I. Sales and Leasing Systems
A. Generally
(1) U.C.C. serves as a gap-filler
(a) This means that the parties can change the terms to avoid default provisions
(2) U.C.C. applies to goods, not services
(a) Good must be a thing that:
(i) is moveable, and
(ii) currently existing and identifiable
· if not both existing and identifiable, it’s a “future good”
(b) In “mixed contract” involving both, cts use two tests
(i) Predominant purpose test – whether the predom. purpose of the contract is to sell goods or to sell services
(ii) Gravamen of the action test – Court determines if the source of the complaint results from goods or services
(c) Sometimes, courts skirt the issue by applying UCC principles to a service contract
(3) Merchants are generally held to a higher standard than non-merchants
(a) You can be a merchant if you do things like:
(i) Hold yourself out as having knowledge
(ii) Deal in the kind of goods sold
(iii) Being in business (this will give you the lowest merchant standards)
B. Leases
(1) Distinction b/t a sale and a lease
(a) Sales can sometimes be disguised as a lease
(i) If it’s a disguised sale, use Article 2
(b) UCC uses “economic realities test.”
(i) Likelihood that at time the trans. entered into, the lessor will receive the goods back at a time when goods still have meaningful econ. life.
· If likely that lessor will retain some interest in the goods, it’s a lease.
· If not, it’s a sale.
(ii) There is also a “intent of parties” test.
· Says if both parties intended a lease, then it’s a lease
· This approach rejected by the UCC
(2) U.C.C. approach to the differences
(a) The U.C.C. says it MUST be found a sale if:
(i) Purports to be a lease, and
(ii) Doesn’t allow termination, and
(iii) Does any one of these:
· Original term of lease greater/equal to remaining life of goods
· Lessee bound to renew the lease for the remaining econ life of goods or bound to become owner
· Lessee has an option to renew the lease for remaining economic life for no/nominal additional consideration
· Lessee has option to become owner of the goods for no/nominal additional consideration
(b) Can still be a sale even if these factors aren’t met
(i) If allows for early termination, but lease charges 50% of the price up front and is paid off after a couple months. =
lessor acquired goods is condition to effectiveness of the contract
· Lessee, before signing the lease, receives an accurate and complete statement regarding warranties and any disclaimers
· Lessor informs lessee in writing of identity of the supplier, the warranties they are entitled to, and that the lessee can communicate with the supplier to find out more about the warranties.
(c) Warranty rules
(i) Lessor in finance lease does not give normal implied warranties of fitness/merchantability (§2A-212(1); 2A-213)
(ii) Supplier in a finance lease has the warranties the supplier makes to the finance lessor passed on to the lessee. §2A-209
· Means lessee looks to supplier for the implied warranties of fitness/merchantability
(iii) After lessee *accepts* goods, promises under the finance lease made by lessee to lessor are irrevocable. §2A-407
· But, lessee gets reasonable time to inspect goods before being deemed to have accepted them. 2A-515.
