© 2007 West Legal Studies in Business, A Division of Thomson Learning Chapter 14 The Formation of Sales and Lease Contracts

© 2007 West Legal Studies in Business, A Division of Thomson Learning 2 How do Article 2 and Article 2A of the UCC differ? What types of transactions does each article cover? What is a merchant’s firm offer? If an offeree includes additional or different terms in an acceptance, will a contract result? If so, what happens to these terms? Article 2 and Article 2A of the UCC both define several exceptions to the writing requirements of the Statute of Frauds. What are these exceptions? What law governs contracts for the international sale of goods? Learning Objectives

© 2007 West Legal Studies in Business, A Division of Thomson Learning 3 Scope of UCC Article 2--Sales Facilitates commercial transactions. UCC Article 2: –Governs contracts for sale of goods. –UCC 2 preempts common law. –Where UCC2 is silent, common law governs.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 4 What is a “Sale”? UCC Article 2 applies to the “sale of goods.” A “sale” is the passing of title of “goods” to/from a “merchant” (seller or buyer) for a price (money, goods, services,etc). –“Goods” are tangible and movable. –A “merchant” has special business expertise and is not a casual buyer/seller.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 5 What are “Goods”? A good is both tangible and movable. “Predominant Test” with goods and services combined. –CASE 14.1 Mecanique C.N.C., In.c, v. Durr Environmental, Inc. (2004). UCC does not apply to real estate unless there is a “good” that can be severed by the Seller. If the good is severed by the Buyer, then UCC does not apply.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 6 Who is a “Merchant”? Generally UCC 2 applies to all buyers of sellers of goods. In some instances, sales by/for a merchant imposes special duties. A Merchant: –Deals in goods of the kind being sold. –Holds himself out with special knowledge or skills. –Is employed as a broker or agent in a transaction.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 7 Scope of Article 2A-Leases Contract for lease of personal goods between a lessor and a lessee. Consumer Leases (primarily for family or personal use). Finance Leases (involves a 3rd party- supplier).

© 2007 West Legal Studies in Business, A Division of Thomson Learning 8 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. Common Law vs. UCC

© 2007 West Legal Studies in Business, A Division of Thomson Learning 9 Formation: Offer - Open Terms Article 2-204: even if terms of uncertain, a contract may still exist. –Open Terms: “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.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 10 Offer - Open Terms “Open Quantity” (UCC2-306): generally courts will NOT impose a quantity, UNLESS: –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.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 11 Merchant’s Firm Offer Common law: An offer could be revoked any time prior to acceptance, unless there was some consideration. Article 2: An offer made by a merchant is irrevocable for reasonable period of time if a written assurance is given. No consideration necessary.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 12 Acceptance Any reasonable means under the circumstances is permissible. Promise to ship or prompt shipment is acceptance. –Shipment of non-conforming goods is both an acceptance and a breach unless goods sent as an “accommodation” to buyer.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 13 Additional Terms If either party is a non-merchant, the contract is formed according to original terms of the offer. If both parties are merchants, contract incorporates new terms unless: (1) original offer expressly limits terms or (2) material change or (3) offeror objects within reasonable time. –CASE 14.2 Wilson Fertilizer & Grain, Inc. v. ADM Milling Co. (1995). Additional terms may be stricken if both parties acted inconsistent with the terms

© 2007 West Legal Studies in Business, A Division of Thomson Learning 14 Consideration Article 2 requires consideration and modifications must be made in good faith. Modification must be in writing if required by Statute of Frauds.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 15 Statute of Frauds Sale of goods over $500 must have a signed writing to be enforceable ($1,000 in leased goods). Exceptions to this rule: –Contracts between Merchants (no objection with 10 days). –Specially manufactured goods. –Admissions by breaching party. –Partial performance.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 16 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.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 17 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 14.3 Jones v. Star Credit Corp. (1969).

© 2007 West Legal Studies in Business, A Division of Thomson Learning 18 CISG Applicability. Comparison of CISG and UCC. –Mirror Image Rule. –Irrevocable Offers. –Statute of Frauds. –Necessity of a Price Term. –Time of Contract Formation.