CHAPTER 16 FORMATION OF THE SALES CONTRACT & CONTRACTS FOR LEASING GOODS DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8 th Ed.)

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 2 INTRODUCTION Statute of Frauds requires certain types of contracts to be in writing to be enforceable. Common Law. Law Merchant. Uniform Sales Act (USA)/Negotiable Instrument Law (NIL). Statute of Frauds requires certain types of contracts to be in writing to be enforceable. Common Law. Law Merchant. Uniform Sales Act (USA)/Negotiable Instrument Law (NIL).

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 3 INTRODUCTION Uniform Commercial Code (UCC) is a legislative intervention to help the law keep pace with needs of society. UCC designed to update and modernize the law of commerce and reflect commercial reality. Uniform Commercial Code – UCC is organized into sections or articles. – The UCC has been adopted in whole or in part by all 50 states. Uniform Commercial Code (UCC) is a legislative intervention to help the law keep pace with needs of society. UCC designed to update and modernize the law of commerce and reflect commercial reality. Uniform Commercial Code – UCC is organized into sections or articles. – The UCC has been adopted in whole or in part by all 50 states.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 4 INTRODUCTION Article 2--Governs sale of goods. Article 2A--Deals with leasing of goods. Article 3--Deals with negotiable instruments. Article 4--Deals with banks and customers. Article 4A --Deals with fund transfers. Article 2--Governs sale of goods. Article 2A--Deals with leasing of goods. Article 3--Deals with negotiable instruments. Article 4--Deals with banks and customers. Article 4A --Deals with fund transfers.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 5 INTRODUCTIONINTRODUCTION Article 5--Deals with letters of credit. Article 7--Deals with documents of title. Article 9--Deals with secured transactions. Article 5--Deals with letters of credit. Article 7--Deals with documents of title. Article 9--Deals with secured transactions.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 6 THE SCOPE OF ARTICLE 2 Covers the sale of goods. – Sale defined as the passing of title from seller to buyer for a price. – Contract for sale covers both a present sale and a contract to sell goods in the future. – Present sale is a sale made at the time the contract is made. Covers the sale of goods. – Sale defined as the passing of title from seller to buyer for a price. – Contract for sale covers both a present sale and a contract to sell goods in the future. – Present sale is a sale made at the time the contract is made.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 7 THE SCOPE OF ARTICLE 2 Covers the “sale of goods.” – Goods defined as “all things that are movable at the time they are identified to the contract.” – Anything tangible that can be physically delivered from seller to buyer. – Goods also extend to cover unborn young of animals, growing crops, anything attached to land which can be detached from and sold apart from land. – Money and investment securities excluded. Covers the “sale of goods.” – Goods defined as “all things that are movable at the time they are identified to the contract.” – Anything tangible that can be physically delivered from seller to buyer. – Goods also extend to cover unborn young of animals, growing crops, anything attached to land which can be detached from and sold apart from land. – Money and investment securities excluded.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 8 A Merchant is someone who deals in the type of goods involved in the sale, claims to be an expert relative to the goods, or employs someone who is an expert. Merchants are required to act in good faith, cooperate in the performance of the contract and a commercially reasonable manner. Non-merchants are required to act in good faith and cooperate in the performance of the contract. A Merchant is someone who deals in the type of goods involved in the sale, claims to be an expert relative to the goods, or employs someone who is an expert. Merchants are required to act in good faith, cooperate in the performance of the contract and a commercially reasonable manner. Non-merchants are required to act in good faith and cooperate in the performance of the contract. THE SCOPE OF ARTICLE 2

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 9 FORMING THE SALES CONTRACT Offer and Acceptance: UCC recognizes a contract exists whenever the parties act as if they have an agreement. Valid offer and acceptance. Contract stands even though some terms are omitted from the agreement. Offer can be accepted in any manner reasonable under the circumstances, unless otherwise indicated. Offer and Acceptance: UCC recognizes a contract exists whenever the parties act as if they have an agreement. Valid offer and acceptance. Contract stands even though some terms are omitted from the agreement. Offer can be accepted in any manner reasonable under the circumstances, unless otherwise indicated.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 10 FORMING THE CONTRACT Under UCC seller can accept by: – 1) Promptly ship conforming goods to the buyer. – 2) Notify the buyer that the goods will be shipped promptly. – 3) Promptly ship nonconforming goods to the buyer. Under UCC seller can accept by: – 1) Promptly ship conforming goods to the buyer. – 2) Notify the buyer that the goods will be shipped promptly. – 3) Promptly ship nonconforming goods to the buyer.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 11 FORMING THE CONTRACT Standard Form Contracts: – Preprinted contract form, often blanks left in certain key places for later completion. – New terms are treated as proposed additions to the contract, if contract is between merchants unless: Offer explicitly limits acceptance to the terms of the offer. New terms materially alter the contract. Offeror objects to new terms within reasonable time. Standard Form Contracts: – Preprinted contract form, often blanks left in certain key places for later completion. – New terms are treated as proposed additions to the contract, if contract is between merchants unless: Offer explicitly limits acceptance to the terms of the offer. New terms materially alter the contract. Offeror objects to new terms within reasonable time.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 12 FORMING THE CONTRACT Firm Offers. – Common law allows revocation anytime prior to acceptance. – Under UCC, offer cannot be revoked for a “reasonable time.” Statute of Frauds. – Requires a contract for the sale of goods for $500 or must be in writing to be enforceable. Firm Offers. – Common law allows revocation anytime prior to acceptance. – Under UCC, offer cannot be revoked for a “reasonable time.” Statute of Frauds. – Requires a contract for the sale of goods for $500 or must be in writing to be enforceable.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 13 FORMING THE CONTRACT Statute of Frauds. Three definite and invariable requirements for the writing: – Must evidence a contract for the sale of goods. – Must be “signed,” which includes any authentication. – Must specify a quantity of goods covered by the contract. Statute of Frauds. Three definite and invariable requirements for the writing: – Must evidence a contract for the sale of goods. – Must be “signed,” which includes any authentication. – Must specify a quantity of goods covered by the contract.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 14 FORMING THE CONTRACT Statute of Frauds. T hree exceptions to the general provisions: – No writing required if specially manufactured goods. – If parties agree in court or in legal proceedings that contract existed. – If goods covered are already delivered and accepted or already paid for. Statute of Frauds. T hree exceptions to the general provisions: – No writing required if specially manufactured goods. – If parties agree in court or in legal proceedings that contract existed. – If goods covered are already delivered and accepted or already paid for.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 15 FORMING THE CONTRACT Statute of Frauds. – Although the Code attempts to provide for flexibility and to facilitate commerce, where a written agreement does exist--the parol evidence rule applies. – Oral evidence can not be introduced to contradict or overturn the terms of the written agreement. – Oral evidence can only clarify, explain, fill in informational gaps. Statute of Frauds. – Although the Code attempts to provide for flexibility and to facilitate commerce, where a written agreement does exist--the parol evidence rule applies. – Oral evidence can not be introduced to contradict or overturn the terms of the written agreement. – Oral evidence can only clarify, explain, fill in informational gaps.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 16 SPECIAL RULES UNDER ARTICLE 2 Assumption that both parties will be acting in good faith. Unconscionability: contract is so unfair or one-sided as to shock the conscience. – Court may refuse to enforce contract, or refuse to enforce any unconscionable clause, or limit application of any unconscionable clause to avoid unfair result. Assumption that both parties will be acting in good faith. Unconscionability: contract is so unfair or one-sided as to shock the conscience. – Court may refuse to enforce contract, or refuse to enforce any unconscionable clause, or limit application of any unconscionable clause to avoid unfair result.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 17 SPECIAL RULES UNDER ARTICLE 2 Open Terms. – Code allows omitted terms to be filled in by the courts to give the parties the “benefit of their bargain.” Options. – Code leaves some options, such as product mix and shipping arrangements to option of buyer or seller. Open Terms. – Code allows omitted terms to be filled in by the courts to give the parties the “benefit of their bargain.” Options. – Code leaves some options, such as product mix and shipping arrangements to option of buyer or seller.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 18 SPECIAL RULES UNDER ARTICLE 2 Cooperation – Parties are required to cooperate with each other in the performance of their duties. – Failure to cooperate or interference with performance can be treated as breach or delay performance. Cooperation – Parties are required to cooperate with each other in the performance of their duties. – Failure to cooperate or interference with performance can be treated as breach or delay performance.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 19 THE SCOPE OF ARTICLE 2A Applies to “any transaction, regardless of form, that creates a lease,” a “finance lease,” or “installment lease” contract. Lease: “transfer of the right to possession and use of goods for a term in return for consideration.” Applies to “any transaction, regardless of form, that creates a lease,” a “finance lease,” or “installment lease” contract. Lease: “transfer of the right to possession and use of goods for a term in return for consideration.”

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 20 CONTRACTS FOR LEASING GOODS Article 2A of the Code governs contracts for lease of goods. Article 2A reflect the differences between a sale and a lease. Article 2A is designed to help protect the basic tenets of freedom of contract. Permits parties to vary certain terms of their lease agreements. Article 2A of the Code governs contracts for lease of goods. Article 2A reflect the differences between a sale and a lease. Article 2A is designed to help protect the basic tenets of freedom of contract. Permits parties to vary certain terms of their lease agreements.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 21 CONTRACTS FOR LEASING GOODS Article 2A recognizes two basic types of leases: – Consumer lease: lease of goods for personal, family, or household use. Total payments not to exceed $25,000. – Finance lease: lessor does not select, manufacture, or supply the leased goods; lessor acquires the goods in connection with the lease; lessee receives or approves of lessor acquiring rights to the goods. Article 2A recognizes two basic types of leases: – Consumer lease: lease of goods for personal, family, or household use. Total payments not to exceed $25,000. – Finance lease: lessor does not select, manufacture, or supply the leased goods; lessor acquires the goods in connection with the lease; lessee receives or approves of lessor acquiring rights to the goods.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 22 CONTRACTS FOR LEASING GOODS Installment lease: authorizes or requires the delivery of goods in separate lots to be separately accepted. Lease of goods in excess of $1000 must be evidenced in writing. Installment lease: authorizes or requires the delivery of goods in separate lots to be separately accepted. Lease of goods in excess of $1000 must be evidenced in writing.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 23 CONTRACTS FOR SALE OF GOODS IN INTERNATIONAL SETTING UN Convention on Contracts for the International Sale of Goods (CISG) approved by 62 nations. Scope of CISG: – Does not apply to goods for personal or household use unless Seller knew/should have known. – Only applies to sale of goods between different nations. UN Convention on Contracts for the International Sale of Goods (CISG) approved by 62 nations. Scope of CISG: – Does not apply to goods for personal or household use unless Seller knew/should have known. – Only applies to sale of goods between different nations.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 24 CONTRACTS FOR SALE OF GOODS IN INTERNATIONAL SETTING CISG: – Acceptance is effective upon receipt by offeror. – Offer is revocable prior to acceptance. – Offer is irrevocable: When offeror states acceptance must be made within a specified time. If Offeree relies on the offer remaining open. CISG: – Acceptance is effective upon receipt by offeror. – Offer is revocable prior to acceptance. – Offer is irrevocable: When offeror states acceptance must be made within a specified time. If Offeree relies on the offer remaining open.