Expert answer:Business Law Question regarding UCC
Expert answer:Over the course of our study of contracts so far, we have seen a set of fairly hard and fast rules that apply to contracts between ordinary people. These rules include the following:Offers must be reasonably definite and certain as to the identity of the parties, the consideration to be exchanged by each party, and the time, place and manner of the required performance.Irrevocable offers – that is, promises to keep offers open for a designated period of time — must be supported by consideration;Acceptances must follow the “mirror image” rule.But we have also seen that many contract terms may be implied, which almost seems to contradict the foregoing rules. Our chapter on Article 2 of the UCC helps explain how the rules that apply to contracts between ordinary people — the ones we are most familiar with from personal experience — may be different from those that apply to “merchants” engaged in the buying and selling of goods. In short, the UCC tends to assume that merchants want to do business and are prepared to accept a lot more unstated terms, whereas those of us who are not merchants might not be comfortable with that level of un-specificity in our contractual terms. There are also relaxed rules for what is necessary for an irrevocable offer and for how variations in acceptances are treated between merchants. Describe a few ways in which the relaxed rules regarding unspecified terms of the offer and regarding additional terms in the acceptance would seem to make it easy for unscrupulous merchants to game the system. What are some tools available to the courts to keep merchants engaging in the relatively free-wheeling world of the UCC on the “straight and narrow”. How do the courts police those trying to game the system, and what tools help the courts to flesh out the actual but unspecified terms of a contract between merchants?I have attached document related to question.
note_on_the_ucc.docx
note_on_ucc_article_2_traps_and_pitfalls.docx
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Note on the UCC
Throughout the contracts section of our course we have been studying the common law of
contracts. Although the common law is, as its name implies, common throughout countries whose legal
systems originated in the British system, there are variations from country to country and from jurisdiction
to jurisdiction within countries.
In the U.S., the implications of the foregoing are that even though we are a common law country, the
individual states had – and, to an extent, still have — different interpretations of the common law, including
the common law of contracts. This made interstate commerce riskier, more uncertain, and more expensive
as lawyers with expertise in the contract law of multiple states became a necessary business expense for
firms engaged in interstate commerce.
Starting in the WWII era, the National Conference of Commissioners on Uniform State Laws began work
on a comprehensive statute that would harmonize the laws of all (or most, at any rate) of the states in the
area of commercial law. This was an undertaking of staggering dimensions. The researchers reviewed the
case and statutory law of all the states. They examined areas in which most jurisdictions agreed with each
other. They examined areas in which jurisdictions disagreed, and selected the rules they thought were best
among the competing opinions. One angle they looked at was whether the decisions around the country
were moving toward or away from a particular point of view.
The end result was the Uniform Commercial Code. This is a massive statute that covers nearly all aspects
of simple and complex commercial transactions. It supplants the common law of contracts within the
areas of business it encompasses, although at the same time it incorporates much of that common
law. Pretty much all the contract law we have studied so far has been incorporated into the UCC, which
means that instead of having to find a case to support our position that (for example) the Statute of Frauds
applies to this or that situation, we can simply look up the statute instead. (Of course, the statute itself is
the subject of a vast number of court opinions interpreting it, but the basic common law doctrines we’ve
been studying are codified by the UCC.)
The legislatures of all the states have adopted the UCC. There are still some local variations, but overall
commercial law is now pretty much uniform around the U.S.
What does this mean for us? If I offer to sell you my car, that’s now covered by the UCC. The rules
governing offer, acceptance, consideration, and the other aspects of contract formation and performance are
now defined by the statute. For ordinary people, there are no real surprises in the UCC.
But the UCC is far more comprehensive than ordinary people need it to be. That’s because a primary
purpose of the statute is not simply to codify and make uniform contract rules for ordinary people, but to
codify the law as it relates to complex business transactions, as well. As such, in addition to its general
provisions, it includes articles on the sales and leasing of personal property, negotiable instruments, bank
deposits, funds transfers, letters of credit, bulk transfers, warehouse receipts and bills of lading, investment
securities, and secured transactions. The UCC is a full year course for law students, and it’s a murderous
course, full of details and cross-references ad infinitum.
Note on UCC Article 2 traps and pitfalls
The UCC has made interstate commerce in goods much easier over the past several decades. But there are
a number of traps and pitfalls that come with UCC Article 2. Here are a few of them.
Goods:
UCC Article 2 basically codifies the common law of contracts regarding the sale of goods only. It does not
cover contracts for services, nor for the sale of land or for intangible personal property, and it does not
cover leases of personal property (which are covered in Article 2A). “Goods”, for purposes of the UCC,
must be tangible and moveable.
What about transactions that involve a combination of goods and services? For example, I may hire a
contractor to install a tile floor. Is that a sale of goods if the contractor provides the tile, or is it the sale of
services? What about the purchase of a mobile phone with attendant service contract? Is that the sale of a
good, or a sale of the service? The courts use a variety of tests, most of which basically ask whether the
predominant purpose of the contract is to provide the good or the service. For most of us, the mobile phone
purchase is really about the service – the phone is basically a way to get the service we are contracting for –
and so I think I’d argue that the contract is not subject to UCC Article 2. The tile installation contract, on
the other hand, I’d argue is more about getting the tile floor, and the installation is just a means to that
end. So I’d probably argue that UCC Article 2 applies to that transaction.
“Between merchants”
As mentioned, the fundamental rules of offer, acceptance, consideration, and so forth, can now be found in
the UCC. As far as ordinary people in ordinary transactions are concerned, there is really no significant
difference between the common law and the UCC. The main difference is that the legal rules for contracts
are now uniform among the states, although occasional minor variations still exist here and there.
The rules for transactions between merchants, however, differ dramatically from those that are not between
merchants. The UCC recognizes that business transactions between merchants differ in many ways from
those not involving merchants. Non-merchants enter into contracts now and then, in order to fulfill their
personal needs. Merchants enter into contracts all the time; it’s how they make money. Merchants may
enter into contracts with the same parties over and over again. And things move fast in the business
world; if we apply the same rules to transactions between merchants that we do to ordinary non-merchant
transactions, doing business be made slower, more cumbersome, and less risky.
But businesses like to do business. They like risk. In a famous book, “The Terrible Truth About Lawyers”,
Mark McCormack, founder of IMG, the first and largest sports management group, warned against letting
lawyers get too close to business decision-making. He said that lawyers are in the business of protecting
their clients against risk, and if left to their own devices they will reduce the risk associated with
transactions to nothing if they can. But, says McCormack, the greater the risk the greater the reward. He
says that the business of managing risk is for the manager, not the attorney, and that managers must strive
to keep the attorneys from eliminating too much risk.
The UCC loosens some of the rules in transactions between merchants. Therefore, we need to first be clear
about what a “merchant” is for purposes of the UCC. The term “Merchant” is defined by UCC 2-104, in
part, as follows:
“Merchant” means a person who deals in goods of the kind or otherwise by his occupation holds himself
out as having knowledge or skill peculiar to the practices or goods involved in the transaction…”
If merchants are involved on both sides of a transaction, relaxed rules of contractual construction
apply. Among those relaxed rules are the following:
•
•
•
Firm offers: Remember that in nom-merchant situations, an irrevocable offer must be supported
by consideration to be enforceable. If I promise to keep an offer open through the weekend, I am
not bound by that promise unless you provide consideration for it. For contracts between
merchants, though, irrevocable offers (called “firm offers”) are binding on the offeror even in the
absence of consideration. To qualify as a firm offer, the offer must be in writing and signed by the
offeror. A firm offer will be binding for a reasonable time up to three months unless a shorter time
is specified in the offer.
Indefinite terms: For non-merchants, we will recall that the essential terms of the offer must be
specified. Between merchants, though, as long as the court is satisfied that the parties intended to
enter into a contract, the absence of specific essential terms will not invalidate the
agreement. Instead, the court will apply certain default rules regarding missing price, delivery
time and place, payment method, and so forth. If the parties have not specified these items, the
court will assume that the parties acted in good faith and with a commitment to fair dealing, and
will determine a reasonable price, time, and so on, or will apply the default rule. (For example, if
the parties don’t specify where delivery is to take place, the default rule is that it will take place at
the seller’s place of business. If they don’t specify the method of payment, it may be in cash or by
any commercially acceptable means.) We learned in the chapter on the parol evidence rule that
evidence of prior dealings between the parties, performance to date on an existing contract, and
usage of trade can be introduced to fill out implied terms in contracts; these rules, as you can see,
have far greater impact in agreements between merchants than in those not between merchants.
No mirror image rule: Businesses typically use preprinted forms for ordering and for confirming
orders. Those business owners who didn’t read “The Terrible Truth About Lawyers” let their
lawyers reduce their risk by means of provisions in these documents that sometimes conflict with
the provisions of the other party’s documents. For example, a purchase order might, by way of
standard terminology, say that delivery of the goods is to be made by UPS, whereas the
confirmation might, by way of its standard terminology, say that delivery of the goods is to be by
FedEx. We will recall that the mirror image rule applies in contracts that are not between
merchants: the terms of the acceptance must exactly mirror the terms of the offer, or it will be
deemed a rejection and counteroffer. Obviously, in many cases the companies want to do business
and really don’t care about whether UPS or FedEx delivers the goods, but under standard common
law rules no contract has been formed. This situation is called “The Battle of the Forms”. When
merchants are on both sides, we assume that contradictory terms in an acceptance will become part
of the contract unless the changes are material, the other party objects within a reasonable time, or
the contract expressly prohibits new terms in the acceptance from becoming part of the contract.
To analyze a UCC Article 2 case, you must first determine whether the contract is a contract for the sale of
goods. This is a two part question. First, is it a contract for “sale”, as opposed to for a lease? Second, is it
for the sale of “goods” – items that are tangible, moveable, and that have value. If the answer to any of the
foregoing questions is “no”, stick with the common law. If the contract is for the “sale” of “goods, go on to
step two.
Step two is to determine whether both parties are “merchants”. Check out the definition of
“merchant”; remember that a party may be a merchant in some goods and services but not in others. For
UCC Article 2 to apply, the party must be a merchant for purposes of the goods under consideration. If the
party is not a merchant, the UCC still applies but the rules will be based on the common law of contracts
that we have learned in our course. If both parties are merchants, the relaxed rules of contractual
interpretation applicable in such cases apply; they don’t apply if either party is not a “merchant” – we then
go back to the common-law based rules codified in the non-merchant part of Article 2.
…
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