453
Chapter 19
The Formation of Sales and
Lease Contracts
See Separate Lecture Outline System
INTRODUCTION
The Uniform Commercial Code (UCC) is probably the most important piece of commercial legislation in the history of
the United States. The drafters of the UCC comprised a sophisticated group of legal scholars—Karl Llewellyn, Grant Gilmore,
Homer Kripke, and Soia Mentschikoff. The UCC created a nearly uniform body of law in each state, greatly facilitating interstate
commerce.
454 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
similarities to the common law contract principles discussed in the previous chapters. Indeed, such similarities should be
expected, because the UCC represents the codification of much of the common law of contracts.
This chapter also briefly reviews the United Nations Convention on Contracts for the International Sale of Goods (CISG)
and special provisions in international contracts.
ADDITIONAL RESOURCES—
VIDEO SUPPLEMENTS
The following video supplements relate to topics discussed in this chapter—
PowerPoint Slides
To highlight some of this chapter’s key points, you might use the Lecture Review PowerPoint slides compiled for
Chapter 19.
Business Law Digital Video Library
The Business Law Digital Video Library at www.cengage.com/blaw/dvl offers a variety of videos for group or
individual review. Clips on topics covered in this chapter include the following.
• Ask the Instructor
determining which aspect of the contract predominates, goods or services. This is a critical threshold consideration,
because the substantive law of the UCC differs from the common law in many important respects.
• Legal Conflicts in Business
International Sales & Lease Contracts—Not enough Jalapenos—The advertising firm ordered a quantity of
jalapenos from Mexico. When the shipment arrived, the advertiser found that the full quantity was not delivered.
Sales & Lease Contracts: Price as a Term—Is there a Contract without a Price?—The software company has
ordered equipment, but the price was not specified in the agreement. Now the equipment company says there was no
contract and therefore will not deliver the equipment.
• Drama of the Law
Offer and Acceptance—Didn’t I just but that car?—Contract negotiation requires a meeting of the minds. When
CHAPTER OUTLINE
CHAPTER 19: THE FORMATION OF SALES AND LEASE CONTRACTS 455
I. The Uniform Commercial Code
A. COMPREHENSIVE COVERAGE OF THE UCC
456 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
B. A SINGLE, INTEGRATED FRAMEWORK FOR COMMERCIAL TRANSACTIONS
The UCC covers the formation of a sales or lease contract (Article 2 or 2A), payment (Articles 3, 4, and 4A), title
documents during storage (Article 7), and security for unpaid amounts (Article 9).
C. PERIODIC REVISIONS OF THE UCC
Periodic revisions to the UCC are intended to clarify sections or to make them more closely comport with changes
in business practices. Recent significant amendments are noted in the text.
ADDITIONAL BACKGROUND—
The Uniform Commercial Code
Of all the attempts in the United States to produce a uniform body of laws relating to commercial transactions,
none has been as comprehensive or successful as the Uniform Commercial Code (UCC). The UCC was the brainchild of
William Schnader, president of the National Conference of Commissioners on Uniform State Laws (NCC).
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 Uniform Stock Transfer Act (1909), the
Uniform Conditional Sales Act (1918), and the Uniform Trust Receipts Act (1933). In the early 1920s, the NCC was
joined in its efforts by the American Law Institute, which was formed to compile the Restatements.
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 appeared to be to draft
in a loose, opened-ended style; his preferred solutions turned on questions of fact (reasonableness, good
faith, usage of trade) rather than on rules of law. He had clearly in mind the idea of a case-law Code: one
that would furnish guide-lines for a fresh start, would accommodate itself to changing circumstances,
would not so much contain the law as free it for a new growth.b
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 was
revised in 1957 and 1958 to incorporate a number of changes that had been recommended by the New York Law
CHAPTER 19: THE FORMATION OF SALES AND LEASE CONTRACTS 457
Revision Commission. Between 1958 and 1964, the UCC was reviewed and substantially enacted in every state (except
Louisiana, which accepted only parts of it) and the District of Columbia. The UCC attempts to provide a consistent and
integrated framework of rules to deal with all phases ordinarily arising in a commercial sales transaction from start to
finish. As amendments and revisions of articles and sections of the UCC in 1962, 1966, 1972, 1977, 1987, 1988, and the
1990s have shown, the UCC has always been meant to reflect, as Llewellyn insisted, “what actually takes place from
day to day in the commercial world.”
II. The Scope of Article 2—The Sale of Goods
A. WHAT IS A SALE?
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. A sale is “the passing of title from the seller to the buyer for a price”
[UCC 2–106(1)]. The price may be payable in money, goods, or services.
B. WHAT ARE GOODS?
Goods are tangible and movable.
1. Goods Associated with Real Estate
• A contract for a sale of minerals or the like (including oil and gas) or of a structure (a building, a fence)
is a contract for a sale of goods if severance is to be made by the seller. If the buyer is to sever the
subject of the contract from the land, the contract is considered a sale of real estate subject to the
CASE SYNOPSIS—
Case 19.1: Jannusch v. Naffziger
Gene and Martha Jannusch owned and operated Festival Foods, which provided concessions at events in Illinois
and Indiana. Lindsey and Louann Naffziger orally agreed to buy the business from the Jannuschs for $150,000. The
Naffzigers made a $10,000 down payment, took possession of the equipment, and began to use it immediately. After
six events, the Naffzigers wanted out of the deal. The Jannuschs filed a suit in an Illinois state court against the
Naffzigers for the balance due. The court held that there was not a sufficient meeting of the minds to form a contract.
The Jannuschs appealed.
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Notes and Questions
If there had been no exchange of equipment, but only the use of the “Festival Foods” name and Jannusch’s help in
operating the business during the first season, would the result in this case have been the same? The court cited the
predominant purpose test in making its decision that Article 2 of the UCC covered the deal between the Jannusches
and the Naffzigers. Without an exchange of goods, even had the court found a contract in the deal, the UCC would not
have applied. But considering the other circumstances—Naffzigers’ operation of the business under the “Festival
Foods” name, Jannusch’s fulfilling the service part of the agreement, and so on—it is likely that the court would have
found an enforceable contract.
Given that the business was not what the Naffzigers expected it to be, and that they returned everything, was it
fair for the Jannuschs to demand full payment? Explain your answer. Yes. Otherwise, it would be like saying you should
get to live in a house for four months and, if you decide you do not like it, force the seller to take it back. There was no
claim that the Jannuschs were not cooperative or misled the Naffzigers; the business activity was just not as profitable
as they had hoped it would be.
would be considered predominantly for services because the consultant would do more than sell the software to the
ANSWER TO “WHAT IF THE FACTS WERE DIFFERENT?” IN CASE 19.1
Suppose that the contract had stated that the truck and other equipment were worth $50,000 and the goodwill
value of the business was worth $100,000. Would that have changed the outcome of this case? Why or why not? If the
ADDITIONAL CASES ADDRESSING THIS ISSUE —
Recent cases in which the courts classified items as “goods” for purposes of UCC Article 2 include the following.
CHAPTER 19: THE FORMATION OF SALES AND LEASE CONTRACTS 459
• Neugent v. Beroth Oil Co., 560 S.E.2d 829 (N.C.App. 2002) (motor fuel—a sale between a jobber, distributor, or oil
company and a dealer is a sale of goods).
• BTA Oil Producers v. MDU Resources Group, Inc., 642 N.W.2d 873 (N.D. 2002) (natural gas—the contract provided
that title to the gas passed at the wellhead before processing).
• Dakota Pork Industries v. City of Huron, 638 N.W.2d 884 (S.D. 2002) (water—”movable at the time of identification
• Watkins and Son Pet Supplies v. Iams Co., 254 F.3d 607 (6th Cir. 2001) (distributorship).
• Villette v. Sledorado Aluminum Products, Inc., __ Misc. __, 45 UCC Rep.Serv.2d 470 (N.Y.Civ. 2001) (aluminum
Recent cases in which the courts ruled that items are not “goods” for purposes of UCC Article 2 include the
following.
• Howard v. CitiFinancial, Inc., 195 F.Supp.2d 811 (S.D. Miss. 2002) (insurance policy).
• Keck v. Dryvit Systems, Inc., __ So.2d __, 46 UCC Rep.Serv.2d 635 (Ala. 2002) (exterior insulation system installed
on a home—removing the system from the home would damage the sheathing and the home’s overall structural
integrity, leaving it exposed to the elements).
• Jones v. CGU Insurance Co., 78 S.W.3d 626 (Tex.App.—Austin 2002) (insurance policy).
• Lucid, Inc. v. DiSanto Technology, __ A.2d __, 43 UCC Rep.Serv.2d 1083 (Conn.Super. 2000) (services rendered to
materials supplied by buyer).
2. Goods and Services Combined
Serving food or drink to be consumed either on or off restaurant premises involves a sale of goods, at least
for the purpose of an implied warranty of merchantability [UCC 2–314(1)]. When goods and services are
combined, courts determine which is predominant—the good or the service.
C. WHO IS A MERCHANT?
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—
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III. The Scope of Article 2A—Leases
Article 2A covers any transaction that creates a lease of goods, as well as subleases of goods [UCC 2A–102, 2A–103(k)].
Article 2A echoes the principles of Article 2, but varies to reflect differences between sale and lease transactions.
A. 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 trade or course of performance
[UCC 2A–103(1)(k)].
B. CONSUMER LEASES
ENHANCING YOUR LECTURE—
FINANCE LEASES AND
THE “HELL OR HIGH WATER” PAYMENT TERM
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 under a finance lease and the
equipment turns out to be defective? Must the lessee still make the payments? Yes. Even if the lease contract does
not expressly state the payment obligation, the lessee will have to pay—because Article 2A makes it clear that the
lessee is obligated to pay the financer/lessor regardless of problems with the leased goods.
THE BOTTOM LINE
The fact that ATIC was obligated to make the lease payments regardless of the condition of the equipment does
CHAPTER 19: THE FORMATION OF SALES AND LEASE CONTRACTS 461
IV. 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
1. Open Terms
A sales or lease contract will not fail for indefiniteness even if one or more terms are left open, as long as:
(1) the parties intended to make a contract and (2) 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 delivery
[UCC 2–305(1)]. If, through the fault of one of the parties, a price is not fixed, the other party can fix a
reasonable price or treat the contract as canceled [UCC 2–205(3)].
b. Open Payment Term
If the payment is not specified, payment is due at the time and place at which the buyer will receive
the goods [UCC 2–310(a)].
c. Open Delivery Term
ANSWER TO VIDEO QUESTION LTR. A
462 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
Is Anna correct in assuming that a contract can exist even though the sales price for the computer equipment was
not specified? Explain. Yes, a contract can exist even if the price was not specified. If the parties have not agreed on a
ANSWER TO VIDEO QUESTION LTR. B
According to the Uniform Commercial Code (UCC), what conditions must be satisfied in order for a contract to be
formed when certain terms are left open? What terms (in addition to price) can be left open? The UCC states that a
sales or lease contract will not fail for indefiniteness even if one or more terms are left open as long as (1) the parties
intended to make a contract, and (2) there is a reasonably certain basis for the court to grant an appropriate remedy
2. Merchant’s Firm Offer
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
B. ACCEPTANCE
Generally, acceptance of an offer to buy or sell goods may be made in any reasonable manner and by any
reasonable means.
1. Methods of Acceptance
a. Any Reasonable Means
When an offeror does not specify a means of acceptance, it can be made by any means of
communication reasonable under the circumstances [UCC 2–206(1), 2A–206(1)].
b. Promise to Ship or Prompt Shipment
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2. Communication of Acceptance
When acceptance by performance is reasonable, “an offeror who is not notified of acceptance within a
reasonable time may treat the offer as having lapsed before acceptance” [UCC 2–206(2), 2A–206(20].
3. Additional Terms
If an offeree’s response indicates a definite acceptance, a contract is formed, even if the acceptance
includes terms in addition to or different from the offer [UCC 2–207(1)].
a. Rules When One Party or Both Parties Are Nonmerchants
If the modifications are not conditional, and one of the parties is a merchant, the contract is formed
according to the terms of the original offer.
C. CONSIDERATION
The UCC requires no consideration for an agreement modifying a contract [UCC 2–209(1), 2A–208(1)].
1. Modifications Must Be Made in Good Faith
Of course, modification must be sought in good faith [UCC 1–203].
2. When Modification without Consideration Does Require a Writing
If a sales or lease contract requires that a modification be in writing [UCC 2–209(2), 2A–208(2)], or if a
modification brings a contract under the Statute of Frauds, it must usually be in writing [UCC 2–209(3)].
D. THE STATUTE OF FRAUDS
ADDITIONAL BACKGROUND—
$500
Under the UCC’s statute of frauds [UCC 2–201], a contract for a sale of goods for the price of $500 or more is not
enforceable unless it is in writing and signed by the party against whom enforcement is sought. The price—$500—is
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
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 sold, and actually receive
the same, or give something in earnest to bind the contract, or in part payment, or unless some note or
memorandum in writing of the contract of sale be signed by the party to be charged or his agent in that
behalf.
To be enforceable under this statute, a contract for a sale of goods had to be in writing if the price of the goods
was, again, at least $500. The Uniform Sales Act was issued in 1896.
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 today to buy what $500 would buy in 1896.
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
contract or their agents thereunto lawfully authorized.
1. Sufficiency of the Writing
A writing is sufficient if it indicates that a contract was intended and it is signed by the party against whom
2. Special Rules for Contracts between Merchants
In a transaction between merchants, the requirement of a writing is satisfied if one of them sends a signed,
written confirmation to the other. If the recipient does not object in writing within ten days, the
confirmation will be enforceable against him or her.
ENHANCING YOUR LECTURE—
CAN AN EMPLOYEE’S E-MAIL
CONSTITUTE A WAIVER OF CONTRACT TERMS?
Under UCC 2–209, an agreement that excludes modification except by a signed writing cannot be otherwise
modified. If the written-modification requirement is contained in a form supplied by one merchant to another, the
other party must separately sign the form for it to be binding. This rule has an exception, though, which can be
significant in the online environment. Under the UCC, an attempt at modification that does not meet the writing
requirement may operate as a waiver [UCC 2–209(4)]. In other words, the parties can waive, or give up, the right to
require that contract modifications be in a signed writing. Can an employee’s e–mail communications form a waiver of
a contract’s written modification requirement? This issue arose in Cloud Corp. v. Hasbro, Inc.a
THE CONTRACT TERMS AND THE PARTIES’ RELATIONSHIP
After placing several orders, Hasbro told Cloud to change the formula in the packets. As a result, Cloud was able to
produce three times as many packets using the same amount of material that it already had on hand to fill Hasbro’s
previous orders. Although Hasbro had not ordered any additional packets, Cloud sent Hasbro an order
acknowledgment for extra packets at a lower price. Hasbro did not explicitly respond to Cloud’s acknowledgment
form. One of Hasbro’s employees, however, referred to the additional quantities of packets at some point in her e-mail
exchanges with Cloud. Several months later, after Cloud had produced the additional packets, Hasbro quit making the
Wonder World Aquarium and refused to pay for the packets that it did not order. Cloud then sued Hasbro for breach of
contract.
WAS THE EMPLOYEE’S E-MAIL A WAIVER?