I. SALE AND LEASE OF GOODS – ARTICLES 2 AND 2A
A. Scope of the Sales System
1. Fundamentals of the Sales System
a. Sales systems bring buyers and sellers together and enable them to create legally enforceable transfers of ownership.
b. 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.
c. A Sales system provides a set of delivery institutions that facilitate the possessory, legal and symbolic transfer from seller to buyer.
d. Sales systems enforce agreements to transfer ownership by giving the aggrieved buyer or seller various remedies for breach by the other.
2. Gap-Filler Function of the UCC
a. The UCC acts as a gap filler for parties with a set of default terms.
i. Warranty Gap Filler
1. Attractive to plaintiff because the prima facie case is easy to prove
2. Must only prove existence of a warranty, causation and damages
ii. Statute of Limitations Gap Filler
1. Not advantageous to the P.
b. Courts only look at the UCC gap fillers if they lack a more specific indication of what the parties must have intended with respect to the term in dispute.
c. Four Ways in which a UCC Gap-Filler will be superseded
i. Contract specifies what that term should be. 1-102(3)
ii. Even where the parties’ written contract is silent on a particular matter, the parties’ repeated occasions for performance within that K may establish an agreement by implication. 2-208(1).
iii. Where parties’ past dealings with one another have established a particular way the parties do business with one another. 1-205.
iv. Custom in a particular industry. 1-205(2).
3. Goods Contract v. Service Contract
a. Mixed goods-service K
i. Example, a carpenter’s contract with a homeowner for the carpenter to install new cabinets in the home owner’s kitchen.
ii. Whenever someone sells an entire business that consists in part of goods, that is an example of a K that mixes goods and something other than services, here things like good will or customer lists.
iii. How To Determine if a Goods Contract or a Service Contract
1. Predominant Purpose Test
a. Most courts apply some version of a predominant purpose test, buy which the court decides whether the predominant purpose of the transaction is to sell goods or services.
i. If goods, then Article 2 applies.
ii. If service, then Article 2 does NOT apply.
iii. Hypo – Taking tapes to a company that copies the tapes and provides a duplicate. Look at why she went to the merchant.
1. She didn’t’ go there to actually just get tapes. She wanted tape copies of the films.
2. Under this test, the purpose would be the actual copying of the tapes. She didn’t care about how the tapes were copied, just that they were copied.
3. This would be a sale of goods.
2. Gravamen Approach
a. Under this approach, courts look to the source of the complaint. Is it related to the good? What was the problem?
i. Was the problem with the stuff, or how it was applied/performed?
b. This test is easier to apply, but is rarely used.
3. Each of the two tests have problems.
i. Sale of natural gas is the sale of goods because it is moveable.
ii. Is electricity the sale of goods? Looks like the sale of gas. On one hand you may say it is a good, on the other you may say it isn’t because it isn’t a physical thing
B. Scope of Article 2A, Leases (CISG and Real Estate)
1. Leases, Generally
a. Article 2A follows Article 2 closely.
b. The lessor has a reasonable expectation of receiving the goods back at a time when the goods still have meaningful economic life.
c. Lease – 2A-103(j)
i. “Lease means a transfer of the right to possession and use of goods for a term in return for consideration, but a sale, including a sale on approval or a sale or return, or retention or creation of a security interest is not a lease. Unless the context clearly indicates otherwise, the term includes a sublease.”
2. Distinguishing a Lease from a Sale
a. In sale, you transfer ownership
b. In a lease, you transfer possession, but not ownership.
c. In a security interest, the interest in property secures payment.
3. Disguised Sale
a. Reasons why one might structure a sale to look like a lease:
i. Don’t want public to know – leases don’t require a public filing
ii. Leases give creditors greater rights
b. If the so-called lease is really a sale of goods on credit, Article 2A does not apply. Instead the “lessor” is really a seller of goods and is also an Article 9 secured party and had better take the steps Article 9 requires for perfection of the seller’s security interest in the goods.
c. Test for Telling a Lease from a Disguised Sale. 1-201(37)
i. Termination Clause. If the K contains a clause that permits the lessee to terminate the lease at any time and return the leased goods, a true lease results.
ii. No Remaining Economic Life. If the lease is for the entire economic life of the leased goods, with or without renewal, a disguised sale has occurred.
1. Hypo – leasing a car for 10 years. There is no significant reversionary interest in the car. The car will not be worth that much after 10 years. This is a disguised sale.
iii. Option to Purchase. If the lease contains an option to purchase for nominal or no additional consideration, a disguised sale has occurred.
a. Nominal Consideration. 1-201(37)(x).
b. Consideration is not nominal when “the option to become the owner of the goods is granted to the lessee the price is stated to be the fair market value of the goods determined at the time the option is to be performed”
iv. Other. A transaction is not necessarily a disguised sale merely because
1. the lessee pays consideration equal to or even greater than the fair market value of the leased goods (as long as the lease does not cover the total economic life of the goods); or
2. the lessee assumes major duties (paying taxes, assuming the risk of loss, etc.)
v. Economic Reality Test 1-203
C. Sales Contract Formation
a. Very similar to contact law requirements for formation
b. However, the UCC does not limit the making of contracts to oral or written agreements.
i. The Code provides that a sales contract can be formed in any manner sufficient to show an agreement between the parties, including their conduct.
c. UCC Contract Formation Provisions
i. 2-204, 2-205, 2-206, and 2-207.
2. Sales Contract Formation – 2-204
a. Sales contracts can be made “in any manner sufficient to show agreement” even conduct;
b. Even if we cannot pinpoint the exact moment a sales contract was formed, we may still conclude that a contract existed; and
c. The only substantive detail that is crucial to the formation of a sales contract is that there be some basis for calculating a remedy for breach.
3. Medium of Acceptance – 2-206
a. This says that offers to make sales contracts may be accepted “in any manner and by any medium reasonable under the circumstances.”
b. When a buyer offers to purchase goods for immediate shipment, the seller may accept such an offer either by shipping the goods or by promising to ship them.
i. Even shipment of nonconforming goods constitutes acceptance.
4. Firm Offers – 2-205
a. These are “irrevocable offers.”
b. The UCC provides that firm offers are irrevocable without consideration if
i. The firm offer relates to a K to sell goods;
ii. If the period is specified, for a reasonable time – but never longer than three months.
c. If the firm offer is on a form supplied by the offeree, the offeror is not bound by it unless the offeror separately signs it.
5. Vendor is Master of the Offer
a. “As such, he may invite acceptance by conduct, and may propose limitations on the kind of conduct that constitutes acceptance. A buyer may accept by performing the acts the vendor proposes to treat as acceptance.” ProCD, Inc. v. Zeidenberg.
6. Battle of the Forms – 2-207
a. Common Law. At common law, the mirror-image rule requires an acceptance to conform to the exact terms of the offer. Any variation constitutes a counter offer.
i. “Last Shot” Doctrine . If the parties nevertheless proceeded to perform the contract, the purported acceptance with the different terms would be considered a “counteroffer” that was accepted by the buyer’s performance. Thus, the seller’s form would control the terms of the contract since it was the last form sent prior to the performance.
b. The UCC
i. Generally under the UCC, a contract is formed despite variations between offer and acceptance, unless the responding offeree specifically requires express acceptance of the new terms by the use of a so-called “proviso clause.”
1. New Terms – where proviso not used
a. New terms are deemed proposals to the K and must be separately accepted to modify the original offer.
b. Merchants. When both parties are merchants, the new terms do become part of the K unless
i. The original offer expressly limited the contract to the original terms;
ii. The original offeror objects to the new terms within a reasonable time; or
iii. The new terms would materially alter the original terms.
2. Different Terms
a. It is unclear whether the Code’s battle of the forms rules apply to different terms, and courts very. See 2-207(2) for materially different provision.
ii. Not a Valid Acceptance. 2-207(1). There are still two ways in which a purported acceptance might not operate as a valid acceptance.
to the subject matter hereof, and supersedes all prior proposals, … and understandings relating to such subject matter. In entering into this Agreement, Buyer acknowledges that it is relying on no statement, representation, warranty, covenant or agreement of any kind made by the Seller or any employee or agent of the Seller, except for the agreements of Seller set forth herein.
c. Intent of the Parties is Controlling. In assessing the intent of the parties, the following factors should be considered:
i. The inclusion of merger or integration clauses in the document under consideration;
ii. The disclaimer of warranties;
iii. Whether the extrinsic term is one that the parties would certainly have included in the document had it been part of their agreement;
iv. The sophistication of the parties; and
v. The nature and scope of both prior negotiations between the parties and any purported extrinsic terms.
i. If the writing that seeks to keep evidence out is not intended by both parties to be a final expression of the parties’ agreement with respect to the terms included therein, then it will not serve to keep out any parol evidence.
1. While a confirmation sent by one party, an offer sheet, or a purchase order are all writings that contain terms, none of these are writings that are intended by both parties to be a final expression of the parties’ agreement as to the terms contained in the writing.
ii. Even where there is writing intended by both parties to be final expression of their agreement, parties may always introduce evidence of side agreements that occurred after the writing in question. Subsequent modifications may be made
iii. Where there is a writing intended by both parties to be a final expression of their agreement, a party may always introduce evidence of usage of trade, course of dealing, or course of performance to explain or supplement the writing.
1. Distinguish between “explaining or supplementing” from “impermissible “contradicting.”
e. Customary Lack of Authority Clauses: states that no one has the authority to modify (neither actual, apparent, or estoppel) a contract where their words might amount to a promise, affirmation, or warranty
G. Requisites to Formulation of Leases
a. When it comes to the requisites for formalizing a K, the system for leases is roughly parallel to that for sales.
i. The rules governing extrinsic evidence for lease contracts in 2A-202 are precisely the same as those found in 2-202.
2. Requirements for a Writing
a. $1,000 Requirement. The necessity for a writing with leases does not kick in unless the total lease payments are at least $1,000.
b. Slightly more required for leases than under 2-201(1).
i. 2A2-201(1) requires a signature of the party to be charged and an indication that a lease contract has been made.
ii. It also must “describe the goods leased and the lease term.”
i. Depart slightly from sales.
ii. Main difference is that there is no “merchant’s exception” to the writing requirement
d. Absence in 2A-201(3) of the exception for payment received and accepted by the lessor.
i. Act of payment is not a sufficient substitute for the required memorandum.
H. Warranties with Sales of Goods
a. Competing Interests
i. Sellers feel the need for an outside time limit on warranties, but buyers who re-sell do not want any time limits to begin until their resale; and
ii. Middlemen do not like to give greater warranties to their buyers than they’re getting from their own sellers.
b. Parties typically negotiate their own warranty terms and do not use the UCC warranties.
i. In many cases, the UCC warranty terms serve as a starting point to warranty negotiation.
2. Basic UCC Quality Warranties
a. Implied Warranty of Title – 2-312
The UCC prov