Chapter 019 - Formation of Sales & Lease Contracts

CHAPTER 12

Chapter 18 Formation of Sales and Lease Contracts

FORMATION OF SALES AND LEASE CONTRACTS © 2010 Pearson Education, Inc., publishing as Prentice-Hall

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Uniform Commercial Code (UCC) • Model act • Comprehensive statutory scheme to cover most aspects of commercial transactions

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Overview of UCC • Article 1

General provisions

• Article 2

Sale of goods

• Article 2A Leases of goods • Article 3

Negotiable instruments

• Article 4

Bank deposits, collections

• Article 4A Wire transfers

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Overview of UCC (continued) • Article 5

Letters of credit

• Article 6

Bulk transfers

• Article 7

Documents of title

• Article 8

Investment securities

• Article 9

Secured transactions

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Article 2 (Sale of goods) • All states except Louisiana have adopted. • Article 2 is also applied by federal courts to sales contracts governed by federal law. • If Article 2 is silent on an issue, common law of contracts applies.

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What is a Sale? • What is a sale? – The passing of title from a seller to a buyer for a price.

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What are Goods? • Tangible things that are movable at the time of their identification to the contract. – E.g., car, book, sweater, corn. • Money and intangible items such as stocks, bonds, and patents are not tangible goods. • Real estate and services are not goods.

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Services • Services not covered by Article 2. • Mixed sales involve both goods and services. – E.g., contract to buy carpet and have it installed; contract to have medical device implanted. • Article 2 applies to mixed sales only if the goods are predominant part of the transaction.

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Who is a Merchant? • •

One who deals in the goods of the kind involved in the transaction, or By his or her occupation holds himself or herself out as having knowledge or skill peculiar to the goods involved in the transaction. −

E.g., appliance dealer is merchant with respect to refrigerators. Not a merchant when sells a car.

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Article 2A (Leases) • Article 2A applies only to leases involving goods. • Article 2A does not apply to real estate or other leases.

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What is a Lease? • Transfer of right to possession and use of named goods for a set term, in return for certain consideration. – Lessor – person who transfers right of possession and use of goods. – Lessee – person who acquires right to possession and use of goods.

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Finance Lease • Three-party transaction consisting of lessor, lessee, and supplier. • Lessor does not select, manufacture, or supply the goods. • Lessor acquires title to goods or right to their possession and use.

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Finance Lease (continued)

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Offer • A contract for the sale or lease of goods may be made in any manner sufficient to show agreement. • This includes conduct by both parties that recognizes the existence of a contract. • A contract may be found even though the moment of its making is undetermined.

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Open Terms • Open terms acceptable • Gap-fillers – Price – Payment – Delivery – Time – Assortment

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Firm Offer Rule • A merchant who (1) offers to buy, sell, or lease goods, and (2) gives written and signed assurance on separate form that offer will be held open, – cannot revoke offer for time stated or, – if no time is stated, for a reasonable time. – Three months is the maximum amount of time permitted under this rule.

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Consideration • Formation of a sales and lease contract requires consideration. • Under the UCC, modifications to sales and lease contracts require no consideration. – Different from common law rule. – Modification must be made in good faith.

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Acceptance • Contract created when offeree sends acceptance to the offeror, not when offeror receives it. – Same as common law rule. • The UCC permits acceptance by any reasonable manner or method of communication. – E.g., seller promises to ship or ships conforming goods.

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Additional Terms • Under common law mirror image rule, additional terms are considered a counteroffer. • Under UCC, additional terms are allowed unless acceptance is expressly conditional on assent to the stated terms. • If either party is a nonmerchant, additional terms are treated as proposed additions. • If both parties are merchants, additional terms may become part of the contract.

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Accommodation Shipment • Shipment that is offered to the buyer as substitution for the originally ordered goods when they are not available. • The accommodation is a counteroffer from the seller to the buyer. • The buyer is free either to accept or to reject the counteroffer.

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Statute of Frauds • All contracts for the sale of goods costing $500 or more, and lease contracts involving payments of $1,000 or more must be in writing. • Writing must be sufficient to indicate that a contract has been made between the parties.

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Exceptions to Statute of Frauds • Specially Manufactured Goods – E.g., custom-made machine, bowling shirts with team name embroidered.

• Admissions in Pleadings or Court • Part Acceptance

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Written Modification • Oral modification not enforceable if the parties agree that any modification of the sales or lease contract must be in a signed writing. • In absence of such agreement, oral modifications to sales and lease contracts are binding if they do not violate the Statute of Frauds.

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Written Confirmation Rule • If both parties are merchants, writing requirement satisfied if: – One party sends written confirmation, and – Other party fails to object in writing within 10 days.

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Parol Evidence Rule •

When sales or lease contract is evidenced by a writing that is intended to be a final expression of the parties’ agreement or confirmatory memorandum, the terms of the writing may not be contradicted by evidence of: • Prior oral or written agreement, or • Contemporaneous oral agreement.

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Parol Evidence Rule

(continued)

• If express terms are not clear on their face, reference may be made to certain outside sources: – Course of performance – Course of dealing – Usage of trade

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Comparison of Contract Law and Law of Sales (1 of 3) Topic

Common Law Contracts

Definiteness

Contract must contain all UCC gap-filling rules permit of the material terms of terms to be implied if the parties the parties’ agreement. intended to make a contract.

Irrevocable offers Option contracts.

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UCC Law of Sales

Option contracts. Firm offers by merchants to keep an offer open are binding up to three months without any consideration.

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Comparison of Contract Law and Law of Sales (2 of 3) Topic

Common Law Contracts

UCC Law of Sales

Counteroffers

Acceptance must be a mirror image of the offer. A counteroffer rejects and terminates the offer.

Additional terms of an acceptance become part of the contract if (1) they do not materially alter the terms of the offer and (2) the offeror does not object within a reasonable time after reviewing the acceptance.

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Comparison of Contract Law and Law of Sales (3 of 3) Topic

Common Law Contracts

Statute of Frauds

Writing must be signed by Writing may be enforced the party against whom against a party who has enforcement is sought. not signed it.

Modification

Consideration is required. Consideration is not required.

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UCC Law of Sales

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Proposed Revisions to Articles 2 and 2A • New e-commerce definitions – Electronic – Electronic Agent – Electronic Record – Record

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