contract analysis 4 pages


BBA 3210, Business Law 1

Course Learning Outcomes for Unit VI Upon completion of this unit, students should be able to:

1. Explain Article 2 of the Uniform Commercial Code pertaining to all types of transactions.

2. Interpret contract and lease assignments 2.1 Articulate the specific obligations of sellers/lessors and buyers/lessees.

Reading Assignment Chapter 15: Formation and Performance of Sales and Lease Contracts, pp. 291–308 Chapter 16: Sales and Lease Contracts: Performance, Warranties, and Remedies, pp. 312–328

Unit Lesson The Uniform Commercial Code (UCC) The UCC was created for businesses and organizations that purchase products to provide clarity and consistency to sales laws. The UCC can apply to many different organizations. For example, the University of Minnesota is considered to be a merchant under the UCC. The UCC affects many businesses and organizations, thus each needs to be aware of the applicable laws. Article 2 (2002) of the UCC governs sales contracts for the sale of goods. Article 2(A) of the UCC governs lease contracts. The Case Opener of Crown Castle Inc. et al. v. Fred A. Nudd Corporation et al. (2008) raised the question of whether cell towers are tangible goods and, therefore, controlled by UCC Article 2 (Kubasek, Browne, Herron, Dhooge, & Barkacs, 2016). The distinction matters because in that jurisdiction, the statute of limitations for breach of contract is six years, whereas it is four years under the UCC. The court held as a matter of law that the four-year statute of limitations under UCC Section 2-725 applied as the cell towers were considered to be tangible goods, despite their very nature to be attached to real estate, which is not a tangible good under the UCC. The UCC applies to anyone who buys and sells goods; however, it makes an important distinction between a merchant and a regular buyer or seller. The distinction is the assumption that a merchant has a stronger ability to watch out for himself or herself than does an ordinary buyer or seller. There are four ways that an entity qualifies as a merchant. If someone regularly sells goods as a business, employs others to sell these goods, works for a person selling the goods, or self-identifies as a merchant, then that entity is a “merchant” under the rules of Article 2. In this case, a private citizen is clearly not a merchant. Consequently, the UCC does not apply the same standard of care to the citizen’s behavior; it places greater duties on merchants. Therefore, a common issue often litigated is whether or not a party to a contract is considered to be a merchant or a private citizen. The UCC varies from common law contract rules. For example, it creates a new category of offers: the firm offer. Under UCC Section 2-205, offers made by merchants are considered to be “firm” if the offer (1) is made in writing and (2) gives assurances that it will be irrevocable for up to three months, despite a lack of consideration for the irrevocability. In addition to the firm offer rule, there are other variations from common law contract. For example, the mirror- image rule does not apply under the UCC. Furthermore, there is no requirement for additional consideration when a contract is modified under the UCC.


Sales and Lease Contracts and the Uniform Commercial Code

BBA 3210, Business Law 2



Sales Contracts Under the UCC There are four scenarios for sales contracts under the UCC. In each, the title, risk of loss, and insurable interest pass at different times. The following sales scenarios are included:

1. simple delivery contract, 2. common-carrier delivery contract, 3. goods-in-bailment contract, and 4. conditional sales contract.

Business managers must understand the rights and obligations of businesses to engage in efficient business transactions. The UCC requires good faith in the performance and enforcement of every contract. Obligations for sellers and lessors are different from the obligations of buyers and lessees. The “perfect tender rule” governs sellers and lessors, whereas the general obligation is stated for buyers and lessees. This rule indicates that if goods or tender of delivery fail in any way to conform to the contract, the buyer/lessee has the right to accept the goods with the defects, reject the entire shipment, or accept part and reject part. This rule is subject to certain exceptions such as industry norms, exceptions outlined in the parties’ agreement, sellers/lessor’s right to cure, excuse from performance when goods are destroyed through no fault of the parties, substantial impairment, and commercial impracticability. Buyers/lessees also possess specific obligations. In addition to the obvious requirements of acceptance and payment for conforming goods according to the contract, buyers/lessees are required to inspect the goods within a reasonable timeframe to ensure that they conform to the specifications of the agreement. Warranties Definition of a warranty: A warranty is an assurance, either express or implied, by one party that the other party can rely on its representations. In sales, this is a binding promise regarding a product should the product fail to meet the manufacturer’s or seller’s promises (Kubasek et al., 2016). The UCC significantly diverges from common law with respect to warranties, particularly implied warranties. With common law, the only implied warranty is the implied warranty of assignability; all other warranties must be explicitly contracted. Warranties generally impose certain duties on the seller/lessor. The UCC establishes three basic categories:

1. warranties of title; 2. express warranties; and, 3. implied warranties of merchantability, fitness for a particular purpose, and trade usage.

In the textbook, Webster v. Blue Ship Tea Room, Inc. (1964) focuses on the merchantability of food (Kubasek et al., 2016). For additional information and a more recent case that used Webster v. Blue Ship Tea Room to render a similar decision, read the case of Mexicali Rose v. Superior Court, 922 P.2d 1292 (1992). Warranty rights of third-parties: The UCC allows for three possibilities: (1) seller’s warranties extend to the buyer’s household members and guests; (2) seller’s warranties extend to any reasonable and foreseeable user; or (3) seller’s warranties extend to anyone injured by the good. Every state in the United States has accepted the UCC, and each state has decided which level of protection shall be extended to third parties.

References Kubasek, N., Browne, M. N., Herron, D. J., Dhooge, L. J., & Barkacs, L. (2016). Dynamic business law: The

essentials (3rd ed.). New York, NY: McGraw-Hill Education. U.C.C. § 2 (amended 2002).