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University of Cincinnati School of Law
Houh, Emily Ming-Sue

Professor Houh
Spring 2014
The Role and Scope of Codes in Sales Systems
-The UCC is a uniform act that was made in an effort to harmonize the law of sales in all the states – at least part of it has been adopted by every state, but some states have made modifications to it
-The UCC is a gap-filler – it fills gaps because parties to sales agreements cannot think of every contingency in advance
-Transactions can happen more quickly if parties are willing to fall back on the UCC
-The UCC also creates uniformity among the states
-The UCC applies to transactions in “goods” (all things that are movable at the time of identification to the contract for sale other than the money in which the price is to be paid – including crops and unborn animals – but not paper that represents something
-The UCC applies to some mixed contracts for the sale of both goods and services
-The predominant purpose test is used by the majority of states and asks whether the predominant purpose of the transaction is to sell goods or services – if it is goods, the UCC applies to the whole transaction, if it is services, the UCC does not apply at all
-The gravamen of the action test is used by the minority of states and asks whether the source of the complaint is with the goods or the services portion of the transaction
Ragus v. City of Chicago

Adel v. Greensprings of Vermont

Cook v. Downing

Scope Issues with Leases and the CISG
Sales v. Leases
-Article 2 only governs sales of goods – Article 2A governs leases
-Article 2A is relatively new and borrows heavily from the language and concepts of Article 2
-Both Article 2 and Article 2A allow parties to make their sale or lease contracts as they wish, with gap fillers provided as backups but with very few restrictions on freedom of contract
-The fundamental difference between a sale and a lease is that the lessor has a reasonable expectation of receiving the goods back when they still have meaningful economic value
-Courts sometimes struggle to decide if a transaction is a true lease or just a disguised sale
-The economic realities test considers the likelihood that the lessor will receive the goods back at a time when they still have meaningful economic life – if so, it is a lease
-There are significant consequences depending on whether a transaction is a lease or a sale
Carlson v. Giachetti
-Carlson leased a machine to King for 2 months
-King sold it to a third party who was unaware of Carlson’s interest (Carlson never filed a financing statement)
-Carlson sued the third party for conversion
-If it was a true lease, King had no power to transfer title to the third party and the third party can be held liable for conversion
-The court held that it was a true lease because that is what the parties intended
-The court used the economic realities test – in this case, when the lease expires, the lessor gets the goods back when they still have economic life and value, so it is a lease
-Since it is a lease, Carlson can sue the third party for conversion
In Re Bailey
-Bailey leased 2 tractors from Lafayette for down payments and monthly payments but then filed for bankruptcy
-Bailey had a purchase option for 10% of the FMV of the tractors at the end of the lease
-Lafayette’s profit was totally derived from the down payment – the monthly payments were exactly what Lafayette owed his supplier each month
-Bailey paid for the insurance, repairs and taxes on the tractors (he thought it was a sale)
-The issue was whether this was a true lease or a disguised sale
-The court held that this was a disguised sale
-In this case, the lessee had an option to purchase the goods for nominal additional consideration
-Nominal consideration means that there is no reasonable alternative but to exercise the purchase option and it would be unreasonable not to do so
-Since the purchase option is only for 10% of the FMV left at the end of the lease, there is obviously not much economic life left for the lessor – no meaningful reversionary interest
Scope of CISG
-Over 70 countries have ratified the CISG, including the US, China, France, Germany, Canada and Mexico
-The CISG says that it will apply to sales of goods between parties with places of business in countries that have ratified the CISG and the parties have reason to know at the time of the contract formation that they have places of business in different countries that have ratified the CISG – unless the parties specify otherwise
-The CISG says that a party’s place of business is the place that has the closest relationship to the contract and its performance
-The CISG does not include contracts where the seller’s obligation is primarily the supply of labor or services
-The CISG is only a default system and parties can opt out of using it
-The CISG only covers sales of consumer goods if the seller neither knew nor should have known that the goods were being purchased for a consumer purpose
-The CISG does not cover the liability of the seller for death or personal injury caused by the goods sold
-The CISG does not cover issues of whether the sale to the buyer cuts off the property rights of thirds parties in the goods that were sold
Valero v. Greeni Oy & Greeni Trading Oy

Sales Contract Formation
§ 2-204: Formation
-A contract for the sale of goods can be made in any manner that is sufficient to show an agreement (such as conduct by both parties that recognizes a contract)
-An agreement sufficient to constitute a sale can be found even if no one can determine the exact moment that it was made
-1 or more terms can be left open and there is still a sale – as long as the partie

acknowledgment form that says acceptance is expressly conditional on the buyer’s assent to additional terms, the acknowledgment form is a counteroffer, so the seller can avoid the contract before shipping the goods because there was no conduct that formed a contract yet
-*If the seller gets a purchase order and then sends an acknowledgment form that says acceptance is expressly conditional on the buyer’s assent to additional terms, and the seller has shipped the goods and accepted payment for them, there is a contract by conduct and the seller will be in breach if he cancels
-*If the seller gets a purchase order that reserves all remedies available and then sends an acknowledgment form that disclaimed consequential damages and added an arbitration clause and then ships the goods, the purchase order was an offer and the acknowledgment form is a definite and seasonable acceptance because it was not expressly conditional, so there is a contract
   -*The arbitration clause is an additional term and probably does not count as a term
   -*The disclaimer of consequential damages is a different term and does not count, so the
      seller must still pay consequential damages – the knockout rule takes it out
-*If the buyer said “I guess so” when the seller first showed him an acknowledgment form when their relationship began and they have been conducting business ever since, § 2-207 does not apply – the term is negotiated
Hill v. Gateway 2000
-Hill bought a computer from Gateway over the phone
-The computer arrived with a list of terms in the box, including a 30-day return policy and arbitration clause
-The issue was whether these terms from the box were a part of the contract
-The court held that Gateway was the offeror and was master of its offer (although, generally, a customer who calls in to place an order is the offeror)
-Hill accepted the offer by not returning the computer within 30 days
-Additional terms included in a box shipped by the seller do become part of the contract between the parties, even if the buyer is unaware of the additional terms and the buyer’s acceptance of the terms is by not returning the item purchased
-Those who accept without reading the terms of a contract assume the risk that the terms will be unfavorable