Performance of Sales and Lease Contracts

Introduction of Sales and Lease Contracts

Seller must transfer and deliver conforming goods.
Buyer must accept and pay for conforming goods.
In the absence of an agreement between Seller and Buyer, UCC Article 2 controls as set out below.

Good Faith Requirement

Good Faith is the foundation of every UCC commercial contract. Good faith means honesty in fact. For a merchant, it means honesty in fact and observance of reasonable commercial standards of fair dealing in the trade.
Merchants are held to a higher standard of care than non-merchants.

Seller-Lessor Obligations

Seller has a duty to “tender” delivery of “conforming goods.”
Tender means “delivery” to agreed place: With reasonable notice, At a reasonable hour, In a reasonable manner.
Exactly, unless otherwise agreed, Place of Delivery-Non-Carriers.
Buyer picks up at Seller’s place of business or, if Buyer has no place of business, then Buyer’s residence.
If both parties know the goods are elsewhere (at a warehouse), then place of delivery is where the goods are.

Place of Delivery—Carriers

Shipment contracts.
Seller has a duty to:
Put goods into hands of independent carrier.
Make contract for transportation.
Obtain and promptly deliver or tender to the Buyer any documents necessary.
Promptly notify Buyer that shipment has been made.
Destination contracts. Seller has duty to:
Tender the goods at a reasonable hour and hold conforming goods at the Buyer’s disposal for a reasonable period of time.

The Perfect Tender Rule

If goods, or tender of delivery, fail in any respect to conform to the contract, the Buyer has the right to:Accept the goods;
Reject the entire shipment; or
Accept part and reject part.
Exceptions to the Perfect Tender Rule

Agreement of the Parties.

Cure, Substitution of Carriers.
Installment contracts.
Commercial Impracticability.
Destruction of Identified goods.
Partial Performance, Proceede

Buyer-Lessee Obligations

Furnish facilities reasonably suited for receipt of the goods.
Make payment at the time and place the Buyer receives the goods.
Credit has to be prearranged.
Credit period begins on the date of shipment.
Pay with cash, credit card, and check.
But if Seller asks for cash, Seller has to give Buyer time to get cash.

Buyer’s Obligations.

  • Buyer has right to inspection before paying:
  • Costs of inspection borne by Buyer.
  • However, C.O.D., C.I.F. and C&F give Buyer no right to inspect.

Acceptance

Buyer can accept goods:
By words or conduct.
If Buyer had reasonable amount of time and failed to reject.
Buyer performs an act which indicates he thinks he is the owner.
Partial Acceptance.
Revocation of Acceptance
Notify Seller of breach.
Revoke only if substantial nonconformity; and
Buyer accepted on the reasonable assumption that the Seller would cure the non-conformity OR Buyer did not discover the nonconformity because defect was latent or hard to discover.
Anticipatory Repudiation
Party communicates he will not perform by time of contract performance.
No breaching party may suspend performance and:
Treat the A.R. as material breach and pursue a remedy; or
Wait a reasonable time.
Case 21.3:  Banco International v. Goody’s Family Clothing (1999).

International Contracts and Letters of Credit Parties.

Account: Buyer.
Issuer: Bank.
Beneficiary: Seller.
Issuer is bound to pay the beneficiary who has complied with the terms and conditions of the letter of credit, usually requiring a bill of lading to the issuer to prove shipment has been made.

Agreement of the Parties

Parties agree that some defective goods will be acceptable.
Parties agree that defective goods can be replaced or repaired within a certain time.

Seller’s Cure

Seller has the right to “Cure” (ship conforming goods to Buyer) if:
Agreed time of performance has not yet expired; or
If Seller had reasonable grounds to expect that Buyer would accept non-conforming goods, i.e., these goods are better than goods ordered, or Buyer has accepted non-conforming goods in the past.

Substitution of Carriers

If a carrier becomes impracticable or unavailable through no fault of either party, a commercially reasonable substitute is acceptable.

Commercial Impracticability

Occurrence of an unforeseen contingency that makes performance impracticable.
Nonoccurrence was a basic assumption on which the contract was made.
If only partial impracticability, Seller must allocate what he/she has.
Case 21.1: Maple Farms v. City School District of Elmira (1974).

Installment Contracts

Installment Contracts can be rejected if:
Installment is substantially non-conforming and can’t be cured.
Non-conforming installment substantially impairs the entire contract.
Destruction of Goods

If no fault of either party and it occurs,
Before risk passes to Buyer then,
Both Seller and Buyer are excused from performance.

Partial Performance

Sometimes unforeseen event only partially affects Seller’s capacity to perform.
In that event, Seller has duty to reasonably allocate any remaining production capacity to fulfilling contractual performance.
Buyer has the right to reject.
Case 21.2: Kock Materials Co. v. Shore Slurry Seal, Inc.  (2002).

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Title, Risk and Insurable Interest

Introduction

Sale of goods requires different rules than real property transactions: risk should not always pass with title.
UCC replaces title with identification, risk, and insurable interest.
Identification
For any interest to pass to buyer, goods must be:

  • In existence.
  • Identified as specific goods in the sales contract (by serial numbers and/or physically separated from others.  Except for fungible goods which do not need separation).
Gives the buyer the right:

  • To obtain insurance on the goods.
  • To recover from third parties who damage the good.
Identification occurs:

  •  If goods are designated when contract is made. If goods are not designated when contract is made, then identified at time of designation.
When Title Passes
Title can pass:

  • Upon physical delivery, or
  • When agreed to by the parties, or
  • If no agreement, depends on whether contract is shipment or destination contract:
    Shipment:  title passes at time and place of shipment.
    Destination: title passes when goods are tendered at the destination.
Case 20.1:  In re Stewart (2002).
Delivery Without Movement of Goods
Title passes when agreed by the parties, or
With document of title:  when and where document delivered.
Without document: when sales contract is made, if goods have been identified or when identification occurs if they have not been identified.
Sales or Leases By Non-Owners
Void Title: true owner gets goods back.
Voidable Title: good faith purchaser keeps goods.
Case 20.2: Memphis Hardwood v. Daniel (2000).
Entrustment rule: good faith purchaser keeps goods. 
Seller’s Retention of Sold Goods: 
good faith purchaser wins.

  • Sham transactions or preferential transfers.
Risk of Loss
ROL does not necessarily pass with title. ROL is important because of insurance concerns.
Unless agreed otherwise, ROL passes to Buyer depending on whether delivery is with or without movement of the goods.
ROL: Delivery with Movement
Shipment Contracts.

  • ROL passes to Buyer when tendered to Carrier.  If goods damaged in transit, Buyer’s loss.
Destination Contracts.

  • ROL passes to Buyer when goods tendered at particular Destination.
Case 20.3:  Windows Inc. v. Jordan Panel System Corp.(1999).
ROL: Delivery without Movement of Goods
Goods Held by Seller:

  • Document of Title is generally not used.
  • If Seller is a merchant, ROL passes when buyer takes physical possession of goods.
Goods Held by Bailee(Warehouse). ROL passes when:

  • Buyer receives document of title; bailee acknowledges Buyer’s right to goods and buyer receives title and has reasonable time to pick up.
ROL: Conditional Sales
Sale on Approval.

  • ROL passes when buyer approves expressly or implicitly.
Sale or Return. (Consignment is sale or return unless it complies with Art. 9.)

  • ROL passes to buyer with possession.
ROL: Breach of Contract
Generally breaching party bears ROL.
Seller’s Breach.

  • Rejection – risk stays with seller.
  • Revocation of acceptance – risk passes back to seller to the extent that buyer’s insurance does not cover the loss.
Buyer’s Breach. Goods are identified, risk passes to buyer for a reasonable amount of time after seller learns of the breach, to the extent that seller’s insurance does not cover loss.
Insurable Interest
Buyer has an insurable interest in goods that have been identified.
Seller has an insurable interest in goods as long as they retain title or a security interest.
Both buyers and sellers can have an insurable interest at the same time.
Bulk Transfers
Covered by Article 6 of the Uniform.
Commercial Code.
A bulk transfer is defined as:

  • Major part of seller’s inventory.
  • Not made in the usual course of business.
UCC 6 is becoming obsolete and has been repealed by many states.

Formation of Sales and Lease Contracts

The UCC
Facilitates commercial transactions.
UCC Article 2: Sale of Goods.

  • Modifies common law of contracts of some areas.
  • UCC 2 preempts common law.
  • Where UCC2 is silent, common law governs.
The Scope of UCC 2
Does not apply to real estate unless there is a “good” that can be severed by the Seller. If the good is severed by the Buyer, then UCC2 does not apply.
Generally contracts for services are not governed by UCC2.
What if Goods and Services combined?
Case 19.1: Micro Data Base v. Dharma Systems (1998).
UCC2 applies to the “sale of goods.”

  • A “sale” is the passing of title of “goods” to/from a “merchant” (seller or buyer) for a price (money, goods, services,etc).
  •  “Goods” are tangible and movable.
  •  A “merchant” has special business expertise and is not a casual buyer/seller.
Case 19.2: Ready Trucking Inc v. BP Exploration & Oil Co. (2001).
Scope of UCC 2A-Leases
Contract for lease of personal goods between a lessor and a lessee.
Consumer Leases (total payments less than $25,000)
Finance Leases (involves a 3rd party-supplier).
Formation of Sales and Lease Contracts
At common law once a valid offer is unequivocally accepted, a binding contract is formed.
UCC is more flexible, and allows for open pricing, payment, and delivery terms.
Offer-Open Terms
UCC 2-204: even if terms of are undetermined, a contract may still exist.

  • Open Terms: “Indefiniteness” is OK as long as the parties intended to make a contract and there is a reasonable basis for a court to grant a remedy.
Open Quantity: generally courts will not impose a quantity. UCC2-306.    Exceptions:
Requirements Contract: buyer agrees to purchase what the buyer needs or requires.
Output Contract: buyer agrees to buy all of seller’s production or output.
Merchant’s Firm Offer
At common law, an offer could be revoked any time prior to acceptance, unless there was some consideration.
At UCC, offer made by merchant in a signed writing is irrevocable for reasonable period of time. No consideration necessary.
Acceptance
Any reasonable means of acceptance under the circumstances is permissible.
Promise to ship or prompt shipment is acceptance.

  • Shipment of non-conforming goods is both an acceptance and a breach unless goods sent as an “accommodation” to buyer (UCC2-206).
Acceptance: Additional Terms
If either party is a non-merchant, the contract is formed according to original terms of the offer.
If both parties are merchants, contract incorporates new terms unless:
(1) original offer expressly limits terms, or
(2) material change, or
(3) offeror objects within reasonable time.
Consideration
UCC requires consideration and modifications must be made in good faith.
Modification must be in writing if required by Statute of Frauds.
Statute of Frauds
Sale of goods over $500 must have a signed writing to be enforceable.
Exceptions to this rule:
Specially manufactured goods.
Admissions by breaching party.
Partial performance.
Merchant doesn’t object within 10 days.               
Oral agreement enforceable after written confirmation between merchants.
Parol Evidence
Terms of a written agreement intended to be the final expression of parties’ intentions, cannot be contradicted by prior or contemporaneous agreements.
Exceptions: consistent terms, course of dealing and trade.
Case 19:3: Puget Sound Financial LLC v. Unisearch Inc. (1976).
Unconscionability
Contract is one that is so unfair and one-sided it is unreasonable to enforce it.
Court can: set it aside, refuse to enforce the unconscionable provision, limit the contract.
Case 19:4: Jones v. Star Credit Corp. (1969).
International Sales
Applicability of the CISG.
Comparison of CISG and UCC.

  • Mirror Image Rule.
  • Irrevocable Offers.
  • Statute of Frauds.
  • Necessity of a Price Term.
  • Time of Contract Formation.
Special Provisions in International Contracts
Language and legal differences create special difficulties.  Parties should agree to:

  • Choice of Language.
  • Choice of Forum (country).
  • Choice of Law.
  • Force MajeureClause.

E-Contracts

Introduction

Most courts find E-Contracts involve basic principles of contract law, applied in the online context.
Online Contract Formation
Online Offers should include:
§ Remedies for Buyer.
§ Statute of Limitations.
§ What constitutes Buyer’s acceptance.
§ Method of Payment.
§ Seller’s Refund and Return Policies.
§ Disclaimers of Liability.
§ How Seller will Use Buyer’s Information (Privacy).
Dispute Settlement Provisions.
§ Choice of Law.
§ Choice of Forum.
§ E-Bay uses online dispute resolution.
Displaying the Offer (via hyperlink).
How Offer Will Be Accepted.
§ Amazon.com–Checkout.
§ “I Accept” Button to Click.
Online Acceptances
Click-on Agreements.
Shrink-Wrap Agreements.
§ Contract terms are inside the box.
§ Party opening box agrees to terms by keeping merchandise.
Enforceable Contract Terms. (UCC 2-204).
Additional Terms.
Case 18.1:  Klocek v. Gateway Inc. (2000).
Click-On Agreements occur when Buyer “checks out” or clicks on “I Accept” button on Seller’s website or when software is installed.
Case 18.2:  i.LAN Systems Inc. v. NetScout Service Level Corp. (2002).
Browse-Wrap Terms.
Case 18.3: Specht v. Netscape Communications (2002).
E-Signatures
E-Signature Technologies.
§ Asymmetric Cryptosystem.
§ Cyber Notary.
State Law Governing E-Signatures.
§ Uniform Electronic Transactions Act (1999).
Federal Law.
§ E-SIGN (2000) gives e-signatures and e-documents legal force.
Partnering Agreements
Sellers and Buyers agree as to protocols to create online agreements.
Useful for electronic inventory (Just in Time) ordering of parts and supplies.
UETA
Purpose is to remove barriers to forming electronic commerce.
E-Signature is “electronic sound, symbol or process…associated with a record and… adopted by a person with intent to sign the record.”
UETA applies only to e-records and e-signatures  relating to a transaction.
UETA and E-SIGN
E-SIGN explicitly refers to UETA.
Provides that E-SIGN is pre-empted by state passing of UETA.
But state law must conform to minimum E-SIGN procedures.
Highlights of UETA
Parties must agree to Conduct Transactions Electronically.
§ A party can “opt out” of UETA terms.
Attribution—process to ensure person sending an electronic record is in fact the real person.
Electronic Errors.
“E-Mailbox” Rules.
§ Dispatched when leaves control of sender.
§ Received when enters recipient’s processing system.
UCITA
Applies to computer information.
Software is not a “good” but intellectual property.
Software is licensed, not sold;
License contract gives Buyer (Licensee) only specific rights.
Attribution and Authentication.
Mass Market Licenses.