Chapter 22 Nature and Forms of Sales Flashcards
Sources of contract law
Common law: contracts regarding real estate or services
Article 2 of the uniform commercial code: contracts regarding sale of goods
Article 2
Section of the uniform commercial code the governs contracts for the sale of goods
Generally applies to both merchant and nonmerchant’s (though some sections apply only to merchants and hold them to special standards)
A sale of goods
Per article 2: transfer of title to tangible personal property for a price
(Price can be money, exchange of property, performance of services)
Parties to the sale of goods
Seller/ vendor: Person who owns the goods
Buyer/ vendee: person to whom the title is transferred
Goods
Per the UCC: all forms of tangible personal property
Includes commodities
Both existing and future foods
Not covered:
- investment securities (Article 8 of the UCC)
- insurance policies, commercial paper (checks) and promissory notes (articles 3 and 4)
- real estate
Existing goods
Goods that physically exist and are owned by the seller at the time of a transaction
Future goods
Goods that exist physically but are not owned by the seller and goods that have not yet been produced (custom goods generally future goods)
Transactions not covered by article 2
- bailment (only possession transfers, not title. Leases covered by section 2A of UCC)
- gifts (theoretically no price. Article 2 only covers transfers with a price)
- contracts for services (governed by common law)
- contracts for goods and services are classified by the dominant element of the contract. May have to compare cost of physical goods to cost of services to determine. Whichever is more expensive “dominates”
Huzinec v. Six flags great adventure
- huzinec hit by a cellphone dropped by another passenger on six flags roller coaster and sustained serious injuries
- filed suit under UCC Article 2 for breach of implied warranty of merchantability
- six flags moved for dismissal as amusement park ticket not covered under article 2
- court agreed: Six flags ticket not a movable good but rather a contract to use of the rides/services of the employees
Necessary elements for formation of sales contracts
Less rigid than contract law
- terms can be missing, as long as parties clearly intended to contract
Minimum terms:
- subject matter
- quantity (if not clearly just for a single item
Article 2 contains provisions covering the following if parties do not include them in their sale contract
- price
- delivery
- time for performance
- payment
- details of performance
Merchants
Seller who deals in specific goods classified by the UCC
Some sections of Article 2 have different rules for merchants (who are expected to have special knowledge) and non-merchants
Sales contract: offer
First step in formation of a sales contract under article 2
Firm offer provision
Offer stated to be held open for a specified time, under the UCC, with respect to merchants
Merchant cannot revoke offer if:
- offer expresses an intention that it will be kept open
- offer is in writing
- order is signed by the merchant
Period of irrevocability not to exceed 3 months. If not stated irrevocable only for reasonable time
If exceed three months there must be consideration (becomes an options contract under common law contracts)
Sales contract: acceptance of offer
Very flexible under UCC
“Any manner and by any medium that is reasonable under the circumstances”
(If offer specifies manner of acceptance that will hold)
Mailbox rule and sales contracts
Mailbox rule applies not just when is the same method as for communication of Offer but for any time it is a reasonable method
Acceptance effective from when mail sent
Mirror image rule
Common law contract rule on acceptance that requires language to be absolutely the same as the offer, unequivocal and unconditional
Under UCC acceptance may include terms that vary from the offer
Additional terms in acceptance: sales with nonmerchants
Offeree may accept and acceptance creates a contract on the original terms even if additional term is suggested
Additional term then may or may not be accepted by other party
(Vs common law where suggested change in terms terminates original offer and creates a new offer to be accepted or not)
If propose additional terms without specifically accepting offer then no contract yet
Additional terms in acceptance: sales with merchants
Additional terms sent back in an acceptance become part of the contract IF they do not materially alter the offer and the offeror does not object in a timely fashion
May add limitations “offer is limited to the terms”
If proposed term is material a contract is formed BUT the material addition does not automatically become part of the contract
Battle of the forms
Merchants’ exchanges of invoices and purchase orders with differing boilerplate terms (contract details)
Acceptance of additional terms
Offeror may expressly or by conduct agree to additional terms added by offeree. May agree orally or in writing. Or there may be acceptance in parties simply perform obligations under contract with knowledge term has been added
When conflicting terms are proposed
If clear parties intend to be bound by contract UCC recognizes formation of contract. The terms cancel each other and are ignored. Contract consists of only parts of offer and acceptance that agree (governed by the applicable part of article 2)
Defenses to formation of sales contracts
Same as common law defenses:
- fraud
- lack of capacity
- intentional misrepresentation
- undue influence/duress
Unconscionable
Unreasonable. Not guided or restrained by conscience and often referring to a contract grossly unfair to one party because of the superior bargaining power of the other party
Court can refuse to enforce sales contract (or portions of contract) found to be unconscionable
C9 ventures v. SVC-West LP
- SVC ordered helium tanks from C9 (had previously ordered the same)
- boilerplate text on C9 invoice that indemnifies C9 against any injuries/ damages beyond gross negligence
- C9 delivered late when guests of SVC presentation were in attendance. SVC did not sign invoice
- kid pulled over a tank and injured his hand
- SVC and C9 settled with family
- C9 filed cross complaint to enforce indemnification provision
- trial court found for C9, SVC appealed
Not governed under UCC as rental, not purchase. Additional terms only valid if SVC agreed to terms and they had not (not even in course of performance)
Even if governed under UCC as a material provision so does not become part of the contract unless accepted
Cost plus
Method of determining the purchase price or contract price equal to the seller’s or contractor’s cost plus a stated percentage as profit
Price in a sale of goods contract
Price may not be fixed, instead indicated how to be determined. (Such as a cost plus formula)
In absence of any reference price will be “reasonable” price at the time of delivery of goods (market price)
Per UCC one party may determine price but must act in good faith
Output contract
Contract of a producer to sell its entire production (output) to buyer
Requirements contract
Contract in which the buyer buys all its needs (requirements) from seller
Condition of requirements or options contracts
1) parties must act in good faith
2) quantity offered or demanded must not be unreasonably disproportionate to prior output or requirements or stated estimate
Infinite duration term on sales contract
With a continuing contract (ex one for periodic delivery of a good) with no time set for the life of the contract the contract runs for a “reasonable time” and may be terminated by notice from either party
Modification of terms of a sales contract
An agreement to modify a contract for the sale of goods is binding even though the modification is not supported by consideration.
Modification valid so long as agreement is voluntary
Parole evidence rule
Rule that prohibits the introduction in evidence of oral or written statements made prior to or contemporaneously with the execution of a complete, final, and unambiguous contract documented by a writing or a record, unless there is a contract defense.
“Four corners of the record”
Requires everything parties want in the agreement is put in before they sign
Parole evidence may be admitted to interpret contract terms or show what the parties meant. Does not prohibit proof of fraud/misrepresentation/other defenses in formation
Course of dealing
Pattern of performance between two parties to a contract
May be used to find what was intended by contract provisions/ to supply missing terms
Usage of trade
Language or customs of an industry
May be used in the interpretation of contract terms
Bulk transfer law
Was article 6 of UCC, now repealed
There is a revised version (alternative B)
Protections afforded under UCC Article 9, secured transactions
Form of sales contract
May be oral or written
Some types must be evidence by record to be enforced
Sale of goods over $500 must be evidenced by a record to be enforceable per statute of frauds
Statute of frauds
Statute that, to present fraud through the use of perjured testimony, requires that certain kinda of contracts be in writing to be binding or enforceable
Nature of record required
When a record is required does not need to be complete common law contract. Cab be simple record with only details required under UCC Article 2
Terms included in record
Must indicate
- that a sale or contract to sell has been made
- the quantity of goods involved
Anything further may be supplied by reference to UCC sections or shown by parole evidence
Authentication
The sales contract record must be signed or authenticated by the person who is being held to the contact or by the authorized agent of that person. (many forms of authentication acceptable)
Confirmation memorandum
A exception to statute of frauds signature requirement for the purpose of expediting transactions
A letter, memo, or electronic document signed or authenticated by one of two merchant parties to an oral contract. Can be used to enforce a contract. Binds the non-signing merchant as well.
If non-signing merchant does not object immediately the memo automatically takes effect in 10 days (must respond within ten days)
Rosenfeld v. Basquiat
Rosenfeld purchased paintings from Basquiat
On receiving her deposit he wrote the contract in crayon that indicated the paintings, stated the price, the deposit received, and the date and they both signed it
She agreed to let him keep the paintings to show at exhibitions
After his death his estate claimed no contract under statute of frauds (said that contract must include delivery date, which it did not)
Original judgement for estate. Rosenfeld appealed. Appeal court judgment for Rosenfeld. The crayon written contract contained all the necessary information for the sale (date of delivery specification not necessary)
Brooks peanut co v. Great southern peanut
Brooks peanuts set up contract with Great Southern Peanut via broker M&H without GSP knowing the buyer was brooks until after terms were accepted
Agent for GSP evinced displeasure on finding out other party was Brooks but did not raise any objections until four months after a confirmation memo was sent signed by M&H agent. No contract or purchase order was issued but parties continued to communicate about contract as if it was going forward
When GSP objected (four months later) they said that M&H was not authorized to confirm the sale or send the confirmation and that a condition precedent had not occured because GSP hadn’t written a contract
Trial court ruled GSP had a defense. Brooks appealed. Appeal judgment for Brooks
- GSP and Brooks had previously done business confirmed solely by confirmations sent by M&H
- confirmation memo contained all necessary information
- Objection was not registered at the time the confirmation was received
- parties continued to behave as if contract was in existence
- so confirmation memo was sufficient evidence of a contract between the parties
Purpose of writing/record
To indicate that there was an understanding or acknowledgement that there was a sale of goods
So a letter from buyer to seller to complain about lack of delivery may be sufficient proof of contract
Form of writings
- may be formal contract, bills of sale, letters, telegrams, emails, faxes, screen printed verifications
As long as meet minimum formation standards and specify quantity
May even be a group of separate communications if pieced together they have all information
Effect of noncompliance with statute of frauds
Means contract cannot be enforced. Contract is still lawful and may be voluntarily performed by parties
Specially manufactured goods exception
Sales contracts may be enforced without a written record if:
the goods are specially made for the buyer and are unusual such that they are not suitable for sale in the ordinary course of the seller’s business (nonresellable) manufacture or purchase must have progressed to the point beyond which materials could be otherwise used
Receipt and acceptance exception
Sales contracts may be enforced without a written record if:
It can be shown that goods were delivered by the seller and both received and accepted by the buyer
Even for amounts over $500
If only partial receipt and acceptance contract may only be enforced for those goods accepted
Payment exception to requirement for written record
Sales contracts may be enforced without a written record if:
The buyer has made full payment
If only partial payment a contract may be enforced for those goods for which the payment has been made and accepted (if for an indivisible good then partial payment may permit enforcement of entire oral contract)
Admission exception for requirement of written record
Sales contracts may be enforced without a written record if:
May be enforced against a party if that party admints in pleadings, testimony, or otherwise in court that a contract for sale was made. Only enforceable for quantity of goods admitted
Grandoe corporation v. Gander mountain company
- Glove maker Grandoe and retailer Gander mountain had multi year relationship where gloves were purchase on the basis of an oral contract (per industry custom)
- in 2007 Gander mountain tried to institute a vendor buying agreement saying oral contracts were for planning purposes only and they could not be bound to them. Sent to Grandoe VP but never acknowledged
- series of meetings followed negotiating a deal for over 3million worth of gloves. Quantities orally approved by gander mountain rep. Some aspects of terms put forth in written records (Resource allowance contract) and signed
- Grandoe manufactured most of the gloves but Gander mountain purchased less than $1 million with and said they wouldn’t honor the oral agreement.
- Grandoe sued for breach of contract. Jury found oral contract valid and awarded damages. Gander mountain appealed. Appeals court affirmed trial court judgement
- no single written document dealt with all the issues and lacked agreement
- since parties had relied on oral agreements in the past that past practice controlled the relationship
Contracts for international sale of goods (CISG)
United Nations convention
Uniform international contract code contracts for international sale of goods
Automatically applies if buyer and seller have places of business in different countries that have ratified the convention but parties can agree to opt out of the convention
Issues tend to be resolved through arbitration/alternative dispute resolution
What CISG does not cover
- goods bought for personal, family, or household use
- contracts where obligation of party supplying good predominantly consists of labor/servivde
Article 2A of the UCC
Codifies law for leases of tangible movable goods
Applies to any action, regardless of form, that creates a lease for personal property or fixtures
Lease
“a transfer of the right to possession and use of goods for a term in return for consideration”
Agreement between owner of property and a tenant by which the former agrees to give possession of the property to the latter for payment of rent
Types of leases
Consumer vs commercial
Finance vs non finance
Consumer lease
Lease of goods for personal, family, or household use
Made by merchant lessor regularly engaged in business of leasing /selling goods involved
Lease made to a natural person
States place individual caps on amount considered a consumer lease (must cover vehicles)
Commercial lease
Aka nonconsumer lease
Lease that does not satisfy the definition of a consumer lease
Finance lease
Three party lease agreement in which there is a lessor, a leasee, and a supplier
Customer (lessee) tells financier where to obtain what goods. Must approve terms of transaction between financier and supplier
Financier (lessor) acquires goods and leases/subleases to customer. Becomes a paper channel between supplier and customer-lessee
Form of lease contract
Must be evidence by a record if total payments under lease will be $1000 or more
Record must be authenticated by the party against whom enforcement is sought
Record must:
- describe leased goods
- state lease terms
- indicate that a lease contract has been formed
Warranties on leases
Except in case of finance leases lessor makes all usual warranties that are made by a seller in the sale of goods
(Finance lease supplier makes warranties and they are passed from the lessor to the lesser who still has direct cause of action on them against the supplier regardless of lack of privity)
Default on lease
Provisioned for in article 2A
- if either lessor or lessee defaults other can seek enforcement by any available judicial or non-judicial procedure.
- neither party entitled to notice of default or notice of enforcement
- rights and remedies similar to seller in a sales contract. If lessee defaults lessor entitled to recover rent due, future rent, damages
Wilson v. Huuuge inc
- Wilson brought class action suit against gambling company huuuge
- company said that it was in their terms of use that arbitration had to be used
- because huuuge failed to build in something that forced the user to look at/agree to the terms before use and the terms were not immediately placed in front of the user the arbitration clause was not enforceable
- court case went forward
Paramount contracting vs DPS industries
- In a bid for construction of runway improvements at an Airport Paramount included a quote from DPS for furnishing and delivering borrow dirt” at a price of 140/ truck load but exclusive of other necessary adjacent work
- paramount awarded the project and contacts DPS about amount of dirt and number of trucks it would need
- at this point DPS believed they had a contract and send a letter confirming the order
- paramount did not respond to this or the next several letters
- paramount eventually responded that they had not yet committed to the purchase and eventually purchased from another vendor
- DPS sued for breach of contract
- depends on if the $140/truck load is mostly for the dirt itself or mostly for the delivery
- court ruled that it was primarily a sales contract for dirt (not services) and that there was a valid contract under UCC
