What is the Uniform Commercial Code?

• Written by The American Law Institute and the National

Conference of Commissioners on Uniform State Laws
• Relevant articles adopted by 49 states (not Louisiana) with
minor differences

Uniform Commercial Code

•Article 1 – General Provisions
•Article 2 – Sales
•Article 2A – Leases
•Article 3 – Negotiable Instruments
•Article 4 – Bank Deposits and Collections
•Article 4A – Funds Transfer
•Article 5 – Letters of Credit
•Article 6 – Bulk Sales
•Article 7 – Documents of Title
•Article 8 – Investment Securities
•Article 9 – Secured Transactions
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 Law Governing Contracts

Article 1

• Part 1, General Provisions

• Apply to the entire UCC, not just Article 2 and Article 2A
• Principles of law and equity, including the law merchant and the
law relative to capacity to contract, principal and agent,
estoppel, fraud, misrepresentation, duress, coercion, mistake,
bankruptcy, and other validating or invalidating cause
supplement its provisions. [§ 1–103]

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Article 1

• Part 2: General Definitions and Principles of

Interpretation

Key Definitions

• “Agreement,” as distinguished from “contract,” means the

bargain of the parties in fact, as found in their language or
inferred from other circumstances, including course of
performance, course of dealing, or usage of trade as provided in §
1 – 303. [§ 1–201(b)(13)]

• “Contract,” as distinguished from “agreement,” means the total

legal obligation that results from the parties agreement as
determined by the UCC and as supplemented by any other
applicable laws. [§ 1–201(b)(12)]

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 Key Definitions
• “Good faith” means honesty in fact and the observance of
reasonable commercial standards of fair dealing.
• [§ 1–201(b)(20)]
• “Person” means an individual, corporation, business trust,
estate, trust, partnership, limited liability company, association,
joint venture, government, governmental subdivision, agency, or
instrumentality, public corporation, or any other legal or
commercial entity. [§ 1–201(b)(27)]
• “Signed” includes using any symbol executed or adopted with
present intention to adopt or accept a writing.
• [§ 1–201(b)(37)]

Key Definitions
• “Writing” includes printing, typewriting, or any other intentional
reduction to tangible form. “Written” has a corresponding
meaning. [§ 1–201(b)(43)]
• “Knowledge” means actual knowledge. [§ 1–202(b)]
• A person has “notice” of a fact if the person:
• Has actual knowledge of it,
• Has received a notice or notification of it, or
• From all the facts and circumstances known to that person at
the time in question, has reason to know that it exists. [§1–
202(a)]

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 Article 1

Part 3: Territorial Applicability

and General Rules

Choice of Law

• Although the UCC allows the parties to select whatever law they
want to apply, whether or not it has any relation to the
transaction in question, most states have adopted a rule that
indicates that the law chosen must have some reasonable
relation to the contract.

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 Freedom of Contract

• Parties may agree to vary the effect of the provisions of the UCC
on their contract EXCEPT:
• Obligation of good faith,
• Diligence,
• Reasonableness,
• Care, and
• As otherwise stated in UCC. [§ 1–302(b)]

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Course of Performance
• A “course of performance” is the sequence of conduct between
the parties to a particular transaction that exists if:

The agreement of the parties with respect to the transaction
involves repeated occasions for performance by a party; and

The other party, with knowledge of the nature of the
performance and opportunity for objection to it, accepts the
performance or acquiesces in it without objection. [§ 1–
303(a)]

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 Course of Dealing

• A “course of dealing” is a sequence of conduct concerning a

previous transaction between the parties to a particular
transaction that is fairly regarded as establishing a common basis
of understanding for interpreting their expressions and other
conduct. [§ 1–303(b)]

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Usage of Trade

• “Usage of trade” is any practice or method of dealing having

such regularity of observance in a place, vocation, or trade as to
justify an expectation that it will be observed with respect to the
transaction in question. [§ 1–303(c)]

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 Interpretation

• Previous terms should be interpreted as in harmony, but if that

construction is unreasonable:
• Express terms prevail over all
• Course of performance prevails over course of dealing and
usage of trade
• Course of dealing prevails over usage of trade
[§ 1–303(e)]

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Obligation and Good Faith

• Every contract or duty within the UCC imposes an obligation of

good faith in its performance and enforcement. [§ 1–304]

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 Settlement of Breach

• A claim or right arising out of an alleged breach may be

discharged in whole or in part without consideration by
agreement of the aggrieved party in an authenticated record. [§
1–306]

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Article 2

Part 1: General Construction and Subject Matter

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 Scope of Article 2-Sales

• Article 2 governs “sale of goods.”

• Article 2 applies to transactions in goods; does not apply to
security interests and is not intended to impair or repeal any
statute regulating sales to consumers, farmers, or other
specified classes of buyers. [§ 2–102]
• “Sale”: passing title from seller to buyer for a price.
• “Goods”: must be tangible and movable (not land, services or
intangibles).
• “Merchant”: deals in goods of the kind sold.

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Merchant

• “Merchant” means a person who deals in goods of a 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 as an agent or broker or other
intermediary who, by his occupation, holds himself out as having
such knowledge or skill. [§ 2–104(1)]

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 Goods

• “Goods” means all things (including specially manufactured

goods) which are movable at the time of identification to the
contract for sale other than the money in which the price is to be
paid, investment securities, and things in action. “Goods” also
includes the unborn young of animals and growing crops and
other indentified things attached to realty. [§ 2–105]

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“Hybrid” Transactions; Goods and

Services
• Majority rule: If the “predominant purpose” of the whole
transaction was the sale of goods, Article 2 will be applied to the
whole (if goods are involved, most courts apply Article 2)
• Minority rule: Article 2 applies to the sale of goods aspect of the
transaction only (problems arise in applying two different
measures of damages)

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 Article 2

Part 2: Form, Formation, and

Re-Adjustment of Contract

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Formal Requirements: Statute of Frauds

• Contract for sale of goods of $500 or more is not enforceable

unless there is a writing sufficient to indicate that a contract has
been made between the parties and signed by the party against
whom enforcement is sought. [§ 2–201(1)]
• The Statute of Frauds concerns only the enforceability of an oral
agreement. It does not mean that an oral agreement for the sale
of goods of 500$ or more cannot be formed or is invalid.
However, if for example the Buyer fails to remit the price, you
may not be able to enforce the agreement in court if the Buyer is
able to successfully use the Statute of Frauds as a defense.

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 Statute of frauds: Main exceptions
• An agreement may be enforced even if it is not set forth in writing under
the following circumstances:
• “Merchant’s Exception” (UCC 2-201 (2)): If you and your Buyer are
both merchants*, and you sent him something in writing
memorializing the oral agreement (some courts consider detailed
invoices sufficient), and he did not object, the oral contract is
enforceable
• If the Buyer against whom you are trying to enforce the Sales
Agreement admitted its existence under oath (e.g. in pleadings or
other sworn statements)
• If the Buyer started to perform the Sales Agreement in part, you will
be able to enforce it up to the amount already paid.
• If the goods were specially manufactured per the Buyer’s order and
you began to manufacture them, or you entered into a contract for
the manufacture with a subcontractor and that subcontractor25 is
unable to resell the products

Between Merchants
• A merchant under the UCC is defined as a person who “deals in
goods of the kind or otherwise holds itself out by occupation as
having knowledge or skill peculiar to the practices or goods
involved in the transaction […] “
• If within a reasonable time a writing in confirmation of the
contract sufficient against the sender is received and the party
receiving it has reason to know its contents, it satisfies the
requirements of a writing against such party unless written
notice of objection to its contents is given within 10 days after it
is received. [§ 2–201(2)]
• The UCC provides that whenever an agreement has been set
forth in writing and was intended to be the final agreement of
the parties, no parol or extrinsic evidence is permitted (UCC 2-
202). This means that a party is not allowed to introduce outside
evidence, including earlier oral agreements, to contradict the
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terms of the written contract

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 Between Merchants

• However, the written agreement may be supplemented by

evidence of:
• Course of performance, course of dealing, or usage of trade; and
• Consistent additional terms (unless the court determines that the
record to have been intended as a complete and exclusive record of
the parties’ agreement)

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Formation in General
• A contract for sale of goods may be made in any manner
sufficient to show agreement, including conduct by both parties
which recognizes the existence of such a contract. [§ 1–204(1)]
• An agreement sufficient to constitute a contract for sale may be
found even though the moment of its making is undetermined.
[§ 1–204(2)]
• Even though one or more terms are left open, a contract for sale
does not fail for indefiniteness if the parties have intended to
make a contract and there is a reasonably certain basis for giving
an appropriate remedy. [§ 1–204(3)]

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 Firm Offers
• If a Buyer offers you to purchase goods in a signed document,
his offer is irrevocable:
• During the time indicated by the Buyer, or
• If he did not indicate any time, during a reasonable time
that shall not exceed three months (UCC 2-205).

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Offer and Acceptance

• Unless otherwise unambiguously indicated by the language or

circumstances, an offer to make a contract shall be construed as
inviting acceptance in any manner and any medium reasonable.
• An order or other offer to buy goods for prompt or current
shipment shall be construed as inviting acceptance either by
prompt promise to ship or by the prompt current shipment of
goods. [§ 2–206]

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 Conflict of Forms

• A written confirmation sent within reasonable time is an

acceptance even though it states terms additional to, or
different from, those offered or agreed upon unless acceptance
is expressly made conditional upon assent to the additional or
different terms. [§ 2–207(1)]
• So, we have acceptance? What are the terms of the agreement?

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Conflict of Forms

• Between merchants such terms become part of the contract,

unless:
• The offer expressly limits acceptance to the terms of the
offer;
• They materially alter it; or
• Notification of the objection to them has already been given
or is given within a reasonable time after notice of them is
received. [§ 2–207(2)]

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 Conflict of Forms

• Typical clauses that would normally “materially alter” the

contract:
• Warranty limitations, including merchantability and fitness
• Terms deviating from usage of trade
• Reservation of Seller to cancel if any invoice is not paid when
due
• Arbitration clause
• Clause requiring complaints be made in a time materially
shorter than customary or reasonable

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Conflict of Forms

• Typical clauses which would NOT normally “materially alter” the

contract:
• Slightly enlarging force majeure clause
• Clause fixing reasonable time for complaints within
customary limits
• In case of a purchase for sale to another, providing for
inspection by the third-party
• Interest on overdue invoices
• A clause altering remedies within customary trade usage

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 Conflict of Forms

• The idea is to avoid clause that would result in hardship or

surprise to other party if incorporated without knowledge of that
party.

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Contract Form

• Conduct by both parties which recognizes the existence of a

contract is sufficient to establish a contract for sale although the
writing of the parties do not otherwise establish a contract. In
such cases the terms of the particular contract consist of those
terms on which the writings of the parties agree, together with
any supplementary terms incorporated under any provisions of
the UCC. [§ 2–207(3)]

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• Under the present state of the law, we believe that there is no
language that a lawyer can put in a form that will always assure the
client of forming a contract on the client’s own terms. These efforts
will be frustrated by a responsive document that is expressly
conditional on assent to that document’s terms, by prior oral
agreement, or by the document’s use as an acceptance, not an
offer. If one must have a term, that party should bargain with the
other party for the term; a client should not get it by a lawyer’s
slight of hand. If a seller must have the term to reduce its liability
but cannot strike a bargain for it, the only answer may be to raise
the price, buy insurance, or – as a last resort – have an extra
martini every evening and do not capitalize the corporation too
heavily. {Uniform Commercial Code, White and Summers 5th
Edition (2000)}

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Modification

• An agreement modifying the contract under the UCC needs no

consideration to be binding. Overrules common – law “pre –
existing duty” rule. [§ 2–209(1)]

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 Formation of Sales and Lease Contracts

• Open Price: haven’t agreed on price - “reasonable price at the time

of delivery.”
• Open Payment: unless otherwise agreed, payment is due on
delivery (COD).
• Open Delivery: unless otherwise agreed, buyer takes delivery at
the Seller’s place of business.
• Open Quantity: generally courts will not impose a quantity.
Exceptions:
• Requirements Contract: buyer agrees to purchase what the
buyer needs or requires.
• Output Contract: buyer agrees to buy all of seller’s production
or output.
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Details of Sales Contracts

• Interpreting a sales contract is easier with common rules of

interpretation:
• Trade practices refers to using words common in a particular
industry
• Example: “case” has a different meanings for different
industries
• If price was omitted, UCC 2-305 fills the gap by providing the
term: reasonable price at the time for delivery

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 Details of Sales Contracts

• An outputs contract is an agreement in which buyer purchases all

the production of seller
• Example: chicken farmer agrees to sell only to Chicken Co. all
chickens produced
• A requirements contract is an agreement in which seller must
provide all requirements of the buyer
• Example: Textiles Inc. must provide all fabric required by T-
Shirts LLC for production

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Details of Sales Contracts

• Under the exclusive dealing contract provision of UCC 2-306(2),

sellers have an obligation to use their best efforts to supply the
goods to the buyer and the buyers are obligated to use their best
efforts to promote their sale
• If no time for performance is specified, a reasonable time is
implied

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 Details of Sales Contracts

• For contracts requiring successive performances over an indefinite

period of time, UCC 2-309 provides that either party can terminate
the contract upon giving reasonable notice
• Standardized shipping terms are customarily used in sales
contracts to aid in determining which party bears the risk of loss

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Title to Goods

• Title (evidence of legal ownership) to goods cannot pass from

seller to buyer until goods are identified to the contract [UCC 2–
401(1)]
• Parties may agree when title passes
• If no agreement, title to goods passes to buyer when seller
completes obligations of delivery
• Fundamental rule: buyer cannot receive better title to goods than
seller had

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 Passing of title (UCC 2-401)
• Unless the parties have agreed otherwise, the passing of title is linked
with the performance of the delivery.
• If the contract requires you to send the goods to the Buyer, and:
• You do not have to deliver them at destination, title passes at
the time of shipment
• You must deliver them at a particular destination, title passes
at the time you tender them there.
•If you do not need to move the goods:
• If you must deliver a document of title (such as a Bill of Lading),
title passes at the time you deliver such document; or
• If no documents of title are to be delivered, title passes at the time
of the conclusion of the Sales Agreement.
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Title to Goods: Exception to Rule

• Under UCC 2-403(1), a seller who has a voidable title may pass
good title to a good faith purchaser for value
• Voidable title: gained by fraudulent means
• Good faith means “honesty in fact in the conduct or transaction
concerned” [UCC 1–201(19)]

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 Title to Goods: Exception to Rule

• A buyer in ordinary course is a person who gains good title

because s/he
(a) in good faith and without knowledge that the sale to him is in
violation of the ownership rights of a third party,
(b) buys goods in the ordinary course of business of a person
selling goods of that kind (other than a pawnbroker) [UCC 1–
201(9)]

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Title to Goods: Exception to Rule

• If goods are entrusted to a merchant who deals in goods of that

kind, the merchant may transfer all rights of the entruster to a
buyer in the ordinary course of business [UCC 2– 403(2)]
• But a merchant-seller cannot pass good title to stolen goods
even if buyer is a buyer in the ordinary course of business

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 Risk of Loss in Shipping

• Common law placed risk of loss on the party who had technical
title at the time of loss
• UCC provides specific rules:
• Contracting parties, subject to the rule of good faith, may
specify who bears risk of loss in the agreement [UCC 2–509(4)]
• If contract requires seller to ship goods by carrier but does not
require delivery to a specific destination, risk passes to buyer
when seller delivers goods to carrier [UCC 2–509(1)(a)]

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International Sale of Goods

• The United Nations Convention on Contracts for the

International Sale of Goods (1980) provides rules governing risk
of loss in sale of goods contracts
• The International Chamber of Commerce published a list of
common international shipping terms known as INCOTERMS

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 Common Shipping Terms

• FOB (free on board) point of origin: Seller must deliver goods free
of expense and at seller’s risk (including loading on board) to the
place designated [2-319(1)]
• FAS (free alongside ship): Seller must deliver goods alongside the
vessel at the port at seller’s own risk and expense [2–319(2)]

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Common Shipping Terms

• CIF (cost, insurance, and freight): price of goods includes seller’s

cost and risk to load, ship, and insure goods [2–320]
• C & F: same as CIF, except seller not obligated to insure [2–320]
• Shipment contract: seller must place goods in possession of a
carrier and contract for transportation as is reasonable for the
nature of goods and other circumstances [2–504(a)]

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 Common Shipping Terms

• Destination contract: seller bears risk and expense of delivery to

particular destination [2–509(1)(b)]
• Common terms of destination contract:
• FOB destination [2–319(1)(b)]: seller bears expense and risk of
delivering goods to that destination
• Ex-ship [2-322]: seller bears expense and risk until goods
unloaded from ship
• No arrival, no sale [2-324]: seller bears expense and risk during
shipment, but if goods fail to arrive, seller has no further
liability to buyer

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Passing of risk (UCC 2-509)

• Where the contract requires or authorizes the Seller to ship the

goods by carrier, the risk of loss passes to the Buyer when the
goods are duly delivered to the carrier
• However, if the contract requires the Seller to deliver the goods
at a particular destination and the goods are duly tendered at
the destination while in the possession of the carrier, the risk of
loss passes to the Buyer when the goods are so tendered, so
that Buyer can take delivery
• Where the Sales Agreement does not involve a carriage, the
risk of loss passes to the Buyer when it receives the document
covering the goods
• In any other case, if the Seller is a merchant, the risk of loss
passes to the Buyer on its receipt of the goods; otherwise the
risk passes to him on tender of delivery
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 Perfect Tender Rule

• The perfect tender rule refers to the common law legal right for
a Buyer of goods to insist upon "perfect tender" by the Seller.
In other words, in a Sales Agreement, the Seller has to deliver
goods that conform to each and every detail of the Sales
Agreement. If the goods do not so conform, the Buyer may
reject them and rescind the contract (UCC 2-601)
• Exceptions:
• If the parties agreed otherwise
• If you promptly notify the Buyer of your intention to cure
the lack of conformity and if you are able do so within the
period of time indicated in the Sales Agreement

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Seller’s express warranties (UCC 2-313)

• An express warranty can be a promise or affirmation of fact by
the Seller to the Buyer with respect to the description of the
goods that became part of the bargain
• As part of the express warranty, you will have to deliver goods
that conform to any such description
• In addition, if you provided any samples or models of the goods
to the Buyer during negotiations, the goods you deliver have to
match the characteristics of such samples or models
• However, if you merely opined on the value of the goods, such
statements do not normally create an express warranty
• If you sell your products to another merchant, you can exclude
an express warranty in the contract

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 Sales on Trial

• Common commercial practice is for seller of goods to entrust

possession of goods to buyer to either give buyer an opportunity
to decide whether or not to buy or to try to resell them to a third
person
• Sale on approval, sale or return, or consignment
• Risk of loss depends on terms of entrusting

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Seller’s implied warranties: Fitness for

particular purpose and merchantability
• Implied warranties are unwritten or unspoken assurances by
the Seller implied by law
• If you are a merchant, the Implied Warranty of
Merchantability is applicable
• In order for the goods to be merchantable, they must be at
least:
• Pass without objection in the trade under the Sales
Agreement’s description; and
• In the case of fungible goods, be of fair average quality
• within
The Implied theofdescription;
Warranty and Purpose applies when the Seller knew
Fitness for a Particular
or had reason to know that (1) the Buyer was buying the goods for a particular
• Be
purpose, fit the
and (2) forBuyer
the was
ordinary
relying onpurposes for which
the Seller’s expertise suchgoods
to select goods are
suitable
for that purpose. There exists then an implied guarantee that the goods are fit for such
used
particular purpose (UCC 2-315) 58

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 Exclusion of warranties (UCC 2-316)
• If you want to exclude or modify an implied warranty or any part of it:
• You must use terms such as “sold as is”, “with all faults” or other
language sufficient to convey that no implied warranty exists
• The exclusion or modification must be set forth in writing
• To exclude or modify the Implied Warranty of Merchantability, the
term “Merchantability” must be used as language
• In particular, with respect to a consumer contract, the Implied
Warranty of Merchantability can only be excluded or modified if
conspicuous language is used and the statement “The seller
undertakes no responsibility for the quality of the goods except as
otherwise provided in this contract” is included.

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Exclusion of warranties (UCC 2-316)

• If the Buyer before entering into the Sales Agreement has examined
the goods, the sample or the model, or has refused to do so after you
requested it, no implied warranty exists with regard to defects that an
examination should have revealed under the circumstances
• An implied warranty may also be excluded or modified by course of
dealing or course of performance or usage of trade.

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 Buyer's right to inspect the goods
• The Buyer has the right to inspect the goods before
accepting and paying for them
• If the goods conform to the Sales Agreement, the
Buyer is obligated to pay for the inspection costs
• If the goods do not conform, the Buyer may demand
the costs of the inspection from the Seller (UCC 2-
513(2)

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Buyer’s Acceptance of the Goods

(UCC 2-606, 2-607)
• The Buyer is deemed to have accepted the goods:
• If, after a reasonable opportunity to inspect the goods, he
indicates that they are conforming or that he will take them in
spite of their non-conformity; or
• If he fails to reject the goods properly after he had a
reasonable opportunity; or
• If he acts in a way inconsistent with the Seller’s ownership of
the goods
• If the Buyer accepts part of a commercial unit, he is required to
accept the entire unit
• The Buyer must pay at the rate indicated in the contract for any
goods accepted
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 Buyer’s Right to Revoke Acceptance
• Buyer may revoke his prior acceptance of goods that turn out
to be non-conforming and the non-conformity substantially
impairs the value to the Buyer:
• If the Buyer accepted the goods on the reasonable assumption
that the non-conformity would be cured, but it has not been
cured; or
• If the Buyer accepted the goods unaware of their non-
conformity, either because it was difficult for the Buyer to learn
of the non-conformity at the time of acceptance, or because
the Buyer relied on the Seller’s assurances that the non-
conformity would be corrected
• A revocation of the acceptance is only effective if the Buyer
notifies the Seller thereof within a reasonable time after the
Buyer discovers or should have discovered the non-conformity
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Buyer's remedies in case of Seller's contractual breach:

• If the Seller breaches the contract by failing to perform its

obligations under the Sales Agreement, the Buyer may,
depending on the nature and on the seriousness of the breach
(UCC 2-711):
• Recover as damages any part of the price already paid,
and/or direct, consequential damages and (if specified in
the sales contract) liquidated damages
• Obtain specific performance
• Obtain the goods back by replevin
• Recover identified goods
• Compensate its loss with any part of the price still due
• Cancel the contract

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 Buyer’s Remedies on Improper Delivery and in
General
• If the delivered goods do not conform to the Sales Agreement,
the Buyer may:
• Reject the whole; or
• Accept the whole; or
• Accept any commercial unit or units and reject the rest
(UCC 2-601)
• The Buyer acquires a security interest in any goods in his
possession or control, for payments he has made on the price
and for expenses incurred in inspection, transportation, etc. In
accordance with this security interest, the Buyer may hold and
resell the goods

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Right to adequate assurance of performance

(UCC 2-609)
• Upon reasonable doubts that the respective other party will duly
perform, either party may ask for adequate assurance of due
performance
• If you as the Seller have reasonable doubts about the Buyer’s
ability to pay for the goods, you may ask for adequate assurance
that the Buyer will be able to pay you. Provided it is
“commercially reasonable”, you may even suspend shipment until
the Buyer has provided you with adequate assurances of payment
• If a justified demand for adequate assurance was not met within
thirty (30) days, that party is deemed to have repudiated the
contract. In such case, you do not have to ship the goods to Buyer,
but you must as soon as possible notify the Buyer you are
cancelling the contract

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 Seller's remedies in General (UCC 2-703)
• If the Buyer is in breach of contract you ma
• Withhold delivery of the goods
• Stop delivery of the goods (UCC 2-705)
• Proceed with respect to goods unidentified to the contract
or unfinished (UCC 2-704)
• Reclaim the goods [2-507(2) or 2-702(2)]
• Require payment directly from the Buyer [UCC 2-325(c)]
• Resell the goods and recover damages (UCC 2-706)
• Recover the price (UCC 2-709)
• Obtain specific performance (UCC 2-716)
• Recover liquidated damages (UCC 2-718)
67

Seller’s specific remedies in case of Buyer’s

insolvency
• If you discover Buyer’s insolvency, you may refuse delivery of the
goods (UCC 2-705)

• If you discover that the Buyer has received goods on credit while
insolvent, you may reclaim the goods within a reasonable time
after the Buyer has received them

• If you discover Buyer’s insolvency, or if Buyer repudiates or fails to

make a payment due before delivery, you may stop the delivery of
the goods in the possession of a carrier (UCC 2-702)

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 How to use the Sales Agreement to your advantage
• You have to make sure that either the Buyer or its Agent
have inspected the merchandise, or that such inspection
is deemed waived under the Sales Agreement. You
should not allow a partial inspection of the merchandise
• As previously stated, under the UCC, the Buyer has the right to
cancel its acceptance, even after having received the
merchandise, therefore you should clearly set forth in your
Sales Agreement:
• When acceptance will be deemed to have occurred
• That the Buyer will have no right to revoke its acceptance
after it has inspected the goods, accepted and received
them

69

Leases of Goods

• Article 2A of the UCC

• Lease agreement – an agreement in which one person (the lessor)
agrees to transfer the right to the possession and use of the
property to another person (the lessee) in exchange for rental
payments

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 Scope of UCC 2A-Leases

• Contract for lease of personal goods between a lessor and a

lessee
• Consumer Leases (total payments less than $25,000)
• Finance Leases (involves a 3rd party-supplier)

71

Article 2A
• Part 1: General Provisions
• Part 2: Formation and Construction of Lease Contract
• Part 3: Effect of Lease Contract
• Part 4: Performance of Lease Contract: Repudiated,
Substituted, and Excused
• Part 5: Default

72

36
 Article 2A

Part 1: General Provisions

73

• Article 2 is the “statutory analog” of Article 2A

• The lease is close in spirit and form to the sale of goods.
• Many definitions and themes found in Article 2 are also
found in Article 2A – “Merchant,” “Unconscionability,”
“Agreement,” “Contract,” “Goods” all flow through.

74

37
• “Lease” means transfer of the right to possession and use of
goods for a term in return for consideration, but a sale, including
a sale on approval or a sale or return, or retention or creation of
a security interest is not a lease. Unless the context clearly
indicates otherwise, the term includes a sublease. [§ 2A–
103(1)(j)]

• “Consumer lease” means a lease that a Lessor regularly engaged

in the business of leasing or selling makes to a Lessee who is an
individual and who takes under the lease primarily for personal,
family, or household purposes. [§ 2A–103(1)(e)]

75

• Note that some jurisdictions limit the definition of a consumer

lease to leases for which payment does not exceed a certain
dollar amount.
• Example:
• Alabama – $100,000
• California – No limit

76

38
• “Finance Lease” is a three–party transaction involving a Lessor,
Lessee, and Supplier. In such leases, the Lessor basically provides
only financing and does not select, manufacture, or supply the
goods, and the Lessee looks to the Supplier for all issues with
respect to the performance of goods leased (e.g., warranties,
etc.). [§ 2A–103(1)(g)]
• This definition would also normally include “sale and lease back”
transactions.

77

Consumer Leases – Choice of Law

• If the law chosen by the parties to a consumer lease is that of a

jurisdiction other than the jurisdiction in which the Lessee
resides at the time the lease agreement becomes enforceable,
or within 30 days thereafter, or in which the goods are to be
used, the choice is not enforceable. [§ 2A–106]

78

39
 Judicial Forum

• If the judicial forum chosen by the parties to a consumer lease is

a forum that would not otherwise have jurisdiction over the
lease, the choice is not enforceable. [§ 2A–106]

79

Article 2A

Part 2: Formation and

Construction of Lease Contract

80

40
 Statute of Frauds
• Leases with total payments, excluding payments for options over
$1,000, must be evidenced by a writing signed by the party
against whom enforcement is sought. [§ 2A–201, is the same as
§ 2–201, except the dollar threshold]

• With slight variations to accommodate the difference between a

sale and a lease:
• Firm offers – lack of consideration OK, cannot exceed three
months [§ 2A–205 = § 2–205]
• Offer and Acceptance in Formation of a Lease – acceptance
by any reasonable medium [§ 2A–206 = § 2–206]

81

• Modification, Rescission, and Waiver – modification to lease

needs no consideration to be binding [§ 2A–208 = § 2–209]
• Express Warranties – applied even to Lessor in finance lease [§
2A–210 = § 2–313]

82

41
 Lessee Under Finance Lease as
Beneficiary of Supply Contract
• The benefit of Supplier’s promises to the Lessor under the supply
contract and all of the warranties, including those of any third
party provided in connection with or as part of the supply
contract, extends to the Lessee to the extent of the Lessee’s
leasehold interest under finance lease, but is subject to the
terms of the warranty and the supply contract and all the
defenses or claims arising therefrom.
[§ 2A–209]

83

Warranties Against Interference and

Infringement
• Lessor warrants that for the lease term no one will interfere with
Lessee’s enjoyment of its leasehold interest due to an act or
omission of the Lessor.
• NO implied warranty against infringement or the like by Lessor in
finance lease. [§ 2A–211(1)]

84

42
 Warranties Against Interference and
Infringement
• Lessor who was a merchant dealing in goods of the kind (no
finance lease) makes implied warranty against infringement or
the like. [§ 2A–211(2)]

• If Lessee furnishes specifications to the Lessor or Supplier for

goods, Lessee must hold Lessor and Supplier harmless against
any claim of infringement that arises out of compliance with
specifications. [§ 2A–211(3)]

85

Implied Warranties of Merchantability and

Fitness for a Particular Purpose
• Merchantability – if Lessor is a merchant, applies just like § 2-
314, but NOT if finance lease. [§ 2A–212]
• Fitness for a Particular Purpose – except in finance lease, Lessor
makes fitness warranty if Lessee relies on Lessor’s skill or
judgment to select or furnish suitable goods. [§ 2A–213]

86

43
 Exclusion or Modification of Warranties
• Merchantability Exclusion – must mention merchantability and in
case of a writing, must be conspicuous.
• Implied Warranty of Fitness – exclusion must be in writing and
conspicuous; all implied warranties of fitness are excluded by
statement that “there are no other warranties which extend
beyond description on the face hereof.” [§ 2A–214(2) = § 2–
316(2)]
• Unless circumstances indicate otherwise, all implied warranties
are excluded by expressions like “as is,” “with all faults,” or other
language which in common understanding calls the Lessee’s
attention to the exclusion of warranties and makes plain there is
no implied warranty. [§ 2A–214(3) = § 2–316(3)]

87

Third–Party Beneficiaries/Privity
[§ 2A–216 = § 2–318]
• Generally extends warranty liability of Lessor to either Lessee’s
family and guests, or others likely to consume or be affected by
the goods if they are injured, depending on which alternative is
adopted.
• California omits this section in its entirety.
• Majority of states extend coverage to any natural person
reasonably expected to use, consume, or be affected by the
goods who was injured.
• Liability flowing from this section cannot be modified or limited.

88

44
 Risk of Loss
• Except in the case of the finance lease, risk of loss is retained by
the Lessor and does not pass to the Lessee. In the case of the
finance lease, risk of loss passes to the Lessee. [§ 2A–219(1)]
• Where the contract requires or authorizes the goods to be
shipped by carrier:
• If the contract does not require delivery of the goods to a
certain destination, risk of loss passes to Lessee when goods
are delivered to carrier.
• If contract requires goods to be delivered to a particular
destination and goods are duly tendered, risk of loss passes
to Lessee when they are duly tendered. [§ 2A–219(2) = § 2–
509(1)]

89

Risk of Loss
• If goods are held by a bailee and delivered without being moved,
risk of loss passes to Lessee upon acknowledgement by the
bailee of the Lessee’s right to possess the goods. [§ 2A–219(2)(b)
= § 2–509(2)]

• In any other case, the risk of loss passes to the Lessee on his
receipt of the goods if the Lessor, or in the case of a finance
lease, the Supplier, is a merchant; otherwise, the risk passes to
the Lessee on tender of delivery. [§ 2A–219(2)(c) =
§ 2–509(3)]

90

45
 Effect of Default on Risk of Loss

• Where tender or delivery of goods so fails to conform to the

contract as to give the right of rejection, risk of loss remains on
Lessor until cure or acceptance.
• If acceptance is rightfully revoked by Lessee, Lessee may, to the
extent of any deficiency in his insurance coverage, treat the risk
of loss as having rested on the Lessor from the beginning.
[§ 2A–220 = § 2–510]

91

Article 2A

Part 3: Effect of Lease Contract

92

46
 Alienability of Parties’ Interest Under
Lease Contract; Delegation of
Performance; Transfer of Rights
• Generally, the interest of a party under a lease contract,
including a sublease, may be assigned or transferred. However, if
the lease makes transfer an event of default or prohibits such a
transfer, the non-transferring party still has the right to collect
related default damages. [§ 2A–303]

• § 2A–303 is “self–executing” and these transfer rights do not

need to be included in an agreement for them to be effective.

93

Lien Priority

• If a person in the ordinary course of business furnishes services

or materials with respect to goods subject to a lease contract, a
lien upon those goods given by statute or rule of law for those
materials or services takes priority over the interest of the Lessor
or Lessee under the lease contract, unless provided otherwise by
law. [§ 2A–306]

94

47
 Article 2A

Part 4: Performance of Lease Contract:

Repudiated, Substituted, and Excused

95

Insecurity: Adequate Assurances of

Performance
• Either party may demand adequate assurances of due
performance in writing and may suspend performance for which
he has not already received the agreed return.
• Between merchants, the reasonableness of grounds for
insecurity and adequacy of assurances offered is determined
according to commercial standards.
[§ 2A–401 = § 2–609]

96

48
 Insecurity: Adequate Assurance of
Performance
• After receipt of a justified demand, failure to provide within a
reasonable time, not to exceed 30 days, such assurances of due
performance as is adequate under the circumstances of the
particular case is a repudiation of the contract. [§ 2A–401 =
§ 2–609]

97

Anticipatory Repudiation

• Where either party repudiates a lease contract with respect to a

performance not yet due, and the loss of such performance
substantially impairs the value of the lease contract to the other,
the aggrieved party has several options:
• For commercially reasonable time await performance by the
repudiating party, or
• Resort to any remedy for default, or
• In either case to suspend his own performance.
[§ 2A–402 = § 2–610]

98

49
 Retraction of Anticipatory Repudiation

• Until the repudiating party’s next performance is due, he can

retract his repudiation unless the aggrieved party has since the
repudiation cancelled or materially changed his position or
otherwise indicated that he considers the repudiation final. Such
retraction must include required assurances. [§ 2A–403 = § 2–
611]

99

Excused Performance

• A Lessor or a Supplier is not in default under the lease contract if

delay in delivery or non-delivery has been made impracticable by
the occurrence of a contingency the non-occurrence of which
was a basic assumption on which the contract was made or by
compliance in good faith with governmental regulation or order.
[§ 2A–405 = § 2–615(a)]

100

50
 Excused Performance

• However, Lessor or Supplier must, to the extent only a portion of

his capacity is affected, allocate production and deliveries among
customers in a fair and reasonable manner and must notify the
Lessee seasonably that there will be a delay or non-delivery. [§
2A–405 = § 2–615]

101

Procedure on Excused
Performance
• If the Lessee receives notification of material or indefinite delay,
the Lessee may, by written notification to the Lessor as to any
goods involved, and with respect to all of the goods, if under an
installment lease contract, value of the whole lease contract is
substantially impaired, the Lessee may:
• Terminate the lease contract, or
• Except a finance lease that is not a consumer lease, modify
the lease contract by accepting the available quota with due
allowance for related rent but without further right against
the Lessor. [§ 2A–406]

102

51
 Irrevocable Promises: Finance Leases

• In the case of the finance lease that is not a consumer lease, a

Lessee’s promises under the lease contract become irrevocable
and independent upon the Lessee’s acceptance of the goods.
• Also enforceable by or against third parties including
assignees of the parties.
• Not subject to cancellation, termination, modification,
excuse, etc., without the consent of the party to whom the
promise runs. [§ 2A–407]

103

• This “hell or high water” clause is self-executing, and no special

provision need be added to the contract.
• EXAMPLE: Lessee has no ability to take “set off” or stop payment
if leased equipment malfunctions due to a breach of warranty;
Lessee’s remedy is against the Supplier, and Lessee must
continue to make payments to Lessor.

104

52
 Article 2A

Part 5: Default

105

Default Procedure

• Parties to the lease can avail themselves of rights and remedies

in the lease as well as those in the Article; rights and remedies
are cumulative unless stated otherwise in the lease or the
Article.
• If the lease covers both real property and goods, the party
seeking enforcement may proceed under the Article with respect
to that portion relating to the goods, or proceed under real
property law with respect to both. [§ 2A–501]

106

53
 Notice After Default

• Except as otherwise provided in the Article or the lease

agreement, the Lessor or Lessee in default under the lease
contract is not entitled to notice of default, or notice of
enforcement from the other party. [§ 2A–502]
• Weasel catcher …

107

Modification or Limitation of Remedies

• Rights and remedies may be different than, or in addition to, the

Article and also may be limited by lease agreement.
• Remedies are cumulative unless stated to be sole and exclusive.
[§ 2A–503]

108

54
 Limitation of Remedies

• If exclusive remedy fails of its essential purpose, other remedies

are available.
• Consequential damages may be limited or excluded unless the
limitation or exclusion is unconscionable.
• Limitation of consequential damages for injury to a person in
case of consumer goods is unconscionable, but limitation of
damages where the loss is commercial is not. [§ 2A–503 =
§ 2–719]

109

Liquidated Damages

• Damages for breach by either party may be liquidated in the

lease agreement, but only at an amount which is reasonable in
light of the anticipated or actual harm cause by the default,
including indemnity for loss or diminution of anticipated tax
benefits or loss or damage to Lessor’s residual interest. [§ 2A–
504]

110

55
 Liquidated Damages

• No reference to large liquidated damages void as a penalty as in

§ 2–718, but still limited by reasonableness. [§ 2A–504]

111

Statutes of Limitation

• An action for default under a lease agreement must be

commenced within four years after the cause of action has
accrued.
• Parties may agree to reduce this to not less than one year, but
may not extent it. [§ 2A–506 = § 2–725]

112

56
 Lessee’s Remedies

• Cancel the lease contract.

• Recover so much of the rent and security as has been paid and is
just under the circumstances.
• “Cover” and recover damages.
• Exercise any other rights or pursue any other remedies provided
in the lease contract.
• Recover the goods if they have been identified.
• In a proper case, obtain specific performance.
[§ 2A–508]

113

Cure by Lessor or Supplier of Improper

Tender
• Lessor or Supplier can cure a non-conforming tender prior to
expiration of time for performance and within a reasonable time
where Lessor or Supplier has reasonable grounds to believe the
tender would be acceptable if he reasonably notifies Lessee of
intent to substitute conforming tender. [§ 2A–513 = § 2–508]

114

57
 Cover; Substitute Goods

• After default by Lessor, the Lessee may cover by making any

purchase or lease of, or contract to purchase or lease, goods in
substitution.

115

Extent of Cover

• Lessee may recover present value, as of the date of the

commencement of the term of the new lease agreement, of the
rent under the new lease agreement applicable to the period of
the new lease term which is comparable to the then-remaining
term of the original lease minus the present value as of the same
date of the total rent for the then-remaining lease term and
incidental and consequential damages, less expenses saved.
[§ 2A–518]

116

58
 Lessee’s Damages for Non-Delivery,
Repudiation, Default, and Breach of
Warranty in Regard to Accepted Goods
• If Lessee has not accepted the goods, the Lessee may recover
the present value, as of the date of the default, of the then-
market rent minus the present value as of the same date of the
original rent, computed for the remaining lease term of the
original lease agreement, together with incidental and
consequential damages, less expenses saved.
[§ 2A–519(1)]

117

Lessee’s Damages for Accepted Goods

• The measure of damages for non-conforming tender or delivery

or other default is the loss resulting in the ordinary course of
events from the Lessor’s default, as determined in any manner
that is reasonable together with incidental and consequential
damages, less expenses saved.
[§ 2A–519(3)]

118

59
 Lessee’s Damages for Breach of
Warranty
• The measure of damages for breach of warranty is the present
value at the time and place of acceptance of the difference
between the value of the use of the goods accepted and the
value if they had been as warranted for the lease term, unless
special circumstances show proximate damages of a different
amount, together with incidental and consequential damages,
less expenses saved.
[§ 2A–519(4)]

119

Lessee’s Incidental Damages

• Incidental damages resulting from a Lessor’s default include

expenses reasonably incurred in inspection, receipt,
transportation, and care and custody of goods rightfully rejected,
any commercially reasonable charges, expenses, or commissions
in connection with effecting cover, and any other reasonable
expense incident to the default. [§ 2A–520(1)]

120

60
 Lessee’s Consequential Damages

• Consequential damages resulting from a Lessor’s default include

any loss resulting from general or particular requirements and
needs of which the Lessor at the time of contracting had reason
to know and which could not reasonably be prevented by cover
or otherwise and injury to persons or property proximately
resulting from any breach of warranty. [§ 2A–520(2)]

121

Specific Performance

• Lessee’s right to specific performance allowable where goods are

unique or in other proper circumstances may include any relief
the court may deem just. [§ 2A–521 = § 2–716]

122

61
 Lessor’s Remedies

• If a Lessee wrongfully rejects or revokes acceptance of goods, or

fails to make a payment when due, or repudiates with respect to
a part or the whole, or if the Lessee is in default under the lease
contract, the Lessor has several remedies which may be
exercised as options with those in the lease agreement.
• HOWEVER, such options are not available from the Article if any
damages liquidated in the lease agreement or determined by the
lease agreement are stated to be exclusive.

123

Lessor’s Remedies

• Cancel the lease contract. [§ 2A–505(1)]

• Proceed respecting goods not identified to the lease contract. [§
2A–524]
• Withhold delivery of the good and take possession of the goods
previously delivered. [§ 2A–525]
• Stop delivery of goods by any bailee. [§ 2A–526]

124

62
 Lessor’s Remedies

• Dispose of the goods and recover damages.

[§ 2A–527]
• Retain the goods and recover damages. [§ 2A–528]
• In a proper case, recover rent. [§ 2A–529]
• Exercise any other rights, or pursue any other remedies,
provided in the lease contract.

125

Lessor’s Right to the Goods

• If the Lessor discovers the Lessee is insolvent, the Lessor may

refuse to deliver the goods.
• After default, the Lessor may require the Lessee to assemble the
goods and make them available to the Lessor and render
unusable any goods employed in trade or business by the
Lessee.
• No need for judicial process if there is no breach of the peace. [§
2A–525]

126

63
 Lessor’s Right to Dispose of Goods

• If the disposition is by lease agreement substantially similar to

the original lease agreement and made in good faith in a
commercially reasonable manner, the Lessor may recover:

The accrued and unpaid rent as of the date of
commencement of the term of the new lease agreement.

The present value, as of the same date, of the total rent for
the then–remaining lease term of the original lease
agreement minus the present value for rent for the
remaining original lease agreement.

Incidental damages less expenses saved. [§ 2A – 527(2)]

127

Lessor’s Damages for Non-Acceptance,

Failure to Pay, Repudiation, or other
Default
• Except as otherwise provided as liquidated damages in the lease
agreement, or otherwise determined pursuant to the agreement
of the parties, if Lessor:

Elects to retain the goods and that disposition is by lease
agreement that does not qualify for treatment under § 2A–
527(2), or

128

64

Is by sale or otherwise, Lessor may recover:
• Accrued and unpaid rent as of the date of default, if
the Lessee has never taken possession of the goods,
or
• If the Lessee has taken possession of the goods, as of
the date the Lessor repossesses the goods, the
present value as of the date of default of the total
rent for the then-remaining lease term of the original
lease agreement minus the present value of the
same date of the market rent.
• Plus incidental damages, less expenses saved.
[§ 2A–528]
129

Lessor’s Action for the Rent

• Lessor may recover accrued and unpaid rent as of the date of

entry of judgment in favor of the Lessor and the present value
for the remaining lease term plus incidential damages, less
expenses saved. [§ 2A–529]

130

65
 Lessor’s Incidental Damages

• Incidental damages to an aggrieved Lessor include any

commercially reasonable charges, expenses, or commissions
incurred in stopping delivery and the transportation, care, and
custody of the goods after the Lessee’s default, in connection
with return or disposition of the goods, or otherwise resulting
from the default. [§ 2A–530]

131

Thank You

132

66