You may have picked up early on in the semester that contracts are governed by state law. While most states have similar contract laws, these laws and the enforcement of the laws vary from state to state. As a result, you might imagine the confusion that could occur when trying to figure out which laws apply when selling goods across state lines. To reduce confusion and keep contract law standardized across states, the National Conference of Commissioners on Uniform State Laws began drafting common contract language in 1945. Named the Uniform Commercial Code (UCC), it has been adopted in every state and exists to simplify and streamline commercial transactions. For our purposes, we will focus on Article 2 of the UCC dealing with the sale of goods. Later in the semester, we will review Article 9 regarding secured transactions.
A key to your understanding of the UCC is that it is a "gap filler." This means that it only comes into play if the contract is silent as to that provision in the UCC. For example, the UCC allows a party to accept an offer by any "reasonable means of communication." However, if the contract states that the offer can only be accepted in a certain manner, then the UCC provision that allows acceptance by other means does not apply. In other words, we look first to the contract; if we don't find answers there, we turn to the UCC.
Scope of Article 2
Article 2 of the UCC governs contracts for the sale of goods. Keep in mind that the general contract laws you have reviewed for the last two weeks will still govern contracts for the sale of goods unless the UCC has modified that rule. Therefore, it will be important to identify if the contract issue you encounter is governed by the UCC or general contract law. A couple of rules at the outset will aid your study of the UCC. First, the UCC only applies to the sale of goods. It does not apply to sales of real estate, services, or stocks. Second, the rules can vary depending on whether one or both parties are a merchant.
What is a Sale?
The UCC defines a sale as the passing of title (ownership) from the seller to the buyer for a price. A gift is not a sale. Pretty simple.
What is a Good?
This one is a little more difficult. To be considered a good, the item must be tangible and moveable. Tangible property has a physical existence - you can touch it. Intangible property is property interests that you cannot touch - a copyright or ownership in a company, for example. Sure, you can touch a piece of paper evidencing your copyright or stock certificate showing your ownership in a company, but you can't touch the actual ownership of either of these interests. On the other hand, if you purchase a bike over the weekend, you can touch it, so it is tangible.
The second requirement is that the good be moveable. A moveable item can be transported from place to place. A standard home, while tangible, cannot be transported because it is fixed in the ground. Therefore, it is not a good. A mobile home, in contrast, can and is designed to be moved, making it a good.
You will occasionally find contracts that involve both goods and non-goods. For example, you may see a contract that involves the purchase of a truck (a good) and services such as helping to move the truck (not a good). In such situations, you will have to employ the predominant-factor test to determine whether the sale is primarily for the goods or the services. If you determine that the main focus of the contract is for the goods, you will use the UCC.
Who is a Merchant?
As mentioned above, the rules will at times change if either the buyer or seller is a merchant. The rationale here is that merchants have a higher level of sophistication and therefore should be held to a different standard than those that are ordinary or inexperienced buyers or sellers. It is therefore important to determine if any of the parties to the contract is a merchant, and then review the UCC's rules regarding merchants to determine if that alters the outcome of the contract dispute. The UCC defines a merchant as one who:
- deals in goods of the kind involved in the contract,
- holds himself or herself out as having special knowledge and skill regarding the practices or goods involved in the contract, or
- employs a merchant as a broker, agent, or other intermediary (an example would be a coin collector who hires a coin broker to purchase a special coin - in this example, the collector would be considered a merchant).
Offer Under the UCC
This may seem obvious, but it's worth repeating that parties are allowed to include contract terms to which the parties agree. For example, the buyer and seller may agree that payment is due 50 days before delivery of the goods, or 30 days after delivery, or 90 days, or 6 years. The UCC's rules about when payment is due will only come into play if the parties are silent as to when payment is due. The UCC, therefore, does not alter the terms to which the parties agree; rather, it works to fill in the gaps of the agreement. With that in mind, let's start our studies with a review of how the UCC changes the general contract law surrounding offers.
In general contract law, a contract is formed the moment that the offeree accepts the terms indicated in the offer. The UCC changes this by recognizing as valid, some agreements where the terms are vague or open. Under the UCC, an agreement will not fail so long as (1) the parties intended to make a contract, and (2) the court can find a reasonably certain basis for giving an appropriate remedy.
If the parties have not agreed to a price in an agreement for the sale of goods, the UCC allows a court to determine a reasonable price at the time of delivery (e.g., using fair market values where available). If the contract indicates that either party may set the price, that party must do so in good faith. Good faith means honesty in fact and the observance of reasonable commercial standards.
When parties do not specify payment terms, the UCC indicates that payment is due at the time and place at which the buyer is to receive the goods. For example, if Jasmine agrees to purchase potatoes from Chris's farm for $50, she'll have to pay for them at the time she picks up the potatoes. If she doesn't pay, Chris can keep the potatoes.
Some contracts speak of successive performances but don't indicate how long the contract will last. When there is confusion about the duration of an ongoing contract, either party can terminate the ongoing relationship at will. The only restriction here is that the parties treat each other in good faith.
Open quantity terms are interesting and a bit more complicated. As you might imagine, if the parties fail to state the quantity of the goods in the agreement, it's very likely that there is no agreement. If I say that I want you to send my dental office toothbrushes, but do not state the number of toothbrushes, we simply do not have a contract because it's unclear if I wanted 50 toothbrushes or 5,000. Nevertheless, there are two exceptions here:
- Requirement contracts. In this agreement, the buyer agrees to buy, and the seller agrees to sell all or up to a stated amount of what the buyer needs or requires. So to stick with our example, if we agree that you will sell me "all the toothbrushes I need" for my dental office, the UCC will find that we have a binding contract. The answer is rather simple - both of us agreed to a bit of ambiguity in our contract. Obviously, we have to work in good faith, but in general, suppliers know more or less how many toothbrushes a typical dental office requires.
- Output contracts. In this agreement, the seller agrees to sell and the buyer agrees to buy all or up to a stated amount of what the seller produces. Notice that the word "produces" limits this exception to production contracts rather than reseller agreements. Because the seller forfeits the right to sell goods to another buyer, there is an implicit consideration built into an output contract.
Merchant's Firm Offer
As you recall, standard contract law dictates that an offer can be revoked any time before it's accepted. The UCC creates an exception when a merchant offers to sell or buy goods. In these cases, if a merchant-offeror promises in a signed writing to keep an offer open, then the merchant's offer is valid and cannot be revoked unilaterally. The offer must be written and signed by the merchant.
Remember that the writing can be a napkin, email, text, or contract printed on expensive and scented paper. The signing requirement only requires a symbol or some other proof that it came from the merchant-offeror.
This rule is unique because no consideration is required. The rationale is that merchants, having more knowledge and experience with the goods in question, should be held to their word. So if John, a horse dealer, sends an email to Kylee indicating that he'll sell her a horse for $5000, he has created a firm offer.
You may be wondering how long the merchant has to honor the offer to sell the horse for $5000. The UCC indicates that offers can have a specified time (i.e., "this offer will remain open until January 15), or if no time is indicated, then it will stay open for a reasonable time. But in no case will the offer remain open for more than 3 months.
Acceptance Under the UCC
Under the UCC, acceptance may be given in any reasonable manner. For example, promising to ship or actually shipping conforming goods (the goods requested in the offer) constitutes acceptance. A bit confusingly, the shipment of nonconforming goods is also considered an acceptance. Shipment of nonconforming goods is both an acceptance and a breach of that contract. For example, I offer to buy 300 red remote-controlled cars from you. You ship 300 blue cars. You accepted my offer, but you breached by sending the wrong color. But as you might imagine, these rules would not apply if you either got permission from me to send the blue cars or if you notified me that you were sending the blue cars as a substitute (in essence making a counteroffer).
Remember that under the common law, if the offeree adds any terms, the law would treat it as a counteroffer. The UCC does not use this mirror image rule. Rather, the UCC allows a contract to be formed if the offeree's response shows a definite acceptance of the offer, even if the acceptance includes terms additional to or different from those contained in the offer. Whether those additional or different terms are incorporated into the agreement depend on whether one or more parties are merchants.
If one or both of the parties are nonmerchants, then we'll use the terms of the original offer and reject the additional terms of the acceptance.
When both parties are merchants, the terms automatically become a part of the agreement unless:
- the original offer expressly limited acceptance to the terms of the original offer,
- the new or additional terms materially alter the agreement, or
- the offeror objects to the new or additional terms within a reasonable period of time.
Consideration Under the UCC
By and large, the consideration requirements are the same under common law and the UCC. One exception is that modifications of agreements under the UCC do not require consideration as they do under the common law. The other difference involves the merchant's firm offer noted above.
The Statute of Frauds
As you recall, the statute of frauds requires that certain agreements must be evidenced by a writing. One of those categories involves sales contracts for goods priced at $500 or more. Any writing, including notes on napkins, emails, or texts will be sufficient to meet the writing requirement as long as it is clear that the parties intended to enter the agreement and it is signed by the party against whom enforcement is being sought.
Contracts Between Merchants
If both parties are merchants, courts will enforce an oral agreement if after coming to an oral agreement, one of the parties sends a signed confirmation (e.g., a memorandum of understanding) to the other merchant within a reasonable time. The confirmation must have the essential terms of the agreement. The rationale here is that if the receiving party is a merchant, he or she will reject the confirmation if it is inadequate or incorrect. If the other party does not reject the confirmation within 10 days, courts will enforce the agreement against the other party, even though it was not signed.
Like with common law exceptions to the statute of frauds rules, the UCC discards the writing requirement in two circumstances:
- Admissions: when the party being sued admits that the contract exists, that party cannot thereafter rely on the statute of frauds to argue that no contract exists. Duh.
- Partial Performance: An oral contract for the sale of goods is enforceable if payment has been made and accepted or if the goods have been received and accepted.
Parol Evidence Rule
Remember that the parol evidence rule is really a tool to keep another party from talking about what was said before or during the signing of an agreement. The UCC will not permit a party to introduce evidence that directly contradicts the terms of the agreement. However, the following will be permitted to clarify the terms of the agreement:
- Course of Dealing. This involves prior conduct between the parties to a contract.
- Usage of Trade. Any practice or method of dealing that is so regularly observed in a place, vocation, or trade as to justify an expectation by the parties that it will be observed in the transaction.
- Course of Performance. This is the conduct that occurs under the terms of a particular ongoing agreement.