BALW 20150 Chapter 20: The Formation of Sales and Lease Contracts

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Bus Admin - Business Law
BALW 20150

Chapter 20: The Formation of Sales and Lease Contracts  State statutory law governing sale and lease transactions is based on the Uniform Commercial Code (UCC) has been adopted by all states  UCC allows parties to form sales and lease contracts without observing the same degree of formality used in forming other types of contracts  Duty of good faith and fair dealing is concept created by UCC and restricted to contracts for sale of goods (case on pg. 375)  Article 2 of UCC sets forth the requirements for sales contracts and duties and obligations of the parties involved in the sales contract o Article 2A lease contracts o (**But parties to sales or lease contracts are free to agree to terms different from those stated in the UCC) – UCC repeatedly states, “unless the parties otherwise agree”  Common law requirements for valid contract (agreement, consideration, capacity, legality) also apply to sales contracts  Whenever a conflict arises between a common law contract rule and the state statutory law based on the UCC, the UCC controls. When the UCC is silent, the common law governs.  Article 2 deals with sale of GOODS does not deal with real property (real estate), services, or intangible property such as stocks and bonds  In some situations, rules can vary depending on whether the buyer or seller is a merchant  **Diagrams on pg. 377  Sale= the passing of title (evidence of ownership rights) from the seller to the buyer for a price o Price may be payable in cash or in other goods or services  Goods are tangible and movable  Goods associated with real estate often do fall within the scope of Article 2 (Ex. contract for sale of minerals, oil, or gas is contract for sale of goods if separation is to be made by the seller, contract for sale of growing crops or timber to be cut is contract for sale of goods regardless of who severs them from the land)  Predominant-factor test used when contracts involve a combination of goods and services, courts use to determine whether a contract is primarily for the sale of goods or the sale of services o If court decides that mixed contract is primarily a goods contract, any dispute, even dispute over the services portion, will be decided under the UCC  In some instances, UCC presumes that special business standards should be imposed because of merchants’ relatively high degree of commercial expertise (these standards do not apply to the casual/inexperienced seller or buyer)  3 ways merchant status can arise: o A merchant is a person who “deals in goods of the kind” involved in the sales contract. Ex. retailer, wholesaler, or manufacturer is a merchant of the goods sold in his/her business (can be a merchant for one type of goods and not others) o A merchant is a person who, by occupation, holds himself/herself out as having knowledge and skill unique to the practices or goods involved in the transaction (can hold banks or universities as merchants) o A person who employs a merchant as a broker, agent, or other intermediary has the status of merchant in that transaction  In general, merchant= person, when acting in a mercantile capacity, possesses or uses an expertise specifically related to the goods being sold  Article 2A – Leases o Lease= a transfer of the right to possess and use goods for a period of time in exchange for payment o Covers any transaction that creates a lease or sublease of goods o **Not concerned with the leases of real property (land or buildings) o Lease agreement= a lessor’s and lessee’s bargain with respect to the lease of goods, as found in their language and as implied by other circumstances o Lessor= one who transfers the right to the possession and use of goods under a lease o Lessee= one who acquires the right to the possession and use of goods under a lease  Elements of a consumer lease: o A lessor who regularly engages in the business of leasing or selling o A lessee who leases the goods primarily for a personal, family, or household purpose o Total lease payments that are less than $25,000  Finance lease involves a lessor, lessee, and a supplier o Typically, lessor is simply financing the transaction o Ex. Marlin corp. wants to lease a crane for construction business. Marlin’s bank agrees to purchase the equipment from Jenco Inc., and lease the equipment to Marlin (bank=lessor-financer, Marlin=lessee, Jenco=supplier) o Article 2A makes lessee’s obligations under a finance lease irrevocable and independent from the financer’s obligations lessee must perform and continue to make lease payments even if the leased equipment turns out to be defective. Lessee must look to supplier for any recovery.  Formation of sales and lease contracts o UCC states that a sales or lease contract will not fail for indefiniteness even if one or more terms are left open as long as both of the following are true:  The parties intended to make a contract  There is a reasonably certain basis for the court to grant an appropriate remedy o UCC provides many open-term provisions that can be used to fill the gaps in a contract o Missing terms can be proved by evidence, or court can presume that the parties intended whatever is reasonable under the circumstances o If too many terms are left open, court may find that the parties didn’t intend to form a contract o Quantity of goods involved usually must be expressly stated in the contract o Open price term if parties haven’t agreed on a price, court will determine a “reasonable price at time for delivery”  Price set by either buyer or seller must be decided in good faith (honesty in fact and observance of reasonable commercial standards of fair dealings in the trade)  If price fails to be set by a party, the other party can treat contract as cancelled or determine a reasonable price o Open payment term when parties do not specify payment terms, payment is due at the time and place at which the buyer is to receive the goods  If seller demands payment in cash, the buyer must be given a reasonable time to obtain it o Open delivery term when no delivery terms are specified, the buyer normally takes delivery at the seller’s place of business (or residence is seller doesn’t have place of business)  When goods are located in some other place and both parties know it, delivery is made there  If time for shipment/delivery is not clearly specified, then court will infer a “reasonable” time for performance o If single contract specifies successive performances but doesn’t indicate how long the parties are required to deal with each other, either party may terminate the ongoing contractual relationship  Principles of good faith/sound commercial practice call for reasonable notification before termination so as to give the other party sufficient time to seek a substitute arrangement o When contract contemplates shipment of the goods but doesn’t specify shipping arrangements, the seller has the right to make these arrangements in good faith, using commercial reasonableness o When a sales contract omits terms relating to the assortment of goods, the buyer can specify the assortment  Exceptions to quantity requirement: o Requirements contract= an agreement in which a buyer agrees to purchase and the seller agrees to sell all or up to a stated amount of what the buyer needs or requires  Implicit consideration buyer gives up the right to buy from any other seller  If buyer promises to purchase only if he/she wishes to do so, promise is illusory (no consideration) and unenforceable o Output contract= agreement in which a seller agrees to sell and the buyer agrees to buy all or up to a stated amount of what the seller produces  Implicit consideration seller gives up right to sell goods to another buyer  Good faith limitation quantity under these contracts is the amount of requirements/output that occurs during a normal production period (actual quantity can’t be unreasonably disproportionate)  Firm offer= when a merchant-offeror gives assurances in a signed writing that the offer will remain open o Irrevocable without necessity of consideration for stated period or for reasonable period if none is stated o Requirements: must be written (or electronically recorded, such as in an email) and signed by the offeror o When firm offer is contained in a form contract prepared by the offeree, the offeror must also sign a separate assurance of the firm offer (to ensure they are aware of it)  UCC permits acceptance of an offer to buy goods either by prompt promise to ship or by the prompt or current shipment of conforming or nonconforming goods o Conforming goods accord with contract’s terms, nonconforming goods do not o Prompt shipment of nonconforming goods= an acceptance, which creates a contract,
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