Chapter 1: Legal Ethics 1

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objectives 1.How do Article 2 and 2A of the UCC differ? What types of transactions does each article cover? 2.What is a merchant’s firm offer? 3.In a sales contract, if an offeree includes additional or different terms in an acceptance, will a contract result? If so, what happens to those terms? 2

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objectives 4.Risk of loss does not necessarily pass with title. If the parties to a contract do not expressly agree when risk passes and the goods are to be delivered without movement by the seller, when does risk pass? 5.What law governs the international sale of goods? 3

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Scope of the UCC and Articles 2 (Sales) and 2A (Leases)  Facilitates commercial transactions.  UCC Article 2: – Governs contracts for sale of goods. – UCC Article 2 preempts common law. – Where UCC Article 2 is silent, common law governs. 4

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Article 2—Sales  Only applies to goods. – The common law of contracts governs real estate, services or intangible property. – Mixed Goods-Services: The Predominant-Factor Test. 5

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Ex Law Governing Contracts 6

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Article 2—Sales  What is a Sale? – Article 2 applies to the “sale of goods.” – A “sale” is the passing of title from seller to a buyer for a price (payable in cash, goods, services). 7

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Article 2—Sales  Article 2 applies to the “sale of goods.”  What are Goods? – Must be tangible and movable. Tangible: has physical existence. Movable: carried from place to place. 8

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Article 2—Sales  What are Goods? – Goods Associated with Real Estate can fall within Article 2 if: (1) Contract for sale of minerals or a structure is a good IF severance is made by seller. If severance by buyer, sale is governed by common law. (2) Sale of growing crops.  9

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Article 2—Sales  What are Goods? – Goods Associated with Real Estate can fall within Article 2 if: (3) Other “things” attached to real property, capable of being severed without harm to land. 10

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Article 2—Sales  Goods and Services Combined: what law governs? – “Predominant Factor” Test – if goods, then UCC governs, if services then common law governs entire contract. 11

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Article 2—Sales  Who is a Merchant? – UCC Article 2 imposes special standards upon a “merchant” who has special business expertise and is not a casual buyer/seller.  12

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Article 2—Sales  Who is a Merchant? – UCC Article 2 defines merchant as someone who: Deals in goods of the kind in the sale. Holds herself out as having special expertise, knowledge, or skill. Person who employs a merchant. 13

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Article 2A—Leases  Definition of a Lease Agreement: contract for lease of personal goods between a lessor and a lessee. – Lessor transfers right to possess and use goods under lease. – Lessee acquires right to possess and use goods.  14

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Article 2A—Leases  Consumer Leases: lessor, lessee who leases for personal, family, or household use, and total payments less than $25,000.  Finance Leases (involves a 3rd party- supplier). 15

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Offer. – At common law once a valid offer is unequivocally accepted, a binding contract is formed. – UCC is more flexible, and allows for open pricing, payment, and delivery terms. Formation of Sales and Lease Contracts 16

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Offer. – Open Terms. UCC 2-204: even if terms are undetermined, a contract may still exist. “Indefiniteness” is OK as long as the parties intended to make a contract and there is a reasonable basis for a court to grant a remedy.  Formation of Sales and Lease Contracts 17

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Offer. – Open Terms. Open Price term: If parties have not agreed on pricing, court can determine “reasonable price at the time of delivery.” Open Payment term: payment is due at the time and place in which buyer receives goods. Formation of Sales and Lease Contracts 18

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Offer. – Open Terms. Open Delivery term: Unless otherwise agreed, buyer takes delivery at the Seller’s place of business. UCC2-308(a). Seller has duty to make arrangements in good faith.  Formation of Sales and Lease Contracts 19

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Offer. – Open Terms. Open Quantity: generally courts will not impose a quantity and there is no remedy, unless the contract is either a requirements or output contract.  Formation of Sales and Lease Contracts 20

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Offer. – Open Terms. Open Quantity (exceptions). – Requirements Contract: buyer agrees to purchase what the buyer needs or requires. – Output Contract: buyer agrees to buy all of seller’s production or output. Formation of Sales and Lease Contracts 21

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Offer. – Merchant’s Firm Offer. Offer made by merchant in a signed writing is irrevocable for reasonable period of time. No consideration necessary. The Offer Must be in Writing and Signed by the Offeror. Formation of Sales and Lease Contracts 22

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Acceptance. – Either by prompt shipment of conforming or nonconforming goods. Non-conforming Goods: is both an acceptance and a breach unless goods sent as an “accommodation” to buyer, with prompt notice by buyer. Formation of Sales and Lease Contracts 23

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Acceptance. – Communication of Acceptance. – Additional Terms. If One Party is a Merchant: contract is formed according to original terms of the offer. C ASE 13.1 O FFICE S UPPLY S TORE. COM V. K ANSAS C ITY S CHOOL B OARD (2011). C ASE 13.1 O FFICE S UPPLY S TORE. COM V. K ANSAS C ITY S CHOOL B OARD (2011). Is this a fair decision to the retailer? Formation of Sales and Lease Contracts 24

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Acceptance. – Additional Terms. When Both Parties are Merchants, the contract incorporates new terms unless: – (1) original offer expressly limits terms, or – (2) material change, or – (3) offeror objects within reasonable time.  Formation of Sales and Lease Contracts 25

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Consideration. – UCC adopts common law rule requiring consideration. However, modifications do not need consideration. – Modifications Must be Made in Good Faith. Formation of Sales and Lease Contracts 26

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  The Statute of Frauds. – Sale of goods over $500 must have a signed writing to be enforceable. – Sufficiency of the Writing: signed by party against whom enforcement is sought. Normally not enforceable beyond quantity of goods shown in the writing.  Formation of Sales and Lease Contracts 27

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  The Statute of Frauds. – Special Rules for Contracts Between Merchants. After oral agreement, one of the merchants sends a signed, written memorandum containing essential terms to the other merchant within a reasonable time. Formation of Sales and Lease Contracts 28

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  The Statute of Frauds. EXCEPTIONS: – Specially manufactured goods. – Admissions by breaching party. – Partial Performance: oral contract is enforceable IF payment has been made or goods have been accepted. Formation of Sales and Lease Contracts 29

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Formation of Sales and Lease Contracts  Parol Evidence. – Terms of a written agreement intended to be the final expression of parties’ intentions, cannot be contradicted by prior or contemporaneous agreements. – Exceptions: consistent terms, course of dealing and trade, course of performance. 30

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Formation of Sales and Lease Contracts  Unconscionability. – Contract is one that is so unfair and one-sided it is unreasonable to enforce it. Court can: set it aside, refuse to enforce the unconscionable provision, limit the contract. – CASE 13.2 J ONES V. S TAR C REDIT C ORP. (1969). – CASE 13.2 J ONES V. S TAR C REDIT C ORP. (1969). Was this a fair decision to the retailer? 31

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Title and Risk of Loss 32  Sale of goods requires different rules than real property transactions: risk should not always pass with title.  UCC replaces title with identification, risk, and insurable interest. 32

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Title and Risk of Loss 33  Identification. – For any interest to pass to buyer, goods must be (1) in existence and (2) identified as specific goods in sales contract.  33

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Title and Risk of Loss 34  Identification. – Identification takes place when specific goods are designated as the subject matter of the contract. Gives buyer the right: To obtain insurance on the goods. To recover from third parties who damage the good. 34

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Title and Risk of Loss 35  Identification. – Existing Goods: if contact calls for ascertainable goods in existence, identification takes place at the time contract is made.  35

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Title and Risk of Loss 36  Identification. – Future Goods. Animals born within 12 months of contract, identification takes place at conception. For crops harvested within 12 months of contracting, identification takes place at time of planting (or when crops begin to grow). All others, when goods shipped, or marked or designated by seller. 36

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Title and Risk of Loss 37  Identification. – Goods Part of a Larger Mass. Goods are identified when marked, shipped, or designated by seller. Exception: fungible goods which are naturally alike (grades of wheat, oil, wine). 37

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Title and Risk of Loss 38  Passage of Title. – Contract between seller and buyer usually determines when title passes. CASE 13.3 U NITED S TATES V C USTOM M OTORCYCLE (2011). CASE 13.3 U NITED S TATES V C USTOM M OTORCYCLE (2011). When did the seller give up possession of the goods to the buyer?  38

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Title and Risk of Loss 39  Passage of Title. – Title can pass: Upon physical delivery, or When agreed to by the parties.  39

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Title and Risk of Loss  Passage of Title. – Shipment and Destination Contracts. If no agreement, title passes based on whether contract is shipment or destination contract. Shipment: title passes at time and place of shipment.  40

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Title and Risk of Loss  Passage of Title. – Shipment and Destination Contracts. Destination: title passes when goods are tendered at the destination. – Delivery Without Movement of Goods. With document of title (bill of lading): title passes when and where document delivered.  41

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Title and Risk of Loss  Passage of Title. – Delivery Without Movement of Goods. Without document: title passes when sales contract is made, if goods have been identified, or when identification occurs if they have not been identified. 42

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Title and Risk of Loss  Passage of Title. – Sales or Leases by Nonowners. Void Title: true owner gets goods back. Voidable Title. – Good Faith Purchaser keeps goods. – Voidable Title and Leases: good faith lessee retains possession.  43

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Title and Risk of Loss  Passage of Title. – Sales or Leases by Nonowners. The Entrustment Rule. – Merchant must deal in goods of that kind. – Gives power to transfer valid title to good faith purchaser in ordinary course of business. 44

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Ex Void and Voidable Titles 45

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Title and Risk of Loss  Risk of Loss. – ROL does not necessarily pass with title. ROL is important because of insurance concerns. – Unless agreed otherwise, ROL passes to Buyer depending on whether delivery is with or without movement of the goods. 46

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Title and Risk of Loss 47  Risk of Loss. – Delivery With Movement of the Goods- Carrier Cases. Shipment Contracts: Risk of loss passes to Buyer when goods tendered to Carrier. If goods damaged in transit, Buyer’s bears risk of loss.  47

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Title and Risk of Loss 48  Risk of Loss. – Delivery With Movement of the Goods- Carrier Cases. Destination Contracts. ROL passes to Buyer when goods tendered at contractually specified destination. 48

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Title and Risk of Loss 49  Risk of Loss. – Delivery Without Movement of the Goods. Often goods are held by a bailee on behalf of the seller in a bailment arrangement. Documents of title give bailee possession of goods and/or contracts to deliver them. Examples: warehouse, trucking company.  49

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Title and Risk of Loss 50  Risk of Loss. – Delivery Without Movement of the Goods. Goods Held by Seller: Document of Title is generally not used. – If Seller is a merchant, risk of loss passes when buyer takes physical possession of goods. (ROL remains with seller until buyer takes physical possession.) 50

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Title and Risk of Loss 51  Risk of Loss. – Delivery Without Movement of the Goods. Goods Held by a Bailee (Warehouse). Risk of loss passes to buyer when: – Buyer receives document of title; bailee acknowledges Buyer’s right to goods and buyer receives title and has reasonable time to pick up. 51

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Title and Risk of Loss 52  Risk of Loss. – When the Contract is Breached: generally breaching party bears risk of loss. When Seller or Lessor Breaches. – Rejection - risk stays with seller. – Revocation of acceptance - risk passes back to seller to the extent that buyer’s insurance does not cover the loss. 52

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Title and Risk of Loss 53  Risk of Loss. – When the Contract is Breached: generally breaching party bears risk of loss. When the Buyer or Lessee Breaches. Goods are identified, risk passes to buyer for a commercially reasonable amount of time after seller learns of the breach, to the extent that seller’s insurance does not cover loss. 53

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Title and Risk of Loss 54  Insurable Interest. – Buyer has an insurable interest in goods that have been identified. – Seller has an insurable interest in goods as long as they retain title or a security interest. – Both buyers and sellers can have an insurable interest at the same time. 54

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Contracts for the International Sale of Goods  Applicability.  Comparison of CISG and UCC. – Mirror Image Rule. – Irrevocable Offers. – Statute of Frauds. – Necessity of a Price Term. – Time of Contract Formation. 55