Chapter 19

The Formation of Sales and Lease Contracts

SCOPE OF U.C.C. ARTICLE 2

SALES (4710)

• Article 2 of the U.C.C. governs contracts for the sale of goods, pursuant to which

(1) title (formal right of ownership- doesn’t necessarily mean a piece of paper like a car title) of

(2) goods (tangible, movable property) is transferred from seller to buyer

(3) in exchange for money.

• Article 2 governs only contracts for the sale of tangible, movable property -- that is,

• property that has a physical existence and

• that can be moved from place to place.

• Article 2 does not govern:

• contracts for services, real property , or intangible property, such as intellectual property, stocks and bonds, and the like, or

• barter contracts, where goods or services are exchanged for other goods or services.

Notice: minerals/crops, etc. are covered under Article 2 IF the contract is made by the seller, else if by buyer, it is under the common law/statutory law of real estate.

SCOPE OF U.C.C. ARTICLE 2A

• Article 2A of the U.C.C. governs contracts for the lease of goods, the sale of which would be governed by Article 2. Namely, an agreement whereby

(1) one person (the lessor)

(2) transfers the rights of possession and use of tangible, movable property

(3) to another person (the lessee)

(4) in exchange for rental payments.

For example a finance lease, where the crane is bought by the bank and leased to the construction company.

• Consumer Leases: In the interest of providing special protection for consumers, Article 2A contains special rules applicable to a lease involving

(1) a lessor who regularly engages in the business of leasing or selling goods,

(2) a lessee who leases the goods primarily for personal, family, or household use, and

(3) total lease payments are less than $25,000.00.

FORMATION/OFFER: OPEN TERMS 4731+

• According to common law, an offer must be definite enough for the parties to ascertain its essential terms.

• Under the U.C.C., a sale or lease contract is not fatally indefinite, even if one or more terms are left open, if:

(1) the parties intended to be bound, and

(2) there is a reasonably certain basis for a remedy.

For example: you could actually leave blanks in a lease and complete it later. Couldn’t under common law.

• Open Price Term 4731.12/4733: As a general rule, if the parties have not agreed on a price, the court will determine a reasonable price (as of )at the time of delivery. However,

• If one of the parties is permitted to set the price, he or she must do so in good faith

• If the price has not been agreed to due to the fault of one of the parties, the other party can treat the contract as cancelled or fix a reasonable price.

• Open Payment Term 4731.14: As a general rule, if the parties do not specify otherwise, payment is due at the time and the place that the buyer receives the goods. Moreover,

• The buyer can tender payment using any commercially

acceptable means (such as a check); however

• If the seller demands payment in cash, the buyer must be given a reasonable time to obtain it.

• Open Delivery Term 4731.01: As a general rule, if the parties do not specify

(1) the place of delivery, the buyer will take delivery at the

seller’s place of business, or (if none exists) at the

seller’s residence; and/or

(2) the time of delivery, the seller will deliver within a

reasonable period of time.

• Open Duration Term: where a contract does not indicate how long the parties are to deal with one another. In such a case, either party may terminate with reasonable notification.

• Assorted Goods: If the terms specifying what mixture of assorted goods are to be delivered, the buyer may specify the assortment.

• Open Quantity Term: Failure to specify the quantity of goods to be bought and sold is fatal at common law.

However, the U.C.C. recognizes two exceptions:

• Requirements Contract: An agreement by which the buyer agrees to purchase and the seller agrees to sell all or up to a stated amount of what the buyer needs or requires. In other words, don’t buy from anyone else.

• Output Contract: An agreement by which the seller agrees to sell all or up to a stated amount of what the seller produces.

• The U.C.C. imposes a good faith requirement on requirements and output contracts, such that the actual quantity purchased or sold cannot be unreasonably disproportionate to normal or comparable requirements or output.

OFFER: FIRM OFFER 4716.01

• Recall: At common law, an offer may be revoked at any time prior to its acceptance by a buyer. The only exception recognized at common law is an option contract, in which the offeree pays consideration for the offeror’s irrevocable promise to keep the offer open for a stated period of time.

• The U.C.C. creates a second exception for firm offers to sell or lease goods made by a merchant.

• Firm Offer: A written, signed offer that is irrevocable for a period of up to three (3) months, without the payment of consideration.

• Merchant: A person who

(1) regularly deals in goods of the kind involved in the sales or lease contract;

(2) holds himself or herself out as having unique knowledge and skill; or

(3) employs a merchant as a broker, agent, or other intermediary.

ACCEPTANCE 4716.06

• Common-Law Acceptance: At common law, an offeror can specify a particular method of acceptance; however, any method of communicating acceptance is effective as long as it is received before the offeror’s deadline.

• U.C.C. Acceptance: The U.C.C. broadens the common-law rule by providing that, when the offeror does not specify a method, acceptance may be communicated by any method that is reasonable under the circumstances -- even if it is not received before the deadline.

• Accepting an Offer to Buy Goods 4716.07: A seller may accept an offer to buy goods for current or prompt delivery by:

(1) a promise to ship to the buyer, or

(2) shipment of conforming goods (i.e., goods that fit the buyer’s description) to the buyer.

• A prompt shipment of nonconforming goods constitutes both an acceptance and a breach by the seller, unless the seller notifies the buyer that the nonconforming goods are an accommodation, not an acceptance.

ADDITIONAL TERMS (Battle of the Forms) 4716.11

• The U.C.C. dispenses with the common-law mirror image rule (i.e., that the acceptance match the offer exactly), taking the position that a contract is formed if the offeree’s response indicates a definite acceptance of the offer, even if the acceptance includes additional or different terms.

• If one or both parties are non-merchants, the contract is formed according to the terms of the original offer, and the additional terms of the acceptance are ignored.

• If both parties are merchants, the additional terms automatically become part of the contract unless

(1) the original offer expressly limits acceptance to the terms of the offer,

(2) the new or changed terms materially alter the contract, or

(3) the offeror objects to the new or changed terms within a reasonable period of time.

• Regardless of merchant status, any purported acceptance which is conditional on the offeror’ s agreement to the new or changed terms is not an acceptance.

ADDITIONAL CONSIDERATION 4716.09

• Unlike common law, the U.C.C. requires no additional consideration to support a contractual modification, subject to the following caveats:

• Good Faith Required: Any modification of the terms or conditions of a contract must be sought in good faith. (i.e., change of market price versus extortion)

• Writing Required: Certain modifications must be in writing to be effective. For example, a writing is required if

(1) the contract provides that any subsequent changes be in writing;

(2) a non-merchant seeks to modify a merchant’s form contract containing a “no oral modification” clause;

(3) the proposed modification would bring the contract under the Statute of Frauds.

THE U.C.C. STATUTE OF FRAUDS 4716.02

• The U.C.C., as it currently reads, requires that contracts

(1) for the sale of goods valued at more than $500, and

(2) for the Lease of goods valued at more than $1,000

must be in writing to be enforceable. (Note: The proposed revisions to Articles 2 and 2A eliminate this requirement.)

• Sufficiency of the Writing 4716.13: A writing is sufficient if (i) it indicates that the parties intended to form a contract, (ii) it is signed by the party against whom enforcement is sought, and (iii) in the case of a lease, it reasonably describes the goods leased and the lease term.

• Merchants’ Written Confirmation 4716.14: If the contract is between two merchants, a written confirmation signed by one merchant and sent to the other is sufficient.

• EXCEPTION: Specially Manufactured Goods 4716.15: An oral contract is enforceable if it is for (i) goods that are specially manufactured for the buyer, (ii) not suitable for sale or lease to others in the seller’s ordinary course of business, and (iii) the seller has substantially started to manufacture or otherwise obtain the goods.

PAROL EVIDENCE AND THE U.C.C. 4716.16-.18

• Parol Evidence Rule: If the parties to a contract set forth its terms in a writing intended to be their final expression, the terms of the writing cannot be altered or contradicted by evidence of any prior agreements or contemporaneous oral agreements. However, under the U.C.C., the written terms may be explained or supplemented by evidence of:

• Consistent Additional Terms: Terms which do not contradict and which help explain the writing;

• Course of Dealing: Prior conduct between the parties to the contract that establishes a common basis for their understanding;

• Usage of Trade: Any practice or method of dealing having such regularity of observance in a place, vocation, or trade that it is reasonably expected to be observed by the transaction in question; and/or

• Course of Performance: The conduct of the parties to the agreement under the terms of the agreement (this evidence is particularly helpful in determining what the parties intended the agreement to mean).

Rules of construction: 1) Express Terms; 2) Course of Performance

3)Course of dealing 4)usage of trade