The Uniform Commercial Code and Contracts for the Sale of Goods

Contracts: The Uniform Commercial Code

The uniform commercial code (UCC) is a set of laws governing sales and commercial transactions.[1] The purpose of any uniform code is to create a standard body of law across multiple jurisdictions. The provisions of the UCC or any uniform code are not binding on a jurisdiction unless they have been adopted by that jurisdiction. However, the UCC has been adopted in whole or in large part by all 50 states. The UCC contains multiple articles dealing with various components of commerce. The focus of this presentation will be on Article 2 of the UCC, which regulates contracts for the sale of goods. We will illustrate when Article 2 applies and discuss several practical concepts from Article 2 that affect contracts and sales.

            Article 2 applies to contracts for the sale of goods.[2] Goods are things that can be identified when the contract is formed and can be moved.[3] Pens, boats, computers, cars and animals are all “goods.” In contrast, real estate, services, and intangibles (such as intellectual property) are not “goods.”

Several UCC provisions provide special rules for “merchants.” A “merchant” is a person that regularly deals in transactions involving certain types of goods or holds himself out as having special knowledge about those goods.[4] A merchant is in the business of selling a specific type of product. If you go to a sporting goods store and buy a baseball, the sporting goods store is a merchant for purposes of the UCC, while you are not.

            While UCC rules are often comparable to general contract rules, the UCC does significantly change the rules in many places. Let’s look at some examples.

The first is the concept of a firm offer. This is an important exception to the general rule that an offer can be withdrawn by the offeror unless she received something of value in exchange for a promise to keep the offer open. For example, if I offer to sell you my house for $400,000, I can pull that offer off the table at any time until you accept. However, if you gave me $100 in exchange for my agreement to keep the offer open for a week, I must keep the offer open for the week. The agreement to keep an offer open for a given period of time in exchange for consideration is sometimes known as an “option contract.”

The firm offer rule dispenses with the need for consideration when dealing between merchants. A firm offer between merchants cannot be revoked for a specified time (or “reasonable” time if none is specified). To be considered a firm offer, the offer must be to buy or sell goods, must be in writing and signed and must specify that it will not be revoked for either a specified time or, if it does not specify a time, for a reasonable time. As in most cases when the UCC varies from the common law, this rule is designed to facilitate commerce. Allowing merchants to be confident that their offers will be good for a reasonable time allows them to engage in other related contractual activities. For example, a contractor may rely on an offer of materials at a certain price when putting together a bid. The firm offer rule allows her to do so with the confidence that the materials merchant will not be able to revoke his offer for a given period of time.

The second concept deals with the case of an acceptance that varies from the offer. This is sometimes known as the “battle of the forms.” Generally, when a contract offer is accepted, the terms must be the same as those in the offer (this is known as the “mirror image” rule). Article 2 changed this traditional contract principle. When there are additional terms to a contract sent in the acceptance, Article 2 applies the following rules.[5]

-          If the offeree accepts on terms that are not the same as the offeror’s, it will be presumed to be a valid acceptance unless the offeree specifically conditioned his acceptance on the change in terms.

-          The additional terms will be construed as proposed additions to the contract. They do not become part of the existing contract.

-          However, if both parties are merchants, then the additional terms do become part of the contract unless:

o   The original offer limits acceptance to the terms of the original offer

o   They are “material” (major) changes to the offer; or

o   The offeror objects to the terms in a reasonable time.

The third UCC doctrine is the UCC’s “gap filler” rules. The traditional law of contracts requires that the parties to a contract have mutual assent to the key elements of the bargain.[6] Because the UCC’s policy encourages enforceability and the ability to contract quickly and reliably, the UCC allows contracts to become enforceable even without agreement on all important terms. For example, the parties may not know the price, date of delivery, or payment terms. When certain terms are left out of a contract, Article 2 provides “gap filler” terms that are used to determine each party’s responsibilities under the contract.[7] For example, when the place of delivery is not specified in the contract, then the gap filler states that the seller’s place of business will be the default rule.[8] If the time for payment is not specified, then the goods must be paid for at the time and place the buyer receives the goods.[9] Even if the parties to a completed agreement fail to reference something so fundamental as the price, the contract is enforceable at a “reasonable price.” If a party does not want to rely on a gap filler provision of Article 2, then he can include specific requirements in the contract.

The UCC also covers risk of loss. The risk of loss focuses on which party must pay for goods that are lost or damaged during delivery.[10] The risk of loss provisions depend on how the goods are being delivered.[11]

            If the goods are not shipped by a common carrier, the risk of loss passes to the buyer when the goods have been delivered unless the seller is a merchant, in which case the risk of loss passes to the buyer when the buyer takes physical possession of the goods.

            If the goods are shipped by a common carrier (which means a third party that is contracted for delivery, such as UPS or the United States Postal Service), then the UCC provides for two types of agreement. A “shipment contract” requires that the seller place the goods into the possession of the carrier. A “destination contract” requires that the seller deliver the goods to the buyer at a certain location. If a shipment contract is used, then the risk of loss passes to the buyer when the goods are delivered to the carrier. If a destination contract is used, the risk of loss passes to the buyer when the goods arrive at the buyer’s location.

The UCC also defines the buyer’s right of inspection and the seller’s right to cure. After the goods are delivered to the buyer, the buyer has the right to inspect the goods before paying for them to make sure they conform to the offer.[12]

If a buyer rejects non-conforming goods, the UCC typically gives the seller the opportunity to fix the mistake (the “right to cure”). This applies only if the original time for the seller to complete the order has not expired, the seller notifies the buyer within a reasonable time of his intention to cure and that the seller complete corrected delivery in time to meet the original delivery date. [13]

These are just some of the areas in which the UCC changes the previously existing contract rules. Because of the UCC’s dominance in the areas of sales of goods, it is important for anyone involved in commercial goods transactions to be familiar with the UCC and its most important provisions.