Part Four: Sales
CONTENTS
Chapter 21 Introduction to Sales and Leases
Chapter 22 Performance
Chapter 23 Transfer of Title and Risk of Loss
Chapter 24 Products Liability: Warranties and Strict Liability in Tort
Chapter 25 Sales Remedies
ETHICS QUESTIONS RAISED IN THIS PART
1. The Code establishes two overriding regulatory requirements on all sales transactions–unconscionability
and good faith. If you were redrafting the Code, how would you define “unconscionability” and “good
faith?”
2. The Code establishes a minimum level of quality when it states in the warranty of merchantability that
goods must be “merchantable,” or “fit for the ordinary purpose intended and of fair, average quality.” Is this
a reasonable minimum level of quality and safety? Is it necessary?
3. The UCC does not require that a contract for the sale of goods be “fair.” Should the Code require that a
contract be fair, or would this unnecessarily derogate the principle of freedom of contract?
4. Under the UCC merchants are held to a higher standard than nonmerchants. Why does the Code do this? Is
it fair to require a higher standard of merchants than of nonmerchants? Should additional protections be
given to nonmerchants under the Code?
5. The Code modifies general contract law by making it easier to form a contract. It has explicitly adopted the
policy of permitting the parties to use “open terms.” Does this make sense? Why?
6. Standardized contracts are widely used, especially by businesses that deal with a large number of
consumers daily. Do the Code provisions on unconscionability serve any useful purpose in this context?
Explain.
ACTIVITIES AND RESEARCH PROBLEMS
1. Look up the warranty of merchantability provision in the version of UCC 2-318 adopted in your state.
Which version of the privity requirements has your state adopted? Check the case law decided under the
provision to determine how your courts have interpreted the privity requirements.
2. UCC 2-302 states that a court can as a matter of law find a contract or any clause unconscionable, but the
term “unconscionable” is not defined in the Code. Research how the courts in your state have interpreted
the term. What types of contracts or contract terms are considered to be “unconscionable” in your state?
3. Research decisions under 2-314 (warranty or merchantability) and find what types of products have been
found to have breached the warranty of merchantability in your region of the country.
4. There have been attempts recently to have a federal statute for products liability. Research some of the
proposals that have been made and analyze the impact they would have upon the Code provisions.
Chapter 21
INTRODUCTION TO SALES AND LEASES
I. Nature of Sales and Leases
A. Definitions
1. Goods
2. Sale
3. Lease
a. Consumer Leases
b. Finance Leases
4. Governing Law
5. CISG
B. Fundamental Principles of Article 2 and
Article 2A
1. Good Faith
2. Unconscionability
3. Expansion of Commercial Practices
4. Sales By and Between Merchants
5. Liberal Administration of Remedies
6. Freedom of Contract
7. Validation and Preservation of
Sales Contracts
II. Formation of Sales and Lease Contracts
A. Manifestation of Mutual Assent
1. Definiteness of an Offer
a. Open Price
b. Open Delivery
c. Open Quantity: Output and
Requirement Contracts
d. Other Open Terms
2. Irrevocable Offers
3. Variant Acceptances
4. Manner of Acceptance
5. Auctions
B. Consideration
C. Form of the Contract
1. Statute of Frauds
a. Modification of Contracts
b. Writings or Record
c. Exceptions
2. Parol Evidence
Cases in This Chapter
Carter v. Tokai Financial Services, Inc.
Pittsley v. Houser
DJ Coleman, Inc. v. Nufarm Americas, Inc.
Commerce & Industry Insurance Co. v. Bayer Corp.
Chapter Outcomes
After reading and studying this chapter, the student should be able to:
Distinguish a sale from a lease and describe the governing law for both.
Identify and explain the fundamental principles of Article 2 and Article 2A
of the Uniform Commercial Code (UCC).
Compare and contrast the manifestation of mutual assent under both the
common law and under Article 2.
TEACHING NOTES
I. NATURE OF SALES AND LEASES
Sales law had its beginning in the United States with the codi%cation of pertinent
common law principles in the Uniform Sales Act in 1906. A new uniform act was
written in 1951 and is the basis for Article 2 of the Uniform Commercial Code as
we know it today. Amendments to Article 2 and 2A were promulgated in 2003
to accommodate electronic commerce and to re-ect development of business
practices, changes in other law, and interpretive di/culties of practical
signiticance. Because no States had adopted them and prospects for enactment
in the near future were bleak, the 2003 amendments to UCC Articles 2 and 2A
were withdrawn in 2011. However, at least forty-three States have adopted the
2001 Revisions to Article 1, which applies to all of the articles of the Code.
NOTE: See Figure 21-1
*** Chapter Outcome ***
Distinguish a sale from a lease and describe the governing law for both.
A. DEFINITIONS
A sales transaction consists of transferring title of goods for a price by an owner
to the buyer.
Goods
“Goods” are de%ned as movable, tangible, personal property.
Sale
Sales transactions are governed by Article 2 of the Code; general contract law
continues to apply where the code has not specifically modi%ed the law.
General contract law also continues to govern all contracts outside the scope of
the Code, including employment contracts, service contracts, insurance
Lease
A lease is defined as a “transfer of rights to possession and use of goods for a
term in return for consideration, but… retention or creation of a security interest
is not a lease.” UCC 2A, 103(1)(j). In nonlease transactions where title in the
goods is transferred but a security interest attaches to the goods (e.g., a
financed car purchase), Article 9 applies.
Consumer Leases – Article 2A carries over general Code principles, primarily
the prohibition against unconscionable provisions, to leases involving consumer
goods.
CASE 21-1
CARTER v. TOKAI FINANCIAL SERVICES, INC.
Court of Appeals of Georgia, 1998
231 Ga.App. 755, 500 S.E.2d 638
http://scholar.google.com/scholar_case?case=1919852511859232954&hl=en&as_sdt=2&as_vis=1&oi=scholarr
Blackburn, J.
Tokai Financial Services, Inc. brought suit against Randy P. Carter for monies owed under
Carter’s guaranty of a telephone equipment lease agreement. The trial court granted summary
judgment to Tokai, and Carter appeals.
* * *
On January 3, 1996, Tokai’s predecessor in interest, Mitel Financial, entered into a “Master
Equipment Lease Agreement” (Agreement) with Applied Radiological Control, Inc. (ARC) for
the lease of certain telephone equipment valued at $42,000. Carter personally guaranteed ARC’s
obligations under the Agreement. ARC made four rental payments and then defaulted on its
obligations as of June 1, 1996. Thereafter, Tokai repossessed the telephone equipment and sold it
for $5,900. * * * Tokai then brought this suit against Carter, and the trial court awarded Tokai
$56,765.74.
Carter contends, nonetheless, that the true intent of the parties was to enter into a security
agreement. “Whether a transaction creates a lease or security interest is determined by the facts
of each case; however, a transaction creates a security interest if the consideration the lessee is to
pay the lessor for the right to possession and use of the goods is an obligation for the term of the
lease not subject to termination by the lessee, and (a) [t]he original term of the lease is equal to or
greater than the remaining economic life of the goods, (b) [t]he lessee is bound to renew the lease
for the remaining economic life of the goods or is bound to become the owner of the goods, (c)
Furthermore, “it is commonly held that the ‘best test’ for determining the intent of an
agreement which provides for an option to buy is a comparison of the option price with the
market value of the equipment at the time the option is to be exercised. Such a comparison shows
whether the lessee is paying actual value acquiring the property at a substantially lower price. * *
* If, upon compliance with the terms of the ‘lease,’ the lessee has an option to become the owner
of the property for no additional or for a nominal consideration, the lease is deemed to be
intended for security. [Citations.] ARC was given the option to purchase the telephone equipment
* * *
“In Georgia, all lease contracts for ‘goods,’ including finance leases, first made or first
effective on or after July 1, 1993, are governed by Article 2A of the Uniform Commercial Code.”
[Citations.] The Agreement was entered into by the parties on January 3, 1996; therefore, it is
subject to Article 2A of the UCC. * * *
* * *
Judgment reversed.
Governing Law
The U.C.C. did not directly apply to lease transactions. To %ll this void, the Code
drafters approved Article 2A-Leases in 1987 and subsequently, in 1990,
amended the Article. South Dakota has enacted the 1987 version of Article 2A
while the District of Columbia and all the other states except Louisiana have
adopted the 1990 version
CISG
CISG — The United Nations Convention on Contract for the International Sale of
Goods (CISG), which has been rati%ed by the US and more than forty other
countries, governs all contracts for the international sales of goods between
parties located in di!erent nations that have rati%ed the CISG. This treaty
CASE 21-2
PITTSLEY v. HOUSER
Idaho Court of Appeals, 1994 875 P.2d 232
http://scholar.google.com/scholar_case?case=1225385276065420693&hl=en&as_sdt=2&as_vis=1&i=scholarr
Swanstrom, J.
[Jane Pittsley contracted with Donald Houser, who was doing business as Hilton Contract Co.
(Hilton), to install carpet in her home. The total contract price was $4,402. From this sum, Hilton
paid the installers $700 to put the carpet in Pittsley’s home. Following installation, Pittsley
complained to Hilton that the installation was defective in several respects. Hilton attempted to
fix the installation but was unable to satisfy Pittsley. Eventually, Pittsley refused any further
efforts to fix the carpet. She sued for rescission of the contract and return of the $3,500 she had
previously paid on the contract plus incidental damages. Hilton counterclaimed for the balance
due on the contract. The magistrate determined that the breach was not so material as to justify
The single question upon which this appeal depends is whether the UCC is applicable to the
subject transaction. If the underlying transaction involved the sale of “goods,” then the UCC
would apply. If the transaction did not involve goods, but rather was for services, then
application of the UCC would be erroneous.
The first line of authority, and the majority position, utilizes the “predominant factor” test.
The Ninth Circuit, applying the Idaho Uniform Commercial Code to the subject transaction,
restated the predominant factor test as:
The test for inclusion or exclusion is not whether they are mixed, but, granting that they are
mixed, whether their predominant factor, their thrust, their purpose, reasonably stated, is the
rendition of service, with goods incidentally involved (e.g., contract with artist for painting)
or is a transaction of sale, with labor incidentally involved (e.g., installation of a water heater
in a bathroom).
The second line of authority, which Hilton urges us to adopt, allows the contract to be
severed into different parts, applying the UCC to the goods involved in the contract, but not to
the nongoods involved, including services as well as other nongoods assets and property. Thus,
an action focusing on defects or problems with the goods themselves would be covered by the
UCC, while a suit based on the service provided or some other nongoods aspect would not be
covered by the UCC. * * *
We believe the predominant factor test is the more prudent rule. Severing contracts into
various parts, attempting to label each as goods or nongoods and applying different law to each
separate part clearly contravenes the UCC’s declared purpose “to simplify, clarify and modernize
the law governing commercial transactions.” §1-102(2)(a). As the Supreme Court of Tennessee
suggested in [citation], such a rule would, in many contexts, present “difficult and in some
instances insurmountable problems of proof in segregating assets and determining their
respective values at the time of the original contract and at the time of resale, in order to apply
two different measures of damages.”
*** Chapter Outcome ***
Identify and explain the fundamental principles of Article 2 and Article 2A
of the Uniform Commercial Code (UCC).
B. FUNDAMENTAL PRINCIPLES OF ARTICLE 2 & ARTICLE 2A
Leases of personal property are of great economic signiticance, yet the law
governing these transactions was previously patched together from the common
law of personal property, real estate leasing law, and the U.C.C. (Articles 2 and
9). No uni%ed or uniform statutory law governed leases of personal property for
most of the twentieth century.
To %ll this void, the drafters of the Code approved Article 2A—Leases in 1987 and
subsequently amended the Article in 1990. Article 2A is an attempt to codify in
one statute all the rules governing the leasing of personal property. Most states
have adopted one of these two versions of Article 2A.
Article 2 and Article 2A are intended to modernize, clarify, simplify and make
uniform the law of sales and leases while providing the -exibility to expand as
unforeseen and new circumstances demand. They are both based on the
following concepts:
Good Faith
All parties to a contract or duty under the Code are required to act honestly in
their dealings with others. Commercial standards may also be looked to as a
measure of whether conduct has met the good faith requirement in the case of
merchants.
Unconscionability
A contract or portion of a contract that is regarded as imposing an unfair burden
on one of the parties to the point that the court’s conscience is o!ended thereby
precluding enforcement. In such cases the court may refuse to enforce the
CASE 21-3
DJ COLEMAN, INC v. NUFARM AMERICAS, INC
United States District Court, North Dakota, 2010
693 F.Supp.2d 1055
http://scholar.google.com/scholar_case?case=17211902140509214621&q=DJ+COLEMAN,+INC+V.
+NUFARM+AMERICAS,+INC&hl=en&as_sdt=2,10
Hovland, J.
The plaintiff, DJ Coleman, Inc. (“DJ Coleman”), is a farm corporation that is incorporated in the
State of North Dakota and conducts farming operations in Burleigh County, North Dakota. DJ
Coleman’s principal, Clark Coleman, is responsible for DJ Coleman’s commercial farming
operations. Clark Coleman is a licensed pesticide purchaser and applicator. The defendant,
Nufarm Americas, Inc. (“Nufarm”), is an Illinois corporation. Between May 10, 2007 and May
Scoil®, and Asana®. Nufarm is the manufacturer of Assert® and the wholesale distributor to
United Agri Products, Inc. (“UAP”), the direct North Dakota retail seller to Clark Coleman.
Clark Coleman did not contact Nufarm for approval before tank mixing Assert®, Scoil®, and
Asana® in 2007. DJ Coleman alleges that Assert® caused severe damage to its 2007 sunflower
crop by producing stunted and deformed heads, and seeks economic and non-economic damages.
* * *
Nufarm contends that the Assert® label effectively limits any damages for breach of warranties to
either the purchase price or the replacement of the product. Section 41-02-94 of the North
Dakota Century Code permits the recovery of consequential damages for injury to property
proximately resulting from any breach of warranty. However, Section 41-02-98 of the North
* * *
The doctrine of unconscionability permits a court to “‘deny enforcement of a contract
because of procedural abuses arising out of the contract’s formation and substantive abuses
relating to the terms of the contract.’” [Citation.] The determination of whether a contractual
provision is unconscionable is a question of law. [Citation.] “The court is to look at the contract
from the perspective of the time it was entered into, without the benefit of hindsight. The
determination to be made is whether, under the circumstances presented in the particular
commercial setting, the terms of the agreement are so one-sided as to be unconscionable.”
[Citation.]
North Dakota law provides the Court with several options when a contract, or clause of a
contract, is found to be unconscionable:
1. If the court as a matter of law finds the contract or any clause of the contract to have been
unconscionable at the time it was made the court may refuse to enforce the contract, or it
N.D.C.C. § 41-02-19.
There is no North Dakota case that addresses whether a limitation of remedies provision is
unconscionable for injury resulting from the application of agricultural chemicals. * * *
* * *
Courts from other jurisdictions vary on whether a limitation of remedies provision is
unconscionable in the chemical agriculture business. * * *
(a) Procedural Unconscionability
“Procedural unconscionability focuses upon formation of the contract and fairness of the
bargaining process, including factors such as inequality of bargaining power, oppression, and
unfair surprise.” [Citation.] Courts are more likely to find unconscionability in consumer
transactions than in commercial transactions involving experienced parties [Citation.] “Courts’
general skepticism of unconscionability claims in purely commercial transactions stems from the
presumption that businessmen possess a greater degree of commercial understanding and
substantially stronger economic bargaining power than the ordinary consumer.” [Citation.]
Nevertheless, the North Dakota Supreme Court has stated:
[G]eneralizations are always subject to exceptions and categorization is rarely an adequate
substitution for analysis. With increasing frequency, courts have begun to recognize that
* * * It is undisputed that DJ Coleman had no bargaining power to alter the language of the
limitation of remedies provision. The limitation of remedies provision contained on the Assert®
label was pre-printed and was not negotiated. There is a substantial inequality in bargaining
power between DJ Coleman and Nufarm. DJ Coleman is a commercial farming operation located
in North Dakota, and Nufarm is part of an enormous, highly diversified, and international
conglomerate. * * * the facts of this case do not demonstrate an element of unfair surprise. Clark
(b) Substantive Unconscionability
Substantive unconscionability focuses on the harshness or one-sidedness of the limitation of
remedies provision. [Citation.] The Official Comment to Section 2-719 of the Uniform
Commercial Code provides:
However, it is of the very essence of a sales contact that at least minimum adequate remedies
be available. If the parties intend to conclude a contract for sale within this Article they must
accept the legal consequence that there be at least a fair quantum of remedy for breach of the
obligations or duties outlined in the contract. Thus any clause purporting to modify or limit
the remedial provisions of this Article in an unconscionable manner is subject to deletion and
in that event the remedies made available by this Article are applicable as if the stricken
clause had never existed.
The clause at issue here would limit DJ Coleman’s remedy for a breach of an express warranty to
the purchase price of Assert® or the replacement of the product. The Court finds that the
limitation of remedies provision is substantively unconscionable. “[T]he farmer is required to
expend large sums of money before any defect [ ] is noticeable, and once a defect is found an
Expansion of Commercial Practices
The Code’s policy is to promote commercial transactions and to achieve this
result, the Code gives considerable weight to “course of dealing” and “usage of
trade” in establishing the meaning of contract provisions.
CISG— Parties are bound by usages they have agreed to and any normal usage
of trade.
Sales by and between Merchants
The Code establishes di!erent and more stringent rules for transactions
involving merchants. A merchant may 1) be a dealer in the goods, or 2) by his
occupation hold himself out as having knowledge or skill peculiar to the goods or
practices involved, or 3) employs an agent or broker whom he holds out as
having such knowledge or skill.
NOTE: Figure 21-2 lists the most signiticant merchant rules.
Liberal Administration of Remedies
Code remedies are to be liberally administered in order to place the agreed party
in as good a position as if the defaulting party had fully performed. Remedies
are discussed further in Chapter 25.
Freedom of Contract
Within certain parameters the parties to a contract may alter the e!ect of some
Code provisions. Good faith, however, is always required.