Transactional Elements of Sales Contracts - Module 2 of 8

Module 2: Transactional Elements of Sales Contracts

Statute of Frauds

Salvador Dali was a famous painter who, in the 1950's, was commissioned to paint the Statue of Liberty for a television show. When Dali did not perform as allegedly agreed, the other party sued. Dali argued that the arrangement to paint constituted a sale of goods under the UCC and was therefore subject to the Code's requirement that there be a written record for sales of goods. The court ruled that the arrangement to procure the painting was not a sale of a "good," so Dali lost.[1]

The Code’s requirement that there be a writing is the UCC’s version of the Statute of Frauds. 

To address what was then perceived to be a widespread problem with contractual fraud, the English Parliament passed the original Statute of Frauds in 1677.[2] The statute required certain types of contracts, including sales of goods, to be in writing in order to be enforceable. England repealed its legislation in 1954 as it pertained to sales of goods. But the UCC continues to enforce this rule. It has been maligned by commentators, as, instead of preventing fraud, some argue that it actually promotes fraud when parties can claim the absence of a writing allows them to escape enforcement of an otherwise valid agreement.[3]

Section 2-201 of the UCC requires that in order to be enforceable, a contract for the sale of goods $500 or more must be in writing, signed by the party (or its agent) against whom enforcement is sought.[4] The terms of the writing need not necessarily be complete or accurate and the writing of the agreement and its signing may occur at different times.[5] All that is necessary for the provision to be satisfied is that the writing indicate the existence of the agreement and the quantity of the goods to be exchanged. Even the price term can be left out without running afoul of the UCC Statute of Frauds. So, for example, if the writing states that the buyer agreed to purchase 100 loaves of bread, that is sufficient. The price can be agreed to orally or left to a UCC gap filler (which would simply insert a “reasonable” price).  

Note that the contract cannot be enforced beyond the quantity referenced in the writing if a larger quantity is agreed to orally.[6] For example, imagine that Acme Corporation orders 10,000 fluorescent bulbs from Chandler’s Electrical Supply. The purchase order and matching invoice stipulated a quantity of 10,000 but Acme claimed it ordered 12,000 and has a phone recording showing that the parties agreed to 12,000 orally. Because the writing specified a quantity of 10,000, under the UCC Statute of Frauds, only the sale of 10,000 units can be enforced.

Between merchants, the Code allows a received written confirmation of an oral order to satisfy the statute of frauds requirement. After agreeing to an order, which may be oral, emailed, online, etc., the merchant may send a confirmation of the agreement to the other party. Under the UCC, the party receiving the agreement has ten days to object to the confirmation. If the receiving party fails to object to the agreement within ten days, then the parties are bound even without the original agreement having been in writing. This is assuming that the original agreement can be proven (such as with an email exchange or recorded phone call). The confirmation itself must comply with the requirements of the statute of frauds.[7]

The Code specifies exceptions regarding when a party may provide evidence of an agreement without a writing. For example, if the parties orally agree to the production of specially manufactured goods not saleable to others in the ordinary course of business, and the seller has already substantially commenced production or procurement of the goods in question, then the agreement will be enforceable.[8]  

For example, Acme Corporation builds replicas of old Ford Mustang sports cars with modern safety and convenience features. Each vehicle is manufactured according to specifications selected by the individual purchaser and at a purchase price of $100,000. Jeff orders a model from Acme and Acme welds together the chassis and frame. After Acme configures the engine and transmission, Jeff cancels the order and claims that since nothing was in writing, their agreement is unenforceable.  Given that production substantially commenced on a specially manufactured good and the amount of the agreement exceeds $500, Jeff would arguably be liable under this statute of frauds exception (assuming that the initial agreement can be proven).   

Another exception exists when a party admits in pleadings or court testimony to the existence of the agreement. Such admission can establish the existence of the agreement without a writing.The Code also provides that when a party has paid for goods and accepted the shipment of those goods, then the existence of the agreement has been shown by performance, even though there is no writing.[9]   

Some courts have allowed estoppel (when the other party reasonably relies on an oral agreement to its detriment) or fraud by the party asserting that there’s no agreement as exceptions. These may allow a party to prove an agreement in the absence of a writing where enforcing the writing requirement would be unjust.[10]

For example, Acme Corporation imports exotic sports cars and Jeff agrees to buy one of their very expensive models. Jeff lies about his finances, though he knew he could not afford to buy the car. He does not have the funds to pay Acme for the vehicle he ordered and when Acme learns of Jeff’s fraud, it cancels the order, but bills Jeff for losses it suffered due to the agreement. Jeff claims there is no writing, but his fraud may operate to prevent him from denying liability on the agreement.   

Parol Evidence Rule

The parol evidence rule governs the admissibility of evidence at trial.  Specifically, it addresses what extrinsic evidence, if any, can be admitted that contradicts or varies the terms of a written agreement. The purpose of the rule is to preserve the integrity of written instruments and encourage the parties to ensure that written agreements are complete and proper. The rule can be confusing in its interpretation and application and leaves judges with significant discretion in determining what evidence can be used to ascertain a contract's terms and meaning.[11]    

If a writing is intended to be a complete and exclusive expression of the terms of an agreement, then evidence of additional terms, whether or not they contradict the writing, must be excluded. The parties may include in an agreement a "merger clause," which expressly provides that the contract is complete and exclusive. For an agreement that is not a complete and exclusive writing of all terms, but leaves some terms incomplete, a court may consider evidence of additional terms that do not contradict the written agreement.[12]

For example, assume Acme Auto Repair orally agrees to purchase 100 car batteries at $200 each from Baker Auto Supply. The parties later sign a contract for 100 car batteries at $175 each. Baker ships 100 car batteries and demands $20,000.  Acme insists that it only owes Baker for 100 car batteries at $175 each. Since the prices set forth by the agreements contradict each other, the written agreement controls, and evidence of the first agreement must be excluded.

Courts interpreting Article 2 have added yet another dimension of complexity to the parol evidence rule. Courts use different criteria to determine whether a writing is complete and exclusive. One approach is the "four-corners test" which is an examination solely of the agreement itself without reference to evidence outside the writing. Another approach also looks at the agreement in the context in which it was concluded to determine whether the agreement is complete in itself.[13] 

Beyond the common law parol evidence rule, the Code provides that course of performance, course of dealing or usage of trade may be used to assist a court in interpretation of an agreement, even one that is complete and exclusive in its terms and even when the agreement is clear on its face.[14]  For agreements that are not complete, the Code additionally allows evidence of “consistent additional terms” to explain or supplement the writing.[15]  Fraud and mistake also operate as exceptions to the parol evidence rule. Evidence otherwise inadmissible under the parol evidence rule may be admitted by a court in order to prevent fraud or clarify a mistake.[16]

Battle of the Forms

One of the most noteworthy provisions of Article 2 is Section 2-207, which has been dubbed by legal scholars as the "battle of the forms" provision.[17] In a typical commercial sale, a buyer submits a purchase order to a seller, who then sends the buyer a confirmation or invoice. The forms thus exchanged may contain differing terms. It then becomes difficult to definitively ascertain whether an agreement between the parties exists and, if so, what the terms are. The “battle of the forms” provision of Section 2-207 was intended to provide some guidance by stipulating the rules that govern the resolution of disagreements involving the use of forms.[18]

Under the common law “mirror image” rule, any change to the terms of an offer operated as rejection of the original offer and a counteroffer with the new terms. When the parties exchanged varying forms, the last form operated as a counteroffer that the other party could accept or reject. This “last-shot” rule, like many of the common law rules the Code sought to remedy, was not based on commercial realities and did not promote effective and efficient transactions.[19] Thus, while the mirror image rule still applies in other contracts, the UCC dramatically changed the rule for contracts for the sales of goods.

Section 2-207 provides that if a form constitutes a “definite and seasonable” expression of acceptance of an offer, then there is a validly enforceable agreement, even though the acceptance or confirmation provided terms different from those in the original offer.[20]  This provision effectively eliminates the common law mirror image rule and allows the parties to vary the terms of an agreement in the course of their transactions. However, the Code provides that an acceptance made conditional on the inclusion of the additional terms is NOT considered an acceptance.

In order to ascertain the terms of a contract in the event of variance between the offer and acceptance, the Code distinguishes between contracts made by merchants and contracts made by non-merchants. If a contract involves at least one non-merchant, then the varying acceptance operates as an acceptance on the terms of the offer. Any additional terms constitute proposals for additional agreements that are ineffective unless agreed to by the other party.

For example, assume that Bill, a non-merchant, orders a used car on eBay from Jim’s Chevy Dealership with an advertised price of $10,000. Jim sends Bill a confirmation that says “Thank you for your order, which is accepted and processed. Please note that the car must be removed from our lot by you within 48 hours or your order will be cancelled.” Since neither the car ad nor the order said anything about the 48-hour pickup requirement, the acceptance (the confirmation) varied from the offer (the order). Under Section 2-207, the contract is valid, but the 48-hour pickup requirement does NOT become part of the agreement unless accepted by Bill. 

If both parties are merchants, though, then the Code provides that the additional terms DO become part of the contract unless one of three exceptions applies. The first exception is that the offeror can expressly forbid the alteration of the offer. If the offeror does so, then any changes are ineffective. A second exception is if the terms of the acceptance materially alter the terms of the offer, then the altered terms do not become part of the agreement. Finally, if the other party objects within a reasonable time of the alterations, those alterations do not become part of the agreement.[21]

For example, Acme Auto Repair requests in writing a shipment from Baker Auto Supply to purchase 400 truck tires at $130 each. Baker responds with an acceptance, but the acceptance states that he can only provide 395 tires, so he crosses out “400” and inserts “395.” This is probably not a material change. So, the 395 would become the binding agreement unless Acme’s offer stipulated that the order could not be altered or unless Acme objects to the change from 400 to 395 within a reasonable time.

Modifications

At common law, modifications to a contract after it had been executed needed to be supported by additional consideration on both sides. Otherwise, the modifications, even if agreed to by both sides, were treated as gratuitous, unenforceable promises.[22]  Article 2 allows the parties to modify a contract without compromising the agreement's enforceability, even if there is no new consideration. However, to be binding, the Code imposes a good faith requirement.[23]  Good faith means “honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.”[24]  The modification must have legitimate purpose and not be the product of pressure by one party on the other, to the extent that the coerced party has no meaningful choice.[25]

For example, assume that Joe agrees with Jane, who owns a hardware store, that Joe will buy 10 snow shovels for $20 each on January 15. On January 14, there is a big snowstorm and, suddenly, Jane can get twice as much for each shovel. She tells Joe that she won’t sell the shovels to him for less than $30. Joe, needing the shovels now, agrees to the new price. This modification will not be binding because Jane used undue pressure and the modification was not made in good faith.

On the other hand, assume that Jane’s supplier ran out of shovels and she could not get shovels wholesale except by paying an extra $10 per shovel. After discussion, Joe agrees to pay an extra $5 per shovel so that they can split the costs of this development. This seems like a good faith modification and will likely be enforced.

Article 2 also allows use of a "no-oral modification" clause, which bars enforcement of any subsequent oral modifications. These clauses were unenforceable under the common law. If a merchant and non-merchant are the parties to an agreement, then the non-merchant must separately sign the no-oral modification clause.[26] Even where allowed, modifications may need to comply with the Statute of Frauds if the new agreement is so covered.[27] 

For example, Tom orally agrees to buy a motorcycle from Acme Corporation for $450.  He later talks to a salesperson and, after acknowledging some confusion regarding model and options, agrees to adjust the price to $550. Since the sale of the motorcycle is now in excess of $500, the agreement between Acme and Tom is within the statute of frauds and must be in writing.      

If the modification does not satisfy the Statute of Frauds requirement, it may still operate as a waiver, in the sense that the other party, by agreeing to a modification, may waive its objection to the agreement. While the modification may be excluded by the Statute of Frauds, a waiver would achieve the same result as the invalid modification.[28] However, some courts have held that for such a waiver to be effective, the other party needs to demonstrate reasonable detrimental reliance on the waiver.[29] 

In our next module, we’ll look at warranties and other implied elements of agreements, such as the unenforceability of unconscionable agreements and special rules that apply to electronic transactions.