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Reference Guide

Sales & Leases of Goods - Reference Guides

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Accounting
Course Code
ACTG 2010
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Sales & Leases of Goods
BREACH OF CONTRACT
• Where one party impairs anothers expectations (no breach), aggrieved party may suspend performance and demand
adequate assurance (s. 2-609)
• Response (or lack) may lead to renewed performance, modification or repudiation
• A repudiation is a manifestation (words or conduct) by a promisor to promisee that he/she will not (or cannot) meet a
future performance under contract (s. 2-610)
• Damaged party may cancel contract, suspend performance, and pursue damages
• Other types result from conduct of seller or buyer during performance
• Seller may fail to deliver on time or tender defective goods; buyer may pursue remedy (s. 2-711)
• Buyer may fail to pay on time or make a wrongful rejection; seller may pursue remedy (s. 2-703)
• Remedies respond to type and timing of others breach
SELLER’S REMEDIES
• Upon buyer’s breach, seller may exercise self-help remedies
• Includes suspending performance, withholding delivery of goods in its possession, and stopping delivery of goods in
transit (s. 2-705)
• Seller may cancel the contract for certain types of breaches and seek damages
• Seller may exercise various damage remedies
• Includes action for the price (s. 2-709); resale to third party of goods completed before or after breach (s. 2-706);
action for damages measured by difference between contract price and market price at time and place for tender
(s. 2-708(1)); and action for lost profit (including reasonable overhead) (s. 2-708(2))
• Each remedy has its own conditions
• Contract price/market price formula is a fall back position when all else fails
• Damages may be increased by incidental damages, incurred after breach, and adjusted downward for savings realized
by breach
• Administration of remedies may be influenced by seller’s choice of one remedy over the other, effect of lost volume, and
applicability of components approach
AGREED REMEDIES
• Parties may attempt to liquidate damages upon breach (s. 2-718)
• A reasonable forecast of damages is enforced as a remedy unless the amount was either unreasonably large or
unconscionably low
• Parties may add or limit other remedies, provided that agreement does not deprive aggrieved party of fair quantum of
remedy
• A clause excluding liability for consequential damages must be conscionable
BUYER’S REMEDIES
• Upon seller’s breach, buyer may exercise self-help remedies
• Includes withholding due payments, cancelling contract, and seeking damages
• If seller repudiates or fails to deliver, then buyer has certain goods-oriented remedies
• Includes specific performance if goods are unique or circumstances exist (s. 2-716); replevin if goods are identified
and cover is not reasonably available (s. 2-712 ); and recovery of goods where seller is insolvent (s. 2-502 )
• If specific performance or replevin are not available, then buyer may cover by purchasing substitute goods in the market
or seek damages at places when buyer learned of breach
• Buyer may recover difference between contract price and cost to cover
• Failure to effect cover does not preclude damages measured by formula
Damage remedies are augmented by provable damages and decreased for expenses saved; available where buyer
rightfully rejected goods or revoked an acceptance
Seller’s Non-Conforming Tender
• If tender is discovered upon inspection, then buyer may reject goods, cancel contract, and pursue damages (s. 2-601)
Rejection must occur in fair time; state grounds to avoid harming seller’s right to cure
• Limits include obligation of good faith, requirement (in installment contracts) that non-conformity be material, and sellers
limited right to cure non-conformity
• A buyer in possession of rightfully rejected goods has security interest for amounts paid and expenses incurred; varying
duties regarding care and disposition
• If goods have been accepted, then buyer has limited power to revoke acceptance, cancel contract, and pursue
damage remedies (s. 2-714 )
Revocation requires notice within reasonable time; influenced by importance of non-conformity, whether buyer
discovered it, and condition of goods at time
• If buyer cannot revoke acceptance, then it may recover damages to accepted goods; notice must have been given to
seller in reasonable time after buyer discovered it
Damages
• If breach of warranty occurs, then buyer’s direct damages are difference in value between goods warranted and
goods accepted (measured at time of acceptance) (s. 2-715)
Incidental damages include post-breach expenses incurred in inspection, receipt, transportation, and custody of
rightfully rejected goods; commercially reasonable expenses connected with cover; and other reasonably related
expenses
Consequential damages result from buyers inability to use promised goods
• Damages result from buyer’s needs which seller had reason to know at time of contracting; buyer must make reasonable
efforts to avoid them
COMMERCIAL LAW
• Under the Uniform Commercial Code (UCC), transactions take various
forms, subject matter is personal property, and parties include merchants and
consumers
• Parties to contract of sale include seller and buyer (s. 2-103(1) ); parties to
lease of goods are lessor and lessee (s. 2A-103(1))
• Contracts for sale of goods are regulated by UCC Article 2; contracts for
leases of goods are regulated by UCC Article 2A
ARTICLE 1
• Provides structure by expressing underlying policies (i.e., simplify commercial
law; allow expansion of commercial practice through parties’ agreement;
make law uniform in various jurisdictions) (s. 1-102(1))
Defines extent to which provisions may be varied by agreement (s. 1-102(3))
Provides general definitions (s. 1-102)
Deals with matters of substance (i.e., imposing good faith duty upon
performance of contracts) (s. 1-203)
SUBSTANTIVE CONTENT
Article 2: Sales • Article 2A: Leases • Article 3: Commercial Paper
Article 4: Bank Deposits and Collections • Article 4A: Funds Transfers
Article 5: Letters of Credit • Article 6: Bulk Sales • Article 7: Documents of Title
Article 8: Investment Securities • Article 9: Secured Transactions
METHODOLOGY
Analyze problem and develop general issue(s)
• Determine whether Code applies
• Develop precise statutory issues
• Consult applicable statutory language, definitions, and cross-references to
other sections to determine principal purpose(s) and applicable policies
Enhance interpretation by consulting comments, legislative history, and
secondary sources
• Analyze judicial decisions interpreting same sections; Code is best
evidence of meaning
SCOPE
• Applies to transactions in goods, unless context requires otherwise
(s. 2-102)
• Covers contracts for present or future sale of goods (s. 2-106(1))
• Involves contract between a seller and buyer (s. 2-103(1)(a),(d))
Goods includes all things (including any specially manufactured goods) that
are movable at the time of identification to contract for sale (s. 2-105(1))
Excludes money where price is to be paid, investment securities, and things
in action
• Transactions in goods do not include gifts, bailments, consignments, leases
(covered by Article 2A), and service and construction contracts subject to
other state law
POLICIES
• Flexible standards dominate, as opposed to rigid rules (s. 2-206(1))
Title receives less emphasis as a problem solving device with regards to
rights, obligations, and remedies (s. 2-401(1))
Pre-transaction planning is encouraged and rewarded
Reasonable terms exist to fill gaps in agreement (with limits) (s. 2-204(3) )
When a seller or buyer is a merchant, different and higher standards of
conduct are required (s. 2-104(3))
• Abuses at time of contracting are regulated by the unconscionability
doctrine (s. 2-302)
• Abuses at time of performance or enforcement of contract are regulated by
requirement of good faith (s. 1-203)
OWNERSHIP CLAIMS
• When an owner seeks to replevin goods sold by a seller to a buyer, that
seller can only provide the buyer with title that is within his/her power to
transfer (s. 2-403)
Exceptions occur when the owner has delivered goods to the seller in a
transaction of purchase (later claimed to be voidable) and owner has
entrusted goods (but not power to sell) to merchant where buyer makes a
purchase in ordinary course of business
SECURITY INTEREST CLAIMS
Security interests in goods are created and perfected under Article 9
• If a secured party creates a perfected security interest in seller’s goods,
and seller sells them to buyer, then buyer is subject to security interest
• Buyer takes free of security interest if secured party authorized sale or
buyer is a buyer in ordinary course of business and security interest was
created by seller
SECURITY INTERESTS
• If seller creates a security interest by agreement or retention of title in
goods sold and delivered to a buyer, then problems of perfection of security
interest, priority, and enforcement are governed by Article 9
• If seller retains or regains possession of goods upon buyer’s default, then
he/she may have possessory security interest under Article 2
• Security interest is created without security agreement and perfected without
filing a finance statement
SELLER’S WARRANTY OF TITLE
• Seller makes a warranty to the buyer that title conveyed is good, its transfer
rightful, and goods are free of any security interest (s. 2-312(1))
• Buyer’s damages for breach include incidental and consequential damages
(s. 2-714(2))
OTHER PARTIES CLAIMS
• After delivery, seller has a limited right to reclaim goods from a buyer in a
credit sale where buyer was insolvent (s. 2-702) or cash sale where check
in payment is dishonored (s. 2-507(2))
• Reclamation power is subject to purchasers, including a secured party, who
have the right to intervene before a demand is made
• A consignor of goods is protected from claims of consignees creditors and
secured parties if appropriate notice is given
• A buyer who leaves named goods in sellers possession may be entitled
to them as against the seller through specific performance, replevin or
reclamation
• A purchaser of those goods from seller may prevail if retention of
possession is entrusted to a merchant and sale was in the ordinary course
of business
• Sellers creditor may prevail over buyer if retention or identification was
fraudulent
Buyer in ordinary course of business may prevail over perfected security
interest even though goods have been left with seller
IMPORTANCE OF AGREEMENT
• A contract is formed when
Article 2 gives legal effect to
parties’ agreement in fact; total
legal obligation that results from
parties’ agreement (s. 1-201(11))
An agreement is the bargain in
fact of parties as found in their
language or by implication from
other circumstances (i.e., course of
dealing, course of performance,
usage of trade) (ss. 1-205, 2-208)
OFFERS & ACCEPTANCE
• An offer is display of willingness
to enter into a bargain made to
justify another person’s
understanding that assent to
bargain is invited and ends it
• A firm offer (an option) may be
created without consideration or
reliance in a writing signed by a
merchant
• An acceptance may be in any
reasonable method or manner
unless otherwise unambiguously
indicated (s. 2-206(1))
Offeree may accept by promise,
performance or commencing
performance
• A contract is formed if offeree
gives definite acceptance with
different terms or if there is
conduct by both parties that
recognizes a contract even when
writings do not agree (s. 2-207)
• If contract is formed, then
additional or different terms may
become part of agreement if
offeror has expressly assented to
them
STATUTE OF FRAUDS
• It conditions enforceability of an
agreement with the presence of a
writing indicating that the
contract for sale has been made
and signed by the charged party
(s. 2-201(1))
Requirement is met even though
writing does not contain all
material terms or where
merchant fails to object to
satisfactory confirmation in
writing sent by other merchant
• Other non-writing situations are
included (e.g., specially
manufactured goods, part
performance, admission in court,
reliance)
Agreement is not enforceable
beyond quantity of goods shown
in writing or evidenced by
performance or admission
GENERAL POLICIES
• Emphasis is upon agreement,
not a promise or consideration
(s. 2-204)
• Less emphasis on formalities;
best evidence of agreement may
be parties’ conduct rather than
their words
• Parties’ intention to make a
contract is given legal protection,
even though time of contract
formation cannot be determined
or material terms have not been
agreed upon
• If parties intended to make a
contract, but a material term has
not been agreed, then court will
supply a reasonable term and
enforce bargain
General Considerations
Contract Formation
Uniform Commercial Code
Article 2: Sale of Goods
Third Party Claims
Remedies
TM
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Description
TM permacharts S a le s&L e a s e so fG o o d s General Considerations Uniform Commercial Code Article 2: Sale of Goods COMMERCIAL LAW ARTICLE 1 SCOPE • Under the Uniform Commercial Code (UCC),transactions tak• Provides structure by expressing underlying policies (i.e.,simplify commercialons in goods,unless context requires otherwise forms,subject matter is personal property,and parties incllaw; allow expansion of commercial practice through parties’ agreement; consumers m ake law uniform in various jurisdictions) (s.1-102(1)) • Covers contracts for present or future sale of goods (s.2-106(1)) • Parties to contract of sale include seller and buyer (s.2-103(1)); parties toich provisions may be varied by agree• Involves contract between a seller and buyer (s.2-103(1)(a),(d)) lease of goods are lessor and lessee (s.2A-103(1)) •Provides general definitions (s.1-102) • Goods includes all things (including any specially manufactured goods) that • Contracts for sale of goods are regulated by UCC Article 2; contracts forrs of substance (i.e.,imposing good faith duty uponle at the time of identification to contract for sale (s.2-105(1)) leases of goods are regulated by UCC Article 2A performance of contracts) (s.1-203) •Excludes money where price is to be paid,investment securities,and things SUBSTANTIVE CONTENT in action • Transactions in goods do not include gifts,bailments,consignments,leases Contract Formation •Article 2:Sales •Article 2A:Leases •Article 3:Commercial P(covered byArticle 2A),and service and construction contracts subject to •Article 5:Letters of Credit •Article 6:Bulk Sales •Article 7:Documents ofTitle IMPORTANCE OF AGREEMENT STATUTE OF FRAUDS •Article 8:Investment Securities •Article 9:SecuredTransactionsIES • A contract is formed when • It conditions enforceability of an • Flexible standards dominate,as opposed to rigid rules (s.2-206(1)) Article 2 gives legal effect toreement with the presence of aODOLOGY • Title receives less emphasis as a problem solving device with regards to parties’ agreement in fact; totalting indicating that the• Analyze problem and develop general issue(s) rights,obligations,and remedies (s.2-401(1)) legal obligation that results fromact for sale has been madeetermine whether Code applies •Pre-transaction planning is encouraged and rewarded parties’ agreement (s.1-201(11)) signed by the charged partyevelop precise statutory issues •Reasonable terms exist to fill gaps in agreement (with limits) (s.2-204(3)) •Anagreement is the bargainin (s.2-201(1)) • Consult applicable statutory language,definitions,and cr•When a seller or buyer is a merchant,different and higher standards of fact of parties as foundintheirquirement is met even thoughther sections to determine principal purpose(s) and appliconduct are required (s.2-104(3)) language or by implicationfromriting does not contain all•Enhance interpretation by consulting comments,legislative• Abuses at time of contracting are regulated by the unconscionability other circumstances (i.e.,course ofal terms or where secondary sources doctrine (s.2-302) dealing,course of performance, erchant fails to object to• Analyze judicial decisions interpreting same sections; C• Abuses at time of performance or enforcement of contract are regulated by usage of trade) (ss.1-205,2-208)isfactory confirmation in evidence of meaning requirement of good faith (s.1-203) OFFERS & ACCEPTANCE writing sent by other merchant • An offer is display of willingness non-writing situations are to enter into a bargain made manufactured goods,party Third Party Claims justify another person’s performance,admission in court, understanding that assent to reliance) OWNERSHIP CLAIMS SELLER’S WARRANTY OF TITLE bargain is invited and ends •Agreement is not enforceable• When an owner seeks to replevin goods sold by a seller t• Seller makes a warranty to the buyer that title conveyed is good,its transfer • A firm offer (an option) maybeyond quantity of goods showneller can only provide the buyer with title that is withirightful,and goods are free of any security interest (s.2-312(1)) created without considerationin writing or evidenced by transfer (s.2-403) • Buyer’s damages for breach include incidental and consequential damages reliance in a writing signed performance or admission •Exceptions occur when the owner has delivered goods to the(s.2-714(2)) merchant GENERAL POLICIES transaction of purchase (later claimed to be voidable) and owner has • An acceptance may be in any entrusted goods (but not power to sell) to merchant where buyer makes a CLAIMS reasonable method or manner •not a promise or considerationurchase in ordinary course of business • After delivery,seller has a limited right to reclaim goods from a buyer in a unless otherwise unambiguousl(s.2-204) SECURITY INTEREST CLAIMS credit sale where buyer was insolvent (s.2-702) or cash sale where check indicated (s.2-206(1)) • Less emphasis on formalities;Security interests in goods are created and perfected underArticle 9is dishonored (s.2-507(2)) •Offeree may accept by promisebest evidence of agreement mayIf a secured party creates a perfected security interest in seller’s goods, is subject to purchasers,including a secured party,who performance or commencing be parties’ conduct rather thand seller sells them to buyer,then buyer is subject to security interestto intervene before a demand is made performance their words • Buyer takes free of security interest if secured party authorized sale orgoods is protected from claims of consignee’s creditors and • A contract is formed if off• Parties’ intention to make abuyer is a buyer in ordinary course of business and security interest was if appropriate notice is given m gives definite acceptance witcontract is given legal protection,d by seller • A buyer who leaves named goods in seller’s possession may be entitled different terms or if there ieven though time of contractSECURITY INTERESTS to them as against the seller through specific performance,reolevin or conduct by both parties that formation cannot be determined reclamation recognizes a contract even whor material terms have not beenf seller creates a security interest by agreement or retpossession is entrusted to a merchant and sale was in the ordinary course writings do not agree (s.2-20agreed upon interest,priority,and enforcement are governed byArticle 9of businesscurity . • If contract is formed,then • If parties intended to make• If seller retains or regains possession of goods upon buyer’s default,thenr may prevail over buyer if retention or identification was additional or different termscontract,but a material term he/she may have possessory security interest underArticle 2raudulent become part of agreement if not been agreed,then court w• Security interest is created without security agreement and perfected withoutourse of business may prevail over perfected security offeror has expressly assentesupply a reasonable term and filing a finance statement interest even though goods have been left with seller r them enforce bargain a Remedies h c BREACH OF CONTRACT BUYER’S REMEDIES • Where one party impairs another’s expectations (no breach),aggrieved party may suspen• Upon seller’s breach,buyer may exercise self-help remedies a adequate assurance (s.2-609) • Includes withholding due payments,cancelling contract,and seeking damages • Response (or lack) may lead to renewed performance,modification or repudiation • If seller repudiates or fails to deliver,then buyer has certain goods-oriented remedies m •future performance under contract (s.2-610) conduct) by a promisor to promisee that he•and cover is not reasonably available (s.2-712); and recovery of goods where seller is insolvent (s.2-502) identified • Damaged party may cancel contract,suspend performance,and pursue damages • If specific performance or replevin are not available,then buyer may cover by purchasing substitute goods in the market • Other types result from conduct of seller or buyer during performance or seek damages at places when buyer learned of breach e • Seller may fail to deliver on time or tender defective goods; buyer may pursue remedy• Buyer may recover difference between contract price and cost to cover • Buyer may fail to pay on time or make a wrongful rejection; seller may pursue remedy • Failure to effect cover does not preclude damages measured by formula p • Remedies respond to type and timing of other’s breach • Damage remedies are augmented by provable damages and decreased for expenses saved; available where buyer SELLER’S REMEDIES rightfully rejected goods or revoked an acceptance • Upon buyer’s breach,seller may exercise self-help remedies Seller’s Non-Conforming Tender • Includes suspending performance,withholding delivery of goods in its possession,and stopping delivery of goods inon inspection,then buyer may reject goods,cancel contract,and pursue damages (s.2-601) transit (s.2-705) • Rejection must occur in fair time; state grounds to avoid harming seller’s right to cure • Seller may cancel the contract for certain types of breaches and seek damages • Limits include obligation of good faith,requirement (in installment contracts) that non-conformity be material,and seller’s • Seller may exercise various damage remedies limited right to cure non-conformity • Includes action for the price (s.2-709); resale to third party of goods completed before or after breach (s.2-706);htfully rejected goods has security interest for amounts paid and expenses incurred; varying action for damages measured by difference between contract price and market price at time and place for tendernd disposition (s.2-708(1)); and action for lost profit (including reasonable overhead) (s.2-708(2)) • If goods have been accepted,then buyer has limited power to revoke acceptance,cancel contract,and pursue • Each remedy has its own conditions damage remedies (s.2-714) • Contract price/market price formula is a fall back position when all else fails • Revocation requires notice within reasonable time; influenced by importance of non-conformity,whether buyer • Damages may be increased by incidental damages,incurred after breach,and adjusted downward for savings realizedon of goods at time by breach • If buyer cannot revoke acceptance,then it may recover damages to accepted goods; notice must have been given to • Administration of remedies may be influenced by seller’s choice of one remedy over the other,effect of lost volume,andbuyer discovered it applicability of components approach Damages AGREED REMEDIES • If breach of warranty occurs,then buyer’s direct damages are difference in value between goods warranted and • Parties may attempt to liquidate damages upon breach (s.2-718) goods accepted (measured at time of acceptance) (s. 2-715) • A reasonable forecast of damages is enforced as a remedy unless the amount was either unreasonably large ornclude post-breach expenses incurred in inspection,receipt,transportation,and custody of unconscionably low expensesly rejected goods; commercially reasonable expenses connected with cover; and other reasonably related • Parties may add or limit other remedies,provided that agreement does not deprive aggr• Consequential damages result from buyer’s inability to use promised goods remedy • Damages result from buyer’s needs which seller had reason to know at time of contracting; buyer must make reasonable • A clause excluding liability for consequential damages must be conscionable efforts to avoid them permacharts TM Performance of Contract for Sale S TRUCTURE BUYER’S OBLIGATIONS P ARTIES’ OBLIGATIONS • After formation,order and content of performance are settled by agreeme•tTo accept and pay in accordance with contract (s.2-301) • Seller’s obligation is to transfer and deliver; buyer’s obligation is to accept (s.2-301) • Price can be paid either in money,goods or an interest in realty and pay for goods in accordance with contract (s.2-301) • If agreement is insufficient,then performance obligations of seller and (s.2-106(1)) • Agreement may cover whether either party extends credit to the other,time buyer are supplied byArticle; parties must have intended to contract and order of performance,and duration and termination of contract • Buyer may pay either a fixed price,a price to be determined by an external • Absent an agreement,Article 2 governs risk of loss problem and standard,a fixed price that is subject to escalation or a price fixed by seller11(1),2-309(1)) determines when one party is excused by post-contract events which make• Pricing mechanism may vary,each of which allocates risks in a different Absent an agreement,neither party extends credit to the other; reasonable continued performance impracticable way terms on order of performance,duration,and termination • Encourages agreed risk allocation and supports agreements during • If parties intended to contract,but then either they fail to agree on the priceludable duty of good faith is imposed upon parties in performance performance which modify contract or the pricing mechanism fails,then the court may choose to supply a (s.1-203) reasonable price RISK OF LOSS SCOPE OF AGREEMENT • Determined by parol evidence rule • Buyer has no duty to accept and pay until it has reasonable opportunit• Rules determine which party bears risk when goods are lost or damaged • Parties intend writing to be either partial or total integration of agreementct goo
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