Before the Uniform Commercial Code (UCC), commercial transactions across the United States were governed by a patchwork of state laws derived from traditional common law. Common law, built on centuries of court decisions, provided general principles for contracts but often lacked the specificity and uniformity needed for the complexities of modern commerce. This led to uncertainty, inconsistency, and increased costs for businesses operating across multiple states.
The UCC was designed to address these challenges by establishing a comprehensive and standardized set of laws specifically for commercial transactions. This article focuses on Article 2 of the UCC, which governs the sale of goods, and highlights four significant areas where the UCC either departs from traditional common law principles or establishes alternative frameworks that supersede common law's application in these areas.
Scope and Application of Article 2 of the UCC
As an initial matter, it is important to establish that Article 2 of the UCC applies specifically to "transactions in goods." That is, for the UCC to apply, the item at the center of the transaction must be a "good," defined as something tangible and moveable. Examples of goods include:
- Manufactured products (cars, furniture, appliances)
- Raw materials (lumber, minerals, crops)
- Livestock
- Computer hardware
Article 2 does not generally apply to:
- Real estate (land and buildings)
- Services (legal advice, medical care, construction)
- Intangible property (stocks, bonds, intellectual property)
Note that in cases of “hybrid” or “mixed” contracts that involve the provision of both goods and services, (for example, a home renovation contract that includes the purchase and installation of cabinets, flooring, and appliances), courts will often analyze the "predominant purpose" of the transaction to determine if Article 2 applies.
The Common Law “Mirror Image Rule” vs. the UCC’s “Battle of the Forms”
Under the traditional common law "mirror image rule," the terms of an acceptance had to perfectly match the terms of the offer to form a contract. This often resulted in ambiguity and frequent legal disagreements, particularly when businesses relied on standardized documents such as purchase orders and invoices for their transactions. UCC Section 2-207 addresses, and aims to rectify these issues, in several ways:
- A contract can be formed even with conflicting terms: Unlike the mirror image rule, different or additional terms in the acceptance might not prevent a contract from being formed.
- Focus on Conduct: The UCC looks at whether the parties act as if they have a contract (by shipping goods, making payments, etc.)
- Knock-out Rule: Conflicting terms "knock out" each other, and the UCC can fill in the gaps with its default rules.
- Additional Terms: Depending on whether the parties are merchants, additional terms in the acceptance may or may not become part of the contract.
Transfer of Risk of Loss Under the UCC
Under common law, the rules governing the risk of loss were less specific, often focusing on when the “title" to the goods was transferred. This approach created uncertainty and made it difficult to determine who bore the losses if the goods were damaged or destroyed in transit. By way of contrast, the UCC provides a more structured framework for determining the risk of loss, using concepts like shipment contracts, destination contracts, and the role of carriers. Some key points to know involve:
- Shipment Contracts vs. Destination Contracts: If the contract requires the seller to ship the goods by carrier but doesn't require delivery at a specific destination, the risk of loss passes to the buyer when the goods are handed to the carrier (shipment contract). If the contract requires delivery at a specific destination, the risk of loss passes to the buyer when the goods are tendered at that destination (destination contract).
- The Role of Merchants: In the absence of contractual provisions to the contrary, if the seller is a merchant, the risk of loss shifts to the buyer once the buyer receives the goods. If the seller is not a merchant, the risk shifts when the seller tenders the goods for the buyer's pickup.
- Effect of Breach: If a party breaches the contract, the risk of loss may shift to the breaching party, even if the standard rules would otherwise allocate it differently. That is if the seller breaches the contract by delivering non-conforming goods (goods that do not meet the specifications agreed upon in the contract), the risk of loss remains with the seller until the buyer has accepted the goods or the goods have been conformed to the contract. Conversely, if the buyer breaches the contract, for example, by refusing to accept delivery of conforming goods without a valid legal reason, the risk of loss can shift to the buyer.
Remedies Under UCC Article 2
The UCC provides a comprehensive set of remedies for both buyers and sellers when one party breaches a contract involving the sale of goods.
Seller's Remedies
- Withhold Delivery: If the buyer is in breach, the seller can generally withhold delivery of the goods.
- Stop Delivery: Under certain circumstances, the seller can stop goods in transit.
- Resell the Goods: If the buyer breaches, the seller may resell the goods in a commercially reasonable manner and recover damages (the difference between the resale price and the contract price, plus incidental costs).
- Recover the Price: In some cases, the seller may sue for the full contract price of goods that have been accepted, lost, or damaged after the risk of loss passed to the buyer.
- Cancel the Contract: For a material breach, the seller may have the right to cancel the entire contract.
Buyer's Remedies
- Reject Nonconforming Goods: If the goods don't conform to the contract, the buyer has the right to reject them with timely notice to the seller.
- Cover: The buyer can purchase substitute goods (i.e., "cover") and recover damages for the difference between the cover price and the contract price.
- Damages: The buyer can seek damages for the seller's breach, including incidental and consequential damages under certain circumstances.
- Accept Nonconforming Goods with Damages: The buyer can accept the goods and sue the seller for damages caused by the nonconformity.
- Specific Performance: In rare cases, such as when the goods are unique (e.g. rare paintings, or antique furniture), the buyer may be able to obtain a court order requiring the seller to deliver the specific goods identified in the contract.
Warranties Under the UCC
Warranties are promises made by the seller regarding the quality, characteristics, or performance of the goods being sold. The UCC recognizes two main types of warranties: express warranties and implied warranties.
- Express Warranties
- What they are: Express warranties are created by the seller's words or actions that become part of the basis of the bargain. They can include:
- Affirmations of fact or promises about the goods (e.g., "This car gets 35 miles per gallon")
- Descriptions of the goods (e.g., "100% cotton")
- Samples or models shown to the buyer (e.g., a floor model TV)
- No Formal Words Needed: The seller doesn't need to specifically use the words "warrant" or "guarantee" to create an express warranty.
- Implied Warranties
- Implied Warranty of Merchantability: Unless excluded or modified, this warranty automatically arises in sales contracts where the seller is a merchant. It essentially guarantees that the goods are:
- Fit for the ordinary purposes for which such goods are used
- Properly packaged and labeled
- Of fair average quality within the trade
- Implied Warranty of Fitness for a Particular Purpose: This warranty arises when the seller knows the buyer has a specific need for the goods and that the buyer is relying on the seller's judgment to select suitable goods. It guarantees that the goods will meet the buyer's particular needs.
Practical Implications
- Liability: Sellers can be held liable for breach of warranty even if they didn't intend to create one.
- Disclaimers: Implied warranties can be disclaimed or modified, though the UCC has specific requirements for how this must be done. Express warranties are generally harder to disclaim.
Buyer Protection: Warranties provide important protection for buyers, ensuring that they are getting the quality of goods they bargained for.
