CONTRACTS I: PROFESSORY CHERRY FALL 2011
UNIT 1: BASIC CONTRACTS
I. SALE OF GOODS/ UCC APPLICATION OR COMMON LAW? (Chapter 3 E&E)
2.7.2 The Use and Application of UCC Article 2:
A. The Scope of Article 2: When Does it Apply?
Article 2 applies to “transactions in goods.” Although the word transaction is broader than the word sale you should not be concerned. If the contract is a sale of goods, Article 2 governs and must be applied.
***When you are dealing with a contracts issue, the FIRST THING YOU SHOULD DO is determine whether or not the transaction is a sale of goods. If it is you must apply Article 2. If it is not, you must not apply Article 2, but must apply principles of common law.
NOTE: There are many issues that could arise in a sale of goods that are not covered by the provisions of Article 2. Where those issues arise, principles of law and equity supplement the provisions of the Code. You will see many areas of contract law in which Article 2 does not have specific provisions, so that UCC 1.103 incorporates common law ruels and makes them applicable to the sale of goods.
B. WHAT IS A SALE?
A sale consists in the passing of title from the seller to the buyer for a price. There are 2 essential characteristics of a sale:
1) That title (ownership of the goods) must pass from the seller to the buyer AND
2) The buyer must pay for them.
The price paid for the goods is usually money but it need not be.
Article 2 does not apply to a transaction in which the owner of property merely leases it for a period of time. In a lease the owner retains title. Likewise, if the owner of property donates it to another person, the gift is not a sale of goods.
The copyright in software is held by its creator, and when the creator “sells” the software to a user, she does not transfer title to the software or the copyright. The holder keeps the copyright and merely conveys to the user a right to use the software (a license). There is no clear consensus on whether software is goods, or whether a license is a sale, some courts have treated the licensing of software as a sale of goods and have applied Article 2 to the transaction
C. WHAT ARE GOODS?
Goods are defined in UCC 2-105(1) as movable things, including manufactured goods, livestock, and growing crops. The definition expressly excludes money and various intangible rights.
i) a customer’s purchase of clothing from a store is obviously a sale of goods. Conversely, a contract with a laundry to clean clothes while relating to goods, is a service.
ii) Similarly, the purchase of a house, while a sale, involves REAL PROPERTY, not goods.
iii) The purchase of shares in a corporation or of coverage under a life insurance policy is likewise a sale, but the subject of the sale is intangible rights, not goods.
iv) Transactions involving the sale of copyrighted creative work embodied in physical form, such as a painting, a book, a music cd, or a DVD, are sales of goods, even though the real value of the object is in its content, and even though the creator’s copyright may restrict the use of the object.
However, the proper characterization of sales of this kind of intellectual property is less clear where the intellectual property is less clear where the intellectual property is purchased on the Internet without any physical object changing hands. Where music, books, movies, and games are sold online and downloaded directly form the seller’s website to the buyer’s computer, it is more difficult to conclude with confidence that the transaction is a sale of goods, and it could be seen as a sale of intangible rights or the licensing of rights to intellectual property rather than a physical object.=
D. WHAT LAW APPLIES TO HYBRID TRANSACTIONS?-PREDOMINANT PURPOSE TEST
Its quite common to have a hybrid transaction that includes both a sale of goods and a component that is not a sale of goods.
EX: a contract to repair a car may include both the supply of parts (the sale of goods) and the provision of labor.
When such a hybrid transaction is in issue, most courts use a “PREDOMINANT PURPOSE TEST” to decide whether Article 2 applies.
If the sale of goods is the more significant aspect of the transaction and the non-sale component is incidental to the sale, Article 2 applies. However if the sale of goods is ancillary, and the other component is predominant, Article 2 does not apply and the transaction is governed by common law.
E. What Is the Importance of Deciding the Question of Scope Correctly?
There are many provisions of the Article 2 that are codifications of common law, that is they did not change the common law rule, but merely reduced it to statutory form.
Article 2 is not comprehensive, UCC 1.103 incorporates many principles of common law to supplement the provisions of the Code. Because there is so much congruence between the two there are many issues that would be answered the same way, irrespective of whether one applied Article 2 or the common law.
There are may situations in which a struggle with the question scope is just not practically significant, because the decision on whether Article 2 should or should not be used makes no difference to the end result.
A few further examples illustrate other situations in which the scope may be important: an implied warranty may exist if the transaction is a sale of goods, but may not exist if it is not; the contract may have to be recorded in a signed writing if it is a sale of goods, but may not need to be if it is not; and the statute of limitations may differ depending on whether the transaction is a sale of goods.
F. MUST THE PARTIES BE MERCHANTS for ARTICLE 2 to APPLY?
This is a constant problem for students.
The simple answer is that if the contract is a sale of goods, Article 2 applies, irrespective of who the parties to the contract may be. It is the nature of the transaction, not the attributes or occupation of the parties that is determinative.
WHAT IS A MERCHANT?
However confusion arises because there are some provisions of Article 2 that have special rules that apply to parties that satisfy Article 2’s definition of a “merchant.”
This term is defined in UCC 2.104 to include persons who deal in goods of the kind involved in the transaction, or who, by their occupation, have knowledge or skill relating to the practices or goods involved in the transaction.
In short, a merchant is an experienced professional buyer or seller, rather than a casual or occasional buyer or seller.
The important point to note is that Article 2 applies to everyone who enters into a contract for the sale of goods. It is only in those narrow situations that specifically impose different rules for merchants that the question of whether a party meets the definition of merchant is relevant.
EXAMPLES AND EXPLANATIONS:
#1a) The sale of a condo is not the sale of goods but real property.
The concept of movability distinguishes tangible personal property that is capable of being moved (even if machinery is needed to move it) from the land.
b) A contract to employ someone as a sales clerk in a department store is not a sale of goods it’s a contract for labor.
c) The sale of a cow is a sale of goods. Livestock and crops (including unborn animals and growing crops) are clearly included within the definition of goods in UCC 2.105
d) The sale of food in a supermarket is a sale of goods subject to Article 2. However a restaurant meal involves both the sale of the food and the provision of services associated with it, such as cooking it; serving it; and providing a table etc. Use the predominant purpose test.
If it is a tangible and moveable property it is usually a sale of goods. Even if you need heavy machinery to move it.
The best question to ask for the predominant purpose test: whether the end product to be delivered under the contract (in this case the completed sculpture), is the subject matter of the transaction. If it is, the transaction is a sale of goods, even though the process of manufacture involves labor as well as materials, end even if the value of the labor greatly exceeds that of the materials.
Therefore, if the seller’s labor is entirely employed in the creation of the tangible, movable end product that is sold, the transaction is properly treated as a sale of goods.
The answer would change if Mark supplied the marble bc Chip would then be supplying no goods at all, but would only be performing labor on Mark’s chunk of marble. The transaction would not be governed by Article 2.
A sale of a car qualifies as a sale of goods, which means this falls under Article 2 regardless if they are merchants. Article 2 applies to sales of goods irrespective if the parties are merchants or not.
This oral agreement is unenforceable bc it is subject to Article 2 and the statute of frauds applies.
II. *WHAT IS A CONTRACT/GENERAL MUTUAL ASSENT(Chapter 1 E&E)
Restatement 1: WHAT IS A CONTRACT?
Promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty. Exchange can make both sides better off. Each gets something he/she needed more than what they gave in exchange. Exchange was voluntary for each side.A particular exchange may not be perfectly equal, yet both parties are still better off. Contract: An exchange relationship created by an agreement, which can be can be either oral or written, between two or more parties, and involves at least one legally enforceable promise.
RS 2. Promise (oral, written or inferred from conduct): A manifestation of intention to act or refrain from acting in a specified way. The person manifesting the intention is the promisor. The person to whom the manifestation is addressed is the promisee. Where performance will benefit a person other than the promisee, that person is a beneficiary.
-RS 3. Agreement: manifestation of mutual assent on part of two or more persons
-RS 3. Bargain: agreement to exchange promises or to exchange a promise for a performance
RS 17. Requirement of a Bargain: Requires a manifestation of mutual assent.
RS 4. How a Promise May Be Made: Words either oral or written, or may be inferred wholly or partly from conduct
*ELEMENTS OF A CONTRACT:
Manifestation of Mutual Assent (Offer/Acceptance) + Consideration = Contract
There must be a bargain, mutual assent, exchange and consideration
RS 22: Offer + Acceptance= Mutual Assent
*MUTUAL ASSENT RS 18
A. Mutual Assent/Meeting of the Minds:
-RS 18: Each party either makes a promise or renders a performance.
-It is the basis of contract. This means that each party must intend to ent
UNIT 2: OFFER AND ACCEPTANCE
A. General Offer
-Restatement 24 Definition of Offer: manifestation of willingness to enter a bargain as to justify the offeree in understanding that his assent to the bargain is invited, and if given, would conclude the deal.
To determine if an offer is capable of assent we look at intent and definiteness of the terms.
-The offer and acceptance model conceives of a process of bargaining between the parties that leads to the formation of a contract.
-The offer creates the “power of acceptance” in the offeree.
-UCC, Offer Acceptance:
The UCC usually defers to common law when dealing with offer and acceptance. The basis for applying the common law where Article 2 does not provide its own rules is 1.103 of the UCC
-The two UCC provisions that most directly address formation issues are UCC 2-204 and 2-206.
-Summary of UCC 2-204:
The fundamental point is that the court should focus on the existence of agreement between the parties, whether shown by words or conduct, and if agreement is apparent, the court should not be concerned about technicalities but should do what it can to uphold and enforce the contract.
-Summary of UCC 2-206: gives technical rules on the manner and mode of acceptance. It emphasizes that an offer should be interpreted as inviting acceptance by any reasonable mode unless the offer or circumstances make it clear that the mode is restricted.
Elements of an Offer
1) Communicated to Offeree-RS 29: Offer must be communicated to the offeree before it takes effect
2) Intent to Contract: Must indicate a desire to contract. To do this it has to specify performances to be exchanged and the terms that will govern the relationship. It may also prescribe the manner of acceptance. The offeror is the “master of the offer.”
-RS 26: Not an offer if offeree has reason to know offeror does not wish to form a contract.
3) Power of Acceptance Given: The offer must engender the reasonable understanding that acceptance will create a contract. Upon acceptance a contract will arise without any further approval required.= This distinguishes an offer from a proposal.
4) Definiteness of Terms RS 33: Terms must be reasonably certain. Leaving terms out may show lack of intent to make an offer or acceptance.
5) Objective Test: To be an offer the communication must convey the reasonable understanding that he offeror intends a contract to arise and expects to be committed upon acceptance. Look at the surrounding circumstances too.
B. Offers Distinguished from Statements That Are NOT Offers
Summary: requires the offeror has objective intent to bargain, definite language/terms, no omissions of crucial terms.
NOT an OFFER: Preliminary negotiations, sometimes offers made in jest and price inquiries/bids.
*Must contain a promise and a commitment.
1. Preliminary Proposals are NOT Offers (Statements of Future Intent):
-Can be defined to include any communication prior to acceptance or prior to the operative offer in the case.
-Prelim Neg. include statements of opinion, intentions, hopes, estimates, inquiries, invitations to make offers, ads, catalogs, invitations for bids and price quotes.
-Use Objective Test: would a reasonable person in the position of P conclude that D made a commitment?
EX: A writes B, “I am eager to sell my house. I would consider $20K for it.” B responds “I will buy your house for $20K.” A has not made an offer, and there is no contract. B should reasonably have understood that A was merely soliciting bids, or starting negotiations, and was not ready to bind himself to the price. (RS 26, Ill4).
-CASE: EMPRO v. BALL CO.
-Was it the initial communication as opposed to an answer to an inquiry (which is more likely to be an offer) and does that inquiry ask for an offer?
-Words of commitment associated with a promise or non-committal language?
-Are the terms detailed or are only a few included? (Is quantity and quality included)?
-Does it involve real property or goods? Court are less likely to view a message about real property as an offer.
-Surrounding Circumstance: EX: Physician treating a patient under emergency is less likely to be taken as a promise opposed to a non-emergency situation..
-Usages of the trade, prior practices of the parties (“course of dealings”)—Cherry