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CH 20: Formation of Sales & Lease Contracts
Terms in this set (66)
Uniform Commercial Code (UCC)
facilitates commercial transactions by making the laws governing sales and lease contracts clearer, simpler, and more readily applicable to the numerous difficulties that can arise during such transactions.
Comprehensive Coverage of UCC
views the entire "commercial transaction for the sale of and payment for goods" as a single legal occurrence having numerous facets.
Onyl covers tangible goods. Goods can be related to land, unborn animals, & crops.
Article 2 of the UCC (as adopted by state statutes) sets forth the requirements for sales contracts or sales of goods, as well as the duties and obligations of the parties involved in the sales contract.
relationship between general contract law and the law governing sales of goods
1. Article 2 deals with the sale of goods. It does not deal with real property (real estate), services, or intangible property such as stocks and bonds. Thus, if the subject matter of a dispute is goods, the UCC governs. If it is real estate or services, the common law applies.
2. In some situations, the rules can vary depending on whether the buyer or the seller is a merchant.
"the passing of title [evidence of ownership rights] from the seller to the buyer for a price"
What are Goods?
To be characterized as a good, an item of property must be tangible, and it must be movable.
has physical existence— it can be touched or seen.
such as corporate stocks and bonds, patents and copyrights, and ordinary contract rights—has only conceptual existence and thus does not come under Article 2.
Item can be carried from place to place. Hence, real estate is excluded from Article 2.
Goods associated with real estate
often do fall within the scope of Article 2, however.
Case: Homeowners in Colorado installed underground radiant heating systems to warm indoor flooring or melt snow and ice under driveways and sidewalks. The systems began to leak as a result of the hardening of a hose called Entran II. The homeowners sued Goodyear Tire and Rubber Company, the maker of the hose, asserting claims under Colorado's version of the UCC. The court held that because the hose was a tangible and movable good at the time the contract was made, it was a "good" under the UCC. Therefore, the UCC applied to the contract even though the hose was later incorporated into real property (under flooring).
When contracts involve a combination of goods and services. PFT is used to determine whether a contract is primarily for the sale of goods or the sale of services.
1. A merchant is a person who deals in goods of the kind involved in the sales contract. Thus, a retailer, a wholesaler, or a manufacturer is a merchant of the goods sold in his or her business. A merchant for one type of goods is not necessarily a merchant for another type. For instance, asporting goods retailer is a merchant when selling tennis rackets but not when selling a used computer.
2. A merchant is a person who, by occupation, holds himself or herself out as having knowledge and skill unique to the practices or goods involved in the transaction. This broad definition may include banks or universities as merchants.
3. A person who employs a merchant as a broker, agent, or other intermediary has the status of merchant in that transaction. Hence, if an art collector hires a broker to purchase or sell art for her, the collector is considered a merchant in the transaction.
Article 2A covers similar issues for lease contracts. Bear in mind, however, that the parties to sales or lease contracts are free to agree to terms different from those stated in the UCC.
covers any transaction that creates a lease of goods or a sublease of goods . essentially a repetition of Article 2, except that it applies to leases of goods rather than sales of goods and thus varies to reflect differences between sales and lease transactions. (Note that Article 2A is not concerned with leases of real property, such as land or buildings.)
a lessor's and lessee's bargain with respect to the lease of goods, as found in their language and as implied by other circumstances
one who transfers the right to the possession and use of goods under a lease
one who acquires the right to the possession and use of goods under a lease. lessee is the party who is leasing the goods from the lessor.
Consumer leases (involves 3 elements)
1. A lessor who regularly engages in the business of leasing or selling.
2. A lessee (except an organization) who leases the goods "primarily for a personal, family, or house- hold purpose."
3. Total lease payments that are less than $25,000
involves a lessor, a lessee, and a supplier. The lessor buys or leases goods from the supplier and leases or subleases them to the lessee. Typically, in a finance lease, the lessor is simply financing the transaction.the lessee must perform and continue to make lease payments even if the leased equipment turns out to be defective.
Formation of sales and lease contracts
parties to sales and lease contracts are basically free to establish whatever terms they wish.
In general contract law, the moment a definite offer is met by an unqualified acceptance, a binding con- tract is formed. In commercial sales transactions, the verbal exchanges, correspondence, and actions of the parties may not reveal exactly when a binding contractual obligation arises. The UCC states that an agreement sufficient to constitute a contract can exist even if the moment of its making is undetermined
UCC states that a sales or lease contract will not fail for indefiniteness even if one or more terms are left open as long as both of the following are true:
1. The parties intended to make a contract.
2. There is a reasonably certain basis for the court to grant an appropriate remedy
If too many terms are left open, a court may find that the parties did not intend to form a contract. Also, the quantity of goods involved usually must be expressly stated in the con- tract. If the quantity term is left open, the courts will have no basis for determining a remedy.
Open Price Term
If the parties have not agreed on a price, the court will determine a "reasonable price at the time for delivery". Sometimes, the price fails to be set through the fault of one of the parties. In that situation, the other party can treat the contract as canceled or deter- mine a reasonable price.
Open Payment Term
When the parties do not specify payment terms, payment is due at the time and place at which the buyer is to receive the goods. buyer can tender payment using any commercially normal or acceptable means, such as a check or credit card. If the seller demands payment in cash, however, the buyer must be given a reasonable time to obtain it. Especially important when the contract states a definite and final time for performance.
Open Delivery Term
When no delivery terms are specified, the buyer normally takes delivery at the seller's place of business. If the seller has no place of business, the seller's residence is used. When goods are located in some other place and both parties know it, delivery is made there. If the time for shipment or delivery is not clearly specified in the sales contract, then the court will infer a "reasonable" time for performance.
Duration of an Ongoing Contract
A single contract might specify successive performances but not indicate how long the parties are required to deal with each other. In this situation, either party may terminate the ongoing contractual relationship.
Options and Cooperation with Regard to Performance
When the contract contemplates shipment of the goods but does not specify the shipping arrangements, the seller has the right to make these arrangements in good faith, using commercial reasonableness in the situation.
If the parties do not specify a quantity, no contract is formed. A court will have no basis for determining a remedy because there is almost no way to determine objectively what is a reasonable quantity of goods for someone to buy.
the buyer agrees to purchase and the seller agrees to sell all or up to a stated amount of what the buyer requires. There is implicit consideration in a requirements contract because the buyer gives up the right to buy from any other seller, and this forfeited right creates a legal detriment (consideration).
the seller agrees to sell and the buyer agrees to buy all or up to a stated amount of what the seller produces. Again, because the seller essentially forfeits the right to sell goods to another buyer, there is implicit consideration in an output contract.
When a Merchant's FIRM OFFER Arises.
arises when a merchant-offeror gives assurances in a signed writing that the offer will remain open. The merchant's firm offer is irrevocable without the necessity of consideration for the stated period or, if no definite period is stated, a reasonable period (neither to exceed three months)
Requirements for a Firm Offer
1. Written (or electronically recorded, such as in an e-mail)
2. Signed by the offeror
When a firm offer is contained in a form contract prepared by the offeree, the offeror must also sign a separate assurance of the firm offer. The requirement of a separate signature ensures that the offeror will be made aware of the firm offer.
UCC permits acceptance of an offer to buy goods "either by a prompt promise to ship or by the prompt or current shipment of con- forming or nonconforming goods"
The prompt shipment of nonconforming goods con- stitutes both an acceptance, which creates a contract, and a breach of that contract. This rule does not apply if the seller seasonably (within a reasonable amount of time) notifies the buyer that the nonconforming shipment is offered only as an accommodation, or as a favor. The notice of accommodation must clearly indicate to the buyer that the shipment does not constitute an acceptance and that, therefore, no contract has been formed.
Communication of Acceptance
if the offeror is not notified within a reason- able time that the offeree has accepted the contract by beginning performance, then the offeror can treat the offer as having lapsed before acceptance
Rules When One Party or Both Parties Are Nonmerchants
If one (or both) of the parties is a nonmerchant, the con- tract is formed according to the terms of the original offer and does not include any of the additional terms in the acceptance.
Rules When Both Parties Are Merchants
In contracts between merchants, the additional terms automatically become part of the contract unless one of the following conditions arises:
1. The original offer expressly limited acceptance to its terms.
2. The new or changed terms materially alter the contract.
3 The offeror objects to the new or changed terms within a reasonable period of time.
Conditioned on Offeror's Assent
Regardless of merchant status, the UCC provides that the offeree's response cannot be construed as an acceptance if it contains additional or different terms and is expressly conditioned on the offeror's assent to those terms
Additional Terms May Be Stricken
states that conduct by both parties that recognizes the existence of a contract is sufficient to establish a contract for sale even though the writings of the parties do not otherwise establish a contract. "the terms of the particular contract will consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act."
The common law rule that a contract requires consideration also applies to sales and lease contracts. Unlike the common law, however, the UCC does not require a contract modification to be supported by new consideration. The UCC states that an agreement modifying a contract for the sale or lease of goods "needs no consideration to be binding".
In some situations, an agreement to modify a sales or lease contract without consideration must be in writing to be enforceable. Any modification that makes a sales contract come under Article 2's writing requirement usually requires a writing (or electronic record) to be enforceable.
The Statute of frauds
Under these provisions, sales contracts for goods priced at $500 or more and lease contracts requiring total payments of $1,000 or more must be in writing to be enforceable
Sufficiency of the Writing
A writing, e-mail, or other electronic record will be sufficient to satisfy the UCC's Statute of Fraud as long as it:
1. Indicates that the parties intended to form a contract.
2. Is signed by the party (or agent of the party) against whom enforcement is sought.
The contract normally will not be enforceable beyond the quantity of goods shown in the writing,
Special Rules for Contracts between Merchants
Merchants can satisfy the Statute of Frauds if, after the parties have agreed orally, one of the merchants sends a signed written (or electronic) confirmation to the other merchant within a reasonable time. Communication must indicate the terms of the agreement, and the merchant receiving the confirmation must have reason to know of its contents. Unless the merchant who receives the confirmation gives written notice of objection to its contents within ten days after receipt, the writing is sufficient against the receiving merchant, even though she or he has not
three exceptions to the writing requirements of the Statute of Frauds. oral contract for the sale of goods priced at $500 or more or the lease of goods involving total payments of $1,000 or more will be enforceable despite the absence of a writing in the circumstances described next:
Specially Manufactured Goods
1. The goods are specially manufactured for a particular buyer or specially manufactured or obtained for a particular lessee.
2. The goods are not suitable for resale or lease to others in the ordinary course of the seller's or lessor's business.
3. The seller or lessor has substantially started to manufacture the goods or has made commitments for the manufacture or procurement of the goods.
In these situations, once the seller or lessor has taken action, the buyer or lessee cannot repudiate the agreement claiming the Statute of Frauds as a defense.
An oral contract for the sale or lease of goods is enforceable if the party against whom enforcement is sought admits in pleadings, testimony, or other court proceedings that a sales or lease con- tract was made. In this situation, the contract will be enforceable even though it was oral, but enforceability will be limited to the quantity of goods admitted.
An oral contract for the sale or lease of goods is enforceable if payment has been made and accepted or goods have been received and accepted. This is the "partial performance" exception. The oral contract will be enforced at least to the extent that performance actually took place.
consists of evidence outside the contract such as evidence of the parties' prior negotiations, prior agreements, or con- temporaneous (simultaneous) oral agreements.
fully integrated contract
When a contract completely sets forth all the terms and conditions agreed to by the parties and is intended as a final statement of their agreement. cannot be contradicted by evidence of any prior agreements or contemporaneous oral agreements.
Course of Dealing
sequence of actions and communications between the parties to a particular transaction that establishes a common basis for their understanding. "may give particular meaning to specific terms of the agreement, and may supplement or qualify the terms of the agreement"
Usage of Trade
Any practice or method of dealing that is so regularly observed in a place, vocation, or trade as to justify an expectation by the parties that it will be observed in their transaction.
course of performance
conduct that occurs under the terms of a particular agreement
Rules of Construction (for interpreting contracts)
1. Express terms.
2. Course of performance.
3. Course of dealing.
4. Usage of trade.
Uncon. contract is one that is so unfair and one sided that it would be unreasonable to enforce it. if the court deems it to have been unconscionable at the time it was made, the court can do any of the following:
1. Refuse to enforce the contract.
2. Enforce the remainder of the contract without the unconscionable part.
3. Limit the application of the unconscionable term to avoid an unconscionable result.
CISG & UCC Comparison
If the CISG and the UCC conflict, the CISG applies (because it is a treaty of the U.S. national government and therefore is supreme). The major differences between the CISG and the UCC in regard to contract formation concern the mirror image rule, irrevocable offers, the Statute of Frauds, and the time of contract formation.
Contracts for International Sales of Goods
The CISG governs international contracts only if the countries of the parties to the contract have ratified the CISG and if the parties have not agreed that some other law will govern their contract.
Unlike the UCC, the CISG does not apply to consumer sales. Neither the UCC nor the CISG applies to con- tracts for services.
Mirror Image Rule
UCC does away with the mirror image rule in domestic sales contracts.
Article 19 of the CISG provides that a contract can be formed even though the acceptance contains addi- tional terms, unless the additional terms materially alter the contract.
To make sure that no disputes arise out of this language problem, an international sales contract should include this which designates the official language by which the contract will be interpreted in the event of disagreement.
includes almost any change in the terms. If an additional term relates to payment, quality, quantity, price, time and place of delivery, extent of one party's liability to the other, or the settlement of disputes, the CISG considers the added term a material alteration. In effect, then, the CISG requires that the terms of the acceptance mirror those of the offer.
provides that a merchant's firm offer is irrevocable, even without consideration, if the merchant gives assurances in a signed writing. In contrast, under the CISG, an offer can become irrevocable without a signed writing. Article 16(2) of the CISG provides that an offer will be irrevocable if:
1. The offeror states orally that the offer is irrevocable.
2. The offeree reasonably relies on the offer as being irrevocable.
the writing requirement
Article 11 of the CISG, however, states that a con- tract of sale "need not be concluded in or evidenced by writing and is not subject to any other require- ments as to form. It may be proved by any means, including witnesses." CISG accords with the legal customs of most nations, which no lon- ger require contracts to meet certain formal or writing requirements to be enforceable.
Time of contract formation
a contract is created not at the time the accep- tance is transmitted but only on its receipt by the offeror. (The offer becomes irrevocable, however, when the acceptance is sent.) "becomes effective at the moment the indication of assent reaches the offeror." "at the moment the act is performed." Thus, it is the offeree's reliance, rather than the communication of acceptance to the offeror, that creates the contract.
Choice of forum
forum-selection clause designates the forum (place, or court) in which any disputes that arise under the contract will be litigated. A forum-selection clause should indicate the specific court that will have jurisdiction. The forum does not necessarily have to be within the geographic boundaries of either party's nation. Under certain circumstances, a forum-selection clause will not be valid. Specifically, if the clause denies one party an effective remedy, or is the product of fraud or unconscionable conduct, the clause will not be enforced. Similarly, if the designated forum causes substantial inconvenience to one of the par- ties, or violates public policy, the clause may not be enforced.
contractual provision designating the applicable law. typically included in every international contract.. At common law, parties are allowed to choose the law that will govern their contractual relationship.
There must normally be some connection between the chosen law and the contracting parties to show that the parties are not merely trying to avoid the laws of their own jurisdictions.
force majeure clause.
French "impossible or irresistible force" or "an act of God". Every contract, especially international ones, should include this clause. commonly stipulate that in addition to acts of God, a number of other eventualities (such as governmental orders or regulations, embargoes, or extreme shortages of materials) may excuse a party from liability for nonperformance.
Al offers to sell his car to Bart for $500, and Bart accepts. Al's car has a market value of $1,000 but this fact is unknown to Al. The contract is enforceable.
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