SALES

Chapter One - Basis Concepts

I. Overview

A. Definition of the Uniform Commercial Code – a code of laws governing

various commercial transactions, including the sale of goods, banking

transactions, secured transactions in personal property, and other matters designed

to bring uniformity in these areas to the laws of the various states, and that has

been adopted, with some modifications, in all states, as well as in the District of

Columbia and in the Virgin Islands. Alabama adopted the UCC in 1964.

B. Article 2 of the UCC applies to transactions in good, including all contracts

involving the sale of goods.

C. Article 2 has adopted much of the common law of contracts, but where the

common law and Article 2 differ, Article 2 prevails.

D. If a regulatory statute governs the sale of goods for a specific class of buyers (e.g.,

consumers, farmers, or other classes of buyers) then that transaction is excluded

from Article 2 coverage (see §2-102).

E. Leases of goods are covered by Article 2A.

II. Scope of Article 2

A. Sale – is the passing of title of goods from the seller to the buyer for a price.

B. Transaction – the doing or performance of business between two or more persons.

C. Contract – the total legal obligation which results from the parties’ agreement.

D. Agreement – the bargain in fact of the parties as found in their language or

implied by:

1. Course of performance.

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 2. Course of dealing.

3. Usage of the trade.

Note: Implied terms cannot contradict the expressed terms of the contract. They

must be reasonably consistent with the expressed terms.

E. Goods

1. UCC §2-105(1) defines “goods” as all things that are movable at the time

of identification to the contract for sale.

2. Article 2 applies to sales of most tangible things (e.g., cars, horses,

hamburgers, etc.). Article 2 does not apply to intangible assets. Intangible

assets have no physical being apart from a writing that evidence their

existence (e.g., an I.O.U. for a debt).

3. Article 2 does not apply to services. Note: If the transaction involves the

sale of goods and the rendering of a service, Article 2 will govern if:

a. The basis of the contract is the furnishing of goods, even if there is

no separate charge stated for the goods; and

b. The cause of action arose from the goods, rather than the services,

portion of the contract.

4. Article 2 does not apply to intangibles and money (except money that is

being treated as a commodity, such as a coin collection).

5. Growing crops are goods.

6. Unborn young of animals are goods (§2-105(1)).

7. Restaurant food and/or drink consumed either on or off the premises are

goods (§2-314(1)).

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 8. Specially manufactured items are goods (§2-105(1)).

9. Article 2 does not apply to investment securities (see Article 8).

10. Article 2 does not apply to security transactions (see Article 9).

11. Article 2 does not apply to the sale of real estate. Except that:

a. The sale of minerals and the like (including oil and gas) or of a

structure or its materials is the sale of goods if they are to be

severed from the realty by the seller.

b. The sale of growing crops or other things (e.g., fixtures) attached

to realty and capable of severance without material harm to the

realty or the sale of timber to be cut is covered by Article 2 no

matter who does the severing.

F. Merchants

1. A “merchant” is a person who deals in goods of the kind, or otherwise by

his occupation, holds himself out as having knowledge or skill peculiar to

the practices or goods involved in the transaction, or to whom such

knowledge or skill may be attributed by his employment of an agent or

broker or other intermediary who, by his occupation, holds himself out as

having such knowledge or skill (§2-104(1)).

2. Courts interpret this definition broadly, except most courts do not consider

a farmer to be a merchant, even with respect to the sale of farm products.

3. Three times when classification of a party as a merchant is of significance:

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 a. In terms of good faith, a merchant must observe reasonable

commercial standards of fair dealing in the trade, in addition to

honesty in fact.

b. Some sections of Article 2 specifically use phrases “between

merchants” and “as against a merchant.” These sections only

apply to a merchant in the merchant’s business capacity. The

phrase “As against a merchant” only applies when a merchant is

the seller, not a buyer.

c. Some sections deal only with merchants who have a professional

status concerning the goods that are the subject of the transaction

(e.g., the implied warranty of merchantability applies only if the

seller is a merchant with respect to goods of the kind involved).

G. Good Faith

1. §1-201(19) defines good faith as honesty in fact in the conduct or

transaction concerned.

2. The UCC imposes an obligation of good faith on performance or

enforcement of every contract it governs.

3. This obligation cannot be avoided through agreement by the parties.

However, the parties may agree to reasonable standards by which good

faith is to be measured.

III. Scope of Article 2A

A. Overview

1. In recent years equipment leasing has become big business.

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 2. Leasing goods in lieu of purchasing them has certain advantages.

a. The lease obligation is not reflected as an asset/liability improving

accounting balance sheet ratios.

b. Sometimes there are tax advantages to leasing goods.

3. Leasing law originally developed from the laws dealing with bailments and

leasing real property.

4. Many courts applied Article 2 to leases. But this was problematic, because

§2-106(1) states a sale requires the passing of title from the seller to the

buyer. In a true lease title does not pass.

5. Prior to Article 2A many times leases were actually sales of goods disguised

as leases. This was done:

a. For bookkeeping and tax advantages, and/or

b. To escape from the necessity of complying with Article 2 or

the secured transactions rules in Article 9.

(1) The original wording of §1-201(37) contained a test for

telling a true lease from a disguised sale.

(2) If the lessee had the option to become owner of the leased

goods at the end of the lease period for nominal or no

consideration, the lease was ruled a sale.

B. How to tell if a transaction is a lease or a sale.

1. If at the end of the lease period the lessee becomes the owner

of the property for little or no consideration, a secured transaction and not

a lease has been created.

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 2. If the contract contains a clause that permits the lessee to

terminate the lease at any time and return the leased goods (the so-called

“walk away” test), it is a true lease.

3. If the lease is for the entire economic life of the leased goods,

with or without renewal, a disguised sale has occurred.

4. Other than these three criteria, each lease must be evaluated on

its own.

a. A problem area arises when the lessee pays consideration equal to or

even greater than the fair market value of the leased goods and the

lease is not for the total economic life of the goods.

b. The lessee’s assumption of major duties (e.g., taxes, risk of loss, etc.)

does not necessarily indicate a lease or a sale of goods.

IV. International Sales

Effective January 1, 1988, the United States became bound by the United Convention on

Contracts for the International Sale of Goods (CISG).