OVERVIEW OF ARTICLE 2
OF THE UNIFORM COMMERCIAL CODE
By Mark T. Garsombke and Andrew J. Schlidt
Negotiating a commercial sales agreement often takes the following course. After
preliminary discussions, a vendor sends its price quotation to a prospective buyer of the vendor’s
goods. The quotation contains the vendor’s standard terms and conditions of sale, all of which
heavily favor the vendor. The buyer then issues a purchase order reflecting the terms upon
which the buyer desires to purchase the goods. The purchase order contains the buyer’s standard
terms and conditions of purchase, all of which heavily favor the buyer. In some cases, the
vendor follows with an acknowledgment restating its terms of sale.
This classic exchange is commonly referred to as the “battle of the forms." The exchange
raises two commonly asked questions. First, has the exchange resulted in a contract? Second, if
so, what are the terms of the contract? The answers to these questions are generally governed by
Article 2 of the Uniform Commercial Code (“UCC”). This overview provides an introduction to
the more commonly referenced provisions of Article 2.1
I. UCC ARTICLE 2: Application and Purpose.
The UCC is a body of proposed uniform laws originally drafted in 1958 by the American
Law Institute and the National Conference of Commissioners on Uniform State Law
(“NCUSL”). It is comprised of a series of Articles governing various aspects of commercial
transactions. Each Article contains proposed laws which, if adopted by a state, govern specific
aspects of commercial transactions in that state. Since the original draft, each of the Articles has
undergone subsequent revisions.
Every state has adopted some version of the UCC, although Louisiana has not fully
adopted Article 2 preferring to maintain its own civil law tradition to govern the sale of goods.
This widespread acceptance has resulted in a body of substantially uniform laws in the United
States governing commercial transactions. However, it should be noted that some states have
adopted the UCC provisions with variations. Furthermore, the courts in one state may interpret
the provisions of the UCC differently than the courts of another. It is important, therefore, to
verify the status of applicable commercial law in any state in which one does business.
APPLICATION. Article 2 of the UCC is also informally referred to as “Sales” to reflect
the area of commercial law it governs - namely, the sale of goods. The term “goods” is a defined
term under Article 2 and generally means “all things which are movable at the time of
identification to the contract...”2 Included within this definition are items such as manufactured
products, food, chemicals and parts. If the contract is not for the sale of “goods”, then Article 2
generally will not apply. For example, Article 2 does not apply to service contracts or contracts
for the sale of money, securities or real estate. Article 2 also does not apply to international
1
Chapter 402 of the Wisconsin Code Annotated contains Article 2 of the UCC and governs the sales of goods in
Wisconsin. Chapter 401 contains UCC Article 1 and includes general provisions applicable to the UCC.
2
See Section 2-105 for a more comprehensive discussion of those items falling within the definition of “goods”
under UCC Article 2.
contracts. Generally, those are subject to the United Nations Convention on Contracts for the
International Sale of Goods (“CISG”). Importantly, however, the parties to a contract may
expressly chose to adopt one nation’s or state’s laws and contract around the CISG, potentially
resulting in the transaction being governed by the UCC if any U.S.A. state law is adopted.3
On occasion a commercial contract might involve the sale of both goods and services
such as construction contracts, repair contracts or contracts for development of software. Many
courts view these as “hybrid” contracts that may or may not be subject to Article 2. In general,
most courts will seek to determine which aspect of the sale is predominant, the sale of goods or
the provision of services. If the contract predominantly involves the sale of goods (51% or
greater), many courts will apply Article 2.4 If the contract involves predominantly the provision
of services, many courts will not apply Article 2. A minority of courts avoid this all or nothing
approach and apply Article 2 only to that portion of the contract relating to the goods.
Within the umbrella of Article 2 are special rules that apply to the sale of goods by
“merchants”. A “merchant” is defined in part in Section 2-104(1) as “(i) a person who deals in
goods of the kind or (ii) otherwise by his occupation holds himself out as having knowledge or
skill peculiar to the practices or goods involved in the transaction." Examples of merchants are
jewelers, electricians, plumbers and carpenters. Almost all businesses selling goods fall within
the definition of merchant. Under Article 2, merchants may be required to assume different or
higher responsibilities than non-merchants.5 In summary then, Article 2 applies to transactions in
“goods” with special rules applying to merchants involved in those transactions.
PURPOSE. Article 2 was crafted to override the common law “mirror image” rule and
provide a more practical framework for businesses to form contractual relationships. Under the
mirror image rule, a contract forms only if the vendor and buyer agree on each and every term.
If the terms of the offer and acceptance are not identical, such that they do not “mirror” each
other, common law presumes that the parties have not reached agreement.
Article 2 overrides this traditional approach to provide a mechanism better suited for the
modern business environment. Today’s businesses act quickly in closing deals. Often they will
proceed as if a deal has closed even if certain terms remain open. Under the mirage image rule,
no contract will have formed if terms remain open. None-the-less, the parties might desire to act
as if a contract exists.
In response to these shortcomings, Article 2 provides a more flexible mechanism for
contract formation. Contracts form not only based upon the parties’ documents, but also based
upon their conduct and course of dealing as well as industry norms. Where terms of a contract
have not been agreed upon, Article 2 supplements the partial agreement with terms customary in
3
See UCC 1A-301 and Article 9 5 of CISG.
4
Coakley & Williams, Inc. v. Shatterproof Glass Corp., 706 F.2d 456 (4th Cir. 1983).
5
For example, merchants are deemed to make implied warranties of merchantability under Section 2-314. Further
along in this overview are additional examples of provisions that apply only to merchants.
2
the industry. In short, businesses need not agree upon each and every term to create a
commercial contract. Article 2 will fill the gaps.
II. DETERMINING WHETHER A CONTRACT EXISTS.
As with the common law mirror image rule, Article 2 relies upon the concepts of “offer”
and “acceptance” in determining whether a contract has formed. One party must first offer to
enter into a contract. A second party must then respond to the terms of the offer. Following this
exchange, a critical determination must be made - whether the exchange has resulted in
agreement. Article 2 helps determine the answer.
The term “agreement” is defined in the UCC as the “bargain” of the parties in fact as
found in their language or by implication from other circumstances including course of dealing
or usage of trade or course of performance.6 The definition provides for formation of an
agreement in one of two ways: (a) through the exchange of documents or (b) through the
conduct of the parties. For the business practitioner, this is a key point to remember. Not only
can written documents create contracts, but conduct with the opposite party can as well.7 Both
mechanisms are briefly analyzed below.
CONTRACTS FORMED BY THE EXCHANGE OF DOCUMENTS. Formation of
an agreement through the exchange of documents is governed by UCC Section 2-207(1).
Intuitively, one can appreciate how written words might ripen into a binding contract. Whether
the exchange of documents does in fact form a contract is at the crux of the battle of the forms.
UCC Section 2-207(1) provides the answer.
Section 2-207(1) presumes that one party has already presented an offer to enter a
contract. Typically, the first document delivered which sets forth the material terms of the deal
acts as the offer. The subsequent response delivered by the opposite party will either accept or
reject of the offer. Section 2-207(1) identifies whether the second party’s response was an
acceptance or rejection.
SECTION 2-207(1). “A definite and seasonable expression of acceptance or a
written confirmation which is sent within a reasonable time operates as an
acceptance even though it states terms additional to or different from those
offered or agreed upon, unless acceptance is expressly made conditional on assent
to the additional or different terms." (emphasis added).
The first part of the Section describes those circumstances in which the response will be deemed
an acceptance of the offer. The second part of the section - as underlined - identifies when the
response acts as a rejection of the offer.
6
See Section 1-201(3) for the complete definition of “agreement” under the general provisions of UCC Article 1.
See Section 2-204(1). A contract for sale of goods may be made in any manner sufficient to show agreement,
including conduct by both parties which recognizes the existence of such a contract.
7
3
Acceptance of the Offer. A responding party has accepted the offer when it responds with
a “definite and seasonable expression of acceptance” or a “written confirmation” of acceptance.8
This is true even if the acceptance "states terms additional to or different from those offered or
agreed upon..." In most cases an acceptance will contain terms in addition to or different from
the offer. The additional or different terms are typically immaterial with regard to whether a
contract has formed.9
For example, a vendor may issue a quotation with its standard warranty language printed
on the reverse side. A buyer may accept the quotation pursuant to a purchase order, but with its
own warranty requirements printed on the reverse side of the purchase order. Under Section 2207(1), a contract has formed despite the additional or different terms. Whether the buyer’s
warranty requirement is part of the contract is another issue to be discussed later. Still, a contract
exists.
Rejection of Offer. There appear to be two instances in which a written response would
be construed as a rejection of the offer. The first instance is one in which the responding party
clearly states in writing that it will not enter into the contract. This certainly is the most
conclusive method for rejecting an offer. The second instance is one in which the response
clearly states that acceptance is “expressly made conditional on assent to the additional or
different terms” set forth in the response. In other words, the party accepting the offer is doing
so only upon the condition that the offeror agrees to the additional or different terms in the
response.
With respect to the second instance, the conditional acceptance is considered a “counteroffer." The bail is thrown back into the offeror’s court. If the offeror assents to the additional
and different terms (by conduct or in writing), those terms are integrated into the contract and a
binding contract is formed. If the offeror fails to assent to the additional and different terms, the
counter-offer is deemed rejected. Negotiations either continue or the deal is aborted.
CONTRACTS FORMED BY THE PARTIES’ CONDUCT. As described above, an
exchange of forms may fail to produce a contract. Even so, absent the exchange of written
terms, the parties by their conduct alone may create an agreement under Article 2.
SECTION 2-207(3). “Conduct by both parties which recognizes the existence of
a contract is sufficient to establish a contract for sale although the writings of the
parties do not otherwise establish a contract. In such case, the terms of the
particular contract consist of those terms on which the writings of the parties
8
Note that under Section 2-206 the mode of acceptance may be dictated by the party making the offer. If the offer
requires acceptance by facsimile, then arguably the acceptance must be made by facsimile. If the offer is silent as to
the mode of acceptance, then an offer to make a contract shall be construed as inviting acceptance in any manner
and by any medium reasonable in the circumstances. See Section 2-206(1)(a).
9
So long as the response agrees with the essential terms of the offer, a contract will be deemed formed. Various
states differ on what are considered “essential” terms. For example, some courts have deemed place of delivery,
price, quantity and specification of goods to be essential terms. Note whether place of delivery and price are
actually essential terms however is debatable. Section 2-305 provides a gap filler for price when no price is
specified. Section 2-308 provides a gap filler for place of delivery when none is specified in the contract. Clearly,
each state court may interpret “essential” terms differently.
4
agree, together with any supplementary terms incorporated under any other
provisions of this Act.”
Based upon Section 2-703(3), the conduct of the parties will create a contract if two
predicate findings are made. First, the parties must have engaged in the process of offer and
acceptance. Second, the parties must have acted as if they had a contract. For example, the
delivery of goods by a vendor is the type of conduct that suggests the vendor thought a contract
existed. The payment for goods received suggests that the buyer believed a contract existed.
The conduct of the parties, through their course of performance and course of dealing with each
other, may be sufficient to establish a contract.
The absence of conduct may also provide evidence of the existence of a contract. For
example, courts may construe one party’s “silence” as “acceptance” of an offer. Where a vendor
offers to deliver a shipment of goods and the other party fails to object to the offer, some courts
have construed such silence - or the failure to object - as an acceptance of the offer. The same is
true when one party proposes additional or different terms to an agreement. The opposite party’s
failure to respond may be deemed an acceptance of the additional or different terms.
The drafters of Article 2 recognized the risks introduced by this mechanism of contract
formation. They recognized the risk of fraudulent claims by parties seeking to enforce a
contractual relationship that did not exist in writing. To safeguard against such risks, Section 2201 (the statute of frauds provision) protects parties from claims that they entered into a contract,
when in fact they did not. As a general rule, the Section provides that a contract for the sale of
goods for the price of $500 or more is not enforceable unless the contract has been evidenced in
writing and signed by the party against whom enforcement is sought. As between merchants, the
writing need only be in the form of a confirming memorandum. The receiving party then has 10
days in which to object to the confirmation. The failure to object to the memorandum may be
deemed an acceptance of the offer.
Generally speaking, a contract will not be enforceable under the statute of frauds
provision without written evidence confirming its existence. However, the Section 2-201
provides three exceptions. Even without written confirmation, a contract will be found to exist
if: (i) the goods require special manufacturing and the vendor has begun the manufacturing
process, (ii) the party against whom enforcement is sought admits in court that a contract exists
or (iii) the goods have been accepted by the buyer and either payment has been made or the
goods received. These three circumstances may provide sufficient evidence alone for a court to
determine that the parties intended to enter into a binding agreement.
III. DETERMINING THE TERMS OF THE CONTRACT.
Having determined that a contract exists, the parties are left to ponder the second
question posed by their exchange. What are the terms of the contract? Again, Article 2 provides
the answer although through a complex mechanism much maligned by courts, lawyers and
clients alike. As one scholar has noted, this mechanism is “arguably the greatest statutory mess
5
of all time.”10 Still, the mechanism exists and it can be fairly stated the terms of the contract will
be a combination of (a) the terms evidenced by exchanged documents and the parties’ conduct
coupled with (b) the supplementary terms imposed under Article 2.
A.
TERMS FROM DOCUMENTS AND CONDUCT.
Common sense suggests that where parties agree on certain terms, those terms should
form a part of the final contract. Article 2 follows this common sense approach. To the extent
the parties agree on particular terms, those terms are incorporated into the final contract.
Whether the additional and different terms proposed by a party are included in the contract is
another issue. Article 2 helps determine what happens to those additional and different terms.
The answer depends in part upon whether the contract formed as a result of exchanged
documents or as a result of the parties’ conduct.
TERMS FROM EXCHANGED DOCUMENTS. When parties exchange their
respective standard terms, they are bound to agree on certain of those terms. The terms upon
which they agree will be incorporated into the final contract. The complexity arises when one
set of terms contains provisions that are additional or different from the other set of terms. For
example, an acceptance may contain terms that are additional to or different from the offer.
Section 2-207(2) provides the framework for ascertaining whether the additional terms are
included in the final deal11
SECTION 2-207(2). “The additional terms are to be construed as
proposals for addition to the contract. Between merchants such
terms become part of the contract unless:
(a)
the offer expressly limits acceptance to the terms of the offer;
(b)
they materially alter it; or
(c)
notification of objection to them has already been given or is given within
a reasonable time after notice of them is received.
Additional terms, as a general rule, automatically become a part of the contract between
merchants.12 There are only three instances in which they don’t, as listed above. If any of the
three limiting provisions applies, the additional terms are omitted from the bargain, but the
acceptance remains operative.
10
Letter from Grant Gilmore to Robert Summers (September 10, 1980), in R. Speidel, R. Summers, & J. White,
Teaching Materials on Commercial and Consumer Law 54-55 (3d ed.
1981).
11
There is a distinction between “additional” and “different” terms under the Article.
Note that 2-207(2) references only “additional” terms.
12
In Wisconsin, if a party seeks to add form damage disclaimer or form indemnification terms to a contract by
acceptance or confirmation, such terms are considered to “materially alter” the contract and, therefore are not
enforceable unless the other party expressly agrees to them. Air Prods & Chems., Inc. v. Fairbanks Morse, Inc., 58
Wis. 2d 193, 214, 206 N.W.2d 414 (1973).
6
“Different” terms are another story. They present complex issues under the current
framework of Section 2-207(2). As stated previously, by its express terms, Section 2-207(2)
applies to “additional” terms only. Because the Section is silent as to “different” terms, courts
have not been consistent in their treatment of such “different” terms. It can be fairly stated that
courts have treated “different” terms in either one of two ways. First, the different terms drop
out of both forms and are replaced with gap fillers. Or second, the different terms drop out of the
acceptance and the offeror’s terms control.13
As for the first alternative, many courts have ruled that the conflicting terms in the forms
cancel each other out. These courts have reasoned that it is unfair to allow the offeror’s
conflicting terms to always prevail over the conflicting terms in the acceptance. Accordingly,
they knock out the conflicting terms from both parties’ forms. The conflicting terms are then
replaced with gap-fillers under Article 2.14
As for the second alternative, other courts have determined that “different” and
“additional” terms should be treated alike under Section 2-207(2). Namely, the different terms in
the acceptance drop out and the offeror’s terms control if any of the three limiting provisions
under Section 2-207(2) are present. The basis for their position is found in the UCC’s Official
Comments to Section 2-207(2) which provides that “additional” and “different” terms are to be
treated similarly under the subsection.
As can be seen, this is a complex area of Article 2. There is only one sure conclusion to
be drawn from the confusion. Under either alternative described above, the “different” terms in
an acceptance will rarely be part of the final contract. In both cases, the different terms drop
from the contract and either the gap fillers or the offeror’s terms govern. The different terms
from an acceptance will only become part of the contract if the offeror assents to those terms in
writing or through its conduct.
TERMS FROM PARTIES’ CONDUCT. When the parties’ conduct creates a contract,
the terms are easier to ascertain. The mechanism for identifying the terms is simply stated in
Section 2-207(3). “[The terms of the particular contract consist of those terms on which the
writings of the parties agree, together with any supplementary terms incorporated under any
other provisions of the Act." All additional and different terms drop out of the contract and are
replaced with supplementary gap-fillers.
B.
SUPPLEMENTAL TERMS UNDER ARTICLE 2.
The “gap fillers” of Article 2 are likely the most fascinating concept in the Article. Their
name aptly describes their function, which is to supplement a contract and fill the gaps on terms
13
The treatment of “different” terms under Article 2 has been a source of much debate and confusion. NCUSL
attempted to address this confusion, and otherwise modernize Article 2, by amending Article 2 in 2003. No state
has yet adopted the proposed amendments to Article 2.
14
See Daitom, Inc. v. Pennwalt Corp., 741 F.2d 1569 (10th Cir. 1984). This approach is very similar to the one
adopted in Section 2-207(3). By this approach, a contract is deemed not to have been formed by an exchange of
documents; rather, the contract is formed through the conduct of the parties and gap fillers compliment the written
terms upon which the parties agree.
7
where the parties fail to reach agreement. It is this core function that distinguishes Article 2 from
the common law mirror image rule. The gap fillers complete an agreement such that it ripens
into an enforceable contracts even when the parties have not finalized each and every term.
“Gap fillers” spring into action without any effort or direction from the contracting
parties. The fillers are automatic in nature and presumptively form a part of the contract, unless
otherwise properly excluded by the parties. As such, it is not necessary to incorporate them into
the agreement, since they are incorporated by law. To the contrary, it is necessary to focus upon
whether certain fillers should be excluded from the agreement and the proper means for doing so.
Below is an overview of selected gap fillers.
CORE OBLIGATIONS OF THE PARTIES. [Section 2-301]. Perhaps already
obvious, but Article 2 explicitly identifies the core obligations of the parties to a contract. The
core obligation of the seller is to “transfer and deliver” the goods. The core obligation of the
buyer is to “accept and pay [for the goods] in accordance with the contract." Clearly this is a
simplistic statement of obligations. Each party will undoubtedly have additional rights, duties
and obligations as set forth in the agreement and the additional gap fillers that follow.
GOOD FAITH. [Section 1-203]. Every commercial contract subject to Article 2
imposes upon the parties an obligation of good faith in its performance and enforcement. Good
faith requires that the parties act with honesty and in accordance with reasonable commercial
standards of fair dealing in the trade. Lack of good faith in performance will constitute a breach
of the contract. This obligation cannot be excluded or disclaimed from the contract.
COURSE OF DEALING. [Section 1-205(1)]. The agreement of the parties will
include that part of their bargain that may be inferred from their previous dealings. The Section
defines course of dealing as a sequence of previous conduct between the parties to a particular
transaction which is fairly to be regarded as establishing a common basis of understanding for
interpreting their expressions and other conduct. Accordingly, if a vendor has undertaken certain
actions in previous dealings, Article 2 may mandate that the vendor undertake the same actions
in future deals with the buyer.
USAGE OF TRADE. [Section 1-205(2)] The agreement of the parties will also include
that part of their bargain that may be inferred from usage of trade. Usage of trade refers to a
practice or method of dealing customary in the industry. This Section specifically defines usage
of trade as any practice or method of dealing having such regularity of observance in a place,
vocation or trade as to justify an expectation that it will be observed with respect to the
transaction in question.15 If it is customary in the industry to provide certain warranties with the
subject goods, Article 2 may mandate that the vendor extend those warranties to the buyer.
COURSE OF PERFORMANCE. [Section 2-208(1)]. The agreement of the parties
will further include that part of their bargain that may be inferred from their course of
performance. The Section provides that “where the contract for sale involves repeated occasions
15
Section 1-205(2) provides that the existence and scope of usage of trade are to be proved as facts. A court may
review written trade codes or similar writings as evidence.
8
for performance by either party with knowledge of the nature of the performance and opportunity
for objection to it by the other party, any course of performance accepted or acquiesced in
without objection shall be relevant to determine the meaning of the agreement." By way of
example, if a vendor has been packaging the goods in wooden crates and the buyer has had
ample opportunity to object to this practice but has not objected, then the use of wooden crates is
a term incorporated into the contract through the vendor’s course of performance.16
WARRANTIES. Article 2 warranties are some of the most complex yet important
provisions from both the vendor’s and buyer’s perspectives. Under Article 2 both express and
implied warranties will run with goods sold by a vendor. Because these warranties automatically
run with the goods, vendors must be familiar with these warranties when negotiating a contract.
Perhaps even more important, vendors must know the appropriate mechanisms for disclaiming
these warranties. Several important warranty provisions under Article 2 are summarized below.
Express Warranties [Section 2-313]. The Code provides that a vendor will have
automatically created and extended express warranties about its goods in three different
circumstances. A vendor will have created and extended such express warranties if it states that
the goods will conform with:
(i)
any affirmation of fact or promise made by the seller to the buyer which
relates to the goods and becomes part of the basis of the bargain;
(ii)
any description of the goods which is made part of the basis of the
bargain; or
A statement that the goods will conform with any of the forgoing creates an express warranty
under Article 2. The same is true even if the vendor doesn’t use the word “warranty” or
“guarantee” in its statement. Furthermore, the express warranties may attach even if the vendor
was unaware of and had no control over the actual condition of the goods. The lesson here is
simple. Vendors must use caution when making statements about, or showing samples of, the
goods to potential customers so as to avoid making express warranties that are not intended.
Implied Warranty of Merchantability [Section 2-314]. Unless appropriately
disclaimed, every sale of goods by a merchant under Article 2 contains an implied warranty that
the goods will be “merchantable.” The definition of “merchantable” under the Code is quite
extensive, broad and somewhat difficult to grasp. But generally speaking, merchantable means
that the goods (i) will pass without objection in the trade, (ii) are fit for the ordinary purposes for
which such goods are used, (iii) are of even quality and quantity within each unit and among all
units involved, (iv) are adequately contained, packaged and labeled as per the agreement and
(v) conform to the promise or affirmations of fact made on the container or label, if any. The
warranty of merchantability establishes what can be described as “bottom line” of quality which
16
Note that under Section 2-208(2), express terms of a contract and course of performance are to be construed
whenever reasonable as consistent with each other. However, when such construction is unreasonable, express
terms of the contract control over course of performance, and course of performance controls over course of dealing,
which controls over usage of trade. Under Section 2-208(3), course of performance is relevant to show a waiver or
modification of any term inconsistent with course of performance.
9
a buyer can reasonably expect to receive. Again, this warranty can be disclaimed by the vendor
as will be described below.
Implied Warranty of Fitness for a Particular Purpose. [Section 2-315]. Unless
appropriately disclaimed, every contract subject to Article 2 contains an implied warranty that
the goods will be fit the buyer’s particular use. The Section describes the warranty as follows:
Where the seller at the time of contracting has reason to know any
particular purpose for which the goods are required and that the
buyer is relying on the seller’s skill or judgment to select or furnish
suitable goods, there is unless excluded or modified ... an implied
warranty that the goods shall be fit for such purpose. [Section 2315].
The implied warranty of fitness arises most often when the vendor’s goods are specifically
selected or particularly manufactured for the buyer’s business. In such instances, the buyer’s
particular purpose for using the goods has been communicated to the vendor and the buyer is
relying upon the vendor’s experience to select or manufacture the appropriate goods. As with
the warranty of merchantability, this warranty can be disclaimed by the vendor as will be
described below.
Implied Warranties of Title and Against Infringement. [Section 2-312].
Article 2 also imposes upon the vendor an implied warranty that the buyer is receiving good,
clean title to the goods in a rightful manner such that the buyer will not be exposed to a lawsuit
to protect title. Section 2-312(1) articulates the warranty as follows: “(a) the title conveyed shall
be good, and its transfer rightful and (b) the goods shall be deliver free from any security interest
or other lien or encumbrance of which the buyer at the time of contracting has no knowledge."
By way of example, a vendor who sells a stolen car arguably has breached the warranty of title.
The same can be said of a vendor who sells goods subject to security liens or other
encumbrances unknown to the buyer.
With respect to intellectual property rights, Section 2-312(3) imposes an implied
warranty that the goods sold by a merchant will not infringe upon a patent, copyright or
trademark of a third party. Note, however, that the warranty against infringement does not apply
if the goods were made to the buyer’s specifications.
Implied Warranties from Course of Dealing or Usage of Trade. [Section 2314(3)]. Tucked away in a corner of Article 2 is a catch-all implied warranty. Specifically, the
Section provides that additional implied warranties may arise from the course of dealing between
the parties or usage of trade in the industry. For example, if in previous dealings with the same
buyer a vendor has made certain warranties about the goods, those warranties may be implied in
future contracts, unless specifically disclaimed. If, in the subject industry, vendors typically
grant certain warranties with respect to specific goods, those warranties will be implied in the
vendor’s contracts, unless specifically disclaimed. It is important as such for a vendor to
seriously consider whether it intends to make such implied warranties. If not, then the vendor
must expressly and appropriately disclaim the implied warranties.
10
Warranty Disclaimers. [Section 2-316]. To the extent a vendor does not wish to
extend any of the warranties mentioned above, Article 2 provides mechanisms for disclaiming
both express and implied warranties. It should be noted, however, that many courts look upon
such disclaimers with disfavor. To the extent any such disclaimers are deemed “unconscionable”
or inequitable by a court, the court may invalidate the disclaimer. As such, there is no guarantee
the disclaimers will be effective.17
Section 2-316 allows vendors to disclaim express warranties about their goods.
However, the disclaimer will not be effective if the vendor has previously made an express
warranty to the buyer with respect to those goods. In other words, a vendor may not grant a
warranty with one hand and take it away with the other. For example, consider the case in which
a vendor expressly warrants in its quotation that the products will be manufactured from high
quality plastics. In a follow up acknowledgment, the vendor attempts to disclaim all express
warranties. Under Article 2, this conflict is to be construed against the vendor. A court would
likely invalidate the warranty disclaimer and require that the vendor deliver products
manufactured from high quality plastics.
A vendor may also disclaim implied warranties. Generally speaking, such disclaimers
must be in writing and must be conspicuous - meaning the disclaimer must stand out from the
other words of the contract. Bolding, capitalizing and/or underlining the disclaimer will help to
satisfy the conspicuousness requirement. Additionally, any disclaimer of the implied warranty of
merchantability must actually use the word “merchantability” in the disclaimer. As a caution, it
should be noted that such disclaimers must comply with numerous requirements under Article 2,
an explanation of which is to lengthy for this overview. Further consultation should be sought to
ensure that such disclaimers are appropriately made.
Limitation of Warranty Remedies. [Section 2-719]. The Code also allows
vendors to limit the remedies available to a buyer in the event of a breach of warranty. The right
to limit remedies is found in Section 2-719(1)(a) which provides in part that:
the agreement...may limit or alter the measure of damages
recoverable under this Article by limiting the buyer’s remedies to
return of the goods and repayment of the price or to repair and
replacement of non-conforming goods or parts...
As allowed under this Section, a vendor may limit a buyer’s remedies to the following at the
vendor’s option: (i) repayment of the purchase price, (ii) repair of the goods or (iii) replacement
of the goods. In most cases, the buyer will not be entitled to additional remedies if the foregoing
limitation is imposed by the vendor at the time of contracting.
Having said this, there are circumstances in which the above remedies would be
insufficient and the limitation of remedies unenforceable. Section 2-719(2) describes these as
17
See Section 2-302 regarding unconscionable contracts or clauses. “If the court as a matter of law finds the
contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to
enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so
limit the application of any unconscionable clause as to avoid any unconscionable result.”
11
circumstances in which the remedies “fail of their essential purpose." As an example, assume a
vendor warrants that the buyer’s car radio will operate correctly for a period of 90 days. Assume
further that, during the 90 day period, the radio catches fire and destroys the car. If the vendor
limited the remedies as above, the vendor might attempt to get off the hook by refunding the
purchase price of the radio. However, a court would likely find that the remedy fails of its
essential purpose in that the buyer sustained damages in an amount substantially greater than the
price of the radio and, therefore, the damages are unconscionably low under the circumstances.18
As a result, a court would likely allow the buyer resort to additional remedies implied in
Article 2.
CONSEQUENTIAL DAMAGES. [Section 2-715(2)]. The Code allows for the
recovery of consequential damages by a buyer following a vendor’s breach of the contract.
Consequential damages are generally defined by the Section as “(a) any loss resulting from
general or particular requirements and needs of which the seller at the time of contracting had
reason to know and which could not be reasonably prevented by cover or otherwise and
(b) injury to person or property proximately resulting from any breach of warranty.:”19 Article 2715(2) limits recovery of consequential damages to buyer’s only - suggesting that vendors may
not recover consequential damages following a buyer’s breach.20 21
LIMITATION OF DAMAGES. [Section 2-719]. Section 2-719(1)(a) authorizes the
parties to “limit or alter the measure of damages recoverable” under Article 2. The right to limit
damages recoverable includes the right to limit or exclude the consequential damages
recoverable by a party. Under Section 2-719(3), “consequential damages may be limited or
excluded unless the limitation or exclusion is unconscionable. Limitation of consequential
damages for injury to the person in the case of consumer goods is prima facie unconscionable,
but limitation of damages where the loss is commercial is not.”
This provision is arguably of great importance to vendors and buyers alike. On the
positive side, an enforceable provision limits the other’s damages to direct and incidental
damages only. On the negative side, there is no guarantee that the limitation will be enforceable.
Because of its obvious importance, sufficient time and effort should be spent drafting a limitation
that is more likely enforceable than not. Case law from the governing jurisdiction will give
insight as to what types of limitations have been deemed enforceable in the past.
18
See, generally, Phillips Petroleum v. Bucvrus- Erie Co., 131 Wis. 2d 21, 388 N.W.2d 584 (1986).
Section 1-106(1), Comment 1, describes consequential damages as “losses resulting from the inability of the
aggrieved party to use the promised performance for purposes of which the defendant knew or had reason to know at
the time of contracting!’
20
Some courts have challenged this interpretation based upon Section 1-106(1) which provides that neither
consequential, special nor punitive damages may be recovered except as specifically provided in the Articles or by
other rule of law. Since vendors can recover consequential damages under general contract law, some courts have
found that this satisfies the “other rule of law” exception in the Section.
21
The economic loss doctrine bars recovery in tort for damages resulting from a product not performing as intended,
including damages to the product itself or economic losses caused by defective product. The economic loss doctrine
does not bar the recovery of damages for injury to persons or other property resulting from a defective product. City
of Stoughton v. Thomasson Lumber Company, 2004 WI App. 6, 269 Wis. 2d 339, 675 N.W.2d 487 (Ct. App. 2003).
19
12
LIQUIDATED DAMAGES. [Section 2-718(1)]. Article 2 provides a mechanism for
“capping” the amount of damages recoverable by a party through a liquidated damages
provision. A liquidated damages provision is deemed enforceable under Article 2 if the
liquidated damages are “in an amount which is reasonable in the light of the anticipated or actual
harm caused by the breach, the difficulties of proof of loss and the inconvenience or
nonfeasibility of otherwise obtaining an adequate remedy." The Section further states that “a
term fixing unreasonably large liquidated damages is void as a penalty." Accordingly, there is
no guarantee that a court will enforce a liquidated damages provision, especially if it fails to
comply with the previously described requirements.
UNSPECIFIED PRICE. [Section 2-305]. Parties can form a contract even though the
price of the goods has not been agreed upon. In such a case, Article 2 will fill the gap by
imposing a price. The price imposed will be the price that is considered “reasonable” at the time
of delivery of the goods based upon industry standards.
Some vendors and buyers might find this gap filler frightening. Few parties will want a
contract to exist if they have not agreed upon a material term such as the price. Accordingly,
Article 2 provides that, if both parties did not intend to be bound unless the price was agreed
upon, then no contract exists.
UNSPECIFIED PLACE OF DELIVERY. [Section 2-308]. Parties can form a
contract even though the place of delivery of the goods has not been specified. Article 2
supplements the contract and designates the vendor’s place of business as the place of delivery.
However, if at the time of contracting, the parties know the goods are located somewhere other
than the seller’s place of business, the place where the goods are located becomes the place of
delivery. For example, if the goods are stored in a warehouse at the time of contracting, then the
warehouse is the place of delivery.
UNSPECIFIED TIME. [Sections 2-309]. Parties can form a contract even though the
time of performance has not been specified. Article 2 fills the gap in Section 2-309 in which
“the time for shipment or delivery or any other action under a contract if not provided in this
chapter or agreed upon shall be a reasonable time." Whether a particular time period is
reasonable will be determined by reference to Section 1-204(2). Under the Section whether a
particular time period is reasonable “depends on the nature, purpose and circumstances of such
action." Granted this standard is rather vague. But it furthers the purposes of Article 2 by
preserving the contract even though a key term is missing. Courts then are given license to
exercise their equitable powers and to review the parties’ course of dealings, course of
performance and usage of trade to determine what reasonable should mean under the
circumstances.
STATUTE OF LIMITATIONS. [Section 2-725]. Under Article 2, any action for
breach of a contract must be brought within 4 years of the breach. Note that the cause of action
accrues when the breach occurs, regardless of the aggrieved party’s lack of knowledge of the
breach. After the 4 year period has run, the aggrieved party may no longer pursue its case. If the
parties wish, they can reduce the limitations period to 1 year by expressly reflecting the reduced
period in their contract. However, parties may not extend the limitations period beyond 4 years.
13
IV. BREACH AND REMEDIES.
The previous two sections of this overview described how Article 2 helps to answer the
two most common questions raised in an exchange of documents and conduct between a vendor
and buyer; namely, whether a contract exists and whose terms are included in the contract.
Assuming now that a contract does exist and its terms are clear, a third issue arises in
performance of the contract. What remedies may a party exercise if the other party breaches its
obligations? Article 2 also provides the answer to this question.
Article 2 recognizes two distinct stages in a typical breach of contract. First, there is an
“anticipatory breach” in which no breach has yet occurred but one party feels insecure about
whether the other will perform as agreed. Second, there is the actual breach. Both stages are
described below together with a summary of the more commonly referenced remedies granted
under Article 2. As a caution, please note that the breach and remedies provision of Article 2 are
complex and fact intensive. It is not possible to cover in depth the various remedies that may or
may not be available for each type of breach. As such, please consider this an introduction
only.22
ANTICIPATORY BREACH. [Section 2-609]. Occasions may arise in which neither
party has breached the contract, yet one party is insecure about the other party’s intent to fully
perform under the contract. In other words, one party is anticipating that the other will breach.
The facts of the case will determine whether such insecurity is justified. For example, if the
vendor promised to manufacture and deliver goods by December 31st, but its work force has been
engaged in a prolonged strike, then adequate facts might exist to justify the buyer’s insecurity.
In such an instance, the buyer need not wait until December 31st to find out if the vendor will
breach. Section 2-609 provides a mechanism for the buyer to seek “adequate assurances” that
the vendor will perform as required.
SECTION 2-609(1). “A contract for sale imposes an obligation on
each party that the other’s expectation of receiving due
performance will not be impaired. When reasonable grounds for
insecurity arise with respect to the performance of either party, the
other may in writing demand adequate assurance of due
performance and until the demanding party receives such
assurance may if commercially reasonable suspend any
performance for which the demanding party has not already
received the agreed return.”
The right to adequate assurance can be broken down into five steps. First, each party has a duty
not to impair the other’s “expectation of receiving due performance” under the contract. Second,
22
Section 1-106(1) presents the basic remedial policy of the UCC: “The remedies provided by this Act shall be
liberally administered to the end that the aggrieved party may be put in as good a position as if the other had fully
performed, but neither consequential or special nor penal damages may be had except as specifically provided in this
Act or by other rule of law.." By limiting the recovery of consequential, special and penal damages, the object of
the provision is to protect the “expectation” interests of the parties - as opposed to punishing the other party for the
breach.
14
the insecure party must have “reasonable grounds for insecurity.”23 Third, the demand for
assurances must be made in writing. Fourth, until assurance is received, the insecure party may
suspend performance.24 Fifth, if a party fails to provide adequate assurances “within a reasonable
time not exceeding thirty days,” the failure is deemed a repudiation and breach of the contract.25
The remedies available following such a breach are introduced below.
BREACH BY BUYER. The remedies available to a vendor upon a buyer’s breach are
generally set forth in Sections 2-702 through 2-710 of Article 2. The facts surrounding each
breach will be critical to the determination of which remedies to exercise and whether additional
remedies might be available. Having said this, Section 2-703 provides a good starting point for
identifying the typical remedies to which a vendor might wish to resort:
SECTION 2-703. “Where the buyer wrongfully rejects or revokes
acceptance of goods or fails to make a payment due on or before
delivery or repudiates with respect to a part or the whole, then with
respect to any goods directly affected and, if the breach is of the
whole contract, then also with respect to the whole undelivered
balance, the aggrieved seller may:
(1)
(2)
(3)
(4)
(5)
(6)
Withhold delivery of such goods;
Stop delivery by any bailee as provided in Section 2-705;
Proceed under Section 2-704 respecting goods still
unidentified to the contract;
Resell and recover damages as provided in Section 2-706;
Recover damages for nonacceptance in Section 2-708 or in
a proper case the price in Section 2-709;
Cancel.”
Of the remedies describe above, two of the remedies can be pursued by the vendor without
judicial action: (a) withholding or stopping delivery of the goods and (b) cancellation of the
contract. Exercise of these two remedies, or any of the others above, without sufficient
justification however could subject the vendor to a breach of contract claim from the buyer. It is
important therefore to closely consider the appropriate course of action before proceeding.
The vendor’s remedies also generally require that the vendor “mitigate” its potential
damages arising from the buyer’s breach. Though not explicitly stated in Article 2, the principal
of mitigation is woven throughout the vendor’s remedies. The concept of mitigation provides
that damages for breach of contract “are not recoverable for loss that the injured party could have
23
Under Section 2-609(2), “reasonable grounds for insecurity” as between merchants shall be determined according
to commercial standards. This adds flexibility, but also ambiguity, to the determination of whether a party’s
insecurity is justified.
24
Note, there is risk to suspending performance. If the insecurity was unjustified under the facts (i.e., no reasonable
grounds for insecurity), then an unjustified suspension of performance may be deemed a breach of the contract by
the party suspending performance.
25
Section 2-609(4).
15
avoided without undue risk, burden or humiliation.”26 In other words, the vendor must take
reasonable steps to avoid or reduce its losses when exercising its remedies. The buyer has the
same obligation to mitigate its damages upon a breach by the vendor.
BREACH BY VENDOR. The remedies available to a buyer upon a vendor’s breach are
generally set forth in Sections 2-711 through 2-717 of Article 2. Again, the facts surrounding
each breach will be critical to the determination of which remedies to exercise and whether
additional remedies might be available. Section 2-711 provides the starting point for identifying
the typical remedies which a buyer might choose to exercise:
SECTION 2-711. “(1) Where the seller fails to make delivery or
repudiates or the buyer rightfully rejects or justifiably revokes
acceptance then with respect to any goods involved, and with
respect to the whole if the breach goes to the whole contract, the
buyer may cancel and whether or not the buyer has done so may in
addition to recovering so much of the price has been paid:
(a) ‘Cover’ and have damages under Section 2-712 as to all the
goods affected whether or not they have been identified to the
contract; or (b) Recover damages for nondelivery as provided in
Section 2-713. (2) Where the seller fails to deliver or repudiates,
the buyer may also (a) If the goods have been identified recover
them as provided in Section 2- 502; or (b) In the proper case obtain
specific performance or replevy the goods as provided in Section
2-716.
In summary, a buyer will seek to exercise its remedies in typically one of four instances: the
vendor fails to deliver the goods, the vendor otherwise repudiates the contract, the buyer rejects
acceptance of the goods or the buyer revokes a prior acceptance of the goods. These last two
instances deserve further discussion. It is critical that a buyer understand the distinction between
“rejecting” acceptance of goods and “revoking” a prior acceptance of goods when pursuing its
remedies.
Rejection of Goods by Buyer. When the vendor tenders delivery of goods, the buyer has
a right to inspect those goods to confirm that they conform with the specifications in the contract.
Under Section 2-601, “if the goods or the tender of delivery fail in any respect to conform to the
contract, the buyer may....reject the whole, accept the whole, or accept any commercial unit or
units and reject the rest." This is commonly referred to as the perfect tender rule. If the vendor
fails to tender the goods in perfect conformance with the contract, the buyer may reject
acceptance of the goods.
The procedure for rejecting the goods is set forth in Section 2-602. After inspecting the
goods, the buyer must exercise its rejection of the goods within a reasonable period of time after
their delivery. The buyer will be deemed to have accepted the goods if it (i) fails to reject them
in writing, (ii) communicates its acceptance of the goods to the vendor or (iii) undertakes any
26
Restatement (Second) Contracts 350(1).
16
conduct inconsistent with the seller’s ownership - i.e., if the buyer resells, uses or processes the
goods.27 Upon rightful rejection of acceptance, the vendor may cure the defective goods if the
time for performance has not yet expired and the vendor provides seasonable notice to the buyer
of vendor’s intention to cure.28 If the vendor does not cure or have the right to cure, the vendor
will be deemed in breach of contract and the buyer may pursue any applicable remedies.29 Upon
acceptance, the buyer is deemed to have taken title to the goods and is generally obligated to pay
for the goods at that point. Because a transfer of title is deemed to have occurred following
acceptance, it is much easier for the buyer to reject acceptance of goods than to revoke a prior
acceptance.
Revocation of Acceptance. Assuming the buyer has accepted the vendor’s tender of
goods, what if anything can the buyer do if it discovers a non-conformity after the goods were
accepted? Article 2 allows a buyer to revoke a prior acceptance of goods but only after several
hurdles have been cleared. The hurdles are outlined in Section 2-608,
Under Section 2-608, a buyer may revoke a prior acceptance but only if the
nonconformity in the goods “substantially impairs it value to the buyer..." This of course is a
fact intensive determination for a court of law. Furthermore the Section requires that revocation
be made within a reasonable time after discovery of the nonconformity and before a substantial
change in the goods occurs. The rationale behind these time restrictions is to protect against
deterioration of the goods such that they are no longer of any value to the vendor upon return.
The Section also provides detailed guidelines for the handling of the goods by the buyer
following revocation.
Again the distinction between rejecting and revoking acceptance is critical for a buyer.
The buyer is given substantially greater rights to reject acceptance and is limited in its ability to
revoke a prior acceptance. As such, it is crucial for a buyer to thoroughly inspect goods tendered
by a vendor prior to acceptance.
V. RECOMMENDATIONS.
As this overview reflects, the drafting and negotiating of commercial contracts subject to
Article 2 are complex tasks. As we have seen, a vendor will not always win the battle to impose
its terms on a buyer. Nor will a buyer always win the battle to impose its terms on the vendor.
In some instances, the supplementary gap-fillers of Article 2 will control. In some cases, one
party’s terms will control if the other party has accidentally assented to those terms.
The complexity and uncertainty of Article 2 can be a source of much frustration.
Recognizing this, there are certain steps that a party can take to add more certainty to the
contractual process. A list of these recommended steps is set forth below. As stated previously,
there are no guarantees under Article 2 that your particular terms will govern a transaction. But
27
See Section 2-606 for a description of what constitutes Acceptance of the vendor’s tender.
Section 2-509.
29
Section 2-711.
28
17
there are steps that one can take to better ensure that the opposite party’s terms do not control the
relationship. These steps include the following:
1.
Always make the “offer”. The offeror gets the first opportunity to control the
terms of the contract. The offer may be in the form of a quotation, so long as it
incorporates the material terms of the deal.
2.
Present the offer in written form. A written form helps establish the offer and
memorializes the offeror’s terms. Consider what happens if a vendor makes a
verbal offer. The buyer will likely submit its purchase order. The vendor is then
placed in the position of offeree by (i) signing the purchase order or (ii) sending
an acknowledgment. As a general rule, the first party to send a written form will
be more successful in establishing themselves as the offeror and knocking out the
opposite party’s terms.
3.
Limit the offer to its terms. Incorporate language into your offer limiting
contract formation to the terms of the offer. This language should knock out any
additional or different terms proposed by the other party. At worst, UCC gapfillers will fill in where conflicting terms drop out.
4.
Condition your acceptance. If you are the offeree, condition your acceptance of
the offer by incorporating the following language into your acceptance:
“Acceptance of this order is made expressly conditional upon Buyer’s [if you
are the vendor] assent to the terms of this form." By doing so, your form
becomes a counter-offer to be accepted or rejected by the offeror. If it is
accepted, your terms arguably control. If it is rejected, then no contract has
formed from the exchange of forms. The parties can go back to the table and
negotiate a mutually agreeable deal.
5.
Do not assent to the other party’s terms. Use caution to ensure that you do not
mistakenly “assent” or otherwise agree to the other party’s terms when you do not
intend to do so. Remember, your conduct may be construed as acceptance. Your
silence may also be construed as acceptance. The only sure way to avoid
accidental acceptance is to reject the counter-offer in writing.
6.
Always object in writing. If you do not wish to be bound by another party’s
terms, object to those terms in writing. If you do not intend to enter into a
contract with the other party, be sure to memorialize the decision in writing to the
other party. This step will preclude the other party from asserting that you
assented to contract formation.
7.
Negotiate and draft individual contracts. With high risk transactions, the best
protection of all is to draft a separate contract for the deal to be signed by the
parties. For vendors, the contract should contain (i) your quotation or standard
contract with pricing terms, and your standard terms and conditions, and (ii) a
negotiated addendum or revised version of your standard contract addressing the
18
other party’s main concerns. This mechanism provides three benefits. First, it
eliminates the buyer’s form - avoiding the battle of the forms. Second, it ensures
that a contract exists. There is no uncertainty regarding whether a contract has
been formed under Article 2. Third, it sets forth the exact terms of the deal.
Additional and different terms will have been negotiated by the parties in the
addendum and the need for indiscriminate gap-fillers reduced. For buyers, the
contract should contain (1) your purchase order or standard contract with pricing
terms and (2) a negotiated addendum or revised version of your standard contract
addressing the other party’s main concerns.
19
1336469v.1