Chapter 17: the formation of Sales and Lease Contracts 3
Chapter 20The Formation of
Sales and Lease Contracts
Introduction
The Uniform Commercial Code (UCC) is probably the most important piece of commercial legislation in the history of the United States. The drafters of the UCC comprised a group of legal scholars—Karl Llewellyn, Grant Gilmore, Homer Kripke, and Soia Mentschikoff. The UCC created a nearly uniform body of law in each state, greatly facilitating interstate commerce.
Because of its nearly uniform applicability, your students may be confused about whether the UCC is a state or federal law. As discussed in Chapter 1, the UCC was (and remains) a joint effort of the National Conference of Commissioners on Uniform State Laws and The American Law Institute. All its articles have been adopted with few changes by every state (except Louisiana, which has adopted only part of it) and the District of Columbia. The UCC contains many similarities to the common law contract principles discussed in the previous chapters. Indeed, such similarities should be expected, because the UCC represents the codification of much of the common law of contracts.
This chapter introduces some of the key concepts under the UCC. The chapter also briefly reviews the United Nations Convention on Contracts for the International Sale of Goods (CISG).
Chapter Outline
I. The Scope of Articles 2 and 2A
The UCC covers all of the phases of an ordinary sale or lease of goods, including the formation of the contract for a sale (Article 2) and a lease (Article 2A).
Additional Background—The Uniform Commercial Code
Of all the attempts in the United States to produce a uniform body of laws relating to commercial transactions, none has been as comprehensive or successful as the Uniform Commercial Code (UCC). The UCC was the brainchild of William Schnader, president of the National Conference of Commissioners on Uniform State Laws (NCC).
The UCC was not the first effort to create more uniformity in the law. Since its founding in 1892, the NCC drafted a number of uniform acts, many of which were accepted in whole or in part by various states. The first was the Uniform Negotiable Instruments Law in 1896, followed by the Uniform Sales Act in 1906 and a number of others—the Uniform Bills of Lading Act (1909), the Uniform Warehouse Receipts Act (1906), the Uniform Stock Transfer Act (1909), the Uniform Conditional Sales Act (1918), and the Uniform Trust Receipts Act (1933). In the early 1920s, the NCC was joined in its efforts by the American Law Institute, which was formed to compile the Restatements.
When the drafting of the UCC began in 1945, its chief reporter was Karl Llewellyn of the Columbia University Law School. Llewellyn was instrumental in shaping the final format of the UCC and was responsible for reviewing and revising all of its provisions, as well as establishing its scope, objectives, and style. According to Schnader, in a 1967 article discussing the preparation and enactment of the UCC, Llewellyn was “the outstanding man in the United States to undertake this task” because he was “the type of law professor who was never satisfied unless he knew exactly how commercial transactions were carried on in the market place. He insisted that provisions of the Code should be drafted from the standpoint of what actually takes place from day to day in the commercial world rather than from the standpoint of what appeared in statutes and decisions.”a Yale scholar Grant Gilmore said of Llewellyn:
It was, I believe, Karl’s non-systematic, particularizing cast of mind and his case-law orientation which gave to the statutes he drafted ... their profound originality. His instinct appeared to be to draft in a loose, opened-ended style; his preferred solutions turned on questions of fact (reasonableness, good faith, usage of trade) rather than on rules of law. He had clearly in mind the idea of a case-law Code: one that would furnish guide-lines for a fresh start, would accommodate itself to changing circumstances, would not so much contain the law as free it for a new growth.b
Soia Mentschikoff—a legal scholar, a practicing attorney, the first woman partner at a major Wall Street law firm, Harvard Law School’s first woman faculty member, dean of the University of Miami Law School, and Llewellyn’s wife—was the Associate Chief Reporter for the UCC.
The first draft of the UCC was issued with the endorsement of the American Bar Association in 1952 and was revised in 1957 and 1958 to incorporate a number of changes that had been recommended by the New York Law Revision Commission. Between 1958 and 1964, the UCC was reviewed and substantially enacted in every state (except Louisiana, which accepted only parts of it) and the District of Columbia. The UCC attempts to provide a consistent and integrated framework of rules to deal with all phases ordinarily arising in a commercial sales transaction from start to finish. As amendments and revisions of articles and sections of the UCC in 1962, 1966, 1972, 1977, 1987, 1988, and the 1990s have shown, the UCC has always been meant to reflect, as Llewellyn insisted, “what actually takes place from day to day in the commercial world.”
a. William Schnader, “A Short History of the Preparation and Enactment of the Uniform Commercial Code,” 22 University of Miami Law Review 1 (1967), p. 4.
b. Grant Gilmore, “In Memoriam: Karl Llewellyn,” 71 Yale Law Journal (1962), p. 813.
A. Article 2—Sales
• When the UCC speaks, its principles apply. When the UCC is silent, other state statutes and the common law apply.
• Article 2 deals with sales of goods—not real property, services, or intangible property (stocks and bonds).
1. What Is a Sale?
A sale is “the passing of title from the seller to the buyer for a price” [UCC 2–106(1)]. The price may be payable in money, goods, or services.
Case Synopsis—Case 20.1: Nautilus Insurance Co. v. Cheran Investments LLC
Nautilus Insurance Co. provided commercial property insurance to Blasini Inc., doing business as the Attic Bar & Grill in Omaha, Nebraska. Following a fire at the bar, Nautilus filed an action in a Nebraska state court against several defendants, including Cheran Investments LLC, to determine who was entitled to the insurance proceeds for the personal property damage. Under an agreement with Cheran, Blasini had agreed to buy the Attic’s business assets but had failed to pay the price. The court declared Cheran the owner of the personal property. Blasini appealed.
A state intermediate appellate court reversed. Under UCC 2–401, title to the assets passed to Blasini at the time Blasini contracted with Cheran and, irrespective of whether the purchase price was paid, Blasini became the owner.
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Notes and Questions
The UCC defines a sale as “the passing of title from the seller to the buyer for a price.” What determines “the passing of title”? Before any interest in goods can pass from the seller to the buyer, the goods must exist and they must be identified as the specific goods designated in the contract. Whether the goods exist can be obvious—a car can be identified by its vehicle identification number (VIN), for instance. Future goods, such as unborn livestock or unplanted crops, however, are not identifiable until conception or the inception of their growth. Other future goods require that the seller ship, mark, or otherwise designate the goods to which the contract refers.
Title to these goods then passes at the time and place of their delivery from the seller to the buyer. Of course, the seller and buyer can agree otherwise. Delivery arrangements can affect when title passes. Under a shipment contract, for example, a seller is required only to deliver the goods into the hands of a carrier. Once this occurs, title has passed to the buyer. When delivery is affected without movement of the goods (when they are located in a warehouse, for example), title generally passes when the buyer is given the appropriate documents to obtain the goods.
2. What Are Goods?
Goods are tangible and movable.
a. Goods Associated with Real Estate
With respect to goods associated with real estate, a contract for a sale of minerals, oil, or gas is a contract for a sale of goods if severance is to be made by the seller. A sale of growing crops or timber to be cut is a sale of goods regardless of who severs them.
b. Goods and Services Combined
When goods and services are combined, courts determine which is predominant—the good or the service. If the contract is primarily for goods, UCC applies to all disputes.
3. Who Is a Merchant?
In some cases, special standards apply to merchants. A merchant for one type of goods is not necessarily a merchant for another type. A merchant is—
• A person who deals in goods of the kind involved in the contract.
• A person who by occupation, holds himself or herself out as having knowledge and skill peculiar to the practices or goods involved in the transaction.
• A person who employs a merchant as a broker, agent, or other intermediary [UCC 2–104].
B. Article 2A—Leases
Article 2A covers any transaction that creates a lease of goods, as well as subleases of goods [UCC 2A–102, 2A–103(k)]. Article 2A echoes the principles of Article 2, but varies to reflect differences between sale and lease transactions.
1. Definition of a Lease Agreement
A lease agreement is a lessor and a lessee’s bargain with respect to a lease of goods as found in their language and as implied by other circumstances, including course of dealing and usage of trade or course of performance [UCC 2A–103(1)(k)].
2. Consumer Leases
Some provisions of Article 2A apply only to consumer leases, which require—
• A lessor who regularly engages in the business of leasing or selling.
• A lessee who lease goods “primarily for a personal, family, or household purpose.”
• Total lease payments that are less than $25,000 [UCC 2A–103(1)(e)].
II. The Formation of Sales and Lease Contracts
The following sections summarize how the UCC changes the effect of the common law of contracts.
A. Offer
1. Open Terms
A sales or lease contract will not fail for indefiniteness even if one or more terms are left open, as long as—
• The parties intended to make a contract.
• There is a reasonably certain basis for the court to grant an appropriate remedy [UCC 2–204(3), 2A–204((3)].
a. Open Price Term
If the parties have not included a price term, a court will set a reasonable price at the time for delivery [UCC 2–305(1)]. If, through the fault of one of the parties, a price is not fixed, the other party can fix a reasonable price or treat the contract as canceled [UCC 2–205(3)].
b. Open Payment Term
If the payment is not specified, payment is due at the time and place at which the buyer will receive the goods [UCC 2–310(a)].
c. Open Delivery Term
If a delivery term is not specified, delivery is at the seller’s place of business (or, if no place of business, the seller’s residence) [UCC 2–308(a)].
d. Duration of an Ongoing Contract
If unspecified successive performances are due, either party can terminate the relationship on reasonable notice [UCC 2–309(2), (3)]
e. Options and Cooperation Regarding Performance
If the contract specifies shipment, but the arrangements are unspecified, the seller has the right to make them [UCC 2–311]. If terms relating to an assortment of goods are omitted, the buyer can specify them [UCC 2–311].
f. Open Quantity Terms
• If the quantity term is left open, a court will have no basis for determining a remedy [UCC 2–306].
• Requirements and output contracts are exceptions—the quantity is the amount that occurs during a normal production year, and the actual quantity cannot be unreasonably disproportionate.
2. Merchant’s Firm Offer
If a merchant gives assurances in a signed writing that an offer will remain open, the offer is irrevocable, without consideration for the stated period of time, or, if no definite period is specified, a reasonable period (neither period to exceed three months) [UCC 2–205, 2A–205].
B. Acceptance
Generally, acceptance of an offer to buy or sell goods may be made in any reasonable manner and by any reasonable means. Acceptance may be by a prompt shipment of goods or a promise to ship [UCC 2–206(1)(b)].
1. Shipment of Nonconforming Goods
A shipment of nonconforming goods is both an acceptance and a breach, unless the seller seasonably notifies the buyer that the shipment is offered only as an accommodation.
2. Communication of Acceptance Required
When acceptance by performance is reasonable, “an offeror who is not notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance” [UCC 2–206(2), 2A–206(20].
3. Additional Terms
If an offeree’s response indicates a definite acceptance, a contract is formed, even if the acceptance includes terms in addition to or different from the offer [UCC 2–207(1)].
a. Rules When One Party or Both Parties Are Nonmerchants
If the modifications are not conditional, and one of the parties is a merchant, the contract is formed according to the terms of the original offer.
b. Rules When Both Parties Are Merchants
If the modifications are not conditional, and both parties are merchants, the additional terms are part of the contract unless—
• The original offer requires the acceptance of its terms.