Chapter 21 Introduction to Sales and Lease Contracts Copyright © 2017 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Overview • LO21-1: What is the UCC? • LO21-2: What is a sales contract? • LO21-3: What kinds of contracts fall under the UCC interpretations? • LO21-4: What is the difference between a UCC Article contract and a • • • common law contract? LO21-5: What is a merchant, and why is that designation significant? LO21-6: What is a lease contract? LO21-7: What is the CISG? 21-2 Chapter 21 Hypothetical Case • Walla Walla Window Washing Equipment Company, Inc ("Walla Walla Window") has contracted with Seattle Slew of Window Washers, LLC ("Seattle Slew") to sell $15,000 worth of window cleaning supplies Walla Walla Window's business is located in Walla Walla, Washington, and Seattle Slew is headquartered in Seattle The date for performance indicated in the contract is June 30 At 8:00 a.m on June 30, James Walls, Walla Walla Window's owner, calls Seattle Slew's owner, Taylor Michaud, to inform him that the window cleaning supplies he ordered are ready at Walla Walla's warehouse Taken aback by Walls's "come and get 'em" approach to the supplies, Michaud responds, "James, if you don't get those window cleaning supplies to me tonight, I will sue you for breach of contract." Walls responds by saying, "Taylor, if you will review our contract, you'll see that we're not obligated to deliver the supplies to you Plus, you have a whole fleet of trucks of your own to choose from Send one to Walla Walla to get these supplies." Michaud retorts, "James, any seller worth his salt knows that buyers expect seller delivery." • If Walla Walla Window Washing Equipment Company, Inc does not deliver the window cleaning supplies to Seattle Slew of Window Washers, LLC by midnight on June 30, is the company in breach of contract? (Assume the contract between the companies does not indicate a seller delivery obligation.) 21-3 Chapter 21 Hypothetical Case • As this chapter indicates, the Uniform Commercial Code (UCC) holds merchants to a higher standard of behavior than non-merchants UCC Section 2-104(1) defines a merchant as "a person who deals in goods of the kind, or otherwise by his occupation, holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction, or to whom such knowledge or skill may be attributed by his employment of an agent or broker or other intermediary who, by his occupation, holds himself out as having such knowledge or skill." • From an ethical perspective, describe why merchants are held to a higher standard of behavior than non-merchants Do you support this "great expectation" of merchants, or you believe that merchant status should be irrelevant in terms of expected standards of behavior in a sale-of-goods transaction? 21-4 The Uniform Commercial Code (UCC) • • Definition: Statutory source of contract law in the U.S that is applicable to transactions involving the sale of goods Outline • • • • • • • • • • • 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 21-5 UCC Article • • • • Purpose: Applies to contracts for the sale of goods • Merchants: Buyers or sellers who 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 applies to contract if goods are predominant part of transaction • • • 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 21-6 UCC Article 2(A) • Purpose: Applies to contracts for the lease of goods • Lease: Transfer of right to possession and use of goods for a term, in • • • return for consideration Lessor: Person who transfers right to possession and use of goods under lease Lessee: Person who acquires the right to possession and use of good under lease Special Leases: Consumer leases and finance leases 21-7 How Sales and Lease Contracts Are Formed Under The UCC • • • Formation in general: Contracts for sale or lease of goods may be made in any manner sufficient to show agreement Offer and acceptance • • Offers valid even if terms left open Mirror-image rule does not apply Consideration: Mutual consideration required upon forming agreement When sales/lease contracts modified, modifications need not be supported by additional consideration 21-8 The UCC and Open Terms • • • • • • • Term left open, and interpretation under UCC Price: Reasonable price supplied at time of delivery Payment: Due when buyer receives goods Delivery: Seller's place of business Time for performance: Reasonable time Duration of contract: Termination allowed in good faith upon reasonable notification Quantity: Courts generally have no basis for determining 21-9 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 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 21-10 UCC Contracts/Leases and the Admissibility of Parole • Evidence outside a written contract is admissible if: • Additional terms consistent with contract terms • Evidence helps interpret agreement, including: • • • Course of performance Course of dealings Usage of trade 21-11 Sales and Lease Contracts: Factors • When courts interpret sales and lease contracts, they look at: • Express contract terms • Course of performance (regarding subject contract) • Course of dealing (between subject parties) • Usage of trade (industry standard) 21-12 Unconscionability • 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 21-13 Contracts for the International Sale of Goods (CISG) • United Nations treaty governing international business-to-business sales contracts • Many major trading nations have signed the CISG • Significance of CISG: Important because CISG (rather than UCC) governs international sales contracts • Advantage of CISG: Provides clarity, predictability, and uniformity for global businesses 21-14 Chapter 21 Hypothetical Case • While traveling on Interstate 10 in the vast, arid space between Phoenix and Los Angeles, Penn Lay's worst nightmare comes true Transmission failure forces him onto the emergency lane of the highway, and at that moment, Lay realizes the true value of his cell phone Lay calls a Phoenix towing company, and his car is transported to S Li Ping Transmission Repair, Inc The repair bill at S Li Ping amounts to $5,000 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 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-state residents the same repair price as in-state residents? 21-15 Chapter 21 Hypothetical Case • Philip Van Houten accepts a contract in the District of Columbia for the sale of a boat from Rita Evenwell via email, but the contract was delivered by regular mail In his email indicating acceptance, Van Houten changes the terms of the sale slightly from Evenwell's contract, stating that he will complete the payments over 10 years instead of the contract's years Evenwell assents to the change in an email reply Van Houten then has a change of heart about the boat—he doesn't want it, after all—and claims that the contract is invalid because of the mirror-image rule Evenwell sues, stating that the UCC applies in this case • Who will win, Van Houten or Evenwell? Why? 21-16 ... 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... for the International Sale of Goods (CISG) • United Nations treaty governing international business- to -business sales contracts • Many major trading nations have signed the CISG • Significance... transaction? 21-4 The Uniform Commercial Code (UCC) • • Definition: Statutory source of contract law in the U.S that is applicable to transactions involving the sale of goods Outline • • • • •