Chapter 16 - The Formation of Sales and Lease Contracts

Question 1

choice-of-language clause

Answer 1

• a clause in a contract designating the official language by which the contract will be interpreted in the event of a future disagreement over the contract’s terms

Question 2

choice-of-law clause

Answer 2

• a clause in a contract designating the law (such as the law of a particular state or nation) that will govern the contract

Question 3

course of dealing

Answer 3

• period conduct between parties to a contract that establishes a common basis for their understanding

Question 4

course of performance

Answer 4

• the conduct that occurs under the terms of a particular agreement; such conduct indicates what the parties to an agreement intended it to mean

Question 5

firm offer

Answer 5

-

Question 6

force majeure clause

Answer 6

• a provision in a contract stipulating that certain unforeseen events - such as war, political upheavals, acts of God, or other events - will excuse a party from liability for nonperformance of contractual obligations

Question 7

forum-selection clause

Answer 7

• a provision in a contract designating the court, jurisdiction, or tribunal that will decide any disputes arising under the contract

Question 8

fully integrated contract

Answer 8

• a written contract that constitutes the final expression of the parties’ agreement
• if a contract is fully integrated, evidence extraneous to the contract that contradicts or alters the meaning of the contracts in any way is inadmissible

Question 9

intangible property

Answer 9

• property that is incapable of being apprehended by the senses (such as by sight or touch); intellectual property is an example of intangible property

Question 10

lease agreement

Answer 10

• in regard to the lease of goods, an agreement in which one person (the lessor) agrees to transfer the right to the possession and use of property to another person (the lessee) in exchange for rental payments

Question 11

lessee

Answer 11

• a person who acquires the right to the possession and use of another’s goods in exchange for rental payments

Question 12

lessor

Answer 12

• a person who transfers the right to the possession and use of goods to another in exchange for rental payments

Question 13

merchant

Answer 13

• a person who is engaged in the purchase and sale of goods

- under the Uniform Commercial Code, a person who deals in goods of the kind involved in the sales contract

Question 14

output contract

Answer 14

• an agreement in which a seller agrees to sell and a buyer agrees to buy all or up to a stated amount of wha the seller produces

Question 15

parol evidence

Answer 15

• a term that originally meant “oral evidence,” but has come to refer to any negotiations or agreements made prior to a contract or any contemporaneous oral agreements made by the parties

Question 16

predominant-factor test

Answer 16

• a test courts use to determine whether a contract is primarily for the sale of goods or for the sale of services

Question 17

requirements contract

Answer 17

• an agreement in which a buyer agrees to purchase and the seller agrees to sell all or up to a stated amount of what the buyer needs or requires

Question 18

sale

Answer 18

• the passing of title (evidence of ownership rights) from the seller to the buyer for a price

Question 19

sales contract

Answer 19

• a contract for the sale of goods under which the ownership of goods is transferred from a seller to a buyer for a price

Question 20

seasonably

Answer 20

• within a specified time period

- if no period is specified, within a reasonable time

Question 21

tangible property

Answer 21

• property that has physical existence and can be distinguished by the senses of touch, sight, and so on
• a car is tangible property, for example

Question 22

unconscionably contract

Answer 22

• a contract or clause that is void on the basis of public policy because one party, as a result of his or her disproportionate bargaining power, is forced to accept terms that are unfairly burdensome and that unfairly benefit the dominating party

Question 23

usage of trade

Answer 23

• any practice or method of dealing having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question

Question 24

SAMPLE TEST QUESTIONS

1. Stop n’ Gas Convenience Stores, Inc., is an East Coast-based firm that does business throughout the United States. With respect to this circumstance, the UCC has been adopted by, and applies in :
   a. all of the states, in whole or in part
   b. only the states on the Atlantic and Pacific coasts
   c. none of the states, to date
   d. only the lower forty-eight states - not Alaska or Hawaii

Answer 24

ANSWER :
(A)
CORRECT :
(A) all of the states, in whole or in part

Question 25

SAMPLE TEST QUESTIONS

2. Over the course of a year, Suites & Sets Corporation sells household furnishings to customers to whom it extends credit. Suites & Sets orders the furnishings from The Storage Depot’s warehouse, from which the items are shipped via common carrier to Suites & Sets customers. Article 2 of the UCC governs :
   a. all of the parties’ sales of the goods
   b. Suites & Sets extension of credit
   c. The Storage Depot’s storage of the goods
   d. each company’s management of its operations.

Answer 25

ANSWER :
(A)
CORRECT :
(A) all of the parties’ sales of the goods

Question 26

SAMPLE TEST QUESTIONS

3. Refined Grains, Inc., is a Kansas-based firm that does business throughout the world. Refined Grains manages retail and wholesale operations, buys and sells commercial venues, undeveloped land, and agricultural products, and other goods. Refined Grains has had to deal with employee and customer theft. With respect to these circumstances, the Uniform Commercial Code (UCC) provides a framework for :
   a. commercial transactions for the sale of and payment for goods
   b. international distribution agreements
   c. domestic and foreign transactions in real estate
   d. prosecuting crimes against business interests

Answer 26

ANSWER :
(A)
CORRECT :
(A) commercial transactions for the sale of and payment for goods

Question 27

SAMPLE TEST QUESTIONS

4. Great Gear, Inc., enters into a contract to sell sports clothing and equipment to Heathways Workout store, which in turn sells a pair of bike shorts to Ilene, a consumer. In comparison to standards that apply to consumers, the UCC imposes on merchants :
   a. less strict legal standards
   b. special business standards
   c. stricter ethical standards
   d. the same overall standards

Answer 27

ANSWER :
(D)
CORRECT :
(B) special business standards

Question 28

SAMPLE TEST QUESTIONS

5. Ferris is refurbishing his kitchen floor and needs a floor sander to complete the job. Ferris’ neighbor Gerda suggests that he call Home Repair Rentals, Inc. Home Repair leases Ferris a floor sander. In this transaction, the lessor is :
   a. Ferris
   b. Gerda
   c. Home Repair
   d. none of the parties

Answer 28

ANSWER :
(C)
CORRECT :
(C) Home Repair

Question 29

SAMPLE TEST QUESTIONS

6. Savannah and Tim enter into a sales contract for orchids. With respect to the specific contractual provisions set out in the UCC, Savannah and Tim may :
   a. agree to different terms only to a reasonable extent
   b. agree to different terms unless they “get caught”
   c. agree to whatever terms they wish
   d. not agree to different terms

Answer 29

ANSWER :
(A)
CORRECT :
(C) agree to whatever terms they wish

Question 30

SAMPLE TEST QUESTIONS

7. American Coffee Company and Beans Broker, Inc., enter into a contract for the sale of a certain quality and quantity of coffee beans, with Beans Brokers to determine the price. The price must be set according to :
   a. the concept of good faith
   b. the principle of fair trade
   c. the predominant-factor test
   d. the doctrine of unconscionably

Answer 30

ANSWER :
(B)
CORRECT :
(A) the concept of good faith

Question 31

SAMPLE TEST QUESTIONS

8. La-Z Days Motels, Inc., and Beds R Us Corporation enter into a contract that does not specify the payment terms. Payment may be made to :
   a. any commercially normal or acceptable means except credit card
   b. cash only
   c. any commercially normal or acceptable means
   d. cash or check only

Answer 31

ANSWER :
(C)
CORRECT :
(C) any commercially normal or acceptable means

Question 32

SAMPLE TEST QUESTIONS

9. Perfect Poultry Company agrees to sell chickens, turkey, and other meats to Quik Markets, Inc., to sell to its customers. Normally, their contract would not be enforceable unless it includes :
   a. the duration of the deal
   b. the price of the goods
   c. the quantity of the goods
   d. the shipping arrangements

Answer 32

ANSWER :
(C)
CORRECT :
(C) the quantity of the goods

Question 33

SAMPLE TEST QUESTIONS

10. Diet & Health Food stores orders 1,000 boxes of granola bars from Energy Products, Inc., but fails to specify the varieties. The granola bars are delivers in an assortment of varieties. Diet & Health may :
    a. accept all of the granola bars “as is” only
    b. accept all of the granola bars “as is” or reject the entire shipment only
    c. accept only the granola bars that it wants and rejects the rest
    d. reject the entire shipment only

Answer 33

ANSWER :
(B)
CORRECT :
(C) accept only the granola bars that it wants and rejects the rest

Question 34

SAMPLE TEST QUESTIONS

11. Fresh Dairy Inc., is the offeror and Gelato Ice a Cream Company is the offeree under a unilateral sales contract in which Hector’s Helado Corporation is also interested. Gelato is not notified of Fresh Dairy’s performance within a reasonable time. Gelato :
    a. may treat the offer as having lapsed
    b. must assume that Fresh Dairy has started to perform
    c. must contact Fresh Dairy
    d. must notify Hector’s

Answer 34

ANSWER :
(C)
CORRECT :
(A) may treat the offer as having lapsed

Question 35

SAMPLE TEST QUESTIONS

12. County Dentists Clinic offers to buy from Dental & Medical Supplies Company a certain quantity of floss and other items for a certain price. Dental & Medical can accept the offer by :
    a. a material alteration of the terms within a reasonable time
    b. a promise to ship or a prompt shipment of the goods
    c. a prompt shipment of the goods only
    d. a shipment of nonconforming goods with a notice of accommodation

Answer 35

ANSWER :
(B)
CORRECT :
(B) a promise to ship or a prompt shipment of the goods

Question 36

SAMPLE TEST QUESTIONS

13. Nature’s Products, Inc., sends its standard order form to Omni Distribution Corporation to evidence a sale of packing materials. Omni responds with its own standard purchase order form. Additional terms in the purchase order automatically become part of the contract unless :
    a. the terms materially alter the original contract
    b. the original offer expressly limited acceptance to its terms
    c. the offeror objects to the new terms within a reasonable time
    d. any of the choices

Answer 36

ANSWER :
(D)
CORRECT :
(D) any of the choices

Question 37

SAMPLE TEST QUESTIONS

14. Downtown Contractors and Equipment Rental Corporation are parties to an oral agreement for a one-year less of a crane with payments totaling more than $10,000. They may satisfy the Statute of Frauds by :
    a. mutually agreeing not to commit fraud
    b. repeating the terms in a phone call
    c. setting out the terms in a memo
    d. shaking hands on the deal

Answer 37

ANSWER :
(B)
CORRECT :
(C) setting out the terms in a memo

Question 38

SAMPLE TEST QUESTIONS

15. iSharp, Inc., and Jenene, the owner of a Kitchen Time shop, orally agree to a sale of knives and other utensils for $12,000. Jenene gives iSharp a check for $4,000 as a partial payment. This contract is :
    a. enforceable to the extent of $4,000
    b. fully enforceable because it is for specially selected goods
    c. fully enforceable because it is oral
    d. not enforceable

Answer 38

ANSWER :
(D)
CORRECT :
(A) enforceable to the extent of $4,000

Question 39

FACT PATTERN 16-B1
Ripe Produce, Inc., and Southeast Asian Bistro & Market enter into a contract for the delivery of locally grown fruits and vegetables. The parties use a standard Ripe Produce form that contains some of the terms the parties agree on but not others. Some of the produce spoils before it can be cooked, served, and eaten, or sold. Southeast Asian refuses to pay for the spoiled goods.

Question 40

FACT PATTERN 16-B1

16. Refer to Fact Pattern 16-B1. Ripe Produce responds that it did not waive payment for spoiled goods in the parties’ previous transactions. Ripe Produce is arguing that the court should take into account :
    a. the course of dealing
    b. the course of performance
    c. the usage of trade
    d. a rule of construction

Answer 40

ANSWER :
(B)
CORRECT :
(A) the course of dealing

Question 41

FACT PATTERN 16-B1

17. Refer to Fact Pattern 16-B1. Ripe Produce files a suit against Southeast Asian, claiming that the buyer assumed the risk of the spoilage of the unsold goods. The court may allow evidence of this term if it finds at the parties’ contract is :
    a. fully integrated
    b. not fully integrated
    c. not supported by consideration
    d. a complete and final statement of their agreement

Answer 41

ANSWER :
(A)
CORRECT :
(B) not fully integrated

Question 42

FACT PATTERN 16-B1

18. Refer to Fact Pattern 16-B1. Southeast Asian contends that the practice in the trade with respect to payment for spoiled produce justifies its refusal to pay. Southeast Asian is arguing that the court should take into account :
    a. the course of dealing
    b. the course of performance
    c. the usage of trade
    d. a rule of construction

Answer 42

ANSWER :
(C)
CORRECT :
(C) the usage of trade

Question 43

SAMPLE TEST QUESTIONS

19. Global Outfitters Outlet and Hyacinth, a consumer, enter into a contract for a sale of ultra-weather camping gear. If the contract includes a clause that is perceived as grossly unfair to Hyacinth, it’s enforcement may be challenged under :
    a. the mirror image rule
    b. the principle of fair trade
    c. the predominant-factor test
    d. the doctrine of unconscionability

Answer 43

ANSWER :
(D)
CORRECT :
(D) the doctrine of unconscionability

Question 44

SAMPLE TEST QUESTIONS

20. Toro, S.A., a company based in Mexico, enters into a contract for the purchase of portable livestock fencing from United States Fencing Company, which is based in the United States. This contract is governed by :
    a. Mexican law
    b. the provisions in the laws of both countries that are similar
    c. the Uniform Commercial Code
    d. the United Nations Convention on Contracts for the International Sale of Goods

Answer 44

ANSWER :
(D)
CORRECT :
(D) the United Nations Convention on Contracts for the International Sale of Goods

Question 45

Uniform Commercial Code (UCC)

Answer 45

• facilitates commercial transactions by making the laws governing sales and lease contracts clearer, simpler, and more readily applicable to the numerous difficulties that can arise during such transactions
• Article 1, titled General Provisions, sets forth definitions and general principles applicable to commercial transactions
• for instance, there is an obligation to perform in “good faith” all contracts falling under the UCC
• Article 1 this provides the basic groundwork for the remaining articles each of which focuses on a particular aspect of commercial transactions

Question 46

Article 2 of the UCC

Answer 46

• sets forth the requirements for sales contracts, as well as the duties and obligations of the parties involved in the sales contract
• governs sales contracts
• the common law requirements for a valid contract - agreement, consideration, contractual capacity, and legality - are also applicable to sales contracts
• two points to keep in mind :
  1. Article 2 deals with the sale of goods. It does not deal with real property (real estate), services, or intangible property such as stocks and bonds. Thus, if the subject matter of a dispute is goods, the UCC governs. If it is real estate or services, the common law applies.
  2. In some situations, the rules can vary depending on whether the buyer or the seller is a merchant.
• goods associated with real estate often do fall within the scope of Article 2
  
  • for instance, a contract for the sale of minerals, oil, or gas is a contract for the sale of goods if severance, or separation, is to be made to the seller
  • also, a contract for the sale of growing crops or timber to be cut is a contract for the sale of goods regardless of who severs them from the land
• applies to sales transactions between all buyers and sellers
• Section 2-104 sets three ways in which merchant status can arise :
  1. A merchant is a person who deals in goods of the kind involved in the sales contract. Thus, a retailer, a wholesaler, or a manufacturer is a merchant of the goods sold in his or her business. A merchant for one type of goods is not necessarily a merchant for another type. For instance, a sporting goods retailer is a merchant when selling tennis rackets but not when selling a used computer.
  2. A merchant is a person who, by occupation, holds himself or herself out as having knowledge and skill unique to the practices or goods involved in the transaction. This broad definition may include banks or universities as merchants.
  3. A person who employs a merchant as a broker, agent, or other intermediary has the status of merchant in that transaction. Hence, if an art collector hires a broker to purchase or sell are for her, the collector is considered a merchant in the transaction.

Question 47

Article 2A of the UCC

Answer 47

• covers similar issues for lease contracts
• defines a lease agreement as a lessor’s and lessee’s brain with respect to the lease of goods, as found in their language and as implied by other circumstances
• applies to all types of leases of goods
• special rules apply to certain types of leases, however, including consumer leases and finance leases
• Consumer Leases
• involves three elements :
  1. A lessor who regularly engages in the business of leasing or selling.
  2. A lessee (except an organization) who leases the goods “primarily for a personal, family, or household purpose.”
  3. Total lease payments that are less than $25,000 [UCC 2A-103(1)(e)]
• Finance Leases
• involves a lessor, a lessee, and a supplier
• the lessor buys or leases goods from the supplier and lease or subleases them to the lessee
• the lessee must perform and continue to make lease payments even if the leased equipment turns out to be defective
• the lessee must look almost entirely to the supplier for any recovery

Question 48

Statute of Frauds

Answer 48

• under these provisions, sales contracts for goods priced at $500 or more and lease contracts requiring total payments of $1,000 or more must be in writing to be enforceable
• a writing, email, or other electronic record will be sufficient to satisfy the UCC’s Statute of Fraud as long as it :
  1. Indicates that the parties intended to form a contract.
  2. Is signed by the party (or agent of the party) against whom enforcement is sought. (Note that a typed name can qualify as a signature on an electronic record.)
• merchants can satisfy the Statute of Fraud if, after the parties have agreed orally, one of the merchants sends a signed written (or electronic) confirmation to the other merchant within a reasonable time and must indicate the terms of the agreement, and the merchant receiving the confirmation must have reason to know of its contents
• unless the merchant who receives the confirmation gives written notice of objection to its contents within ten days after receipt, the writing is sufficient against the receiving merchant, even though she or he has not signed it
• three exceptions to writing requirements
• An oral contract for the sale of goods priced at $500 or more for the lease of goods involving total payments of $1,000 or more will be enforceable despite the absence of a writing in the circumstances described
  1. The goods are specially manufactured for a particular buyer or specially manufactured or obtained for a particular lessee.
  2. The goods are not suitable for resale or lease to others in the ordinary course of the seller’s or lessor’s business
  2. The seller or lessor has substantially started to manufacture the goods or has made commitments for the manufacture or procurement of the goods.
• in these situations, once the seller or lessor has taken action, the buyer or lessee cannot repudiate the agreement claiming the Statute of Frauds as a defense

Question 49

1980 United Nations Convention on Contracts for the International Sale of Goods (CISG)

Answer 49

• Article 19
  
  • provides that a contract can be formed even though accost an d contains additional terms, unless the additional terms materially alter the contract
• an offer can become irrevocable without a signed writing only if :
  1. The offeror states orally that the offer is irrevocable
  2. The offeree reasonably relies on the offer as being irrevocable
• Article 11
  
  • states that a contract of sale “need not be concluded in of evidenced by writing and is not subject to any other requirements as to form. It may be proved by any means, including witnesses.”
  • accords with the legal customs of most nations, which no longer require contracts to meet certain formal writing requirements to be enforceable
• Article 18(2)
  
  • states than an acceptance by return promise (a unilateral contract) “becomes effective at the moment the indication of assent reaches the offeror”
• Article 18(3)
  
  • the offeree may also bind the offeror by performance even without giving any notice to the offeror
  • the acceptance becomes effective “at the moment that act is performed”
• Article 6
  
  • imposes no limitation on the parties in their choice of what law will govern the contract