Commercial Transactions Outline
Summer 2011,
University of Dayton School of Law
Professor Charles Gilmary Hallinan
I. Formation [Book One Sales Systems].
In any kind of commercial transaction there’s a transfer of the use of ownership or service for a price. One party is a buyer (vendee) and the other party is the vendor, whether selling the use of the thing (a lease) or whatever. So, the first part of the course is one subset of commercial transaction—contracts for the sale of goods. We’ll also talk about contracts for the lease of goods. The UCC addresses that question. The greatest amount of this class will be occupied with what happens when there is such a transaction and the vendor is entitled to payment. In a contract for sale, for example, the vendor is obliged to deliver the goods and to transfer title to the goods in accordance with the contract. The obligation of the buyer is to accept the goods & pay for them in accordance with the contract. If the obligation of the buyer is to pay, which is generally the case, one of the other obligations might be to. . . there have been developed an immense number of commercial devices to facilitate payment from the buyer’s perspective or to enhance, from the vendor’s perspective, that they will be paid. That’s what will occupy most of our time.
A transaction starts with a sale lease or delivery of services. “UCC 2-301. General Obligations of Parties. The obligation of the seller is to transfer and deliver and that of the buyer is to accept and pay in accordance with the contract.” That’s article 2 in a nutshell. That’s true in every contract of sale whether we’re talking about a multi-million dollar deal or a bag of M&Ms bought at the UDF. Each involves a transfer of ownership that happens for a price. In every one of those contracts, 2-301 tells us what the obligations are. “in accordance with the contract” is the key there because in any contractual transaction the first place to look at is the contract—it’s the parties agreement that is the source of the duty of the buyer and seller. What the buyer pays and what the seller delivers is defined by the contract. In a transaction at the UDF, you don’t have a written contract. Article 2 provides “off-the-rack” contract terms that become part of a contract unless the parties agree otherwise. There are standard article 2 rules that can be contracted around if the parties want. Inevitably there will be something the parties didn’t think of when writing a contract, so we’ll have to rely on the default rules. The default rules in article 2 are different than other default rules. But you must first know what kinds of transactions are covered by article 2. That’s where we’ll begin.
§ 2-301. General Obligations of Parties.
The obligation of the seller is to transfer and deliver and that of the buyer is to accept and pay in accordance with the contract.
Seller’s Obligation under Article 2 = Transfer, Deliver T & D
Buyer's Obligation under Article 2 = Accept, Pay according to Contract A & PC
· Assignment 1: The Role and Scope of Codes in Sales Systems.
A. Fundamental Aspects of Sales. Sales “systems” mean all of the people, institutions, laws, and practices that are involved in transfers of ownership for a price. Sales systems generally perform four functions that facilitate the transfer of ownership from seller to buyer. First, sale systems bring buyers and sellers together and enable them to create legally enforceable transfers of ownership. The systems provide legal rules to define when formation occurs and provide people and institutions that help enable formation to happen. Second, sales systems provide a set of standard terms that govern the transfer of ownership unless the buyer and seller choose to modify the standard terms. One caveat here is not to confuse the code with the sales system itself. Codes such as the UCC play an important role in law-related sales systems, but they are merely one cog in the bigger machine. Third, is to provide a set of delivery institutions that facilitate the possessory, legal and symbolic transfer from seller to buyer. Fourth, sales systems enforce agreements to transfer ownership by giving the aggrieved buyer or seller various remedies for breach. Assignments are organized to correspond to sales systems’ four subsystems: formation, terms, performance, and remedies.
Sales System’s Four Subsystems = Formation, Terms, Performance, Remedies F T P R
Sales of goods are governed by Article 2 of the UCC. The rules of Article 2A, which govern leases, borrow heavily from Article 9. It is occasionally hard to distinguish a lease from a sale. Both involve the exchange of consideration for rights in property; with leases, however, there is not only a physical division of the goods being exchanged, but [and] a temporal division as well.
The sale of goods is a contractual arrangement. Article 2, which governs the sale of goods, treats a sales transaction as a contractual transaction. It involves contract, but the subject matter of it is also the transfer of ownership of personal property—the transfer of goods. Occasionally, the property aspects of sales law come to the fore. It’s impossible to talk about a sale without talking about ownership, title, and the like. But by and large Article 2 is built on the assumption that the property aspect is incidental and that it’s mostly a contractual arrangement.
Contracts Require = Offer, Acceptance, Consideration O A C
Offer = Present Contractual Intent, Definiteness of Terms, Communication of Offer O = PCI DT CO
Acceptance = Unequivocal Manifestation of Mutual Assent A = UMMA
Consideration = an Act Forbearance or Promise, Bargained For and Received, by a Promisor from a Promisee C = AFP BFR
Definiteness of Terms = Parties, Subject Matter, Time, Price DT = P SM T P
The sale of goods is contractual, so we have to know how a contract is formed. There are differences between contract rules and UCC rules. Such as the mailbox rule, but also larger matters such as whether fresh consideration is needed to modify an existing contract. It IS in the common law view, but not in the UCC under Article 2. Modifications can be enforceable under the UCC without fresh consideration. Our focus is on areas where the character of the contract for sale is peculiar to the subject of goods. If you a contract involves three stages: the point where they make their deal, the points where the performance of the agreement happens, or the end when the performance is done and something has gone wrong as some wouldn’t like and there are legal disputes that arise. (Formation, Performance, and Remedies.) The differences in formation rules between common law and UCC are small. That goes to the mailbox rule and fresh consideration.
There are significant differences in the performance stage between contract and UCC rules. The basic rule for performance is set out in 2-301. The obligation of the seller is to transfer and deliver. Transfer means to transfer ownership, and that’s peculiar to sales contracts, and to deliver, which is to give physical possession to the buyer, in accordance with the contract. The obligation of the buyer is to accept, which is not acceptance as in offer and acceptance. It means the obligation is to receive the goods; to take them and to hold them. And then to pay for them in accordance with the contract. Everything else in Article 2 is an expansion or explanation of those obligations.
Seller’s Obligation under Article 2 = Transfer, Deliver T & D
Buyer's Obligation under Article 2 = Accept, Pay according to Contract A & PC
In accordance with the contract. The contract of the parties is not simply what they have expressly agreed to. Rather, in sales law, the contract is the totality of the rights and obligations of the parties that arise out of their agreement. The core point of that is when we say “in accordance with the contract” we say in accordance with the parties agreement as fleshed out by the UCC and other sources.
B. The Real World of Sales. There seem to be two, only slightly overlapping, worlds: the world of business practice and the world of law. In the world of business practice, law is much less significant than reputation and leverage as forces that govern the day-to-day behavior of the actors. If a buyer or seller is not acting consistently with the expected norms in an industry, the most common response of an aggrieved party is not to sue, but rather to cease doing business with the violator. The prospect of future business with the other side is often enough to coax parties away from hard-line positions, and from litigation.
C. Functions of a Code in Sales Systems. Parties to a sales contract cannot think of every contingency in advance. With sales of personal property, Article 2 fills the gaps for the parties with a convenient and comprehensive set of default terms on issues such as warranties and remedies. The common law comes in as a backup gap filler. The advantage of Article 2 as a gap filler compared with the common law is that Article 2 is more predictable and more uniform from state to state. § 1-103 says that the provisions of the Code displace any common law to the contrary, but that the common law shall continue to supplement the Code. The common law continues to be important in law-related sales systems. First, where Article 2 is merely codifying existing law, the common law can help define terms that the UCC has left undefined. Second, in some UCC sections and Official Comments the drafters make it clear that the provision in question is not intended to affect certain related common law doctrine. Third, there are a number of common law doctrines that are never referred to explicitly in the Code but that nevertheless continue to operate with Code provisions. The official version of the UCC is not necessarily “the law” in every state. The newest Article 2 version has not been enacted in any state. Even where the UCC is the same in different states, the courts of each may interpret it differently. Check the state common law that is controlling in any given case.
§ 1-103. Construction of [Uniform Commercial Code] to Promote its Purposes and Policies: Applicability of Supplemental Principles of Law.
(a) [The Uniform Commercial Code] must be liberally construed and applied to promote its underlying purposes and policies, which are: (1) to simplify, clarify, and modernize the law governing commercial transactions; (2) to permit the continued expansion of commercial practices through custom, usage, and agreement of the parties; and (3) to make uniform the law among the various jurisdictions.
(b) Unless displaced by the particular provisions of [the Uniform Commercial Code], the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, and other validating or invalidating cause supplement its provisions.
D. Scope of Article 2. The scope of Article 2 asks what’s included and what’s not in Article 2’s world of default terms. Article 2 is the most prevalent set of default rules for sales of goods, but there are other systems that shun Article 2. Another key functional consideration of Article 2 coverage is whether or not the particular transfers will be subject to the gap filling role of the Code. Courts will look to the UCC gap filler only if they lack a more specific indication of what the parties must have intended with respect to the term in dispute. There are at least four ways a UCC gap filler will be superseded. First, the gap filler will not apply to a particular term if the contract itself specifies what that term should be. § 1-302(a) seeks to give effect to private agreements, at least to the extent that those agreements are within the limits of good faith and commercial reasonableness. Second, even where the parties’ written contract is silent on a particular matter, the parties’ repeated occasions for performance within that contract may establish an agreement by implication. § 1-303(a) calls these particular kinds of implicit terms “course of performance.” Third, where parties’ past dealings have established a particular way that the parties do business with one another, that history may establish by implication certain standard terms between the parties. § 1-303(b) calls for such implied terms based on past contracts between the same parties “course of dealing.” Fourth, if there is a custom in a particular industry concerning a performance term, that custom will prevail over the UCC gap filler whenever the two are inconsistent. The UCC calls such customs “usage of trade.” § 1-303(c). The Code also created in § 1-303(e) a hierarchy among these rules: “express terms control both course of dealing and usage of trade and course of dealing controls usage of trade.” On the other hand, the statement of this hierarchy begins with the admonition that whenever it is reasonable, we should seek to construe the express terms of an agreement as consistent with course of dealing or usage of trade.
Fours ways that UCC gap-fillers are superseded = Express Agreement in the contract, Course of Performance, Course of Dealing, Usage of Trade EA CP CD UT
§ 1-302. Variation by Agreement.
(a) Except as otherwise provided in subsection (b) or elsewhere in [the Uniform Commercial Code], the effect of provisions of [the Uniform Commercial Code] may be varied by agreement.
(b) The obligations of good faith, diligence, reasonableness, and care prescribed by [the Uniform Commercial Code] may not be disclaimed by agreement. The parties, by agreement, may determine the standards by which the performance of those obligations is to be measured if those standards are not manifestly unreasonable. Whenever [the Uniform Commercial Code] requires an action to be taken within a reasonable time, a time that is not manifestly unreasonable may be fixed by agreement.
(c) The presence in certain provisions of [t
f the trade may properly be considered in the interpretation of an ambiguous contract.
In order to eliminate ambiguity from a contract it is necessary to exclude other reasonable interpretations.
Here, the court noted that in its attempt to counter the affidavits of the City, Ragus presented the affidavit of its president, which, however, simply did not address the factual allegations concerning usage of the trade. The result was that the factual averments of the City’s affidavits were deemed to be admitted. As seen in this case, it is of the utmost importance that a party’s pleadings fully address all of the opponent’s factual statements and legal positions.
On the issue of scope, Article 2’s provisions are most deficient in coverage of what are commonly known as “mixed contracts”: those involving a combination of goods and services, or a combination of goods and something other than services. Article 2 says that it applies to “transactions in goods,” § 2-102, and then defines goods as “all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale.” § 2-105(1). Nowhere does either of these provisions suggest how to treat a contract that includes both goods and non-goods aspects. Courts have taken two approaches to these mixed contracts. Most courts apply some version of a predominant purpose test, by which the court decides whether the predominant purpose of the transaction is to sell goods or services. If it is goods, then Article 2 applies to the whole transaction, even the services portion of it. If the predominant purpose is determined to be services, then Article 2 does not apply to any part of the transaction, not even the goods portion. The other common approach is the gravamen of the action test. Under that test, the court determines whether the gravamen of the action (the source of the complaint) is with the goods or the services portion of the transaction. If the problem lies with the goods, then Article 2 applies even if the predominant purpose of the transaction is services rather than goods. If the problem lies with the services, then Article 2 does not apply to the dispute even if the predominant purpose of the transaction is goods rather than services. Each test has problems. Often it is quite difficult to determine whether the “predominant purpose” of a particular transaction is goods or services. While it might seem easier to decide what is the “gravamen of the action” in a particular case, even that can be tricky.
Predominant Purpose Test in mixed goods/services contracts = is the Predominant Purpose of the transaction to sell Goods or Services? PP G or S
Gravamen of the Action Test in mixed goods/services contracts = is the Source of the Complaint with the Goods or Services? SC G or S
Dakota Pork Indus. v. City of Huron (638 N.W.2d 884 S.D. 2002) (Dakota Pork brought a suit against the City of Huron for breach of express and implied warranties for the furnishing of water).
The furnishing of water by contractual agreement constitutes a sale of goods pursuant to Article 2 of the UCC.
The UCC defines “goods” as being all things which are movable at the time of identification to the contract for sale. § 2-105(1). Goods must exist and be identified before any interest in them can pass. “Whatever can be measured by a flow meter has ‘movability’ as that term is used in connection with the definition of goods.” § 2-105(19).
The UCC defines “goods” as all things “which are movable at the time of identification to the contract for sale[.]” SDCL 57A-2-105(1). Goods “must be both existing and identified before any interest in them can pass.” SDCL 57A-2-105(2). “Whatever can be measured by a flow meter has ‘movability’ as that term is used in connection with the definition of goods.”
Even if Dakota was unable to establish that water constitutes a “good” for purposes of Article 2, it nevertheless may have prevailed on a claim analogous to that of breach of warranty if it was able to show that the water supplied by the City was not fit for its ordinary purposes, drinking or cleansing. The analogous UCC provision, covering the warranty of merchantability, is in § 2-314.
§ 2-105. Definitions: Transferability; “Future” Goods; “Lot”; “Commercial Unit”. [May be wrong version—see page 10 below.]
(1) “Goods” means all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities (Article 8) and things in action. “Goods” also includes the unborn young of animals and growing crops and other identified things attached to realty as described in the section on goods to be severed from realty (Section 2-107).
(2) Goods must be both existing and identified before any interest in them may pass. Goods that are not both existing and identified are “future” goods. A purported present sale of future goods or of any interest therein operates as a contract to sell.
(3) There may be a sale of a part interest in existing identified goods.
(4) An undivided share in an identified bulk of fungible goods is sufficiently identified to be sold although the quantity of the bulk is not determined. Any agreed proportion of the bulk or any quantity thereof agreed upon by number, weight, or other measure may to the extent of the seller's interest in the bulk be sold to the buyer that then becomes an owner in common.
(5) “Lot” means a parcel or a single article which is the subject matter of a separate sale or delivery, whether or not it is sufficient to perform the contract.
