LSB Commercial Transactions Exam 1

UCC Purpose & Policy Goals

The Uniform Commercial Code is a set of state statutes adopted across all states to standardize and simplify laws governing commercial transactions, facilitating interstate business. Article 2 specifically governs contracts for the sale of goods. Its core policy goal is to promote commercial efficiency and transaction completion.

Definition of Goods

Goods are property that is both tangible, meaning it has a physical existence, and movable from place to place. Real estate, service contracts, and employment agreements aren't goods and are governed by state common law.

Predominant Purpose Test (Mixed Contracts)

For contracts involving both goods and services, courts apply the Predominant Purpose Test to determine the governing law.

Predominant Purpose Test (Mixed Contracts) - UCC Applies

If the primary purpose is the transaction of a sale, with labor incidentally involved, the UCC applies. An example is buying furniture with delivery included.

Predominant Purpose Test (Mixed Contracts) - Common Law Applies

If the primary purpose is rendering a service, with goods incidentally involved, common law applies.

Merchant Standards

A merchant is anyone regularly engaged in the sale of a particular good or someone who employs an agent or broker with specialized knowledge. The UCC holds merchants to higher standards of commercial awareness and allows expedited transactions.

Landmark Case - ProCD v. Zeidenberg (1996) - Holding

A searchable computer database sold on CD-ROM is a good. Shrink-wrap licenses included inside software packaging are enforceable under UCC § 2-204(1) because a seller may propose acceptance by conduct, such as using the software after an opportunity to inspect the terms.

Formation Flexibility (§ 2-204)

An enforceable sales contract can arise in any manner sufficient to show agreement, including past commercial conduct, verbal exchanges, or industry norms.

Firm Offers (§ 2-205)

A merchant's written and signed offer to keep a sales offer open is irrevocable without consideration, unlike a common law option contract. If no duration is specified, the offer remains open for a maximum of three months.

Open Terms & UCC Gap-Fillers

Missing contract terms, known as open terms, don't invalidate a sales contract if intent to form an agreement exists. The UCC supplies default gap-fillers.

Open Terms & UCC Gap-Fillers - Price (§ 2-305)

A reasonable price at the time of delivery based on market value.

Open Terms & UCC Gap-Fillers - Delivery (§ 2-308)

Delivery occurs at the seller's place of business within a reasonable time.

Open Terms & UCC Gap-Fillers - Payment (§ 2-310)

Payment is due at the time and place of delivery.

Open Terms & UCC Gap-Fillers - Quantity (General Rule & Exceptions)

Quantity is a mandatory term. Without a specified quantity, a contract is unenforceable. The only two exceptions are output contracts, in which the buyer agrees to purchase all output produced by the seller, and requirements contracts, in which the buyer agrees to purchase all needed supply from the seller. Both require good-faith dealing.

Acceptance & Consideration Modifications

Acceptance may be made in any reasonable manner, eliminating the rigid common law Mirror Image Rule. Contract modifications under UCC Article 2 don't require additional consideration, provided they're made in good faith.

Battle of the Forms (§ 2-207) - Nonmerchant Transactions

If at least one party is a nonmerchant, additional terms in an acceptance are treated as proposals and don't become part of the contract.

Battle of the Forms (§ 2-207) - Merchant Transactions

Additional terms automatically become part of the contract unless the offer explicitly limits acceptance to the original terms, the additional terms materially alter the contract, or the offeror objects within a reasonable time.

Battle of the Forms (§ 2-207) - Knockout Rule

When forms contain conflicting terms, the conflicting terms knock each other out, and UCC gap-fillers supply the applicable rule.

Statute of Frauds (§ 2-201)

Contracts for the sale of goods valued at $500 or more must be in writing to be legally enforceable.

Statute of Frauds (§ 2-201) - Required Writing Elements

The writing must include the quantity of goods, the signature of the party to be charged, and language evidencing intent to form a contract.

Statute of Frauds (§ 2-201) - Landmark Case - Rosenfeld v. Basquiat (1996)

A receipt written in crayon on brown wrapping paper that listed the quantity, price, deposit, name of the goods, and signatures satisfied the Statute of Frauds. Delivery terms weren't required.

Statute of Frauds (§ 2-201) - Merchant Confirmation Rule

A merchant who receives a signed written confirmation memorandum from another merchant is bound unless the receiving merchant objects promptly.

Identification of Goods (§ 2-501)

Before title or risk of loss can pass, goods must exist and be identified to the contract, such as through serial numbers, markings, or separated lot numbers.

Passing of Title (§ 2-401 Default Rules) - Shipment Required

Title passes when the seller delivers the goods to the common carrier.

Passing of Title (§ 2-401 Default Rules) - Document of Title Required

Title passes when the documents of title, such as a bill of lading or warehouse receipt, are delivered.

Passing of Title (§ 2-401 Default Rules) - No Shipment or Documents Required

Title passes when the contract is made and the goods are identified.

Good Faith Buyers (GFB) & Title Issues

A good faith buyer is someone who purchases honestly, for value, and without knowledge of title defects.

Good Faith Buyers (GFB) & Title Issues - Voidable Title (Fraud or Bounced Checks)

A seller with voidable title can pass valid title to a good faith buyer. The original owner's sole recourse is suing the fraudster, as illustrated by Case 15.1, Hodges Wholesale Cars.

Good Faith Buyers (GFB) & Title Issues - Void Title (Stolen Property)

Stolen property transfers void title. A good faith buyer can't acquire valid title, and the rightful owner can always recover the goods.

Good Faith Buyers (GFB) & Title Issues - Entrustment Rule (§ 2-403)

Entrusting goods to a merchant who deals in goods of that kind gives the merchant the power to transfer valid title to a good faith buyer in the ordinary course of business.

Insurable Interest

A buyer acquires an insurable interest in goods as soon as the goods are identified to the contract, even before title passes.

Risk of Loss Allocation - Shipment Contracts (Default Rule)

The seller is only required to deliver the goods to the common carrier. Risk of loss shifts to the buyer once the goods are handed to the carrier.

Risk of Loss Allocation - Destination Contracts

The seller must tender delivery at a specified destination. Risk of loss shifts to the buyer only upon proper tender at that location.

Risk of Loss Allocation - Non-Conforming Goods

Risk of loss stays with the seller until the nonconformity is cured or the goods are accepted.

INCOTERMS - FOB Place of Shipment

This is a shipment contract. The buyer bears the risk and shipping costs once the goods are handed to the carrier.

INCOTERMS - FOB Place of Destination

This is a destination contract. The seller bears the shipping costs and risk during transit.

INCOTERMS - CIF (Cost, Insurance, Freight)

The seller pays freight and insurance naming the buyer as beneficiary, but title and risk transfer to the buyer upon delivery to the carrier.