1. Introduction to Sales and Lease Contracts
Chapter 21
Introduction to Sales and Lease Contracts

2. 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?”

3. Introduction 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.

4. UCC Outline (Articles and Topics)
Article 1: General Provisions
Article 2: Sales
Article 2(A): Leases
Article 3: Negotiable Instruments
Article 4: Bank Deposits and Collections
Article 4(A): Wire Transfers
Article 5: Letters of Credit
Article 6: Bulk Transfers
Article 7: Documents of Title
Article 8: Investment Securities
Article 9: Secured Transactions
The UCC includes the following provisions: Article 1: General Provisions; Article 2: Sales; Article 2(A): Leases; Article 3: Negotiable Instruments; Article 4: Bank Deposits and Collections; Article 4(A): Wire Transfers; Article 5: Letters of Credit; Article 6: Bulk Transfers; Article 7: Documents of Title; Article 8: Investment Securities; and Article 9: Secured Transactions.

5. UCC Article 2 Terminology
Sale: The passing of title from seller to buyer for a price
Goods: Tangible things that can be moved (Examples: Automobiles, furniture, electronics)
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
Merchants: Buyers or sellers who
Deal in goods of the kind involved in contract
By occupation, represent themselves as having knowledge and skill unique to goods involved in transaction, or
Employ a merchant as a broker, agent, or other intermediary
Important UCC Article 2 terminology includes a “sale,” which constitutes the passing of title from a seller to a buyer for a price; “goods,” tangible things that can be moved (for example, automobiles, furniture, and electronics;) “mixed” goods and services contracts, or contracts that include both goods and services (UCC Article 2 applies to contract if goods are a “predominant part” of the transaction;) and “merchants,” defined as buyers or sellers who deal in the kinds of goods involved in contract, who by occupation, represent themselves as having knowledge and skill unique to goods involved in transaction, or who employ a merchant as a broker, agent, or other intermediary.

6. The Scope of UCC 2-The Sale of Goods
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.
What if Goods and Services combined?

7. Scope of Article 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.

8. UCC Article 2(A) Terminology
Leases: Transfers of right to possession and use of goods for a term, in return for consideration
Special Leases: Consumer leases and financial leases
Important UCC Article 2(A) terminology includes “leases,” or transfers of the right to possession and use of goods for a term, in return for consideration, and “special” leases, or consumer leases and financial leases.

9. 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 party-supplier).

10. Formation of Sales and Lease 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.

11. How Sales and Lease Contracts Are Formed Under The UCC
Offer and Acceptance
Offers valid even if terms left open
“Mirror-image” rule does not apply
Courts evaluate each case individually to determine whether additional terms allowed
Consideration: Mutual consideration required upon forming agreement. When sales/lease contracts modified, modifications need not be supported by additional consideration
In general, the UCC is more lenient than the common law regarding contract formation. In determining whether contracts have been legally formed, courts evaluate the intent of the parties to sales or lease contracts. With regard to offer and acceptance in a UCC contract, offers can be valid even if terms are left open, the “mirror-image” rule does not strictly apply, and courts evaluate each case individually to determine whether additional terms are allowed. Mutual consideration is required upon forming a sales or lease agreement. When UCC contracts are modified, the modification does not need to be supported by additional consideration to be binding.

12. Open Terms
UCC 2-204: even if terms of are undetermined, a 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.

13. Open Terms
Open Price Term: If parties have not agreed on pricing, court can determine “reasonable price at the time of delivery.” UCC2-305
Open Payment Term: Unless otherwise agreed, payment is due on delivery (COD). UCC2-310(a)
Open Delivery Term: Unless otherwise agreed, buyer takes delivery at the Seller’s place of business. UCC2-308(a)
Time for Performance: “Reasonable” time
Duration of Contract: “Reasonable” period of time, with termination allowed in good faith, and upon notice

14. Open Terms
Open Quantity: generally courts will not impose a quantity. UCC 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.

15. Statute of Frauds
Sale of goods over $500 must have a signed writing to be enforceable.
Exceptions to this rule (see next slide):
Specially manufactured goods.
Admissions by breaching party.
Partial performance.
Merchant doesn’t object within 10 days.
Oral agreement enforceable after written confirmation between merchants.

16. UCC Statute of Frauds Exceptions
Specifically-manufactured goods
Buyer/lessee ordered goods made to meet his/her specific needs
Goods not suitable for sale/lease to others in “ordinary course of business; and
Seller/lessor has substantially begun manufacture of goods, or made commitments for their procurement
Admission (In legal pleadings, testimony, or court)
Partial Performance: Enforceable to extent payment made and accepted, or to extent goods received and accepted
There are several exceptions to the UCC statute of frauds writing requirement. If the goods are “specially-manufactured,” the contract does not have to be in writing in order to be enforceable. With “specifically-manufactured” goods, the buyer or lessee orders goods made to meet his or her specific needs, the goods are not suitable for sale or lease to others in the “ordinary course” of business, and the seller or lessor has substantially begun manufacture of the goods, or has made commitments for their procurement. If the defendant admits in legal pleadings, in testimony, or in court that the contract exists, the contract does not have to be in writing in order to be enforceable. Finally, partial performance makes an oral contract enforceable to the extent payment has been made and accepted, or to the extent the goods have been received and accepted.

17. Additional terms consistent with contract terms
UCC Contracts/Leases and the Admissibility of Parol Evidence—Evidence Outside Written Contract Admissible If:
Additional terms consistent with contract terms
Information helps interpret agreement, including:
Course of performance
Course of dealing
Usage of trade
According to the UCC, evidence outside of a written sales or lease contract is admissible if the outside additional terms are consistent with contract terms. Parole evidence is also admissible if it helps interpret the agreement, including evidence pertaining to course of performance, course of dealing, and usage of trade.

18. Interpretation of Sales and Lease Contracts: Priority of Evidence
Express contract terms
Course of performance (regarding subject contract)
Course of Dealings (between subject parties)
Usage of trade (industry standard)
In interpreting sales and lease contracts, evidence is prioritized in the following order, from first to last: express contract terms; course of performance (regarding the subject contract;) course of dealings (between the subject parties;) and usage of trade (or industry standard.)

19. Unconscionability (Definition):
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
In the context of UCC contracts for the sale of goods or leases, an agreement that is so unfair or “one-sided” that the court refuses to enforce it is referred to as an “unconscionable” contract.
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