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1
whole or in part.
The Formation of
Sales and Lease Contracts
Llewellyn, Grant Gilmore, Homer Kripke, and Soia Mentschikoff. The UCC created a nearly uniform body of law in
each state, greatly facilitating interstate commerce.
Because of its nearly uniform applicability, your students may be confused about whether the UCC is a state
or federal law. The UCC was (and remains) a joint effort of the National Conference of Commissioners on Uniform
Goods (CISG) and special provisions in international contracts.
2 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
A. COMPREHENSIVE COVERAGE OF THE UCC
The UCC covers all of the phases of an ordinary sale or lease of goods.
CASE SYNOPSIS—
alleging breach of contract and breach of good faith and fair dealing. The court granted IUSM's motion for
summary judgment. Amaya appealed.
A state intermediate appellate court affirmed. Amaya’s separate causes of action for alleged breaches of
contract and the duty of good faith and fair dealing were “inapposite.” On the sole claim for breach of contract,
The UCC’s duty of good faith and fair dealing may not apply to the contract that exists between a
university and its students, but the school cannot act in bad faith. How is “bad faith” defined? To whom
else might a school owe this duty? The duty of good faith and fair dealing may not serve as a basis for a
separate cause of action with respect to a contract between a student and a university because it is not a
contract that falls under the UCC. According to the court in the Amaya case, this duty as a separate cause is
students. To graduate incompetent, irresponsible, or unethical doctors into medical practice would be to the
detriment of the health and safety of members of the public.
whole or in part.
principles is an obligation to perform in “good faith” all contracts falling under the UCC [UCC 1–304]. Good
faith means honesty in fact. With regard to merchants, good faith means honesty in fact and the observance
of reasonable commercial standards of fair dealing in the trade.
3. What type of contract was at the center of this case? The contract at the center of the Amaya was not
a contract for a sale of goods. This case involved an implied contract for services. The contract involved the
legal relationship between a student and a university. With respect to this contract, according to the court’s
opinion in this case, “the courts' approach has been similar to that used with contracts conditioned upon the
satisfaction of one party. The university requires that the student's academic performance be satisfactory to
the UCC and is generally restricted to contracts covered by the UCC—in particular, contracts for the sale of
goods. The contract here was not a contract for a sale of goods but an implied contract for services. The
contract involved the legal relationship between a student and a university.
Of course, if Indiana University School of Medicine, the school involved in the case, had acted in bad
4A), title documents during storage (Article 7), and security for unpaid amounts (Article 9).
ADDITIONAL BACKGROUND—
The UCC was not the first effort to create more uniformity in the law. Since its founding in 1892, the NCC
drafted a number of uniform acts, many of which were accepted in whole or in part by various states. The first
was the Uniform Negotiable Instruments Law in 1896, followed by the Uniform Sales Act in 1906 and a
number of others—the Uniform Bills of Lading Act (1909), the Uniform Warehouse Receipts Act (1906), the
whole or in part.
When the drafting of the UCC began in 1945, its chief reporter was Karl Llewellyn of the Columbia
actually takes place from day to day in the commercial world rather than from the standpoint of what
appeared in statutes and decisions.”a Yale scholar Grant Gilmore said of Llewellyn:
It was, I believe, Karl’s non-systematic, particularizing cast of mind and his case-law
orientation which gave to the statutes he drafted . . . their profound originality. His instinct
Soia Mentschikoff—a legal scholar, a practicing attorney, the first woman partner at a major Wall Street
law firm, Harvard Law School’s first woman faculty member, dean of the University of Miami Law School, and
Llewellyn’s wife—was the Associate Chief Reporter for the UCC.
The first draft of the UCC was issued with the endorsement of the American Bar Association in 1952 and
meant to reflect, as Llewellyn insisted, “what actually takes place from day to day in the commercial world.”
a. William Schnader, “A Short History of the Preparation and Enactment of the Uniform Commercial Code,” 22 University of Miami Law
Review 1 (1967), p. 4.
• When the UCC speaks, its principles apply. When the UCC is silent, other state statutes and the
common law apply.
• Article 2 deals with sales of goods—not real property, services, or intangible property (stocks and
bonds).
whole or in part.
ANSWER TO CRITICAL THINKING QUESTION IN THE FEATURE—
INSIGHT INTO ETHICS
promotes competition among our states for the best economic policies. When a customer buys a product in a
store, the cashier does not ask for the customer’s home address. A federal law would hold online sellers to an
entirely different standard. Web sites would have to add taxes to a sale based on the shipping destination of
the product, which may be neither where the seller nor the buyer resides.
a. Goods Associated with Real Estate
A contract for a sale of minerals, oil, or gas is a contract for a sale of goods if severance is to
be made by the seller. A sale of growing crops or timber to be cut is a sale of goods
regardless of who severs them.
In some cases, special standards apply to merchants. A merchant for one type of goods is not
necessarily a merchant for another type. A merchant is—
• A person who deals in goods of the kind involved in the contract.
• A person who by occupation, holds himself or herself out as having knowledge and skill
sale and lease transactions.
1. Definition of a Lease Agreement
A lease agreement is a lessor and a lessee’s bargain with respect to a lease of goods as found in
their language and as implied by other circumstances, including course of dealing and usage of
whole or in part.
• A lessor who regularly engages in the business of leasing or selling.
lease are irrevocable and independent from the financer’s obligations [UCC 2A–407].
• A finance lease involves three parties—a lessor, a lessee, and a supplier. The lessor buys or
leases goods from a supplier and leases or subleases them to the lessee [UCC 2A–103(1)(g)].
Typically, in a finance lease, the lessor is simply financing the transaction.
As mentioned, in a finance lease, the lessee is obligated to pay the lessor, or financer, no matter what,
or—as some say—come hell or high water. Typically, this “hell or high water” payment obligation is specified
in the lease agreement. For example, in one finance lease, a provision stated that the lessee could not
“withhold, set off, or reduce such payments for any reason.” Yet what if a lessee arranges to lease equipment
equipment through a finance lease. The manufacturer of the equipment transferred the equipment to Siemens
Credit Corporation, which then leased the equipment to ATIC for a five-year term at $2,314 per month. When
the equipment turned out to be defective, ATIC stopped making the lease payments. Siemens subsequently
sued ATIC for the lease payments due. ATIC alleged, among other things, that it was unconscionable to
require it to make payments on defective equipment. The court, though, viewed the matter differently. The
The fact that ATIC was obligated to make the lease payments regardless of the condition of the
equipment does not mean that ATIC was without a remedy. As the court noted in this case, “ATIC has raised
triable issues of fact [issues that could go to trial] as to its equipment problems, but . . . they are properly
brought only against the manufacturer,” not against the lessor (Siemens).
III. The Formation of Sales and Lease Contracts
The following sections summarize how the UCC changes the effect of the common law of contracts.
A. OFFER
• There is a reasonably certain basis for the court to grant an appropriate remedy [UCC 2–
204(3), 2A–204((3)].
a. Open Price Term
If the parties have not included a price term, a court will set a reasonable price at the time for
c. Open Delivery Term
If a delivery term is not specified, delivery is at the seller’s place of business (or, if no place of
business, the seller’s residence) [UCC 2–308(a)].
right to make them [UCC 2–311]. If terms relating to an assortment of goods are omitted, the
buyer can specify them [UCC 2–311].
f. Requirements and Output Contracts
If the quantity term is left open, a court will have no basis for determining a remedy [UCC 2–
a. When a Merchant’s Firm Offer Arises
This arises when a merchant gives assurances that an offer will remain open. The offer is
irrevocable, without consideration for the stated period of time, or, if no definite period is
specified, a reasonable period (neither period to exceed three months) [UCC 2–205, 2A–205].
8 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
whole or in part.
2A–206(20].
2. Additional Terms
If an offeree’s response indicates a definite acceptance, a contract is formed, even if the ac-
ceptance includes terms in addition to or different from the offer [UCC 2–207(1)].
If the modifications are not conditional, and both parties are merchants, the additional terms
are part of the contract unless—
• The original offer requires the acceptance of its terms.
• The new or changed terms materially alter the contract.
Expro Americas, LLC and Surface Production Systems, Inc. (collectively SPS), submitted two purchase
orders to WPS, Inc., to make certain equipment. WPS accepted the orders subject to SPS’s “full release to
proceed” and agreement to pay the costs “associated with any order cancellation.” As negotiations continued,
SPS submitted another order that gave WPS full permission to proceed and agreed that SPS would pay all
were in agreement, that by beginning the work WPS only did what it was obligated to do, and that now SPS
was obligated to pay for its cancellation of the orders.
..................................................................................................................................................
whole or in part.
reasonable time, SPS could have avoided liability for the cancellation costs. But this also assumes that WPS
would have proceeded with the work without SPS’s agreement to the term. Considering the other facts in this
case, it does not seem likely that WPS would have gone ahead under those circumstances.
In allowing a party to condition its acceptance on additional terms, does contract law make
negotiations more or less efficient? Explain your answer. Conditional acceptances make negotiations
more efficient because they allow the parties to reach an agreement more quickly. A conditional acceptance
acts as a counteroffer. Thus, to reach an agreement, the original offeror need only accept the terms of the
conditional acceptance. That requires one less step than making another offer and then waiting for it to be
Why would a manufacturer like WPS want its purchase orders to include terms such as those at
issue in this case? Why would a buyer like Expro or SPS want to exclude such terms? A manufacturer
would want such terms included in a purchase order so that if the order were canceled, the manufacturer
could recover its costs. A buyer would want such terms excluded from a purchase order so that if necessary,
d. Additional Terms May Be Stricken
Also, if conduct by both parties recognizes the existence of a contract, this is sufficient to
establish a contract, even without a writing, which means in practice that a court can strike any
terms on which the parties do not agree [UCC 2–207(3)].
209(3)].
D. THE STATUTE OF FRAUDS
The UCC requires a writing for a contract for a sale of goods to be enforceable when the price of the
goods is $500 or more [UCC 2–201]—a lease requires a writing for payments of $1,000 or more [UCC
ADDITIONAL BACKGROUND—
$500
440.2201 Formal requirements; statute of frauds
Sec. 2201. (1) Except as otherwise provided in this section a contract for the sale of goods for the
price of $500 or more is not enforceable by way of action or defense unless there is some writing
sufficient to indicate that a contract for sale has been made between the parties and signed by the
appeared in Section 33-105(1) of the Indiana Statutes (Ind. St. § 33-105(1)):
Goods and Choses in Action—Contract to sell or sale—1) A contract to sell or a sale of any goods or
choses in action of the value of five hundred dollars ($500) or upwards shall not be enforceable by
action unless the buyer shall accept part of the goods or choses in action so contracted to be sold or
Will $500 buy today what it would buy in 1896? Will it buy today what it would buy in 1952?
Obviously, the answer to both questions is no. Between 1896 and 1980, the price level has increased five
times; between 1890 and today, the level has increased six times. Today, $500 is equivalent to one-sixth of
the value of goods transacted for at the time of the Uniform Sales Act. In other words, it would take $3,000
And be it further enacted by the authority aforesaid, that from and after the said four-and-twentieth-
day of June, no contract for the sale of any goods, wares, or merchandises for the price of ten
pounds sterling or upwards shall be allowed to be good, except the buyer shall accept part of the
goods so sold and actually receive the same or give something in earnest to bind the bargain or in
part of payment, or that some note or memorandum in writing of the said bargain be made and
signed by the parties to be charged by such contract or their agents thereunto lawfully authorized.
