Download Chapter 19: Formation of Sales and Lease Contracts

Chapter 18
Formation of Sales
and Lease Contracts
§1: The UCC
Facilitates commercial transactions.
UCC Article 2: Sale of Goods.
Modifies common law of contracts of some
areas.
UCC 2 preempts common law.
Where UCC2 is silent, common law governs.
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§2: The Scope of UCC 2
Does not apply to real estate unless there
is a “good” that can be severed by the
Seller. If the good is severed by the Buyer,
then UCC2 does not apply.
Generally contracts for services are not
governed by UCC2.
Goods and services combined?
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Scope of UCC2 [2]
UCC2 applies to the “sale of goods.”
A “sale” is the passing of title of “goods”
to/from a “merchant” (seller or buyer) for a
price (money, goods, services,etc).
“Goods” are tangible and movable.
A “merchant” has special business expertise
and is not a casual buyer/seller.
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§3: Scope of UCC 2A-Leases
Contract for lease of personal goods
between a lessor and a lessee.
Consumer Leases (total payments less
than $25,000).
Finance Leases (involves a 3rd partysupplier).
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§4: Formation of Sales Contracts
At common law once a valid offer is
unequivocally accepted, a binding
contract is formed.
UCC is more flexible, and allows for open
pricing, payment, and delivery terms.
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Offer-Open Terms [1]
UCC 2-204: even if terms of are
undetermined, contract may still exist.
Open Terms: “Indefiniteness” is OK as long as
the parties intended to make a contract and
there is a reasonable basis for a court to grant a
remedy.
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Offer-Open Terms [2]
• UCC2-305: If parties have not agreed on
pricing, court can determine “reasonable price
at the time of delivery.”
• UCC2-308: Unless otherwise agreed, buyer
takes delivery at the Seller’s place of
business.
• UCC2-310: Unless otherwise agreed,
payment is due on delivery (COD).
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Offer-Open Terms [3]
UCC2-306 “Open Quantity”: generally
courts will not impose a quantity.
Exceptions:
Requirements Contract: buyer agrees to
purchase what the buyer needs or requires.
Output Contract: buyer agrees to buy all of
seller’s production or output.
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Firm Offer
At common law, an offer could be
revoked any time prior to acceptance,
unless there was some consideration.
At UCC, offer made by merchant is
irrevocable for reasonable period of time
if writing assurance is given. No
consideration necessary.
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Acceptance
Any reasonable means of under the
circumstances is permissible.
Promise to ship or prompt shipment is
acceptance.
Shipment of non-conforming goods is both an
acceptance and a breach unless goods sent as an
“accommodation” to buyer (UCC2-206).
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Additional Terms
If either party is a non-merchant, the
contract is formed according to original
terms of the offer.
If both parties are merchants, contract
incorporates new terms unless: (1) original
offer expressly limits terms or (2) material
change or (3) offeror objects within reasonable
time.
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Consideration
UCC requires consideration and
modifications must be made in good
faith.
Modification must be in writing if
required by Statute of Frauds.
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Statute of Frauds
Sale of goods over $500 must have a
signed writing to be enforceable.
Exceptions to this rule:
Specially manufactured goods.
Admissions by breaching party.
Partial performance.
Merchant doesn’t object within 10 days.
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Parol Evidence
Terms of a written agreement intended to
be the final expression of parties’
intentions, cannot be contradicted by
prior or contemporaneous agreements.
Exceptions: consistent terms, course of
dealing and trade.
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Unconscionability
Contract is one that is so unfair and onesided it is unreasonable to enforce it.
Court can: set it aside, refuse to enforce
the unconscionable provision, limit the
contract.
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§5: International Sales
Applicability of the CISG.
Comparison of CISG and UCC.
Mirror Image Rule.
Irrevocable Offers.
Statute of Frauds.
Necessity of a Price Term.
Time of Contract Formation.
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Case 18.1: Micro Data v. Dharma Systems
(Goods and Services Combined)
FACTS:
Micro (MDBS) contracted with Dharma to adapt
Dharma’s software program (known as SQL Access)
for use in a system that MDBS was to provide to
Unisys Government Systems, Inc.
After delivery, some defects were reported. Dharma
refused to fix them until MDBS signed an agreement to
limit the distribution of the adapted software (known as
the RDMS Emulation), but MDBS did not sign.
MDBS sued Dharma for breach of contract. Dharma
counterclaimed.
ISSUE: Was the contract for goods or services?
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Case 18.1: Micro Data v. Dharma Systems
(Goods and Services Combined)
HELD: FOR DHARMA.
The court ruled that the contract was for a
sale of goods, and that MDBS had violated
it.
“A contract for a sale of customized
software is subject to Article 2 of the UCC,
because although both goods and services
were involved, the goods component
predominated.”
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Case 18.2: Wilson Fertilizer v.
ADM Milling
(Additional Terms)
FACTS:
 Wilson agreed to sell grain to ADM Milling Co.
ADM sent a confirmation stating that “[t]his
contract is also subject to the Trade Rules of the
National Grain and Feed Association [NGFA].”
(The NGFA rules require the arbitration of disputes
and limit the time for filing a complaint to one
year). Wilson did not respond.
Later, in a dispute, Wilson filed suit against ADM.
ADM moved to dismiss, claiming that the NGFA
rules required arbitration.
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Case 18.2: Wilson Fertilizer v.
ADM Milling
(Additional Terms)
HELD: FOR ADM.
Wilson had argued that the confirmation materially
altered the contract, because it imposed a
hardship of arbitration.
The UCC “specifically permits parties to a contract
for sale to reduce the time for filing claims to one
year.” Also, “and even more significantly,” Wilson
could have submitted a claim for arbitration within
the one-year limit. The contract was formed in
October 1992, and Wilson filed the complaint in
September 1993.
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Case 18.3: Jones v. Star Credit
(Unconscionability)
FACTS:
Jones, who had limited financial resources, agreed to
purchase a freezer for $900, with financing for total price of
$1,439.69. In fact, the freezer had a maximum retail value
of about $300.
The Joneses sued Star on grounds of unconscionability.
HELD: FOR JONES.
Contract was reformed and Jones made no further
payments.
Court considered the disparity between the purchase price
and the retail value, the credit charges that alone
exceeded the retail value, and the seller’s knowledge of
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the buyers’ limited resources