ACC 473: UCC, Chs. 20-23

The Uniform Commercial Code

1. Article 1: General Provisions
2. Article 2: Sale of Goods
3. Article 2A: Lease contracts.
4. Article 3: Negotiable instruments
5. Article 4: Bank deposits and collections
6. Article 4A: Fund transfers
7. Article 5: Letters of Credit
8. Article 7: Documents of title

Article 2

Modifies common law:

1. If not modified by UCC, then common law applies to sales contracts.
2. When a conflict arises between a common law UCC, the UCC controls.
3. When the UCC is silent, the common law governs

Sale

The passing of title (evidence of ownership rights) from a seller to a buyer
for a price [UCC 2–106 (1)]

• The price may be payable in cash or other goods or services.

Sale of Goods

1. Tangible property: physical existence and can be distinguished by the
senses of touch, sight, etc.
2. Intangible property: conceptual existence and thus does not come under Article 2.
3. Goods associated with real estate often do fall within the scope of Article 2 [UCC 2–107].

Article 2 [UCC 2–107]

a) Sale of minerals, oils, or gas is a contract for the sale of goods if
severance, or separation, is to be made by the seller.
b) Sale of growing crops or timber to be cut is a contract for the sale
of goods regardless of who severs them from the land

Combination of goods and services

a) Predominant-factor test: test courts use to determine whether a
contract is primarily for the sale of goods or for the sale of services.
b) If primarily a goods contract, any dispute, even a dispute over the
services portion, will be decided under the UCC

Merchant

A person who is engaged in the purchase and sale of goods

1. A person that deals in goods of the kind involved in the sales contract.
2. A person by occupation, holds themselves out as having knowledge and skill unique to the practices or goods involved in the transaction, OR
3. A person who employs a merchant as a broker, agent, or other
intermediary has the status of merchant in that transaction

Article 2 A Leases

1. Lease agreement: An agreement in which one person (the lessor) agrees to transfer the right to the possession and use of property to another person (the lessee) in exchange for rental payments. Does not include real property (land)
2. Lessor: A property owner who allows others to use his or her property in exchange for payment

3. Lessee: A person who pays for the use or possession of another’s
property

Consumer Leases

a) A lessor who regularly engages in the business of leasing or selling
b) A lessee (except an organization) who leases the goods “primarily
for a personal, family, or household purpose”
c) Total lease payments less than $25,000 [UCC 2A–1 0 3 (1) (e)]

Finance Leases

a) The lessor buys or leases goods from the supplier and leases or
subleases them to the lessee [UCC 2 A–103 (1) (g)].
b) Lessor is financing the transaction.
c) Article 2 makes the lessee’s obligations under a finance lease
irrevocable and independent from the financer’s obligations [UCC 2 A–
407].

• (1) Lessee must perform and continue to make lease payments
  even if the leased equipment turns out to be defective

The Formation of Sales and Contracts

1. The UCC modify common law contract rules

2. The UCC states that an agreement sufficient to constitute a contract can exist even if the moment of its making is undetermined [UCC 2–204 (2), 2 A–204 (2)]

Open Terms

sales or lease contract will not fail for indefiniteness even if one or more terms are left open as long as both of the following are true:

a) The parties intended to make a contract.

b) There is a reasonably certain basis for the court to grant an appropriate remedy [UCC 2–204 (3), 2 A–204 (3)].

Price

a) If the parties have not agreed on a price, the court will determine a “reasonable price at the time for delivery” [UCC 2–305 (1)].

b) If either the buyer or seller is to determine the price, the price is to be decided in good faith [UCC 2–305 (2)].

c) good faith means honesty in fact and the observance or reasonable commercial standards of fair dealing in the trade [UCC 2–103 (1) (b)].

d) If the price fails to be set through the fault of one of the parties, the other party can treat the contract as canceled or determine a reasonable price [UCC 2–305 (2)].

Payment Terms

When the parties do not specify payment terms, payment is due at the time and place at which the buyer is to receive the goods [UCC 2–310 (a)].

a) The buyer can tender payment using any commercially normal or acceptable means, such as check or credit card; however, if the seller demands payment in cash, the buyer must be given a reasonable time to obtain it [UCC 2–511 (2)].

Delivery Terms

When no delivery terms are specified, the buyer normally takes delivery at:

a) the seller’s place of business [UCC 2–308 (a)].

b) If the seller has no place of business, the seller’s residence is used.

c) When goods are located in some other place and both parties know it, delivery is made there.

d) If the time for shipment or delivery is not clearly specified in the sales contract, then the court will infer a “reasonable” time for performance [UCC 2–309 (1)].

Successive Performance

If a single contract specifies successive performances but does not indicate how long the parties are required to deal with each other, either party may terminate the ongoing contractual relationship.

a) Principles of good faith and sound commercial practice call for reasonable notification before termination so as to give the other party sufficient time to seek a substitute arrangement [UCC 2–309 (2), (3)]

Shipment Terms

When the contract contemplates shipment of the goods but does not specify the shipping arrangements, the seller has the right to make these arrangements

a) The seller must make the arrangements in good faith, using commercial reasonableness in the situation [UCC 2–311].

Assortment

When a sales contract omits terms relating to the assortment of goods, the buyer can specify the assortment.

Open Quantity Terms

if the parties do not specify a quantity, no contract is formed. UCC recognizes two exceptions to this rule:

a) Requirements contract

b) Output contract

Requirements Contract

An agreement in which a buyer agrees to purchase and the seller agrees to sell all or up to a stated amount of what the buyer needs or requires.

(1) illusory (without consideration and unenforceable) as a requirements contract if: buyer promises to purchase only if they wish.

(2) The buyer reserves the right to buy the goods from someone other than the seller

Output contract

An agreement in which a seller agrees to sell and a buyer agrees to buy all or up to a stated amount of what the seller produces.

Good faith limitation on requirements and output contracts:

(1) The quantity under such contracts is the amount of requirements or the amount of output that occurs during a normal production period.

(2) The actual quantity purchased or sold cannot be unreasonably disproportionate to normal or comparable prior requirements or output [UCC 2–306 (1)].

Merchant’s Firm Offer

An offer (by a merchant) that is irrevocable without consideration for a period of time (not longer than three months) [UCC 2–205, 2 A–205].

a) A firm offer by a merchant must be in writing AND

b) must be signed by the merchant.

Acceptance

1. May be made in any reasonable manner and by any reasonable means.

2. “Either by a prompt promise to ship or by the prompt or current shipment of conforming or nonconforming goods” [UCC 2–206 (1) (b)].

• Conforming goods accord with the contract’s terms, whereas nonconforming goods do not.

Nonconforming goods

Shipment of nonconforming goods constitutes both an acceptance, and a breach.

(1) Unless, seller seasonably notifies the buyer that the nonconforming shipment is offered only as an accommodation, or as a favor.

(2) Seasonably: Within a specified time period; if no period is specified, within a reasonable time.

(3) The notice of accommodation must clearly indicate to the buyer that the shipment does not constitute an acceptance and that, therefore, no contract has been formed.

Failure to notify of acceptance

If the offeror is not notified within a reasonable time that the offeree has accepted the contract by beginning performance, then the offeror can treat the offer as having lapsed before acceptance [UCC 2–206 (2), 2 A–206 (2)].

Acceptance with Additional Terms

a) a contract is formed if the offeree’s response indicates a definite acceptance of the offer, even if the acceptance includes terms additional to or different from those contained in the offer [UCC 2–207 (1)].

b) If one (or both) of the parties is a non-merchant, the contract is formed according to the terms of the original offer and does not include any of the additional terms in the acceptance [UCC 2–207 (2)].

Contracts between merchants

Additional terms automatically become part of the contract unless one of the following three conditions arises:

a) The original offer expressly limited acceptance to its terms.

b) The new or changed terms materially alter the contract.

c) The offeror objects to the new or changed terms within a reasonable period of time [UCC 2–207 (2)].

Offeree’s response

Is not an acceptance if it contains additional or different terms and is expressly conditioned on the offeror’s assent to those terms [UCC 2–207 (1)].

a) Whether or not the parties are merchants.

Modification of Contract

1. An agreement modifying a contract for the sale or lease of goods “needs no consideration to be binding” [UCC 2–209 (1), 2 A–208 (1)].

2. Any contract modification must be made in good faith [UCC 1–304].

3. When a non-merchant buys goods from a merchant-seller, and the merchant supplies a form that contains a prohibition against oral modification, the merchant must sign a separate acknowledgment of the clause for it to be enforceable [UCC 2–209 (2), 2

4. Any modification that makes a sales contract come under Article 2’s writing requirement (its Statute of Frauds) usually requires a writing to be enforceable

Statute of Frauds

Sales contracts for goods priced at $500 or more and lease contracts requiring total payments of $1,000 or more must be in writing to be enforceable [UCC 2–201 (1), 2 A–201 (1)].

A writing, including an e-mail or other electronic record, will be sufficient to satisfy the UCC’s Statute of Frauds as long as it:

a) Indicates that the parties intended to form a contract

b) Is signed by the party (or agent of the party) against whom enforcement is sought

c) The contract normally will not be enforceable beyond the quantity of goods shown in the writing, however.

d) For leases, the writing must reasonably identify and describe the goods leased and the lease term

Special Rules for Contracts between Merchants

a) Merchants can satisfy the Statute of Frauds if, after the parties have agreed orally, one of the merchants sends a signed written confirmation to the other merchant within a reasonable time.

b) The communication must indicate the terms of the agreement, and the merchant receiving the confirmation must have reason to know of its contents.

c) Unless the merchant who receives the confirmation gives written notice of objection to its contents within ten days after receipt, the writing is sufficient against the receiving merchant, even though she or he has not signed it [UCC 2–201 (2)].

Statute of Frauds Exception

oral contract for the sale or lease of customer-made goods will be enforceable if:

a) Special Goods

b) Admission

Special Goods exception

(1) goods are specially manufactured for a particular buyer or specially manufactured or obtained for a particular lessee.

(2) goods are not suitable for resale or lease to others in the ordinary course of the seller’s or lessor’s business.

(3) seller or lessor has substantially started to manufacture the goods or has made commitments for the manufacture or procurement of the goods.

Admission Exception

An oral contract for the sale or lease of goods is enforceable if the party against whom enforcement is sought admits in pleadings, testimony, or other court proceedings that a sales or lease contract was made.

(1) Contract will be enforceable even though it was oral, but enforceability will be limited to the quantity of goods admitted.

Performance

a) An oral contract for the sale or lease of goods is enforceable if payment has been made and accepted or goods have been received and accepted.

b) The oral contract will be enforced at least to the extent that performance actually took place.

Parol Evidence

1. Fully integrated contract: parole evidence not allowed

2. Non-fully integrated contract: court may allow evidence of consistent additional terms to explain or supplement the terms in the contract.

Rules of Construction

UCC establishes the following order of priority:

(1) Express terms

(2) Course of performance

(3) Course of dealing

(4) Usage of trade

Unconscionable

Contract is so unfair and one-sided that it would be unreasonable to enforce it.

1. Refuse to enforce the contract

2. Enforce the remainder of the contract without the unconscionable part 3. Limit the application of the unconscionable term to avoid an unconscionable result

Contracts for the International Sale of Goods

1. 1980 United Nations Convention on Contracts for the International Sale of Goods (CISG).

a) The CISG governs if the countries of the parties to the contract have ratified the CISG and if the parties have not agreed that some other law will govern their contract.

b) CISG does not apply to consumer sales.

c) Neither the UCC nor the CISG does not applies to contracts for services.

d) The CISG uses the mirror image rule

e) Irrevocable Offers: an offer can become irrevocable without a signed writing.

f) Article 11 of the CISG does not require a writing, may be proved by any means, including witnesses.”

g) Contract formed receipt of acceptance by the offeror

Forum-selection clause

Designating the court, jurisdiction, or tribunal that will decide any disputes arising under the contract.

1. A forum-selection clause will not be enforced if the clause:

a) Denies one party an effective remedy

b) Is a product of fraud

c) Is a product of unconscionable conduct

d) Causes substantial inconvenience to one of the parties

e) Violates public policy

Choice-of-law clause

A clause in a contract designating the law (such as the law of a particular state or nation) that will govern the contract.

Choice-of-language clause

A clause in a contract designating the official language by which the contract will be interpreted

Force majeure clause

certain unforeseen events such as war, political upheavals, and acts of God will excuse a party from liability for nonperformance of contractual obligations.

Identification

The express designation of the specific goods provided for in the contract

1. In existence

2. Identified to the contract [UCC 2–105 (2)]

Gives the buyer or lessee the right to:

1. Insure (or to have insurable interest in) the goods

2. Recover from third parties who damage the goods

Existing Goods

identification takes place at the time the contract is made

Future Goods

a) Identification occurs when goods are shipped, marked or otherwise designated as the good referenced in the contract

b) Unborn animals to be born within twelve months after contracting, identification takes place when the animals are conceived.

c) Crops

• (1) Harvested within twelve months (or in the next harvest season occurring after contracting, whichever is longer), identification takes place when the crops are planted.

  • (2) No reference to crops by when they will be harvested, then identification takes place when the crops begin to grow.

Goods That Are Part of a Larger Mass

(1) Identified when marked, shipped, or somehow designated as the particular goods to pass under the contract.

(2) Fungible goods – Goods that are alike by physical nature, by agreement, or by trade usage.

• (a) Hold title as tenants in common

  • (b) Title and risk of loss can pass to the buyer without actually separating the goods [UCC 2–105 (4)].

When Title Passes

Once goods exist and are identified, UCC 2–401 applies to the passage of title

1. “Unless otherwise explicitly agreed”.

2. Without an explicit agreement to the contrary, title passes to the buyer at the time and the place the seller performs by delivering the goods [UCC 2–401 (2)].

Deliver of Goods with Movement

1. Shipment Contract

2. Destination Contract

3. Tender of delivery

Shipment Contract

seller is required to ship the goods by carrier

a) The buyer assumes liability for any losses or damage to the goods after they are delivered to the carrier [UCC 2–401 (2) (a)].

b) Contract assumed to be a shipment contract if nothing to the contrary is stated in the contract.

Destination contract

A contract in which the seller is required to ship the goods by carrier and deliver them at a particular destination.

a) The seller assumes liability for any losses or damage to the goods until they are tendered at the destination specified in the contract [UCC 2– 401 (2) (b)].

Tender of delivery

When the seller places or holds conforming goods at the buyer’s disposal (with necessary notice), enabling the buyer to take possession [UCC 2–503 (1)]

Delivery without Movement of the Goods

Contract that does not call for the seller to ship or deliver the goods.

Title document required: title passes to buyer when and where the document is delivered.

• (1) Bill of lading

• (2) Warehouse receipt

Title Document Not Required:

• a) If goods are identified to the contract, title passes at the time and place the sales contract is made.

  • b) If the goods have not been identified, title does not pass until identification occurs.

Sales or Leases by Non owners

Buyer acquires what title the seller has to the goods.

Leasehold Interest

Lessee acquires right to possess and use the goods.

a) A lessee acquires whatever leasehold interest the lessor has or has the power to transfer, subject to the lease contract [UCC 2 A–303, 2 A– 304, 2 A–305].

Void Title

a) Purchase from Seller that is not the owner of the goods

• (1) Buyer unknowingly purchases goods from seller

• (2) Acquires no title because the seller’s title is void

• (3) True Owner can reclaim the goods from the buyer.

b) Lease of goods from Lessor that is not owners

• (1) Void

Voidable Title

A seller has a voidable title when:

(1) Goods obtained by fraud.

(2) Goods paid for with a dishonored check

(3) Goods purchased on credit when the seller was insolvent.

• (a) Insolvent –a person who ceases to pay “his debts in the ordinary course of business or cannot pay his debts as they become due or is insolvent within the meaning of federal bankruptcy law” [UCC 1–201 (23)].

Good faith purchaser

(a) A purchaser who buys without notice of any circumstance that would put a person of ordinary prudence on inquiry as to whether the seller has valid title to the goods being sold.

(b) Purchases for value gives legally sufficient consideration for the goods purchased.

(c) Original owner normally cannot recover goods from a good faith purchaser for value [UCC 2– 403 (1)].

Entrustment rule

Leaving purchased goods with the merchant for later delivery or pickup [UCC 2–403 (3)].

Buyer in the ordinary course of business

A buyer who, in good faith and without knowledge that the sale violates the ownership rights or security interest of a third party in the goods, purchases goods in the ordinary course of business from a person in the business of selling goods of that kind [UCC 1–201 (9)].

Bailment

The personal property of one person (a bailor) is entrusted to another (a Bailee), who is obligated to return the bailed property to the bailor or dispose of it as directed.