Formation of Sales and
Lease Contracts
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Uniform Commercial Code
(UCC)
• Comprehensive statutory
scheme.
• Serves as a model act.
• The UCC includes laws that
cover most aspects of
commercial transactions.
• The common law of
contracts governs if the UCC
is silent.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Overview of the Uniform Commercial Code
• Article 1
General provisions
• Article 2
Sales
• Article 2A
Leases
• Article 3
Commercial paper
• Rev. Article 3
instruments
Negotiable
• Article 4
collections
Bank deposits &
• Article 4A
Wire transfers
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Overview of the Uniform Commercial Code
(continued)
• Article 5
Letters of credit
• Article 6
Bulk transfers
• Article 7
title
Documents of
• Article 8
securities
Investment
• Article 9
transactions
Secured
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Article 2 (Sales)
• All states except Louisiana have
adopted some version of Article 2 (Sales)
of the UCC.
• Article 2 is also applied by federal courts
to sales contracts governed by federal
law.
• Article 2 applies only to transactions in
goods – i.e., tangible items.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Article 2 (Sales) (continued)
• Article 2 does not apply to
transactions in intangible
items, real estate, or service.
• What is a sale?
– The passing of title from a seller
to a buyer for a price.
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What are Goods?
• Tangible things that are
movable at the time of their
identification to the contract.
• Money and intangible items
such as stocks, bonds, and
patents are not tangible
goods.
• Real estate and services are
not tangible.
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Services
• Services are not covered by
Article 2.
• Mixed sales involve both
goods and services.
• Article 2 applies to mixed
sales only if the goods are
the predominate part of the
transaction.
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Who Is a Merchant?
•
A person who:
1.
2.
Deals in the goods of the kind
involved in the transaction, or
By his or her occupation holds
himself or herself out as
having knowledge or skill
peculiar to the goods
involved in the transaction.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Article 2A (Leases)
• Article 2A applies only to
leases involving goods.
• Article 2A does not apply to
real estate or other leases.
• Many states have adopted
Article 2A.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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What Is a Lease?
• A transfer of the right to the
possession and use of the
named goods for a set term
in return for certain
consideration.
– 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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Finance Lease
• A three-party transaction
consisting of the lessor, the
lessee, and the supplier.
• The lessor does not select,
manufacture, or supply the
goods.
• The lessor acquires title to the
goods or the right to their
possession and use in
connection with the terms of
the lease.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Offer
• A contract for the sale or
lease of goods may be
made in any manner
sufficient to show agreement.
• This includes conduct by
both parties that recognizes
the existence of a contract.
• A contract may be found
even though the moment of
its making is undetermined.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Open Terms
• Sometimes the parties to a sales
or lease contract leave open a
major term in the contract.
• Gap-filling rule allows open
terms to be read into contract.
–
–
–
–
–
Open Price Term
Open Payment Term
Open Delivery Term
Open Time Term
Open Assortment Term
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Firm Offer Rule
• 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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Consideration
• The formation of a sales and
lease contract requires
consideration.
• In common law,
modifications to a contract
need to be supported by
new consideration.
• Under the UCC,
modifications to sales and
lease contracts require no
consideration.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Acceptance
• Both common law and the
UCC provide that a contract
is created when the offeree
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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Additional Terms
• Under common law, the mirror
image rule applies, an additional
terms are considered a
counteroffer.
• Under the UCC, additional terms
are allowed unless acceptance is
expressly conditional on assent to
the stated terms.
• If one party is a nonmerchant, the
additional terms are treated as
proposed additions.
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Accommodation Shipment
• 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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Statute of Frauds
• A rule that requires all
contracts for the sales of
goods costing $500 or more,
and lease contracts involving
payments of $1,000 or more
be in writing.
• The writing must be sufficient
to indicate that a contract
has been made between the
parties.
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Exceptions to the Statute of Frauds
• Specially Manufactured
Goods
• Admissions in Pleadings or
Court
• Part Acceptance
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Written Modification
• Oral modification is not
enforceable if the parties
agree that any modification
of the sales or lease contract
must be in a signed writing.
• 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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Parol Evidence Rule
•
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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Parol Evidence Rule, continued
• If the express terms are not
clear on their face, reference
may be made to certain
outside sources:
– Course of performance.
– Course of dealing.
– Usage of trade.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Comparison of Contract Law and the
Law of Sales (1 of 3)
Topic
Common Law
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.
Irrevocable
Offers
Option contracts. Firm
offers by merchants to
keep an offer open are
binding up to three
months without any
consideration.
Option contracts.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Comparison of Contract Law and the
Law of Sales (2 of 3)
Topic
Common Law
Contracts
UCC Law of Sales
Counteroffer
s
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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Comparison of Contract Law and the
Law of Sales (3 of 3)
Topic
Common Law
Contracts
UCC Law of
Sales
Statute of Frauds
Writing must be
signed by the
party against
whom
enforcement is
sought.
Writing may be
enforced against
a party who has
not signed it.
Modification
Consideration is
required
Consideration is
not required
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