Business Law II

ASSIGNMENT

The Open Offer

Jimmy, an art dealer and merchant, is running out of funds. Luckily, he owns a priceless Van Gogh painting. He writes his friend Tommy. The letter says “Tommy you remember that Van Gogh painting you were interested in buying? I will offer it to you for $500,000. I will give you one month to accept this offer.” Jimmy signs the letter. Tommy receives the letter, and he is very excited. He writes back two weeks later saying that he accepts, and Tommy encloses a check for $500,000. Unfortunately, Jimmy received a better offer for the painting, and Jimmy accepts that one.

•Is there a breach of contract?

•If so, what remedies may Tommy get?

** 500 to 750 words, APA style, MUST BE ORIGINAL WORK, 3 references with citations**

COURSE READING

SALES AND LEASE CONTRACTS

Article 2 of the Uniform Commercial Code (UCC) governs transactions in goods. The UCC defines a sale as “the passing of title from the seller to the buyer for a price.” Goods are tangible and movable personal property. This tangibility encompasses items with a physical existence. Personal property, such as bonds and stock, has a conceptual existence and are, therefore, not covered by the UCC. Movable property includes items that can be carried from place to place. For this reason, fixtures attached to land that cannot be removed without material harm to the land are not considered to be movable property. The UCC’s provision may apply differently depending on whether the seller is a merchant. A merchant under the UCC is a person who: a) deals in goods of the kin involved in the contract; b) 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; and c) a person who employs a merchant as a broker, agent, or other intermediary. Additionally, the UCC covers the lease of goods in Article 2A. The UCC changes the common law of contracts in a number of ways.

One of the major ways the UCC changes the law of contracts relates to the treatment of contracts with ambiguous offers, acceptances, or terms. For example, the court will enforce a contract even if some terms are left open as long as 1) the parties intended to make a contract; and there is a reasonably certain basis for the court to grant an appropriate remedy. The court may rely upon extrinsic evidence to supply these terms. Additionally, the court may rely upon various “gap-filler” provisions in the UCC. These allow the court to rely upon (in this order): 1) course of performance—or the parties' actions in attempting to meet their obligations under the contract; 2) course of dealings—or the parties' actions in attempting to meet their obligations under other contracts together; 3) usage of trade—or the meaning that terms of the contract are given within a particular trade or industry. However, the court cannot use these doctrines to help specify a quantity term.

The UCC also makes some substantial modification to the rules governing offers, acceptance and consideration. For example under the merchant firm offer rule, a signed offer to keep a offer open will be enforceable even without consideration for the amount of time specified in the writing or a reasonable amount of time (though in no case will the offer be left open for longer than three months). And the common law mirror-image rule has also been modified. Under the UCC, an acceptance that has terms that differ from the offer will create a contract as long as there is a definite acceptance. The UCC is also much more lenient on the requirement for consideration. For example, modifications made in good faith do not require consideration. And we have already discussed how the merchant’s firm offer rule will create a binding option contract even without consideration.

Additionally, the UCC simplifies laws relating to title and risk of loss in sales contracts. Essentially, the UCC divorces questions of who has the title from those dealing with who bears the risk of law. It replaces a title-based approach by focusing on specific risk of loss and identification rules. Identification is a prerequisite under the UCC for an interest in goods to pass from seller to buyer. It requires that the goods exist and be identified to the contract. With existing goods, identification occurs when the contract is made. And identification will allow a buyer to obtain insurance on the goods. Identification leads to title passing to the buyer. Although the parties may specify when title transfer occurs after identification by default, the title will pass when delivery occurs. Finally, the UCC allows the party to set when the risk of loss—who bears the loss if goods are destroyed—passes from the seller to the buyer. If no contrary provision is set, the risk of loss transfers based on specific rules in the UCC. These rules differ depending on the situation. These rules are generally less concerned with title and more with a common-sense approach based on which party is in a better position to protect the goods from destruction.

RISK OF LOSS, PERFORMANCE, AND BREACH

Title used to be the central concept in sales law, and the party with title bore the risk of loss of the goods (and thus would be able to insure against if necessary). Under this approach, it was sometimes difficult to tell when title transferred from the buyer to the seller. However, the UCC replaced an emphasis on title with an emphasis on identification and risk of loss.

Identification is a process by which a buyer will gain the right to obtain insurance on goods and the right to recover from third parties that recover goods. It requires that goods exist, and that the goods are identified in the contract. By identifying goods in a way that can distinguish them from other goods, the passage of title can be facilitated. And identification occurs when the contract is made in the case of existing goods. Once the identification occurs, the passage of title will occur. The parties can agree when the title will pass. If there is no other agreement, the title to goods passes at the time and place at which the seller or lessor delivers the goods.

Finally, there are rules governing risk of loss. Essentially, the UCC has divorced the question of who bears the risk of loss on the destruction or harm to goods from title. Rather, the UCC applies a more commonsense approach that generally places the risk of loss on the party most able to guard against potential harm to the goods. These rules will be discussed in further detail below. However, it is important to first recognize that the parties are free to modify these rules by contract at any time. In situations with movement of goods, the risk of loss will shift in the following ways: 1) in shipment contracts the risk passes when the goods are delivered to a carrier; 2) in a destination contract, risk passes when the goods are tendered to a buyer or lessee at the specified destination. When there is not movement of goods, the risk of loss will change differently in the following scenarios: 1) in the case of goods held by the seller or lessor the risk of loss changes when the buyer takes possession of the goods if the seller is a merchant. Otherwise the risk will pass on tender of delivery; 2) if the goods are held by a bailee, the risk of loss will transfer when the buyer receives a negotiable document for title of the goods; 2) the bailee acknowledges the buyer’s right to possess the goods; or 3) the buyer receives a nonnegotiable document of title and has had a reasonable time to present the document to the bailee and demand the goods.

The UCC also has rules governing performance under the contract and breaches for a failure to meet contractual obligations. The UCC requires that party to a contract act with good faith and commercial reasonableness. Sellers are required to tender delivery at a reasonable time and in a reasonable manner, and the seller must give the buyer notice. This delivery must be in one shipment (absent contrary agreement or custom), and the delivery must conform to the so-called perfect tender rule, which requires conformity with every detail of the contract. Although this rule is harsh, the UCC allows for mitigation of this rule in many cases. For example, the seller may have the right to cure defective delivery if there is still time to perform the contract. It is important that you familiarize yourself with some of the other exceptions to this rule. On the other hand, buyers are under an obligation to pay according to the terms of the contract. Buyers may inspect goods, and if the goods do not meet the requirements of the contract, no payment is required. Finally, the buyer may revoke acceptance if nonconformity substantially impairs the value of the goods and: 1) acceptance was based on reasonable assumption that the nonconformity would be cured and it has not; 3) the buyer or lessee did not discover the nonconformity before acceptance, because it was difficult or because assurances made by the seller or lessor that the goods conformed kept the buyer or lessee from inspecting.

The UCC provides for several remedies of these (or other duties) are not met. Sellers remedies include the right to withhold delivery (when a buyer fails to meet its obligation), reclaim goods if the prerequisites are met, resell goods, recover the purchase price or to recover damages. Buyers may reject a delivery, obtain specific performance, cover, or recover damages. The UCC will govern when these remedies may be used.