\

T]|APTER 18TksFnmthmuf$ftk*rdL*cmfin*ffffi

.THE SCOPE OF THE UCC

-THE SCOPE OF ARTICLE 2-SALES

-THE SCOPE OF ARTICLE 2A-LEASES.THE FORMATION OF SALES

AND LEASE CONTRACTS.CONTRACTS FOR THE

INTERNATIONAL SALE OF GOODS

CHAPTER OUITINE LEARI{|1{G 0BtECTtVtS

s the chapter-opening quotation states, the object of the law is to encorlrage comlrrerce.This is particularly tme with respect to the Unifonn Cornmercial Code (UCC). The

UCC facilitates commercial hansactions by making the laws governing sales and lease con-tracts uniforrl, clearer, simpler, and more reaclily applicable to the numerous difficulties thatcan arise ch-rring such transactions. Recall from Chapter I that the UCC is one of many uni-form (rnodel) acts draftecl by the National Conference of Comrnissioners on Uniforr-r StateLaws and submitted to tl.re states for adoption. Once a state legislature has adopted a uniforrract, the act becomes stahrtory law in that state. Thus, when we b:rn to sales and lease con-hacts, we nlove away from common law principles and into the area of statutory law.

We open this cl-iapter with a discussion of the general coverage of the UCC and its sig-nificance as a legal landrlark. We ther-r look at the scope of the UCCt Article 2 (on sales)and Article 2A (on leases) as a backgror-rnd to the focus of tl'ris chapter, which is the for-mation of contracts for the sale and lease of goods. Because intemational sales transac-tions are increasingly comnonplace in the business worlcl, we conclucle this chapter withan exarnination of the United Nations Convention on Contracts for the International Saleof Coods (CISG). which soverns international sales contracts.

The UCC attempts to provide a consistent and integrated framework of rules to deal with allphases ordinarily arising in a commercial sales or lease transaction from start to finish. Forexample, consicler the following events, all of which may occur during a single hansaction:

AFTER READINC THIS CHAPTER, YOU SHOULD BE ABLE TOANSWER THE FOLLOWING QUESTIONS:

I How do Article 2 ancl Article 2A of the UCC differlWl-rat types of transactions does each article coverl

2 Wrat is a merchant's firm offer?

5 If an offeree includes additional or different termsin an acceptance, wil l a contract result? If so, whatl-rappens to these terrns?

4 Article 2 and Article 2A of tlie UCC both defineseveral exceptions to tl-re writing requirements ofthe Statr-rte of Frauds. What are these exceptions?

5 Wrat law governs contracts for the irrternationalsale ofgoods?

65The great objectof the law is toenc0uragecOmmerce.t t

f . C)harrrbre, l7 39-\823(British jurist)

426 l!EiI[@SALES AND LEASE CONTRACTS

rIII

I A contract for the sale or lease of goods is formed and executed. Article 2 and Ariicle 2A

of the UCC provide rules governing all aspects of tl-ris transaction.

2 Tlrc transaction may irtt,olve a payment-by check, electronic fund transfer, or other

tnedns. Article 3 (or-r negotiable instruments), Article 4 (on bank deposits and collec-

tions), Article 44 (on ftrlrd transfers), and Article 5 (on letters of credit) cover this part

of the transaction.

! The transaction may intolve a bill of lading or a warehouse receipt that cotters goods when

they are shipped or stored. Article 7 (on documents of title) deals with this subject.

4 The transaction may intolve a demand by the seller or lender for some form of security

for the remairLing balance owed. Article 9 (or-r secured transactions) covers this part of

the transactior-r.

'fhe UCC has been adopted ir-r whole or in part by all of tl-re states.l Because of its

intportance in the area of commercial transactions, we present the UCC as this chapter's

Landmark in the Law feature on the followir-rg page.

.\rticle Z of the UCC governs sales contracts, or contracts for the sale of goods. To facilitate

cornmercial transactions, Article 2 modifies some of the common law contract requirements

that were snrnmarized in Chapter B and discussed in detail in Chapters 9 through 15. To

the extent that it has not been rnodified by the UCC, however, the commou law of contracts

also applies to sales contracts. In general, the rr-rle is that when a UCC provision addresses

a certain issue, the UCC governs; when the UCC is silent, the common law governs.

In regard to Article 2, you shoulcl keep hvo points in rnind. First, 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 a dispr,rte involves goods, the UCC governs. If

it ir-ivolves real estate or services, the cornmon law applies. The relationship between gen-

eral contract law ancl the law governing sales of goods is illustrated in Exhibit l8-l on

page 429. Second, in sotne instances, the rules may vary quite a bit, depending on

ri hether the buyer or the seller is a merchant. We look now at how the UCC defines three

irrportant ternrs: sd/e, goods, and merchant status.

What ls a Sale?The UCC defines a sale as "the passing of title fevidence of ownership] from the seller to

tl-re br-ryer for a price" IUCC 2-106(1)]. The price may be payable in cash (or its eqr,riva-

lent) or in ot l rer goods or services.

What Are Goods?To be characterized as a good, the iterr-r of property must be tangible, and it must be movable.

Tangible property has physical existence-it can be touched or seen. Intangible property-

such as corporate stocks and bonds, patents and copyrights, and ordinary contract rights-has

only conceptual existence and thus does not come under A-rticle 2. A movable item can be

carried from place to place. Hence, real estate is excluded from Article 2'

Two issues often give rise to disputes in detern'rining whether the obiect of a contract is

goods ar-rd thus whether futicle 2 is applicable. One problem has to do with goods associated

with real estate, stch as crops or timber, and the other concerns contracts involving a com-

bination oF goods and services.

427 EUEmtrTHE FORMATION OFSALES AND TEASE CONTRACTS

ffiCornell University's Legallnformation Institute alsooffers the full text ofthe UCC at

SALES CONIRACT

A contract for the sale of goodsunder which the ownership of goodsis transfened from a seller to a buyerfor a price.

SAtEThe passing of title to property fromthe seller to the buyer for a price.

TANGIBLE PROPERTYProperty that has physical existenceand can be distinguished by thesense of touch or sight. A car istangible property; a patent right isintangible property.

INTANGIBTE PROPERTYProperty that cannot be seen ortouched but exists only conceptually,such as corporate stocks and bonds,patents and copyrights, and ordinarycontract rights. Article 2 of the UCCdoes not govern intangible property.

l. Louisiana has not adopted Articles 2 and 2A, however

-i

,;s

I

428 I@SALES AND LEASE CONTRACTS

liEli|lnmm Although the UCC hasbeen widely adopted without manychanges, states have modifiedsome of the details to suit theirpart icular needs.

-j Of all the attempts to produce a uniform body oflaws relating to commercial transactions in theUnited States, none has been as comprehensive orsuccessful as the Uniform Commercial Code (UCC).

The Origins of the UCC The UCC was the brainchi ld of wi l l iam A. Schnader, presi-dent of the National Conference of Commissioners on Uniform State Laws (NCCUSL).The drafting of the UCC began in 1945. The most significant individual involved in theproject was its chief editor, Karl N. Llewellyn of the Columbia University Law School.Llewellyn's intellect, continuous efforts, and abil ity to compromise made the first versionof the UCC-completed in 1949-a legal landmark. Over the next several years, the UCCwas substantially accepted by virtually every state in the nation.

Periodic Changes and Updates Various articles and sections of the UCC are periodi-cally changed or supplemented to clarify certain rules or to establish new rules whenchanges in business customs render the existing UCC provisions inapplicable. For exam-ple, because of the increasing importance of leases of goods in the commercial context,Article 2A governing leases was added to the UCC. To clarify the rights of parties to com-mercial fund transfers, particularly electronic fund transfers, Article 44 was issued. Articles3 and 4, on negotiable instruments and banking relationships, underwent significantrevision in the 1990s. Because of other changes in business and in the law, the NCCUSLhas recommended the repeal of Article 6 (on bulk transfers), offering a revised Article 6to those states that prefer not to repeal it. The NCCUSL has also revised Article 9, cover-ing secured transactions. The revised Article 9, which has been adopted by all of thestates, wil l be discussed at length in Chapter 25.

By periodically revising the UCC's orticles,the NCCUSL hos been oble to adapt its provisions to changing business customs ondproctices. UCC provisions governing sales and lease controcts have olso been extended tocontracts formed in the online environment.

To locate informotion on the web concerning the (Jniform

Commerciol Code, go to this tex* Web site at| 8." ond click on "URLs for Landmorks."

select "Chopter

Goods Associated with Real Estate Goocls associatecl with real estate often fall withinthe scope of Article 2. Section 2-i07 provides the following mlcs:

I A cor-rtract for the sale of minerals or the l ike (including oil anci gas) or a stnrcture(suclr as a building) is a contract for the sale of goods if sererdnce, or separation, is lobe rnade by th.e seller. lf thc buyer is to sever (separate) the mincrals or stnrcture frorrtl-re land, the contract is considered to be a sale of real estate governecl by tlrc principlesof real property law, not the UCC.

2 A sale of growing crops (such as potatoes, carrots, wheat, ancl the l ikc) or t imber to becnt is considered to be a contract for the sale of goods regardless of who seyers them.

429 ffiffiffigTHE FORMATION OFSALES AND LEASE CONTRACTS

This exhibit graphical ly i l lustrates the relat ionship between general

(UCC Articles 2 and 2A) governing contracts for the sale and lease

governed exclusively by Article 2 of the UCC but are also governed

whenever i t is relevant and has not been modif ied by the UCC'

contract law and statutory lawof goods. Sales contracts are notby general contract law

I Other "tl i ings attachecl" to rcalty but capable of severatrce lvithout niaterial harnr tcr

thc lancl arJconsiclerecl goocls regardless of who severs thent.Z "l'hings attachecl" that

arc sevcr:rble lvithout harrn to realty coulcl inclucle strch itens as a portable hcatcr, a

rvilclow air colclit ioler i1 a house, and stools in:r rcst:trtrartt. ' l 'hus, retnoval of orle of

these things woulcl be consiclerecl a salc of goocls. ' l 'hc test is lvhcther rcruoval wil l

ca.,se s.tbstontial harm to thc real propertl to which thc iten-r is irttachecl.

Goods and Services Cornbined In czrses involving contracts il rvhich goocls :rrlcl ser-

' iccs are combilcd, courts have rcached differcnt results. I 'br instance, is providirtg blood

PREDOMINANT-FACTOR TESTA test courts use to determinewhether a contract is primarily forthe sale of goods or for the sale ofservices.

Sunflowers in bloom. Does Article 2

of the UCC opply to the sole of

sunflower seeds to o snack-foods

compony? Why or why notT(Delphine Menard/Creative Commons)

to a patient cluring an operation a "salc of goocls" or the' 'pcrformance of :r rleclical service"? Sorne courts say it is a

gootl; others say it is a service. Becartse the IJCC does not

provide the artswers to such cluestions, thc courts generall,v

irse the predominant-factor test to detcrrninc whethcr :l

contract is prinarily for the sale of goods or for the sale of

:en,ices.3 Tli is cletennin:rtion is important because the

LICC wili appl;t to services provided ttnder a tnixed con-

tract that is preclominantly for goocls, even though the

2. Thc Ll(lC irvoicls the Iern firLttres hcre because ihe rvord has nurrterous

delinit ions. A fixture is anvthing so firnrlv or permanentlr 'attached to iand or

to a buildinq as to becortre a part of it Once personal proPerb bccones a

tirture, it is governecl bl real estate lau'. See Chapter'1' l '

3. UCIC 2-l l+( I ) does stipulate that serving food or drinks is a "sale of

goocls" for plrrposes of the implied warranh of me rchantabil it l , as u'rl l be

cl iscusser l in Chapter 21.1 'he UCIC also speci f ies thatsel l ing unborr t animals

and rarc coins qualif ics as a "sale of goods "

General Contract Law

Nonsales Contracts(contracts outside the UCC,

primari ly contracts for servicesand for real estate)

riiglult;itio 6:,itrl)1i:i:it!r1i:i 1rt:l!:Fl:iilrlllrr rilttlifF*li l$r!!ri

Relevant Common LawNot Modif ied by the UCC

Contractsfor the

Sale and Lease of Goods

l t l

Statutory Law(UCC Articles 2 and 2A')

450 t!ililtttf,SAIES AND LEASE CONTRACTS

Festival Foods, which provided concessions at events aroundll l inois and Indiana. They owned a truck, a trailer, freezers,roasters, chairs, tablet a fountain service, signs, and lighting.Lindsey and Louann Naffziger were interested in buying theconcessions business. They met with the Jannusches andorally agreed to a price of 9150,000. The Naffzigers paid$10,000 down with the balance to come from a bank loan.They took possession of the equipment and began to use itimmediately in Festival Foods operations at various events,even though Gene Jannusch kept the titles to the truck and

lN THE W0RDS 0F THE C0URT . . . Chor lesJ.REYNARD,JudgePresiding.

majority of courts treat services as being excluded by the UCC. In other words, if a courtdecides that a mixed contract is primarily a goods contract, any dispute, even a disputeover the services portion, will be decided under the UCC. Likewise, any disagreerr-rentover a predominantly services contract will not be decided using the UCC, even if the dis-pute involves the goods portion ofthe contract.

If an entire business, including a truck and its equipment, is sold, but the contract doesnot specify what portion of the sale price relates to tl-re goods, does Article 2 of the UCCstill apply to tl-re trar-rsaction? That was tl-re main issue in the following case.

Appellate Court of lll inois, Fourth District,579 lll.App.3d 581,885 N.E.2d 7ll (2008).

BACKGROUND AND FACTS trailer in his name. Cene Jannusch was paid to attend twoevents with the Naffzigers to provide advice about running theoperation. After six events, and at the end of the outdoorseason, the Naffzigers returned the truck and all theequipment to its storage location and wanted out of the deal.They said the business did not generate as much income asthey expected. The Jannusches sued the Naffzigers for thebalance due on the purchase price. The trial court held thatthe Uniform Commercial Code (UCC) governed the case butthat there was not enough evidence to show that the partieshad a sufficient meeting of the minds to form a contract. TheJannusches appealed.

.j lW",-i Gene and Martha Jannusch ran

Defendants lthe Naffzigers] argue the UCC should not apply because this caseinvolves the sale of a business ratl-rer than just the sale of goods. The "preclorrinant pur-pose" test is trsecl to cletermine whether a contract for both the sale of goods and the ren-dition of services falls within the scope of Article 2 of the UCC.

Defendants argue that nothing was said in the contract about allocating a price forgood will, a covenant not to compete, allocating a price for the equiprnent, how to releaseliens, what would happen if there was no loar-r approval, and other issues. Defendantsargue these are essential terrns for the sale of a business and the Internal Revenue Servicerequires that parties allocate the sales price. "None of these items were even discussedmuch less agreed to. There is r-rot an enforceable agreement when there are so manyessential tern-rs missing." "A contract may be enforced ever-r tl-rough some contract termsmay be missing or left to be agreed trpon, but if the essential terms are so uncertain thatthere is no basis for cleciding whetl'rer the agreement l'ras been kept or broken, there is nocontract."

The essential terms were agreed upon in this case. The purchase price was $150,000,and the items to be transfelred were specified. No essential terms remained to be agreedupon; the only action rernaining was the perforrnance of the contract. Defendants tookpossession of the items to be transferred and used them as their own. "Rejection of goodsmust be within a reasonable time after their delivery or tender. It is ineffective unless thebuyer seasonably notifies the seller." IUCC 2-602(l)l Defendants paid $10,000 of the pur-

CASE ls. l -Cont inued

chase price. The fact that defendants were disappointed in the incorne from the events

thev operated is not inconsistent with the existence of a contract. lEmphasis added.]

tn" ttirt court noted that "the parties have very different views about what transpired

in the course of the coltract-forrnation discussions." It is not necessary that the parties

share a subjective understanding as to the tern'rs of the contract; the parties'condttct may

inclicate an agreement to the teims. The conduct ir-r this case is clear. Parties discussing

the sale ofgold, do not transfer those goods and allow them to be retained for a substan-

tial period" before reaching agreement. Defendants replaced equipment, reported

i'rco*., paicl taxes, and paid Gene for his tirne and expenses,all of which is inconsistent

*,ith the iclea that defendants were only "pursuing buying the business." An agreement to

r.nake an agreernent is not an agreement, but there was clearly more than tl-rat here.x x x f6. parties' ,gr."-.nt could have been fleshed or-rt with additional terms, but

the essential terms were agreed upor-r. fNaffziger] admitted there was an agreement to pur-

chase Festival Foods for $t 5O,OO-O but could not recall specifically making an oral agree-

ment on any partictrlar date. "An agreement sufficient to constitute a contract for sale Inay

be fonncl even tlio.rgh the rnoment of its making is undetermined'" IUCC 2-704Q)1

Retuming the goods it the end of the season was not a reiection of plaintiffs' offer to sell; it

wrrs d bredch of contract' IEniphasis added.]

We conclude there was an agreement to sell Festival Foocls for the

and that clefenclants breached that agreement. We reverse tl-re circuit

and remand for the entry of an order consistent with this opinion.

DECISI0N AND REMEDY rtre appeals court reversed thedecision of the trial court, finding that a contract had been

formed under the UCC and that the Naffzigers had breached it '

Ihe primary value of the contract was in the goods, not the

value of the business; the parties agreed on a price; and the

Naffzigers took possession of the business. They had no right

to return it.

411 nffftTrtnTHE FORMATION OFSATES AND LEASE CONTRACTS

price of $l 50,000court's judgmelrt

WHAT IF THE FACTS WERE DIFFERENT?Suppose thot the controct hod stated thot the truck

ond other equipment were worth $5o,oo0 ond the goodwill

volue of the business was worth $Ioo,ooo. Would thot hove

chonged the outcome of this cose? Why or why not?

@

Who ls a Merchant?-\rticle 2 governs the sale of goods in general. It applies to sales trarxactions between all

buyers ani sellers. In a limited ,-rurrrblr of instances, however, the UCC presumes tl'rat

..rtrin special business standards ought to be in-rposecl on tnerchantsbecause they pos

,.r, , ,.lrtiu.ly high degree of commercial expertise.4 Such standarcls do r-rot apply to the

casual or inexperilnceJseller or br-ryer (a "consuner"). Section 2-104 sets out three ways

in which mercl tant status can ar ise:

I A merchant is a person wl-ro deals in goods of the kind involved in lhe sales contract.

Thus, a retailer, a wholesaler, o, a manufacturer is a merchant of those goods sold in

the business. A merchant for one type of goods is not necessarily a merchant for

another type. For example, a sporting equipment retailer is a merchant when selling

tennis rackets but not when selling a used computer'

-.1hryr"*t"""h"*pply

only to merchants rleal principally with the Statute of Frauds, firn offers, corfirmatory

r'emorandums, warrantres, an{ contract modifications. 'fhese special rules reflect expedient busiless practices corn-

nonlv known to merchants in the commercial setting. They will be discussed later in ihis chapter'

Cornell University's Legallnformation Institute offersonline access to the UCC asenacted in several of the states at

452 IINiIIIESALES AND LEASE CONTRACTS

MERCHANT

A person who is engaged in thepurchase and sale of goods. Underthe UCC, a person who deals ingoods of the kind involved in thesales contract or who holds herselfor himself out as having ski l l orknowledge peculiar to the practicesor goods involved in the transaction.lucc 2-'r041.

LEASEUnder Article 24 of the UCC, atransfer of the right to possess anduse goods for a period of time inexchange for payment.

LEASE ACREEMENTIn regard to the lease of gooos, anagreement in which one person (thelessor) agrees to transfer the right tothe possession and use of propertyto another person (the lessee) inexchange for rental payments.

l-EssoRA person who transfers the rightto the possession and use of goodsto another in exchange for rentalpaymenrs.

TESSEEA person who acquires the right to thepossession and use of another's goodsin exchange for rental payments.

A compony offering leases foroutomobiles. All such leases oregoverned by Article 24 of the UCC.Whot leoses are not govetned by theUCC? (5. Jones/Creative Commons)

A merchant is a person ivho, by occr:pation, holds hirnself or herself out as havingknowledge ar-rd skill Llnique to the practices or goods invoived in the transaction. Notctl'rat this broad definitior-i rnay inclucle banks or rlniversities as merchants.

A person who entploys d. merclTdnt ds d broker, ctgent, or other intermediary has tl-rc sta-tus of merchant in that transaction. I{encc, if a "gentlernan f:rnner" who orclinarilydoes not run the farm hires a broker to purchase or sell l ivestock, the farmcr is consid-ered a merchant in thc transactiot'r.

In summary, a pcrson is a merchant when she or he, acting in a rriercantile capacity,

Posscsses or tises an expertise specifically relatecl to the goods being sold. Nevertl'reless, tl-redistinction between rncrchants and nonmerchants is not : l lways clear-cut. For example,state courts appear to be split on whether farmers shoulcl be considered rr-ierchants.5 Insome states, farmers are consiclerecl nicrchants because they sell prodr-rcts or l ivestock ona rcgular basis. hr other states, courts havc held that the drafters of the UCC did notintend to inclucle farners as rnerchants.

In the past fcw clec:rdes, leases of personal property (goods) have becon.re increasingly com-molr. In this context, a lease is a tr:rnsfer of the right to posscss and Llse goods for a perioclof tirnc iu exchange for pavn.rent. Article 2A of the UCC was created to fill the need forLlniform gtriclelincs in tl.ris area. Article 2A covers aly transaction that creirtes a le:rse ofgoocls, as wcll as subleases of goocls IUCC ZA-102, 2A-l0l(l Xk)]. Except that it applies toleases, rathcr than sales, of goocls, Articlc 2A is esse ntially a repetition of Article 2 :rncl varicsorrly to reflect cliffcrences ltetween sales ancl le:rse transactions. (Note that Article 2A is notconcertrecl lvith lcases of real property, such as lancl or btri lcl ings. ' l 'he laws governirg thcsctypes of tr:rnsactions will be exarriinecl in Chapter 4,f.)

Defini t ion of a lease AgreemenlArticle 2A clefincs a lease agreement zrs a lessor ancl lessee's betrgain with respect to the

leasc of goods, as fotrncl in thcir l:rr.rguagc arrcl as implied by otl ier clrcullr-starlccs, including colrrse of clcaling ar.rd usage of traclc or collrse of perfor-mance iUCC 2A-103( l ) (k) | . A lessor is one who transfers ihe r ight to t l iepossession :urd use of goods unclcr a lease ILJCC ZA-103(1)(p)]. A lessee is oncwho accluires the right to thc tcmporary possession and use of goocls uucler alease f UCC 2A-103(1)(o)]. L-r othcr rvorcls, the lessee is the party who is leasingthe goocls frorn tlie lcssor. Article 2A applies to all types of leases of goocls,including comrrerci:rl lcases and consllmer leases. Special rules apply to cer-iain typcs of leases, holvever, inclucling conslrnlcr leases and fin:rnce leases.

€onsumer leasesAconsumer /erl.se involves three clements: (l) a lcssor who regularly engages irrt} 're business of leasing or scll ing; (2) a lessee (except ar-r organization) rvholcases the goods "primarily for :r personal, fan-ri ly, or househoid purpose"; ;rnd(3) total lease p:rlanents that are less than a cloilar amount set by state statuteILICC 2A-103(1)(e)1. ' lb ensure special protection for consumers, ccrtain pro-visiot-is of Article 2A apply only io consumer leases. For example, onc provisionstates that a constlncr may recover attorneys'fees if a court f inds that a tcrm rna consrlmer lcase contract is unconscionable f UCC 2A-108(a)(a)].

5. Seethecorrr t 'sdiscussionofthis issuenR.F' .Cutninghant&Co.y.Dr iscol l ,7Misc.3d234,7(X)N.YS.2d 368 (200t) .

I

II

lIIIiIII

iI

i

Finance leases.\finance /ease involves a lessor, a lessee, and a supplier. The lessor buys or leases goods from

the supplier and leases or subleases thern to the lessee IUCC 2A-103(t)(g)] Typically, in a

finance lease, the lessor is simply financing the hansaction. lrEIIfrFIElsrl Marlin

Corporation wants to lease a crane for use in its coltshuction business. Marlin's bank agrees

to purchase the equipment from ]ennco, Inc., and lease the equipment to Marlin. In this

sihration, the bank is the lessor-financer, Marlin is the lessee, and )ennco is the supplier. EArticle 2A, unlike ordinary contract law, makes the lessee's obligations under a com-

mercial finance lease irrevocable and independent from the financer's obligations IUCCl\-407]. In other words, the lessee must perform and continue to make lease payments

ei'en if the leased equiprnent turns out to be defective. The lessee must look almost

entirely to the supplier for warranties.

In regard to the formatior-r of sales and lease contracts, Article 2 and Article 2A of the UCC

modify colrnlon law cor-rtract rules in several ways. Retnember, though, that parties to sales

conhacts are free to establish whatever tenns they wish. The UCC cornes into play only

'*hen the parties have failed to provide in their contract for a contir-rgency that later gives

rise to a dispute. The UCC makes this clear time and again by using such phrases as"unless the parties otherwise agree" or "absent a contrary agreement by the parties."

0ffetIn general contract law, the rnoment a definite offer is rnet by an unqualified acceptance,

a binding contract is formed. In commercial sales transactions, the verbal exchanges, cor-

respondence, and actions of the parties may not reveal exactly when a binding contractual

obligatiol arises. Tl-re UCC states that an agreement sufficient to constitr-rte a contract can

erist even if the rnoment of its making is undetermined IUCC 2-204(2), 2A-204(2)).

Open Terms Renernber from Chapter 9 that under the common law of contracts, an

ott-er r-r-rust be definite enor-rgh for the parties (and the courts) to ascertain its essential

terns when it is accepted. In contrast, the UCC states that a sales or lease contract will

lot fail for inclefiniteness even if one or more terms are left open as long as (l) tlie parties

iltended to rlake a contract and (2) there is a reasonably certain basis for the cor-rrt to

grant an appropriate rernedy IUCC 2-204(3),2A-204G)1.

tiExAMFC rBA Mike agrees to lease frorn Compr-rQuik a highly specialized computer

nork station. Mike and one of CompuQuik's sales representatives sign a lease agreement

that leaves some of the details blank, to be "worked out" the following week, when the

leasing manager will be back fron-r her vacation. In the rneantime, CornpuQuik obtains

the necessary equipment from one of its sr-rppliers and spends several days rnodifying the

equipment to sr-rit Mike's needs. When the leasing manager retLrrns, she calls Mike and

tells him that his work station is ready. Mike says he is no longer interested in the work

station, as he has Arranged to lease the sarne type of eqr-ripment for a lower price from

another firm. CompuQuik sues Mike to recover its costs in obtaining and modifying the

equipment, and one of the issues before the court is whether the parties had an enforce-

able contract. The court will likely hold that they did, based on their intent and conduct,

despite the "blanks" in their written agreement. ERelative to the common law of conlracts, the UCC has radically lessened the require-

ment of definiteness of terms. Keep in mind, though, that the more terms left open, the

less likelv it is that a court will find that the parties intended to form a contract.

455 EIEKtrTHE FORMATION OFsAtE5 AND IEASE CONTRACIS

[E[H under the UCC, it isthe actions of the partiesthat determine whether theyintended to form a contract.

454IIEIIT@SALES AND LEAsE CONTRACTS

liliNInEFII The common tawrequires that the parties make theirterms definite before they have acontract. The UCC applies generalcommercial standards to make theterms of a contract definite.

Open Price Term. If the parties have not agreed on a price, the court will detern-iine a"reasonirble pr ice at the t ime for del iver.r" 1UCC Z-305r I r . I f e j t l rer fhe l l ryer or t l reseller is to determine the price, the price is to be fixed (set) in good faith IUCC 2-]05(2)).Under the UCC, good faith means honesty in fact and the observance of reasonable con-r-r-r 'rercial standards of fair clealing in the trade IUCC 2-103(l)(b)]. The concepts of good

faith and commercial reesondbleness permeate the UCC. Son-retimes, the price fails to befixed through the fault of one of the parties. In that sitr-ration, tl're other party can treat thecontract as canceled or [ ix a reasorrable pr ice. l r rxnrvrpTr r8. t Perez and Merr ick enterinto a contract for the sale of unfir-risl-red cloors and agree that Perez wiil deterrnine theprice. Perez refuses to specify the price. Merrick can either treat t l"re contract as canceleclor set a reasonable pr ice f UCC 2-305(3)1. E

Are open price terms foir if the seller olways seems to get the better deal? In sales law, itis acceptable for a contract to leave the price term open and to state that the seller wil l setthe price. Such fixing of an open price term must be done in good faith, however.Consequently, when Sunoco, Inc., consistently left the price term for delivered gasoline openin hruenty-trruo different states, a question arose as to whether the company was acting ingood faith. The contracts allowed Sunoco to set the price payable in any manner it wished.Sunoco created a complicated formula that resulted in 414 pricing zones for 1,180 dealers.Sometimes, prices were set differently for adjacent price zones.

A number of gasoline dealers in New York and New Jersey sued. They argued that rather thansetting prices in good faith, Sunoco was manipulating the price to control the dealers' businessactivities. Reviewing the facts, the court did not agree. lt ruled that the price differentials were notattributable to "generally arbitrary unreasonable, or capricious conduct on Sunoco's partl' Thecourt found that the fact that Sunoco charged higher prices in markets with less competition wassimply the result of a capitalist system. Rather than acting with "bad motives or intention,"Sunoco simply took advantage of market conditions for its own benefit.6

ult

Open Payment Tenn. When p:rrties do not specily peryment terttrs, p:ryt't'tcrt is cltre atthc tinre ancl place at wli ich tl 're buyer is to receive the goocls I t lCC 2*l I0(a) l. The buyerc:ur tencler paynrent using :tny cormrercizrlly norrral or acceptable l'neans, such :rs achecl< or creclit carcl. If the seiler dem:rnds payment in cash, howcver, the buyer tnttst begivcn a reasonable time to obtain it IIJCC 2-5ll(2)]. This is especi:rl ly inrportantwheutl-rc contract states a definite ernd final tirne for perforrnance.

Open Delivery Tenn. When no delivery terrns are specifiecl, the buyer nonnally takesdelivery at the seller's place of business IUCC 2-308(a)1. If the seller has no place of busi-ness, the seller's residence is used. When goods are locatecl in some other place ar-rd bothparties know it, delivery is n-rade there. If the tirne for shipment or delivery is not clearlispecified in the sales contract, the court lvi l l infer a "reasonable" tirne for performance

lucc 2-3oe(1)].

Duration of an Ongoing Contract. A single contract n'right specify successive perform-ances but not indicate how long the parties are required to deal with each other. In thissituation, either party may terminate the ongoir-rg contractual relationsl-rip. Principles ofgood faith and souncl commercial practice call for reasonable notification before termina-

6. Callahan v. Sunoco, Inc., - F.Supp.2d - (tr D Pa. 2005)

o" *Tffi*^*sALE5 AND LEASE CONTRACTS

tion, however, to give the other party reasonable time to seek a substitute arrangement

ucc z-l0e(2), (l)l

Options and Cooperation Regarding Performance. When the contract contemplates

shiprner-rt of the goods br-rt does not specify the sl'ripping arrangements, the seller l-ras the

right to make these arrangements in goocl faith, using commercial reasonableness in the

si tuat ion IUCC 2-] l I l .Wlren a sales contract on'rits terms relating to the assortmert of goods, the buyer can

specify the assortrnent. ITEXAMFLE-tsA Petry Dmgs, Inc., agrees to pr.rrchase one thousand

toothbrushes frorn Marconi's Dental Supply. The toothbmshes corne ir-r a variety of colors,

but the contract does not specif, color. Petry, the buyer, has the right to take six hurdred

blue toothbrushes and for-rr l-rundred green ones if it wishes. Pctry, l'rowever, ntust exercise

good faith and cornmerciai reasonableness in making its selection IUCC 2-3 l l l . E

Open Quantity Tern. Norrlally, if the parties clo not specify a qr-rar-rtity, a cor-rrt will

have no basis for deterrnining a rernecly. This is because tl-rere is alrnost no way to deter-

mine objectively wl'rat is a reasonable quantity of goods for someone to buy (wl'rereas a

court can oblectively determine a reasonable price for particular goods by looking at the

market). Nevertl 'reless, the UCC recognizes two exceptions involving recluirements and

or.rtput contracts I UCC 2-306(I)1.In a requirements contract, the buyer agrees to purchase and the seller agrees to sell REeulRE[fiENrs coNrnAcr

all or up to a statecl amount of what the br-ryer needs or reqr-Lires. I TEXAMPLE I BE U rnpqua An agreement in which a buyer

Can'ery forms a co'tract with Al Garcia. The ca''ery agrees to pur.ho[ fr-* Cn'rJ'u., :E::::[ |:iiTi:: il'ri::H,ancl Garcia agrees to sell to the cannery, all of the greeu beans that the canncry needs or airount of what the buyer needs

requires during the summer of 2010. E There is irnplicit consideration in a reqtrirements or requires'

contract because the buyer (the cannery, in tl i is sitr-ration) gives up the right to buy grecn

beans frorn ar.ry other seller, and this forfeited right creates a legal detriment (that is, cott-

sideratior-r). Recl,rirernents contracts are common in the br,rsiness world ancl are rtormally

enforceable. In contrast, if the buyer prornises to purchase only if the buyer wishes to do

so, or if the br-ryer reserves the right to buy the goods from someone other than the seller,

the prornise is i l l .rsory (without consicleration) and unenforceable by eithcr party.T

In an output contract, the seller agrecs to sell and tfre buycr agrees to buy all or up to ourPur coi{rRAcr

a stated arnount of what tl-re seller prodtLces. trEiAMFiT r&Cl Al Garcia forms a contract An agreement in which a seller

rrith U*ipq'a Ca'nery. Garcia agrees to sell to the carr,-r"ry, r,rd th".r,r,..r'y*;.r; i;l""T:i::'["r1i?Hflruffin,pr-rrchase frorn Garcia, all of the beans that Garcia proclr-rccs on his farrn during the sum- of what the seller produces.

mer of 2010. tr Again, because the seller cssentially forfeits the right to scli goods to

another buyer, there is implicit considcration in an output contract.The UCC inposes a good faith limit(ttion on recluirements and outpttt contracts. The

quantity under such contracts is the amount of requirements or the amount of output that

occurs dr-rring a normal production year. The actual quantity purcl-iased or solcl cannot be

unreasonably disproportionate to norrnal or comparable prior requirements or output

iucc 2-1061.

lf you leave certain terms of a sales or lease eontract open, the UCC allows acourt to supply the missing terms. Although this can sometimes be advantageous

{to establish that a contract existed, for instance), it can alss be a maiordisadvantage. lf you fail to state a price in your contract offer, for exarnple, acourt will impose a feasonable price by looking at the market price of similargoods af the time af delivery. Thus, instead of receiving your standard price for

7 See,forexanple, InreAnclnrGlassContainerCorp.,315 Bankr.765(N{.DFla.2006)

456 EmmrTfflSATES AND LEASE CONTRACTS

FIRM OFFERAn offer (by a merchant) that isirrevocable without the necessityof consideration for a stated periodof time or, if no definite period isstated, for a reasonable time (neitherperiod to exceed three months). Afirm offer by a merchant must bein writing and must be signed bythe offeror.

the goods, you will receive what a court considers a reasonable price when thegoods are delivered. When drafting contracts for the sale or lease of goods, makesure that the contract clearly states any terms that are essential to the bargain,particularly price. lt is often better to establish the terms of your own contra€tsrather than to leave it up to a court to determine what terms are reasonable aftera dispute has arisen.

tr

Merchant's Firm Offer Under corlrnon law contract principles, an offer can berevoked at any tin're before acceptance. The major comrron law exception is an optioncontract (discussed in Chapter 9), in which the offeree pays consideration for the offeror'sirrevocable prornise to keep the offer open for a stated period. The UCC creates a secondexception for firm offers rnade by a rnerchant to sell, buy, or lease goods.

A firm offer arises when a merchant-offeror gives dssurances in a signed writing tl-rat theoffer will remain open. The merchant's firm offer is irrevocable without the necessity ofconsiderationb for the stated periocl or, if no definite period is stated, a reasonable period(neitlrer period to exceed tlrree months) IUCC 2-205,2A-205). ITExAMPLE tsZ Osaka, aused-car dealer, writes a letter to Saucedo on fanuary I stating, "l have a used 2009 Sr-rzukiSX4 or the lot that I ' l l sell you for $11,000 any tirne beh.veen now and January 31." Thiswriting creates a firm offer, and Osaka will be liable for breach if he sells the Suzuki SX4to sorneone other than Saucedo before Jantrary 31. E

It is necessary that the offer be botb written and signed by the offeror.e When a firnroffer is contained in a form contract prepared by the offeree, the offeror rnust also sign aseparate assrlrance of the firrn offer. 'fhis requirerr.rent ensures that the offeror is aware ofthe offer. For instance, an offeree might respond to an initial offer by sencling its own fon'ncontract containing a clause stating tliat the offer will remain open for three months. Ifthe firm offer is buried amid copiotrs language in one of the pages of the offeree's fornrcontract, the offeror may inaclvertently sign the contract without realizing that it conterinsa finn offer, thus clefeating the purpose of the mle-which is to give effect to a rnerchant'scleliberate intent to be bouncl to a finn offer.

AcceptanceThe followir-rg subsections exarrine the UCC's provisions governing acceptance. As youwill see, acceptance of an offer to buy, sell, or lease goods generally rray be made in anr'reasonable manner ar-rcl by any reasonable nre:rns.

Methods of Acceptance The general colrmon law rule is that an offeror can specif,, orauthorize, a particuiar rreans of acceptance, n'raking that rnethod the only one effectivefor contract forrnation. Even an unar-rthorized rneans of communication is effective, hoil.ever, as long as the acceptance is received by the specifiecl cleadline. Irrxnrvtpt-e tssl Janeloffers to sell her Hurrmer H2 to Arik for $24,000. 'l'he offer states, "Answer by fax witliinfive days." If Arik sends a letter, ar-rcl Janel receives it within five days, a valid contract isformed, nonetheless. El

8. [{theoffereepaysconsideration,thenanoptioncontract(notarnerch:rnts{irmoffer)is{ortred.

9. Signed includes ary synbol executed or adopted by a party lvit l i a present intentiol to authenticrte a u rit irg

IUCC] 201(39)] .Aconpletesignatureisnotrequired.Therefore, in i t ia ls,aihumbprint ,atradenane,oranyrna; i

used in l ieu ofa written signature wil l suffice, regarclless ofits location on the document.

.\ny Reasonable Means. Wl-ren tl-re offeror does not specify a means of acceptance, theUCC provides tl-rat acceptance can be made by any means of communication that is rea-sonable under the circumstances IUCC 2-206(l),2A-206(l)]. This broadens the com-mon law rules concerning authorizecl means of acceptance. (For a review of therequirements relating to mode and timeliness of acceptance, see Cl-rapter 9.)

lrExAMFfEltB5I Anodyne Corporation sends Bethlehem lndustries a letter offering tolease $1,000 worth of postage meters. The offer states thatAnodyne will keep the offeropen for only ten days from the date of the letter. Before the ten days elapse, Betl-rlehernsends Anodyne an acceptance by fax. Is a valid contract formed? The answer is yes,because acceptance by fax is a commercially reasonable medium of acceptance under thecircumstances. Acceptance is effective on Betl-rlehern's transmission of the fax, whichoccurred before the offer lapsed. [l

Promise to Ship or Prompt Shipment. The UCC permits a seller to accept an offer tobuy goods "either by a prompt promise to ship or by the prompt or current shipment ofcor.rforrning or nonconforming goods" IUCC 2-206(l)(b)] Conforming goods are goodsthat accord with the contract's terms; nonconforming goods do not. Tl're seller's promptshipment of nonconforming goods in response to the offer constitutes both an acceptancei a contract) and a breach of that contract.

This rule does not apply if the seller seasonably (within a reasonarble amount of t ime)rrotifies the br-ryer that the nonconforming shipment is offered only as an accommodation,or as a favor. The notice of accornmodation must clearly indicate to the buyer that theshipment does not constitute an acceptance and that, therefore, r-ro contract has beer-rIOrlT1eO.

IrExdmFiE tsJ6l McFarrell Pharrlacy orders five cases of Johnson & Johnson 3-by-5-inchgauze pads from Halderson Medical Supply, Inc. If Halderson ships five cases of Xeroforrr3-by-5-inch gauze pads instead, the shipment acts as both an acceptance of McFarrell's offerand a breach of the resulting contract. McFarrell rray slle Halderson for any appropriatedamages. If, however, Halderson notifies McFarrell that the Xeroform gar-rze pacls are being

shipped ds dl1 dccommodation-becar-rse Halderson has only Xeroform pads in stock-theshipment will constitr-rte a counteroffer, not an acceptance. A cor-rtract will be forrned onlyif McFarrell accepts the Xeroforn'r gauze pads. [l

Communication of Acceptance Under the comnron law, because a r-rnilateral offerinvites acceptance by a performance, the offeree neecl not notify the offeror of perfor-rnance unless the offeror would not otherwise know about it. In other worcls, beginning therequested performance is an in'rplied acceptance. The UCC is tnore stringent than thecommon law in this regard. Under the UCC, if the offeror is not notified within a reason-able time that the offeree has accepted the contract by beginning performance, ihen theofferor can treat the offer as having lapsed before acceptance IUCC 2-206(2),2A-206(2)1.

trExAMptFtJ-ttl Lee writes to Pickwick Bookstore on Monday, "Please send rne a copyof Webster's New College Dictionary for $25.55, C.O.D.," and signs it, "Lee." Pickwick

receives the request but does not ship the book for four weeks. When the book arrives, Lee

re jects it, claiming that it has arrived too late to be of value. In this situation, because Leehad heard nothing from Pickwick for a month, he was justified in assr-rming that the storedid not intend io deliver the book. Lee could consider tfiat the offer had lapsed becauseof the length of time Pickwick delayed shiprnent. E

Additional Terms Under the common lau if Alderman makes an offer to Beaie, and

Beale in turn accepts but in the acceptance makes some slight modification to the terms

4r7 EIlEmtrTHE FORMATION OF5ALE5 AND LEASE CONTRACTS

lTlltllMlill The UCC's rules onmeans of acceptance illustratethe UCC's flexibility. The ruleshave been adapted to new formsof communication, such as faxesand online communications.

SEASONABLYWithin a specified time period or,if no period is specified, within areasonable time.

458l'IITTTilT'.tTlSAtES AND LEASE CONTRACTS

EACHGNCIUNU AilII FACTSSun Coast Merchandise

Corporation, a California firm, designs and sells products thatbusinesses distribute as promotional items. MyronCorporation, a New Jersey firm, asked Sun about a fl ip-top

a. ln the "SEARCH THE N.J. COURTS DECISIONS" section, type "Sun Coast" in

the box, and click on "Search!" ln the result, click on the case name to access

the ooinion.

of the offer, there is no contract. Recail from Chapter 9 that the so-called mirror imagerule requires that the terms of the acceptance exactly match those of the offer. The UCC

dispenses with tl're mirror image rule. Generaily, the UCC takes tl-re position that if theofferee's response indicates a definite acceptance of the offer, a contract is formed et,en if

the acceptance incltLdes additional or different terms from those contained in the offer

IUCC 2-207 (l)]. What happens to these additional terms? The answer to this question

depencls, in part, on whetl-rer the parties are non[Ierchants or merc]rants.

Rules When One Party or Both Parties Are l,{onmerchants. If or-re (or both) of the par-ties is a nonmerchant, the contract is formed according to the terrns of the origir-ral offersubmitted by the original offeror and not accorclir-rg to the additional terms of the accep-tance f UCC 2-207(Z)1. f iExAMPtE t812l Tolsen offers in writ ing to sell his laptop com-

pr,rter and printer to Valdez for $650. Valdez faxes a reply to Tolsen stating, "l accept your

offer to purchase your laptop and printer for $650. I would l ike abox of laser printer paperand two extra toner cartriclges to be included in the purcl'rase price." Valdez has given'lblsen a definite expression of acceptance (creating a contract), even tl'ror,rgh the accep-tance also sttggests :rn added tern'r for the offer. Because Tolsen is not a merchant, tl'readditional term is n-rerely a proposal (sr-rggestion), and Tolsen is r-rot legally obligatecl to

compiy with that term. E

RulesWhen Both Parties Are Merchants. In contracts between merchants, the additionalterms automatically beconre part of the contract unless (l) the original offer expressly l irn-its acceptarrce to the tern'rs of the offer, (2) the new or changed terms material/), alter thecontract, or (3) the offeror objects to the new or char-rged tenns within a reasonable perioclof t irr.re fUCC 2-207(2).|.

Wh:rt constitutes a rnaterial :rlteration is frequently a question tl-rat only:r cottrt can decide.Generally, if the moclification involves no unre2rsonable elernent of surprise or hardship for

the offeror, the cotrrt will holcl that the moclification did not materially alter the coutract.

frExAMPtE-tsm Woolf has orclered ureat fiorr 'l-upman sixty-four times over a hvo-yearperiod. Each time, Woolf placed the order over the phone, and'l-upman rnailed a confirma-tion forrn, and then an invoice, to Woolf.'lupman's confirmation form alrd invoice havealways incluclecl ar arbitration cleruse. If Woolf placcs another orcler and fails to pay for themeat, the court will like\, l6ld that the aclclitional terni-the arbitration provisior-r-did notrnaterially alter the contract because \4bolf shoulcl not have been surprised by the term. El

In the following case, the court explains the "revoh-rtionary change in contraci law"

catrsed by the UCC's principles on additional terms.

Superior Court of New Jersey, Appellate Division, 393 N.J.Super. 55, 922 A.zd 782 (2OO7).la*librarr,rutgers.edu/rcarch-rhttrta

calculator on which Myron could engrave the names of itscustomers. ln December 2000, Myron began to submitpurchase orders for about 400,000 of what the parties referredto as "Version l" calculators. In April 2001, Sun redesigned thefliptop. Over the next few weeks, the parties discussed termsfor making and shipping 4 mill ion of the "Version l l"calculators before the Christmas season. By May 27, Myronhad faxed four orders with specific delivery dates. Two dayslater, Sun announced a delaved schedule and asked Myron to

cr$,_4;,t#fl'ffi -s;ip$ilt;i1t+unldir

submit revised orders. Unwilling to agree to the new dates,Myron did not honor this request. The parties attempted tonegotiate the issue but were unsuccessful. Finally, Sun filed asuit in a New Jersey state court against Myron, claiming,among other things, breach of contract. The court entered a

459 GIEEETHE FORMATION OFSALES AND TEASE CONTRACTS

judgment in Sun's favor. On appeal to a state intermediateappellate court, Myron argued, among other things, that thejudge's instruction to the jury regarding Sun's claim wasinadequate.

It{ THt WORDS 0t IHE COUnT . . . FtsHER, J.A.D. ludse, Appellate Divisionl

**t t l .

The era when a valid, binding contract could only come into existence when a party'sacceptance mirrored the other party's offer ended with the adoption of the UniformCommercial Code (UCC). The UCC altered the common law approach, finding it to beinconsistent with the modern realities of commerce. * * * Article 2 of the UCC radicallyaltered sales law and expanded our conception ofa contract. The heart ofthis revolution-ary change in contract law can be found in lNew )ersey Statutes Annotated (N.J.S.A.)]l2A:Z-207(1) lNew Jersey's version of UCC 2-207(l)1, which declares that "lal definiteand seasonable expression of acceptance or a written confirmation which is sent within areasonable time operates as an acciptance even though it states terms additional to or dif-ferent from those offered or agregd upon, unless acceptance is expressly made conditionalon assent to the additional or different terms." No longer are communicating parties left todebate whether dn acceptdnce perfectly meets the terms of an offer, but instead the existenceof a binding contract may be based on words or conduct, which need not minor an offer, soIong as they reveal the parties' intention to be bound. lEmphasis added.]

Considering that the UCC permits the formation of a contract by way of conduct thatreveals the parties' understanding that a contract exists, and notwithstanding the sugges-tion of additional or even non-conforming terms, the complex of communicationsbehveen [Sun and Myron] demonstrates that neither can the formation of a contract beconfirmed or foreclosed without a resolution of the existing factual disputes and theweighing of the significance of the parties' convoluted communications.

*xt *

In short, it is conceivable-and the jury could find-that the parties' inability to agreeon certain terms reveals the lack of an intent to be bound; in other words, that their com-munications constitr-rted mere negotiations that never ripened into a contract. By thesame token, the iury could find that a contract was formed despite a failure or an inabil-ity to agree on all terms. N.].S.A. l2A:2-207(2) provides that an acceptance coupled withthe proposal of new or different terms does not necessarily preclude the formation of acontract. In such a circumstanco, * * x the new or different terms proposed by the offeree

fcouldl become part of the contract * * 'c fEmphasis added.]

All these questions required that the factfinder analyze the meaning and significancet*._Oit,j.r'communications based upon the legal framework provided by the UCC.

'' '( x The trial judge correctly determined that the [contentions about] contract for-

"r"ltl" * * * raised fact questions to be decided by the iury

i' * *

In describing for the jury what it takes for the parties to form a binding contract, thejudge stated:

A proposal to accept an offer on any different terms is not an acceptance ofthe original offer. Ifany new or different terms are proposed in response to the offer, the response is not an accep-tance, but rather a counteroffer. A counteroffer is a new offer by the party making that proposal. CASE 18.2-Cont inues next page

440 IINIIT@SATES AND LEASE CONTRACTS

CASE 18.2-Cont inued

DECISI0N AND REMEDY rhe state intermediateappellate court concluded that the judge's instruction to thejury with respect to the question of whether Sun and Myronhad formed a contract was "fundamentally flawed" and"provided insufficient guidance for the jury's resolution of theissues." On this basis, the court reversed the lower court'sjudgment and remanded the case for a new trial.

The new offer must in turn be agreed to by the party who rnade the original offer for there to bean accePtance.

As we have aiready explained, the UCC does not require that a party's response mirror

an offer to result in a binding contract. The offeree may propose additional or differentterms without necessarily having the response viewed as a non-binding counteroffer.Instead, an offeree's proposal of additional or cor-rflicting terms may be found to constitr-rte

an acceptance, and the other or different terms viewed as rrere proposals to modify the

contract thus forn-red.The judge's misstatement in this regard was hardly harrnless * * * . In describing

when the law recognizes that a contract was formed, the judge provided the lury with erro-neous instructions that struck directly at the heart of the case.

F0R CRITICAt ANAI.YSI$-SocialC O n s i d e f a t 10fi epptying the correct principles to

the focts in this case. how would vou have decided the issue?Explain.

IililtrE]ffinEfif The UCC recognizesthat a proposed deal is a contractif, in commercial understanding,the deal has been closed.

lll

Conditioned on Offeror's Assent. Regardless of rrerchant status, the UCC providesthat the offeree's expression cannot be construed as an acceptance ifit contains additionalor different terms that are explicitly conclitioned on the offeror's assent to those terms

|UCC2_207(l) ] .mPhi1ipsofferstosel lHr-rndert650potrndsofturkeythighs at a specified price and with specified delivery terms. Hundert responds, "l acceptyotrr offer for 650 pounds of turkey thighs on the condition that you give me ninety days topay for them." Hundert's response will be construed not as an acceptance but as a coun-teroffer, which Philips rnay or may not accept. E

AdditionalTerms May Be Stricken. The UCC provides yet another option for dealingwitlr confl icting terms in the parties'writ ings. Section 2-207Q) states that conduct byboth parties that recognizes the existence ofa contract is sufficient to establish a contractfor the sale of goods even though the writings of the parties do not otherwise establish acontract. In this situation, "the terms of the particular contract will consist of those termson which the writings of the parties agree, together with any supplementary terms incor-porated under any other provisions of tl-ris Act." In a dispute over contract terms, this pro-vision allows a court sirnply to strike from the contract those terms on which the partiesdo not agree.

IrExAMFtEltsTt SMTMarketing orders goods over the phone from Brigg Sales, Inc.,which ships the goods with an acknowledgment form (confirming the order) to SMT.SMT accepts and pays for the goods. Tl-re parties'writings do not establish a contract, butthere is no question that a contract exists. If a dispute arises over the terms, such as theextent of any warranties, UCC 2-207 (3) provides the governing rule. El

The fact that a merchant's acceptance frequently contains additional terms or eventerms that conflict wiih tl-rose of the offer is often referred to as the "battle of the forms."Altl-rough the drafters of UCC 2-207 triedto eliminate this battle, the problem of differ-ing contract terms still arises in commercial settings, particularly when contracts are basedon the merchants' forms, such as order forms ar-rd confirmation forms.

(onsiderat ionl'ie comn.ron law rr-rle that a contract requires cor-rsideration also applies to sales and lease: ntracts. Unlike the commot-t law, however, the UCC does not require a contract mod-.::iaiion to be sr-rpported by new consideration. An agreement modifyir-rg a contract for thei."ie or lease of goods "needs no Consideration to be binding" IUCC 2*209(1),_\-r08(r)1.

\lodifications Must Be Made in Good Faith Of course, a contract n'rodification must be

- .rglrt irr good faith IUCC l-203] ITExAMPLE tsrolAll ied. Inc.. agrees to lease a new recre-,:onal vehicle (RV) to Louise for a stated rnonthly payment. Sr-rbsequently, a sudden shift:. the market makes it difficult for Allied to lease the new RV to Louise at tl're contract price.'.rthout suffering a loss. Allied tells Louise of the situation, and she agrees to p.y nt't rd.li-.,,nal sum for tl-re lease of the RV. Later Louise reconsiders and refuses to pay more than:ire original price. Under the UCC, Louise's promise to moclify the contract needs no con-,:leration to be binding. Hence, she is bouncl by the nodified contract. El

Ir.r tlris example, a shift in the marketis a good faith reason for contract modification.i\hat if tl-rere really was no shift in the market, however, ancl Allied knew tl-rat Louise::eeded to lease the new RV ir-nmecliately but reftrsed to cleliver it unless she agreed to pay. higher price? This attempt at extortion through moclificatior-r without a legitir-nate corn-.nercial reason would be ineffective because it would violate the cluty of good faith. All ied'.'.oulcl not be permitted to enforce the higher price.

\\hen Modification without Consideration Requires a Writing In some situations, an-igreelrent to modify a sales or lease contract without consideration mtrst be in writing to beenforceable. If the contract itself prohibits :rny changes to the contract unless they are in a.ignecl writing, for instance, then only those changes agreecl to in a signed writing areenforceable. If a consttmer (nonmerchar-rt br-ryer) is dealir-rg with a rrerchant and the mer-chant supplies the forn that contains a prohibition against oral rnodification, the corlslurerrnrrst sign a separate acknowledgment of such a clause IUCC 2-209(2),2h-208(2)].

Also, under Article 2, any modification that brings a sales contract r-rnder the Statute ofFraucls rnust usually be in writing to be enforceable. Thus, if an oral contract for the saleof goods priced at $400 is modified so that the contract goods are now priced at $600, themodification must be in writ ing to be enforceable IUCC 2-209Q)]. (This is because tl-reUCC's Statute of Frauds provision, as you will read shortly, requires a written record ofsales contracts for goods priced at $500 or more.) If, however, the buyer accepts deliveryof the goods after the modification, he or she is bouncl to the $600 price [UCC2-201(l)(c)1. (Unlike Article 2, Article 2A does not say whether a lease as rnodified r-reedsto satisfii the Statute of Frauds.)

Statute of FraudsThe UCC contains Statute of Frauds provisions covering sales and lease contracts. Undertl-rese provisions, sales contracts for goods priced at $iOO or more and lease contractsrequiring payments of $1,000 or more must be in writ ing to be enforceable [UCC2-201(1),2A-201(l)]. (Note that these low threshold amounts may eventually be raised.)

Sufficiency of the Writing The UCC has greatly relaxed the requirements for the suffi-ciency of a writing to satisf, the Statute of Frauds. A writing or a memorandum will be suf-ficient as long as it indicates that the parties intended to form a contract and as lor-rg as it issigned by the parly (or agent of the party-see Chapter 28) against whon'r enforcement issought. The contract norrnally will not be enforceable beyond the quantity of goods shown

44r glmuTHE FORMATION OFSALES AND LEASE CONTRACTS

nT:ilW,lli|'il tt has been proposedthat the UCC be revised toeliminate the Statute of Frauds.

442 III$F5{:r'IrlSALES AND LEASE CONTRACTS

An ortison creates o speciallydesigned "bowl within o bowl" outof one piece of cloy. If o restourontorolly controcted with the ortisonto cteote lwenty of the speciollydesigned bowls for use in itsbusiness, at a price of $800, wouldthe controct have to be in writing tobe enforceoble? Why or why not?(AP PhotofliVide World Photos)

in the writing, however. All other terms can be proved in court by oral testimony. For leases,the writing must reasonably identift and describe the goods leased and the iease term.

Special Rules for Contracts between Merchants Once again, the UCC provides a spe-cial rule for merchants.l0 Merchants can satisfy the requirements of a writing for theStatute of Frauds if, after the parties have agreed orally, one of the merchants sends asigned written confirmation to the other merchant. The communication must indicatethe terms of the agreement, and the merchant receiving the confirmation must have rea-son to know of its contents. Unless the merchant who receives the confirmation gives writ-ten notice of objection to its contents within ten days after receipt, the writing is sufficientagainst the receiving merchant, even tl'rough she or l-re has not signed anything IUCC2-20t(2)1.

lrExAMptFrsr?-l Alfonso is a merchant-buyer in Cleveland. He contracts over the tele-phone to purchase $6,000 worth of spare aircraft parts from Goldstein, a merchant-sellerin New York City. Two days later, Goldstein sends a written confirmation detailing theterms of the oral contract, and Alfonso subsequently receives it. If Alfonso does not notif,Goldstein in writing of his objection to the contents of the confirmation within ten daysof receipt. Alfonso cannot raise the Statute of Frauds as a defense against the enforcementofthe oral contract. E

Note that the written confirmation need not be a traditional paper document with ahandwritten signature. Courts have held that an e-mail confirming the order and includ-ing the company's typed name was sufficient to satisfu the UCC's Statute of Frauds. Fora discussion of a case involving this issue, see this chapter's Adapting the Law to theO nline Env ironment fearure.

Exceptions In addition to the special rules for merchants, the UCC defines three excep-tions to the writing requirements of the Statute of Frauds. An oral contract for the sale ofgoods priced at $500 or more or the lease of goods involving total payments of $1,000 ormore will be enforceable despite the absence of a writing in the circumstances discussed inthe following subsections IUCC 2-201 (3),2h-201(4)]. These exceptions and other ways inwhich sales law differs from seneral contract law are summarized in Ihe Concebt Summaryon page 444.

Specially Manufactured Goods. An oral contract is enforceable if (1) it is forgoods that are specially manufactured for a particular buyer or specially manufac-tured or obtained for a particular lessee, (2) these goods are not suitable for resale orlease to others in the ordinary course of the seller's or lessor's business, and (3) theseller or lessor has substantially started to manufacture the goods or has made com-mitments for their manufacture or procurement. In this situation, once the seller orlessor has taken action, the buyer or lessee cannot repudiate the agreement claim-ing the Statute of Frauds as a defense.

IiExdMpiE tsJs-] Womach orders custom-made draperies for her new boutique.The price is $6,000, and the contract is oral. When the merchant-seller manufac-tures the draperies and tenders delivery to Womach, she refuses to pay for themeven though the iob has been completed on time. Womach claims that she is notliable because the contract was oral. Clearlv. if the unique stvle and color of the

10. Note that this rule applies only to sales (urder Article 2); theLe is no corresponding rule that applies to

leases (under Article 2A). According to the comments accompanying UCC 2A-201 (Article 2As Siatute of

Frauds), the "behveen merchants" provision was not included because "the number ofsuch transactions

involving leases, as opposed to sales, was thought to be modest."

lt I alty colltr:rcts requlre aful l ' . . . , , . - ,1

_ji:l \\ntrng to sailsn ilre

Statute of Fraucls. As morc-rnd nlore contracts :rre:r.gotiated orally or through;-rnai1, the question arises-,. kr u'hether e-m:lil coln-::runications c:rn ftrlfill the'.,, riting require rnent. 'fhis

:))ue \\,as at the heart of a case involving a tcxtile uercherttdis-,irg colnp:rny and its supplier.

Was There an Enforceable Contract?

Blzlk International Corporatior"t contt:tcted to btly ntllrerotls

:;.rirs of jcans frorn 'lhrr:rnt Apparel Group for a total price

'f arouncl !12 million. After a series of clisptrtcs bctwccr.r thc

-onrpanies, ' l i rrrant solcl the je:rns to a thircl party at a l i igher

:-.r ice. Bazak sue cl for breacl.r cl f cotrtract. ' farrant claime cl that

:hc contract was not enforceable l tecaltse there rvas no signecl' . , . r i t ing.

.\lthough the parties never clrerv up :r r.vritten contr;rct,:hcr did engage in a series of e-mail traustnissiotrs. l tr oue,Blzak provicled detai ls ofthe purchase ancl attachecl a letterrrr its orvu colnpuurv stationery. Bazak clairnecl that this:-nrail constitrrtccl r written cotrfirmation that satisficcl the:tatute of Frar-rds. ' larrant dis:rgrccd, arguittg that (I)bec:iuse

-,n c-mail tr :ursrrr issior.t is electronic, i t cannot qual i fy as a'.rnttcn confirrnatiorr of the agreenrent; (Z) thc c-nai l rvas trot

-r u rittcn urenrorandum bctu'een nrerch:rnts bec:rttse it u,:ts:rot signccl; ancl (3) using c-rr iai l rvas uot an appropriate:ncans of corrrmLrrr icat ion in thc apparel inclustrv.

The Court Rules in Favor of E-Mail Communications

I hc court r-uled ag:rinst all of '[hn:rnt's argurnents. Evcttihough the e-nrails rvere "intangible nressages," they still qu:rli-lrccl as writings. 'l'he coitrt pointecl out that f:rres, telexes, :rnd

445rfmIHE FORIVIATION OFSALES AND LEASE CONTRACTS

telegr:uls arc all ir-rtangible fornrs of cotntmtnication whilethey arc bcing transrnittecl. \Mrether :rn e-nail is printecl onpapcr or savecl ol :l server, it remains ":rn objectively obseru-ablc ancl taneible recorcl that sr.rch a conlirnatiou exists."Additionally, a signecl writ ing cloes not necessarily lnean apiece of papcr to rvl-ricl i a signature is physically appliecl. Inthis case, thc c-rnail attaclirnent, consisting oFa ietter oncomp:ury letterhead with the conrpany prcsident's typecl"signature," was sufficient. Finally, statir-rg that e-mail was at-tinappropriate rnethod of cornmurrication meant veLy little .'lbrrant r'r'ould l.rave to prove that the parties' prior courseof clealing and tracle usage in tl.re apparel inclrstry rarelyinvolved e-rnails. T'he court found that there was evidenceto tl.re contrary.a

hrclcecl, a conrt in a subsequent case involving the apparelinclustry applied the sarne re:rsonir-rg to allow a breach of cot.t-tract clairn to so forw:ud basecl on :rn e-mail coufiruration.Great White Bear, LLC, a clothing rnaker, alleged thatMervyns, LLC, had agr:eecl to purchirse $l1.7 nri l l ion inclothir-rg from the cornpany. After placing only Xi2.3 rnil l ionin orclers, Mervyns inforr.necl Great White Bear that it woulclnot place zrny nlore orders. Great White Bear fi lecl a lawsuit,clainring that an e-niail confirmation between the two uer-charts u'as sLrfficicnt to satisft the Statute of F'ratrds. 'fhe

court agreed, noting that "thcrc ale ro rigicl recluiretrents asto the f6rm or contJnt of ir cor.rfirutittorv ivritins."b

{ , : l : l l . : \

WHS F0R CRITICAt ANAIYSIS ArethereonytradesWJ.c$ or industries in todoy's environment for whiche-moil confirmotion would be inoppropriote? Explain.

a. Bozak lnternotional Corp. v. Toffant Apporel Group, 378 F.SuPp.2d

377 (S.D.N.Y 200s).

b. Great White Beor, LLC v. Mervyns, LLC, -F.Supp.2d -,2oo7 WL

129s747 (S"D.N.Y 2oo7).

dni,,|. tl.l

-:,rperics make it irrrprob:rble that thc scllcr can find anotlier btrr,er, Wom:rch is l iablc to. c sellcr. Note that thc seller urust har,c rnaclc a sr.ibstaritial beginning in tlanufactr.iring. .c sltecialized item prior to the buver's repucliation. (Herc, the nranufircture w:rs con-: eted.) Of cor-rrse, t l ic court rnust sti l l bc convinced by evidence of the ter-rns of i lrc oral

- ' l t l t ract . le l

\dmissions. An oral contract for thc sale or leasc of goods is enforceable if thc par\,,,gainst rvhom enforcement of the contract is sought admits in pleaclirrgs, testimonv, or,iher court proceedir-rgs that a contract for sale ."l'as rliade. h-r this situatiott, the contr:rct

'. ill be enforceabie even thor-rgh it r,vas oral, but enforceabilih will be limitecl to tl're quan-

.rh of soods admitted.

444 tlNilillflf,SALES AND LEASE CONTRACTS

Conlract Te rms

Accepla nre

(onlraclModif icat ion

lrrevocable Offers

Statute of FraudsRequirements

nHfifffiFT:nn An admission canbe made in documents, includinginternal memos and employeereports, that may be obtainedduring discovery prior to trial.

Maior Differences between Contract Law and Sales law

CONTRACT tAW

Contract must contain all material terms.

Mirror image rule applies. lf additionalterms are added in acceptance,counteroffer is created.

Modification requires consideration.

Option contracts (with consideration).

All material terms must be included in thewriting.

SALES tAW

Open terms are acceptable, if parties intendedto form a contract, but the contract is notenforceable beyond quantity term.

Additional terms will not negate acceptanceunless acceptance is made expressly conditionalon assent to the additional terms.

Modification does not require consideration.

Merchants' firm offers (without consideration).

Writing is required only for the sale of goodsof $500 or more, but contract is not enforceablebeyond quantity specified. Merchants cansatisfy the requirement by a confirmatorymemorandum evidencing their agreement.

Exceptions:l. Specially manufactured goods.2. Admissions by party against whom

enforcement is sought.3. Partial performance.

lffiExAMplE l&19-l Lane ancl Byror"r negoti:rte :rn agrcenent over the telcphone. Duringthe negotiations, f,erne requests a clelivery price for five hunclrecl gallons of gasoline and asep:rratc price for seven hunclred gallons of garsoline. Byror replies that the price woulclbe the s:rrne, $3.50 per gallon. L:rne orally orclers fivc hunclred gallons. Byron honestlybelieves that L:rne orclerecl seven hunclrecl gallons ancl ter-rclers thert arrount. Lzrne refusesthe shipnent of seven hunclrecl gallons, ancl Byron sues for breach. In his pleaclings ancltestimorry, Lzrne adnits that an oral conh:rct was rrercle, but only for five hurclrecl gallons.Bec:ruse Lane achnits the existence of the or:rl contract, Lane cannot plead the Statute ofFrauds as a defense. 'fhe contract is enforce:rble, howevcr, only to the extent of the quan-tity aclnrittecl (five hundred gallons). @

Partial Performance. An or:rl contract for the sale or leasc of goods is enforceable i[ pay-nrent has been made ancl accepted or goocls have been receivecl arrcl acceptecl. ' l 'his is the"partial performance" exception. The oral contract will be enforcecl at least to the exter-rttlrat perforrnance actualllt took place.

trEXAMPl-l tB,rEAllan orally contracts to lease to Opus Enterprises a thor,rsand chairs at

$2 each to be used dr,rring a one-day concert. Before delivery, Opus sends Allan a checkfor $1,000, which Allan cashes. Later, when Ailan aitenpts to deliver the chairs, Optrsreftrses deiivery, claiming the St:rtute of Frar-rds as :r clefense , and demands the return ofits $1,000. Under the UCC's partial perfonrance rr-rle, Allan can enforce the oral contractby ter-rder of delivery of five hundrecl chairs for the $1,000 accepteci. Simiiarly, if Opushad made no paynent but hacl acceptecl tl-ie delivery of five hundred chairs from Allan,the oral contract wouid have been enforceable against Opus for $ 1,000, the lease payrnentdue for ihe five hundred chairs delivered. @

Parol EvidenceIf the parties intendecl the terms set forth in the contract as a complcte and fir-ial expres-sior-r of their agreen-ient, then the terrls of tl-rc contract cannot be contradicted by evi-dence of any prior agreements or contemporaneous oral agrecnients. As discr-rssed inChapter 13, this principle of law is known tts Ihc parol evidence rule.If , howevet, the writ-ing contains only sorne of the terrns that the parties agreecl on ancl not others, then thecontract is r-iot ftrlly integratecl.

When a court finds that the terms of tlie agreerncnt are not fully integrated, then thcconrt nay allow eviclence of consistent additional tenns to cxplain or supplement theternrs stated in thc contract. ' l ' l- ie court rn:ry also :rl low the parties to submit eviclertce ofcourse of dealing, tLsage of trade, and course of performance when the contract was clnlypartially ir-rtegrated ILICC 2-202, 2A-202). A court will not under any crrcumstalrcesallow the parties to subrnit evidence that coltradicts thc stated terms (this is aiso the rulc

under tl-re coinll lon law of contracts).

Course of Dealing and Usage of liade Undcr tlic UCC, the rle:rniug of :l.ry agree-nrent, evidencecl by the languergc of the parrties and by tlreir actions, must be interpretedin l ight of conrnrercial pr:rcticcs and other surrouncling circumst:rnces. hr interpreting aconrmercial agreeureut, the court wil l assuu.re that the corlrse of prior clcaling betweenthe parties ancl the ger.rererl usagc of tracle were taken into accouut when the agreen.rentrras ohrasecl.

A course of dealing is a secprence of previotrs actions and communications bctweenthe parties to a particul:rr tr:rnsaction that establishes a comr-non basis for their ttncler-stancling IUCC 1-205(l)l A course of clealing is restricted to the secprence of concluctbetrveen the partics in their transactiotrs previotrs to the agreement.

Usage of trade is defined as ary practice or rnethocl of dealing having such rcgularityoi observance in a place, vocation, or tr:rde as to justify :ru expect:rtion tl-rat it will beobservecl with respect to tl ie trar.rs;rction in question IUCC 1-205(2)1.' l 'he express termsof au agreenent and an applicable course of dealing or r.rsage of traclc wil l be cotrstruedto bc consistent with each other whenever reasonable. When such a construction is

tntedsondble, howevcr, the express terrrts itr the agreernent rvil l prevail IUCC 1-205(4) l.

Course of Performance A course of performance is tl-re concluct that occurs under theterms of a particular agreement. Presurnably, tire parties thernselves know best what theynreant by their worcls, and the collrse of pcrforrnance actually undertaken uncler their

agreement is the bcst indication of what they rneant IUCC 2-208(l), 2A-207(l)1.

t rExA-MptE rB:t l f urrsorr 's Lrrrnber Corrrparr i corr t r r rcts wi l l r Bar lyrnole to scl l Barryt t tore

a specified number of "two-by-fours." Tlie lun'rber in fact does not measllreI ir-rches by'{ inches but rat}rer iZ inches by 3% inches. fanson's agrees to deliver the lum-

ber in five deliveries, and Barryn-rore, without objection, accepts the lurnber in the first three

deliveries. On the fourth delivery, however, Barrymore objects that the hvo-by-for-rrs do not

measllre 2 inches by 4 inches. The course of perforrnance in this transactiot't-that is, thetact that Barryrnore acceptecl three deliveries without objection under the agreement-isrelevant in detern'rinimg that here the ternt two-by-four actually means " l% by 7/.." Janson'scan also prove that two-by-fours need not be exactly 2 inches by 4 ir-rcl'res by applying usage

oi trade, course of prior dealir-rg, or both. Janson's can, for example, show that in previouskansactions, Barryn-iore took I%-by-7]Linch lumber witl-rout objection. In addition, fanson'scan shorv that in the h-rmber trade, hvo-by-fours are commonly lZ inches by 3% incl-ies. E

Rules of Construction The UCC provicles rules of constnLction for interpreting con-

tracts. Erpress terms, course of perforrnance, collrse of dealing, and usage of tracle are to

445 EIEHUTHE FORMATION OFSALES AND LEASE CONTRACTS

COURSE OF DEATINGPrior conduct betuveen the partiesto a contract that establishes acommon basis for theirunderstanding.

USAGE OF TRADEAny practice or method of deal inghaving such regularity of observancein a place, vocation, or trade as tojustify an expectation that it will beobserved with resDect to thetransaction in question.

€OURSE OF PERFORMANCEThe conduct that occurs under theterms of a particular agreement.Such conduct indicates what theparties to an agreement intended itto mean.

446mtr@SATES AND LEASE CONTRACTS

fonm v, $fat

be construed together when they do not contradict one another' When such a coustrttc-

tion is unreasorr"rbl", however, tle following order of priority controls: (l) express terms'

(2) course of p"rfor-", ' tce, (3jcourse of dell i"g, andl+1 usage of trade IUCC l-205(4)'

z-2o\(z),2A-207 (Z)1.

U n consciona bi l i tYAs discussed in Chapter l l , an unconscionable contract is one that is so unfair and one

sidecl that it woulcl be unreasonable to enforce it. The UCC allows the cor-rrt to evaluate

a contract or any clause in a contract, and if the court deems it to have been uncon-

scior-rable at tl're time it was made, the court can (l) refuse to enforce the contract'

(2) enforce the remaincler of the contract without the unconscionable clause, or (3) I imit

the applicatio,'r of ,rry unconscionable clauses to avoid an unconscionable result f UCC

2-302,2A-l0B]. The following lanchnark case illustrates an early application of the

UCCk ttnconscionabil i$ provisions'

Credit Corp,

m**nffiilt*nf,tr$filff;t*tt

Suoreme Court of New YorK Nassau County, 59 Misc 2d 189, 298 N'Y'S'2d 264 (1969)'

sixth century Roman civil low allowed the courts to rescind o

controct if the morket volue of the goods that were the subiect

of the contract equaled less thqn holf the controd price' This

same ratio hos oppeared over the last forty yeors in many

cases in which courts hove found contract clauses to be

unconscionable under UCC 2-302 on the ground thotthe price

wos excessive. Most of the litigonts who hove used UCC 2-302

successfully hove been consumers who were poor or othervvise

ot a disodvontage. In a Connecticut case, for example, the

court held thot a controct requiring o person who was poor to

make poyments totaling $l ,248 for o television set thot

retoiled for $499 wos unconscionoble.a The seller hod not told

the buyer the full purchose price' ln a New York cose, the court

a. Murphy v. McNomaro,36 Conn'Supp' 183, 416 A'2d 17o (1979)'

HISTORICAT ANDECONOMIC SETTING rn the

hetd thot a controct requiring o Spanish-speoking consumer to

moke poyments totoling neorly $l ,l50 for o freezer thot

wholesoled for less thon $350 wos unconscionoble'b rhe

controct was in English, and the solesperson did not tronslote

or exploin it"

BACKGROUND AND FACTS rhe Joneses, the plainti f fs,

agreed to purchase a freezer for $900 as the result of a

,i lurp"rron't visit to their home. Tax and financing charges

raised the total price to $1,439.69' At trial, the freezer was

found to have a maximum retail value of approximately $300'

The plaintiffs, who had made payments totaling $619'88'

brought a suit in a New York state court to have the purchase

contract declared unconscionable under the UCC'

b. Frostifresh Corp. v. Reynoso, 52 Misc'2d 26,274 N'Y's2d 757 (1966);

rev'd on issue of damages, 54 Misc.2d 119, 281 N'Y'S'2d 946 (1967)'

lN THE WORDS 0F THE COURT . . . so/ wAcHrLER, rust ice'

I i I ;r..a," ttZ-3[Zof the UCC] authorizes the court to find, as a matter of law, that

a contract or a clause of a contract was "urrconscionable at the time it was t-t-rade," and

*por so fi,-r,tir-rg the court n-ray refuse to enforce the contract, excise tl-re objectionable

clause or fi-ii ifr" ,pplication of the cla.se to avoicl an unconscionable result' * * *

****,. x * The question which preser-rts itself is whether ot not, under the circumstances

of this case, the sale of a freezlr unit having a retail value of $100 for $900 ($1,439'69

inclucling credit charges ancl $lB sales tax) iiunconscionable as a matter of law' * * *

* * * The nratfieriratical clisparity behveen $300, which presumably includes a reason-

able profit margir-r, ancl $900, which is exorbitant on its face, carries the greatest weight'

CASE 18.3-Cont inued

Credit cl'rarges alone exceed by rnore than $ 100 the retail value of the freezer. * x x The'. e n limited fir-rancial resolrrces of the purcl-raser, known to the sellers at the time of the

.ale. is entit lecl to weight ir-r the balanc". x x x

* * * The defendant has already been amply compensated. In accordance with the

:tatute, the application of the payment provision should be lir-r-ritecl to amourtts already

:.lid by the plaintiffs and the contract be reforrned and amended by changing the pay-

:rents called for tl-rerein to equal the amount of payn-rer-rt actually so paicl by the plaintiffs.

DECISI0N AND REMEDY rne court held that thecontract was not enforceable and reformed the contract sothat no further payments were required.

447 ElMmtrTHE FORMATION OFSALES AND LEASE CONTRACTS

unconscionoble-an opproach thot focuses on "excessive" priceond unequol borgaining power.

RELEVANT WEB SITES To |ocote informotion on the web

ltt IMPACT 0F THIS CASE 0N T0DAY'S tAW concerning fhe Jones v. star credit corp. decision, go to thisf'fo;! fnis eorly cose illustrotes the opprooch thot mony text's Web sife of www.cengage.(om/blaqblt, seled "Chopter

courts todoy toke when deciding whether o soles controct is | 8," ond then click on "lJRLs for Londmorks!'

@

Intemation:rl sales contracts between firrrs or ir-rdivicluals locertecl in different cottutries

rre governecl by the l9B0 United Nations Convetrtiotr on Contracts for the International

Sale of Goocls (CISG).'fhe CISG govems intenrational contracts only if the cottntries of

the parties to the contract have ratified the CISG ancl if the parties have not agreed that

.onre other law will govern their contract. As of 2009, the CISG had been aclopted by

:clenty conntries, inch,rding the Unitecl States, Canada, Mexico, some Central and South

.\nrerican countries, and r-nost Er:ropean nations. This means that tl-re CISG is the ur-ri-

rcrrr internatior-ral sales law of countries accountinq for tnore than two-thirds of all global

irade.

Appl icabi l i ty of the ( lSG

Essentially, the CISG is to international sales contracts what Article 2 of the UCC is to

domestic sales contracts. As discussecl in this chapter, in domestic transactions the UCC

applies when the parties to a contract for a sale of goods have failed to specifu in writing

sone important term concerning price, delivery, or the like. Similarly, whenever the par-

ties sr-rb ject to the CISG I'rave failed to specifu in writing tl-re precise terms of a contract for

the international sale of goods, the CISG will be applied. Unlike the UCC, the CISC does

not apply to consumer sales, and neiiher the UCC nor the CISG applies to contracts for

services.Businesspersons must take special care when drafting international sales contrach to avoid

problems caused by distance, inch-rdir-rg language differences and varying national laws. The

fold-or-rt exhibit located within this chapter shows an actual international sales conhact used

br.starbucks Coffee Con'rpany. The fold-or,rt illustrates many of the special terms and clauses

that are fpically contained in international contracts for the sale of goods. Annotations in the

fblcl-out exhibit explain tl-re meaning and significance of specific clauses in the contract. (See

Chapter 46 for a discussion of otl-rer laws that frame global business trar-rsactions.)

ffiThe full text of the CISG isavailable online at the PaceUniversity School ol Larn/s Institute oflnternational Commercial Law. Go to

448 EiIi!@SALES AND TEASE CONTRACTS

To read an in-depth articlecomparing the provisions ofthe CISC and the UCC, go to

Oberman.htnl.

Suppose that the owner of thisfoctory, a IJ.S. firm, offers to sell oGermon compony o certoin numberof boxes for a set price. The parties

discuss the offer on the phone, ondthe U.S. firm orally ogrees to keepthe offer open for o period of timebut foils to send written ossurancesof the offer. Would the offer berevocoble under the UCC? Wouldit be revocoble under the CISG?Exploin the different opprooches.(Courtesy of Semo Box Company)

A Comparison of CISG and UCC Provis ionsThe provisions of the CISG, although similar for the most part to those of the UCC, differ

frorn them in certain respects. We have already mentioned some of these differences. In the

l)eyond Our Borders feature in Chapter I 3 on page 77), for exampie, we pointed out that the

CISG does not include any Statr-rte of Frauds provisions. Under Article 1l of the CISG, an

international sales contract does not need to be evidenced by a writing or to be in any partic-

ular form.We look here at soine differences between the UCC and the CISC with respect to con-

tract formation. In tl-re following chapters, we will continue to point out diflerences

between the CISG and the UCC as they relate to the topics covered. These topics

include risk of loss, performance, remedics, and lvarranties.

Offers Son're differences betrveen the UCC and the CISG have to do with offers. For

instance, the UCC provides that a merclrant's firrn offer is irrevocable, even without consid-

eration, if the rnerchant gives assurances in a signed writing. In contrast, under the CISC, an

offer can become irrcvocable withouta signed writing. futicle 16(2) of the CISG provides

that an offer will be irrevocable if thc rnerchant-offeror simply states orally that the offer is

irrevocable or iftlie offeree reasonably rclics on the offer as being irrevocable. In both ofthese

situations, tl-re offer will be irrevocablc cvcn rvithout a writing and without consideration.Anothcr difference is that, ur-icler the UCC, if thc price term is left open, the court wil i

cletermine "a rcasonable price at the tirne for clelivery" |UCC Z-li l5(l)1. Under the

CISG, however, thc price term niust be specified, or at least provisions for its specifica-

tion must be included in the agreernent; othcrwise, norrnally no contretct wil l exist.

Acceptances L,ike tlCC 2-207, the CISG provides tl'rat a contract can be formed evetrthough the acceptarrcc contains aclclitional terms, unless the :rclclitional terms

materially alter tlie coutract. Under the CISG, however, the clefinition of a"rnaterial alteration" inclucles virtually any change in the ternrs. If an aclclitionalterin relates to paymcnt, quality, c1u:rntity, price, title anci place of clelivery,extcnt of onc party's liability to the other, or the settlernent of clisputes, the CISCconsiciers the acldecl term a "material alteration." In effect, then, thc CISCrequires thert the terns of the acceptance mirror those of the offer.

Additionally, uncler the UCC, an acceptance is effective on dispatch. Underthe CISC], however, a contract is not created unti l the offeror receives the

acccpt:rnce. (The offer bccornes irrevocable, however, whcr.r the acceptattce ts

sent.) Also, in contrast to thc UCC, the CISG provides that acceptance by per-forrnance does not requirc that tl-re offeror be notified of the perforrrance .

The Formation of Sales and lease Contracts

Guy Holcomb ownsand operates OasisGoodtime Emporium,an adult entertainmentestablishment.

Holcomb wanted to create an adult Internet system for Oasisthat would offer customers adult theme videos and "[ive" chatroom programs using performers at the club. On May 10,Holcomb signed a work order authorizing Crossroads

Consulting Group (CCG) "to deliver a working prototype of acustomer chat system, demonstrating the integration of livevideo and chatting in a Web browser." In exchange for creatingthe prototype, Holcomb agreed to pay CCG $64,697. On May20, Holcomb signed an additional work order in the amount of

912,943 for CCG to install a customized firewall system. Thework orders stated that Holcomb would make monthlyinstallment payments to CCC, and both parties expected thework would be finished by September. Due to unforeseen

:'roblems largely attributable to system configuration and:c#tlvare incompatibility, completion of the project required-ore time than anticipated. By the end of the summer, thertreb site was sti l l not ready, and Holcomb had fallen behind in:e payments to CCG. CCG was threatening to cease work and

'e a suit for breach of contract unless the bil l was paid. Rather:an make further payments, Holcomb wanted to abandon thelrreb site project. Using the information presented in the:dpter, answer the following questions.

| [ l 'ould a court be l ikely to decide that the transactionbetween Holcomb and CCG was covered by the UniformCommercial Code (UCC)? Why or why not?

449 EIIEEtrI|ttrtrtf^Hlll^trtftr**.

2 Would a court be l ikely to consider Holcomb a merchantunder the UCC? Why or why not?

5 Did the parties have a valid contract under the UCC? Explain.

4 Suppose that Holcomb and CCC meet in October in anattempt to resolve their problems. At that t ime, the partiesreach an oral agreement that CCG will continue to workwithout demanding full payment of the past-due amountsand Holcomb will pay CCC $5,000 per week. Assuming thatthe contract falls under the UCC, is the oral agreementenforceable? Whv or whv not?

(ourse of deal ing 445course of performance 445firm offer 456ietangible Woperty 427ilcase q52

lcase agreement 452

Iessee 452lessor 452merchant 452output contract 455predominant-factor test 429requirements contract 455

sale 427sales contracl 427seasonably 457tangible property 427usage of t rade ++s

The Scope of the UCC(See pages 426-427.)

ffte Scopeof Articfe 2-Sales(See pages 427-452.)

fhe Scopeof Article 2A-Leases(See pages 432-433.)

Offer and Acceptance(See pages 433-440.)

The UCC attempts to provide a consistent uniform, and integrated framework of rules to dealwith all phases ordinarily orising in a commercial sales or lease transadion, including contractformation, passage of title and risk of loss, performance, remedies, payment for goods,warehoused goods, and secured transactions.

Article 2 governs contracts for the sale of goods (tangible, movable personal property). Thecommon law of contracts also applies to sales contracts to the extent that the common law hasnot been modified by the UCC. lf there is a conflict between a common law rule and the UCC,the UCC controls.

Article 2A governs contracts for the lease of goods. Except that it applies to leases, instead ofsales, of goods, Article 24 is essentially a repetition of Article 2 and varies only to reflectdifferences behneen sales and lease transactions.

1. Offer-

a. Not all terms have to be included for a contract to be formed (only the subject matter andquantity term must be specified).

b. The price does not have to be included for a contrad to be formed.

c. Particulars of performance can be left open.

d. A written and signed offer by a merchant, covering a period of three months or less, isirrevocable without payment of consideration.

2. Acceptonce-

a. Acceptance may be made by any reasonable means of communication; it is effective whendispatched.

(Continued)

450MiI@SATES AND LEASE CONTRACTS

Offer and Acceptance-Continued

Consideration(See page 441.)

Requirements underthe'statute of Frauds(See pages 441-444.)

Parol Evidence Rule(See pages 445*446.)

Unconscionability(See pages 446-447.)

Contracts for thelnternational Saleof Goods(See pages 447-448.)

b. An offer can be accepted by a promise to ship or by prompt shipment of conforming goods,

or by prompt shipment of nonconforming goods if not accompanied by a notice of

accommodation.

c. Acceptance by performance requires notice within a reasonable time; otherwise, the offer

can be treated as lapsed.

d. A definite expression of acceptance creates a contract even if the terms of the acceptancevary from those of the offer, unless the varied terms in the acceptance are expresslyconditioned on the offeror's assent to those terms.

A modification of a contract for the sale of goods does not require consideration.

L All contracts for the sale of goods priced at g500 or more must be in writing. A writing is sufficient

as long as it indicates a contract between the parties and is signed by the party against whomenforcement is sought. A contract is not enforceable beyond the quantity shown in the writing'

2. When written confirmation of an oral contract between merchanb is not objected to in writing

by the receiver within ten days, the contract is enforceable.

3. Exceptions to the requirement of a writing exist in the following situations:

a. When the oral contract is for specially manufactured goods not suitable for resale to others,and the seller has substantially started to manufacture the goods.

b. When the defendant admits in pleadings, testimony, or other court proceedings that an oral

contract for the sale of goods was made. ln this case, the contract will be enforceable to theextent of the quanti$ of goods admitted.

c. The oral agreement will be enforceable to the extent that payment has been received and

accepted by the seller or to the extent that the goods have been received and accepted by

the buyer.

L The terms of a clearly and completely worded written contract cannot be contradicted by

evidence of prior agreements or contemPoraneous oral agreements.

2. Evidence is admissible to clarify the terms of a writing in the following situations:

a. lf the contract terms are ambiguous.

b. lf evidence of course of dealing, usage of trade, or course of performance is necessary to

learn or to clarify the intentions of the parties to the contract.

An unconscionable contract is one that is so unfair and one sided that it would be unreasonableto enforce it. lf the court deems a contract to have been unconscionable at the time it was made,the court can (l) refuse to enforce the contract, (2) refuse to enforce the unconscionable clauseof the contract, or (3) limit the application of any unconscionable clauses to avoid anunconscionable result.

lnternational sales contracts are governed by the United Nations Convention on Contracts for the

International Sale of Coods (CISC)-if the countries of the parties to the contract have ratified the

CISC (and if the parties have not agreed that some other law will govern their contract).Essentially, the CISG is to international sales contracts what Article 2 of the UCC is to domesticsales coniracts. Whenever parties who are subject to the CISG have failed to specify in writing theprecise terms of a contract for the international sale of goods, the CISG will be applied.