UCC Article 2: Because Even Your Toaster Deserves a Fair Contract

The Uniform Commercial Code (“UCC”) is a comprehensive set of laws governing commercial transactions. It was designed and drafted with the aim of standardizing, harmonizing, and simplifying the laws around commercial transactions across the country. It governs various aspects of commercial transactions, providing a consistent set of rules to promote fairness, predictability, and efficiency. While many are familiar with Article 9 and its governing of secured transactions — where security interests are taken in personal property — Article 2 deals specifically with the sale of goods and is just as important to understand as Article 9. Every day, there are hundreds of UCC Article 2 transactions, but few consider Article 2 beyond the purchase of simple consumer goods, like automobiles, clothing, and electronics. However, Article 2 reaches transactions beyond those for simple consumer goods, encompassing transactions that routinely implicate millions of dollars. This Insight will delve into the framework and scope of Article 2 and its impact on business and consumer transactions.

What Are Goods?

UCC Article 2 applies to transactions for goods, which “means all things … which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities . . . things in action … [and] also includes the unborn young of animals and growing crops and other identified things attached to realty as described in the section on goods to be severed from realty ….”[1] In simpler terms, under UCC Article 2, “goods” are tangible, movable items. This includes things like cars, furniture, electronics, and food, but excludes real estate, services, and intangible assets like stocks or bonds. For UCC Article 2 to apply, the sale must involve the transfer of these goods from the seller to the buyer for a price.

Scope and Purpose

UCC Article 2 applies specifically to contracts for the sale of goods. It governs both the formation of these contracts and the rights and duties of the parties involved. Its main purposes are: (1) standardization — by creating a uniform set of rules, businesses can rely on consistent expectations across different states and across contracts in the same state; (2) flexibility — UCC Article 2 allows parties to modify terms, providing flexibility in various contractual situations; and (3) gap-filling provisions — if a contract is missing key terms, UCC Article 2 provides default rules to fill in the gaps which encourages smooth commercial transactions, as the law can be applied even if all details are not spelled out in a contract.

A key distinction in Article 2 is its focus on “merchants” and “non-merchants.” Article 2 imposes higher standards on merchants due to their expertise and familiarity with trade practices. Merchants are individuals or entities engaged in the sale of goods as part of their business, while non-merchants are regular buyers or sellers who do not engage in commercial trade as a profession.

Formation of a Sales Contract

Under UCC Article 2, a contract for the sale of goods can be formed in various ways: (1) offer and acceptance — in general contract law, a sale of goods begins with an offer and an acceptance; (2) firm offers — if a merchant makes a written offer and promises in writing to keep the offer open for a certain period (up to 90 days), the offer cannot be revoked during that time, even without consideration; and (3) battle of the forms — if the parties exchange forms (e.g., purchase orders and invoices) with conflicting terms, the UCC uses a flexible approach to determine which terms are part of the contract, often accepting all terms that are agreed upon and eliminating conflicting ones.

While the aforementioned methods of creating a binding contract are more well known, there are others to be aware of:

Section 2-201(2) creates a contract for the sale of goods if the parties discuss a transaction, one of the parties sends a written confirmation of that discussion, and the recipient of the confirmation is aware of the contents of the confirmation and does not object in writing within 10 days after it receives the confirmation.

Section 2-201(3)(a) creates a binding contract if a buyer orders specially manufactured goods, the seller had substantially begun making those goods by either manufacturing or procuring before buyer repudiates the order, and the seller cannot sell the goods in the ordinary course of its business.

Section 2-201(3)(c) creates a binding contract where a buyer has accepted delivered goods or where a seller has accepted payment for goods.

Section 2-207(3) enforces contracts if “[c]onduct by both parties … recognizes the existence of a contract … although the writings of the parties do not otherwise establish a contract.”

While there are many specific constructs for contract formation, UCC Article 2 is flexible when it comes to contract formation, as an agreement can still be valid even if some terms are left open, as long as the parties intended to make a contract and there is a reasonable basis for giving a remedy.

Terms of the Sales Contract

Several important terms of a sales contract are governed by Article 2, even if not explicitly specified by the parties: (1) price — if the contract does not specify a price, the UCC allows the price to be determined by market value or a reasonable price at the time of delivery; (2) quantity — this is the one term that must be specified for a contract to be valid, although there are exceptions for requirements or output contracts (where the quantity is set by buyer’s requirements or seller’s output); and (3) delivery and risk of loss — if not otherwise specified, delivery is expected to occur at the seller’s place of business — risk of loss passes from the seller to the buyer when delivery takes place unless the parties agree otherwise.

Performance of the Contract

The UCC requires both parties to act in good faith during the performance of the contract, meaning honesty in fact and observance of reasonable commercial standards. The seller must deliver the goods as agreed and must ensure that the goods conform to the contract terms. The buyer is required to accept and pay for the goods if they conform to the contract terms. Additionally, the buyer must inspect the goods in a timely manner and notify the seller if the goods are non-conforming. If the goods do not conform, the buyer may reject them or demand replacements. However, the seller is also given a chance to “cure” any non-conformity before the buyer rejects the goods, provided they can do so within the contract time.

Remedies for Breach of Contract

UCC Article 2 provides remedies for both the buyer and the seller when the other party breaches the contract. If the buyer fails to make payment, the seller can withhold delivery of the goods. The seller can resell the goods to another buyer and recover damages, which typically include the difference between the resale price and the original contract price. If the seller is unable to resell the goods, they may sue the buyer for damages, calculated as the difference between the contract price and the market price at the time of breach. If the seller breaches the contract, the buyer can purchase substitute goods and recover damages for any difference in price. In some cases, the buyer can demand that the seller deliver the goods as originally promised, particularly if the goods are unique or custom-made. The buyer can reject goods that do not conform to the contract and either cancel the contract or demand replacements.

Warranties Under UCC Article 2

UCC Article 2 recognizes several types of warranties that may be implied in a contract for the sale of goods: (1) express warranties — these are explicitly stated promises made by the seller, often related to the quality or functionality of the goods; (2) implied warranty of merchantability — if the seller is a merchant dealing in the type of goods sold, there is an implied promise that the goods are fit for the ordinary purposes for which such goods are used; and (3) implied warranty of fitness for a particular purpose — if the seller knows that the buyer is relying on their expertise to select suitable goods for a particular purpose, there is an implied warranty that the goods will be fit for that purpose.

Conclusion

UCC Article 2 provides a detailed and flexible framework for governing the sale of goods in the United States. By establishing clear rules for contract formation, performance, and remedies, it helps create predictability and fairness in commercial transactions. The provisions on warranties, the battle of the forms, and remedies for breach all aim to protect the interests of both buyers and sellers. Understanding UCC Article 2 is essential for anyone involved in the sale or purchase of goods, as it provides the legal backbone for most commercial sales transactions.

——————————————————————–

This DarrowEverett Insight should not be construed as legal advice or a legal opinion on any specific facts or circumstances. This Insight is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The contents are intended for general informational purposes only, and you are urged to consult your attorney concerning any particular situation and any specific legal question you may have. We are working diligently to remain well informed and up to date on information and advisements as they become available. As such, please reach out to us if you need help addressing any of the issues discussed in this Insight, or any other issues or concerns you may have relating to your business. We are ready to help guide you through these challenging times.

Unless expressly provided, this Insight does not constitute written tax advice as described in 31 C.F.R. §10, et seq. and is not intended or written by us to be used and/or relied on as written tax advice for any purpose including, without limitation, the marketing of any transaction addressed herein. Any U.S. federal tax advice rendered by DarrowEverett LLP shall be conspicuously labeled as such, shall include a discussion of all relevant facts and circumstances, as well as of any representations, statements, findings, or agreements (including projections, financial forecasts, or appraisals) upon which we rely, applicable to transactions discussed therein in compliance with 31 C.F.R. §10.37, shall relate the applicable law and authorities to the facts, and shall set forth any applicable limits on the use of such advice.

[1] Uniform Commercial Code §2-105(1)