Chapter 21Introduction to Sales and Lease Contracts

Hypothetical

While traveling on Interstate 10 in the vast, arid land between Phoenix and Los Angeles, a traveler’s “worst nightmare” occurs. Transmission failure forces tourist Penn Lay to the emergency lane of the highway, and at that time Lay realizes the true value of a cell phone. Lay calls a Phoenix towing company, and his car is transported to S. Li Ping Transmission Repair, Inc.

The repair bill amounts to $4,500. On the bill, transmission parts total $4,000, and labor hours total $1,000 (5 hours at $200 per hour.) Lay believes that the principles of capitalism do not extend to such an exorbitant sum, and he further believes that S. Li Ping interpreted his out-of-state, North Carolina license plate as a “license to steal.”

Who wins? In litigation between the parties, does the Uniform Commercial Code (UCC) apply, or ordinary contract law (“common” law?) If ordinary contract law applies, should North Carolina or Arizona law apply? Does S. Li Ping have a legal and/or ethical obligation to charge “out-of-staters” the same repair price as “in-staters?”

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Introduction

o Facilitates commercial transactions.

o UCC Article 2: Sale of Goods.o Modifies common law of contracts

of some areas.o UCC 2 preempts common law.o Where UCC2 is silent, common law

governs.

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UCC Outline (Articles and Topics)o Article 1: General

Provisions

o Article 2: Sales

o Article 2(A): Leases

o Article 3: Negotiable Instruments

o Article 4: Bank Deposits and Collections

o Article 4(A): Wire Transfers

o Article 5: Letters of Credit

o Article 6: Bulk Transfers

o Article 7: Documents of Title

o Article 8: Investment Securities

o Article 9: Secured Transactions

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UCC Article 2 Terminology

o Sale: The passing of title from seller to buyer for a price

o Goods: Tangible things that can be moved (Examples: Automobiles, furniture, electronics)

o Mixed goods and services contracts: Contracts that include both goods and services. UCC Article 2 applies to contract if goods are “predominant part” of transaction

o Merchants: Buyers or sellers who

o Deal in goods of the kind involved in contract

o By occupation, represent themselves as having knowledge and skill unique to goods involved in transaction, or

o Employ a merchant as a broker, agent, or other intermediary

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The Scope of UCC 2-The Sale of Goods

o 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.

o Generally contracts for services are not governed by UCC2.

o What if Goods and Services combined?

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Scope of Article 2

o UCC2 applies to the “sale of goods.”o A “sale” is the passing of title of

“goods” to/from a “merchant” (seller or buyer) for a price (money, goods, services,etc).

o “Goods” are tangible and movable.o A “merchant” has special business

expertise and is not a casual buyer/seller.

UCC Article 2(A) Terminology

o Leases: Transfers of right to possession and use of goods for a term, in return for consideration

o Special Leases: Consumer leases and financial leases

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Scope of UCC 2A—Leases

o Contract for lease of personal goods between a lessor and a lessee.

o Consumer Leases (total payments less than $25,000).

o Finance Leases (involves a 3rd party-supplier).

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Formation of Sales and Lease Contracts

o At common law once a valid offer is unequivocally accepted, a binding contract is formed.

o UCC is more flexible, and allows for open pricing, payment, and delivery terms.

How Sales and Lease Contracts Are Formed Under The UCC

o Offer and Acceptanceo Offers valid even if terms left openo “Mirror-image” rule does not applyo Courts evaluate each case individually to

determine whether additional terms allowed

o Consideration: Mutual consideration required upon forming agreement. When sales/lease contracts modified, modifications need not be supported by additional consideration

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Open Terms

o UCC 2-204: even if terms of are undetermined, a contract may still exist.o 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.

Open Terms

o Open Price Term: If parties have not agreed on pricing, court can determine “reasonable price at the time of delivery.” UCC2-305

o Open Payment Term: Unless otherwise agreed, payment is due on delivery (COD). UCC2-310(a)

o Open Delivery Term: Unless otherwise agreed, buyer takes delivery at the Seller’s place of business. UCC2-308(a)

o Time for Performance: “Reasonable” time

o Duration of Contract: “Reasonable” period of time, with termination allowed in good faith, and upon notice

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Open Terms

o Open Quantity: generally courts will not impose a quantity. UCC2-306. Exceptions: o Requirements Contract: buyer

agrees to purchase what the buyer needs or requires.

o Output Contract: buyer agrees to buy all of seller’s production or output.

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Statute of Frauds

o Sale of goods over $500 must have a signed writing to be enforceable.

o Exceptions to this rule (see next slide):o Specially manufactured goods.o Admissions by breaching party.o Partial performance.o Merchant doesn’t object within 10 days.

o Oral agreement enforceable after written confirmation between merchants.

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UCC Statute of Frauds Exceptions

o Specifically-manufactured goods

o Buyer/lessee ordered goods made to meet his/her specific needs

o Goods not suitable for sale/lease to others in “ordinary course of business; and

o Seller/lessor has substantially begun manufacture of goods, or made commitments for their procurement

o Admission (In legal pleadings, testimony, or court)

o Partial Performance: Enforceable to extent payment made and accepted, or to extent goods received and accepted

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UCC Contracts/Leases and the Admissibility of Parol Evidence—Evidence Outside Written Contract Admissible

If:

o Additional terms consistent with contract terms

o Information helps interpret agreement, including:

o Course of performance

o Course of dealing

o Usage of trade

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Interpretation of Sales and Lease Contracts: Priority of Evidence

o Express contract terms

o Course of performance (regarding subject contract)

o Course of Dealings (between subject parties)

o Usage of trade (industry standard)

Unconscionability (Definition):

o In context of UCC contract for sale of goods or lease, an agreement that is so unfair or “one-sided” that court refuses to enforce it

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