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CHAPTER 10 SALES ANDLEASE CONTRACTS
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LEARNING OBJECTIVES
How do Article 2 and Article 2A of the UCC differ? What types of transactions does each article cover?
In a sales contract, if an offeree includes additional or different terms in an acceptance, will a contract result? If so, what happens to these terms?
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LEARNING OBJECTIVES
What exceptions to the writing requirements of the Statute of Frauds are provided in Article 2 and Article 2A of the UCC?
Risk of loss does not necessarily pass with title. If the parties to a contract
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LEARNING OBJECTIVES
. . . do not expressly agree when risk passes and the goods are to be delivered without movement by the seller, when does risk pass?
What law governs contracts for the international sale of goods?
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SCOPE OF ARTICLE 2 (SALES)AND ARTICLE 2A (LEASES)Article 2 applies to the sale of
goods over $500.• Does not apply to sale of land or
services.• Modifies the common law of contracts in
certain areas, especially if one of the parties is a merchant.
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ARTICLE 2—SALES
What is a “Sale”?• Passing title from seller to buyer for a
price.• Price may be in cash or in other goods or
services.
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ARTICLE 2—SALES
What are “Goods”?• Must be tangible and movable (not land,
services or intangibles).• Goods Associated With Land.• Goods and Services Combined:
Predominant Factor test. If primarily for goods, UCC applies.
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EXHIBIT 10.1
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ARTICLE 2—SALES
Who is a “Merchant”?• A merchant is one who deals in goods of
the kind sold, and is presumed to possess a high degree of expertise.
• A merchant holds himself out as having special skill or knowledge.
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ARTICLE 2—SALES
Who is a “Merchant”?• A person who employs a merchant as a
broker or agent has the status of merchant in that situation.
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ARTICLE 2A—LEASES
Article 2A.• Applies to all commercial and consumer
lease/financing of goods.Lease Agreement.
• Lessor: sells the right to possess and use goods.
• Lessee: acquires right to possess and use.11
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FORMATION OF SALES AND LEASE CONTRACTS
UCC modifies the common law of contracts as follows: • Where UCC speaks, it preempts the
common law;• Where UCC is silent, the common law
governs.
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OFFER: OPEN TERMS
Under UCC Article 2, an offer may include “open” terms:• As long as the parties intended to form a
contract, and • There is a reasonably certain basis for
the court to grant a remedy.
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OFFER: OPEN TERMS
The only term the court will not create is the quantity.• If quantity is not specifically stated, a
court will deem the contract unenforceable because it cannot objectively determine the quantity.
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OFFER: OPEN TERMS
An open quantity contract is unenforceable, UNLESS the contract is either:
• 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.
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OFFER: MERCHANTS
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.
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ACCEPTANCE
Seller can specify manner of acceptance. • If none is specified, any reasonable
means.• A Promise to Ship or Prompt Shipment
of conforming goods is acceptance.
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ACCEPTANCE
Shipment of Nonconforming Goods.• Prompt shipment of nonconforming goods
is both an acceptance and a breach, unless the seller notifies the goods are only an accommodation.
• Notice of the accommodation must indicate no contract has been formed.
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ACCEPTANCE
Notice of Acceptance Required.• If a unilateral offer is not accepted
within a reasonable time with performance, the offeror can treat the offer as lapsed before acceptance.
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ACCEPTANCE
Additional Terms.• Common Law: under the “mirror image”
rule, the terms must be identical.• Article 2 dispenses with mirror image
rule. • CASE 10.1 WPS, Inc. v. Expro Americas, LLC
(2012). What facts did the court use to find a enforceable contract?
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ACCEPTANCE
Additional Terms (Article 2).• When One Party is Not a Merchant: only
original terms accepted. • When Both Parties are Merchants:
additional terms form contract unless there is prohibition or new terms or terms materially alter contract, or the party objects.
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ACCEPTANCE
Additional Terms (Article 2).• Conditioned on Offeror’s Assent: when
an offer contains additional or different terms expressly conditioned on the offeror’s assent, no contract is formed without that assent. (UCC 2-207(1)).
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ACCEPTANCE
Additional Terms (Article 2).• Additional Terms May Be Stricken:
conduct by both parties may be sufficient to create an enforceable contract. A court will simply strike the terms of the contract on which the parties do not agree (UCC 2-207(3)).
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CONSIDERATION
Modifications must be made in good faith.
Modifications without consideration must be written:• (1) If contract itself prohibits changes
without a writing.
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CONSIDERATION
Modifications without consideration must be written:• (2) If consumer is dealing with a
merchant, consumer must sign separate acknowledgment.
• (3) Any modification that brings the contract under UCC 2 Statute of Frauds.
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THE STATUTE OF FRAUDS
Contracts for Sale of Goods over $500 (or lease over $1,000) must be in writing.
Sufficiency of the Writing.• Sufficient if it is signed by one party and
indicates parties intended to form a contract.
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THE STATUTE OF FRAUDS
Special Rules Between Merchants.• Written confirmation after oral
agreement.• Confirmation must indicate the terms,
and merchant receiving must have knowledge of its contents.
• Receiver has 10 days to object. 27
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THE STATUTE OF FRAUDS
Exceptions to Writing:• Specially Manufactured Goods.• Admissions.• Partial Performance.
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EXHIBIT 10.2 MAJOR DIFFERENCES BETWEEN CONTRACT AND SALES LAW
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PAROL EVIDENCE
Generally, terms of a written agreement or memo cannot be contradicted by prior, extrinsic evidence, unless the evidence is:• A Course of Dealing and Usage.• A Course of Performance.
Rules of Construction.30
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UNCONSCIONABILITY
Contract so unfair and one-sided that it would be unreasonable to enforce it. • CASE 10.2 Jones v. Star Credit Corp.
(1969). English language contract that required a Spanish speaker to pay nearly 400% for a refrigerator was not enforceable.
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UNCONSCIONABILITY
Court can:• Refuse to enforce it.• Enforce contract without
unconscionable clause, or• Limit impact of contract to avoid
unconscionable result.
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TITLE AND RISK OF LOSS
Sale of goods requires different rules than real property transactions: risk should not always pass with title.
UCC replaces common law notions of title with identification, risk of loss, and insurable interest.
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TITLE AND RISK OF LOSS
Before title to goods can pass from seller to buyer, they must exist and be identified.
Identification.• Occurs when specific goods are
designated as subject matter of contract.
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TITLE AND RISK OF LOSS
Identification.• Gives buyer the right to obtain insurance
on the goods and to recover damages from third parties.
• Existing Goods: identification takes place at time contract is made.
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TITLE AND RISK OF LOSS
Identification.• Future Goods:
• If sale of unborn animals (or crops) within 12 months, identification occurs at conception (or planting).
• Any other goods, identification takes place when goods are shipped.
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TITLE AND RISK OF LOSS
Identification.• Goods That Are Part of a Larger Mass.
• Identification occurs when goods are marked, shipped, or otherwise designated.
• EXCEPTION: Fungible Goods (e.g., wheat) do not need separation.
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PASSAGE OF TITLE
Title passes when agreed to by the parties.
If there is no agreement, under Article 2-401 title of identified goods passes to the Buyer at the time and place the Seller physically delivers the goods.
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PASSAGE OF TITLE• CASE 10.3 United States v. 2007 Custom
Motorcycle (2011). Why did the court ‘strike’ Indy’s claim?
Shipment and Destination Contracts.• If there is no agreement, delivery
arrangements determine when title passes.
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PASSAGE OF TITLE
Shipment and Destination Contracts.• Shipment Contracts: title passes at time
and place of shipment.• Destination Contracts: title passes when
goods are tendered (Chapter 11) at the destination.
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PASSAGE OF TITLE
Delivery without Movement of the Goods. • Unless agreed otherwise, title passes:
• With document of title: when and where document delivered.
• Without document: when sales contract is made, if goods have been identified or when identification occurs if they have not been identified.
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PASSAGE OF TITLE
Sales or Leases by Nonowners.• Void Title (Theft): true owner gets goods
back.• Voidable Title: Seller has power to
transfer goods, so good faith purchaser (with no knowledge) has valid title to goods.
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PASSAGE OF TITLE
Entrustment Rule.• Entrusting goods to merchant who deals
in those goods, gives her power to transfer all rights in the ordinary course of business.
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VOID AND VOIDABLE TITLES
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RISK OF LOSS
Delivery with Movement of Goods—Carrier Cases.• When contract fails to agree on when
ROL passes, courts determine whether: • It is a shipment contract, and ROL passes when
seller tenders goods to carrier. • It is a destination contract, and ROL passes when
goods tendered at destination by carrier. 45
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RISK OF LOSS
ROL: Delivery without Movement of Goods.• If Goods Held by Seller:
• Document of Title is generally not used.• If Seller is a merchant, ROL passes when
buyer takes actual possession of goods.
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RISK OF LOSS
ROL: Delivery without Movement of Goods.• Goods Held by Bailee (Warehouse): ROL
passes when buyer receives document of title; bailee acknowledges Buyer’s right to goods and buyer receives title and has reasonable time to pick up.
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RISK OF LOSS
ROL When Contract Breached.• When Seller or Lessor Breaches.
• Shipment of Non-Conforming Goods -- ROL does not pass to buyer until:
• Seller “cures” the defect (goods are replaced or repaired), or
• Buyer accepts non-conforming goods and waives right to reject.
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RISK OF LOSS
ROL When Contract Breached.• When Seller or Lessor Breaches.
• Buyer can revoke acceptance after discovery of latent defect – ROL passes back to seller to the extent that buyer’s insurance does not cover the loss.
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RISK OF LOSS
ROL When Contract Breached.• When Buyer or Lessee Breaches.
• After goods are identified, ROL passes to buyer for a reasonable amount of time after seller learns of the breach, to the extent that seller’s insurance does not cover loss.
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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.
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CONTRACTS FOR THE INTERNATIONAL SALE OF
GOODSApplicability of the CISG.Comparison of CISG and UCC.
• Mirror Image Rule.• Irrevocable Offers.• Statute of Frauds.• Necessity of a Price Term.• Time of Contract Formation.
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