Chapter 14 Formation and Performance of Sales and Lease Contracts McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc All rights reserved Chapter 14 Ethical Dilemma As this chapter indicates, the Uniform Commercial Code (UCC) holds a merchant to a higher standard of behavior than non-merchants UCC Section 2-104(1) defines a merchant as “a person who deals in goods of the kind, or otherwise by his occupation, holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction, or to whom such knowledge or skill may be attributed by his employment of an agent or broker or other intermediary who, by his occupation, holds himself out as having such knowledge or skill.” From an ethical perspective, why should merchants be held to a higher standard of behavior than non-merchants? Do you support this “great expectation” of merchants, or you believe that merchant status should be irrelevant in terms of expected standards of behavior in a sale of goods transaction? 14-2 Chapter 14 Case Hypothetical and Ethical Dilemma While traveling on Interstate 10 in the vast, arid land between Phoenix and Los Angeles, a traveler’s “worst nightmare” occurs Transmission failure forces tourist Penn Lay to the emergency lane of the highway, and at that time Lay realizes the true value of a cell phone Lay calls a Phoenix towing company, and his car is transported to S Li Ping Transmission Repair, Inc The repair bill amounts to $4,500 On the bill, transmission parts total $4,000, and labor hours total $1,000 (5 hours at $200 per hour.) Lay believes that the principles of capitalism not extend to such an exorbitant sum, and he further believes that S Li Ping interpreted his out-of-state, North Carolina license plate as a “license to steal.” Who wins? In litigation between the parties, does the Uniform Commercial Code (UCC) apply, or ordinary contract law (“common” law?) If ordinary contract law applies, should North Carolina or Arizona law apply? Does S Li Ping have a legal and/or ethical obligation to charge “out-of-staters” the same repair price as “in-staters?” 14-3 The Uniform Commercial Code (UCC): A uniform/model law that governs commercial transactions, including contracts for the sale of goods, leases, and secured transactions 14-4 UCC Outline (Articles and Topics) • Article 1: General Provisions • Article 5: Letters of Credit • Article 2: Sales • Article 6: Bulk Transfers • Article 2(A): Leases • Article 7: Documents of Title • Article 3: Negotiable Instruments • Article 8: Investment Securities • Article 4: Bank Deposits and Collections • Article 9: Secured Transactions • Article 4(A): Wire Transfers 14-5 UCC Article Applies to contracts for the sale of goods 14-6 UCC Article Terminology • Sale: The passing of title from seller to buyer for a price • Goods: Tangible things that can be moved (Examples: Automobiles, furniture, electronics) • Mixed goods and services contracts: Contracts that include both goods and services UCC Article applies to contract if goods are “predominant part” of transaction • Merchants: Buyers or sellers who -Deal in goods of the kind involved in contract -By occupation, represent themselves as having knowledge and skill unique to goods involved in transaction, or -Employ a merchant as a broker, agent, or other intermediary 14-7 UCC Article 2(A) Applies to contracts for the lease of goods 14-8 UCC Article 2(A) Terminology • Lease: Transfer of right to possession and use of goods for a term, in return for consideration • Lessor: Person who transfers right to possession and use of goods under lease • Lessee: Person who acquires right to possession and use of goods under lease 14-9 How Sales and Lease Contracts Are Formed Under The UCC • Formation in General: UCC more lenient than common law regarding contract formation; courts evaluate intent of parties to sales or lease contract • Offer and Acceptance -Offers valid even if terms left open -“Mirror-image” rule does not apply -Courts evaluate each case individually to determine whether additional terms allowed • Consideration: Mutual consideration required upon forming agreement When sales/lease contracts modified, modifications need not be supported by additional consideration 14-10 UCC Statute of Frauds General Rule: Contracts for sale of goods must be in writing if goods valued at $500 or more; lease contracts that require payments of $1,000 or more must also be in writing 14-12 Unconscionability Definition: In context of UCC contract for sale of goods or lease, an agreement that is so unfair or “onesided” that court refuses to enforce it 14-13 Contracts for the International Sale of Goods (CISG) • Definition: Treaty governing international “businessto-business” sales contracts • Many major trading nations have signed the CIS • Significance of CISG: Important because CISG (rather than UCC) governs international sales contracts • Advantage of CISG: Provides clarity, predictability, and uniformity for global businesses 14-14 Title, Risk of Loss, and Insurable Interest 14-15 Categories of Title • Good Title: Acquired from someone who already owns the goods “free and clear” • Void Title: Not true title -Example: Purchase of stolen goods • Voidable Title: Occurs in certain situations in which contract between original parties would be void, but goods have already been sold to third party 14-16 UCC Article Rules Regarding Title Acquisition • Good Title: Acquired from someone who has rightful ownership • Void Title: Results when someone acquires possession of stolen goods • Voidable Title results when: -Buyer deceived seller regarding his/her identity -Buyer wrote bad check -Buyer committed criminal fraud in securing goods -Buyer and seller agreed title would not transfer until later time -Buyer is a minor 14-17 Acquiring Good Title General Rule: If “third party purchaser” makes “good-faith” purchase for value, he/she gets good title (not void/voidable title) 14-18 Acquiring Good Title General Rule: If owner entrusts possession of goods to merchant who deals in goods of that kind, merchant can transfer all rights in the goods to a buyer in the “ordinary course of business” 14-19 UCC Terminology Regarding Transfer of Title • “Ownership”—Transfer of Title • “Encumbrance”—Goods used as collateral for debt • “Loss”—Refers to which party has “risk of loss” when goods damaged/destroyed • “Insurable Interest”—Right to insure goods against any risk exposure 14-20 Types of Sales Contracts “Simple Delivery” (Definition): Buyer and seller contract, buyer leaves with goods • Title transfers to buyer when contract executed • Risk of loss transfers to buyer when buyer takes possession • Buyer has insurable interest upon receiving title 14-21 Types of Sales Contracts “Common Carrier Delivery” (Definition): Buyer and seller contract, seller then places goods with common carrier • “Shipment” Contract: Title transfers to buyer at time and place of shipment; buyer bears risk of loss while goods in transit • “Destination” Contract: Seller bears risk of loss until seller delivers goods to stipulated destination 14-22 Shipping Terms Specifying Requirements For Delivery (Term and Explanation) • FOB (“Free on Board”): Selling price includes transportation costs, and seller has risk of loss to either place of shipment, or place of destination • FAS (“Free Alongside”): Seller, at seller’s expense, delivers goods alongside ship before risk transferred to buyer • CIF or CF (“Cost, Insurance, and Freight”; “Cost and Freight”): Seller places goods in possession of carrier before risk passes to buyer • Delivery “Ex-Ship” (Delivery From Carrying Vessel): Risk of loss passes to buyer when goods leave ship 14-23 Types of Sales Contracts “Goods-In-Bailment” (Definition): Identifies goods in storage • Rules regarding passage of title, risk of loss, and insurable interest vary, depending on whether seller has negotiable title 14-24 Types of Sales Contracts “Conditional Sales” • “Sale-On-Approval”: Title and risk of loss with seller until buyer notifies seller of approval • “Sale-Or-Return”: Buyer has insurable interest once goods identified in contract; title and risk of loss transfer depend on whether goods in bailment, delivered by common carrier, or delivered by seller 14-25 Risk of Loss Upon Breach of Contract • Seller in Breach (by failing to deliver goods): -Buyer may accept nonconforming goods “as is”, or reject goods (subject to seller’s right to “cure”) -Risk of loss remains with seller until buyer accepts goods, or deficiencies corrected • Buyer in Breach (buyer refuses to accept conforming goods, goods later lost or damaged): -Risk of loss depends on type of contract between buyer and seller 14-26 ... occurs Transmission failure forces tourist Penn Lay to the emergency lane of the highway, and at that time Lay realizes the true value of a cell phone Lay calls a Phoenix towing company, and his... possession of goods to merchant who deals in goods of that kind, merchant can transfer all rights in the goods to a buyer in the “ordinary course of business 14-19 UCC Terminology Regarding Transfer of. .. higher standard of behavior than non-merchants? Do you support this “great expectation” of merchants, or you believe that merchant status should be irrelevant in terms of expected standards of behavior