CHAPTERCHAPTER McGraw-Hill/Irwin©2008 The McGraw-Hill Companies, All Rights Reserved FIFTEENFIFTEEN UCC—Article 2: Sale of Goods and Dealings with Merchants

15-2 Objectives Chapter Objectives: Use vocabulary regarding the UCC’s transactions in goods properly Identify the types of transactions covered by the UCC Explain the different standards applicable to merchants and non-merchants under the UCC Discuss the exceptions to formation defects that would otherwise invalidate the contract Explain the battle of the forms

15-3 Objectives Chapter Objectives: Differentiate between a firm offer and an option contract Evaluate the potential warranties involved in a transaction Discuss the options available to the buyer and seller upon breach Identify the remedies available to each nonbreaching party

15-4 This chapter examines only one article of the Uniform Commercial Code (UCC). Article 2 deals solely with transactions between merchants relating only to movable goods— those dealings that we normally associate with commerce—or sales Objectives

15-5 Article 2 of the UCC is divided into seven sections. Each section deals with one aspect of commercial contracts for the sale of goods –Section 1 addresses the general construction of the code and gives definitions and intentions of this article –Section 2 deals with the formation of the contract –Section 3 addresses the obligations of the parties with respect to the transaction including warranties and price, delivery, allocation of risk Article 2 - UCC

15-6 –Section 4 solely concerns the passage of title to the goods and will not be discussed in this chapter –Section 5 addresses performance obligations –Section 6 deals with the consequences of a breach –Section 7 describes the remedies available as a consequence of the breach Article 2 - UCC

15-7 Transactions in goods –A sale or other transfer of title to identifiable, tangible, movable things from a merchant to a buyer Predominant factor test –An examination of a transaction to determine whether the primary purpose of the contract is the procurement of goods or services Covered Transactions

15-8 Now that the subject matter, the goods, has been identified, it is important to define the parties who are governed by the UCC Article 2 only applies where the seller is also a merchant, a person that “ deals in goods of the kind or otherwise holds itself out by occupation as having knowledge or skill peculiar to the practices or goods involved in the transaction ” Merchants

15-9 Formation Of The Contract Missing Terms Do Not Invalidate the Offer –Under common law principles, an offer must identify the parties, price, quantity, and time for performance –UCC has created a distinction between two types of parties that could be involved in a covered transaction, merchants and nonmerchants

15-10 Modifications or Counteroffers Do Not Terminate the Offer –Battle of the forms An evaluation of commercial writings whose terms conflict with each other in order to determine what terms actually control the performances due from the parties –Limitation of acceptance A commercial offeror may specifically state that the offeree must accept all terms as set forth in the offer with no deviations Formation Of The Contract

15-11 If the contract calls for the manufacture of specialized goods, those that can only be used by this one particular buyer, then the contract can be enforced despite failing under the UCC’s Statute of Frauds The manufacturer can recover for the time, labor, and materials expended as it started the process of creating these special goods Formation Of The Contract

15-12 The courts have fashioned a four-part test to determine when this UCC exception applies: 1.the goods must be specially made for the buyer; 2.the goods must be unsuitable for sale to others in the ordinary course of the seller’s business; 3.the seller must have substantially begun to have manufactured the goods or to have a commitment for their procurement; and 4.the manufacture or commitment must have been commenced under circumstances reasonably indicating that the goods are for the buyer and prior to the seller’s receipt of notification of contractual repudiation Formation Of The Contract

15-13 Material alteration –A change in the terms that would surprise or impose hardship on the other party if allowed to become a part of the agreement Objection to terms –A merchant must state her disapproval of the offeree’s new or different terms within a reasonable time, or else they are considered accepted by her Formation Of The Contract

15-14 Firm offer –An option contract to keep the offer open between merchants that does not have to be supported by separate consideration in order to be valid Formation Of The Contract

15-15 Silence as Acceptance –To reflect the reality of commercial transactions, the UCC permits the shipment of goods to act as acceptance. The offeree has not transmitted an acceptance to the buyer’s invitation to purchase the goods; in silence she has acted upon the offer –On the receiver’s side, silence is acceptance of the goods as conforming under the contact unless the buyer notifies the seller within a reasonable time Formation Of The Contract

15-16 Warranty –A promise or representation by the seller that the goods in question meet certain standards Warranty of title –The seller promises the buyer that the seller has the right to transfer the title free and clear of encumbrances to the buyer Express warranty –A written representation by the seller as to the nature of the goods to be sold Formation Of The Contract

15-17 Implied warranty –An unwritten representation that is normally and naturally included by operation of law that applies to the goods to be sold Merchantable –Goods must meet certain standards that are required in the relevant industry Implied warranty for a particular purpose –If a seller has reason to know of the needs of the buyer in relation to the goods to be sold, the seller impliedly warrants the goods to that higher standard Formation Of The Contract

15-18 Good faith obligation –Both buyers and sellers must deal with each other in a reasonable and fair manner without trying to avoid legitimate performance obligations Sale on approval –The agreement may provide that the contract for sale is not consummated until the buyer receives and approves of the goods Sale or return –The agreement provides that if the buyer is unable to resell the goods, she is permitted to return the unsold goods to the original seller Formation Of The Contract

15-19 Identification of the goods to the contract –Once a seller has designated specific goods as the ones that will be delivered to the buyer, the buyer has a protectable interest in them Tender of delivery –The seller is ready to transfer the goods to the buyer and the goods are at the disposal of the buyer Nonconforming –Goods that are not in reasonable compliance with the specifications in the contract Performance

15-20 If the goods are found to be nonconforming, the seller may tell the buyer that she will cure the defect by delivering conforming goods within the allotted contract time This right to cure, or fix the problems with the performance, is absolute if the seller can do so within the original time for performance If the seller has reason to believe that the goods were in conformance with the contract, she may have a reasonable amount of additional time to cure the defect Performance

15-21 Upon improper delivery of nonconforming goods, the seller is in breach of the contract. It is the buyer’s responsibility to establish proof of the breach and inform the seller Under section 2-601, the buyer may –accept the whole; –reject the whole; –accept any commercial unit and reject the rest Breach

15-22 Acceptance revocation of a previous acceptance –A buyer has the right to refuse to accept the seller’s attempts at a cure if those attempts are still not in conformance with the contract requirements Commercial unit –A batch of goods packaged or sold together in the normal course of the relevant industry Breach

15-23 Duty to resell –The UCC requires commercial sellers to try to resell the goods that have not been accepted by the original buyer Actions inconsistent with rejection –A buyer must not do anything that is contrary to her previous refusal of the goods Specific reasons for rejection –The buyer is under an obligation to notify the seller within a reasonable time not only that the goods have been rejected but also the reasons for the refusal to accept the goods Breach

15-24 Adequate Assurances –In a “last ditch” effort to avoid a breach post-shipment, the UCC provides a mechanism for both buyers and sellers to ensure performance, or at least find out if a breach is likely before time for performance –Section gives the parties a right to seek adequate assurance of performance where the party has reason to believe that the other will not be able to perform. This feeling of insecurity must be commercially reasonable Breach

15-25 The UCC gives sellers the following options where the buyer has breached: 1.Withhold delivery. Section Stop delivery. Section Identify and complete manufacture of the goods in order to prepare them for resale or cease production and resell for salvage value. Section Resell and recover the difference. Section Recover damages caused by the breach or recover the contract price. Sections and Cancel the contract. Section Remedies

15-26 Finish or scrap –The seller has the option to either finish producing the partially manufactured goods or stop production and scrap the materials for their recycled value Price under the contract –The seller has the right to collect the agreed-upon price for the goods where the buyer has possession, despite the market conditions at the time Remedies

15-27 Buyer’s Remedies –The UCC gives buyers the following options where the buyer has breached: 1.Recover any payments made 2.“Cover” the loss by purchasing substitute goods 3.Compel delivery of identified goods 4.Recover damages caused by the breach 5.Cancel the contract Remedies

15-28 Spot sale –A purchase on the open market in that particular place at that particular time Value of the goods as accepted –The buyer is entitled to a “set-off” for the difference between the price of the goods as specified in the contract and the actual price those goods would garner on the open market Remedies

15-29 Article 2 of the Uniform Commercial Code governs the sale of goods between both merchants and nonmerchants. Some particular rules apply to dealings between merchants, persons holding themselves out as having particular knowledge or skills in goods involved in the transaction Summary

15-30 All of the UCC’s provisions governing the transactions in goods give certainty and clarity of action to the participants so they may act in good faith in a predictable, commercially reasonable manner Summary