Formation of Sales and

Lease Contracts

19 - 1
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.

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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 Negotiable
instruments
• Article 4 Bank deposits &
collections
• Article 4A Wire transfers

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Overview of the Uniform Commercial Code
(continued)

• Article 5 Letters of credit

• Article 6 Bulk transfers
• Article 7 Documents of
title
• Article 8 Investment
securities
• Article 9 Secured
transactions

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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.

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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. 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.

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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.

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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.
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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.

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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.

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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

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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.

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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.

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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.

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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.

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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.
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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.

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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.

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 Comparison of Contract Law and the
Law of Sales (1 of 3)
Topic Common Law UCC Law of Sales
Contracts

Definiteness Contract must UCC gap-filling rules

contain all of the permit terms to be
material terms of implied if the parties
the parties’ intended to make a
agreement. contract.
Irrevocable Option contracts. Option contracts. Firm
Offers offers by merchants to
keep an offer open are
binding up to three
months without any
consideration.

© 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 UCC Law of Sales

Contracts

Counteroffer Acceptance must Additional terms of an

s be a mirror image acceptance become part
of the offer. A of the contract if (1) they
counteroffer do not materially alter the
rejects and terms of the offer and (2)
terminates the the offeror does not object
offer. 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 UCC Law of

Contracts Sales

Statute of Frauds Writing must be Writing may be

signed by the enforced against
party against a party who has
whom not signed it.
enforcement is
sought.

Modification Consideration is Consideration is

required not required

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

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Performance of Sales and
Lease Contracts

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Identification of Goods
• Distinguishing goods named
in contract from seller’s or
lessor’s other goods
• Seller or lessor retains risk of
loss until goods identified
• Title cannot pass until goods
identified

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Identification of Goods (continued)
• Parties can agree to time and
manner of identification
• Existing goods are identified by
naming specific goods
• Future goods are identified
when born, planted, shipped.
Marked or designated

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Passage of Title
• The passing of title from a
seller to a buyer for a price.
• Title cannot be passed until
goods exist and have been
identified.
• Title passes upon terms
agreed to in contract.
• If no terms are stated, title
passes when delivery is
completed.

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Shipment and Destination
Contracts
• Shipment Contract
– Seller should make proper
shipping arrangements
– Deliver the goods into the
carrier’s hands
• Destination Contract
– Seller delivers goods either to
buyer’s place of business or
another destination specified in
sales contract

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Shipment and Destination
Contracts (continued)
• Delivery of Goods without
Moving Them
– Buyer is required to pick up
goods from seller
– May require document of title
or bill of lading

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Risk of Loss: No Breach of Sales
Contract
• Carrier Cases: Movement of
Goods
– Shipment Contracts
- Risk of loss passes to buyer
when seller delivers the
conforming goods to the carrier
– Destination Contracts
- Risk of loss passes to buyer
when seller delivers the
conforming goods to the
specified destination

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Risk of Loss: No Breach of Sales
Contract
• Noncarrier Cases: No Movement
of Goods
– Merchant Seller
- Risk of loss passes to buyer when
buyer receives the goods
– Nonmerchant Seller
- Risk of loss passes to buyer upon
‘tender of delivery’ of the goods:
- When seller places or holds the
goods available for the buyer to
take delivery and notifies the buyer
of this fact

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Risk of Loss: No Breach of Sales
Contract (continued)
• Goods in Possession of a Bailee
- Risk of loss passes to buyer when:
- buyer receives a negotiable
document of title covering the goods
- The Bailee acknowledges the buyer’s
right to possession of the goods or,
- The buyer receives a nonnegotiable
document of title or other written
direction to deliver and has a
reasonable time to present the
direction to the bailee and demand
the goods

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Risk of Loss: Conditional Sales

• Sale on Approval
- There is no sale unless and until
the buyer accepts the goods
• Sale on Return
- Sale is considered final only if the
buyer fails to return the goods within
the specified time

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Risk of Loss: Conditional Sales

• Consignment
- Seller (consignor) delivers goods
to buyer (consignee) to sell
- Consignor is paid a fee if he/she
sells the goods on behalf of the
consignor

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Risk of Loss: Breach of Sales
Contract
• Seller in Breach
- If seller delivers nonconforming
goods to the buyer
• Buyer in Breach
- If buyer refuses to take delivery
of conforming goods, repudiates the
contract or otherwise breaches the
contract

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Risk of Loss: Lease Contracts
• Risk of loss is retained by the
lessor. In case of finance
lease, risk of loss passes to
the lessee
• If a 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

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Sales by Nonowners

• Void Title and Lease: Stolen

Goods
- Purchase of lease of stolen
goods do not result in transfer of
title of the goods and the lessee
does not acquire any leasehold
interest in the goods.

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Sales by Nonowners (continued)

• Voidable Title
- Purchaser has voidable title if goods
were obtained by fraud, if a check is
later dishonored, or if he/she
impersonates another person

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Sales by Nonowners (continued)

• Entrustment Rule
– If an owner entrusts the possession
of his/her goods to a merchant
who deals in goods of that kind,
the merchant has the power to
transfer all rights/title in the goods
to a buyer in the ordinary course
of business.
– The real owner cannot reclaim the
goods from this buyer

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 Remedies for Breach of
Sales and Lease Contracts

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Tender of Delivery
• Transfer or delivery of goods to the
buyer or lessee in accordance
with sales or lease contract
• Requires:
– Conforming goods to be put aside
and held for buyer or lessee
– Notification be made to buyer or
lessee
– Goods must be tendered in single
delivery unless otherwise noted in
contract
– Payment due upon delivery unless
otherwise noted

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Place of Delivery
• Contract usually states place
and time of delivery
• If contract silent, place is
seller’s or buyer’s place of
business
• If they have no place of
business, it is their residence

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Place of Delivery (continued)
• If goods at warehouse and
are to be delivered without
being moved, delivery
occurs when seller:
– Tenders buyer negotiable
document of title
– Produces acknowledgement
from bailee of buyer’s right
of possession
– Tenders nonnegotiable
document of title or written
direction to bailee to deliver
goods to buyer

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Delivery in Carrier Cases
• Shipment Contracts
– Do not name destination
• Seller must put goods in carrier’s
possession and contract for delivery
• Obtain and deliver all documents
necessary for buyer to obtain
possession
• Notify buyer of shipment
• Destination Contracts
– Names destination
– Delivery must be made at reasonable
time and in reasonable manner

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Perfect Tender Rule

• If goods fail to conform,

buyer/lessee may:
– Reject entire shipment
– Accept whole shipment, or
– Reject part and accept part

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Exceptions
• Agreement of Parties
– Parties may contract to limit perfect
tender rule
• Defective or nonconforming goods
may be rejected
• Seller/lessor may replace
nonconforming goods
• Buyer/lessee accepts nonconforming
goods with compensation
• Substitution of Carriers
– Commercially reasonable carrier may
be substituted if agreed-upon delivery
manner fails or becomes unavailable

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Cure

• UCC gives seller/lessor

opportunity to cure
– time has not expired
– must notify buyer/lessee of
intentions

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Installment Contract

– Goods delivered and accepted at

different times
– Requires specific knowledge
– Seller can only reject entire
contract if default impairs value of
entire contract
– Seller can reject non-conforming
shipments

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Destruction of Goods
• Contract void
– If goods are totally destroyed
through no fault of either party
before risk of loss passes
– Both parties excused from
performance
• Contract voidable
– If goods are partially destroyed
through no fault of either party
before risk of loss passes
– Buyer may inspect goods and
choose to void the contract

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 Buyer’s and Lessee’s Performance

• Once seller/lessee has tendered

delivery, buyer/lessee is obligated to
accept and pay as per sales/lease
contract.
• If contract silent, UCC controls.

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Right of Inspection
• Buyer has the right to inspect
goods before paying for
them
• Buyer may reject
nonconforming goods
• Parties may agree as to time
and place of inspection
• If contract silent, inspection
must occur at reasonable
time and place

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Payment
– Due from buyer when and
where goods delivered
– Contract may set terms
– Can be paid in any
manner acceptable in
ordinary course of business
• If cash required, buyer must
be given an extension to
secure cash

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Acceptance
• 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.
• Acceptance occurs if buyer acts
inconsistently with seller’s
ownership rights.
• Buyers/lessees must accept
“commercial unit”.

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Revocation of Acceptance
• Buyer can revoke acceptance if:
– Goods are non-conforming
– The nonconformity substantially
impairs the value of the goods
– The seller’s promise to timely cure is
not met
– Goods were accepted before non-
conformity was discovered and the
nonconformity was difficult to
discover
– The goods were accepted before the
nonconformity was discovered and
the seller/lessor assured the
buyer/lessee that the goods were
conforming

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Right to Withhold Delivery
• Delivery of goods may be
withheld if:
– Seller/lessor is in possession of goods
when buyer/lessee breaches contract
– Buyer/lessee fails to make payment
when due
– Buyer/lessee repudiates contract
• If part of the shipment has been
delivered at time of breach,
seller/lessor may withhold delivery
of remainder.
• If seller/lessor discovers that
buyer/lessee is insolvent, they may
require cash payment.

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Right to Stop Goods in Transit
• Seller/lessor may stop
shipment in transit if:
– He discovers buyer’s/lessee’s
insolvency
– Buyer/lessee repudiates
shipment
– Buyer/lessee fails to make
payment when due
• Seller/lessor must give
sufficient notice to allow
bailee to prevent delivery
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Right to Reclaim Goods
• Seller/lessor may reclaim
goods if:
– The buyer misrepresented their
solvency in writing within 3
months before delivery
– Paid for goods with a check
that bounced
– If the lessee is in default of the
contract

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Right to Dispose of Goods
• Must be made in good faith
• Seller/lessor must give notice
to buyer/lessee of intention
– Notice not required with
perishable goods or goods that
will quickly decline in value
• Seller/lessor may recover
damages
• Profit does not revert to
original buyer

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Right to Recover the Purchase
Price or Rent
• Seller/lessor may sue to
recover if:
– Buyer/lessee fails to pay as due
– Buyer/lessee breaches contract
after goods have been
identified and seller/lessor
cannot resell or dispose of them
– Goods are damaged or lost
after risk passes to buyer/lessee

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Additional Rights
• Seller/lessor may sue to
recover damages caused by
buyer’s or lessee’s breach.
• Seller/lessor may recover lost
profits.
• Seller/lessor may cancel
contract if buyer/lessee
breaches.

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Buyer’s and Lessee’s Remedies
• Buyer may reject nonconforming goods or
improperly tendered goods.
– May reject the whole, accept the whole, or
accept any commercial unit and reject the rest
– Must reject within a reasonable time period.
– Must follow reasonable instructions for return of
goods.
• If goods are perishable, must make
reasonable effort to sell them on seller’s
behalf.
– Buyer entitled to reimbursement for shipping,
holding, storage expenses.

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Buyer’s and Lessee’s Remedies
(continued)

• If buyer makes full or partial

payment before goods are
received and seller/lessor
becomes insolvent within ten days
of receiving payment, they can
recover goods .
• If goods are unique, buyer can
obtain specific performance
• Buyer/lessor may cover.
• Buyer/lessee has right to replevy
goods, if they are wrongfully
withheld.

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Buyer’s and Lessee’s Remedies
(continued)

• Buyer/lessee may cancel contract

if seller/lessor fails to deliver
conforming goods or repudiates
contract
– Buyer/lessee may recover damages
• Buyer/lessee may recover
damages for accepted
nonconforming goods
• Buyer/lessee may recover
damages for loss from seller’s
breach

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Additional Performance Issues

• Assurance of Performance
– An adequate assurance of due
performance may be demanded
in writing by either party.

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Anticipatory Repudiation
– Occurs when a party
repudiates the contract before
performance is required.
– Wavering is not sufficient.
– Aggrieved party may:
• Await performance for a
commercially reasonable time.
• Treat contract as breached at
time of anticipatory repudiation.
• Indicate repudiation is considered
final.

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Statute of Limitations

– The UCC provides that an action

for breach of any written or oral
sales or lease contract must
commence within four years after
the cause of the action accrues.

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Agreements Affecting Remedies
• Parties may agree to
remedies in addition to those
available under the UCC.
• UCC allows for liquidated
damages as a substitute for
actual damages.

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