Chapter 17 Notes- The Formation of Sales and Lease Contracts Flashcards
Based on the Uniform Commercial Code (UCC) which has been adopted as law by all of the states.
State Stautory Law Governing Sales and Lease Transactions
Seeks to promote commerce. The goal is to simplify and to streamline commercial transactions.
- Allows parties to form sales and lease contracts, including those entered into online, without observing the same degree of formality used in forming other types of contracts.
- Article 2 (sales)
- Article 2A (Leases)
Uniform Commercial Code (UCC)
Governs international sales contracts. A model uniform law that applies only when a nation has adopted it.
United Nations Convention on Contracts for the International Sale of Goods (CISG)
A contract for the sale of goods.
Sales Contract
- Governs Sales Contracts
- Modifies some of the common law contract requirements.
- To the extent that it was not been modified by the UCC, however, the common law of contracts also applies to sales contracts. The common law requirements for a valid contract- agreement, consideration, capacity and legality are also applicable to sales contracts.
Article 2- Sales
When a UCC provision address a certain issue, the UCC governs, but when the UCC is silent, the common law governs.
General Rule- UCC vs Common Law
- 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.
- In some situations, the rules can vary depending on whether the buyer or the seller is a merchant.
2 Points to Keep in Mind in Regard to Article 2
The passing of title to property from the seller to the buyer for a price.
- Price may be payable in cash (or its equivalent) or in other goods or services.
Sale (UCC definition)
In order to be characterized as this, the item of property must be tangible and it must be moveable.
Good
Property that has physical existence and can be distinguished by the senses of touch and sight.
Tangible Property
Property that cannot be touched but exists only conceptually, such as corporate stocks. Such property is not governed by Article 2 of the UCC.
Intangible Property
An item that can be moved from place to place.
Moveable
Because real estate cannot be moved from place to place, it is excluded from Article 2. The goods associated with real estate often fall within the scope of Article 2.
- Severance, or separation must be made- minerals, oil or natural gas must be severed by the seller.
- 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.
Goods Associated with Real Estate
- Courts generally usethe Predominant-factor Test to determine whether a contract is for the sale of goods or for the sale of services.
- If a court decides that a mixed contract is primarily a goods contract, any dispute, even a dispute over the services portion, will be decided under the UCC.
Goods and Services Combined
A test courts use to determine whether a contract is primarily for the sale of goods or for the sale of services.
Predominant Factor Test
Presumes that certain special business standards out to be imposed because of _____ relatively high degree of commercial expertise. Such standards do not apply to the casual or inexperienced seller or buyer (consumer).
Mechants
- A merchant is a person who deals in goods of the kind involved in the sale contract. Thus, a retailer, a wholesaler, or a manufacturer is a merchant of those goods sold in the business. A merchant for one type of goods isnot necessarily a merchant for another type.
- A merchant is a person who, by occupation, holds himself or herself out as having special knowledge and skill related to the practices or goods involved in the transaction. This broad definition may include banks or universities.
- A person who employs a merchant as a broker, agent, or other intermediary has the status of merchant in that transaction.
Section 2-104- Three Ways Merchant Status can Arise:
Under the UCC, a person who deals in the goods of the kind involved in the sales contract or who holds herself or himself out as having skill or knowledge peculiar to the practices or goods being purchased or sold.
- Courts are split on whether farmers are included
Merchant
Under Article 2A of the UCC, a transfer of the right to possess and use goods for a period of time in exchange for payment.
Lease
- Created to fill the need for uniform guidelines for leases
- Covers any transaction that creates a lease of goods, as well as subleases of goods. (includes commercial and consumer leases)
- Essentially a repetition of article 2, except that it applies to leases of goods rather than sale of goods and thus varies to reflect differences between sales and lease transactions.
Article 2A- Leases
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.
Lease Agreement
A person who transfers the right to the possession and use of goods to another in exchange for rental payments.
Lessor
A person who acquires the right to the possession and use of another’s goods in exchange for rental payments.
Lessee
- A lessor who regularly engages in the business of leasing and selling.
- A lessee (except an organization) who leases the goods “primarily for a personal, family, or household purpose.”
- Total lease payments that are less than a dollar amount set by state statute.
Consumer Leases
Parties to sales contracts are normally free to whatever terms they wish. Comes into play only when the parties have failed to provide in their contract for a contingency that later gives rise to a dispute.
- Offer
- Acceptance
- Consideration
UCC- Formation of Sales and Lease Contracts
In commercial sales, the verbal exchanges, correspondence, and actions of the parties may not reveal exactly when a binding contractual obligation arises. UCC states that an agreement sufficient to constitute a contract can exist even if the moment of its making is undetermined.
Offer
Under common law of contracts, an offer must be definite enough for the parties (and the courts) to ascertain its essential terms when it is accepted. However, the UCC states that a sales or lease contract will not fail for indefiniteness even if one or more terms are left open as long as both of the following are true:
- The parties intended to make a contract.
- There is a reasonably certain basis for the court to grant an appropriate remedy.
Open Terms
Used to fill in the gaps in a contract. All that is necessary to prove the existence of a contract is in indication that there is a contract. Missing terms can be proved by evidence, or a court can presume that the parties intended whatever is reasonable under the circumstances.
- If too many are left open a court may find that the parties did not intend to form a contract.
- The quantity of goods involved must be expressly stated in the contract. If this is left open, the courts will have no basis for determining a remedy.
Open-Term Provisions
- Open price term
- Open payment term
- Open delivery term
- Duration of an ongoing contract
- Options and cooperation regarding performance
- Open quantity terms
Types of Open Term Provisions
If the parties have not agreed on a price, the court will determine a “reasonable price at the time for delivery”. If either the buyer or the seller is to determine the price, the price is to be fixed (set) in good faith.
- Sometimes, the price fails to be fixed through the fault of one of the parties. In that situation, the other party can treat the contract as canceled or fix a reasonable price.
Open Price Term
Honest in fact and the observance of reasonable commercial standards of fair dealing in the trade.
- This concept and commercial reasonableness permeate the UCC.
Good Faith (UCC definition)
When parties do not specify payment terms, payment is due at the time and place at which the buyer is to receive the goods.
- The buyer can tender payment using any commercially normal or acceptable means, such as check or credit card.
- If the seller demands payment in cash, the buyer must be given a reasonable time to obtain it.
Open Payment Term
When no delivery terms are specified, the buyer normally takes delivery at the seller’s place of business.
- If seller has no place of business, the seller’s residence is used.
- When goods are located some other place and both parties know it- delivery is made there.
- If time for shipment or delivery is not clearly specified in the sales contract, the court will infer a “reasonable” time for performance.
Open Delivery Term
A single contract might specify succesive performances but not indicate how long the parties are required to deal with each other.
- Either party may terminate the ongoing contractual relationship.
- Principals of good faith and sound commercial practice call for reasonable notification before termination to give the other party time to make substitute arrangements.
Duration of an Ongoing Contract
When the contract contemplates shipment of the goods but does not specify the shipping arrangements, the seller has the right to make these arrangements in good faith, using commercial reasonableness in the situation.
- When a sales contract omits terms relating to the assortment of goods, the buyer can specify the assortment.
Options and Cooperation Regarding Performance
Normally, if the parties do not specify a quantity, there is no contract, because a court will have no basis for determining a remedy.
Two Exceptions:
- Requirement contracts
- Output Contracts
Open Quantity Terms
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.
- If the buyer promises to purchase only if the buyer wishes to do so, or if the buyer reserves the right to buy the goods from someone other than the seller, the promise is illusory (without consideration) and unenforceable by either party.
Requirements Contract
An agreement in which a seller agrees to sell and a buyer agrees to buy all or up to a stated amount of what the seller produces.
Output Contracts
The quantity under such contracts is the amount of requirements or the amound of output that occurs during a normal production year.
- The acutal quantity purchased or sold cannot be unreasonably disproportionate to normal or comparable prior requirements or output.
Good Faith Limitation on Requirements and Output Contracts
An offer (by a merchant) that is irrevocable without the necessity of consideration for a stated period of time or, if not definite period is stated, for a reasonable time (neither period to exceed three months).
- Gives assurances in a signed writing that the offer will remain open
- Must be both written and signed by the offeror
Firm Offer
Generally may be made in any reasonable manner and by any reasonable means. The UCC permits this either by a prompt promise to ship or by the prompt or current shipment of conforming or nonconforming goods.
Acceptance
Accord with the contract’s terms.
Conforming Goods
Do not accord with the contract’s terms.
Nonconforming Goods
The prompt shipment of nonconforming goods constitutes both an acceptance, which creates a contract, and a breach of that contract.
- Does not apply if the seller seasonably notifies the buyer that the nonconforming shipment is offered only as an accomodation.
- Notice of accomodation must clearly indicate to the buyer that the shipment does not constitute an acceptance and that, therefore, no contract has been formed.
Shipment of Nonconforming Goods
Within a specified time period or, if no person is specified, within a reasonable time.
Seasonably
Favor
Accommodation
UCC is more stringent than the common law in regards to communication of acceptance in that it requires notification. (Unilateral contracts- under common law do not require notification because the acceptance is performing the act).
- If the offeror is not notified within a reasonable time that the offeree has accepted the contract by beginning performance, then the offeror can treat the offer has having lapsed before acceptance.
Communication of Acceptance Reqired
Under common law- Mirror Image Rule. The UCC dispenses with the mirror image rule. Under the UCC a contract is formed if the offeree’s response indicates a definite acceptance of the offer, even if the acceptance includes terms additional to or different from those contained in the offer.
- Whether the additional terms become part of the contract depends, in part, on whether the parties are nonmerchants or merchants.
Additional Terms
The contract is formed according to the terms of the original offer submitted by the original offeror and not according to the additional terms of the acceptance.
Rules When One Party or Both Parties are Nonmerchants
UCC created a special rule for this to avoid the “battle of the forms.” In contracts between merchants, the additional terms automatically become part of the contract unless one of the follow conditions exists:
- The original offer expressly limited acceptance to its terms.
- The new or changed terms materially alter the contract.
- The offeror objects to the new or changed terms within a reasonable period of time.
Rules When Both Parties Are Merchants
Occurs when two merchants exchange separate standard forms containing different contract terms.
Battle of the Forms
Generally, if the modification does not involve an unreasonable element of surprise or hardship for the offeror, the court will hold that the modification did not materially alter the contract.
Determining Whether an Alteration is Material
Courts consider the parties’ prior dealings in contracts between merchants.
Prior Dealings Between Merchants
Regardless of merchant status, the UCC provides that the offeree’s expression cannot be construed as an acceptance if it contains additonal or different terms that are explicitly conditioned on the offeror’s assent to those terms.
Conditioned on Offeror’s Assent
Section 2-207(3) states that conduct by both parties that recognizes the existence of a contract is sufficient to establish a contract for the sale of goods even though the writings of the parties do not otherwise establish a contract.
- In this situation “the terms of the particular contract will consist of those terms on which the writings of the parties agree, together with the supplementary terms incorporated under other provisions of the Act.”
- In a dispute over contract terms, this provision allows a court simply to strike from the contract those terms on which the parties do not agree.
- Problem of differing contract terms still arises in commercial settings, particularly when standard forms for placing and confirming orders are used.
Additional Terms may be Stricken
The common law rule that a contract requires consideration also applies to sales and lease contracts.
- Unlike common law, UCC does not require a contract modification to be supported by new consideration.
- An agreement modifying a contract for the sale or lease of goods “needs no consideration to be binding.”
- A contract modification must be sought in good faith.
Consideration
In some situations, an agreement to modify a sales or lease contract without consideration must be in writing to be enforceable.
- If the contract itself prohibits any changes to the contract unless they are in a signed writing, for instance, then only those changes agreed to in a signed writing are enforceable.
Writing
If a consumer is dealing with a merchant and the merchant supplies the form that contains a clause prohibiting oral modification, the consumer must sign a separate acknowledgement of the clause.
- Any modification that brings a sales contract under Article 2’s Statute of Frauds provision usually must be in writing to be enforceable.
Nonmerchant Buyer- Consideration
The UCC contains Statute of Frauds provisions covering sales and lease contracts. Sales contracts for goods priced at $500 or more and lease contracts requiring payments of $1,000 or more must be in writing to be enforceable.
The Statute of Frauds
A writing, including e-mail or other electronic record, will be sufficient to satisify the UCC’s statute of grauds as long as it meets the following requirements:
- It indicates that the parties intended to form a contract.
- It is signed by the party (or agent of the party) against whom enforcement is sought. (Remember that typed name can qualify as a signature).
Sufficiency of the Writing
The contract normally will not be enforceable beyond the _____ of goods shown in the writing. All other terms can be proved in court by oral testimony. For leases, the writing or record must reasonably identify and describe the goods leased and the lease term.
Quantity
Merchants can satisify the Statute of Frauds if, after the parties have agreed orally, one of the merchants sends a signed written confirmation to the other merchant within a reasonable time.
- The communication must indicate the terms of the agreement
- 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 10 days after receipt, the writing or record is sufficient, even though she or he has not signed anything.
Special Rules for Contracts Between Merchants
UCC defines three exceptions to the writing requirements of the Statute of Frauds.
- An oral contract for the sale of goods priced at $500 or more- or the lease of goods priced at $1,000 or more- will be enforceable despite the absence of writing in those three exceptions.
- Under those conditions, once the seller or lessor has taken action, the buyer or lessee cannot repuidate the agreement claiming the Statute of Frauds defense.
Exceptions- Statute of Frauds
- The goods are specially manufactured for a particular buter or specially manufactured or obtained for a particular lease.
- The goods are not suitable for resale or lease to others in the ordinary course of the seller’s or lessor’s business.
- The seller or lessor has substantially started to manufacture the goods or has made committments for the manufacture or procurement of the goods.
Three Exceptions - Statute of Frauds
An oral contract for the sale or lease of goods is enforceable if the party against whom enforcement of the contract is sought admits in pleadings, testimony, or other court proceedings that a contract for sale or lease was made.
- The contract will be enforceable even though it was oral, but enforceability will be limited to the quantity of goods admitted.
Admissions
An oral contract for the sale or lease of goods is enforceable if payment has been made and accepted or goods have been received and accepted.
- “partial performance” exception
- The oral contract will be enforced at least to the extent that performance actually took place.
Partial Performance
Consists of evidence outside the contract, such as evidence of the parties’ prior negotiations, prior agreements, or oral agreements made at the time of contract formation.
- When a contract completely sets forth all the terms and conditions agreed to by the parties and is intended as a final statement to their agreement, it is considered fully integratd. The parole evidence rule applies.
- The terms of a fully integrated contract cannot be contradicted by evidence outside the contract.
Parole Evidence- Fully Integrated
Occurs when the writing (or record) contains some of the terms the parties agreed on but not others.
- In this situation, a court may allow consistent additional terms to explain or supplement the terms stated in the contract.
- Court may also allow the parties to submit evidence of course of dealing, usage of trade, or course of performance.
- A court will not under any circumstances allow the parties to submit evidence that contradicts the contract’s stated terms (this is also the rule under common law).
Parole Evidence - Not Fully Integrated
Under the UCC, the meaning of any agreement, evidenced by the language of the parties and by their actions, must be interpreted in light of commercial practices and other surrounding circumstances.
- In interpreting a commercial agreement, the court will assume that the course of prior dealing between the parties and the useage of trade were taken into account when the agreement was phrased.
Course Dealing and Usage of Trade
Prior conduct between the parties to a contract that establishes a common basis for their understanding.
- Restricted to the sequence of conduct between the parties in their transactions prior to the agreement.
- Relevant in ascertaining the meaning of the parties’ agreement.
- “may give particular meaning to specific terms of the agreement, and may supplement or qualify the terms of the agreement.”
Course of Dealing
Any practice or method of dealing that is so regularly observed in a place, vocation, or trade that parties justifiably expect it will be observed in their transaction.
Usage of Trade
The conduct that occurs under the terms of a particular agreement, which indicates what the parties to that agreement intended the agreement to mean.
- The parties themselves know best what they meant by their words, thus the course of performance actually carried out under their agreement is the best indication of what they meant.
Course of Performance
Express terms, course of performance, course of dealing, and usage of trade are to be construed to be consistent with each other whenever reasonable. When such a construction is unreasonable, the UCC estabishes an order or priority.
Rules of Construction
- Express terms
- Course of performance
- Course of dealing
- Useage of trade
Order of Priority for Unreasonable Construction
A contract that is so unfair and one sided that it would be unreasonable to enforce it. UCC allows courts to evaluate this. If a court deems a countract to be this at the time it was made, the court can do any of the following:
- Refuse to enforce the contract
- Enforce the remainder of the contract without the unconscionable part
- Limit the application of the unconscionable term to avoid an unconscionable result.
Unconscionability
In most situations, the UCC focuses less on title than on the concepts of identification, risk of loss, and insurable interest.
- Before creation of UCC- title was the central concept in sales law and controlled all issues and rights and remedies of the parties to a sales contract.
- In some situations, title is still relevant under the UCC and the UCC has special rules for determining who has title.
Title and Risk of Loss
In the sale of goods, the express designation of the goods provided for in the contract.
- Must be done before any interest in specific goods can pass from the seller or lessor to the buyer or lessee.
- Allows for title to pass from the seller to the buyer (title of leased goods do not pass to the lessee)
- Allows risk of loss to pass from the seller or lessor to the buyer or lessee- gives buyer or lessee to insure the goods and the right to recover from third parties who damage the goods.
Identification
The parties can agree in their contract on when identification will take place. If the parties do not specify, the UCC provisions determine when identification takes place.
Identification- Goods Already in Existence
If the contract calls for the sale or lease of specific goods that are already in existence, identification takes place at the time the contract is made.
Existing Goods
Goods not in existence at the time of contracting.
- If a sale or lease involves unborn animals to be born within 12 months after contracting, identification takes place when the animals are conceived.
- If sale involves crops that are to be harvested within 12 months (or next harvest season occurring after contracting, whichever is longer), identification takes place when the crops are planted.
- In the sale or lease of any other future goods, identification occurs when the goods are shipped, marked, or otherwise designated by the seller or lessor as the goods to which the contract refers.
Future Goods
As a general rule, these are identified when the goods are marked, shipped, or somehow designated by the seller or lessor as the particular goods that are the subject of the contract.
- Exception: fungible goods
Goods that are Part of a Larger Mass
Goods that are alike by physical nature, agreement, or trade usage.
- i.e.- specific grades or types of wheat, petroleum, cooking oil, which are usually stored in large containers.
- If the owners of these goods hold title as tenants in common, a seller-owner can pass title and risk of loss to the buyer without actually separating the goods. The buyer replaces the seller as an owner in common.
Fungible Goods
Owners with individual shares of the whole.
Tenants In Common
Once goods are identified, the provisions of UCC 2-401 apply to the passage of title. Parties can expressly agree when and how title will pass.
- Any explicit understanding between the buyer and the seller determines when title passes.
- Without explicit agreement to the contrary, title passes to the buyer at the time and the place the seller performs by delivering the goods.
Passage of Title
Unless otherwise agreed, delivery arrangements can determine when title passes from the seller to the buyer.
Shipment and Destination Contracts
A contract for the sale of goods in which the seller is required or authorized to ship the goods by carrier. The seller assumes liability for any losses or damage to the goods until they are delivered to the carrier.
- Title passes to the buyer at the time and place of shipment.
- Generally, all contracts are assumed to be shipment contracts if nothing to the contrary is stated in the contract.
Shipment Contract
A contract for the sale of goods in which the seller is required or authorized to ship the goods by carrier and tender delivery of the goods at a particular destination. The seller assumes liability for any losses or damage to the goods until they are tendered at the destination specified in the contract.
- Title passes to the buyer when the goods are tendered at that destination
Destination Contract
Occurs when the seller places or holds conforming goods at the buyer’s disposal (with any necessary notice), enabling the buyer to take possession.
Tender of Delivery
When the sales contract does not call for the seller to ship or deliver the goods (when the buyer is to pick up the goods), the passage of title depends on whether the seller must deliver a document of title (such as bill of lading or warehouse receipt) to the buyer.
- If the goods are stored in a warehouse, title passes to the buyer when the appropriate documents are delivered tothe buyer.
- The goods never move, the buyer can choose to leave the goods at the same warehouse for a period of time, and the buyer’s title to those goods will remain unaffected.
Delivery Without Movement of the Goods
A receipt for goods that is signed by a carrier and serves as a contract for the transport of the goods.
Bill of Lading
A receipt issued by a warehouser for goods stored in a warehouse.
Warehouse Receipt
A paper exchanged in the regular course of business that evidences the right to possession of goods. (bill of lading or warehouse receipt).
- When this is required, title passes to the buyer when and where the document is delivered.
Document of Title
And delivery is made without moving the goods, title passes at the time and place the sales contract is made, if the goods have already been identified.
- If not identified, title does not pass until identification occurs.
When no Documents of Title are Required
Problems occur when a person who acquires goods with imperfect title attempts to sell or lease them. Sections 2-402 and 2-403 of the UCC deal with the rights of two parties who lay claim to the sale goods, sold with imperfect title. Generally, a buyer acquires at least whever title the seller has to the goods sold.
Sales by Leases by Nonowners
A buyer may unknowingly purchase goods from a seller who is not the owner of the goods.
- If seller is a theif- title is void (no title exists legally)
- The buyer acquires no title
- The real owner can reclaim the goods from the buyer
- If leased- title is void- the lessor has no leashold interest to transfer.
Void Title
If a seller has goods that he or she was selling that were:
- Obtained by fraud
- Paid for with a check that is later dishonored (returned for insufficient funds)
- Purchased on credit when the seller was insolvent.
Voidable Title
A condition in which a person cannot pay his or her debts as they become due or ceases to pay debts in the ordinary course of business.
Insolvent
A seller with voidable title has the power to transfer good title to a good faith purchaser.
- One who purchases for value gives legally sufficient consideration (value) for the goods purchased. The real, or original owner cannot recover goods from a good faith purchaser for value.
- If not a good faith purchaser for value, then the actual owner of the goods can reclaim them from the buyer (or the seller, if the goods are still in the seller’s possession).
Voidable Title- Power to Transfer
A purchaser who buys without notice of any circumstance that would cause a person of ordinary prudence to inquire as to whether the seller has valid title to the goods being sold.
Good Faith Purchaser
The rule that entrusting goods to a merchant who deals in goods of that kind gives that merchant the power to transfer those goods and all rights to them to a buyer in the ordinary course of business.
- Basically allows innocent buyers to obtain legitimate title to goods purchased from merchants even if the merchants do not have good title.
The Entrustment Rule
Include both goods that are turned over to the merchant and purchased goods left with the merchant for later delivery or pickup.
Entrusted Goods
- She or he buys goods in good faith (honestly)
- The goods are purchased without knowledge that the sale violates the rights of another person in the goods.
- The goods are purchased in the ordinary course from a merchant (other than a pawnbroker) in the business of selling goods of that kind.
- The sale to that person is consistent with the usual or customary practices in the kind of business in which the seller is engaged.
Buyer in the Ordinary Course of Business
(Similar to the entrustment rule- this is for leasing)
Under the UCC, this does not necessiarily pass with title. When risk of loss passes from seller or lessor to a buyer or lessee is generally determined by the contract between the parties.
Risk of Loss
Like risk of loss, this does not nescessariy require the passage of title. In addition, when this risk passes from a seller to a buyer, the buyer is generally determined by the contract between the parties.
Risk of Liability
When the contract involves movement of the goods through common carrier but does not specify when risk of loss passes, the courts first look for specific delivery terms in the contract.
- Terms determine which party will pay the cost of delivering the goods and who bears the risk of loss
- If the contract does not include these terms, then the courts must decide whether the contract is a shipment or a destination contract.
Delivery with Movement of the Goods- Carrier Cases
In a shipment contract, the seller or lessor is required to authorize to ship goods by carrier, but is not required to deliver them to a particular final destination.
- The risk of loss in this kind of contract is passed to the buyer or lessee when the goods are delivered to the carrier.
Shipment Contracts
The risk of loss passes to the buyer or lessee when the goods are tendered to the buyer or lessee at the specified destination.
Destination Contracts
Frequently, the buyer or lessee is to pick up the goods from the seller or lessor, or the goods are held by a bailee.
- goods held by the seller
- Goods held by a bailee
Delivery Without the Movement of Goods
A situation in which the person property of one person (a bailor) is entrusted to another (a bailee), who is obligated to return the bailed property to the bailor or dispose of it as directed.
Bailment
A party who, by a bill of lading, warehouse receipt, or other document of title, acknowledges possession of goods and/or contracts to deliver them.
Bailee (UCC Definition)
A document of title is usually not used. If the seller is a merchant, risk of loss to goods held by the seller passes to the buyer when the buyer actually takes physicall possession of the goods.
- The merchant bears the risk of loss between the time the contract is formed and the time the buyer picks up the goods.
Goods Held by the Seller- Merchant
The risk of loss of goods held by the seller passes to the buyer on tender of delivery. This means that the seller bears the risk of loss until he or she makes the goods available to the buyer and notifies the buyer that the goods are ready to be picked up.
Goods Held by the Seller- Nonmerchant
The risk of loss passes to the lessee on the lessee’s receipt of the goods, if the lessor is a merchant. Otherwise, the risk passes to the lessee on tender of delivery.
Goods Held by the Seller- Leases
The goods are usually represented by a document of title. May be written or evidenced by an electronic record. Risk of Loss passes to the buyer when one of the following occurs:
- The buyer receives a negotiable document of title for the goods.
- The bailee acknowledges the buyer’s right to possess the goods.
- The buyer receives a nonnegotiable document of title, and the buyer has a reasonable time to present the document to the bailee and demand the goods. If the bailee refuses to honor the document, the risk of loss remains with the seller.
Goods Held by a Bailee
If goods held by a bailee are to be delivered without being moved, the risk of loss passes to the lessee on acknowledgement by the bailee of the lessee’s right to possession of the goods.
Goods Held by a Bailee- Lease
When a sales or lease contract is breached, the transfer of risk operates differently depending on which party breaches. Generally, the party in breach bears the risk of loss.
Risk of Loss When the Contract is Breached
When the seller or lessor breaches by supplying goods that are so nonconforming that the buyer has the right to reject them, the risk of loss does not pass to the buyer.
- If a buyer accepts a shipment of goods and later discovers a defect, acceptance can be revoked.
When the Sellor or Lessor Breaches
- The defects are cured
- The buyer accepts the goods in spite of their defects (thus waiving the right to reject).
With nonconforming goods, the risk of loss does not pass to the buyer until one of the following occurs:
The right of a party who tenders nonconforming performance to correct his or her performance within the contract period.
Cure
Allows the buyer to pass the risk of loss back to the seller, at least, to the extent that the buyer’s insurance does not cover the loss.
Revocation
General rule is that when a buyer or lessee breaches a contract, the risk of loss immediately shifts to the buyer or lessee. This rule has three important limitations:
- The seller or lessor must already have identified the contract goods.
- The buyer or lessee bears the risk for only a commercially reasonable time after the seller or lessor has learned of the breach.
- The buyer or lessee is liable only to the extent of any deficiency in the seller’s insurance coverage.
When the Buyer or Lessee Breaches
Any party purchasing insurance must have a sufficient interest in the insured item to obtain a valid policy.
- Insurance laws- not the UCC- determine sufficiency.
- UCC is helpful because it contains certain rules regarding insurable interest in goods
Insurable Interest
A property interest in goods being sold or leased that is sufficiently subtantial to permit a party to insure against damage to the goods.
Insurable Interest
Has insurable interest in identified goods. The moment the contract goods are identified by the seller or lessor, the buyer or lessee has a property interest in them. That allows the buyer or lessee to obtain necessary insurance coverage for those goods even before the risk of loss has passed.
- When parties do not explicitly agree on identification in their contract, then the UCC provisions on identification apply.
Insurable Interest of the Buyer or Lessee
Has an insurable interest in goods as long as she or he retains title to the goods. Even after the title passes to the buyer, a seller who has a security interest in the goods still has an insurable interest.
- Buyer and seller can have insurable interest in the same goods at the same time
- Buyer and seller must sustain an actual loss to recover from an insurance company,
Insurable Interest of the Sellor
A right to secure payment.
Security Interest
Retains an insurable interest in leased goods until the lessee exercise an option to buy and the risk of loss has passed to the lessee.
Insurable Interest of the Lessor
Goverened by the 1980 United Nations Convention on Contracts for the International Sale of Goods (CISG).
- Only governs if the parties have not agreed that some other law will govern their contract.
- Accounts for more than 2/3 of global trade
Contracts for the International Sale of Goods
The CISG is to internatinal sales contracts what Article 2 of the UCC is to domestic sales contracts. Whenever the parties subject to the CISG have failed to specify in writing the precise terms of a contract for international sale of goods, the CISG will be applied.
- Unlike the UCC, this does not apply to consumer sales.
- Neither the UCC or the CISG applies to contracts for services.
Applicability of the CISG
If the CISG and the UCC conflict, the ___ applies (because it is a treaty of the US national government and therefore takes precedence over state laws under the US constitution).
CISG
The CSIG does not include this provision. An international sales contract does not need to be evidenced by a writing or be in any particular form.
Statute of Frauds
An offer can become irrevocable without a signed writing or record. An offer will be irrevocable in either of the following circumstances:
- The offeror states orally that the offer is irrevocable
- The offeree reasonably relies on the offer as being irrevocable.
- The price term must be included in the agreement. Otherwise, normally no contract will exist.
Offers
A contract can be formed even though the acceptance contanis additional terms, unless the additional terms materially alter the contract.
- Material alteration includes almost any change in the terms.
- If additional terms realtes to payment, quality, quantity, price, time and place or delivery, extent of one party’s liability to the other, or the settlement of dispites, the CISG considers the added term a material alteration.
- Requires the terms of the acceptance mirror those to the offer.
Acceptances
Under the CISG, an acceptance is effective on ______, so a contract is created not at the time the acceptance is transmitted but only on its receipt by the offeror (The offer becomes irrevocable, however, when the acceptance is sent).
Dispatch
The CISG provides that acceptance by ______ does not require that the offeror be notified of the _______.
Performance.
