Introduction to Sales Contracts

Today's law of sales originated centuries ago in the customs and traditions of merchants and traders. The Lex Mercatoria (Law Merchant) was a system of rules, customs, and usages self-imposed by early commercial traders and merchants to settle disputes and to enforce obligations among themselves. These rules were introduced at "fairs," at which merchants met to exchange goods and settle differences through "fair courts" established and operated by the merchants themselves. By the end of the seventeenth century, the principles of the Law Merchant had become widely accepted. They became part of the common law. From that time on, judges, not merchants, refined the principles of mercantile law into the modern comercial law of sales.

In the United States, sales law varied from state to state, and this made multistate sales contracts difficult The difficulties became esecially troublesome in the late nineteenth century as multistate contracts became the norm. For this reason, numerous attempts were made to produce a uniform body of law relating to commercial transactions. The National Conference of Commissioners on Uniform State Laws drafted several uniform laws which eventually were combined into a sing, comprehensive body of statutory law, the Uniform Commercial Code, usually referred to as the "UCC"

The UCC consists of nine articles:

Article 1: General Provisions
Article 2: Sales of goods
Article 2a: Leases of goods
Article 3: Negotiable Instruments (Commercial Paper)
Article 4: Bank deposits & collections
Article 4a: Fund Transfers
Article 5: Letters of Credit
Article 6: Bulk Sales
Article 7: Warehouse receipts, bills of lading, & other documents of title
Article 8: Investment securities
Article 9: Secured transactions

These articles are periodically changed or supplemented to clarify certain rules or to establish new rules when changes in business customs have rendered the existing UCC provisions inapplicable.

Remember that the UCC is not the law. It is the enactment of the UCC by individual states that is the law in each state. Remember also that although the act is "uniform," the law in different states will differ because legislators may make changes to the uniform act when adopting it, and because in some places the UCC provides more than one alternative with each state to select the option to be used in that state. While it is probably safe to study the UCC, remember that the specific law in your state or in another state may not be the same. Also, even if the law is the same, the courts in different states may have interpreted it differently.

Article 2: Sales Contracts


The Scope of Article 2

Article 2 of the UCC (as adopted by the state) applies only to contracts for the sale of goods. Contracts for services or the sale of real property are not covered by Article 2. For those contracts you apply the common law of contracts which we've already studied. Sometimes you apply the common law to contracts for the sale of goods. In general, the rule is that whenever there is a conflict between a common law contract rule and Article 2, Article 2 controls. In other words, when Article 2 addresses a certain issue, it governs. When Article 2 is silent, the common law governs.

What are goods?

To be characterized as a "good," an item of personal property must be tangible (have physical existence), and be moveable. Two areas are problematic:
1. Goods associated with Real Estate
Goods associated with real estate often fall within the scope of Article 2. Section 2-107 provides the following rules:
a. A contract for the sale of minerals or the like (including oil and gas) or a structure (such as a building) is a contract for the sale of goods if severance, or separation, is to be made by the seller. If the buyer is to sever the minerals or structures from the land, the contract is considered to be a sale of real estate governed by the principles of real property law, not the UCC.

b. A sale of growing crops or timber to be cut is a contract for the sale of goods regardless of who severs them.

c. Other "things attached" to realty but capable of severance without material harm to the land are considered toods ,i> regardless of who severs them. Examples are: a heater, a window air conditioner in a house, and tables and stools in a restaurant. Thus, removal of one of these things would be considered a sale of goods. The test is whether removal will cause substantial harm to the real property to which the item is attached.


2. Mixed Transactions
In cases in which goods and services are combined, courts disagree. For example, is the furnishing of blood to a patient during an operation a "sale of goods" or the "performance of a medical service"? Some courts say it is a good; other say it is a service. Because the UCC does not provide the answers to such questions, the courts try to determine which factor is predominant--the good or the service.

Once having made that determination, some courts will apply the applicable law to the entire contract. If it is goods, then the UCC governs the entire contract. Other states will apply the UCC to the goods part of the contract and the common law to the non-goods part of the contract.

What is a merchant?

Article 2 governs the sale of goods in general. It applies to sales transactions between all buyers and sellers. In a limited number of instances, however, the UCC presumes that in certain phases of sales transactions involving merchants, special business standards ought to be imposed because of the merchants' relatively high degree of commercial experience. Such standards do not apply to the casual or inexperienced seller or buyer ("consumer"). Section 2-104 defines three ways in which merchant status arises:

1. A merchant is a person who deals in goods of the kind involved in the sales contract. Thus, a retailer, a wholesaler, or a manufacturer is a merchant of those goods sold in the business. A merchant for one type of goods is not necessarily a merchant for another type. For example, a sporting-equipment retailer is a merchant when selling tennis equipment but not when selling a used computer.

2. A merchant is a person who, by occupation, holds himself out as having knowledge and skill unique to the practices or goods involved in the transaction. The broad definition may include banks or universities as merchants.

3. A person who employs a merchant as a broker, agent, or other intermediary has the status of merchant in that transaction. Hence, if a "gentleman farmer" who ordinarily does not run the farm hires a broker to purchase or sell livestock, the farmer is considered a merchant in the transaction.

Formal Requirements & Rules of Construction

Statute of Frauds

We've already discussed the addition of "contracts for the sale of goods over $500" to the original statute of frauds.

There are three exceptions:

1. When both parties to a contract for the sale of goods are merchants, a confirmatory writing signed by one of the parties will bind both parties unless it is objected to in writing within ten days of receipt by the receiving merchant. [2-201(2)]

2. If goods are to be specially manufactured for the buyer by the seller and are not resalable by the seller in the regular course of business, the seller can bind the buyer even without a signed writing by the buyer once the seller has made "either a substantial beginning of their manufacture or commitments for their procurement." [2-201(3)(a)]

3. Oral contracts involving the sale of goods of $500 or more are enforceable against a buyer or seller who admits that an oral contract existed during testimony in open court or in pleadings. However, the contract is enforceable only for the quantity of goods actually admitted. [2-201(3)(b)]

4. The Statute of Frauds cannot be used as a defense to the enforcement of an oral contract to the extent that goods under the contract have been accepted and paid for. This is the partial performance exception. The oral contract will be enforced at least to the extent that performance actually took place. [2-201(4)(b)]

Parol Evidence Rule

Under the UCC, when parties have executed a signed writing relating to a contract for the sale of goods that is intended to embody the final agreement of the parties, the written agreements cannot be contradicted by parol evidence. Parol evidence is oral or extraneous evidence made before or contemporaneously with the signing of the written contract. Terms in such contracts can, however, be explained by course of dealing, usage of trade, course of performance and by additional consistent terms (unless the court finds that the contract was intended to be the complete and exclusive agreement of the parties).

Course of Dealing


Usage of Trade


Course of Performance


Inapplicability of Seals




Contract Formation

The UCC greatly relaxes the traditional requirements of contract formation. Under the UCC, a valid contract can exist even if it is not possible to determine the moment of its making. Under the UCC, a contract can still be valid even if material terms are missing.

Offer

Open Terms:

Under the UCC, a sales contract will not fail for indefiniteness even if one or more of the terms are left open as long as (1) the parties intended to make a contract, and (2) there is reasonably certain basis for the court to grant an appropriate remedy. However, the more terms left open, the less likely a court will find that the parties intended to form a contract.

If the parties have not agreed on a parice, the court will determine a "reasonable price at the time for delivery.

When parties do not specify payment terms, payment is due at the time and place at which the buyer is to receive the goods. The buyer can tender payment using any commercially normal or acceptable means, such as a check or credit card. If the seller demands payment in cash, however, the buyer must be given a reasonable time to obtain it.

When no delivery terms are specified, the buyer normally takes delivery at the seller's place of business. If the seller has no place of business, the seller's residence is used. When goods are located in some other place and both parties know it, delivery is made there. If the time for shipment or delivery is not clearly specified in the sales contract, then the court will infer a "reasonable" time for performance.

Normally, if the parties do not specify a quanity, a court will not have a basis for determining a remedy. Two exceptions to this are the requirements contract and the output contract.

Merchant's Firm Offer

Under common law principles, an offer can be revoked at any time before acceptance. The major common law exception is an option contract in which the offeree pays consideration for the offeror's irrevocable promise to keep the offer open for a given period.

The UCC creates a second exception which applies only to firm offers for the sale of goods made by a merchant (regardless of whether the offeree is a merchant). A firm offer arises when a merchant-offeror gives assurances in a signed writing that the offer will remain open. The merchant's firm offer is irrevocable without the necessity of consideration for the named period, or, if no definite period is given, a reasonable period, neither to exceed three months.

Acceptance

Generally, acceptance of an offer to buy or sell goods may be made in any reasonable manner and by any resonable means.

Methods of Acceptance

The general common law rule is that an offeror can specify, or authorize, a particular means of acceptance, making that means the only one effective for contract formation. Even an unauthorized means of communication is effective, however, as long as the acceptance is received by the specified deadline.

When the offeror does not specify a means of acceptance, the UCC provides that acceptance can be made by any means of communication that are reasonable under the circumstances.

The UCC permits acceptance of an offer to buy goods for current or prompt shipment (an offer to enter into a unilateral contract....accept by prompt shipment), by either a prompt promise to ship the goods to the buyer or the prompt shipment of conforming goods to the buyer. The prompt shipment of nonconforming goods constitutes both an acceptance and a breach. This rule does not apply fi the seller seasonably (within a reasonable amount of time) notifies the buyer that the nonconforming shipment is offered only as an accomodation, or as a favor. The notice of accomodation must clearly indicate to the buyer that the shipment does not constitute an acceptance and that, therefore, no contract has been formed. The shipment of nonconforming goods then becomes a counter offer and a contract is formed only if the offeree accepts them. Without notification the shipment of nonconforming goods is an acceptance and breach and the buyer may sue the seller for appropriate damages.

Addtional Terms

Under the common law, if the offeror makes an offer and the offeree accepts but adds some slight modification, there is no contract. This is the mirror image rule. This often led to a battle of the forms.

To avoid the battle of the forms, the UCC dispenses with the mirror image rule. The UCC generally takes the position that if the offeree's response indicates a definite acceptance of an offer, a contract is formed, even if the acceptance includes terms additional to or different from those contained in the offer. What happens to those additional terms? The answer depends partly on whether the parties are merchants or non-merchants.

Rules when one or both parties are non-merchants

If one party (or both parties) are non-merchants, the contract is formed according to the terms of the original offer submitted bythe original offeror and not according to the additional terms of the acceptance.

Rules when both parties are merchants

In contracts between merchants, the additional terms automatically become part of the contract unless (1) the original offer expressly limited acceptance to its terms, (2) the new or changed terms materially alter the contract, or (3) the offeror objects to the new or changed terms within a reasonable period of time.

Consideration

The common law rule that a contract requires consideration also applies to sales contracts. Unlike the common law, however, the UCC does not require a contract modification to be supported by new consideration. Under the UCC, an agreement modifying a contract for teh sale of gods "needs no consideration to be binding."

Unconscionable Contract or Clause

The UCC allows the court to evaluate a contract or any clause in a contract, and if the court deems it to have been unconscionable at the time it was made, the court can (1) refuse to enforce the contract, (2) enforce the remaineder of the contract without the unconscionable clause, (3) limit the application of the unconscionable clause to avoid an unconscionable result.


Statute of Limitations