Copyright © 2009 by Pearson Prentice Hall. All rights reserved. PowerPoint Slides to Accompany CONTEMPORARY BUSINESS AND ONLINE COMMERCE LAW 6 th Edition by Henry R. Cheeseman Chapter 16 Formation of Sales, Lease, and E-Contracts

16 - 2Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Uniform Commercial Code (UCC) Comprehensive statutory scheme Serves as a model act The UCC includes laws that cover most aspects of commercial transactions Every state (except Louisiana) has enacted the UCC as their commercial law statute

16 - 3Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Overview of the Uniform Commercial Code (UCC) (1 of 2) Article 1General provisions Article 2 (revised) Sales Article 2ALeases Article 3Negotiable instruments Article 4Bank deposits & collections Article 4AWire transfers Article 5Letter of Credit Article 1General provisions Article 2 (revised) Sales Article 2ALeases Article 3Negotiable instruments Article 4Bank deposits & collections Article 4AWire transfers Article 5Letter of Credit

16 - 4Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Overview of the Uniform Commercial Code (UCC) (2 of 2) Article 6Bulk transfers Article 7Documents of title Article 8Investment securities Article 9 (revised) Secured transactions Article 6Bulk transfers Article 7Documents of title Article 8Investment securities Article 9 (revised) Secured transactions

16 - 5Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Scope of Article 2 (Sales) All states except Louisiana have adopted some version of Article 2 (Sales) of the UCC Article 2 is also applied by federal courts to sales contracts governed by federal law Article 2 establishes rules that govern the sale of goods Article 2 has recently been revised Has been adopted by some states

16 - 6Copyright © 2009 by Pearson Prentice Hall. All rights reserved. What is a Sale? sale A sale is the passing of title from a seller to a buyer for a price [UCC 2-106(1)] Dell Computer Corporation (seller) Big Cheese Corporation (purchaser) Sale of computer Payment

16 - 7Copyright © 2009 by Pearson Prentice Hall. All rights reserved. What Are Goods? Goodstangible things Goods are defined as tangible things that are movable at the time of their identification to the contract [UCC 2-105(1)] Money and intangible items such as stocks, bonds, and patents are not tangible goods Real estate is not a tangible good because it is not movable Contracts for provision of services are not covered by Article 2

16 - 8Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Who is a Merchant? A person who: 1.Deals in the goods of the kind involved in the transaction, or 2.By his or her occupation holds himself or herself out as having knowledge or skill peculiar to the goods involved in the transaction. [UCC 2-104(1)]

16 - 9Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Scope of Article 2A (Leases) Article 2Aleases Article 2A applies only to leases involving goods Article 2A does not apply to real estate or other leases Many states have adopted Article 2A

Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Definition of a Lease Lease Lease – a transfer of the right to the possession and use of the named goods for a set term in return for certain consideration [UCC 2A-103(1)(i)(x)] Lessor Lessor – the person who transfers the right of possession and use of goods under the lease. Lessee Lessee – the person who acquires the right to possession and use of goods under a lease. Lease Lease – a transfer of the right to the possession and use of the named goods for a set term in return for certain consideration [UCC 2A-103(1)(i)(x)] Lessor Lessor – the person who transfers the right of possession and use of goods under the lease. Lessee Lessee – the person who acquires the right to possession and use of goods under a lease. Lease Equipment Dow Chemical Company (lessee) Ingersoll-Rand Corporation (lessor)

Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Finance Lease A three-party transaction consisting of the lessor, the lessee, and the supplier 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)]

Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Example of a Finance Lease Transaction Boeing Aircraft Company (seller) City Bank (purchaser) (lessor) Jet Blue Airline Co. (lessee) Delivery of airplane Sale of airplane Payment Lease payments Lease

Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Formation of Sales and Lease Contracts (1 of 6) Any rules established by Articles 2 and 2A take precedence over the common law of contracts Offer 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 [UCC 2-204(1), 2A-204(1)]

Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Formation of Sales and Lease Contracts (2 of 6) Open Terms Sometimes the parties to a sales or lease contract leave open a major term in the contract Open Price Term Open Payment Term Open Delivery Term Open Time Term Open Assortment Term Open Terms Sometimes the parties to a sales or lease contract leave open a major term in the contract Open Price Term Open Payment Term Open Delivery Term Open Time Term Open Assortment Term read into These open terms are permitted to be read into a sales or lease contract gap- filling rule This rule is commonly referred to as the gap- filling rule [UCC 2-204(3), 2A-204(3)] read into These open terms are permitted to be read into a sales or lease contract gap- filling rule This rule is commonly referred to as the gap- filling rule [UCC 2-204(3), 2A-204(3)]

Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Formation of Sales and Lease Contracts (3 of 6) Firm Offer Rule Firm Offer Rule [UCC 2-205, 2A-205] 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 Three months is the maximum amount of time permitted under this rule

Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Formation of Sales and Lease Contracts (4 of 6) Acceptance Acceptance The UCC provides that a contract is created when the offeree (i.e., the buyer or lessee) sends an acceptance to the offeror, not when the offeror receives the acceptance The UCC permits acceptance by any reasonable manner or method of communication [UCC 2-206(1)(a), 2A-206(1)]

Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Formation of Sales and Lease Contracts (5 of 6) Accommodation Shipment Accommodation Shipment A shipment that is offered to the buyer as a replacement for the original shipment when the original shipment cannot be filled The accommodation is a counteroffer from the seller to the buyer The buyer is free either to accept or to reject the counteroffer [UCC 2-206(1)(b)]

Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Formation of Sales and Lease Contracts (6 of 6) Consideration Consideration The formation of sales and lease contracts requires consideration Under the UCC, 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]

Copyright © 2009 by Pearson Prentice Hall. All rights reserved. UCC Statute of Frauds A rule that requires all contracts for the sale of goods costing $500 or more, and lease contracts involving payments of $1,000 or more be in writing [UCC (1), 2A-201(1)] The writing must be sufficient to indicate that a contract has been made between the parties

Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Exceptions to the Statute of Frauds The following are exceptions to the Writing Requirement of the UCC Statute of Frauds: Specially manufactured goods Admissions in pleadings or court Part acceptance [UCC 2-201(3), UCC 2A-201(4)]

Copyright © 2009 by Pearson Prentice Hall. All rights reserved. UCC Written Confirmation Rule If both parties to an oral sales or lease contract are merchants, the Statute of Frauds requirements are satisfied if: written confirmation 1.One of the parties sends a written confirmation of the sale to the other within a reasonable time after contracting, and 2.The other merchant does not give written notice of an objection to the contract within ten days after receiving the confirmation [UCC 2-201(2)]

Copyright © 2009 by Pearson Prentice Hall. All rights reserved. When Written Modification is Required Oral modification is not enforceable if the parties agree that any modification of the sales or lease contract must be in a signed 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.

Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Parol Evidence A rule that 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 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]

Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Comparison of Contract Law and the Law of Sales (1 of 3) TopicCommon Law of Contracts UCC Law of Sales DefinitenessContract must contain all of the material terms of the parties agreement. UCC gap-filling rules permit terms to be implied if the parties intended to make a contract. [UCC 2-204] Irrevocable Offers Option contracts.Option contracts. Firm offers by merchants to keep an offer open are binding up to three months without any consideration. [UCC 2-205]

Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Comparison of Contract Law and the Law of Sales (2 of 3) TopicCommon Law of Contracts UCC Law of Sales CounteroffersAcceptance 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. [UCC 2-207] ModificationConsideration is required. Consideration is not required. [UCC 2-209]

Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Comparison of Contract Law and the Law of Sales (3 of 3) TopicCommon Law of Contracts UCC Law of Sales Statute of Frauds Writing must be signed by the party against whom enforcement is sought. Writing may be enforced against a party who has not signed it if (1) both parties are merchants, (2) one party sends a written confirmation of their oral agreement within a reasonable time after contracting, and (3) the other party does not give written notice of objection within ten days after receiving the confirmation. [UCC 2-201]

Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Use of Letters of Credit in International Trade letter of credit The irrevocable letter of credit has been developed to manage the risks in international sales. The function of a letter of credit is to substitute the credit of a recognized international bank for that of the buyer.