Uniform Commercial Code (UCC)

If you are engaged in the sale of products, it’s important to understand the provisions of the UCC. Its purpose is to facilitate sales and commercial transactions through the adoption of uniform rules across all fifty states, the District of Columbia, Puerto Rico, U.S. Virgin Islands, and Guam.

States that enact the UCC have the option of altering the language to meet local customs and circumstances. While these changes are usually minor, be aware of the local rules and laws.
The focus of this discussion is Article 2, which has not been enacted by Louisiana. It has chosen to use its civil law to govern the sale of goods.


Application

Article 2 deals with the sale of goods that can be identified and moved. It does not apply to service contracts or real estate sales. It also distinguishes between merchants and non-merchants. Merchants are defined as those regularly engaged in the sale of goods and are held to a higher standard. This includes retail stores, supermarkets and auto dealers, but not a private individual who runs a classified ad to sell his used car. However, if you are a regular eBay seller who routinely sells products over the internet or through your own website, you would be considered a merchant.

Contract formation

When it comes to contracts, the UCC differs from common law. Some key provisions follow:
  • Firm offers are valid without consideration and can’t be revoked for the stated effective period (up to three months), and can be signed or presented on company letterhead.
  • Failure to include a firm price in a contract for the sale of goods will not invalidate the contract if the parties’ intent was to form a contract. A reasonable price will be determined by a court if agreement on price can’t be reached.
  • Modifications may be acceptable without consideration.
  • Requirements contracts may be assigned if the assigned quantity is proportionate to the original quantity.
  • Offers to buy for prompt shipment may be accepted by a timely promise to ship or actual shipment.
Under the UCC, there are rules in place that are designed to avoid a total contract breach. Limited space prevents a full discussion of these rules, but it’s important to understand them before concluding any agreement. These include the statute of frauds application, reasonable time standard, risk of loss, reclamation, reasonable grounds for insecurity, specially manufactured goods, rightfully rejected goods, cure or cover, and insolvency.

In the event of a breach of contract, the UCC specifies damages as the difference between the contract price and the market price when the buyer learned of the breach, plus incidental damages.

Battle of the forms

Article 2 deals with the question of whether the seller’s or buyer’s contract terms will prevail when two merchants send offers back and forth using their own boilerplate purchase order or contract. Generally, the contract will be formed and new or added terms will be incorporated into the agreement unless:
  • The original terms are materially altered by the new terms
  • The offer specifically limited acceptance of the agreement to its own terms
  • The first party has objected to the new terms, or objects in a timely manner
What constitutes a material alteration is judged as a function of the specific item. For example, a delay in the delivery schedule of fresh meat would be ruinous, but a delay in the delivery of paper clips would not be. If an offer is expressly conditioned on its own terms, then it’s a counteroffer, not an acceptance. If performance occurs after the counteroffer without express acceptance of all terms, then those terms on which both parties agree will form a contract. The UCC will also incorporate “gap-filler” provisions as needed to form a valid contract.

Conforming goods

The buyer has a right of perfect tender to accept only those goods that conform to the contract. He may accept or reject nonconforming goods, but must do so within a reasonable time after delivery and before acceptance. Timely notification must be given to the seller, and although a reason for rejection is not required, it’s best to provide one so that it may be relied on during any future legal proceedings.

If a seller delivers nonconforming goods with a notice of accommodation, this is considered a counteroffer. If the buyer accepts the goods, a new contract is formed with the original price and terms. If the buyer doesn’t accept and the seller won’t deliver conforming goods, the buyer can sell the goods and use the proceeds to pay down any amount owed.

Implied Warranties

Everyone is familiar with express warranties since many products come with a written warranty when purchased new. These warranties clearly specify the extent to which the manufacturer or seller will back up the quality and performance of the product. Merchants need to be aware that there are further implied warranties that their products are merchantable and fit for their intended purpose.

Implied warranties apply even if not provided in writing and protect consumers from products that don’t meet the seller’s representations. The implied “warranty of merchantability” is an assurance that the goods meet the buyer’s reasonable expectations and that they are of similar value and quality to comparable goods. When you shop at the supermarket, you don’t receive a written warranty, but you expect the food to be fresh and edible. If it isn’t, you can still return it since it would not be considered merchantable.
When the buyer selects and purchases goods in reliance on the seller’s expertise and knowledge, then there is an implied “warranty of fitness for a particular purpose.” The seller may or may not be a merchant in this case, but he must know the intended use of the product.

Implied warranties can be disclaimed by using specific language such as “sold as is.” However, state law may prohibit such disclaimers on certain products.

Summary

This brief overview barely scrapes the surface of the provisions of the UCC Article 2, and is intended only as an introduction to this important and complex topic. Anyone engaged in the sale of goods should thoroughly read and understand all of its provisions and the impacts on their business.
If you need help, consult with an attorney who specializes in commercial transactions or business law. Knowing the rules will help keep you out of trouble, but it will also make your business more efficient and attractive to other businesses you interact with. When they start citing the UCC during contract negotiations, you don’t want to be left in the dark.

Michael Sanibel is a freelance writer specializing in business, marketing, personal finance, law, science, aviation, sports, automobiles, entertainment, travel, and political analysis. He graduated from the United States Air Force Academy and is also licensed to practice law in California and New Hampshire. Michael wrote this feature article exclusively for Debbie May.com (www.DebbieMay.com), an organization dedicated to helping small businesses succeed.