Business Law Chapter 15: Formation and Performance of Sales and Lease Contracts

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Significance of UCC
clarifies sales law and makes this area of law more predictable to businesses that engage in transactions in more than one state
Article 2
focuses on contracts for the sale of goods
Article 2(A)
focuses on contracts for the lease of goods
3 categories that can be bought and sold according to the UCC
1.) goods (tangible)
2.) realty
3.) services (intangible)
Sale (UCC Article 2)
consists of the passing of title from the seller to the buyer for a price
Goods (UCC Article 2)
all tangible things which are moveable at the time of identification to the contract for sale
Trade Fixture
items attached to real estate that are used for business activities
Mixed Sale
contract that combines a good with a service
Merchants (UCC)
– person who regularly sells goods as his or her business or trade or employs people to sell those goods
– anyone who works for a person selling those goods
– anyone who holds himself or herself out as a merchant or dealer
Lease (UCC Article 2(A))
transfer of the right to possession and use of goods for a term in return for consideration
Lessor (UCC Article 2(A))
person who transfers the right to possession and use of goods under a lease
Lessee (UCC Article 2(A))
person who acquires the right to possession and use of goods under a lease
United Nations Convention on Contracts for the International Sale of Goods (CISG)
offered as a treaty that countries could sign, indicating their willingness to allow this treaty to govern international business-to-business sales contracts
(Interpretation Under UCC) Price
“reasonable price” supplied at time of delivery
(Interpretation Under UCC) Payment
due at time and place at which the buyer is to receive the goods
(Interpretation Under UCC) Delivery
place for delivery is seller’s place of business
(Interpretation Under UCC) Time
contract must be performed in reasonable time
(Interpretation Under UCC) Duration
party that wants to terminate an ongoing contract must use good faith and give reasonable notification
(Interpretation Under UCC) Quantity
courts generally have no basis for determining remedy
How are contracts formed under the UCC compared to common law?
– Formation in general: UCC more lenient than common law regarding contract formation; courts evaluate intent of parties to sales or lease contract
– Offer and Acceptance
○ Offers valid even if terms left open
○ “mirror-image” rule does not apply
○ Courts evaluate each case individually to determine whether additional terms allowed
– Consideration: mutual consideration required upon forming agreement. When sales/lease contracts modified, modifications need not be supported by additional consideration
Firm Offer
1.) offer made in writing
2.) gives assurances that it will be irrevocable for no longer than three months despite a lack of consideration for the irrevocability
Mirror-Image Rule (UCC)
UCC- additional terms do not negate acceptance unless acceptance is made expressly conditional on assent to the additional terms
Common Law – additional terms = counteroffer
Consideration (UCC)
eliminates requirement of consideration for the modification of sales and lease contracts
Battle of Forms
if last set of negotiations are NOT SPECIFICALLY rejected, then last terms standing are the ones applicable to the final transaction
Statute of Frauds Requirements (UCC and Common Law)
UCC – contracts for the sale of goods must be in writing if the goods are $500 or more, leases must be for payments of $1,000 or more
Common Law – all material terms to a contract to be in writing
Exception – if parties are merchants
type of documentation that shows contractual intent and satisfies the statute of frauds requirement
3 Kinds of Title
1.) Good
2.) Void
3.) Voidable
Good Title
acquired from someone who already owns the goods free and clear
Void Title
not true title
Voidable Title
contract between original parties would be void, but the goods have already been sold to a third party
Aspects for Buyer to get Voidable Title
1.) buyer deceived the seller regarding his or her true identity
2.) buyer wrote bad check for the goods
3.) buyer committed criminal fraud in securing goods
4.) buyer and seller agreed that title would not pass until some later time
5.) buyer is a minor
someone entrusts the possession of a good to a merchant and asks him to repair that good
Issues with Concept of Title
– Ownership
– Encumbrance
– Loss
– Insurable interest
Issue of Ownership
when does title actually transfer from seller to buyer?
Issue of Encumbrance
right to encumber goods as collateral for a debt depends on who is holding title
Issue of Loss
when does the risk of loss become attached?
Issue of Insurable Interest
– it is the right to insure the goods against any risk exposure such as damage or destruction
– when is this insurable interest created?
4 Types of Sales Contracts*
1.) Simple delivery
2.) Common-carrier delivery
3.) Goods-in-bailment
4.) Conditional sales
Simple Delivery Contract
purchased goods are transferred to buyer from seller at either time of the sale or some time later by the seller’s delivery
Tender of Delivery
moment the goods were available for the buyer to take
Common-Carrier Contract
occurs when goods are delivered to the buyer by a common carrier, such as a trucking line
seller–>common carrier–>buyer
Shipment contract
title passes when goods are turned over to common carrier by the seller
Destination contract
title passes when common carrier delivers the goods to the buyer
Risk of Loss
transfers from seller to buyer simultaneously with title
Insurable Interest
created when the buyer and/or seller holds title or retains a risk of loss
Goods-in-Bailment Contract
occurs when purchased goods are in some kind of storage under control of third party, such as a warehouseman
Conditional Sales Contract
sale itself is contingent on approval
Sale-on-approval contract
seller allows the buyer to take possession of the goods before deciding whether to complete the contract by making the purchase
Sale-or-return contract
seller and buyer agree that buyer may return the goods at a later time
Seller in breach
Buyer may accept nonconforming goods “as is” or reject goods (subject to seller’s right to “cure”)

Risk of loss remains with seller until buyer accepts goods, or deficiencies corrected

Buyer in breach
(buyer refuses to accept conforming goods, goods later lost or damaged):

Risk of loss depends on type of contract between buyer and seller

Categories: Sales