Power Point Slides to Accompany ESSENTIALS OF BUSINESS

Power. Point Slides to Accompany ESSENTIALS OF BUSINESS AND ONLINE COMMERCE LAW 1 st Edition by Henry R. Cheeseman Chapter 10 Sales and Lease Contracts: Formation, Title, and Risk Slides developed by Les Wiletzky Copyright © 2006 by Pearson Prentice-Hall. All rights reserved

Uniform Commercial Code (UCC) o o Comprehensive statutory scheme Serves as a model act The UCC includes laws that cover most aspects of commercial transactions Every state (except Louisiana) has enacted the UCC as their commercial law statute Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 2

Overview of the Uniform Commercial Code (UCC) (1 of 2) o Article 1 General provisions o Article 2 (revised) Sales o Article 2 A o Article 3 Negotiable instruments o Article 4 Bank deposits & collections o Article 4 A o Article 5 Leases Wire transfers Letter of Credit Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 3

Overview of the Uniform Commercial Code (UCC) (2 of 2) o Article 6 Bulk transfers o Article 7 Documents of title o Article 8 Investment securities o Article 9 (revised) Secured transactions Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 4

Scope of Article 2 (Sales) Article 2 establishes rules that govern the sale of goods o All states except Louisiana have adopted some version of Article 2 (Sales) of the UCC o Article 2 is also applied by federal courts to sales contracts governed by federal law o Article 2 has recently been revised o n Has been adopted by some states Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 5

What Is a Sale? o A sale is the passing of title from a seller to a buyer for a price [UCC 2 -106(1)] Big Cheese Corporation Sale of computer Dell Computer Corporation (purchaser) (seller) Payment Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 6

What Are Goods? o o Goods are defined as tangible things that are movable at the time of their identification to the contract [UCC 2 -105(1)] Money and intangible items such as stocks, bonds, and patents are not tangible goods Real estate is not a tangible good because it is not movable Contracts for provision of services are not covered by Article 2 Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 7

Who Is a Merchant? o A person who: 1. Deals in the goods of the kind involved in the transaction, or 2. By his or her occupation holds himself or herself out as having knowledge or skill peculiar to the goods involved in the transaction [UCC 2 -104(1)] Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 8

Scope of Article 2 A (Leases) o Article 2 A applies only to leases involving goods o Article 2 A does not apply to real estate or other leases o Many states have adopted Article 2 A Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 9

Definition of a Lease o o o Lease – a transfer of the right to the possession and use of the named goods for a set term in return for certain consideration [UCC 2 A-103(1)(i)(x)] Lessor – the person who transfers the right of possession and use of goods under the lease Lessee – the person who acquires the right to possession and use of goods under a lease Dow Chemical Company (lessee) Lease Equipment Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Ingersoll. Rand Corporation (lessor) 10 - 10

Finance Lease o o o A three-party transaction consisting of the lessor, the lessee, and the supplier The lessor does not select, manufacture, or supply the goods Instead, the lessor acquires title to the goods or the right to their possession and use in connection with the terms of the lease [UCC 2 A-103(1)(g)] Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 11

Example of a Finance Lease City Bank (purchaser) Sale of airplane (lessor) Lease Payment Lease payment s Boeing Aircraft Company (seller) Delivery of airplane Jet Blue Airline Co. (lessee) Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 12

Formation of Sales and Lease Contracts (1 of 6) Any rules established by Articles 2 and 2 A take precedence over the common law of contracts o Offer o A contract for the sale or lease of goods may be made in any manner sufficient to show agreement n This includes conduct by both parties that recognizes the existence of a contract [UCC 2204(1), 2 A-204(1)] n Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 13

Formation of Sales and Lease Contracts (2 of 6) o Open Terms Sometimes the parties to a sales or lease contract leave open a major term in the contract n n n Open Price Term Open Payment Term Open Delivery Term Open Time Term Open Assortment Term o o Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. These open terms are permitted to be read into a sales or lease contract This rule is commonly referred to as the gapfilling rule [UCC 2204(3), 2 A-204(3)] 10 - 14

Formation of Sales and Lease Contracts (3 of 6) o Firm Offer Rule [UCC 2 -205, 2 A-205] n n A merchant who (1) offers to buy, sell, or lease goods, and (2) gives a written and signed assurance on a separate form that the offer will be held open, Cannot revoke the offer for the time stated or, If no time is stated, for a reasonable time Three months is the maximum amount of time permitted under this rule Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 15

Formation of Sales and Lease Contracts (4 of 6) o Acceptance n n The UCC provides that a contract is created when the offeree (i. e. , the buyer or lessee) sends an acceptance to the offeror, not when the offeror receives the acceptance The UCC permits acceptance by any reasonable manner or method of communication [UCC 2 -206(1)(a), 2 A-206(1)] Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 16

Formation of Sales and Lease Contracts (5 of 6) o Accommodation Shipment n n n A shipment that is offered to the buyer as a replacement for the original shipment when the original shipment cannot be filled The accommodation is a counteroffer from the seller to the buyer The buyer is free either to accept or to reject the counteroffer [UCC 2 -206(1)(b)] Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 17

Formation of Sales and Lease Contracts (6 of 6) o Consideration n The formation of sales and lease contracts requires consideration Under the UCC, an agreement modifying a sales or lease contract needs no consideration to be binding [UCC 2 -209(1), 2 A-208(1)] Modification of a sales or lease contract must be made in good faith [UCC 1 -203] Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 18

UCC Statute of Frauds o A rule that requires all contracts for the sale of goods costing $500 or more, and lease contracts involving payments of $1, 000 or more be in writing [UCC 2 -201(1), 2 A-201(1)] o The writing must be sufficient to indicate that a contract has been made between the parties Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 19

Exceptions to the Statute of Frauds o Following are exceptions to the Writing Requirement of the UCC Statute of Frauds: Specially Manufactured Goods n Admissions in Pleadings or Court n Part Acceptance [UCC 2 -201(3), UCC 2 A-201(4)] n Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 20

UCC Written Confirmation Rule o If both parties to an oral sales or lease contract are merchants, the Statute of Frauds requirements are satisfied if: 1. One of the parties sends a written confirmation of the sale to the other within a reasonable time after contracting, and 2. The other merchant does not give written notice of an objection to the contract within 10 days after receiving the confirmation [UCC 2201(2)] Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 21

When Written Modification is Required o o Oral modification is not enforceable if the parties agree that any modification of the sales or lease contract must be in a signed writing [UCC 2 -209(2), 2 A-208(2)] In the absence of such an agreement, oral modifications to sales and lease contracts are binding if they do not violate the Statute of Frauds Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 22

Parol Evidence o A rule that states that when a sales or lease contract is evidenced by a writing that is intended to be a final expression of the parties’ agreement or confirmatory memorandum, the terms of the writing may not be contradicted by evidence of: 1. A prior oral or written agreement, or 2. A contemporaneous oral agreement (i. e. , parol evidence) [UCC 2 -202, 2 A-202] Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 23

Comparison of Contract Law and the Law of Sales (1 of 3) Topic Common Law of Contracts UCC Law of Sales Definiteness Contract must contain all of the material terms of the parties’ agreement. UCC gap-filling rules permit terms to be implied if the parties intended to make a contract. [UCC 2 -204] Irrevocable Offers Option contracts. Firm offers by merchants to keep an offer open are binding up to three months without any consideration. [UCC 2205] Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 24

Comparison of Contract Law and the Law of Sales (2 of 3) Topic Common Law of Contracts UCC Law of Sales Counteroffers Acceptance must be a mirror image of the offer. A counteroffer rejects and terminates the offer. Additional terms of an acceptance become part of the contract if (1) they do not materially alter the terms of the offer and (2) the offeror does not object within a reasonable time after reviewing the acceptance. [UCC 2 -207] Modification Consideration is not required [UCC 2 -209] Consideration is required Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 25

Comparison of Contract Law and the Law of Sales (3 of 3) Topic Common Law of Contracts Statute of Frauds Writing must be signed by the party against whom enforcement is sought. UCC Law of Sales Writing may be enforced against a party who has not signed it if (1) both parties are merchants, (2) one party sends a written confirmation of their oral agreement within a reasonable time after contracting, and (3) the other party does not give written notice of objection within 10 days after Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 26

Identification of Goods o o o Distinguishing the goods named in the contract from the seller’s or lessor’s other goods Identification of goods can be made at any time and in any manner explicitly agreed to by the parties to the contract In the absence of such an agreement, the UCC mandates when identification occurs [UCC 2 -501(1), 2 A-217] Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 27

Passage of Title (1 of 2) o o o Once the goods exist and have been identified, title to the goods may be transferred from the seller to the buyer Article 2 of the UCC establishes precise rules for determining the passage of title in sales contracts Lessees do not acquire title to the goods they lease Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 28

Passage of Title (2 of 2) o Under UCC 2 -401(1), title to goods passes from seller to the buyer in any manner and on any conditions explicitly agreed upon by the parties: n n n Shipment contracts [UCC 2 -401(2)(a)] Destination contracts [UCC 2 -401(2)(b)] Document of title [UCC 2 -401(3)(a)] Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 29

Carrier Cases: Movement of Goods Generally, goods shipped via carrier are considered to be sent pursuant to a shipment contract or a destination contract o Shipment contract – the buyer bears the risk of loss during transportation [UCC 2 -509(1)(a)] o Destination contract – requires the seller to deliver conforming goods to a specific destination [UCC 2 -509(1)(b)] n The seller bears the risk of loss during transportation o Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 30

Shipping Terms Sales contracts often contain the following terms: o F. O. B. (free on board) point of shipment o F. A. S. (free alongside) or F. A. S. (vessel) port of shipment o C. I. F. (cost, insurance, and freight) and C. & F. (cost and freight) o F. O. B. place of destination o Ex-ship (from the carrying vessel) o No-arrival, no-sale contract Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 31

Noncarrier Cases: No Movement of Goods (1 of 3) o o A sales contract may stipulate that the buyer is to pick up the goods, either at the seller’s place of business or another specified location Who bears the risk of loss if the goods are destroyed or stolen after the contract date and before the buyer picks the goods up from the seller? Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 32

Noncarrier Cases: No Movement of Goods (2 of 3) o o Merchant–Seller Rule: If the seller is a merchant, the risk of loss does not pass to the buyer until the goods are received Nonmerchant–Seller Rule: Nonmerchantsellers pass the risk of loss to the buyer upon “Tender of delivery” of the goods [UCC 2 -509(3)] Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 33

Noncarrier Cases: No Movement of Goods (3 of 3) o Goods in the Possession of a Bailee (e. g. , a warehouse) – goods sold by a seller to a buyer are sometimes in the possession of a bailee n If such goods are delivered to the buyer without moving them, the risk of loss passes to the buyer [UCC 2 -509(2)] Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 34

Risk of Loss: Conditional Sales (1 of 3) o Sale on Approval n n n There is no actual sale unless and until the buyer accepts the goods In a sale on approval the risk of loss and title remain with the seller They do not pass to the buyer until acceptance [UCC 2 -327(1)] Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 35

Risk of Loss: Conditional Sales (2 of 3) o Sale or Return Contract n n The seller delivers goods to a buyer with the understanding that the buyer may return them if they are not used or resold within a stated or reasonable period of time The risk of loss and title transfer to the buyer when he or she takes possession of the goods [UCC 2 -327(2)] Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 36

Risk of Loss: Conditional Sales (3 of 3) o Consignment n n n A seller (the consignor) delivers goods to a buyer (the consignee) for sale The consignee is paid a fee if he or she sells the goods on behalf of the consignor A consignment is treated as a sale or return under the UCC [UCC 2 -326(3)] Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 37

Risk of Loss: Breach of a Sales Contract Seller in Breach o A seller breaches a sales contract if he or she tenders or delivers nonconforming goods to the buyer [UCC 2510] Buyer in Breach o Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Buyers breach a sales contract if they: n Refuse to take delivery of conforming goods, n Repudiate the contract, or n Otherwise breach the contract [UCC 2 -510] 10 - 38

Risk of Loss: Lease Contracts o If the parties to a lease contract do not agree as to who will bear the risk of loss of the goods if they are lost or destroyed, the UCC supplies risk of loss rules: Ordinary Lease – risk of loss is retained by the lessor n Finance Lease – risk of loss passes to the lessee n Tender of delivery of goods fails to conform to the lease contract – the risk of loss remains with the lessor or supplier until cure or acceptance n [UCC 2 A-219, 2 A-220(1)(a)] Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 39

Insuring Goods Against Loss or Damage Determine the value of goods subject to the sales or lease contract o Purchase insurance from a reputable insurance company covering the goods subject to the contract o Maintain the insurance by paying the premiums when they are due o Immediately file the proper claim and supporting documentation with an insurance Copyright © 2006 by Pearsonif. Prentice-Hall. All rights reserved. 10 - 40 company the goods are damaged, o

Sales by Nonowners (1 of 2) o Void n Title A thief acquires no title to the goods he or she steals [UCC 2 -403(1)] o Voidable n Title that a purchase has if the goods were obtained by: o Fraud o. A check that is later dishonored o Impersonating another person [UCC 2 -201(1), 1 -201(44)(d), UCC 2 -403(1)] Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 41

Sales by Nonowners (2 of 2) o o Good Faith Purchaser for Value A person to whom good title can be transferred from a person with voidable title The real owner cannot reclaim goods from a good faith purchaser for value o o Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Good Faith Subsequent Lessee A person to whom a lease interest can be transferred from a person with voidable title The real owner cannot reclaim the goods from the subsequent lessee until the lease expires 10 - 42

Entrustment Rule: Buyer in the Ordinary Course of Business (1 of 2) o o A person who in good faith and without knowledge that the sale violates the ownership or security interests of a third party buys the goods in the ordinary course of business from a person in the business of selling goods of that kind A buyer in the ordinary course of business takes the goods free of any third-party security interest in the goods [UCC 2 -403(2)] Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 43

Entrustment Rule (2 of 2) o The entrustment rule also applies to leases o If a lessor entrusts the possession of his or her goods to a lessee who is a merchant who deals in goods of that kind, the merchantlessee has the power to transfer all the lessor’s and lessee’s rights in the goods to a buyer or sublessee in the ordinary course of business [UCC 2 A-305(2)] Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 44

Summary: Passage of Title in Sales by Nonowner Third Parties and Sales of Goods Subject to Security Agreements (1 of 2) Type of Transaction Title Innocent Possessed by Purchaser Seller Goods Void title. acquired by theft are resold. Good faith purchaser for value. Goods Voidable title. Good faith acquired by purchaser for fraud or value. dishonored check are Copyright resold. © 2006 by Pearson Prentice-Hall. All rights reserved. Purchaser Acquires Title to Goods No. Original owner may reclaim the goods. Yes. Purchaser takes free of claim of original owner. 10 - 45

Summary: Passage of Title in Sales by Nonowner Third Parties and Sales of Goods Subject to Security Agreements (2 of 2) Type of Transaction Title Innocent Possessed by Purchaser Seller Purchaser Acquires Title to Goods entrusted by owner to merchant who deals in that type of good are resold. No title. Yes. Purchaser takes free of claim of original owner. Buyer in ordinary course of business. Creditor Good title. Buyer in possess ordinary security course of interest in by Pearson Prentice-Hall. All rightsbusiness. Copyright © 2006 reserved. Yes. Purchaser takes free of creditor’s 10 - 46

Use of Letters of Credit in International Trade o The irrevocable letter of credit has been developed to manage the risks in international sales o The function of a letter of credit is to substitute the credit of a recognized international bank for that of the buyer Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 10 - 47