1. Formation of Sales and Lease Contracts CHAPTER FIFTEEN

2. Copyright © Houghton Mifflin Company. All rights reserved.15 | 2 Sale of Goods Legally, the sale of goods is defined as the sale of tangible, moveable personal property. –Tangible means that the item for sale is something that you can see, touch, and feel (for example, items such as an automobile, boat, book, etc.) Goods do not include intangible items such as a share of stock. –Moveable personal property refers to things other than land or items permanently attached to the land.

3. Copyright © Houghton Mifflin Company. All rights reserved.15 | 3 Sale of Goods (continued) It is important to note the sale of a good because when a good is bought and sold, the Uniform Commercial Code (UCC) rules will apply to the sale. When the sale of service also involves a good, it is known as a mixed sale. The UCC will apply when the primary purpose of the transaction is the sale of the good.

4. Copyright © Houghton Mifflin Company. All rights reserved.15 | 4 Sale of Goods (continued) There are several items considered to be goods that aren’t clearly within the previous definition. When the seller will sever the goods: – Growing crops are goods. – Timber to be cut is a good. – Minerals, gas, and oil are goods. – An item that can be easily detached from land and sold can be a good. If the buyer will sever the timber or minerals these items are not goods but real property. – Real property law will govern the transaction.

5. Copyright © Houghton Mifflin Company. All rights reserved.15 | 5 Merchant Versus Nonmerchant The UCC defines buyers and sellers of goods into: –Merchants: people who regularly deal in the sale of goods. In some situations, the UCC will apply special rules to merchants. Generally a retailer or wholesaler will be considered merchants. –Nonmerchant: occasional or casual sellers

6. Copyright © Houghton Mifflin Company. All rights reserved.15 | 6 Formation of a Sales Contract The UCC does not change the essential elements of contract formation: – Offer and acceptance – Consideration – Competent parties – Legal purpose The UCC has relaxed some of the technical legal requirements found in the common law.

7. Copyright © Houghton Mifflin Company. All rights reserved.15 | 7 Formation of a Sales Contract (continued) The UCC has relaxed the mirror-image rule, which required that the acceptance must exactly follow the offer. The UCC focuses on allowing a contract to form as long as the facts indicate the parties really intended to form a contract. The UCC has provisions which allow filling in gaps the parties may have left in forming the contract. Gap fillers include: – Inserting a price term – Place and time for delivery – Payment terms, etc.

8. Copyright © Houghton Mifflin Company. All rights reserved.15 | 8 Formation of a Sales Contract (continued) In relaxing the rules of contract formation the code did add two requirements to minimize potential abuses: –The parties must meet the obligations under the contract in good faith (dealing honestly). –If the parties are in a position of unequal bargaining power the dominant party must avoid unfair dealings with the other party. If unfairness occurs a court could refuse to enforce the contract because the contract was unconscionable.

9. Copyright © Houghton Mifflin Company. All rights reserved.15 | 9 Firm Offer A firm offer under the UCC may not be revoked as long the all following requirements are met: –The offer is for the sale of goods. –The offer is made by a merchant. –The offer is in writing and signed by the merchant. –The offer cannot be for a period of time longer than three months. Under an option contract (discussed in Chapter 7) we discussed paying consideration to keep an offer open. Under the UCC a firm offer modifies those rules.

10. Copyright © Houghton Mifflin Company. All rights reserved.15 | 10 Acceptance When dealing at a distance, an acceptance under the UCC can be transmitted by any reasonable means in a business setting, unless the offeror specifies a particular method of acceptance. In certain circumstances, the UCC will allow acceptance by performance. –Acceptance by shipping nonconforming goods is both an acceptance and a breach of contract. –If the seller states the shipment of nonconforming goods is an accommodation, then it is regarded as a counteroffer and not a breach.

11. Copyright © Houghton Mifflin Company. All rights reserved.15 | 11 Battle of the Forms Modern commerce is often done by an exchange of forms. An offer is sent out and confirmation of the order is sent back by the seller. –The terms in these forms can and do differ, a single set of terms must be established to measure performance. Between merchants, additional terms in the confirmation become part of the contract unless: The offeror expressly gives notice to the offeree limiting acceptance to the terms of the offer. The offeror gives notice to the offeree within a reasonable time rejecting the additional terms. The new terms materially alter the contract (e.g., change in price).

12. Copyright © Houghton Mifflin Company. All rights reserved.15 | 12 Consideration Under the UCC, the parties must still exchange consideration. The parties can agree to modify the contract consideration to be supplied by one party with no change in the other party’s consideration, as long as the change is made in good faith. –This means the change is fair in the circumstances.

13. Copyright © Houghton Mifflin Company. All rights reserved.15 | 13 Statute of Limitations The UCC sets a uniform statute of limitations for the sale of goods of four (4) years. Although the UCC does allow the parties to shorten the statute of limitations, it cannot be set at period shorter than one (1) year.

14. Copyright © Houghton Mifflin Company. All rights reserved.15 | 14 Statute of Frauds The UCC requires that a contract for the sale of goods for $500 or more must be in writing. –Proposed amendments to the UCC raise the $500 amount to $5,000. The writing requirement at common law has been relaxed under the UCC. Generally the writing must contain the following: –Quantity and description of goods sold –A writing signed by the party being sued to enforce the contract

15. Copyright © Houghton Mifflin Company. All rights reserved.15 | 15 Statute of Frauds (continued) Exceptions to the statute of frauds (where an oral contract will be enforced): –The buyer receives and accepts the goods A partial acceptance will be enforced to the extent goods are accepted. –The buyer makes full payment for the goods. –The buyer makes a part payment on the goods. –Substantial steps have been taken toward the production of goods made specially to order. –There is admission of the contract in court testimony. –There is written confirmation between merchants. The confirmation must be made within ten (10) days of contract formation.

16. Copyright © Houghton Mifflin Company. All rights reserved.15 | 16 Enforceable Oral Sales Contracts Buyer receives and accepts the goods Buyer makes full payment Buyer makes a part payment for the goods Specially manufactured goods Admission in court of an oral contract Written confirmation between merchants

17. Copyright © Houghton Mifflin Company. All rights reserved.15 | 17 Parol Evidence Rule Contracts in writing stating a final agreement can not be changed in court by parol evidence –Can be presented to add meaning to unclear language in a contract Evidence allowed from three sources – course of dealing, course of performance, usage of trade

18. Copyright © Houghton Mifflin Company. All rights reserved.15 | 18 Formation of the Lease Contract UCC article 2A has been adopted in many states to govern the leasing of goods. A lease is defined as a transfer of possession and use of goods for a certain period of time: By a lessor (owner) To a lessee (renter) Based on consideration

19. Copyright © Houghton Mifflin Company. All rights reserved.15 | 19 Types of Goods Leases There are two types of leases under the UCC. –Consumer lease Made to lessee for personal, family or household usage Made by lessor who regularly engages in the business of making leases A consumer lease’s payments cannot exceed a total of a dollar limit set by state statute.

20. Copyright © Houghton Mifflin Company. All rights reserved.15 | 20 Types of Goods Leases (continued) –Finance lease Involves three parties instead of two One party leases or purchases the goods from the supplier and then turns around and leases those goods to a third party. Often the purpose of this type of lease is for the lessor to provide financing for lessees lease of the goods provided by a supplier.

21. Copyright © Houghton Mifflin Company. All rights reserved.15 | 21 E-Sales Contracts With the advent of the Internet transacting business in the virtual world has become a reality. E-Sales are more convenient, reduce paperwork, and streamline business operations. Where possible traditional common law and UCC rules will apply to these sales. However, experience has told us that new laws are also necessary to operate in cyberspace. –Thus, both federal and state governments are creating new laws to assist in governing transactions in this new virtual medium.

22. Copyright © Houghton Mifflin Company. All rights reserved.15 | 22 E-Sales Contracts (continued) An offer and acceptance can be exchanged via e-mail, the Web, or other electronic methods. To ensure that offers and acceptances made online cannot be challenged merchants need to take steps to protect themselves: –The contract in its entirety should be displayed online. –Terms such as price, payment terms, delivery options, warranty, method of dispute, settlement, etc. should all be clearly spelled out.

23. Copyright © Houghton Mifflin Company. All rights reserved.15 | 23 E-Sales Contracts (continued) If selling over the Web: –The sellers website should clearly spell out the terms of the offer being made. –Exactly what responses entered at the website constitute acceptance need to be clearly stated. –If you are using a click box on a website and it says “I Agree” or “I Accept” there should be a notation that tells the offeree they are accepting a binding contract.

24. Copyright © Houghton Mifflin Company. All rights reserved.15 | 24 E-Sales Contracts (continued) Electronic communications can be considered to meet the writing requirement. –Communications using tangible methods such as telegraphed messages, telexes, Western Union Mailgram and faxes meet the writing requirement. –Postings on “chat lines,” electronic bulletin boards, or e-mails kept in a computer log do not meet the requirement of a writing.

25. Copyright © Houghton Mifflin Company. All rights reserved.15 | 25 E-Sales Contracts (continued) Signatures: a merchant seller and consumer should agree on the signature method. –As discussed in Chapter 11, the law does provide means for electronic signatures to be considered valid. Electronic Communication Errors –Errors can and do happen in electronic communications. –The legal solutions for issues of communication error will depend upon the factual situation in which these errors occurred.