Chapter 18 PDF

Chapter 18 Most tangible items—such as books, clothing, and tools—are considered goods. In medieval times, merchants gathered at fairs in Europe to exchange such goods. Over time, certain customs and rules evolved for enforcing contracts and resolving disputes. These customs and rules, which were re...

Chapter 18 Most tangible items—such as books, clothing, and tools—are considered goods. In medieval times, merchants gathered at fairs in Europe to exchange such goods. Over time, certain customs and rules evolved for enforcing contracts and resolving disputes. These customs and rules, which were referred to as the Law Merchant, were enforced by “fair courts” established by the merchants. Eventually, the customs and rules of the Law Merchant were absorbed into the common law.Toward the end of the 1800s, England enacted a statute (the Sale of Goods Act) that codified the common law rules of commercial transactions. In the United States, laws governing the sale of goods also developed. In 1906, the Uniform Sales Act was promulgated in the United States and enacted in many states. It was quickly outdated, however, as mass production and distribution of goods developed in the 20th century. In 1949, the National Conference of Commissioners on Uniform State Laws promulgated a comprehensive statutory scheme called the Uniform Commercial Code (UCC). The UCC covers most aspects of commercial transactions. Article 2 (Sales) and Article 2A (Leases) of the UCC govern personal property sales and leases. These articles are intended to provide clear, easy-to-apply rules that place the risk of loss of the goods on the party most able to either bear the risk or insure against it. The common law of contracts governs whether either Article 2 or Article 2A is silent on an issue. This chapter discusses the formation of sales and lease contracts. Subsequent chapters cover the performance, enforcement, breach, and remedies for the breach of sales and lease contracts, as well as sales and lease contract warranties. 1. 18.1 Describe the Uniform Commercial Code (UCC). One of the major frustrations of businesspeople conducting interstate business is that they are subject to the laws of each state in which they operate. To address this problem, in 1949, the National Conference of Commissioners on Uniform State Laws promulgated the Uniform Commercial Code (UCC) Article 2 (Sales) 1. 18.2 Define sales contracts governed by Article 2 of the UCC. All states except Louisiana have adopted some version of Article 2 (Sales) of the UCC. Article 2 is also applied by federal courts to sales contracts governed by federal law. Critical Legal Thinking Questions What is the benefit of states having the same or similar laws regarding transactions in goods? Should uniform laws also be adopted for the provision of services, the sale of real estate, and other transactions? What Is a Sale? Article 2 of the UCC applies to transactions in goods [UCC 2-102]. All states have held that Article 2 applies to a sales contract for the sale of goods. The sale of goods consists of the passing of title of goods from a seller to a buyer for a price [UCC 2-106(1)]. Goods are defined as tangible items that are movable at the time of their identification to a contract [UCC 2-105(1)]. Specially manufactured goods and the unborn young of animals are examples of goods. Certain items are not considered goods and are not subject to Article 2. They include the following: Money and intangible items are not tangible goods. Examples Stocks, bonds, and patents are not tangible goods. Real estate is not a tangible good because it is not movable [UCC 2-105(1)]. However, minerals, structures, growing crops, and other items that are severable from real estate may be classified as goods subject to Article 2. Examples The sale and removal of a chandelier in a house is a sale of goods subject to Article 2 because its removal would not materially harm the real estate. The sale and removal of the furnace, however, would be a sale of real property because its removal would cause material harm [UCC 2-107(2)]. Who Are Sellers? A manufacturer, distributor, wholesaler, dealer, or retailer who owns—i.e., has title to—the product during the chain of distribution is a seller. However, shippers, warehouses, brokers, marketers, auctioneers, bailees, and consignees, who do not take title to property during the course of a distribution but rather render services to facilitate that distribution or sale, are not sellers. Goods versus Services Contracts for the provision of services—including legal services, medical services, and dental services—are not covered by Article 2. Sometimes, however, a sale involves the provision of both a service and a good in the same transaction. This sale is referred to as a mixed sale. Article 2 applies to mixed sales only if the goods are the predominant part of the transaction. Whether the sale of goods is the predominant part of a mixed sale is decided by courts on a case-by-case basis. Generally, Article 2 of the UCC applies to all sales contracts, whether they involve merchants or not. However, Article 2 contains several provisions that either apply only to merchants or impose a greater duty on merchants. UCC 2-104(1) defines a merchant as (1) a person who deals in goods of the kind involved in the transaction or (2) a person who by occupation holds him- or herself out as having knowledge or skill peculiar to the goods involved in the transaction.Article 2A (Leases) 1. 18.3 Define lease contracts governed by Article 2A of the UCC. Personal property leases of goods are a billion-dollar industry. Article 2A (Leases) of the UCC directly addresses personal property leases [UCC 2A-101]. It establishes a comprehensive uniform law covering the formation, performance, and default of leases in goods [UCC 2A-102, 2A-103(h)]. Article 2A is similar to Article 2. In fact, many Article 2 provisions were simply adapted to reflect leasing terminology and practices that carried over to Article 2A. Definition of Lease A lease is a transfer of the right to the possession and use of named goods for a set term in return for certain consideration [UCC 2A-103(1)(i)(x)]. Leased goods can be anything from an automobile leased to an individual to a complex line of industrial equipment leased to a multinational corporation. In a lease contract, the lessor is the person who transfers the right of possession and use of goods under the lease [UCC 2A-103(1)(p)]. The lessee is the person who acquires the right to possession and use of goods under the lease [UCC 2A-103(1)(n)]. Finance Lease A finance lease is a three-party transaction consisting of a lessor, a lessee, and a supplier (or vendor). The lessor does not select, manufacture, or supply the goods. Instead, the lessor acquires title to the goods or the right to their possession and use in connection with the terms of the lease [UCC 2A-103(1)(g)]. Formation of Sales and Lease Contracts: Offer 1. 18.4 Describe the formation of sales and lease contracts and define the firm offer rule. As with general contracts, the formation of sales and lease contracts requires an offer and an acceptance. The UCC-established rules for each of these elements often differ considerably from common law. A contract for the sale or lease of goods may be made in any manner sufficient to show agreement, including conduct by both parties that recognizes the existence of a contract [UCC 2-204(1), 2A-204(1)]. Under the UCC, an agreement sufficient to constitute a contract for the sale or lease of goods may be found even though the moment of its making is undetermined [UCC 2-204(2), 2A-204(2)]. Open Terms Sometimes the parties to a sales or lease contract leave open a major term in the contract. The UCC is tolerant of open terms. According to UCC 2-204(3) and 2A-204(3), a contract does not fail because of indefiniteness if (1) the parties intended to make a contract and (2) there is a reasonably certain basis for giving an appropriate remedy. In effect, certain open terms are permitted to be “read into” sales or lease contracts. This rule is commonly referred to as the gap-filling rule A contract may provide that the price will be set by another standard, either on delivery or on a set date. If the agreed-on standard is unavailable when the price is to be set, a reasonable price is implied at the time of delivery of the goods [UCC 2-305(1)]. A seller or buyer who reserves the right to fix a price must do so in good faith [UCC 2-305(2)]. When one of the parties fails to fix an open price term, the other party may opt to either (1) treat the contract as canceled or (2) fix a reasonable price for the goods [UCC 2-305(3)]. OPEN PAYMENT TERM If the parties to a sales contract do not agree on payment terms, payment is due at the time and place at which the buyer is to receive the goods. This is called an open payment term. If delivery is authorized and made by way of document of title, payment is due at the time and place at which the buyer is to receive the document of title, regardless of where the goods are to be received [UCC 2-310]. OPEN DELIVERY TERM If the parties to a sales contract do not agree to the time, place, and manner of delivery of the goods, the place for delivery is the seller’s place of business. If the seller does not have a place of business, delivery is to be made at the seller’s residence. This is called an open delivery term. If identified goods are located at some other place, and both parties know of this fact at the time of contracting, that place is the place of delivery [UCC 2-308]. If goods are to be shipped but the shipper is not nam Consideration The formation of sales and lease contracts requires consideration. However, the UCC changes the common law rule that requires the modification of a contract to be supported by new consideration. An agreement modifying a sales or lease contract needs no consideration to be binding [UCC 2-209(1), 2A-208(1)]. firm offer rule. This rule states that a merchant who (1) offers to buy, sell, or lease goods and (2) gives a written and signed assurance on a separate form that the offer will be held open cannot revoke the offer for the time stated or, if no time is stated, for a reasonable time. The maximum amount of time permitted under this rule is three months [UCC 2-205, 2A-205].Modification of a sales or lease contract must be made in good faith [UCC 1-203]. As in the common law of contracts, modifications are not binding if they are obtained through fraud, duress, extortion, or Formation of Sales and Lease other bad faith efforts. Contracts: Acceptance 1. 18.5 Describe acceptance and define the UCC’s additional terms rule and written confirmation rule. Both common law and the UCC provide that a contract is created when the offeree (i.e., the buyer or lessee) sends an acceptance to the offeror (seller or lessor), not when the offeror receives the acceptance. Method and Manner of Acceptance Unless otherwise unambiguously indicated by language or circumstance, an offer to make a sales or lease contract may be accepted in any manner and by any reasonable medium of acceptance [UCC 2-206(1)(a), 2A-206(1)]. If an order or other offer to buy goods requires prompt or current shipment, the offer is accepted if the seller (1) promptly promises to ship the goods or (2) promptly ships either conforming or nonconforming goods [UCC 2-206(1)(b)]. The shipment of conforming goods signals acceptance of the buyer’s offer. Acceptance of goods occurs after the buyer or lessee has a reasonable opportunity to inspect them and signifies that (1) the goods are conforming, (2) the buyer will take or retain the goods despite their nonconformity, or (3) the buyer fails to reject the goods within a reasonable time after tender or delivery [UCC 2-513(1), 2A-515(1)]. Under common law’s mirror image rule, an offeree’s acceptance must be on the same terms as the offer. The inclusion of additional terms in the acceptance is considered a counteroffer rather than an acceptance. Thus, a counteroffer extinguishes the offeror’s original offer. UCC 2-207(1) is more liberal than the mirror image rule. It permits definite and timely expression of acceptance or written confirmation to operate as an acceptance even though the contract contains terms that are additional to or different from the offered terms, unless the acceptance is expressly conditional on assent to such terms. If one or both parties to a sales contract are nonmerchants, any additional terms are considered proposed additions to the contract. The proposed additions do not constitute a counteroffer or extinguish the original offer. If the offeree’s proposed additions are accepted by the original offeror, they become part of the contract. If they are not accepted, the sales contract is formed on the basis of the terms of the original offer [UCC 2-207(2)]. Accommodation Shipment A shipment of nonconforming goods does not constitute an acceptance if the seller reasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer [UCC 2-206(1)(b)] The UCC includes Statute of Frauds provisions that apply to sales and lease contracts. The provisions of the UCC Statute of Frauds are as follows: All contracts for the sale of goods priced at $500 or more must be in writing [UCC 2-201(1)]. Lease contracts requiring payments of $1,000 or more must be in writing [UCC 2A-201(1)]. Future amendments to the UCC may increase these dollar amounts. The writing must be sufficient to indicate that a contract has been made between the parties. Except as discussed in the paragraphs that follow, the writing must be signed by the party against whom enforcement is sought or by an authorized agent or broker. If a contract falling within these parameters is not written, it is unenforceable. Exceptions to the UCC Statute of Frauds In three situations, a sales or lease contract that would otherwise be required to be in writing is enforceable even if it is not in writing [UCC 2-201(3), UCC 2A-201(4)]:  1. Specially manufactured goods. Buyers and lessees often order specially manufactured goods. If a contract to purchase or lease such goods is oral, the buyer or lessee may not assert the Statute of Frauds against the enforcement of the contract if (1) the goods are not suitable for sale or lease to others in the ordinary course of the seller’s or the lessor’s business and (2) the seller or lessor has made either a substantial beginning of the manufacture of the goods or commitments for their procurement. 2. Admissions in pleadings or court. If the party against whom enforcement of an oral sales or lease contract is sought admits in pleadings, testimony, or otherwise in court that a contract for the sale or lease of goods was made, the oral contract is enforceable against that party. However, the contract is enforceable only as to the quantity of goods admitted. 3. Part acceptance. An oral sales or lease contract that should otherwise be in writing is enforceable to the extent to which the goods have been received and accepted by the buyer or lessee. Example A lessor orally contracts to lease 20 automobiles to a lessee. The lessee accepts the first eight automobiles tendered by the lessor. This action is part acceptance. The lessee refuses to take delivery of the remaining 12 Under the written confirmation rule, if both parties to an oral sales or lease contract are merchants, the Statute of Frauds writing requirement can be satisfied if (1) one of the parties to an oral agreement sends a written confirmation of the sale or lease within a reasonable time after contracting and (2) the other merchant does not give written notice of an objection to the contract within 10 days after receiving the confirmation. This situation is true even though the party receiving the written confirmation has not signed it. The only stipulations are that the confirmation is sufficient and that the party to whom it was sent has reason to know its contents [UCC 2-201(2)].Oral modification of a contract is not enforceable if the parties agree that any modification of the sales or lease contract must be signed in writing [UCC 2-209(2), 2A-208(2)]. In the absence of such an agreement, oral modifications to sales and lease contracts are binding if they do not violate the Statute of Frauds. If the oral modification brings the contract Parol within the Statute of Frauds, it must be in writing to be enforceable. Evidence Rule The parol evidence rule states that when a sales or lease contract is evidenced by a writing that is intended to be a final expression of the parties’ agreement or a confirmatory memorandum, the terms of the writing may not be contradicted by evidence of (1) a prior oral or written agreement or (2) a contemporaneous oral agreement (i.e., parol evidence) [UCC 2-202, 2A-202]. This rule is intended to ensure certainty in written sales and lease contracts. Occasionally, the express terms of a written contract are not clear on their face and must be interpreted. In such cases, reference may be made to certain sources outside the contract. These sources are construed together when they are consistent with each other. If that is unreasonable, they are considered in descending order of priority [UCC 2-208(2), 2A-207(2)]:  1. Course of performance. Conduct of the parties concerning the contract in question. 2. Course of dealing. Conduct of the parties in prior transactions and contracts. 3. Usage of trade. Any practice or method of dealing that is regularly observed or adhered to in a place, a vocation, a trade, or an industry. Electronic Sales and Lease Contracts 1. 18.7 Describe how Revised Article 2 (Sales) and Article 2A (Leases) permit electronic contracting. Many sales and lease contracts are now electronic. Jurisdictions recognize and enforce electronic sales contracts (e-sales contracts) and electronic lease contracts (e-lease contracts). Following are some of the definitions for electronic commerce and their implications: Electronic means relating to technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities. This term extends many of the provisions and rules of the UCC to cover electronic contracting of sales and lease contracts. Electronic agent means a computer program or an electronic or other automated means used independently to initiate an action or respond to electronic records or performances in whole or in part, without review or action by an individual. This definition allows for contracting for the sale and lease of goods over the internet, using websites and other electronic media to order or lease goods. Electronic record (e-record) means a record created, generated, sent, communicated, received, or stored by electronic means. This term is often used in addition to the words writing and record and thus recognizes that UCC contracts and other information may be sent or stored by electronic means rather than in tangible writings. Electronic signature (e-signature or digital signature) means the signature of a person that appear Letters of Credit 1. 18.8 Describe how letters of credit facilitate international trade. Letters of credit are often used to finance international trade and facilitate import-export transactions. A letter of credit, also known as a documentary credit, is a formal document issued by a bank that guarantees payment to a seller on behalf of a buyer. The International Chamber of Commerce (ICC) has promulgated the Uniform Customs and Practice for Documentary Credits (UCP), which establishes specific terms (called Incoterms) that are almost universally accepted and used to govern international letters of credit. Most parties to international sale of goods contracts that involve letters of credit agree that the provisions of the UCP apply to their letters of credit. In an international sales transaction, the buyer (the importer) and the seller (the exporter) are located in different countries. If the seller delivers the goods but the buyer fails to pay for the goods, difficulties may arise for the seller in obtaining payment because the buyer is located in a different country, where different legal rules and procedures may apply. Also, the unpaid seller will incur legal and other expenses in trying to recover payment. To solve this problem, the seller often requires that the buyer obtain a letter of credit from a bank whereby the seller is paid for the goods by the bank rather than by the buyer directly. Letters of credit are often used if the seller and buyer have not conducted pri Letters of credit can also be used in domestic sales and purchase transactions. Domestic letters of credit are usually governed by Article 5 (Letters of Credit) of the UCC, although the parties may designate that the provisions of the UCP apply to their transaction. Often, a standby letter of credit is used in domestic sales transactions. Rather than being the primary method for paying for goods, a standby letter of credit guarantees the seller that if the buyer does not pay for the goods, then the bank will pay the seller. Letters of credit are also used to guarantee payment for the provision of services and the transfer of intellectual property. The vast majority of letters of credit are issued in electronic form, and the UCP and Article 5 have been revised to accommodate digital letters of credit and trade practices.