C o n t r a c t s I I
Professor Drahozal Spring 1998
Scope. Article II governs all “transactions in goods.” U.C.C. § 2-102.
Transactions. While the short title of Article II (“sales”) may suggest that Article II is limited only to transactions involving the sale of goods, courts have generally read the statute broadly, so as to include more than sales. “Transactions” thus often includes transfers such as bailments.
Goods. Article II defines “goods” as “moveable[s]” able to be identified at the time of transaction. U.C.C. § 2-105(1). Accordingly, Article II generally does not apply to transactions involving real estate or services.
Fixtures. Article II does not apply to fixtures.
Things in action. Article II does not apply to a “thing in action” (e.g., rights and future interests). U.C.C. § 2-105(1).
Future goods. A future good is one not both “existing and identified” at the time of agreement. Nonetheless, future goods are considered “goods” under Article II. U.C.C. § 2-105(2).
Specially manufactured goods. Specially manufactured goods are considered “goods” under Article II. U.C.C. § 2-105(1).
Minerals, oil, and natural gas. The sale of minerals, oil, and natural gas involves a “good” so long as the seller is to sever such from the ground. U.C.C. § 2-107.
Mixed contracts. A mixed contract is a transaction that involves both goods and services. Courts generally use one of two tests to determine whether or not Article II applies to such transactions.
Predominant purpose test. If the goods portion of the contract predominates over the service portion of the contract, Article II will govern the transaction. See Kaplan v. Cablevision of PA, Inc.
Gravamen of the action test. If the source of a plaintiff’s complaint arises solely from the portion of the contract involving goods, Article II will apply to the transaction.
Relation to the common law. When Article II expressly addresses an issue, the Article II provision supersedes the common law. However, when Article II does not specifically address an issue, the common law rule governs that issue. U.C.C. § 1-103.
Effect of merchant. The fact that a party is not a merchant is irrelevant as to whether or not Article II applies to a given transaction. However, most of Article II’s substantive provisions (e.g., warranties) apply exclusively to merchants.
Scope. Article IIA applies to “any transaction…that creates a lease.” U.C.C. § 2A-102.
Lease. A lease is a transfer of the right of possession and use of a good in return for consideration. U.C.C. § 2A-103(1)(J).
Goods. Goods include anything “moveable at the time of identification to the lease contract” as well as fixtures. U.C.C. § 2A-103(1)(H).
Security interests. A security interest is an interest in personal property or fixtures which secures payment or performance of an obligation (i.e. a “disguised sale”). U.C.C. § 1-201(37). A security interest is not a lease. U.C.C. § 2A-103(1)(J).
Differentiating between leases and security interests. Because a declaration clause does not necessarily determine whether a particular transaction is a lease or a security interest, Article IIA provides a framework within which to assess each individual agreement.
Bright-line factors. A particular transaction is a security interest (and thus not a lease) if there is no ability on the part of the lessee to terminate the lease and one or more of the following four are present:
The term of the lease is equal to or greater than the economic life of the goods. U.C.C. § 1-201(37)(A)
The lessee must renew the lease for the economic life of the goods or must become the owner of the goods. U.C.C. § 1-201(37)(B)
The lessee may renew the lease for the remaining economic life of the goods for no or nominal consideration. U.C.C. § 1-201(37)(C).
The lessee may become the owner of the goods for no or nominal consideration. U.C.C. § 1-201(37)(D)
Facts of the case. If a particular transaction does not satisfy the bright-line test, whether it creates a security interest or a lease is determined “by the facts of each case.” U.C.C. § 1-201.
Economic realities test. Courts generally look at whether or not the lessor has a reversionary interest in the goods; if the lessor will likely get back some value in the goods at the end of the day, the transaction is considered a lease. U.C.C. § 1-201 Official Comment 37.
Right of purchase options. Right of purchase options alone do not conclusively determine that a particular transaction is a security interest. Because the facts of each case are controlling, courts attempt to predict in economic terms how likely it is that a lessee will exercise the right of purchase option.
Viewed prospectively. The terms of the transaction are to be viewed prospectively. U.C.C. § 1-201(37)(Y).
Finance Leases. A finance lease is a lease which involves three parties, typically a supplier of goods, a financing institution (which operates as the lessor) and a lessee. Finance leases are considered leases, and are thus governed by Article IIA. U.C.C. § 2A-103(1)(G).
Determining whether a transaction creates a finance lease. For a specific transaction to be considered a finance lease, it must meet the requirements of U.C.C. § 2A-103(1)(G).
Lease. The transaction must create a lease under U.C.C. § 1-201(37). U.C.C. §2A-103(1)(G).
Selection. The lessor must not select, manufacture, or supply the good being leased. U.C.C. § 2A-103(1)(G)(i).
Acquisition. The lessor must acquire the goods or the right to possession and use of the goods in connection with the lease. U.C.C. § 2A-103(1)(G)(ii).
Factor. On of the factors listed in U.C.C. § 2A-103(1)(G)(A-D) must be met, all of which provide that the lessee has an opportunity to view the contract between the lessor and the supplier.
Convention on Contracts for the International Sale of Goods (“C.I.S.G.”).
Scope. The C.I.S.G. applies to contracts for the sale of goods between parties whose places of business are in different states where the states are parties to the C.I.S.G. C.I.S.G. Ch. 1 Art. 1(1) and 1(1)(A).
Goods. The C.I.S.G. does not apply to transactions involving “goods bought for personal, family, or household use.” C.I.S.G. Ch. 1 Art. 2(A). If the seller, before the conclusion of the contract, does not (subjective) and should not (objective) know that the goods were bought for personal use, the C.I.S.G. will apply. C.I.S.G. Ch. 1 Art. 2(A).
Specially manufactured goods. Specially manufactured goods are considered “goods.” C.I.S.G. Ch. 1 Art. 3(1).
Mixed contracts. The C.I.S.G. applies to mixed contracts only when the goods portion of the contract predominates. C.I.S.G. Art. 3(2).
Place of business.
Multiple places of business. When a party has two or more places of business, the place of business with the closest relation to the completion of the contract is considered. C.I.S.G. Art. 10.
Knowledge. Based on the contract or information disclosed, if a party knows (subjective) or has reason to know (objective) of the place of business of the other, the C.I.S.G. applies so long as the other requirements are met. If, however, a party does not know or have reason to know of the other’s place of business, the C.I.S.G. does not apply. C.I.S.G. Art. 1(2).
Contracting states. Contracting states are those which have ratified the C.I.S.G.
“Opting out.” Contracting parties may chose to exclude the application of any or all of the C.I.S.G. C.I.S.G. Art. 6.
Drafting considerations. Beware. By drafting a contract in a manner that provides that a certain state’s law will govern, the contracting parties may inadvertently apply the C.I.S.G. For example, by declaring that Michigan law applies, a party may apply the C.I.S.G. because the C.I.S.G., as a federal treaty, becomes the ‘supreme law of the land,’ and is thus applicable to each state.
Contract formation under Article II. Generally, every contract formed under Article II must meet the requirements of assent (i.e. offer and acceptance) and consideration. See appendix, contract formation.
Consideration. While the U.C.C. never specifies that consideration is essential to contract formation, the common law requirement of consideration is incorporated under U.C.C. § 1-103.
Assent. A contract may be formed in any manner sufficient to show agreement [U.C.C. § 2-204(1)] even though the moment of its making is undetermined [U.C.C. § 2-204(2)].
Formation by writing.
Acceptance. Unless indicated by language or circumstances, an offer invited acceptance in any manner reasonable under the circumstances. U.C.C. § 2-206(1)(A).
Purchase orders. Unless indicated by language or circumstances, a purchase order acts as an offer that may be accepted either by a promise to ship or by the shipment of conforming or non-conforming goods. U.C.C. § 2-206(1)(B).
Formation by conduct. Conduct may be sufficient to establish the formation and existence of a contract. U.C.C. § 2-204(1).
Firm Offers. A party may make a firm offer, under which the offer remains open for a certain duration of time. U.C.C. § 2-205.
Merchant. A firm offer may only be made by a merchant.
Goods. The offer may be either for the purchase or sale of goods.
Signed writing. A firm offer must be made in a signed writing.
Definition of “signed.” Under Article II, a complete signature is not required. A ‘signature’ may be printed, stamped, or written, and may take the form of initials, symbols, thumbprints, or letterhead. U.C.C. § 1-201(39).
Terms. The terms of the firm offer must indicate that the offer is to remain open.
Consideration. There is no need for consideration.
Duration. If the firm offer states a fixed duration, it will be held open for that duration. If there is no stated time, the firm offer remains open for a reasonable time.
When no consideration is given. A firm offer without consideration may not be held open for longer than 3 months.
When consideration is given. It may be argued that when consideration is given in a firm offer, the offer may be held open longer than 3 months because U.C.C. § 2-205 applies only to firm offers without consideration. Thus, the common law rule of firm offers with consideration, incorporated via U.C.C. § 1-103, governs the offer.
Reliance. It may be argued that reliance upon the existence of a firm offer under Restatement on Contracts § 90 serves as consideration, which in turn holds the offer open for longer than 3 months.
Lease formation under Article IIA.
Acceptance varying from offer. Because Article IIA does not recognize an equivalent of U.C.C. § 2-207, the mirror image rule governs the formation of leases (incorporated under U.C.C. § 1-103).
Firm offer. A party may make a firm offer in regards to a lease by satisfying essentially the same elements listed in U.C.C. § 2-205. U.C.C. §
specific; rather, it needs to “reasonably identif[y]” the goods. U.C.C. § 2-201(2).
Term of the lease. The writing must identify the term of the lease. Note that the writing does not need to specify the correct lease term, but the writing is only enforceable up to the term indicated. U.C.C. § 2A-201(3).
Sufficient to indicate that a contract has been made. (quantity term).
Exceptions to the statute of frauds.
Specially manufactured goods exception to the statute of frauds. U.C.C. § 2A-201(4)(A). Note that the lease term is either that stated in the deficient writing [U.C.C. § 2A-201(5)(A)] or, if there is no writing, a reasonable lease term [U.C.C. § 2A-201(5)(C)].
Specially manufactured. The goods must be specially manufactured for the lessee.
Unsuitability. The goods must not be suitable for sale to others in the ordinary course of the seller’s business.
Seller has begun. Manufacture of the special goods for the lessee must have begun before notice of repudiation is received or commitments for their procurement must have been established.
Circumstances. The circumstances reasonably indicate that the goods are for the lessee.
Admissions exception to the statute of frauds. U.C.C. § 2A-201(4)(B). The U.C.C. allows the enforcement of a contract despite the lack of a writing when a party seeking to avoid the contract “admits in his pleading, testimony, or otherwise in court that a contract for sale has been made.” The contract is enforceable up to the quantity admitted. U.C.C. § 2A-201(5)(B).
Part performance exception to the statute of frauds. U.C.C. § 2A-201(4)(C). A contract otherwise failing to satisfy the writing requirement is enforceable with respect to goods received and accepted by the lessee.
Requirements of a writing under the C.I.S.G.
No statute of frauds. As a general rule, parties are not required to reduce any contract to written form. C.I.S.G. Art. 11.
Opting out. Contracting states are permitted to “opt out” of the writing provision of the C.I.S.G., and impose their own statute of frauds rules to contracts formed where any party is a member of the contracting state. C.I.S.G. Art. 96. Note that the United States has refrained from doing so.
Parol Evidence. Parol evidence rules serve to bar the introduction of certain terms that are not reduced to written form. Only those side agreements which come at the time or before a contract is formed are governed by parol evidence rules; the rules thus do not consider terms which come after contract formation.
Parol evidence and the sale of goods under Article II. Application of the parol evidence rule under Article II is dependent upon the type of formal writing at issue:
Non-integrated (“draft”) contract. A draft contract may be supplemented and/or contradicted by additional or different terms.
Partially integrated contract. U.C.C. § 2-202. A partially integrated contract may not be contradicted by previous or contemporaneous terms, but may be explained or supplemented by course of dealing, usage of trade, course of performance [U.C.C. § 2-202(A)] or consistent additional terms [U.C.C. § 2-202(B)].
Fully integrated contract. U.C.C. § 2-202. A fully integrated contact, one intended to be a final, definitive bargain, may not be contradicted or supplemented by previous or contemporaneous terms. [U.C.C. § 2-202(B)]. A fully integrated contract may be supplemented by course of dealing, usage of trade, and course of performance [U.C.C. § 2-202(A)] so long as such are not explicitly considered within the contract.
Merger clause. A merger clause is one which expressly provides that a particular contract is a complete and exclusive representation of the bargain. Merger clauses serve as compelling but not conclusive evidence that a contract is fully integrated.
Parol evidence and leases under Article IIA. Parol evidence rules for leases are precisely the same as those concerning the sale of goods. See U.C.C. § 2A-202.
Parol evidence and the sale of international goods under the C.I.S.G.
No parol evidence rule. Under the C.I.S.G., there is no parol evidence rule, and thus all testimony regarding contract formation may be admitted into a court of law. Art. 8(3).
Adding parol evidence. Contracting parties may choose to apply law that mirrors the U.C.C. version of the parol evidence rule through Art. 6.