Quiz 13: The Formation of Sales and Lease Contracts
Business
Q 1Q 1
The Thorny Issue of Taxing Internet Sales
From the very beginning of e-commerce, cities and states have complained that they are losing millions, if not billions, of dollars of potential tax revenues because nearly all e-commerce companies do not collect state and local sales taxes. Although most states have laws requiring their residents to report purchases from other states and to pay taxes on those purchases (so-called use taxes), few (if any) U.S. consumers ever comply with these laws. Certainly, the possibility of avoiding sales taxes has likely contributed to the growth of e-commerce. Not surprisingly, retailers with investment in physical sales outlets have complained to local, state, and federal governments about this "sales tax inequity."
Local Governments Are Suing Online Travel Companies
One recent trend in the effort to collect taxes from e-commerce has focused on online travel companies, including Travelocity, Priceline.com, Hotels.com, and Orbitz.com. By 2011, at least a dozen cities, including Atlanta, Charleston, Philadelphia, and San Antonio, had filed suits claiming that the online travel companies owed taxes on hotel reservations that they had booked. All of the cities involved in the suits impose hotel occupancy taxes. In Atlanta, for example, the local statute authorizes the city to devise "a rate of taxation, the manner of imposition, payment, and collection of the tax, and all other procedures related to the tax."
At issue in the lawsuits is not whether the online travel companies owe hotel occupancy tax, but rather the amount of tax that they owe and the procedure that should be used to collect it. Online travel companies, such as Hotels.com, typically purchase blocks of hotel rooms at a wholesale rate and subsequently resell the rooms to customers at a marked-up retail rate, keeping the difference as profit. The company forwards to the hotel an amount intended to cover the hotel occupancy tax on the wholesale price of the rooms sold. The hotel then remits to the city taxing authority the tax on the rooms sold by the online travel agency. Thus, the online travel companies do not remit taxes directly to any city authorities.
In calculating the amount of tax owed, the online travel companies assess the occupancy tax rates on the wholesale prices of the rooms, rather than the retail prices that they charge. The cities claim that the online travel companies should be assessing the hotel occupancy tax on the retail prices of the rooms. The cities also want the online companies to register with the local jurisdictions and to collect and remit the required taxes directly.
What the Courts Have Been Deciding
More than a dozen cases have been brought against online travel agencies, but so far the courts have been divided. Many of these cases have been brought in federal district courts, and those courts have often ruled in favor of the cities.
Some state courts have also upheld the cities' claims. In one case, for example, the Supreme Court of Georgia reversed the lower court's dismissal and remanded the case for trial on Atlanta's claim concerning the city's hotel tax ordinance. Given that most cities and counties have found themselves in dire financial straits since the latest recession, we can expect to see more such suits around the country.
FOR CRITICAL ANALYSIS
Why do you think that cities and states have not brought similar lawsuits against e-commerce retailers such as Amazon.com?
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Facts: The facts deal with the tax payment issue posed by e-commerce companies and the amount of loss borne by the federal government every year. The Federal government is suffering huge losses every year because E-Commerce Companies are avoiding payment of taxes to the government. Laws for E-Commerce Companies: The laws enacted by the government and the common law are not able to restrict the tax evasion practices of the E-commerce companies. The law advocates that the e-commerce companies need to get registered at one place and pay taxes as per the tax laws applicable in the state. Outcome: The cities and states are not able to file cases against the E-Commerce Companies because these giants are registered in multiple locations. Thus, the states and cities are unable to decide which state law and tax rate to be applied to the Company. The situation of E-Commerce Companies in multiple locations makes it hard for the governments to find out if the company had actually paid the tax in a particular state or not. When the government is not able to discover which company has paid its tax and which had not, it cannot bring suits against the defaulting companies. Thus, it can be concluded that cities and states are unable to file cases against the E-Commerce Companies because these companies are located in more than one locations.
Q 2Q 2
ISSUE SPOTTERS
E-Design, Inc., orders 150 computer desks. Fav-O-Rite Supplies, Inc., ships 150 printer stands. Is this an acceptance of the offer or a counteroffer? If it is an acceptance, is it a breach of the contract? What if Fav-O-Rite told E-Design it was sending the printer stands as "an accommodation"? (See pages 299-302.)
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When breaching takes place of a sale or lease contract then the transferring of the risk will function very differently which will depend completely as to which party has breached. Normally the party that was involved in the breaching will have to bear the complete risk of the loss. In the case when the breaching is done by the seller or the lessor and if the goods are not confirmed then the buyers will have the right to decline the possession of the goods. In case of acceptance of a consignment of the goods and afterwards realises that there is some sought of fault in the goods then at that time the acceptance of the goods can be cancelled. Cancellation of the goods will permit the risk of loss to be transferred to the seller by the buyer and to the degree where the insurance of the buyer will not cover the entire loss. Therefore in this case also if the E-Design, Inc accepts the 150 printer stands and afterwards if any fault is detected then the order can actually be cancelled. But in the case if Fav-O-Rite had informed the E-Design that it was going to send the printer stand then the acceptance would not be based on nonconforming as the E- Design could cancel the order before it was shipped.
Q 3Q 3
Answers to the even-numbered questions in this For Review section can be found in Appendix F at the end of this text.
How do Article 2 and Article 2A of the UCC differ? What types of transactions does each article cover?
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The Article of the UCC manages the contracts based on the sales or it manages those contracts that are concerned with the transaction of various goods. For the facilitation of the transactions, which are for profit making purposes, Article 2 makes amendments in some of the contract requirements based on common laws. The main point of focus over here is that the Article 2 is concerned directly with the sale of the goods and it is not concerned with the real property, it doesn't deal with services or even the stocks or the bonds that are known as the intangible property. The Article 2A of the UCC manages the leases. Nowadays the leases that are concerned with the goods have become very widespread. Lease can actually be explained as the transferring of the right for the utilisation of a good that a person possesses for payment for a particular period of time. The particular transactions that are concerned with the Article 2 are the ones that will create a lease for a particular good and along with that a sublease for the good will also be created. Article 2 is usually applied to the lease rather than to the sale of the particular good. Article 2 A is a replication of the article 2 and it is different only when it has to reveal the difference that exists between the lease and the sales transactions.
Q 4Q 4
The five Learning Objectives below are designed to help improve your understanding of the chapter. After reading this chapter, you should be able to answer the following questions:
How do Article 2 and Article 2A of the UCC differ? What types of transactions does each article cover?
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Q 5Q 5
Answers to the even-numbered questions in this For Review section can be found in Appendix F at the end of this text.
What law governs contracts for the international sale of goods?
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Q 6Q 6
Guy Holcomb owns and operates Oasis Goodtime Emporium, an adult entertainment establishment. Holcomb wanted to create an adult Internet system for Oasis that would offer customers adult theme videos and "live" chat room programs using performers at the club. On May 10, Holcomb signed a work order authorizing Crossroads Consulting Group (CCG) "to deliver a working prototype of a customer chat system, demonstrating the integration of live video and chatting in a Web browser." In exchange for creating the prototype, Holcomb agreed to pay CCG $64,697. On May 20, Holcomb signed an additional work order in the amount of $12,943 for CCG to install a customized firewall system. The work orders stated that Holcomb would make monthly installment payments to CCG, and both parties expected the work would be finished by September. Due to unforeseen problems largely attributable to system configuration and software incompatibility, the project required more time than anticipated. By the end of the summer, the Web site was still not ready, and Holcomb had fallen behind in the payments to CCG. CCG was threatening to cease work and file suit for breach of contract unless the bill was paid. Rather than make further payments, Holcomb wanted to abandon the Web site project. Using the information presented in the chapter, answer the following questions.
1. Would a court be likely to decide that the transaction between Holcomb and CCG was covered by the Uniform Commercial Code (UCC)? Why or why not?
2. Would a court be likely to consider Holcomb a merchant under the UCC? Why or why not?
3. Did the parties have a valid contract under the UCC? Explain.
4. Suppose that Holcomb and CCG meet in October in an attempt to resolve their problems. At that time, the parties reach an oral agreement that CCG will continue to work without demanding full payment of the past-due amounts and Holcomb will pay CCG $5,000 per week. Assuming that the contract falls under the UCC, is the oral agreement enforceable? Why or why not?
DEBATE THIS The UCC should require the same degree of definiteness of terms, especially with respect to price and quantity, as general contract law does.
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Q 7Q 7
ISSUE SPOTTERS
Truck Parts, Inc. (TPI), often sells supplies to United Fix-It Company (UFC), which services trucks. Over the phone, they negotiate for the sale of eighty-four sets of tires. TPI sends a letter to UFC detailing the terms and two weeks later ships the tires. Is there an enforceable contract between them? Why or why not? (See pages 297-299.)
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Q 8Q 8
Answers to the even-numbered questions in this For Review section can be found in Appendix F at the end of this text.
In a sales contract, if an offeree includes additional or different terms in an acceptance, will a contract result? If so, what happens to these terms?
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Q 10Q 10
Statute of Frauds. Fresher Foods, Inc., orally agreed to purchase one thousand bushels of corn for $1.25 per bushel from Dale Vernon, a farmer. Fresher Foods paid $125 down and agreed to pay the remainder of the purchase price on delivery, which was scheduled for one week later. When Fresher Foods tendered the balance of $1,125 on the scheduled day of delivery and requested the corn, Vernon refused to deliver it. Fresher Foods sued Vernon for damages, claiming that Vernon had breached their oral contract. Can Fresher Foods recover? If so, to what extent? (See pages 302-304.)
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Q 11Q 11
Answers to the even-numbered questions in this For Review section can be found in Appendix F at the end of this text.
What exceptions to the writing requirements of the Statute of Frauds are provided in Article 2 and Article 2A of the UCC?
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Q 12Q 12
In a sales contract, if an offeree includes additional or different terms in an acceptance, will a contract result? If so, what happens to these terms?
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Q 13Q 13
Question with Sample Answer-Merchant's Firm Offer. On September 1, Jennings, a used-car dealer, wrote a letter to Wheeler, stating, "I have a 1955 Thunderbird convertible in mint condition that I will sell you for $13,500 at any time before October 9. [signed] Peter Jennings." By September 15, having heard nothing from Wheeler, Jennings sold the Thunderbird to another party. On September 29, Wheeler accepted Jennings's offer and tendered the $13,500. When Jennings told Wheeler he had sold the car to another party, Wheeler claimed Jennings had breached their contract. Is Jennings in breach? Explain. (See page 299.)
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Q 14Q 14
Answers to the even-numbered questions in this For Review section can be found in Appendix F at the end of this text.
Risk of loss does not necessarily pass with title. If the parties to a contract do not expressly agree when risk passes and the goods are to be delivered without movement by the seller, when does risk pass?
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Q 15Q 15
Risk of loss does not necessarily pass with title. If the parties to a contract do not expressly agree when risk passes and the goods are to be delivered without movement by the seller, when does risk pass?
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Q 16Q 16
Offer. In 1998, Johnson Controls, Inc. (JCI), began buying auto parts from Q. C. Onics Ventures, LP. For each part, JCI would inform Onics of its need and ask the price. Onics would analyze the specifications, contact its suppliers, and respond with a formal quotation. A quote listed a part's number and description, the price per unit, and an estimate of units available for a given year. A quote did not state payment terms, an acceptance date, the time of performance, warranties, or quantities. JCI would select a supplier and issue a purchase order for a part. The purchase order required the seller to supply all of JCI's requirements for the part but gave the buyer the right to end the deal at any time. Using this procedure, JCI issued hundreds of purchase orders. In July 2001, JCI terminated its relationship with Onics and began buying parts through another supplier. Onics filed a suit in a federal district court against JCI, alleging breach of contract. Which documents-the price quotations or the purchase orders-constituted offers? Which were acceptances? What effect would the answers to these questions have on the result in this case? Explain. [ Q. C. Onics Ventures , LP v. Johnson Controls , Inc.,_F.Supp.2d_(N.D.Ind. 2006)]
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Q 17Q 17
The five Learning Objectives below are designed to help improve your understanding of the chapter. After reading this chapter, you should be able to answer the following questions:
What law governs contracts for the international sale of goods?
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Q 18Q 18
Case Problem with Sample Answer Clear Lakes Trout Co. operates a fish hatchery in Idaho. Rodney and Carla Griffith are trout growers. Clear Lakes agreed to sell "small trout" to the Griffiths, who agreed to sell the trout back when they had grown to "market size." At the time, in the trade "market size" referred to fish approximating one-pound live weight. The parties did business without a written agreement until September 1998, when they executed a contract with a six-year duration. The contract did not define "market size." All went well until September 2001, after which there was a demand for larger fish. Clear Lakes began taking deliveries later and in smaller loads, leaving the Griffiths with overcrowded ponds and other problems. In 2003, the Griffiths refused to accept more fish and filed a suit in an Idaho state court against Clear Lakes, alleging breach of contract. Clear Lakes argued that there was no contract because the parties had different interpretations of "market size." Clear Lakes claimed that "market size" varied according to whatever its customers demanded. The Griffiths asserted that the term referred to fish of about one-pound live weight. Is outside evidence admissible to explain the terms of a contract? Are there any exceptions that could apply in this case? If so, what is the likely result? Explain. [ Griffith v. Clear Lakes Trout Co., 143 Idaho 733, 152 P3d 604 (2007)]
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Q 19Q 19
Additional Terms. Continental Insurance Co. issued a policy to cover shipments by Oakley Fertilizer, Inc. Oakley agreed to ship three thousand tons of fertilizer by barge from New Orleans, Louisiana, to Ameropa North America in Caruthersville, Missouri. Oakley sent Ameropa a contract form that set out these terms and stated that title and risk would pass to the buyer after the seller was paid for the goods. Ameropa e-mailed a different form that set out the same essential terms but stated that title and risk of loss would pass to the buyer when the goods were loaded onto the barges in New Orleans. The cargo was loaded onto barges but had not yet been delivered when it was damaged in Hurricane Katrina. Oakley filed a claim for the loss with Continental but was denied coverage. Oakley filed a suit in a Missouri state court against the insurer. Continental argued that title and risk passed to Ameropa before the damage as specified in the buyer's form under Section 2-207(3) of the Uniform Commercial Code because the parties did not have a valid contract under UCC 2-207(1). Apply UCC 2-207 on additional terms in an acceptance to these facts. Is Continental correct? Explain. [ Oakley Fertilizer , Inc. v. Continental Insurance Co., 276 S.W3d 342 (Mo.App.E.D. 2009)]
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Acceptance. JMAM, LLC, is a wholesaler of costume jewelry doing business as "Joan Rivers Worldwide Enterprises." B.S. International, Ltd. (BSI), makes costume jewelry JMAM and BSI did business under an agreement written by JMAM that set forth certain terms. One of the terms specified that JMAM would receive credit from BSI for any items rejected by JMAM's customers. JMAM had presented the terms to BSI with a cover letter stating, "By signing below, you the vendor agree to [these] terms." Steven Baracsi, BSI's owner, had signed the letter and returned it. For the next six years, BSI made jewelry for JMAM, which sold the jewelry to QVC, Inc. Items rejected by QVC were sent back to JMAM, which applied the cost as a credit against BSI invoices. The items, however, were never returned to BSI. When a dispute arose over the orders, BSI filed a suit in a Rhode Island state court against JMAM, claiming that it was owed $41,294.21 for items delivered but not returned. BSI showed the court a copy of JMAM's terms. Across the bottom had been typed a "PS. [Post Script]" requiring the return of rejected merchandise. Baracsi testified that he had mailed this page to JMAM. James Halliday, JMAM's chief financial officer, testified that he had never seen it. When do additional terms become part of a contract between merchants? Was BSI's "PS." part of this contract? Discuss. [ B. S. International , Ltd. v. JMAM , LLC , 13 A.3d 1057 (R.I. 2011)]
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Q 21Q 21
Delivery without Movement of the Goods. Aleris International, Inc., rented a John Deere 644J loader from Holt Equipment Co. Four months later, the parties signed a sales contract for the loader, which was still in Aleris's possession. This agreement provided that "despite physical delivery of the equipment, title shall remain in the seller" until Aleris paid the full price or the parties signed an installment contract, a loan agreement, or a lease for it. The next month, Aleris filed for bankruptcy in a federal court. Holt filed a claim with the court to repossess the loader. Holt asserted that under UCC 2-401, it was the owner. Holt cited the sales contract provision that referred to the seller's retention of title and to the fact that Aleris had not fully paid for the loader. Which provision of UCC 2-401 applies in this case? What are its rules? Under these rules, who is entitled to the loader, and why? [ In re Aleris International , Ltd., __ Bankr. __ (D.Del. 2011)]
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A Question of Ethics Daniel Fox owned Fox Lamberth Enterprises, Inc., a kitchen and bath remodeling business, in Dayton, Ohio. Fox leased a building from Carl and Bellulah Hussong. Craftsmen Home Improvement, Inc., also remodeled baths and kitchens. When Fox planned to close his business, Craftsmen expressed an interest in buying his showroom assets. Fox set a price of $50,000. Craftsmen's owners agreed and gave Fox a list of the desired items and "A Bill of Sale" that set the terms for payment. The parties did not discuss Fox's arrangement with the Hussongs, but Craftsmen expected to negotiate a new lease and extensively modified the premises, including removing some of the displays to its own showroom. When the Hussongs and Craftsmen could not agree on new terms, Craftsmen told Fox that the deal was off. [ Fox Lamberth Enterprises, Inc. v. Craftsmen Home Improvement, Inc.,___ N.E.2d ___ (2 Dist. 2006)]
1 In Fox's suit in an Ohio state court for breach of contract, Craftsmen raised the Statute of Frauds as a defense. What are the requirements of the Statute of Frauds? Did the deal between Fox and Craftsmen meet these requirements? Did it fall under one of the exceptions? Explain.
2 Craftsmen also claimed that the "predominant factor" of its agreement with Fox was a lease for the Hussongs' building. What is the predominant-factor test? Does it apply here? In any event, is it fair to hold a party to a contract to buy a business's assets when the buyer is unable to negotiate a favorable lease of the premises on which the assets are located? Discuss.
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Q 23Q 23
Video Question To watch this chapter's video, Sales and Lease Contracts, go to www.cengagebrain.com. Register the access code that came with your new book or log in to your existing account. Select the link for the "Business Law Digital Video Library Online Access" or "Business Law CourseMate." Click on "Complete Video List," view Video 26, and then answer the following questions:
1 Is Anna correct in assuming that a contract can exist even though the sales price for the computer equipment was not specified? Explain.
2 According to the Uniform Commercial Code (UCC), what conditions must be satisfied in order for a contract to be formed when certain terms are left open? What terms (in addition to price) can be left open?
3 Are the e-mail messages that Anna refers to sufficient proof of the contract? Why or why not?
4 Would parol evidence be admissible? Explain.
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There is no answer for this question
Q 24Q 24
Office Supply Store.com v. Kansas City School Board
Missouri Court of Appeals, 334 S.W.3d 574 (2011).
www.courts.mo.gov
FACTS Office Supply Store.com is a domain name registered to Office Supply Store, Inc., a corporation based in Bellevue, Washington. Employees of the Kansas City School District in Missouri allegedly ordered $17,642.54 worth of office supplies-without the authority or approval of their employer-from Office Supply Store.com. The Office Supply invoice that was sent with the goods (after the order had been placed) identified Los Angeles, California, as the "legal venue" for deciding disputes. When the goods were not paid for, Office Supply filed a suit against the Kansas City School Board and others, including some of the district's employees, in a California state court. The defendants did not respond. The court entered a default judgment in Office Supply's favor for more than $30,000 in damages, interest, attorneys' fees, and court costs. Office Supply asked a Missouri state court to formally register the judgment so that it could be enforced. The defendants appealed this registration.
ISSUE Is a forum-selection clause enforceable when it was included as an additional term in a seller's invoice that was received at the time the goods were delivered?
DECISION No. A state appellate court reversed the lower court's decision.
REASON Under UCC 2-207, additional terms included in an invoice delivered by a seller to a nonmerchant buyer with the purchased goods do not become part of the parties' contract, unless that buyer expressly agreed to them. This law has been adopted in both California and Missouri. In this case, the school board and the district's employees did not fit the definition of a merchant under the UCC. Thus, the court reasoned that the forum-selection clause could only be construed as a proposal for an addition to the contract. There was no evidence that the defendants had agreed to the clause.
FOR CRITICAL ANALYSIS-Ethical Consideration Should the court have allowed the default judgment to be registered so that it could have been enforced? Why or why not?
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Jones v. Star Credit Corp.
Supreme Court of New York, Nassau County, 59 Misc.2d 189, 298 N.Y.S.2d 264 (1969).
FACTS The Joneses, the plaintiffs, 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 plaintiffs, 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.
ISSUE Should the law deny enforcement of this contract on the ground of unconscionability?
DECISION Yes. The court held that the contract was unenforceable as it stood, and the contract was reformed so that no further payments were required.
REASON The court relied on UCC 2-302(1), which states that if "the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made, the court may... so limit the application of any unconscionable clause as to avoid any unconscionable result." The court then examined the disparity between the $900 purchase price and the $300 retail value, as well as the fact that the credit charges alone exceeded the retail value. These excessive charges were exacted despite the seller's knowledge of the plaintiffs' limited resources. The court reformed the contract so that the plaintiffs' payments, amounting to more than $600, were regarded as payment in full.
FOR CRITICAL ANALYSIS-Social Consideration Why didn't the court rule that the Joneses, as adults, had made a decision of their own free will and therefore were bound by the terms of the contract, regardless of the difference between the freezer's contract price and its retail value?
IMPACT OF THIS CASE ON TODAY'S LAW This early case illustrates the approach that many courts today take when deciding whether a sales contract is unconscionable-an approach that focuses on "excessive" price and unequal bargaining power.
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Q 26Q 26
United States v. 2007 Custom Motorcycle
United States District Court, District of Arizona, __ F.Supp.2d __ (2011).
FACTS Timothy Allen commissioned a custom motorcycle from Indy Route 66 Cycles, Inc., a company based in Indianapolis, Indiana. Indy built the motorcycle and issued a "Certificate of Origin" in April 2007. Two years later, federal law enforcement officers arrested Allen on drug charges and seized his home and other property in Phoenix, Arizona. The officers also seized the Indy-made motorcycle from the garage of the home of Allen's sister, Tena. The government alleged that the motorcycle was subject to forfeiture as the proceeds of drug trafficking. Indy filed a claim in a federal district court against the government. Indy argued that it owned the motorcycle, as evidenced by the "Certificate of Origin," which the company still possessed. Indy claimed that it had been keeping the motorcycle in storage. The government asserted that the motorcycle had been delivered to Allen in April 2007 and that Indy thus did not have standing to make its claim. The government filed a motion to strike the claim.
ISSUE Did ownership to the motorcycle pass at the time that Indy gave Allen possession and control over it?
DECISION Yes. The district court issued a ruling in the government's favor and granted the motion to strike Indy's claim.
REASON Under UCC 2-401(2), "unless otherwise explicitly agreed, title passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods." In the sales transaction in this case, the parties did not "otherwise explicitly agree" to different terms. Thus, the critical factor was whether Indy had delivered the motorcycle to Allen. Testimony by Indy's former vice president, Vince Ballard, was "inconclusive." Although Ballard implied that Indy had delivered the motorcycle to Allen, he also asserted that Indy had kept it in storage. Yet the motorcycle was found in Tena's garage. This "strongly indicates that claimant delivered it to [Timothy] Allen." Thus, Indy had given up possession of the motorcycle to Allen. This was sufficient to pass title even though Indy had kept a "Certificate of Origin." As a consequence, the motorcycle was subject to forfeiture as the proceeds of drug trafficking.
WHAT IF THE FACTS WERE DIFFERENT? Suppose that Indy had given the "Certificate of Origin" to Allen and had kept the motorcycle. Would the result have been different? Explain.
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