Introduction to Sales and Lease Contracts Chapter 21 Introduction to Sales and Lease Contracts Chapter 21: Introduction to Sales and Lease Contracts Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

The Uniform Commercial Code (UCC): A uniform/model law that governs commercial transactions, including contracts for the sale of goods, leases, and secured transactions The Uniform Commercial Code, or UCC, is a uniform law that governs commercial transactions, including contracts for the sale of goods, leases, and secured transactions.

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.

Applies to contracts for the sale of goods UCC Article 2 Applies to contracts for the sale of goods UCC Article 2 applies to contracts for the sale of goods.

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.

Applies to contracts for the lease of goods UCC Article 2(A) Applies to contracts for the lease of goods UCC Article 2(A) applies to contracts for the lease of goods.

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 finance 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 finance leases.

How Sales and Lease Contracts Are Formed Under The UCC Formation in General: UCC more lenient than common law regarding contract formation; courts evaluate intent of parties to sales or lease contract 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.

Exhibit 21-4: The UCC and Open Terms Term Left Open, and Interpretation Under UCC Price: “Reasonable price” at time of delivery Payment: When buyer receives goods Delivery: Seller’s place of business Time for Performance: “Reasonable” time Duration of Contract: “Reasonable” period of time, with termination allowed in good faith, and upon notice Quantity: Contract fails for lack of definiteness The UCC contains special rules regarding “open” terms, or provisions that are not included in the contract. If price is missing, the court will impose a “reasonable” price at the time of delivery. If payment is missing, payment is due when the buyer receives the goods. If delivery is missing, the seller must simply make the goods available at the seller’s place of business. If time for performance is missing, performance is due within a “reasonable” period of time. If the contract does not specify how long it will last, the duration of the contract will be a “reasonable” period of time, with termination allowed in good faith, and upon notice. Quantity is required in a UCC contract; if the quantity term is missing in a UCC contract, the contract fails for a lack of definiteness.

UCC Statute of Frauds General Rule: Contracts for sale of goods must be in writing if goods valued at $500 or more; lease contracts that require payments of $1,000 or more must also be in writing According to the UCC statute of frauds, contracts for the sale of goods must generally be in writing if the goods are valued at $500 or more. Lease contracts that require payments of $1,000 or more must also be in writing.

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.

UCC Contracts/Leases and the Admissibility of Parole 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.

Interpretation of Sales and Lease Contracts: Priority of Evidence Express contract terms Course of performance (regarding subject contract) Course of dealing (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.)

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.

Contracts for the International Sale of Goods (CISG) Definition: Treaty governing international “business-to-business” sales contracts Many major trading nations have signed the CIS Significance of CISG: Important because CISG (rather than UCC) governs international sales contracts Advantage of CISG: Provides clarity, predictability, and uniformity for global businesses “CISG,” or Contracts for the International Sale of Goods, is defined as a treaty governing international “business-to-business” sales contracts. Many major trading nations have signed the CISG, and it is an important treaty in the sense that it, rather than the UCC, governs international sales contracts involving signatory nations. CISG provides clarity, predictability, and uniformity for global businesses.