Once it has been determined that
Article 2 governs, the next series of questions concerns the parties’
agreement, and possible contract resulting from that agreement:
What are the terms of the agreement between
the parties?
How does the UCC impact the parties’
agreement?
How do supplemental general principles of law
impact the parties’ agreement?
This basic analysis is called for
by the definitions of contract and agreement, both of which were discussed
extensively in earlier posts. By way of quick review, contract is defined under
Section 1-201(b)(12) as ‘the total legal
obligation that results from the parties agreement as determined by the Uniform
Commercial Code as
supplemented by any other applicable laws.’
It is quickly apparent that in order to know what the contract is
between the parties, it is necessary to determine the contents of the parties’
agreement, for the contract is the legal result of their agreement.
‘Agreement’ is defined as the ‘bargain of the parties in fact,
as found in their language or inferred from other circumstances, including
course of performance, course of dealing, or usage of trade as provided in
Section 1-303.’ The importance of course of performance, course of dealing and
usage of trade in this analysis is critical, and has been discussed several times
in earlier posts. The essence of their
importance lies in the fact that each of these components can supply terms to a
contract that may never have been discussed or negotiated.
Once all of the terms are
understood, the second element of the definition of contract kicks in: What is
the impact of the Uniform Commercial
Code on the parties’ agreement? The first
question is whether the proposed transaction is within the purview of the
Uniform Commercial Code. This is the scope question discussed in the last post.
The second question which must be asked in this context is: Is the contract
enforceable? That analysis begins with
the Article 2 Statute of Frauds contained in Section 2-201. The basic rule is stated in Section 2-201(1):
Except as otherwise provided in this section a contract for the sale of goods for the price of $500 or more is not
enforceable by way of action or defense unless there is some writing sufficient
to indicate that a contract for sale has been made between the parties and
signed by the party against whom enforcement is sought or by his authorized
agent or broker. A writing is not insufficient because it omits or incorrectly
states a term agreed upon but the contract is not enforceable under this
paragraph beyond the quantity of goods shown in such writing.
Section 2-201(1) is clear and very
straightforward. If the contract has a
value of $500 or more, there must be a writing which sufficiently indicates
such a contract, and which is signed by the party ‘against whom enforcement is
sought.’ Therefore, a purported seller
of goods who seeks to hold a particular person liable as a buyer, must have a
writing signed by the buyer or by his authorized agent or broker. Similarly, a buyer seeking to hold a person
liable as a seller must have a writing signed by the seller.
The basic
rule of Section 2-201(1) has several exceptions. The Reply Doctrine of Section 2-201(2) has
particular significance for two primary reasons. First, the downside for not understanding and
following the rule of Section 2-201(2) can be devastating to a business. Second, most businesses are unaware of
Section 2-201(2) and hence are in a state of potential major liability. Section 2-201(2) states as follows:
Between merchants if within a reasonable time a writing in confirmation of
the contract and sufficient against the sender is received
and the party receiving it has reason to know its contents, it satisfies the
requirements of subsection (1) against such party unless written notice of
objection to its contents is given within 10 days after it is received.
The best way to illustrate the impact is by way of a simple
hypothetical:
Assume that you are a manufacturer
of tables that you sell at the wholesale level to retailers for $1,000.
You receive a call from a
potential buyer who wants to buy 1000 tables for a motel chain and, given the
large order, offers you $650.00 for the tables.
You advise buyer that you have no
interest in selling your tables for $650.00 and unless he is willing to pay the
full $1,000 you have no interest in further discussions with him.
Several days later, you receive
the following email:
Dear
Seller:
Pursuant to our discussion of
December 4, 2015 I confirm our contract and agree to purchase 1000 tables from
you for $650.00 per table. I appreciate
your recognition of this large order through your discounted price.
Sincerely,
Buyer
You read the email and think to yourself ‘This guy is crazy’
so you delete the email, not knowing that your transaction falls within Section
2-201(2).
Both parties are merchants, so the
first prerequisite of Section 2-201(2) is met.
The writing confirms the contract and is ‘sufficient against the
sender’—i.e.—signed by the sender—in this case, the alleged buyer. Hence the second prerequisite is met. The third requirement will also be
met—i.e.—the person receiving it ‘has reason to know of its contents’ since it
was sent to his account via email.
At this point, unless the seller gives written notice of objection to its contents, within 10 days of receipt, buyer
will have been deemed to have satisfied the requirements of the Statute of
Frauds. This may seem to be a harsh
result, but the Code is expressing support for a basic business protocol— answer
your business communications in a timely manner. That is reasonable commercial behavior. If
you don’t answer your business communications in a timely manner, and one of
those communications confirms a nonexistent contract, you are exposed in a
major way.
This
does not mean that the buyer will win in a lawsuit for the 1000 tables at
$650.00 per table. However it does mean that one of two things will happen—you
will either incur the expense of litigation proving your case, or you will
settle. Both of these can be avoided
with a simple one sentence reply denying the existence of the contract.
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