UCC relaxes this and allows for some open terms: uOpen Terms: UCC states that a sales or lease contract with open terms will not fail for indefiniteness if both the following are true: §The parties intended to make a contract. §There is a reasonably certain basis for the court to grant an appropriate remedy - for example, contract stating "market price."
§Right to Recover Damages for Buyer's Nonacceptance: If buyer repudiates goods, seller can bring action to recover damages (lost profits, OR contract price - market price, plus incidentals). §Right to Stop Delivery of Goods in Transit: Goods are "in transit" when seller has tendered goods to carrier. §Effect of Insolvency and Breach: •Buyer is insolvent: Seller can stop entire shipment of goods. •Buyer is in breach: Seller may stop a whole truckload or whole container.
Remedies for Breach Contract - Sellers
§Right to Withhold Delivery: If breach by buyer, seller can withhold delivery of all goods §The seller or lessor can also refuse to deliver the goods to a buyer or lessee who is insolvent unless the buyer or lessee pays in cash. §Right to Resell or Dispose of Goods: Seller can resell and hold buyer liable for difference. •Unfinished Goods: Seller can (1) cease manufacturing goods for scrap/salvage or (2) complete manufacture of the goods, sell them, and hold buyer responsible for deficiency.
Remedies for Breach Contract - Sellers
Remedies of the Seller or Lessor: When buyer lessee is in breach, seller has various remedies: uIf the goods are in the buyer's/lessee's possession, the seller/lessor can sue to recover the purchase price /lease payment due, plus incidental damages. If not, the seller/lessor has the right to pursue the following remedies: uThe Right to Cancel the Contract: If the buyer breaches, the seller can choose to cancel the contract Seller must notify buyer and buyer is not discharged from remaining obligations.
Remedies for Breach of Contract - Sellers
Remedies for Breach of Contract - Buyers
Remedies of the Buyer or Lessee: §The Right to Cancel the Contract: If Seller breaches, Buyer can cancel the contract. Buyer is relieved of any further obligations under the contract but retains all rights to other remedies against the seller or lessor. §The Right to Obtain the Goods upon Insolvency: The buyer can recover goods that have been paid for if the seller is insolvent—whether partial or full payment. Seller or lessor must have become insolvent within ten days after receiving the first payment and goods must be identified to the contract.
Contracts for the International Sale of Goods
Special Provisions in International Contracts: Parties must take special care when drafting international sales contracts to avoid problems caused by distance, including language differences and differences in national laws. uItems such as a choice-of-language clause will designate the official language of contract interpretation in case of a dispute. Also...choice of law and choice of forum.
Statute of Frauds
Special Rules for Merchants: §The Statute of Frauds is satisfied if after oral agreement, one of the merchants sends a signed, written memorandum containing essential terms to the other merchant within a reasonable time. Example 14.10, pg. 295. uExceptions: The UCC defines three exceptions to the writing requirements of the Statute of Frauds: 1) Specially Manufactured Goods: Oral contracts for specially manufactured goods will be enforced. Exceptions: 2) Admissions: Oral contract is enforceable if there are admissions by breaching party during court proceedings. 3) Partial Performance: An oral contract is enforceable IF payment has been made or goods have been accepted.
Statute of Frauds (UCC Article 2):
Statute of Frauds (UCC Article 2): Any modification that makes a sales contract come under Article 2's writing requirement usually requires a writing to be enforceable. uSales contracts for goods priced at $500+ and lease contracts requiring total payments of $1,000+ must be in writing to be enforceable [UCC 2-201(1), 2A-201(1)].
Sufficiency of the Writing:
Sufficiency of the Writing: A writing, including an e-mail or other electronic record, will be sufficient to satisfy the UCC's Statute of Frauds if it: §Indicates that the parties intended to form a contract. §Is signed by the party (or agent of the party) against whom enforcement is sought. §The contract normally will not be enforceable beyond the quantity of goods shown in the writing. §For leases, the writing must reasonably identify and describe the goods leased and the lease term.
Performance and Breach of Sales and Lease Contracts
The seller must transfer and deliver conforming goods, and the buyer must accept and pay for conforming goods [UCC 2-301, 2A-516(1)]. -Every party to every contract for the sale or lease of goods owes every other party a duty of good faith (honesty in fact).
Unconscionability: The UCC allows courts to evaluate a contract and if the court deems it to have been unconscionable when made, the court can: §Refuse to enforce the contract. §Enforce the remainder of the contract without the unconscionable part. §Limit application of the unconscionable term to avoid an unconscionable result.
Unconscionability
Remedies for Breach of Contract - Buyers
When Seller or Lessor Delivers Nonconforming Goods: §The Right to Reject Goods: Buyer or lessee can reject all of the goods or any commercial unit of the goods. §Buyer or lessee may obtain cover or cancel the contract and may seek damages just as if the seller or lessor had refused to deliver the goods. Revocation of Acceptance: The acceptance of a lot or a commercial unit can be revoked if the nonconformity substantially impairs the value of the lot
Remedies for Breach of Contract - Buyers
When Seller or Lessor Refuses to Deliver the Goods: §The Right to Obtain Specific Performance: The buyer has the right to sue to obtain specific performance and recover damages if the goods are unique. uWhen Seller or Lessor Refuses to Deliver the Goods: §The Right of Cover: The buyer can purchase other goods (obtain cover) and recover damages from the seller. (Quench Example)
When Title Passes: Without an explicit agreement to the contrary, title passes to the buyer at the time and the place the seller performs by delivering the goods [UCC 2-401(2)]. à See Case in Point 1
When Title Passes: Without an explicit agreement to the contrary, title passes to the buyer at the time and the place the seller performs by delivering the goods [UCC 2-401(2)]. à See Case in Point 1
Who is responsible for the goods at various times? Who bears the risk of loss before, during, after transit? Who has what rights and when?
Who is responsible for the goods at various times? Who bears the risk of loss before, during, after transit? Who has what rights and when? -UCC Replaces the concept of "Title" with u1) Identification u2) Who bears the Risk of Loss u3) Creation of an Insurable Interest Identification takes place when specific goods are designated as the subject matter of a contract.
Warranties Implied from Prior Dealings or Trade Custom: Without evidence to the contrary, when both parties to the contract have knowledge of a well-recognized trade custom, courts will infer that both parties intended for that custom to apply to their contract.
implied warranties
An implied warranty is one that is implied by the nature of the transaction or the situations of the parties. §Merchantability: Goods sold by a merchant who deals in goods of the kind sold gives rise to an implied warranty of merchantability...but this isn't that much of a warranty...goods must only be... §"Reasonably fit for the ordinary purposes for which such goods are used." §Of average, fair, or medium grade. §Adequately packaged and labeled. §Conform to promises on label.
implied warranty
Merchantability: Warranty of merchantability may be breached even if merchant did not know or could not have discovered that a product was defective. See Case in Point 14.26, pg. 312 - pipe with defective grade of steel. Fitness for a Particular Purpose: Arises when a seller/lessor knows both of the following: §The particular purpose for which a buyer or lessee will use the goods. See Example 14.27, pg. 213 - paint. §That the buyer or lessee is relying on the skill and judgment of the seller or lessor to select suitable goods §
implied warranty
Delivery without Movement of Goods: §Often goods are held by a bailee on behalf of the seller in a bailment. •Documents of title such as a bill of lading give bailee possession of goods and/or contracts to deliver them. Examples: Warehouse, trucking company.
insurable interest
Delivery without Movement of Goods: §When the contract does not call for the seller to ship/deliver the goods, passage of title depends on whether the seller must give the buyer a document of title such as a bill of lading or a warehouse receipt. §Title Document Is Required: Title passes to the buyer when and where the document is delivered. Title Document Is Not Required: If the goods are identified to the contract, title passes at the time and place that the sales contract was made.
insurable interest
Delivery without Movement of Goods: •Nonmerchants: If the seller is not a merchant, the ROL to goods held by the seller passes to the buyer on tender of delivery [UCC 2-509(3)]. •Merchants: If the seller is a merchant, ROL to goods held by the seller passes to the buyer when the buyer actually takes physical possession of the goods [UCC 2-509(3)].
insurable interest
ROL When Sales (or Lease) Contract Is Breached: Depends on which party breached, breaching party usually bears ROL. When the Seller or Lessor Breaches: If buyer has the right to reject the goods, ROL does not pass to the buyer until either the defects are cured OR the buyer accepts the goods. When the Buyer or Lessee Breaches: The general rule is that when a buyer or lessee breaches a contract, the risk of loss immediately shifts to the buyer or lessee.
insurable interest
The time that risk of loss (ROL) passes from a seller or lessor to a buyer or lessee is generally determined by the contract between the parties. §Shipment Contracts: Risk of loss in a shipment contract passes to the buyer or lessee when the goods are delivered to the carrier [UCC 2-509(1)(a), 2A-219(2)(a)]. See Example 14.16, pg. 301. §Destination Contracts: Risk of loss passes to the buyer or lessee when the goods are tendered to the buyer or lessee at the specified destination [UCC 2-509(1)(b), 2A-219(2)(b)].
insurable interest
Acceptance: Buyer can accept goods: §By words or conduct. §If buyer had reasonable amount of time and failed to reject. §Buyer performs an act that is inconsistent with the seller's ownership. -Partial Acceptance: If some of the goods do not conform to the contract, and seller has failed to cure, buyer can make a partial acceptance
obligations of the seller/lessor
Anticipatory Repudiation: When a party communicates intention to not perform when performance is due. §Nonbreaching party may treat the repudiation as (1) a final breach and pursue a remedy or (2) wait a reasonable time to see if contract is honored. §In either situation, nonbreaching party can suspend performance. §The UCC permits breaching party to "retract" repudiation so long as the nonbreaching party has not materially changed their position.
obligations of the seller/lessor
Commercial Impracticability: Events that were unforeseen by either party may make performance commercially impracticable. Only unforeseeable events provide a defense
obligations of the seller/lessor
Delivery via Carrier: §Destination Contracts: Seller has duty to: •Tender the goods at a reasonable hour. •Hold the goods available for a reasonable period of time for the buyer/lessee to take possession. •Obtain and promptly deliver any documents the buyer/lessee needs to take possession of the goods from the carrier. •Give appropriate notice to the buyer/lessee that goods are available for her to take delivery.
obligations of the seller/lessor
Exceptions to the Perfect Tender Rule: §Agreement of the Parties to accept. §Cure: The right of the seller repair or replace defective or nonconforming goods. §Substitution of Carriers: An agreed-on manner of delivery may become impracticable or unavailable through no fault of either party. If a commercially reasonable substitute is available, this substitute performance is sufficient tender to the buyer and may be used.
obligations of the seller/lessor
Obligations of the Buyer or Lessee uPayment: Unless agreed otherwise, the buyer must make payment at the time and place the goods are received. uRight of Inspection: Buyer has absolute right to inspection before payment, unless C.O.D. §Goods must be conforming before payment. If the goods are not as ordered, the buyer or lessee has no duty to pay. Inspection can take place at any reasonable place/time and in any reasonable manner.
obligations of the seller/lessor
The Perfect Tender Rule: §Seller is obligated to ship or tender conforming goods. §Buyer is obligated to accept and pay for the goods. uIf 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. §Accept part and reject part.
obligations of the seller/lessor
§Destruction of Identified Goods: §An unexpected event may totally destroy the goods through no fault of either party. §1) If the goods were identified at the time of contract formation, the parties are excused from performance §2) If the goods are partially destroyed, the buyer or lessee can inspect them and either treat the contract as void OR accept the damaged goods with a price reduction.
obligations of the seller/lessor
Warranty Disclaimers: §Unless circumstances indicate otherwise, warranties of fitness and merchantability can be disclaimed with the words "as is" or "with all faults." §The disclaimer does not need to be written, but if it is, the writing must be conspicuous. §To disclaim an implied warranty of fitness for a particular purpose, the disclaimer must be in a writing and must be conspicuous.
warranties
Goods and Services Combined: A court will generally use the predominant-factor test to determine whether a contract for a combination of goods and services is primarily for the sale of goods or the sale of services. If a court decides that a mixed contract is primarily a goods contract, any dispute will be decided under the UCC.
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§Goods Associated with Real Estate: Goods such as minerals, gas, or oil fall within the scope of Article 2 (UCC 2-107) if severance is to be made by the seller. Contracts for the sale of growing crops or timber to be cut is also a contract for the sale of goods regardless of who severs them from the land.
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1: The Scope of Articles 2 (Sales) and 2A (Leases)
§Article 2 of The Uniform Commercial Code (UCC) preempts common law in the sale of goods and modifies the common law of contracts in some areas. But where UCC 2 is silent, common law governs. UCC 2 applies to sales of goods while common law governs real estate, services or intangible property. UCC 2 also applies to leases of goods. What Is a "Sale"? The passing of title from seller to a buyer for a price (payable in cash, goods, services). See Case in Point 14.1, pg. 287. What is a "Good"? An item of property that is tangible and movable
Who Is a "Merchant"?
§UCC Article 2 imposes special standards upon a "merchant" who has special business expertise and is not a caual buyer/seller. §A merchant: •Deals in goods of the kind in the sale. •Holds herself out as having special expertise, knowledge, or skill. •Is a person who employs a merchant as a broker, agent, or other intermediary.