Chapter 18 - Formation of Sales and Lease Contracts
mirror image rule
A common law rule that requires that the terms of the offeree's acceptance adhere exactly to the terms of the offeror's offer for a valid contract to be formed.
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.
UCC Statute of Frauds
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)].
Article 2 (Sales)
Article 2 of the UCC applies to transactions in goods [UCC 2-102]. All states have held that Article 2 applies to sales contracts 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)].
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.
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)].
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)].
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].
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)].
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].
Article 5 (Letters of Credit)
Letters of credit support the sale of goods. If a buyer wishes to purchase goods on credit from a seller, the seller may require the buyer to obtain a letter of credit from a bank. A letter of credit guarantees the seller that if the buyer does not pay for the goods, then the bank will pay the seller. A buyer of a letter of credit must pay a bank a fee to write the letter of credit. Letters of credit are governed by Article 5 (Letters of Credit) of the Uniform Commercial Code (UCC). Letters of credit are of significant importance in supporting the international sale of goods. Often a seller located in one country will sell goods on credit to a buyer located in another country only if the buyer submits a letter of credit from a bank guaranteeing payment if the buyer does not pay. Many banks require that international letters of credit be governed by the Uniform Customs and Practices for Documentary Credits (UCP).
Article 2A (Leases)
Personal property leases are a billion-dollar industry. Consumer leases of automobiles or equipment and commercial leases of items such as aircraft and industrial machinery fall into this category. Article 2A (Leases) of the UCC directly addresses personal property leases [UCC 2A-101]. It establishes a comprehensive, uniform law covering the formation, performance, and default of leases in goods [UCC 2A-102, 2A-103(h)]. 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)].
course of dealing
Prior conduct between parties to a contract that establishes a common basis for their understanding.
Goods
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: 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)].
Uniform Commercial Code
The UCC is a model act drafted by the American Law Institute and the National Conference of Commissioners on Uniform State Laws. This model act contains uniform rules that govern commercial transactions. For the UCC or any part of the UCC to become law in a state, that state needs to enact the UCC as its commercial law statute. Every state (except Louisiana, which has adopted only parts of the UCC) has enacted the UCC or the majority of the UCC as a commercial statute. The UCC is divided into articles, with each article establishing uniform rules for a particular facet of commerce in this country.
course of performance
The conduct that occurs under the terms of a particular agreement; such conduct indicates what the parties to an agreement intended it to mean.
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.
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 three months [UCC 2-205, 2A-205].
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.
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.
Electronic agent
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.
merchant
a person who deals in the goods of the kind involved in the transaction or (2) a person who by his or her 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 his or her lawn mower to a neighbor.
Electronic record (e-record)
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.
mixed sale
a sale that involves the provision of a service and a good in the same transaction
Finance Lease
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)].
Lease
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)].