Sales and Lease Contracts PDF

C h a p te r 14 Sales and Lease Contracts W hen we turn to contracts for attempts to produce a uniform body Today, businesses often engage the sale and...

C h a p te r 14 Sales and Lease Contracts W hen we turn to contracts for attempts to produce a uniform body Today, businesses often engage the sale and lease of goods, of laws relating to commercial trans- in sales and lease transactions on we move away from com- actions in the United States, none has a global scale. The United Nations mon law principles and into the area been as successful as the UCC. Convention on Contracts for the of statutory law. State statutory law The goal of the UCC is to sim- International Sale of Goods (CISG) governing sales and lease transactions plify and to streamline commercial governs international sales contracts. is based on the Uniform Commercial transactions. The UCC allows parties The CISG is a model uniform law Code (UCC), which has been adopted to form sales and lease contracts, that applies only when a nation has as law by all of the states.1 Of all the including those entered into online, adopted it, just as the UCC applies without observing the same degree of only to the extent that it has been 1. Louisiana has not adopted Articles 2 and 2A, formality used in forming other types adopted by a state. however. of contracts. statutory law based on the UCC, the UCC controls. 14–1 The Scope of Articles 2 (Sales) Thus, when a UCC provision addresses a certain issue, and 2A (Leases) the UCC rule governs. When the UCC is silent, the common law governs. The relationship between general Article 2 of the UCC sets forth the requirements for contract law and the law governing sales of goods is sales contracts, as well as the duties and obligations of the illustrated in Exhibit 14–1. parties involved in the sales contract. Article 2A covers In regard to Article 2, keep two points in mind. similar issues for lease contracts. Bear in mind, however, 1. Article 2 deals with the sale of goods. It does not deal that the parties to sales or lease contracts are free to agree with real property (real estate), services, or intangible to terms different from those stated in the UCC. property such as stocks and bonds. Thus, if the sub- ject matter of a dispute is goods, the UCC governs. 14–1a Article 2—The Sale of Goods If it is real estate or services, the common law applies. 2. In some situations, the rules can vary depending on Article 2 of the UCC (as adopted by state statutes) gov- whether the buyer or the seller is a merchant. erns sales contracts, or contracts for the sale of goods. To facilitate commercial transactions, Article 2 modifies We look now at how the UCC defines a sale, goods, and some of the common law contract requirements that merchant status. were discussed in the previous chapters. To the extent that it has not been modified by the What Is a Sale? The UCC defines a sale as “the pass- UCC, however, the common law of contracts also applies ing of title [evidence of ownership rights] from the seller to sales contracts. In other words, the common law to the buyer for a price” [UCC 2–106(1)]. The price may requirements for a valid contract—agreement, consider- be payable in cash or in other goods or services. Case in ation, capacity, and legality—are also applicable to sales Point 14.1 Blasini, Inc., contracted to buy the business contracts. assets of the Attic Bar & Grill in Omaha, Nebraska, from In general, the rule is that whenever a conflict arises Cheran Investments, LLC. Blasini obtained insurance between a common law contract rule and the state and was making monthly payments on the assets, which 287 Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 288 Un it Three The Commercial Environment Exhibit 14–1 The Law Governing Contracts This exhibit graphically illustrates the relationship between general contract law and statutory law (UCC Articles 2 and 2A) governing contracts for the sale and lease of goods. Sales contracts are not governed exclusively by Article 2 of the UCC but are also governed by general contract law whenever it is relevant and has not been modified by the UCC. Nonsales Contracts General Contract Law C o nt ro ls (contracts outside the UCC, primarily contracts for services and for real estate) Relevant Common Law Not Modified by the UCC Co n t ro l s Contracts for the Sale and Lease of Goods s trol Statutory Law Con (UCC Articles 2 and 2A) included furniture and equipment. A fire broke out and Goods Associated with Real Estate. Goods associated damaged the assets involved in the sale. Because the pur- with real estate often do fall within the scope of Article 2 chase price had not yet been fully paid, a dispute arose [UCC 2–107]. For instance, a contract for the sale of concerning who was entitled to the insurance proceeds minerals, oil, or gas is a contract for the sale of goods if for the damage. severance, or separation, is to be made by the seller. Similarly, Nautilus Insurance Company asked a Nebraska state a contract for the sale of growing crops or timber to be cut court to resolve the matter. Ultimately, a state appel- is a contract for the sale of goods regardless of who severs late court held that the sale of the Attic’s business assets them from the land. involved goods, and thus the agreement was governed by Case in Point 14.2 Perry Dan Cruse owned a busi- the UCC. Under UCC 2–401, title to the goods passed ness in Indiana that bought standing timber, cut it, and to Blasini at the time of contract formation, regardless of then resold it. Donald Freyberger had a contract with whether the entire purchase price had been paid. There- Cruse under which Cruse was to harvest 120 choice trees fore, Blasini was entitled to the insurance proceeds.2 from Freyberger’s land within six months. As payment, (For a discussion of how states can impose taxes on online Freyberger would receive a percentage of the net pro- sales, see this chapter’s Digital Update feature.) ceeds from the sale of the cut timber. Cruse harvested and cut the trees but then filed for bankruptcy before What Are Goods? To be characterized as a good, an the timber was sold. Freyberger filed a claim with the item of property must be tangible, and it must be mov- bankruptcy court, asserting that he had a “vendor’s lien” able. Tangible property has physical existence—it can be on the timber because Cruse owed him $15,150 on the touched or seen. Intangible property—such as corporate contract. (A lien would give Freyberger’s claim priority stocks and bonds, patents and copyrights, and ordinary over Cruse’s other creditors.) contract rights—has only conceptual existence and thus The bankruptcy court held that the timber was per- does not come under Article 2. A movable item can be sonal property (goods) under the UCC regardless of who carried from place to place. Hence, real estate is excluded cut it. Because no vendor’s lien can arise on personal from Article 2. property under Indiana law, Freyberger’s claim did not receive any special priority under bankruptcy law, and the debt could be discharged.3 2. Nautilus Insurance Co. v. Cheran Investments, LLC, 2014 WL 292809 (Neb.Ct.App. 2014). 3. In re Cruse, 2013 WL 323275 (Bankr. S.D.Ind. 2013). Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  C h a p te r 14 Sales and Lease Contracts 289 Digital Update Taxing Web Purchases In 1992, the United States Supreme Court ruled that an and opened the door to state taxation of online sales. individual state cannot compel an out-of-state business The South Dakota legislature had enacted a statute that lacks a substantial physical presence within that that required certain out-of-state sellers to collect and state to collect and remit state taxes.a Congress has the remit sales tax “as if the seller had a physical presence power to pass legislation requiring out-of-state corpora- in the state.” The law applied only to sellers that sell tions to collect and remit state sales taxes, but it has more than $100,000 worth of goods or services not done so. Thus, for some years, online retailers with- within the state per year. South Dakota then sued out a physical presence in a state were not required to three large retailers, Wayfair, Overstock.com, and collect sales taxes from state residents. (State residents Newegg, for failing to collect taxes as required under are supposed to self-report their purchases and pay use this law. The lower courts and the state’s highest taxes to the state, which they rarely do.) court ruled in favor of the retailers because of the Supreme Court’s precedent requiring physical Redefining Physical Presence presence. A number of states found a way to circumvent the When the case reached the Supreme Court, Supreme Court’s 1992 ruling—they simply redefined however, the justices reexamined the earlier decision, physical presence. New York started the trend when it and five out of nine of them chose to overrule it. changed its tax laws in this manner. In New York, an The majority found that the case’s focus on physical online retailer that pays any party within New York to presence created an “online sales tax loophole” solicit business for its products is considered to have that gave out-of-state businesses an advantage. The a physical presence in the state and must collect state justices concluded that in today’s online environment, taxes. Since then, around half of the states have made physical presence in a taxing state is not necessary similar changes. for the seller to have a substantial connection with These laws, often called “Amazon tax” laws because the state. they are aimed largely at Amazon.com, affect all online Chief Justice John Roberts wrote the dissenting sellers, especially retailers that pay affiliates to direct opinion. He noted, “E-Commerce has grown into a traffic to their websites. The laws have been upheld by significant and vibrant part of our national economy several courts.b against the backdrop of established rules, including the physical-presence rule. Any alteration to those rules The Supreme Court Changes Course with the potential to disrupt the development of such a In 2018, in South Dakota v. Wayfair, Inc.,c the United critical segment of the economy should be undertaken States Supreme Court overruled its earlier decision by Congress.” a. Quill Corp. v. North Dakota, 504 U.S. 298, 112 S.Ct. 1904, 119 Critical Thinking Does the Supreme Court’s decision in L.Ed.2d 91 (1992). South Dakota v. Wayfair, Inc., make it more or less likely b. Direct Marketing Association v. Brohl, 814 F.3d 1129 (10th Cir. 2016); D & H Distributing Co. v. Commissioner of Revenue, 477 Mass. 538, that Congress will enact legislation that requires out-of- 79 N.E.3d 409 (2017). state corporations to collect and pay taxes to states for c. ___ U.S. ___, 138 S.Ct. 2080, 201 L.Ed.2d 403 (2018). online sales? Goods and Services Combined. When contracts involve Case in Point 14.3 Kenneth Sack and N111KJ, a combination of goods and services, courts generally use LLC, contracted to buy a jet from Cessna Aircraft Com- the predominant-factor test to determine whether a con- pany for $7.2 million. As part of the agreement, Cessna tract is primarily for the sale of goods or the sale of promised to manage the jet—that is, rent it out on services.4 If a court decides that a mixed contract is pri- N111KJ’s behalf—for five years to help recoup the pur- marily a goods contract, any dispute, even a dispute over chase price. Three years later, Cessna informed N111KJ the services portion, will be decided under the UCC. that the jet was being dropped from the management program. Because of this decision, N111KJ was forced 4. UCC 2–314(1) does stipulate that serving food or drinks is a “sale of goods” to sell the jet for less than 80 percent of the purchase for purposes of the implied warranty of merchantability, which will be discussed in the context of warranties. The UCC also specifies that selling price. Later, N111KJ filed a suit in a federal district court unborn animals or rare coins qualifies as a “sale of goods.” against Cessna, claiming breach of contract under the Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 290 Un it Three The Commercial Environment UCC. The court dismissed the claim, ruling that the 14–1b Article 2A—Leases contract was not subject to the UCC because managing a jet was a service. N111KJ appealed. Leases of personal property (goods such as automobiles A federal appellate court reversed the lower court’s and industrial equipment) have become increasingly dismissal. The contract involved a sale of goods (the jet) common. In this context, a lease is a transfer of the right and a sale of services (its management). Under the to possess and use goods for a period of time in exchange predominant-factor test, the clear purpose of the agree- for payment. Article 2A of the UCC was created to fill ment was the sale of the jet to N111KJ. Its management the need for uniform guidelines in this area. was a secondary purpose.5 Article 2A covers any transaction that creates a lease of goods or a sublease of goods [UCC 2A–102, 2A–103(1) (k)]. Article 2A is essentially a repetition of Article 2, Who Is a Merchant? Article 2 governs the sale of except that it applies to leases of goods rather than sales goods in general. It applies to sales transactions between of goods and thus varies to reflect differences between all buyers and sellers. In a limited number of instances, sales and lease transactions. (Note that Article 2A is not though, the UCC presumes that special business standards concerned with leases of real property, such as land or ought to be imposed because of merchants’ relatively high buildings.) degree of commercial expertise.6 Such standards do not apply to the casual or inexperienced seller or buyer (consumer). Section 2–104 sets forth three ways in which mer- chant status can arise: 14–2 The Formation of 1. A merchant is a person who deals in goods of the Sales and Lease Contracts kind involved in the sales contract. Thus, a retailer, In regard to the formation of sales and lease contracts, the a wholesaler, or a manufacturer is a merchant of the UCC modifies the common law in several ways. We look goods sold in his or her business. A merchant for one here at how Articles 2 and 2A of the UCC modify com- type of goods is not necessarily a merchant for mon law contract rules. Remember, though, that parties another type. For instance, a sporting goods retailer to sales and lease contracts are basically free to establish is a merchant when selling tennis rackets but not whatever terms they wish. when selling a used computer. The UCC comes into play when the parties either 2. A merchant is a person who, by occupation, holds fail to provide certain terms in their contract or wish himself or herself out as having knowledge and skill to change the effect of the UCC’s terms in the con- unique to the practices or goods involved in the tract’s application. The UCC makes this very clear by transaction. This broad definition may include banks its repeated use of such phrases as “unless the parties or universities as merchants. otherwise agree” and “absent a contrary agreement by 3. A person who employs a merchant as a broker, agent, or the parties.” 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 consid- 14–2a Offer ered a merchant in the transaction. In general contract law, the moment a definite offer is In summary, a person is a merchant when she or he, met by an unqualified acceptance, a binding contract acting in a mercantile capacity, possesses or uses an exper- is formed. In commercial sales transactions, the verbal tise specifically related to the goods being sold. This basic exchanges, correspondence, and actions of the parties distinction is not always clear-cut. For instance, state may not reveal exactly when a binding contractual courts appear to be split on whether farmers should be obligation arises. The UCC states that an agreement considered merchants. sufficient to constitute a contract can exist even if the moment of its making is undetermined [UCC 2–204(2), 2A–204(2)]. 5. Sack v. Cessna Aircraft Co., 676 Fed.Appx. 887 (11th Cir. 2017). 6. The provisions that apply only to merchants deal principally with the Open Terms Under the common law of contracts, an Statute of Frauds, firm offers, additional terms in acceptances, warranties, offer must be definite enough for the parties (and the and contract modification. These special rules, which reflect expedient business practices commonly known to merchants in the commercial courts) to ascertain its essential terms when it is accepted. setting, will be discussed later in this chapter. In contrast, the UCC states that a sales or lease contract Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  C h a p te r 14 Sales and Lease Contracts 291 will not fail for indefiniteness even if one or more terms no delivery terms are specified, the buyer normally takes are left open as long as both of the following are true: delivery at the seller’s place of business [UCC 2–308(a)]. Keep in mind, though, that if too many terms are left 1. The parties intended to make a contract. open, a court may find that the parties did not intend 2. There is a reasonably certain basis for the court to to form a contract. Also, the quantity of goods involved grant an appropriate remedy [UCC 2–204(3), usually must be expressly stated in the contract. If the 2A–204(3)]. quantity term is left open, the courts will have no basis The UCC provides numerous open-term provisions for determining a remedy. that can be used to fill the gaps in a contract. For instance, In the following case, one company orally agreed to if the parties have not agreed on a price, the court will store another company’s goods in anticipation of form- determine a “reasonable price at the time for delivery” ing a contract, but they did not agree on how long that [UCC 2–305(1)]. When the parties do not specify pay- arrangement would last. The question was whether the ment terms, payment is due at the time and place at which open term in their agreement rendered the contract the buyer is to receive the goods [UCC 2–310(a)]. When unenforceable. Case 14.1 Toll Processing Services, LLC v. Kastalon, Inc. United States Court of Appeals, Seventh Circuit, 880 F.3d 820 (2018). Background and Facts Toll Processing Services, LLC, a subsidiary of International Steel Services, Inc., was formed to own and operate a pickle line. A pickle line is used in the steel industry to process hot-rolled steel coil through acid tanks to remove rust and impurities. Toll Processing purchased a used pickle line that had been serviced by Kastalon, Inc., which provides equipment and repairs for the steel industry. The line included fifty-seven pickle-line rolls, some of which were in need of repair. Toll Processing was planning to reinstall the used pickle line in its own facility but did not yet have a facility. Kastalon agreed to move the pickle rolls to its facility and store them, at no cost, until Toll Processing could issue a purchase order to Kastalon to recondition the rolls. Both parties believed that Toll Processing would complete its plan to reinstall the pickle line within months, but they did not discuss the time frame. Kastalon moved the pickle rolls to its facility over a period of three months but then had no further contact with Toll Processing for two years. Believing that the pickle rolls were of little value and that Toll Processing had gone out of business, Kastalon eventually scrapped the rolls and received $6,300 from a recycler. The following year, Toll Processing contacted Kastalon and requested a price quote for reconditioning the rolls, at which point Kastalon informed Toll that the rolls had been scrapped. Toll Processing sued Kastalon for breach of contract (in addition to several other claims). A district court granted summary judgment in favor of Kastalon, finding that the oral agreement between the parties did not have a specific duration and lacked consideration. Toll Processing appealed to a federal appellate court. In the Language of the Court PEPPER, District Judge. **** Under Illinois law, oral agreements are enforceable “so long as there is an offer, an acceptance, and a meeting of the minds as to the terms of the agreement.” To be enforceable, such an oral agreement must be sufficiently definite as to its material terms. The parties do not dispute that the duration of Kastalon’s obligation to store the rolls was a material term of their agreement; their dispute relates to the length of the duration. [Emphasis added.] * * * Toll Processing argued that Kastalon agreed to store the rolls until Toll Processing issued a pur- chase order for Kastalon to refurbish the rolls—whenever that might be. Kastalon confirmed that it had agreed to store the rolls until Toll Processing found a location for the pickle line and issued the purchase Case 14.1 Continues Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 292 Unit Th ree The Commercial Environment Case 14.1 Continued order for the refurbishment of the rolls, but insisted that this was to be for a short time—a period of three or four months. This discrepancy, the district court found, showed that the parties did not have a mutual understanding as to the duration of the storage agreement. On appeal, Toll Processing argues that “the parties’ conduct established an agreement on the material terms, and the undisputed facts of record established that there was consideration to support the agreement.” Toll Processing also argues that the district court erred because the duration of the contract either was tied to the reinstallation of the pickle line, or presented a genuine dispute of material fact regarding the parties’ mutual intent. Kastalon responded that [Toll Processing’s in-house attorney] admitted that the parties did not reach an agreement that Kastalon was to hold the rolls indefinitely, and that he admitted that the alleged oral agreement placed no obligations on Toll Processing other than to advise Kastalon that it had received a purchase order for the pickle line and was ready to proceed with work involving the rolls. According to Kastalon, the spare and vague terms of this oral agreement were too indefinite to be enforced under Illinois law. Kastalon’s expectation that Toll Processing would hire it to repair and refurbish the rolls constitutes consideration. But we conclude that the district court correctly entered judgment in Kastalon’s favor as to Toll Processing’s breach of contract claim, because the evidence shows that the parties did not have a mutual understanding that Kastalon would store the rolls indefinitely. The duration of the agreement was to be determined by the date on which Toll Processing issued a purchase order to Kastalon to repair and refurbish the rolls for use in the newly installed pickle line. When Kastalon agreed to store the rolls, however, Toll Processing did not know when—or even if—it would issue that purchase order. The parties hoped and anticipated that Toll Processing would issue the purchase order within months, but Toll Processing conceded that it was possible it might never have issued a purchase order. Decision and Remedy The appellate court affirmed the judgment of the district court on the breach of contract claim. Although parties may have attempted to form a contract, they did not reach a mutual understanding that Kastalon would store the pickle rolls for any certain period of time. Because there was no meeting of the minds on this term, the agreement was unenforceable. The appellate court reversed and remanded the district court’s decision on Toll Processing’s other claims, however. Critical Thinking What If the Facts Were Different? Suppose that the parties admitted that they had agreed Kastalon would store the rolls for up to one year. How would this have affected the court’s decision on breach of contract? Ethical Was it unethical for Kastalon to scrap the rolls without attempting to contact Toll Processing? Explain. Requirements Contracts. Requirements contracts are If, however, the buyer promises to purchase only if he common in the business world and normally are enforce- or she wishes to do so, the promise is illusory (without able. In a requirements contract, the buyer agrees to consideration) and unenforceable by either party. Simi- purchase and the seller agrees to sell all or up to a stated larly, if the buyer reserves the right to buy the goods from amount of what the buyer requires. someone other than the seller, the promise is unenforce- Example 14.4 Newport Cannery forms a contract able (illusory) as a requirements contract. with Victor Tu. The cannery agrees to purchase from Tu, and Tu agrees to sell to the cannery, all of the green beans Output Contracts. In an output contract, the seller that the cannery requires during the following summer. agrees to sell and the buyer agrees to buy all or up to a There is implicit consideration in this contract because stated amount of what the seller produces. Example 14.5 the buyer (the cannery) gives up the right to buy goods Ruth Sewell has planted two acres of organic tomatoes. (green beans) from any other seller. This forfeited right Bella Union, a local restaurant, agrees to buy all of creates a legal detriment—that is, consideration. the tomatoes that Sewell produces that year to use at Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  C h a p te r 14 Sales and Lease Contracts 293 the restaurant. Again, because the seller essentially for- The prompt shipment of nonconforming goods con- feits the right to sell goods to another buyer, there is stitutes both an acceptance, which creates a contract, and implicit consideration in an output contract. a breach of that contract. This rule does not apply if the The UCC imposes a good faith limitation on require- seller seasonably (within a reasonable amount of time) ments and output contracts. The quantity under such notifies the buyer that the nonconforming shipment is contracts is the amount of requirements or the amount offered only as an accommodation, or as a favor. The notice of output that occurs during a normal production period. of accommodation must clearly indicate to the buyer The actual quantity purchased or sold cannot be unrea- that the shipment does not constitute an acceptance sonably disproportionate to normal or comparable prior and that, therefore, no contract has been formed. requirements or output [UCC 2–306(1)]. Example 14.7 Mendez orders one thousand blue smart fitness watches from Halderson. Halderson ships Merchant’s Firm Offer Under regular contract prin- one thousand black smart fitness watches to Mendez. If ciples, an offer can be revoked at any time before accep- Halderson notifies Mendez that it has only black watches tance. The major common law exception is an option in stock, and the black watches are being sent as an contract, in which the offeree pays consideration for the accommodation, then the shipment is an offer. A con- offeror’s irrevocable promise to keep the offer open for a tract will be formed only if Mendez accepts the black stated period. The UCC creates a second exception for watches. firm offers made by a merchant concerning the sale or If, however, Halderson ships black watches without lease of goods (regardless of whether or not the offeree is notifying Mendez that the goods are being sent as an a merchant). accommodation, the shipment is both an acceptance A firm offer arises when a merchant-offeror gives and a breach of the resulting contract. Mendez can sue assurances in a signed writing that the offer will remain Halderson for any appropriate damages. open. The merchant’s firm offer is irrevocable without the necessity of consideration7 for the stated period or, if Communication of Acceptance Under the com- no definite period is stated, a reasonable period (neither mon law, because a unilateral offer invites acceptance to exceed three months) [UCC 2–205, 2A–205]. by performance, the offeree need not notify the offeror To qualify as a firm offer, the offer must be: of performance unless the offeror would not otherwise know about it. In other words, a unilateral offer can be 1. Written (or electronically recorded, such as in an accepted by beginning performance. e-mail). The UCC is more stringent than the common law 2. Signed by the offeror. in this regard because it requires notification. Under the Example 14.6 Osaka, a used-car dealer, e-mails a let- UCC, if the offeror is not notified within a reasonable ter to Gomez on January 1, stating, “I have a used Toyota time that the offeree has accepted the contract by begin- RAV4 on the lot that I’ll sell you for $22,000 any time ning performance, then the offeror can treat the offer between now and January 31.” This e-mail creates a firm as having lapsed before acceptance [UCC 2–206(2), offer, and Osaka will be liable for breach of contract if he 2A–206(2)]. sells the RAV4 to another person before January 31. Additional Terms Recall that under the common law, the mirror image rule requires that the terms of the accep- 14–2b Acceptance tance exactly match those of the offer. Example 14.8 Acceptance of an offer to buy, sell, or lease goods generally Adderson e-mails an offer to sell twenty Samsung Galaxy may be made in any reasonable manner and by any rea- tablets to Beale. If Beale accepts the offer but changes it to sonable means. The UCC permits acceptance of an offer require more powerful tablets, then there is no contract if to buy goods “either by a prompt promise to ship or by the the mirror image rule applies. prompt or current shipment of conforming or noncon- To avoid such problems, the UCC dispenses with the forming goods” [UCC 2–206(1)(b)]. Conforming goods mirror image rule. Under the UCC, a contract is formed accord with the contract’s terms, whereas nonconforming if the offeree’s response indicates a definite acceptance of goods do not. the offer, even if the acceptance includes terms additional to or different from those contained in the offer [UCC 2–207(1)]. Whether the additional terms become part of 7. If the offeree pays consideration, then an option contract (not a merchant’s the contract depends, in part, on whether the parties are firm offer) is formed. nonmerchants or merchants. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 294 Un it Three The Commercial Environment Rules When One Party or Both Parties Are Nonmer- As noted previously, the fact that a merchant’s accep- chants. If one (or both) of the parties is a nonmerchant, tance frequently contains terms that add to or even con- the contract is formed according to the terms of the flict with those of the offer is often referred to as the original offer. The contract does not include any of “battle of the forms.” Although the UCC tries to elimi- the additional terms in the acceptance [UCC 2–207(2)]. nate this battle, the problem of differing contract terms still arises in commercial settings, particularly when stan- Rules When Both Parties Are Merchants. The UCC dard forms (for placing and confirming orders) are used. includes a special rule for merchants to avoid the “battle of the forms,” which occurs when two merchants exchange separate standard forms containing different 14–2c Consideration contract terms. The common law rule that a contract requires consider- Under UCC 2–207(2), in contracts between mer- ation also applies to sales and lease contracts. Unlike the chants, the additional terms automatically become part of common law, however, the UCC does not require a con- the contract unless one of the following conditions arises: tract modification to be supported by new consideration. 1. The original offer expressly limited acceptance to its The UCC states that an agreement modifying a contract terms. for the sale or lease of goods “needs no consideration to 2. The new or changed terms materially alter the contract. be binding” [UCC 2–209(1), 2A–208(1)]. Of course, 3. The offeror objects to the new or changed terms any contract modification must be made in good faith within a reasonable period of time. [UCC 1–304]. In some situations, an agreement to modify a sales or When determining whether an alteration is material, lease contract without consideration must be in writing courts consider several factors. Generally, if the modifica- to be enforceable. For instance, if the contract itself speci- tion does not involve any unreasonable element of sur- fies that any changes to the contract must be in a signed prise or hardship for the offeror, a court will hold that the writing, only those changes agreed to in a signed writing modification did not materially alter the contract. Courts are enforceable. also consider the parties’ prior dealings. Sometimes, when a consumer (nonmerchant) is buy- ing goods from a merchant-seller, the merchant supplies Conditioned on Offeror’s Assent. The offeree’s response a form that contains a prohibition against oral modifica- is not an acceptance if it contains additional or different tion. In those situations, the consumer must sign a sepa- terms and is expressly conditioned on the offeror’s assent to rate acknowledgment of the clause for it to be enforceable those terms [UCC 2–207(1)]. This is true whether or not [UCC 2–209(2), 2A–208(2)]. Also, any modification the parties are merchants. that makes a sales contract come under Article 2’s writ- Example 14.9 Philips offers to sell Hundert 650 ing requirement (its Statute of Frauds, discussed next) pounds of turkey thighs at a specified price and with spec- usually requires a writing to be enforceable. ified delivery terms. Hundert responds, “I accept your See Concept Summary 14.1 for a review of the UCC’s offer for 650 pounds of turkey thighs on the condition that rules on offer, acceptance, and consideration. you agree to give me ninety days to pay for them.” Hundert’s response will be construed not as an acceptance but as a counteroffer, which Philips may or may not accept. 14–2d The Statute of Frauds The UCC contains Statute of Frauds provisions cover- Additional Terms May Be Stricken. The UCC provides ing sales and lease contracts. Under these provisions, yet another option for dealing with conflicting terms in the sales contracts for goods priced at $500 or more and lease parties’ writings. Section 2–207(3) states that conduct by contracts requiring total payments of $1,000 or more both parties that recognizes the existence of a contract is must be in writing to be enforceable [UCC 2–201(1), sufficient to establish a sales contract—even if the parties’ 2A–201(1)]. (These low threshold amounts may eventu- writings do not otherwise establish a contract. In this situ- ally be raised.) ation, “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 Sufficiency of the Writing A writing, including any other provisions of this Act.” In a dispute over contract an e-mail or other electronic record, will be sufficient to terms, this provision allows a court simply to strike from satisfy the UCC’s Statute of Frauds as long as it: the contract those terms on which the parties do not agree. 1. Indicates that the parties intended to form a contract. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  C h a p te r 14 Sales and Lease Contracts 295 Concept Summary 14.1 Offer, Acceptance, and Consideration under the UCC Offer Not all terms (including payment and delivery) have to be included for a contract to be formed. The price does not have to be included for a contract to be formed. The contract normally must specify the quantity of goods involved. An offer by a merchant in a signed writing with assurances that the offer will not be withdrawn is irrevocable without consideration (for up to three months). Acceptance Acceptance may be made by any reasonable means of communication. It is effective when dispatched. Acceptance of an offer can be made by a promise to ship or by the shipment of conforming goods, or by prompt shipment of nonconforming goods unless accompanied by a notice of accommodation. Acceptance by performance requires notice within a reasonable time. Otherwise, the offer can be treated as lapsed. A definite expression of acceptance creates a contract even if the terms of the acceptance differ from those of the offer (unless acceptance is expressly conditioned on consent to the additional or different terms). Consideration A modification of a contract for the sale or lease of goods does not require consideration as long as it is made in good faith. 2. Is signed by the party (or agent of the party) against merchant, even though she or he has not signed it [UCC whom enforcement is sought. (Remember that a 2–201(2)]. typed name can qualify as a signature on an elec- Example 14.10 Alfonso is a merchant-buyer in tronic record.) Cleveland. He contracts over the telephone to purchase The contract normally will not be enforceable beyond $6,000 worth of spare aircraft parts from Goldstein, a the quantity of goods shown in the writing, however. All merchant-seller in New York City. Two days later, Gold- other terms can be proved in court by oral testimony. For stein e-mails a signed confirmation detailing the terms leases, the writing must reasonably identify and describe of the oral contract, and Alfonso subsequently receives the goods leased and the lease term. it. Alfonso does not notify Goldstein in writing that he objects to the contents of the confirmation within ten days of receipt. Therefore, Alfonso cannot raise the Special Rules for Contracts between Merchants Statute of Frauds as a defense against the enforcement of The UCC provides a special rule for merchants in sales the oral contract. transactions (there is no corresponding rule that applies to leases under Article 2A). Merchants can satisfy the Statute of Frauds if, after the parties have agreed orally, one of Exceptions The UCC defines three exceptions to the merchants sends a signed written confirmation to the the writing requirements of the Statute of Frauds [UCC other merchant within a reasonable time. 2–201(3), 2A–201(4)]. The communication must indicate the terms of the 1. Specially manufactured goods. An oral contract for agreement, and the merchant receiving the confirma- the sale or lease of goods will be enforceable if it is tion must have reason to know of its contents. Unless for goods that are specially manufactured for a par- the merchant who receives the confirmation gives writ- ticular buyer or lessee, the goods are not suitable for ten notice of objection to its contents within ten days selling or leasing to others, and the seller or lessor has after receipt, the writing is sufficient against the receiving substantially started manufacturing the goods. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 296 Unit Th ree The Commercial Environment Exhibit 14–2 Major Differences between Contract Law and Sales Law Topic Contract Law Sales Law Contract Terms The contract must contain Open terms are acceptable, if the parties intended to form all material terms. a contract, but the quantity term normally must be specified, and the contract is not enforceable beyond the quantity term. Acceptance Mirror image rule applies. Mirror image rule does not apply. Additional terms will not negate If additional terms are acceptance unless acceptance is made expressly conditional on added in acceptance, a assent to the additional terms. counteroffer is created. Contract Modification requires Modification does not require consideration. Modification consideration. Irrevocable Option contracts (with con- Merchants’ firm offers (without consideration) are irrevocable. Offers sideration) are irrevocable. Statute of Frauds All material terms must be Writing is required only for the sale of goods priced at $500 or more, Requirements included in the writing. but the contract is not enforceable beyond the quantity specified. Merchants can satisfy the requirement by a written confirmation evidencing their agreement. Exceptions exist for (1) specially manufactured goods, (2) admissions, and (3) partial performance. 2. Admissions. An oral contract for the sale or lease 14–2e Unconscionability of goods is enforceable if the party against whom An unconscionable contract is one that is so unfair and enforcement is sought admits in pleadings, testi- one-sided that it would be unreasonable to enforce it. mony, or other court proceedings that a sales or lease The UCC allows a court to evaluate a contract or any contract was made. clause in a contract, and if the court deems it to have 3. Partial performance. An oral contract for the sale or been unconscionable at the time it was made, the court lease of goods is enforceable if payment has been can do any of the following [UCC 2–302, 2A–108]: made and accepted or goods have been received 1. Refuse to enforce the contract. and accepted. The oral contract will be enforced at 2. Enforce the remainder of the contract without the least to the extent that performance actually took unconscionable part. place. 3. Limit the application of the unconscionable term to The exceptions just discussed and other ways in which avoid an unconscionable result. sales law differs from general contract law are summa- The following classic case illustrates an early applica- rized in Exhibit 14–2. tion of the UCC’s unconscionability provisions. Classic Case 14.2 Jones v. Star Credit Corp. Supreme Court of New York, Nassau County, 59 Misc.2d 189, 298 N.Y.S.2d 264 (1969). Background and Facts The Joneses agreed to purchase a freezer for $900 as the result of a sales- person’s visit to their home. Tax and financing charges raised the total price to $1,234.80. Later, the Joneses, who had made payments totaling $619.88, brought a suit in a New York state court to have the purchase contract declared unconscionable under the UCC. At trial, the freezer was found to have a maximum retail value of approximately $300. In the Language of the Court Sol M. WACHTLER, Justice. **** Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  C h a p te r 14 Sales and Lease Contracts 297 * * * [Section 2–302 of the UCC] authorizes the court to find, as a matter of law, that a contract or a clause of a contract was “unconscionable at the time it was made,” and upon so finding the court may refuse to enforce the contract, excise the objectionable clause or limit the application of the clause to avoid an unconscionable result. **** * * * The question which presents itself is whether or not, under the circumstances of this case, the sale of a freezer unit having a retail value of $300 for $900 ($1,439.69 including credit charges and $18 sales tax) is unconscionable as a matter of law. Concededly, deciding [this case] is substantially easier than explaining it. No doubt, the mathemati- cal disparity between $300, which presumably includes a reasonable profit margin, and $900, which is exorbitant on its face, carries the greatest weight. Credit charges alone exceed by more than $100 the retail value of the freezer. These alone may be sufficient to sustain the decision. Yet, a caveat [warning] is warranted lest we reduce the import of Section 2–302 solely to a mathematical ratio formula. It may, at times, be that; yet it may also be much more. The very limited financial resources of the purchaser, known to the sellers at the time of the sale, is entitled to weight in the balance. Indeed, the value dispar- ity itself leads inevitably to the felt conclusion that knowing advantage was taken of the plaintiffs. In addition, the meaningfulness of choice essential to the making of a contract can be negated by a gross inequal- ity of bargaining power. [Emphasis added.] **** * * * The defendant has already been amply compensated. In accordance with the statute, the appli- cation of the payment provision should be limited to amounts already paid by the plaintiffs and the contract be reformed and amended by changing the payments called for therein to equal the amount of payment actually so paid by the plaintiffs. Decision and Remedy The court held that the contract was not enforceable and reformed the contract so that no further payments were required. Critical Thinking Social Why would the seller’s knowledge of the buyers’ limited resources support a finding of unconscionability? Impact of This Case on Today’s Law This early classic case illustrates the approach that many courts take today when deciding whether a sales contract is unconscionable—an approach that focuses on “excessive” price and unequal bargaining power. Most of the litigants who have used UCC 2–302 success- fully could demonstrate both an absence of meaningful choice and contract terms that were unreasonably favorable to the other party. UCC, and the UCC has special rules for determining 14–3 Title, Risk, when title passes. (These rules do not apply to leased and Insurable Interest goods, obviously, because title remains with the lessor, or owner, of the goods.) In most situations, however, Before the creation of the UCC, title—the right of the UCC has replaced the concept of title with three ownership—controlled all issues of rights and remedies other concepts: identification, risk of loss, and insurable of the parties to a sales contract. It was frequently dif- interest. ficult to determine when title actually passed from the seller to the buyer, however. It was also difficult to predict how a court would decide which party had title at the 14–3a Identification time of a loss. Before any interest in goods can pass from the seller or Because of such problems, the UCC has separated the lessor to the buyer or lessee, the goods must be (1) in exis- question of title as much as possible from the question tence and (2) identified to the contract [UCC 2–105(2)]. of the rights and obligations of buyers, sellers, and third Identification takes place when specific goods are des- parties. In some situations, title is still relevant under the ignated as the subject matter of a sales or lease contract. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 298 Un it Three The Commercial Environment Title and risk of loss cannot pass to the buyer from the clothing for men, women, and children. Until the seller seller unless the goods are identified to the contract. (As separates the 10,000 pairs of men’s jeans from the other mentioned, title to leased goods remains with the lessor.) items, title and risk of loss remain with the seller. Identification is significant because it gives the buyer or A common exception to this rule involves fungible lessee the right to insure (or to have an insurable interest goods. Fungible goods are goods that are alike natu- in) the goods and the right to recover from third parties rally, by agreement, or by trade usage. Typical examples who damage the goods. include specific grades or types of wheat, petroleum, and The parties can agree in their contract on when identi- cooking oil, which usually are stored in large containers. fication will take place. (This type of agreement does not Owners of fungible goods typically hold title as tenants effectively pass title and risk of loss on future goods, such in common (owners with undivided shares of the whole), as unborn cattle, however.) If the parties do not so spec- which facilitates further sales. A seller-owner can pass ify, the UCC provisions discussed here determine when title and risk of loss to the buyer without actually separat- identification takes place [UCC 2–501(1), 2A–217]. ing the goods. The buyer replaces the seller as an owner in common [UCC 2–105(4)]. Existing Goods If the contract calls for the sale or lease Example 14.13 Alvarez, Braudel, and Carpenter of specific and determined goods that are already in exis- are farmers. They deposit, respectively, 5,000 bushels, tence, identification takes place at the time the contract 3,000 bushels, and 2,000 bushels of grain of the same is made. Example 14.11 Litco Company contracts to grade and quality in a grain elevator. The three become lease a fleet of five cars designated by their vehicle identi- owners in common, with Alvarez owning 50 percent fication numbers (VINs). Because the cars are identified of the 10,000 bushels, Braudel 30 percent, and Car- by their VINs, identification has taken place, and Litco penter 20 percent. Alvarez contracts to sell her 5,000 acquires an insurable interest in the cars at the time of bushels of grain to Treyton. Because the goods are fun- contracting. gible, she can pass title and risk of loss to Treyton with- out physically separating the 5,000 bushels. Treyton Future Goods Any goods that are not in existence at now becomes an owner in common with Braudel and the time of contracting are known as future goods. The Carpenter. following rules apply to identification of future goods: 1. If a sale or lease involves unborn animals to be born 14–3b When Title Passes within twelve months after contracting, identifica- Once goods exist and are identified, the provisions of tion takes place when the animals are conceived. UCC 2–401 apply to the passage of title. In nearly all 2. If a sale involves crops that are to be harvested within subsections of UCC 2–401, the words “unless otherwise twelve months (or in the next harvest season occur- explicitly agreed” appear. In other words, the buyer and ring after contracting, whichever is longer), identi- the seller can reach an explicit agreement as to when title fication takes place when the crops are planted. If will pass. the sales contract does not refer to crops by when Without an explicit agreement to the contrary, title they will be harvested, then identification takes place passes to the buyer at the time and the place the seller performs when the crops begin to grow. by delivering the goods [UCC 2–401(2)]. For instance, if a 3. In a sale or lease of any other future goods, identifi- person buys cattle at a livestock auction, title will pass to cation occurs when the seller or lessor ships, marks, the buyer when the cattle are physically delivered to him or otherwise designates the goods as those to which or her (unless otherwise agreed). (The delivery of goods the contract refers. Future goods that fall into this may sometimes be accomplished by drones, as discussed category might include solar panels that are to be in this chapter’s Managerial Strategy feature.) designed and manufactured after a contract is signed Case in Point 14.14 Timothy Allen contracted with for their purchase. Indy Route 66 Cycles, Inc., to have a motorcycle cus- tom built for him. Indy built the motorcycle and issued Goods That Are Part of a Larger Mass Goods a “Certificate of Origin.” Later, federal law enforcement that are part of a larger mass are identified when the officers arrested Allen on drug charges and seized his goods are marked, shipped, or somehow designated by property, including the Indy-made cycle, which officers the seller or lessor as the particular goods to pass under the found at the home of Allen’s sister, Tena. The govern- contract. Example 14.12 Briggs orders 10,000 pairs ment alleged that the motorcycle was subject to forfeiture of men’s jeans from a lot that contains 90,000 articles of