Chapter 11


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Sales and Leases: Formation, Title and Risk

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Chapter 11

  1. 1. CHAPTER 11 Sales and Leases: Formation, Title and Risk
  2. 2. <ul><li>How do Article 2 and 2A of the UCC differ? </li></ul><ul><li>What is a merchant’s firm offer? </li></ul><ul><li>If an offeree includes additional/different terms in acceptance, what happens? </li></ul><ul><li>What are the 3 exceptions to the Statute of Frauds in Article 2 and 2A? </li></ul><ul><li>What law governs the international sale of goods? </li></ul>Learning Objectives
  3. 3. UCC Scope <ul><li>UCC: </li></ul><ul><ul><li>Article 2/2A—sale or lease of goods. </li></ul></ul><ul><ul><li>Articles 3-5—negotiable instruments and banking. </li></ul></ul><ul><ul><li>Article 6—bulk transfers. </li></ul></ul><ul><ul><li>Article 7—warehousing and shipping. </li></ul></ul><ul><ul><li>Article 8—securities. </li></ul></ul><ul><ul><li>Article 9—secured transactions. </li></ul></ul>
  4. 4. Scope of Article 2--Sales <ul><li>Article 2 governs “sale of goods.” </li></ul><ul><li>“Sale”: passing of title from seller to buyer for a price. </li></ul><ul><li>“Goods”: must be tangible and movable (not land, services or intangibles). </li></ul><ul><ul><li>Goods Associated With Land. </li></ul></ul><ul><ul><li>Goods and Services Combined. </li></ul></ul><ul><ul><ul><li>Mecanique C.N.C., Inc. v. Durr Environmental, Inc. (2004). </li></ul></ul></ul><ul><li>“Merchant”: deals in goods of the kind sold. </li></ul>
  5. 5. Scope of Article 2A--Leases <ul><li>Lease Agreement between Lessor and Lessee. </li></ul><ul><ul><li>Lessor: sells the right to possession and use of goods. </li></ul></ul><ul><ul><li>Lessee: acquires right to possess and use goods under a lease. </li></ul></ul><ul><li>Article 2A: applies to all commercial and consumer lease/financing of goods. </li></ul>
  6. 6. Formation: Offer <ul><li>UCC modifies the common law of contracts. Where UCC speaks, it preempts the common law. Where it is silent, the common law governs. </li></ul><ul><li>A valid offer under UCC 2 may include “open” price, payment and delivery terms. </li></ul><ul><ul><li>Exception: Quantity—No contract, unless : </li></ul></ul><ul><ul><ul><li>Requirements: Buyer purchase all he needs. </li></ul></ul></ul><ul><ul><ul><li>Output: Buyer agrees to purchase all Seller manufactures. </li></ul></ul></ul><ul><ul><li>Only tangible and movable (not land, services or intangibles) </li></ul></ul><ul><li>Merchant’s Firm Offer. </li></ul>
  7. 7. Formation: Acceptance <ul><li>Acceptance </li></ul><ul><ul><li>Methods of Acceptance: Seller can specify manner of acceptance. If not any reasonable means. </li></ul></ul><ul><ul><li>Promise to Ship/Prompt Shipment of conforming goods. </li></ul></ul><ul><ul><ul><li>Non-Conforming goods may be “accommodation.” </li></ul></ul></ul><ul><ul><li>Notice. </li></ul></ul>
  8. 8. Agreement <ul><li>Additional Terms </li></ul><ul><ul><li>Common Law: terms must be the same for contract or battle of the forms. </li></ul></ul><ul><ul><li>UCC: additional/different terms permitted, depending on the status of the parties: </li></ul></ul><ul><ul><ul><li>Either Non-merchant : only original terms accepted. </li></ul></ul></ul><ul><ul><ul><li>Both Merchants : additional terms form contract unless there is prohibition or new terms or terms materially alter contract, or the party objects. </li></ul></ul></ul>
  9. 9. Statute Of Frauds <ul><li>Contracts for Sale of Goods over $500 or lease over $1,000 must be in writing. </li></ul><ul><ul><li>Sufficiency of the Writing. </li></ul></ul><ul><ul><li>Written Confirmation Between Merchants. </li></ul></ul><ul><ul><ul><li>Written confirmation after oral agreement. </li></ul></ul></ul><ul><li>Exceptions: </li></ul><ul><ul><li>Specially Manufactured Goods. </li></ul></ul><ul><ul><li>Admissions. </li></ul></ul><ul><ul><li>Partial Performance. </li></ul></ul>
  10. 10. Parol Evidence <ul><li>Generally, terms of a written agreement or memo cannot be contradicted by prior, extrinsic evidence, unless the evidence is: </li></ul><ul><ul><li>Consistent, Additional Terms. </li></ul></ul><ul><ul><li>A Course of Dealing and Usage. </li></ul></ul><ul><ul><li>A course of Performance, or </li></ul></ul><ul><ul><li>Rules of Construction or Interpretation. </li></ul></ul><ul><li>Unconscionability. </li></ul><ul><ul><li>Jones v. Star Credit Corp. (1969). </li></ul></ul>
  11. 11. Title, Risk and Insurable Interest <ul><li>Sale of goods requires different rules than real property transactions: risk should not always pass with title. </li></ul><ul><li>UCC replaces title with identification, risk, and insurable interest. </li></ul>
  12. 12. Identification <ul><li>For any interest to pass to buyer, goods must be: </li></ul><ul><ul><li>In existence. </li></ul></ul><ul><ul><li>Identified as specific goods in the sales contract (by serial numbers and/or physically separated from others. Except for fungible goods which do not need separation). </li></ul></ul>
  13. 13. Identification <ul><li>Gives the buyer the right: </li></ul><ul><ul><li>To obtain insurance on the goods. </li></ul></ul><ul><ul><li>To recover from third parties who damage the good. </li></ul></ul><ul><li>Identification occurs: </li></ul><ul><ul><li>If goods are designated when contract is made. If goods are not designated when contract is made, then identified at time of designation. </li></ul></ul>
  14. 14. Passage of Title: Shipment and Destination Contracts <ul><li>Unless there is an agreement to the contrary, title passes to the Buyer at the time and place the Seller physically delivers the goods. </li></ul><ul><li>Title passes when agreed to by the parties. </li></ul><ul><li>If no agreement, depends on whether the contract is a shipment or destination contract: </li></ul><ul><ul><li>Shipment : title passes at time and place of shipment. </li></ul></ul><ul><ul><li>Destination : title passes when goods are tendered at the destination. </li></ul></ul>
  15. 15. <ul><li>Title passes when agreed by the parties. </li></ul><ul><li>If no agreement, title passes: </li></ul><ul><ul><li>With document of title: when and where document delivered. </li></ul></ul><ul><ul><li>Without document: when sales contract is made, if goods have been identified or when identification occurs if they have not been identified. </li></ul></ul>Passage of Title: Delivery Without Movement of Goods
  16. 16. <ul><li>In a shipment contract, ROL passes when seller tenders goods to carrier. </li></ul><ul><li>In a destination contract, ROL passes when goods tendered at destination. </li></ul>Risk of Loss
  17. 17. Risk of Loss: Delivery Without Movement of Goods <ul><li>Goods Held by Seller: </li></ul><ul><ul><li>Document of Title is generally not used. </li></ul></ul><ul><ul><li>If Seller is a merchant, ROL passes when buyer takes physical possession of goods. </li></ul></ul><ul><ul><li>Ganno v. Lanoga Corp. (2003). </li></ul></ul><ul><li>Goods Held by Bailee (Warehouse). ROL passes when: </li></ul><ul><ul><li>Buyer receives document of title; bailee acknowledges Buyer’s right to goods and buyer receives title and has reasonable time to pick up. </li></ul></ul>
  18. 18. Conditional Sales <ul><li>Sale on Approval. </li></ul><ul><ul><li>ROL passes when buyer approves expressly or implicitly. </li></ul></ul><ul><li>Sale or Return. (Consignment is sale or return unless it complies with Article 9.) </li></ul><ul><ul><li>ROL passes to buyer with possession. </li></ul></ul>
  19. 19. ROL: Seller Breaches Contract <ul><li>Generally breaching party bears ROL. </li></ul><ul><li>Seller’s Breach. </li></ul><ul><ul><li>Rejection - risk stays with seller. </li></ul></ul><ul><ul><li>Revocation of acceptance - risk passes back to seller to the extent that buyer’s insurance does not cover the loss. </li></ul></ul>
  20. 20. <ul><li>Buyer’s Breach. Goods are identified, risk passes to buyer for a reasonable amount of time after seller learns of the breach, to the extent that seller’s insurance does not cover loss. </li></ul>ROL: Buyer Breaches Contract
  21. 21. Insurable Interest <ul><li>Buyer has an insurable interest in goods that have been identified. </li></ul><ul><li>Seller has an insurable interest in goods as long as they retain title or a security interest. </li></ul><ul><li>Both buyers and sellers can have an insurable interest at the same time. </li></ul>