Legal Line: Sale of Goods and the Uniform Commercial Code
June 02, 2011

Every transaction involving the sale of goods, no matter how large or small, whether by merchants or consumers, is subject, at least in part, to Article 2 of the Uniform Commercial Code enacted in all fifty states. Generally speaking, “goods” are things that can be moved.

The buyer and seller may form an agreement under Article 2 without anything in writing but under certain circumstances, the agreement may not be enforceable without a writing. This principle is embodied in what is usually referred to as the UCC statute of frauds, and is based on the theory that a writing provides objective evidence that a contract does exist. The statute of frauds has been critized because it can be misused to perpetuate a different type of fraud where a party can avoid an agreement by claiming that no writing exists. Clearly, the best business practice, with few exceptions, is to have a written agreement that sets forth the terms by which the parties will be bound. To the extent the parties’ agreement does not set forth all terms, Article 2 may provide terms for them, some of which may come as an unpleasant surprise to the ill-prepared buyer or seller. In a written agreement the parties can agree that certain terms of Article 2 will not apply to their agreement in an effort to allocate risks between the buyer and seller.

The writing between the parties need not be in a single document on paper and it need not state all of the terms and even need not state the terms accurately. It need not be signed by both parties but needs to be signed by the party against whom enforcement is sought. In this electronic age, a writing can take the form of emails, text, and even tweets. Even when there is no writing at all, a contract valid in other respects is enforceable if the goods are to be specially manufactured for the buyer and could not be sold to others and the seller makes a substantial beginning in the production of the goods or commits to purchase materials for production and under other circumstances.

 

Unless excluded, certain implied warranties are imposed by Article 2, one of which is the implied warranty of merchantability, to the effect that the goods “are of fair average quality” within the description and “are fit for the ordinary purposes for which the goods are used.” Additionally, if the seller has reason to know any particular purpose for which the goods are required, there is an implied warranty of fitness for that particular purpose. These warranties last for a period of four years and, if breached, subject the seller to exposure for “incidental and consequential damages” which can be substantial. For instance, consequential damages can include loss of profits of the buyer. Those losses of profits can subject the seller to much greater damages than the seller had anticipated. That is, if a manufacturer of bicycle parts sells those parts to a manufacturer of racing bicycles, knowing the performance characteristics of those bicycles and if the parts sold are not fit for racing purposes even though they might be fine for ordinary purposes, causing the bicycle to underperform, the seller of the parts can be liable to the bicycle maker for damages that could be measured not only by the buyer having to replace the parts but by the bicycle maker’s loss of business that results from orders that cannot be fulfilled and even sales that are not made due to the fact that bicycle purchasers resort to another brand which can meet the desired performance characteristics.

Certain specific language has to be used in order for a seller to disclaim these warranties and the significant risk that goes along with them. Article 2 of the Uniform Commercial Code sets forth a complex set of rules that every person in the business of selling and buying goods should respect. In order to avoid the sometimes quite significant pitfalls that can present  themselves to an unwary buyer or seller, it is important to have agreements for the purchase and sale of goods in writing prepared by or reviewed by counsel familiar with the ins and outs of Article 2.

This article was written by Atty. R. Steven Krohn with Rudolph, Fine, Porter & Johnson, LLP (www.rfpj.com) in Evansville, Indiana. For additional information, you may contact him at 812.422.9444 or rsk@rfpj.com. His practice areas include corporate and business law, business acquisitions law, real estate, and contract law.

 

This article is intended solely as an information source and its contents should not be construed as legal advice. Readers should not act upon the information presented without professional counsel.