Chapter 1: Legal Ethics
1
Learning Objectives
1. How do Article 2 and 2A of the UCC
differ? What types of transactions does
each article cover?
2. What is a merchant’s firm offer?
3. In a sales contract, if an offeree
includes additional or different terms
in an acceptance, will a contract result?
If so, what happens to those terms?
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2
Learning Objectives
4. Risk of loss does not necessarily pass
with title. If the parties to a contract
do not expressly agree when risk
passes and the goods are to be
delivered without movement by the
seller, when does risk pass?
5. What law governs the international
sale of goods?
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3
The Scope of the UCC and Articles 2
(Sales) and 2A (Leases)
 Facilitates commercial transactions.
 UCC Article 2:
–Governs contracts for sale of goods.
–UCC Article 2 preempts common law.
–Where UCC Article 2 is silent, common
law governs.
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4
Article 2—Sales
 Only applies to goods.
–The common law of contracts governs
real estate, services or intangible
property.
–Mixed Goods-Services: The
Predominant-Factor Test.
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5
Ex. 13-1 Law Governing Contracts
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6
Article 2—Sales
 What is a Sale?
–Article 2 applies to the “sale of goods.”
–A “sale” is the passing of title from
seller to a buyer for a price (payable in
cash, goods, services).
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7
Article 2—Sales
 Article 2 applies to the “sale of
goods.”
 What are Goods?
–Must be tangible and movable.
• Tangible: has physical existence.
• Movable: carried from place to place.
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8
Article 2—Sales
 What are Goods?
–Goods Associated with Real Estate can
fall within Article 2 if:
• (1) Contract for sale of minerals or a
structure is a good IF severance is made by
seller. If severance by buyer, sale is
governed by common law.
• (2) Sale of growing crops. 
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9
Article 2—Sales
 What are Goods?
–Goods Associated with Real Estate can
fall within Article 2 if:
• (3) Other “things” attached to real
property, capable of being severed
without harm to land.
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10
Article 2—Sales
 Goods and Services Combined: what
law governs?
–“Predominant Factor” Test – if goods,
then UCC governs, if services then
common law governs entire contract.
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11
Article 2—Sales
 Who is a Merchant?
–UCC Article 2 imposes special standards
upon a “merchant” who has special
business expertise and is not a casual
buyer/seller. 
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12
Article 2—Sales
 Who is a Merchant?
–UCC Article 2 defines merchant as
someone who:
• Deals in goods of the kind in the sale.
• Holds herself out as having special
expertise, knowledge, or skill.
• Person who employs a merchant.
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13
Article 2A—Leases
 Definition of a Lease Agreement:
contract for lease of personal goods
between a lessor and a lessee.
–Lessor transfers right to possess and use
goods under lease.
–Lessee acquires right to possess and use
goods. 
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14
Article 2A—Leases
 Consumer Leases: lessor, lessee who
leases for personal, family, or
household use, and total payments
less than $25,000.
 Finance Leases (involves a 3rd partysupplier).
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15
Formation of Sales
and Lease Contracts
 Offer.
–At common law once a valid offer is
unequivocally accepted, a binding
contract is formed.
–UCC is more flexible, and allows for
open pricing, payment, and delivery
terms.
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16
Formation of Sales
and Lease Contracts
 Offer.
–Open Terms. UCC 2-204: even if terms
are undetermined, a contract may still
exist.
• “Indefiniteness” is OK as long as the
parties intended to make a contract and
there is a reasonable basis for a court to
grant a remedy. 
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17
Formation of Sales
and Lease Contracts
 Offer.
–Open Terms.
• Open Price term: If parties have not
agreed on pricing, court can determine
“reasonable price at the time of delivery.”
• Open Payment term: payment is due at
the time and place in which buyer
receives goods.
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18
Formation of Sales
and Lease Contracts
 Offer.
–Open Terms.
• Open Delivery term: Unless otherwise
agreed, buyer takes delivery at the Seller’s
place of business. UCC2-308(a). Seller has
duty to make arrangements in good
faith.
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19
Formation of Sales
and Lease Contracts
 Offer.
–Open Terms.
• Open Quantity: generally courts will not
impose a quantity and there is no remedy,
unless the contract is either a
requirements or output contract. 
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20
Formation of Sales
and Lease Contracts
 Offer.
–Open Terms.
• Open Quantity (exceptions).
–Requirements Contract: buyer agrees to
purchase what the buyer needs or requires.
–Output Contract: buyer agrees to buy all of
seller’s production or output.
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21
Formation of Sales
and Lease Contracts
 Offer.
–Merchant’s Firm Offer.
• Offer made by merchant in a signed
writing is irrevocable for reasonable
period of time. No consideration
necessary.
• The Offer Must be in Writing and Signed
by the Offeror.
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22
Formation of Sales
and Lease Contracts
 Acceptance.
–Either by prompt shipment of
conforming or nonconforming goods.
• Non-conforming Goods: is both an
acceptance and a breach unless goods
sent as an “accommodation” to buyer,
with prompt notice by buyer.
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23
Formation of Sales
and Lease Contracts
 Acceptance.
–Communication of Acceptance.
–Additional Terms.
• If One Party is a Merchant: contract is
formed according to original terms of the
offer.
• CASE 13.1 OFFICE SUPPLY STORE.COM V.
KANSAS CITY SCHOOL BOARD (2011). Is this a
fair decision to the retailer?
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24
Formation of Sales
and Lease Contracts
 Acceptance.
–Additional Terms.
• When Both Parties are Merchants, the
contract incorporates new terms unless:
–(1) original offer expressly limits terms,
or
–(2) material change, or
–(3) offeror objects within reasonable
time. 
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25
Formation of Sales
and Lease Contracts
 Consideration.
–UCC adopts common law rule requiring
consideration. However, modifications
do not need consideration.
–Modifications Must be Made in Good
Faith.
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26
Formation of Sales
and Lease Contracts
 The Statute of Frauds.
–Sale of goods over $500 must have a
signed writing to be enforceable.
–Sufficiency of the Writing: signed by
party against whom enforcement is
sought. Normally not enforceable
beyond quantity of goods shown in the
writing. 
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27
Formation of Sales
and Lease Contracts
 The Statute of Frauds.
–Special Rules for Contracts Between
Merchants. After oral agreement, one
of the merchants sends a signed,
written memorandum containing
essential terms to the other merchant
within a reasonable time.
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28
Formation of Sales
and Lease Contracts
 The Statute of Frauds. EXCEPTIONS:
–Specially manufactured goods.
–Admissions by breaching party.
–Partial Performance: oral contract is
enforceable IF payment has been made
or goods have been accepted.
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29
Formation of Sales and
Lease Contracts
 Parol Evidence.
–Terms of a written agreement intended
to be the final expression of parties’
intentions, cannot be contradicted by
prior or contemporaneous agreements.
–Exceptions: consistent terms, course of
dealing and trade, course of
performance.
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30
Formation of Sales and
Lease Contracts
 Unconscionability.
–Contract is one that is so unfair and
one-sided it is unreasonable to enforce
it. Court can: set it aside, refuse to
enforce the unconscionable provision,
limit the contract.
– CASE 13.2 JONES V. STAR CREDIT CORP. (1969).
Was this a fair decision to the retailer?
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31
Title and Risk of Loss
 Sale of goods requires different rules
than real property transactions: risk
should not always pass with title.
 UCC replaces title with identification,
risk, and insurable interest.
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3232
Title and Risk of Loss
 Identification.
–For any interest to pass to buyer, goods
must be (1) in existence and (2)
identified as specific goods in sales
contract. 
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3333
Title and Risk of Loss
 Identification.
–Identification takes place when specific
goods are designated as the subject
matter of the contract. Gives buyer the
right:
• To obtain insurance on the goods.
• To recover from third parties who damage
the good.
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3434
Title and Risk of Loss
 Identification.
–Existing Goods: if contact calls for
ascertainable goods in existence,
identification takes place at the time
contract is made. 
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3535
Title and Risk of Loss
 Identification.
–Future Goods.
• Animals born within 12 months of contract,
identification takes place at conception.
• For crops harvested within 12 months of
contracting, identification takes place at
time of planting (or when crops begin to
grow).
• All others, when goods shipped, or marked
or designated by seller.
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3636
Title and Risk of Loss
 Identification.
–Goods Part of a Larger Mass.
• Goods are identified when marked,
shipped, or designated by seller.
• Exception: fungible goods which are
naturally alike (grades of wheat, oil, wine).
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3737
Title and Risk of Loss
 Passage of Title.
–Contract between seller and buyer
usually determines when title passes.
• CASE 13.3 UNITED STATES V. 2007 CUSTOM
MOTORCYCLE (2011). When did the seller
give up possession of the goods to the
buyer? 
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3838
Title and Risk of Loss
 Passage of Title.
–Title can pass:
• Upon physical delivery, or
• When agreed to by the parties.
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
3939
Title and Risk of Loss
 Passage of Title.
–Shipment and Destination Contracts. If
no agreement, title passes based on
whether contract is shipment or
destination contract.
• Shipment: title passes at time and
place of shipment. 
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4040
Title and Risk of Loss
 Passage of Title.
–Shipment and Destination Contracts.
• Destination: title passes when goods are
tendered at the destination.
–Delivery Without Movement of Goods.
• With document of title (bill of lading):
title passes when and where document
delivered. 
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4141
Title and Risk of Loss
 Passage of Title.
–Delivery Without Movement of Goods.
• Without document: title passes when
sales contract is made, if goods have been
identified, or when identification occurs if
they have not been identified.
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4242
Title and Risk of Loss
 Passage of Title.
–Sales or Leases by Nonowners.
• Void Title: true owner gets goods back.
• Voidable Title.
–Good Faith Purchaser keeps goods.
–Voidable Title and Leases: good faith lessee
retains possession. 
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4343
Title and Risk of Loss
 Passage of Title.
–Sales or Leases by Nonowners.
• The Entrustment Rule.
–Merchant must deal in goods of that kind.
–Gives power to transfer valid title to good
faith purchaser in ordinary course of
business.
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4444
Ex. 13-2 Void and Voidable Titles
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4545
Title and Risk of Loss
 Risk of Loss.
–ROL does not necessarily pass with
title. ROL is important because of
insurance concerns.
–Unless agreed otherwise, ROL passes
to Buyer depending on whether
delivery is with or without movement
of the goods.
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4646
Title and Risk of Loss
 Risk of Loss.
–Delivery With Movement of the GoodsCarrier Cases.
• Shipment Contracts: Risk of loss passes to
Buyer when goods tendered to Carrier. If
goods damaged in transit, Buyer’s bears risk
of loss. 
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4747
Title and Risk of Loss
 Risk of Loss.
–Delivery With Movement of the GoodsCarrier Cases.
• Destination Contracts. ROL passes to
Buyer when goods tendered at
contractually specified destination.
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4848
Title and Risk of Loss
 Risk of Loss.
–Delivery Without Movement of the
Goods.
• Often goods are held by a bailee on behalf
of the seller in a bailment arrangement.
• Documents of title give bailee possession
of goods and/or contracts to deliver them.
• Examples: warehouse, trucking company.

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4949
Title and Risk of Loss
 Risk of Loss.
–Delivery Without Movement of the
Goods.
• Goods Held by Seller: Document of Title is
generally not used.
–If Seller is a merchant, risk of loss passes
when buyer takes physical possession of
goods. (ROL remains with seller until buyer
takes physical possession.)
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5050
Title and Risk of Loss
 Risk of Loss.
–Delivery Without Movement of the
Goods.
• Goods Held by a Bailee (Warehouse). Risk
of loss passes to buyer when:
–Buyer receives document of title; bailee
acknowledges Buyer’s right to goods and
buyer receives title and has reasonable time
to pick up.
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5151
Title and Risk of Loss
 Risk of Loss.
–When the Contract is Breached: generally
breaching party bears risk of loss.
• When Seller or Lessor Breaches.
–Rejection - risk stays with seller.
–Revocation of acceptance - risk passes back
to seller to the extent that buyer’s insurance
does not cover the loss.
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5252
Title and Risk of Loss
 Risk of Loss.
–When the Contract is Breached: generally
breaching party bears risk of loss.
• When the Buyer or Lessee Breaches. Goods are
identified, risk passes to buyer for a
commercially reasonable amount of time after
seller learns of the breach, to the extent that
seller’s insurance does not cover loss.
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5353
Title and Risk of Loss
 Insurable Interest.
–Buyer has an insurable interest in goods
that have been identified.
–Seller has an insurable interest in goods
as long as they retain title or a security
interest.
–Both buyers and sellers can have an
insurable interest at the same time.
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5454
Contracts for the
International Sale of Goods
 Applicability.
 Comparison of CISG and UCC.
–Mirror Image Rule.
–Irrevocable Offers.
–Statute of Frauds.
–Necessity of a Price Term.
–Time of Contract Formation.
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55