978-1285770178 Lecture Note BL ComLaw 1e IM-Ch16 Part 1

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

of a wrong out of a dishonest, illegal, or unethical purpose—and Amaya, the student here, had proved it, he

could have stated a valid claim.

A school, in particular a medical school, may owe a duty not to act in bad faith to the public as well as to

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—

transactions, none has been as comprehensive or successful as the Uniform Commercial Code (UCC). The

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

cancellation costs. After WPS began work, SPS canceled the orders. When SPS did not pay the associated

A state intermediate appellate court affirmed. The parties had a contract that included WPS’s conditions.

With the third purchase order, SPS had given WPS “full release to proceed” and had agreed “to pay all valid

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.