Sales of Goods and the UCC - Module 1 of 5




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Module 1: Sales of Goods and the UCC

Article 2 of the UCC

The National Conference of Commissioners on Uniform State Laws and the American Law Institute collaborated to produce ten articles governing certain types of commercial transactions. These articles are collectively known as the Uniform Commercial Code, originally promulgated in 1962, which we’ll refer to as the UCC or the “Code." The articles are originally based on the British Sale of Goods Act and the Uniform Sales Act of the early twentieth century. The Code is intended to serve as a model for state legislatures to adopt and customize as they see fit.[1] 

The UCC is not law in itself. It is a model for states to follow and tailor to their goals. While all states have enacted the UCC to one degree or another, there is some variance in degree, especially with regards to amendments released periodically which states are free to adopt or ignore.[2] 

Article 2 of the UCC deals with sales of goods. The goals of Article 2 are to simplify, clarify and modernize the law of commercial transactions and to permit the expansion of commercial transactions through custom, usage and agreement.[3]  Article 2 applies to transactions in goods, which is broader than just contracts for the sale of goods. Article 2A deals with leases to specifically address those types of contracts.[4]   

The UCC promotes the freedom of contract where the parties may agree to the terms that they like, but they may not disclaim the Code's requirements of “good faith, diligence, reasonableness and care.”[5] The Code provides these minimum requirements and leaves much to the discretion of the contracting parties. While Article 2 applies to transactions among ordinary buyers and sellers, certain provisions of Article 2 apply only to merchants. A "merchant" under the Code is one who deals in the kind of goods sold or has knowledge or skills particular to the goods involved in the transaction.[6]  

Analysis of a transaction under the UCC involves two basic inquiries: First, whether the parties entered into a contract and, second, if there is a contract, what are the binding terms.[7] Even without complete agreement to all of the terms, if there is an intent to be bound and a “reasonably certain” basis to compute a remedy, the Code requirements are satisfied.[8]  

Note that Article 2 only applies to goods and not services. Goods are defined as things that are movable.[9] Growing crops and other things expected to be severed from realty without harming the realty itself are also goods.[10]  Mineral, oil, gas and buildings are goods if the seller severs them from the ground, but if the buyer is expected to do so, then they are not goods, but realty. Contracts to sever oil and gas by the buyer are not governed by Article 2. Services, labor and legal causes of action are also not goods. 

Mixed transactions, which are sales that include both goods and services, can lead to varying court interpretations. For example, electricity has divided the courts. Electricity could be considered a movable good provided to customers or a service generated for the benefit of customers. In one case, the blood used in a transfusion was found by the court to be a service.[11]  

There are two tests to determine whether something is a good or a service and therefore whether Article 2 applies. Under the predominant purpose test, which is the majority view, the courts look at the predominant component in the transaction and accordingly categorize the subject of the transaction as a good or service. Under the gravamen test, which is the minority view, the court will look to the target of the complaint. If the subject of the complaint is a good, then the Code will apply.[12]

Article 9 of the UCC governs the creation of security interests in goods, which entitle a seller who extends credit to repossess the good for lack of payment. While Article 9 governs the security interest, Article 2 governs the underlying sale of goods. The Code is not intended to repeal or in any way impair statutes intended to protect certain persons such as consumers and farmers.

Forming a Sales Contract

At common law, there was a presumption that an acceptance must be in the same manner or means by which the offer was made.[13] Under Article 2, if an offeror makes an offer but does not specify the manner or means of acceptance then acceptance may be in any manner and by any means that are reasonable under the circumstances.[14]

Article 2 also addresses unilateral and bilateral contracts. The offeror can request a return promise in what is called a "bilateral contract" or a return performance in what is called a "unilateral contract." In the absence of a suitable designation by the offeror, the common law favored the establishment of a bilateral contract, but either is acceptable under Article 2.[15] Moreover, a seller can accept a buyer's offer simply by shipping the goods called for by the contract without an overt acknowledgement of the offer. For example, an online or mailed order can be processed with or without a confirmation email.

If the seller ships goods that do not conform to the buyer's specifications or reasonable expectations, then the goods are said to be "nonconforming."[16]  A seller that ships non-conforming goods while telling the buyer that he is requesting an “accommodation,” has effectively made a counteroffer to the buyer that the buyer may accept or reject. If the seller does not inform the buyer that he is requesting accommodation, then the seller has effectively accepted the buyer's original offer and the seller has breached the contract by shipping non-conforming goods.[17]  

Under the common law, an offeror could revoke an offer at any time prior to acceptance. Under Article 2, an offeror's eligibility to revoke an offer is limited if the other party has initiated the requested performance.[18] If the person to whom the offer is made, called the "offeree," gives the offeror notice that performance has begun within a "reasonable time" after commencing performance (such as with a confirmation email), then the offer is deemed accepted.[19] This rule protects the offeror because it affords the offeror notice that there is a valid acceptance. It additionally protects the offeree because the rule precludes revocation by the offeror. The common scenario is the case of specially-manufactured goods.

For example, imagine that Golden State Vineyards orders, from Northwest Corporation, special vats for its wines that are not available commercially and must be custom made. The job would reasonably take about three months. Northwest begins constructing the vats but does not tell Golden State it is doing so. Four months later, the company decides it does not want the vats and so informs Northwest. Northwest objects and insists it has a valid contract. Since Northwest began performance without notifying Golden State, it might not be able to establish a valid claim against Golden State.        

Under the common law, offers were considered revocable at any time and for any reason (before acceptance) unless there was some consideration paid for keeping the offer open. However, to promote efficient commercial transactions and prevent an offeror from withdrawing an offer in an untimely way that potentially confounds the expectations of the offeree, Article 2 provides a firm offer rule.[20]  Under this provision, if a merchant makes an offer to sell or buy goods that gives assurances that the offer will not be withdrawn for a stated or reasonable time, it is irrevocable. The offer must be communicated in a signed writing. If it does not specify an amount of time for which it will be held open, it is held open for a reasonable time, not to exceed three months.

Contract Terms

The parties to a contract may agree to any terms that are not “manifestly unreasonable.”[21] Many provisions of Article 2, such as implied warranties and guarantees or assumptions, may be disclaimed or waived upon mutual agreement of the parties. However, disclaimers and waivers may be expressly stated by the parties or implied by their words or conduct. Article 2 itself provides the language the parties may use to disclaim and waive specific provisions, especially in cases of warranties. However, note that the parties may not disclaim Article 2's requirements of “good faith, diligence and reasonableness.”[22] “Good faith” means honesty and the observance of reasonable commercial standards of fair dealing.[23]   

The parties also may not waive the right to make a claim if a contract is unconscionable.[24]  An unconscionable contract is a deal that is so one-sided that the courts will not enforce the contract.[25]  

For example, assume Golden State Vineyards buys several grape-processing machines on credit from Sonoma Processing Equipment.  The loan is structured as a series of loans, each one for a different machine.  According to the sales contract, Golden State’s default of payment on any one loan at any time entitles Sonoma to repossess each of Golden State’s machines for which there is an outstanding loan due. Moreover, payments are prorated over all of the machines, to make it difficult for Golden State to pay off the loan on any one machine. If Golden State did not understand the loan or a court finds its terms unconscionable, then the contract could be ruled unenforceable.[26] Note that the sophistication of the parties may work to favor enforcement of the contract if the court finds that Golden State understood the onerous terms but proceeded anyway.      

The Code allows agreements to be enforceable even if important terms are missing or were never discussed. Missing terms may be supplied by the Code's default rules and "gap-filler" provisions. Default rules are rules that the Code supplies in specific situations and "gap-filler" rules are provisions that can be inferred by the conduct of the parties, custom and industry practices.[27] Courts use a structured hierarchy in the UCC to interpret terms implied in a contract. They are the parties' prior course of performance, prior course of dealing and usage of trade.   

The prior course of performance means the repeated conduct in a particular transaction by the parties without objection.[28] Prior course of dealing is similar to prior course of performance, but pertains to the conduct of the parties over a series of transactions.[29]  Prior course of dealing establishes a common basis of understanding for interpreting the expressions of the parties and their other conduct. Usage of trade is a regular practice or method in the industry of such regularity that it justifies an expectation that it will be observed in certain other transactions.[30]  

In a given transaction, the terms of the contract control its interpretation in the event of a dispute. If the terms are unclear then the parties can resort to the prior course of performance, prior course of dealing and usage of trade, in that order of priority.[31]   

For example, assume Golden State Vineyards orders wine racks from Sierra Corporation to store its wine bottles. Sierra ships and Golden State receives a series of several wine racks for its chardonnay wines. Golden State makes payment and orders more wine racks, but it then begins to offer a more profitable port wine which uses a different-sized bottle. Golden State was under the impression that the type of rack was irrelevant and that it could receive a different size by simply informing Sierra. Sierra was counting on selling its chardonnay-sized racks to Golden State and refuses to change the types of racks they were sending.  Each side suspends performance.  In resolving the dispute, a court might find that the prior course of performance indicated that the chardonnay-sized racks were suitable. Whether or not Golden State can exercise a claim to select a different size may depend on the prior course of dealing between the parties or what is customary in the industry.

Default Terms

A contract may exist under Article 2 without a price term.[32] The default price is a “reasonable” price at the time of delivery. Alternatively, the parties may designate the buyer or seller as the one who will determine the price term, though that party must do so in good faith. If the party fails to do so and is at fault, then the other party may treat the contract as canceled or valid for a reasonable price term. The parties can also establish price determination by reference to an external mechanism, such as a market quote. So, for example, the parties may agree on August 1 that the buyer will purchase 100 widgets on November 1 for whatever price widgets are typically being sold for in a given city on that date. 

Article 2 also provides default rules for delivery should the parties fail to specify delivery terms.[33] Delivery must be made within a reasonable time and, unless otherwise agreed, delivery must be made in one shipment. If delivery is to be in separate shipments, then payment is due for each individual shipment after it is accepted. The default place of delivery is the seller’s place of business or, if none, the seller’s residence. Article 2 therefore provides a default rule that the buyer must pick up the goods. If the goods are identified as occupying a particular place (for example, “the red 2020 Toyota parked in the parking lot at 123 Elm Street”), then delivery is at that place. The buyer will be expected to go to the place and pick up the goods. 

Default rules are also set forth for payment. The buyer is obligated to pay for the goods at the time and place of receipt, rather than at the shipment of the goods.[34] Moreover, the buyer has a right of inspection when the goods are delivered and the obligation to pay for the goods arises only after there has been reasonable time for inspection.[35] If the inspection reveals a problem with the shipment, the buyer may refuse delivery. Of course, an unjustified rejection of a delivery is considered a breach of contract.

Other Types of Contracts

Article 2 provides for specific types of contracts that would ordinarily be unenforceable at common law under the doctrine of mutuality of consideration. These include output, requirements and exclusive dealing contracts.[36] Though these agreements are technically illusory, because one party or the other has the discretion or ability to avoid performance under the agreements, the UCC allows them because they are commercially desirable for their flexibility. 

Output and requirements contracts have no specific quantity term that is negotiated by the parties. Instead, in an output contract, the quantity is the amount of goods the seller can produce in a given period of time. In a requirements contract, the quantity is the amount the buyer requires in a given period of time.  Under the common law, these may be unenforceable because they are illusory promises as the production or requirement may be entirely at the discretion of a party. The seller might “output” nothing under an output contract and the buyer might “require” nothing under a requirements contract.[37] 

While the UCC allows for the enforceability of these contracts, it requires that the parties act in good faith.[38] They must “output” or “require” a reasonable amount under the circumstances based on the reasonable expectations of the parties at the outset of the agreement. Alternatively, the parties may elect to provide estimated amounts to make explicit their expectations under the contract. These estimated amounts can assist a court in interpreting the contract should there be a dispute. 

Similarly, in an exclusive dealings contract, one party agrees to deal exclusively with the other party, or both may agree to exclusively deal with each other.[39] In the former case, where, for example, a wholesaler might agree to sell its goods exclusively through a retailer, it’s possible that one party (the retailer in our case) may not be agreeing to any specific performance. Nevertheless, the agreement is considered enforceable, and the Code imputes a requirement of good faith on both parties. In our example, it is implied that the retailer will purchase a reasonable amount of goods from the wholesaler to justify the expectations of the exclusive relationship.

In our next module, we’ll turn to the transactional elements of contracts for the sales of goods, including writing and interpretation of contract terms and modifications of sales contract agreements.


 


[1] Henry D. Gabriel and Linda J. Rusch. The ABCs of the UCC: (Revised) Article 2:Sales. 1-4. (2004).  This text is a good overview of the UCC but treats the proposed 2003 UCC revisions at length, which were abandoned in 2011 because no state chose to adopt them.  Those discarded provisions were of course ignored in preparing these materials.

[3] Uniform Commercial Code - Sales. §1-103; Gabriel and Rusch, 4.

[11] See Perlmutter v. Beth DavidHospital 308 N.Y. 100, 123 N.E.2d792 (1954) as discussed in Sale of Goods in Service-Predominated Transactions, 37 Fordham L. Rev. 115 (1968). Available at: http://ir.lawnet.fordham.edu/flr/vol37/iss1/5.

[17] Uniform Commercial Code - Sales. §2-206(1)(b); Gabriel and Rusch, 18.

[24] Uniform Commercial Code - Sales. §2-302; Gabriel and Rusch, 31.

[25] See James J. White and Robert S. Summers, West Hornbook Series, Uniform Commercial Code, 6th Ed.  §§ 5-1 – 5-9 (2010).

[32] See Uniform Commercial Code – Sales. §2-305; Gabriel and Rusch, 35-37.