CHAPTER 10 Sales, Leases, and E-Contracts

1. CHAPTER 10 Sales, Leases, and E-Contracts

2. The Scope of the UCC • Facilitates commercial transactions. • UCC Article 2: • Governs contracts for sale of goods. • UCC 2 preempts common law. • Where UCC2 is silent, common law governs.

3. What is a “Sale”? • UCC Article 2 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.

4. What is a “Good”? • A good is both tangible and movable. • UCC 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 UCC does not apply. • Generally contracts for services are not considered goods.

5. What is a “Merchant”? • Generally UCC 2 applies to all buyers of sellers of goods. • In some instances, sales by/for a merchant imposes special duties. • A Merchant: • Deals in goods of the kind being sold. • Holds himself out with special knowledge or skills. • Is employed as a broker or agent in a transaction. • Case 10.1 Hammer v. Thompson (2006).

6. Scope of Article 2A-Leases • Contract for lease of personal goods between a lessor and a lessee. • Consumer Leases (primarily for family or personal use). • Finance Leases (involves a 3rd party-supplier).

7. 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.

8. Offer - Open Terms • Article 2-204: even if terms of uncertain, 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.

9. Offer - Open Terms • “Open Quantity” (UCC2-306): generally courts will NOT impose a quantity, UNLESS: • 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.

10. Merchant’s Firm Offer • Common law: An offer could be revoked any time prior to acceptance, unless there was some consideration. • Article 2: An offer made by a merchant is irrevocable for reasonable period of time if a written assurance is given. No consideration necessary.

11. Acceptance • Any reasonable means under the circumstances is permissible. • Promise to ship or prompt shipment is acceptance. • Shipment of non-conforming goods is both an acceptance and a breach unless goods sent as an “accommodation” to buyer.

12. Additional Terms • If either party is a non-merchant, the contract is formed according to original terms of the offer. • If both parties are merchants, contract incorporates new terms unless: (1) original offer expressly limits terms or (2) material change or (3) offeror objects within reasonable time. • Additional terms may be stricken if both parties acted inconsistent with the terms

13. Consideration • Article 2 requires consideration and modifications must be made in good faith. • Modification must be in writing if required by Statute of Frauds.

14. Statute of Frauds • Sale of goods over $500 must have a signed writing to be enforceable. • Exceptions to this rule: • Specially manufactured goods. • Admissions by breaching party. • Partial performance. • Merchant doesn’t object within 10 days.

15. Performance: Good Faith • Good Faith is the foundation of every UCC commercial contract. • Good faith means honesty in fact. • For a merchant, it means honesty in fact and observance of reasonable commercial standards of fair dealing in the trade. Merchants are held to a higher standard of care than non-merchants.

16. Obligations of the Seller / Lessor • Seller has a duty to “tender” delivery of “conforming goods.” • Tender means “delivery” to agreed place: • With reasonable notice. • At a reasonable hour. • In a reasonable manner. • Exactly, unless otherwise agreed.

17. Place of Delivery (Carriers) • Shipment contracts. Seller has a duty to: • Put goods into hands of independent carrier. • Make contract for transportation. • Obtain and promptly deliver or tender to the Buyer any documents necessary. • Promptly notify Buyer that shipment has been made. • Destination contracts. Seller has duty to: • Tender the goods at a reasonable hour and hold conforming goods at the Buyer’s disposal for a reasonable period of time.

18. The Perfect Tender Rule If goods, or tender of delivery, fail in any respect to conform to the contract, the Buyer has the right to: • Accept the goods; • Reject the entire shipment; or • Accept part and reject part.

19. Exceptions to the Perfect Tender RuleClick on the Links Below • Agreement of the Parties. • Cure. • Substitution of Carriers. • Installment contracts. • Commercial Impracticability. • Destruction of Identified Goods. • Assurance and Cooperation.

20. Obligations of the Buyer / Lessee • Furnish facilities reasonably suited for receipt of the goods. • Payment at the time and place the Buyer receives the goods. • Credit has to be prearranged. • Credit period begins on the date of shipment. • Pay with cash, credit card, check. • But if Seller asks for cash, Seller has to give Buyer time to get cash.

21. Obligations of the Buyer / Lessee • Buyer has right to inspect before paying: • Costs of inspection borne by Buyer. • However, C.O.D., C.I.F. and C&F give Buyer no right to inspect.

22. Acceptance Buyer can accept goods: • By words or conduct. • If Buyer had reasonable amount of time and failed to reject. • Buyer performs an act which indicates he thinks he is the owner.

23. Anticipatory Repudiation • Party communicates he will not perform by time of contract performance. • Non-breaching party may suspend performance and: • Treat the A.R. as material breach and pursue a remedy; or • Wait a reasonable time.

24. Remedies for Breach Seller Remedies Buyer Remedies If Goods in Seller’s Possession If Goods in Seller’s Possession If Goods in Transit If Seller delivers non-conforming goods If Goods in Buyer’s Possession End Click on the Links Below

25. Remedies of the Seller or Lessor • Seller may withhold delivery of the goods: • If material breach by Buyer, Seller can withhold delivery of all goods. • If non-material breach, Seller can withhold delivery of this installment. • Seller can withhold delivery of all goods if Buyer is insolvent.

26. Remedies of theSeller or Lessor • Seller may resell or dispose of the goods; and • Recover damages: the difference between the contract price and the resale price + incidental damages+ damages = the market price at the time & place of tender + incidental damages - expenses saved. • If No Damages, Seller can sue for lost profits.

27. Remedies of theSeller or Lessor • Seller has the right to recover the purchase price (or lease payments). • Seller has the right to recover damages = the market price at the time & place of tender + incidental damages. • if there are no damages, Seller can sue for lost profits. • Case 10.3 Utica Alloys, Inc. v. Alcoa, Inc. (2004).

28. Remedies of the Buyer or Lessee • When Seller breaches its contract, Buyer/ Lessee has the right to: • Cover: buy or lease substitute goods in good faith. Available if buyer rejects goods or revokes acceptance. Buyer can recover difference between cost of cover and contract price. • Specific performance: enforce contract for unique goods.

29. Remedies of theBuyer or Lessee • Right to recover damages. Measure of damages is difference between contract price and market price for goods at time of breach.

30. Remedies of theBuyer or Lessee • Right to reject all or part of the goods. If Seller does not make perfect tender Buyer has the right to reject all or part of goods. • Buyer must timely notify Seller of rejection and reasons and follow Seller’s directions. • Buyer is entitled to commission for selling perishable goods. • Buyer may store the goods and retain a security interest in the goods for his costs.

31. Remedies of theBuyer or Lessee • Right to recover damages for accepted goods. If buyer has accepted non-conforming goods, she may: • Sue for breach of warranty. • Sue for ordinary damages. • Deduct damages from purchase price.

32. Remedies of theBuyer or Lessee • Right to revocation of acceptance. Buyer must notify Seller of breach. Revocation of Acceptance only if: • substantial nonconformity; and • Buyer accepted on the reasonable assumption that the Seller would cure the non-conformity OR Buyer did not discover the nonconformity because defect was latent or hard to discover. • Case 10.4 Fitl v. Strek (2005).

33. Contractual Provisions Affecting Remedies • Parties can elect or limit UCC remedies in the contract. • Contracts can exclude/include consequential damages that are not unconscionable. • Cause of action expires FOUR years after breach of contract.

34. Sales and Lease Warranties: Title • Automatically arises in most commercial sales transactions. • UCC-312 creates 3 warranties: • Good Title. • No Liens. • No Infringements. • Disclaimer of Title warranty can generally be disclaimed only with specific language in contract. • Circumstances may be obvious to clearly indicate disclaimer of title, such as a sheriff’s sale.

35. Express Warranties • Can be oral or written-- don’t have to use the words “warrant” or “guarantee.” • Any Affirmation or Promise. • Any Description. • Any Sample or Model.

36. Express Warranties • To create an express warranty, the affirmation of fact must become the “basis of the bargain.” • And Buyer must rely on warranty when he enters into contract. • Statements of Opinion and Value. • Generally excludes “puffing” – “Best car in town”, not an express warranty. • However, expert opinion is not puffery.

37. Implied Warranties • Warranty inferred at law based on the circumstances or nature of the transaction. • Under the UCC, merchants warrant the goods they sell are “merchantable”, i.e., fit for ordinary purpose for which such goods are sold.

38. Implied Warranty of Merchantability • Automatically arises from merchants. • Goods are of average, fair, or medium-grade. • Adequately packaged and labeled. • Conform to promises on label. • Have a consistent quality and quantity among the commercial units.

39. Implied Warranty of Fitness for a Particular Purpose • Arises by any Seller who: • Knows the particular purpose for which the goods are being bought; and • Knows the buyer is relying on seller’s skill and judgment to select suitable goods.

40. Implied Warranty from Course of Dealing or Trade • Warranties can arise from parties’ pre-existing relationship or usage of well-recognized trade customs. • Courts will infer common trade usage or course of dealing.

41. Warranty Disclaimers • Express Warranties can be disclaimed: • If they were never made (evidentiary matter). • If a clear written disclaimer in contract with specific, unambiguous language and called to Buyer’s attention: (BOLD CAPS UNDERLINED).

42. Warranty Disclaimers • Implied Warranties: • Merchantability: “As Is,” “With All Faults.” • Fitness for a Particular Purpose: must be in writing and conspicuous. • If Buyer has the right to fully inspect and either: does so or refuses to do so, warranties are disclaimed as to defects that could reasonably be found.

43. E- Contracts: Offers • B2C-Business to Consumer E-Contracts. • B2B-Business to Business E-Contracts. • Online Offers Should Include: • Conspicuous and Obvious Terms. • Remedies available (including Seller’s Refund). • Statutes of Limitation. • Dispute Settlement Provisions. • Disclaimers of Liability. • How information will be used by Seller.

44. E-Contracts: Acceptance • Online Acceptances: • Shrink-Wrap Agreements-Enforceable Terms. • Shrink Wrap Agreements-Proposals for Additional Terms (not all terms are enforceable).

45. E-Contracts: Acceptance • Offer (cont’d): • Click-On (Click-Wrap) Agreements. • Online version of “shrink-wrap” agreements. • Acceptance by clicking on an “I Accept” button on the website. • “Browse-Wrap” Terms.

46. E-Signatures • Many contracts require a writing and a signature to be enforceable. • With E-Contracts, signatures have changed. Signatures can be: • Digital (with Cybernotary). • Signature Dynamics. • Smart Cards, Personal Identification. • A Mouse Click (attribution problems).

47. Laws Governing E-Signatures • States: some have e-signature legislation but it is not uniform. Most based on UETA (see below). • Federal Law: • E-Signatures (E-SIGN Act). • E-Documents. • Parties must agree to use electronic signatures.

48. UETA • Similar to federal E-SIGN. • Highlights: • Parties must agree to conduct e-transactions. • Can be implied by conduct/email. • Attribution are procedures that ensures identity of seller and buyer. • Allows formation of contracts by e-agents. • Notarization via digital signature. • E-Mistakes can make a contract voidable.

49. Seller: Goods in Seller’s Possession • Seller may rescind the contract. • Seller may identify the goods to the contract. • Seller may sell raw materials for scrap or finish production. Next