UCC Article 2 - Part 1 - YouTube

Today, we're talking about sales and the

Uniform Commercial Code. So what is the

Uniform Commercial Code? Well it's a set of

model statutes and covers everything

from the sale of goods, to negotiable

instruments, to secure transactions. But

what we're going to focus on today is

article 2 of the Uniform Commercial Code,

which deals with the sale and lease of

goods. The idea behind the UCC is that it

would provide uniform laws to govern

these business transactions across the

country. But, it being a model set of

statutes, it's up to each state whether

to adopt those statutes and make it the

law in that state. Virtually every

state in the United States has adopted

the UCC and especially article 2 of the

UCC. So currently, it pretty much is the

law in any state in the Union. The UCC

provides what we call default rules, and

that means that we still have this

freedom of contract. The parties are

still free to agree to to their own

terms, but if they don't the UCC may have

a provision that will step in and fill

in any missing terms in the contract. So

the UCC is different from the common law

of contracts because the UCC is statute

based. And the UCC modifies the common

law of contracts in some areas as it

relates to the sale and lease of goods.

We're going to see some changes in the

areas of offer, acceptance, consideration,

performance, and breach. There are some

areas of that common law of contracts

that are unchanged

like legality, capacity, and assignment. So

when we talk about article 2 of the UCC

we're talking about contracts for the

sale of goods. Okay so it's a contract. So

we're still going to have those four

elements of a contract that we talked

about. We have to have that agreement,

which is offers plus acceptance. We

have to have consideration. We have to

have capacity. And we have to have

legality. We're talking about a sale and

so that means that there's some transfer

of title, ownership of goods exchanging

hands for price, and we're talking about

goods- not services not real estate but

goods. Goods are defined as tangible

movable personal property. But sometimes

you have a situation where goods and

services combine. What do you do in

that situation? Does the UCC apply

because the transaction involves goods?

Or, does the common law of contracts

apply because the transaction involves

a service of some kind? Well, in

that situation the courts have applied

what's called the predominant purpose

test, or the predominant factor test.

You're going to look and see which is

predominant. What is it that the consumer

really wants? Do they want the service or

do they want the goods for example if

you're having a pool installed there are

goods involved in that the materials

necessary to build and construct the

pool. But there's also a service of

building it. So there's a combination of

goods and services there. What is it that

you really want? Is it the service? Or is

it the good? And so we would have to

weigh that and make that determination.

What I'm going to try to point out

through the rest of these slides

are some specific areas where the UCC is

different

from the common law of contracts. And so

one area where it's different is in the

area of open or missing terms. If you

remember under the common law contracts,

there had to be definite terms.

Reasonably certain terms. Without

that we didn't have a valid offer. We

didn't have an agreement. But under the

UCC we're going to relax that because we

want to encourage business. So if there's

some open or missing terms the contract

will not be unenforceable as long as the

parties still intended to form a

contract and there's some reasonably

certain basis for remedy. So, if you have

a missing term how would you go about

filling in that missing term? Well, the

parties could agree on something. There

could be a UCC provision that would step

in and fill in the missing term. Or, the

court could have to fill the gap, by

looking at what is the

industry standard, or what have these two

parties done in prior contracts. But

underlying all this, and throughout the

UCC is this expectation that the parties

have to act in good faith. And so, that

could come into play and as well. The UCC

makes some differences between merchants

and non merchants it treats them

differently at times. And when it does

that, it's usually in order to protect

the non merchant. So, we'll point some of

that out as we go through here. Another

area where the UCC is different from the

common laws contracts is when it comes

to modification of the sales contract. If

you remember at common law if you are

going to modify a contract there had to

be some additional consideration given

in order for the modification to be

binding. But, that's not the case with the

UCC. So long as the parties are acting in

good faith, and so

long is they create a writing if that's

necessary under the statute of frauds.

Another area where the UCC is different

from the common law of contracts and

where it treats merchants differently

the non-merchants is in this area of the

offer; what's called the merchants firm

offer. If you remember from the common

law of contracts, our general rule is that

an offer can be revoked any time before

acceptance. And we talked about one

exception to that was the option

contract, but another exception under

Article 2 is: if a merchant has a signed

and written offer, then it must remain

open for a reasonable time. What's a

reasonable time?Tthe courts have said no

more than three months. Another area of

difference between the common law of

contracts and the UCC in this area of

offer and acceptance is what's called:

the Battle of the Forms, and this is an

area where we're treating merchants differently

from non merchants because this Battle

of the Forms only applies to offer an

acceptance between merchants. If you

remember at common law terms added by

the offeree became a counteroffer. But

under the UCC, any added terms are

automatically going to become part of

the agreement between two merchants

unless, the offer specifically forbids

further terms or the new terms

materially alter the contract, or three

the offeror objects to the new terms

within a reasonable time. As far as

acceptance, there are a few differences

that can come into play here between the

UCC and the common law of contracts.

Acceptance has to be communicated by any

reasonable means. And acceptance may be

demonstrated by promise to ship

conforming goods or by going ahead and

shipping those conforming goods. A

promise or the actual act of shipping

the conforming goods. But what happens if

non-conforming goods are shipped? For

instance i order 100 blue ink pens but

instead you ship me 100 red ink

pens? Those goods would be non-conforming,

because they don't match with what I had

ordered. If non-conforming goods are

shipped and the seller sends a notice of

accommodation within a reasonable time

saying, "Hey we're out of blue pens. I

sent you these red ones as an

accommodation." If the seller sends that

notice within a reasonable time, then the

non-conforming goods are going to be

treated like a counteroffer. Which I

would then be free to accept or reject.

But, if the seller sends non-conforming

goods and doesn't provide that notice of

accommodation, then the lawn treats that

is an acceptance into breach. So the

seller would be in breach if they don't

send that notice of accommodation along

with those non-conforming goods. Another

area where there are some differences is

with the statute of frauds. If you

remember where the common law of contracts

we talked about how a contract for the

sale of goods at a value of five hundred

dollars or more. It has to be in writing. But,

the UCC is going to relax that a

little bit, and say that an oral contract

is going to be enough if it involves

specially manufactured goods, that have

been substantially started. So, that's

made some substantial progress on

manufacturing those goods,

and the goods are not suitable for

resale. So, it would be something very

unique that they couldn't sell to

anybody else. That's one exception.

Another exception where the oral

contract would be enough is, if the

parties admit to it in court. That there

was an agreement. And a third

exception, an oral contract may be enough

if there's been partial payment, or

partial acceptance. And the key question

there is: can the goods be separated? If

the goods can be separated, then we will

enforce the agreement up to the amount

paid or accepted. But, if it's something

that doesn't lend itself to being

separated, for instance a special garage

door or something - you can't really

separate that it's one whole piece, then

the agreement would not be enforceable

under the statute of frauds. Parole

evidence-- The parol Evidence Rule at the

common law says that a court cannot

consider evidence of things that were

discussed or agreed to but not put in a

file written contract. Well, the UCC is

going to relax that a little bit and say,

even if there is a final written

contract we will consider parol evidence

to clarify ambiguous terms. To do

that we'll look at the course of dealing;

what are the prior dealings between these

two parties. The course of performance;

what has been their behavior in the

current transaction. And third, what is

the usage of trade and sort of the

industry norm. Identification, title and

risk of loss -- Well title and risk of loss

can't pass until the goods have been

identified. Once the goods are

set apart, or identified for that buyer; the

buyer has an insurable interest and a

right to recover from any third-party

that might damage the goods. Title

ownership of the goods is going to pass

to the buyer when the goods are

delivered to the carrier, or the buyer

depending on the terms of the contract.

One big reason that we have contracts

and have allow contracts for the sale of

goods is to address this issue of risk

of loss. Parties are usually going to

address risk of loss in the contract, but

if they don't, there are some terms from

the UCC that can come in to speak to

that issue. If the contract is a shipment

contract, then the risk of loss is going

to pass when the goods are delivered to

the carrier. And sometimes how you'll see

that referenced in the contract it may

say something like: "free on board, sellers

location." And that tells you that when

the goods are placed in the carrier's

hands at the sellers location, the risk

of loss has then passed from seller to

buyer. Risk of loss can also be addressed

through a destination contract; which

basically says risk of loss does not

pass until the goods are tendered to the

buyer at a specific destination.

Usually that's the buyers city or the

buyers location: so that would mean that

the seller is going to hold onto that

risk of loss, and will be responsible if

the goods are damaged in transit. If the

goods are being held by the seller for

the buyer to come and pick them up, then

the risk of loss will not pass to the

buyer until the buyer takes physical

possession. What if there are

non-conforming goods?

You know, the seller messed up they sent

the wrong product. In that case it's only

fair that the risk of loss remains with

the seller. Until the seller either cures

the goods either by replacing the goods,

repairing them, or giving some discount

somehow accounting for the nonconformity,

or if the buyer accepts the goods,

despite a defect. What about a sale by

non-owners? Well, general rule is that the

buyer is going to receive whatever

ownership rights the seller had. So, if

the seller didn't own the goods, then

there would be nothing for the seller to

transfer, and the buyer would not receive

any ownership rights. An example of that would

be a void title, the sale of stolen goods

that original owner can come back and

recover those goods from any subsequent

good faith purchaser. A good faith

purchaser is someone who purchases

something without any knowledge that it

is stolen, or that there's any issue with

title or ownership of the goods. By

contrast a voidable title is what

arises when goods are obtained through

fraud or a bad check. In that situation

the subsequent good faith purchaser is

going to receive good title. The reason

being that if fraud or bad check is

involved, the original owner was in a

good position to check that out and make

sure that the check was good or so forth

before handing over the goods. It's also

true that with a voidable title the

true owner voluntarily parted with the

goods. Whereas with a void title; where

goods have been stolen, the

original owner did not voluntarily part

with the

goods. The last point that I want to make

here is something called the entrustment rule-- it

basically says that if goods are

entrusted to a merchant and the merchant

sells those goods to a buyer in the

ordinary course of business, then that

buyer obtains good title. So for instance,

if you had an engagement ring and you

left that with a jeweler for him to

clean it or whatever, and somebody came

into the store and they saw the ring and

said "Hey, I really like that ring I'd

like to buy it!" and the jeweler sells it

to them, that customer just obtained good

title to your engagement ring. This is

one of those areas where I think the

law is trying to do what's right, but

you know I'm not sure that that's really

the just result. You're left with the

recourse of suing the merchant but

that's the entrustment rule.