3 The Formation of Sales and Lease Contracts In regard to the formation of sales and lease contracts, the UCC modifies the common law in several ways. We look here at how Articles 2 and 2A of the UCC modify common law contract rules. Remember, though, that parties to sales and lease contracts are basically free to establish whatever terms they wish. The UCC comes into play when the parties either fail to provide certain terms in their contract or wish to change the effect of the UCC's terms in the contract's application. The UCC makes this very clear by its repeated use of such phrases as \"unless the parties otherwise agree\" and \"absent a contrary agreement by the parties.\" Offer In general contract law, the moment a definite offer is met by an unqualified acceptance, a binding contract is formed. In commercial sales transactions, the verbal exchanges, correspondence, and actions of the parties may not reveal exactly when a binding contractual obligation arises. The UCC states that an agreement sufficient to constitute a contract can exist even if the moment of its making is undetermined [UCC 2-204(2), 2A- 204(2)]. Open Terms According to general contract law, an offer must be definite enough for the parties (and the courts) to ascertain its essential terms when it is accepted. In contrast, the UCC states that a sales or lease contract will not fail for indefiniteness even if one or more terms are left open as long as both of the following are true: 1. The parties intended to make a contract. 2. There is a reasonably certain basis for the court to grant an appropriate remedy [UCC 2-204(3), 2A-204(3)]. The UCC provides numerous openterm provisions (discussed next) that can be used to fill the gaps in a contract. Thus, if a dispute occurs, all that is necessary to prove the existence of a contract is an indication (such as a purchase order) that there is a contract. Missing terms can be proved by evidence, or a court can presume that the parties intended whatever is reasonable under the circumstances. Keep in mind, though, that if too many terms are left open, a court may find that the parties did not intend to form a contract. Also, the quantity of goods involved usually must be expressly stated in the contract. If the quantity term is left open, the courts will have no basis for determining a remedy. Open Price Term. If the parties have not agreed on a price, the court will determine a \"reasonable price at the time for delivery\" [UCC 2-305(1)]. If either the buyer or the seller is to determine the price, the price is to be decided in good faith [UCC 2-305(2)]. Under the UCC, good faith means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade [UCC 2-103(1)(b)]. The concepts of good faith and commercial reasonableness permeate the UCC. Sometimes, the price fails to be set through the fault of one of the parties. In that situation, the other party can treat the contract as canceled or determine a reasonable price. Example 20.5 Perez and Merrick enter into a contract for the sale of goods and agree that Perez will determine the price. Perez refuses to specify the price. Merrick can either treat the contract as canceled or set a reasonable price [UCC 2-305(3)]. Open Payment Term. When the parties do not specify payment terms, payment is due at the time and place at which the buyer is to receive the goods [UCC 2-310(a)]. The buyer can tender payment using any commercially normal or acceptable means, such as a check or credit card. If the seller demands payment in cash, however, the buyer must be given a reasonable time to obtain it [UCC 2-511(2)]. This is especially important when the contract states a definite and final time for performance. Case in Point 20.6 Max Alexander agreed to purchase hay from Wagner's farm. Alexander left his truck and trailer at the farm for the seller to load the hay. Nothing was said about when payment was due, and the parties were unaware of the UCC's rules. When Alexander came back to get the hay, a dispute broke out. Alexander claimed that he had been given less hay than he had ordered and argued that he did not have to pay at that time. Wagner refused to release the hay (or the vehicles on which the hay was loaded) until Alexander paid for it. Eventually, Alexander jumped into his truck and drove off without paying for the hayfor which he was later prosecuted for the crime of theft (see Chapter 10). Because the parties had failed to specify when payment was due, UCC 2-310(a) controlled, and payment was due at the time Alexander picked up the hay. Open Delivery Term. When no delivery terms are specified, the buyer normally takes delivery at the seller's place of business [UCC 2-308(a)]. If the seller has no place of business, the seller's residence is used. When goods are located in some other place and both parties know it, delivery is made there. If the time for shipment or delivery is not clearly specified in the sales contract, then the court will infer a \"reasonable\" time for performance [UCC 2-309(1)]. Duration of an Ongoing Contract. A single contract might specify successive performances but not indicate how long the parties are required to deal with each other. In this situation, either party may terminate the ongoing contractual relationship. Nevertheless, principles of good faith and sound commercial practice call for reasonable notification before termination so as to give the other party sufficient time to seek a substitute arrangement [UCC 2-309(2), (3)]. Options and Cooperation with Regard to Performance. When the contract contemplates shipment of the goods but does not specify the shipping arrangements, the seller has the right to make these arrangements in good faith, using commercial reasonableness in the situation [UCC 2-311]. When a sales contract omits terms relating to the assortment of goods, the buyer can specify the assortment. Example 20.7 Petry Drugs agrees to purchase one thousand toothbrushes from Marconi's Dental Supply. The toothbrushes come in a variety of colors, but the contract does not specify color. Petry, the buyer, has the right to take six hundred blue toothbrushes and four hundred green ones if it wishes. Petry, however, must exercise good faith and commercial reasonableness in making the selection [UCC 2-311]. Requirements and Output Contracts Normally, as mentioned earlier, if the parties do not specify a quantity, no contract is formed. A court will have no basis for determining a remedy because there is almost no way to determine objectively what is a reasonable quantity of goods for someone to buy. (In contrast, a court can objectively determine a reasonable price for particular goods by looking at the market for like goods.) The UCC recognizes two exceptions to this rule in requirements and output contracts [UCC 2-306(1)]. Requirements Contracts. Requirements contracts are common in the business world and normally are enforceable. In a requirements contract An agreement in which a buyer agrees to purchase and the seller agrees to sell all or up to a stated amount of what the buyer needs or requires., the buyer agrees to purchase and the seller agrees to sell all or up to a stated amount of what the buyer requires. Example 20.8 Newport Cannery forms a contract with Victor Tu. The cannery agrees to purchase from Tu, and Tu agrees to sell to the cannery, all of the green beans that the cannery requires during the following summer. There is implicit consideration in a requirements contract because the buyer (the cannery, in Example 20.8) gives up the right to buy from any other seller, and this forfeited right creates a legal detriment (consideration). If, however, the buyer promises to purchase only if he or she wishes to do so, the promise is illusory (without consideration) and unenforceable by either party. Similarly, if the buyer reserves the right to buy the goods from someone other than the seller, the promise is unenforceable (illusory) as a requirements contract. Output Contracts. In an output contract An agreement in which a seller agrees to sell and a buyer agrees to buy all or up to a stated amount of what the seller produces., the seller agrees to sell and the buyer agrees to buy all or up to a stated amount of what the seller produces. Example 20.9 Ruth Sewell has planted two acres of organic tomatoes. Bella Union, a local restaurant, agrees to buy all of the tomatoes that Sewell produces that year to use at the restaurant. Again, because the seller essentially forfeits the right to sell goods to another buyer, there is implicit consideration in an output contract. The UCC imposes a good faith limitation on requirements and output contracts. The quantity under such contracts is the amount of requirements or the amount of output that occurs during a normal production period. The actual quantity purchased or sold cannot be unreasonably disproportionate to normal or comparable prior requirements or output [UCC 2-306(1)]. Merchant's Firm Offer Under regular contract principles, an offer can be revoked at any time before acceptance. The major common law exception is an option contract (discussed in Chapter 12), in which the offeree pays consideration for the offeror's irrevocable promise to keep the offer open for a stated period. The UCC creates a second exception for firm offers made by a merchant concerning the sale or lease of goods (regardless of whether or not the offeree is a merchant). When a Merchant's Firm Offer Arises. A firm offer An offer (by a merchant) that is irrevocable without consideration for a period of time (not longer than three months). A firm offer by a merchant must be in writing and must be signed by the offeror.arises when a merchantofferor gives assurances in a signed writing that the offer will remain open. The merchant's firm offer is irrevocable without the necessity of consideration for the stated period or, if no definite period is stated, a reasonable period (neither to exceed three months) [UCC 2-205, 2A-205]. Example 20.10 Osaka, a usedcar dealer, emails a letter to Gomez on January 1, stating, \"I have a used 2013 Toyota RAV4 on the lot that I'll sell you for $22,000 any time between now and January 31.\" This email creates a firm offer, and Osaka will be liable for breach of contract if he sells the RAV4 to another person before January 31. Requirements for a Firm Offer. To qualify as a firm offer, the offer must be: 1. Written (or electronically recorded, such as in an email). 2. Signed by the offeror. When a firm offer is contained in a form contract prepared by the offeree, the offeror must also sign a separate assurance of the firm offer. The requirement of a separate signature ensures that the offeror will be made aware of the firm offer. For instance, an offeree might respond to an initial offer by sending its own form contract containing a clause stating that the offer will remain open for three months. If the firm offer is buried amid copious language on the last page of the offeree's form contract, the offeror may inadvertently sign the contract without realizing that it contains a firm offer. This would defeat the purpose of the rulewhich is to give effect to a merchant's deliberate intent to be bound to a firm offer. Acceptance Acceptance of an offer to buy, sell, or lease goods generally may be made in any reasonable manner and by any reasonable means. The UCC permits acceptance of an offer to buy goods \"either by a prompt promise to ship or by the prompt or current shipment of conforming or nonconforming goods\" [UCC 2-206(1) (b)]. Conforming goods accord with the contract's terms, whereas nonconforming goods do not. The prompt shipment of nonconforming goods constitutes both an acceptance, which creates a contract, and a breach of that contract. This rule does not apply if the seller seasonably Within a specified time period. If no period is specified, within a reasonable time.(within a reasonable amount of time) notifies the buyer that the nonconforming shipment is offered only as an accommodation, or as a favor. The notice of accommodation must clearly indicate to the buyer that the shipment does not constitute an acceptance and that, therefore, no contract has been formed. Example 20.11 McFarren Pharmacy orders five cases of Johnson & Johnson 3by5inch gauze pads from H.T. Medical Supply, Inc. If H.T. ships five cases of Xeroform 3by5inch gauze pads instead, the shipment acts as both an acceptance of McFarren's offer and a breach of the resulting contract. McFarren may sue H.T. for any appropriate damages. If, however, H.T. notifies McFarren that the Xeroform gauze pads are being shipped as an accommodation because H.T. has only Xeroform pads in stockthe shipment will constitute a counteroffer, not an acceptance. A contract will be formed only if McFarren accepts the Xeroform gauze pads. Communication of Acceptance Under the common law, because a unilateral offer invites acceptance by performance, the offeree need not notify the offeror of performance unless the offeror would not otherwise know about it. In other words, a unilateral offer can be accepted by beginning performance. The UCC is more stringent than the common law in this regard because it requires notification. Under the UCC, if the offeror is not notified within a reasonable time that the offeree has accepted the contract by beginning performance, then the offeror can treat the offer as having lapsed before acceptance [UCC 2-206(2), 2A-206(2)]. Additional Terms Recall from Chapter 12 that under the common law, the mirror image rule requires that the terms of the acceptance exactly match those of the offer. Example 20.12 Aldrich emails an offer to sell twenty Samsung Galaxy model 7.0 tablets to Beale. If Beale accepts the offer but changes it to require model 8.9 tablets, then there is no contract. To avoid these problems, the UCC dispenses with the mirror image rule. Under the UCC, a contract is formed if the offeree's response indicates a definite acceptance of the offer, even if the acceptance includes terms additional to or different from those contained in the offer[UCC 2-207(1)]. Whether the additional terms become part of the contract depends, in part, on whether the parties are nonmerchants or merchants. Rules When One Party or Both Parties Are Nonmerchants. If one (or both) of the parties is a nonmerchant, the contract is formed according to the terms of the original offer and does not include any of the additional terms in the acceptance [UCC 2-207(2)]. Case in Point 20.13 OfficeSupplyStore.com sells office supplies on the Web. Employees of the Kansas City School District in Missouri ordered $17,642.54 worth of office supplieswithout the authority or approval of their employerfrom the Web site. The invoices accompanying the goods contained a forumselection clause (see Chapter 12) that required all disputes to be resolved in California. When the goods were not paid for, Office Supply filed suit in California. The Kansas City School District objected, arguing that the forumselection clause was not binding. The court held that the forumselection clause was not part of the parties' contract. The clause was an additional term included in the invoices delivered to a nonmerchant buyer (the school district) with the purchased goods. Therefore, the clause did not become part of the contract unless the buyer expressly agreed, which did not happen in this case. Rules When Both Parties Are Merchants. The drafters of the UCC created a special rule for merchants to avoid the \"battle of the forms,\" which occurs when two merchants exchange separate standard forms containing different contract terms. Under UCC 2-207(2), in contracts between merchants, the additional terms automaticallybecome part of the contract unless one of the following conditions arises: 1. The original offer expressly limited acceptance to its terms. 2. The new or changed terms materially alter the contract. 3. The offeror objects to the new or changed terms within a reasonable period of time. When determining whether an alteration is material, courts consider several factors. Generally, if the modification does not involve any unreasonable element of surprise or hardship for the offeror, a court will hold that the modification did not materially alter the contract. Courts also consider the parties' prior dealings. In the following case, a party conditioned its acceptance of an offer on the other parties' agreement to additional terms by a specific date. When the parties agreed to the most important terms after the deadline, the court had to decide if there was an enforceable contract. Case 20.2 WPS, Inc. v. Expro Americas, LLC Court of Appeals of Texas, First District, 369 S.W.3d 384 (2012). BACKGROUND AND FACTS In April 2006, WPS, Inc., submitted a formal proposal to manufacture equipment for Expro Americas, LLC, and Surface Production Systems, Inc. (SPS). Expro and SPS then submitted two purchase orders. WPS accepted the first purchase order in part, and it accepted the second order conditionally. Among other things, WPS required that, by April 28, 2006, Expro and SPS give their \"full release to proceed\" and agree to \"pay all valid costs associated with any order cancellation.\" The parties' negotiations continued, and Expro and SPS eventually submitted a third purchase order on May 9, 2006. The third purchase order did not comply with all of WPS's requirements, but it did give WPS full permission to proceed and agreed that Expro and SPS would pay all cancellation costs. With Expro and SPS's knowledge, WPS then began work under the third purchase order. Expro and SPS soon canceled the order, however, so WPS sent them an invoice charging them for the cancellation costs. At trial, the jury and court concluded that there was a contract and found in WPS's favor. Expro and SPS appealed. IN THE LANGUAGE OF THE COURT Terry JENNINGS, Justice. * * * * * * * WPS replied with a conditional acceptance of the second purchase order. WPS also stated that its conditional acceptance depended upon the receipt of a revised purchase order by April 28, 2006. Although it is undisputed that Expro * * * and SPS did not issue a revised purchase order by this date, the evidence * * * reveals that the parties continued their discussions and negotiations over those matters that had yet to be resolved. * * * The parties operated as if they had additional time to resolve the outstanding differences. [Emphasis added.] Expro * * * and SPS submitted their revised third purchase order on May 9, 2006, agreeing in writing to virtually all the matters that had remained unresolved to that date. * * * Most importantly, Expro * * * and SPS provided * * * a \"full release to proceed\" and agreed to \"pay all valid costs associated with any order cancellation.\" In his testimony, [SPS's vice president] conceded that the term \"Release to Proceed\" \"basically means that one party is in agreement,\" authorizing the other party to go forward. * * * WPS had previously sought the release to proceed so that it could \"diligently\" perform its obligations under the contract. The jury could have reasonably concluded that WPS, having now obtained the release * * * and * * * [the] promise to pay cancellation charges * * *, was contractually obligated to perform and meet the delivery date. [Emphasis added.] DECISION AND REMEDY The Texas appellate court found that WPS had a contract with Expro and SPS. It affirmed the lower court's judgment for WPS. THE LEGAL ENVIRONMENT DIMENSION In allowing a party to condition its acceptance on additional terms, does contract law make negotiations more or less efficient? Explain your answer. THE ECONOMIC DIMENSION Why would a manufacturer like WPS want its purchase orders to include terms such as those at issue in this case? Why would a buyer like Expro or SPS want to exclude such terms? Conditioned on Offeror's Assent. Regardless of merchant status, the UCC provides that the offeree's response cannot be construed as an acceptance if it contains additional or different terms and is expressly conditioned on the offeror's assent to those terms [UCC 2- 207(1)]. Example 20.14 Philips offers to sell Hundert 650 pounds of turkey thighs at a specified price and with specified delivery terms. Hundert responds, \"I accept your offer for 650 pounds of turkey thighs on the condition that you agree to give me ninety days to pay for them.\" Hundert's response will be construed not as an acceptance but as a counteroffer, which Philips may or may not accept. Additional Terms May Be Stricken. The UCC provides yet another option for dealing with conflicting terms in the parties' writings. Section 2-207(3) states that conduct by both parties that recognizes the existence of a contract is sufficient to establish a contract for sale even though the writings of the parties do not otherwise establish a contract. In this situation, \"the terms of the particular contract will consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act.\" In a dispute over contract terms, this provision allows a court simply to strike from the contract those terms on which the parties do not agree. Example 20.15 SMT Marketing orders goods over the phone from Brigg Sales, Inc., which ships the goods to SMT with an acknowledgment form (confirming the order). SMT accepts and pays for the goods. The parties' writings do not establish a contract, but there is no question that a contract exists. If a dispute arises over the terms, such as the extent of any warranties, UCC 2-207(3) provides the governing rule. As noted previously, the fact that a merchant's acceptance frequently contains terms that add to or even conflict with those of the offer is often referred to as the \"battle of the forms.\" Although the UCC tries to eliminate this battle, the problem of differing contract terms still arises in commercial settings, particularly when standard forms (for placing and confirming orders) are used. Consideration The common law rule that a contract requires consideration also applies to sales and lease contracts. Unlike the common law, however, the UCC does not require a contract modification to be supported by new consideration. The UCC states that an agreement modifying a contract for the sale or lease of goods \"needs no consideration to be binding\" [UCC 2-209(1), 2A-208(1)]. Of course, any contract modification must be made in good faith [UCC 1-304]. In some situations, an agreement to modify a sales or lease contract without consideration must be in writing to be enforceable. For instance, if the contract itself specifies that any changes to the contract must be in a signed writing, only those changes agreed to in a signed writing are enforceable. Sometimes, when a consumer (nonmerchant) is buying goods from a merchant-seller, the merchant supplies a form that contains a prohibition against oral modification. In those situations, the consumer must sign a separate acknowledgment of the clause for it to be enforceable [UCC 2-209(2), 2A-208(2)]. Also, any modification that makes a sales contract come under Article 2's writing requirement (its Statute of Frauds, discussed next) usually requires a writing (or electronic record) to be enforceable. The Statute of Frauds The UCC contains Statute of Frauds provisions covering sales and lease contracts. Under these provisions, sales contracts for goods priced at $500 or more and lease contracts requiring total payments of $1,000 or more must be in writing to be enforceable [UCC 2- 201(1), 2A-201(1)]. (These low threshold amounts may eventually be raised.) Sufficiency of the Writing A writing, email, or other electronic record will be sufficient to satisfy the UCC's Statute of Fraud as long as it: 1. Indicates that the parties intended to form a contract. 2. Is signed by the party (or agent of the party) against whom enforcement is sought. (Remember that a typed name can qualify as a signature on an electronic record, as discussed in Chapter 9.) The contract normally will not be enforceable beyond the quantity of goods shown in the writing, however. All other terms can be proved in court by oral testimony. For leases, the writing must reasonably identify and describe the goods leased and the lease term. Special Rules for Contracts between Merchants The UCC provides a special rule for merchants in sales transactions (there is no corresponding rule that applies to leases under Article 2A). Merchants can satisfy the Statute of Frauds if, after the parties have agreed orally, one of the merchants sends a signed written (or electronic) confirmation to the other merchant within a reasonable time. The communication must indicate the terms of the agreement, and the merchant receiving the confirmation must have reason to know of its contents. Unless the merchant who receives the confirmation gives written notice of objection to its contents within ten days after receipt, the writing is sufficient against the receiving merchant, even though she or he has not signed it [UCC 2-201(2)]. Example 20.16 Alfonso is a merchantbuyer in Cleveland. He contracts over the telephone to purchase $6,000 worth of spare aircraft parts from Goldstein, a merchantseller in New York City. Two days later, Goldstein emails a signed confirmation detailing the terms of the oral contract, and Alfonso subsequently receives it. Alfonso does not notify Goldstein in writing (or email) that he objects to the contents of the confirmation within ten days of receipt. Therefore, Alfonso cannot raise the Statute of Frauds as a defense against the enforcement of the oral contract. Exceptions The UCC defines three exceptions to the writing requirements of the Statute of Frauds. An oral contract for the sale of goods priced at $500 or more or the lease of goods involving total payments of $1,000 or more will be enforceable despite the absence of a writing in the circumstances described next [UCC 2-201(3), 2A-201(4)]. Specially Manufactured Goods. An oral contract for the sale or lease of custommade goods will be enforceable if: 1. The goods are specially manufactured for a particular buyer or specially manufactured or obtained for a particular lessee. 2. The goods are not suitable for resale or lease to others in the ordinary course of the seller's or lessor's business. 3. The seller or lessor has substantially started to manufacture the goods or has made commitments for the manufacture or procurement of the goods. In these situations, once the seller or lessor has taken action, the buyer or lessee cannot repudiate the agreement claiming the Statute of Frauds as a defense. Example 20.17 Womach orders custom window treatments to use at a day spa business for $6,000 from Hunter Douglas. The contract is oral. When Hunter Douglas manufactures the window coverings and tenders delivery to Womach, she refuses to pay for them, even though the job has been completed on time. Womach claims that she is not liable because the contract was oral. If the unique style, size, and color of the window treatments make it improbable that Hunter Douglas can find another buyer, Womach is liable to Hunter Douglas. Admissions. An oral contract for the sale or lease of goods is enforceable if the party against whom enforcement is sought admits in pleadings, testimony, or other court proceedings that a sales or lease contract was made. In this situation, the contract will be enforceable even though it was oral, but enforceability will be limited to the quantity of goods admitted. Case in Point 20.18 Gerald Lindgren, a farmer, agreed by phone to sell his crops to Glacial Plains Cooperative. The parties reached four oral agreements: two for the delivery of soybeans and two for the delivery of corn. Lindgren made the soybean deliveries and part of the first corn delivery, but he sold the rest of his corn to another dealer. Glacial Plains bought corn elsewhere, paying a higher price, and then sued Lindgren for breach of contract. In papers filed with the court, Lindgren acknowledged his oral agreements with Glacial Plains and admitted that he did not fully perform. The court applied the admissions exception and held that the four agreements were enforceable. Partial Performance. An oral contract for the sale or lease of goods is enforceable if payment has been made and accepted or goods have been received and accepted. This is the \"partial performance\" exception. The oral contract will be enforced at least to the extent that performance actually took place. Case in Point 20.19 Quality Pork International formed an oral contract with Rupari Food Services, Inc., which buys food products and sells them to retail operations. Quality was to ship three orders of pork to Star Food Processing, Inc., and Rupari was to pay for the products. Quality shipped the goods to Star and sent invoices to Rupari. Rupari billed Star for all three orders but paid Quality only for the first two. Quality filed a suit against Rupari to recover $44,051.98, the cost of the third order. Rupari argued that because the parties did not have a written agreement, there was no enforceable contract. The court held that even though Rupari had not signed a written contract or purchase order, it had accepted the goods and partially performed the contract by paying for the first two shipments. Rupari's conduct was sufficient to prove the existence of a contract and the court required Rupari to pay for the last shipment. The exceptions just discussed and other ways in which sales law differs from general contract law are summarized in Exhibit 203. Exhibit 203 Major Differences between Contract Law and Sales Law Contract Law Sales Law Contract Terms Contract must contain all material terms. Open terms are acceptable if parties intended to form a contract, but the contract is not enforceable beyond quantity term. Acceptance Mirror image rule applies. If additional terms are added in acceptance, a counteroffer is created. Additional terms will not negate acceptance unless acceptance is expressly conditioned on assent to the additional terms. Contract Modification Modification requires consideration. Modification does not require consideration. Irrevocable Offers Option contracts (with consideration). Merchants' firm offers (without consideration). Statute of Frauds Requirements All material terms must be included in the writing. Writing is required only for sale of goods priced at $500 or more, but the contract is not enforceable beyond the quantity specified. Merchants can satisfy the writing by a confirmation evidencing their agreement. Exceptions: 1. Specially manufactured goods. 2. Admissions by party against whom enforcement is sought. 3. Partial performance. Parol Evidence Recall from Chapter 16 that parol evidence consists of evidence outside the contract such as evidence of the parties' prior negotiations, prior agreements, or contemporaneous (simultaneous) oral agreements. When a contract completely sets forth all the terms and conditions agreed to by the parties and is intended as a final statement of their agreement, it is considered fully integrated (see Chapter 16). The terms of a fully integrated contract A written contract that constitutes the final expression of the parties' agreement. If a contract is integrated, evidence extraneous to the contract that contradicts or alters the meaning of the contract in any way is inadmissible.cannot be contradicted by evidence of any prior agreements or contemporaneous oral agreements. If, however, the writing contains some of the terms the parties agreed on but not others, then the contract is not fully integrated. When a court finds that a contract is not fully integrated, then the court may allow evidence of consistent additional terms to explain or supplement the terms in the contract. The court may also allow the parties to submit evidence of course of dealing, usage of trade, or course of performance [UCC 2-202, 2A- 202]. Course of Dealing and usage of Trade Under the UCC, the meaning of any agreement, evidenced by the language of the parties and by their actions, must be interpreted in light of commercial practices and other surrounding circumstances. In interpreting a commercial agreement, a court will assume that the course of dealing between the parties and the general usage of trade were taken into account when the agreement was phrased. Course of Dealing. A course of dealing Prior conduct between parties to a contract that establishes a common basis for their understanding.is a sequence of actions and communications between the parties to a particular transaction that establishes a common basis for their understanding [UCC 1-303(b)]. A course of dealing is restricted to the sequence of conduct between the parties in their transactions prior to the agreement. Under the UCC, a course of dealing between the parties is relevant in ascertaining the meaning of the parties' agreement. It \"may give particular meaning to specific terms of the agreement, and may supplement or qualify the terms of the agreement\" [UCC 1-303(d)]. Usage of Trade. Any practice or method of dealing that is so regularly observed in a place, vocation, or trade as to justify an expectation by the parties that it will be observed in their transaction is a usage of trade 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.[UCC 1-303(c)]. Example 20.20 Phat Khat Loans, Inc., hires Fleet Title Review Company to search the public records for prior claims on potential borrrowers' assets. Fleet's invoice states, \"Liability limited to amount of fee.\" In the title search industry, liability limits are common. After conducting many searches for Phat Khat, Fleet reports that there are no claims with respect to Main Street Autos. Phat Khat loans $100,000 to Main, with payment guaranteed by Main's assets. When Main defaults on the loan, Phat Khat learns that another lender has priority to Main's assets under a previous claim. If Phat Khat sues Fleet Title for breach of contract, Fleet's liability will normally be limited to the amount of its fee. The statement in the invoice was part of the contract between Phat Khat and Fleet, according to the usage of trade in the industry and the parties' course of dealing. Course of Performance The conduct that occurs under the terms of a particular agreement is called a course of performance The conduct that occurs under the terms of a particular agreement; such conduct indicates what the parties to an agreement intended it to mean.[UCC 1-303(a)]. Presumably, the parties themselves know best what they meant by their words. Thus, the course of performance actually carried out under the parties' agreement is the best indication of what they meant [UCC 2-208(1), 2A-207(1)]. Example 20.21 Janson's Lumber Company contracts with Lopez to sell Lopez a specified number of two byfours. The lumber in fact does not measure exactly 2 inches by 4 inches but rather 17/8 inches by 3 inches. Janson's agrees to deliver the lumber in five deliveries, and Lopez, without objection, accepts the lumber in the first three deliveries. On the fourth delivery, however, Lopez objects that the twobyfours do not measure precisely 2 inches by 4 inches. The course of performance in this transactionthat is, the fact that Lopez accepted three deliveries without objection under the agreementis relevant in determining that here a \"twobyfour\" actually means a \"17/8by3.\" Janson's can also prove that twobyfours need not be exactly 2 inches by 4 inches by applying usage of trade, course of dealing, or both. Janson's can, for example, show that in previous transactions, Lopez took 17/8inch by3inch lumber without objection. In addition, Janson's can show that in the trade, two byfours are commonly 17/8 inches by 3 inches. Rules of Construction The UCC provides rules of construction for interpreting contracts. Express terms, course of performance, course of dealing, and usage of trade are to be construed to be consistent with each other whenever reasonable. When such a construction is unreasonable, however, the UCC establishes the following order of priority [UCC 1-303(e), 2-208(2), 2A-207(2)]: 1. Express terms. 2. Course of performance. 3. Course of dealing. 4. Usage of trade. Unconscionability As discussed in Chapters 14 and 15, an unconscionable contract is one that is so unfair and one sided that it would be unreasonable to enforce it. The UCC allows a court to evaluate a contract or any clause in a contract, and if the court deems it to have been unconscionable at the time it was made, the court can do any of the following [UCC 2-302, 2A-108]: 1. Refuse to enforce the contract. 2. Enforce the remainder of the contract without the unconscionable part. 3. Limit the application of the unconscionable term to avoid an unconscionable result. The following classic case illustrates an early application of the UCC's unconscionability provisions. Classic Case 20.3 Jones v. Star Credit Corp. Supreme Court of New York, Nassau County, 59 Misc.2d 189, 298 N.Y.S.2d 264 (1969). BACKGROUND AND FACTS The Joneses agreed to purchase a freezer for $900 as the result of a salesperson's visit to their home. Tax and financing charges raised the total price to $1,234.80. At trial, the freezer was found to have a maximum retail value of approximately $300. The Joneses, who had made payments totaling $619.88, brought a suit in a New York state court to have the purchase contract declared unconscionable under the UCC. IN THE LANGUAGE OF THE COURT Sol M. WACHTLER, Justice. * * * * * * * [Section 2-302 of the UCC] authorizes the court to find, as a matter of law, that a contract or a clause of a contract was \"unconscionable at the time it was made,\" and upon so finding the court may refuse to enforce the contract, excise the objectionable clause or limit the application of the clause to avoid an unconscionable result. * * * * * * * The question which presents itself is whether or not, under the circumstances of this case, the sale of a freezer unit having a retail value of $300 for $900 ($1,439.69 including credit charges and $18 sales tax) is unconscionable as a matter of law Concededly, deciding [this case] is substantially easier than explaining it. No doubt, the mathematical disparity between $300, which presumably includes a reasonable profit margin, and $900, which is exorbitant on its face, carries the greatest weight. Credit charges alone exceed by more than $100 the retail value of the freezer. These alone may be sufficient to sustain the decision. Yet, a caveat [warning] is warranted lest we reduce the import of Section 2-302 solely to a mathematical ratio formula. It may, at times, be that; yet it may also be much more. The very limited financial resources of the purchaser, known to the sellers at the time of the sale, is entitled to weight in the balance. Indeed, the value disparity itself leads inevitably to the felt conclusion that knowing advantage was taken of the plaintiffs. In addition, the meaningfulness of choice essential to the making of a contract can be negated by a gross inequality of bargaining power. [Emphasis added.] * * * * * * * The defendant has already been amply compensated. In accordance with the statute, the application of the payment provision should be limited to amounts already paid by the plaintiffs and the contract be reformed and amended by changing the payments called for therein to equal the amount of payment actually so paid by the plaintiffs. DECISION AND REMEDY The court held that the contract was not enforceable and reformed the contract so that no further payments were required. IMPACT OF THIS CASE ON TODAY'S LAW This early classic case illustrates the approach that many courts take today when deciding whether a sales contract is unconscionablean approach that focuses on \"excessive\" price and unequal bargaining power. Most of the litigants who have used UCC 2-302 successfully could demonstrate both an absence of meaningful choice and that the contract terms were unreasonably favorable to the other party. THE SOCIAL DIMENSION Why would the seller's knowledge of the buyers' limited resources support a finding of unconscionability? Concept Summary 20.1 reviews the concepts and rules related to the formation of sales and lease contracts. Concept Summary 20.1 The Formation of Sales and Lease Contracts Concept Offer and Acceptance Description 1. 2. Offer 1. Not all terms have to be included for a contract to be formed. 2. The price does not have to be included for a contract to be formed. 3. Particulars of performance can be left open. 4. An offer by a merchant in a signed writing with assurances that the offer will not be withdrawn is irrevocable without consideration (for up to three months). Acceptance 1. Acceptance may be made by any reasonable means of communication. It Concept Description is effective when dispatched. Consideration Requirements under the Statute of Frauds Parol Evidence Rule 2. The acceptance of a unilateral offer can be made by a promise to ship or by the shipment of conforming or nonconforming goods. 3. Acceptance by performance requires notice within a reasonable time. Otherwise, the offer can be treated as lapsed. 4. A definite expression of acceptance creates a contract even if the terms of the acceptance modify the terms of the offer. A modification of a contract for the sale of goods does not require consideration. 1. All contracts for the sale of goods priced at $500 or more must be in writing. A writing is sufficient as long as it indicates a contract between the parties and is signed by the party against whom enforcement is sought. A contract is not enforceable beyond the quantity shown in the writing. 2. When written confirmation of an oral contract between merchants is not objected to in writing by the receiver within ten days, the oral contract is enforceable. 3. Exceptions to the requirement of a writing exist in the following situations: 1. When the oral contract is for specially manufactured or obtained goods not suitable for resale or lease to others and the seller or lessor has made commitments for the manufacture or procurement of the goods. 2. If the defendant admits in pleadings, testimony, or other court proceedings that an oral contract for the sale or lease of goods was made, then the contract will be enforceable to the extent of the quantity of goods admitted. 3. The oral agreement will be enforceable to the extent that payment has been received and accepted or to the extent that goods have been received and accepted. 1. The terms of a clearly and completely worded written contract cannot be contradicted by evidence of prior agreements or contemporaneous oral agreements. 2. Evidence is admissible to clarify the terms of a writing in the following situations: a. If the contract terms are ambiguous. b. If evidence of course of dealing, usage of trade, or course of performance is necessary to learn or to clarify the intentions of the parties to the contract