Article 2: Going Forward

As of this post, we have looked at some of the basic concepts in the formation of a contract under Article 2 including: the Statute of Frauds under Section 2-201; the importance of the distinction between a merchant and non merchant under Article 2; battle of the forms under Section 2-207; parol evidence under Section 2-202; recovery of attorneys’ fees as consequential damages under Section 2-607(5)(a); right to adequate assurance of performance under Section 2-609, and the failure of presupposed conditions under Section 2-615.

All of this is supplemented with all of the posts on Article 1 starting with the Purposes and Policies of the UCC as stated in Section 1-102, and the mandate to the courts to ‘liberally construe and apply’ the Code to further these policies.  The policies stated in Article 1 create a macro framework through which to process all of the Uniform Commercial Code.  These blend with the policies of a particular Article in the interpretation process. Supplemental rules of law under Section 1-103(b) is another section which allows facts to be uniquely applied to the supplemental area of law which applies to the case.  For those of you seeking to learn Article 2, it would be helpful to review the earlier posts on Article 1, followed by the Article 2 posts.  The more thorough your knowledge of Article 1, the better your foundation for everything that follows.

As we go forward with Article 2, several things should be stated.  First—and this is my opinion—sales transactions are the least formalized transactions under the Uniform Commercial Code.  By that I mean it is less likely that there will be a finalized, integrated document which has been formally executed than in any of the other Articles.  Sales transactions often involve a phone call, some correspondence, a shipping document and conduct which recognizes the existence of the contract.  As a result, terms supplied by the Code have greater significance.

Second, the Article 2 expectation is that in the event of a dispute the parties will work it out through negotiation.  This is a reflection of how these matters are handled in reality, and is reflected in the general structure and content of Article 2. Hence, comment 4 to Section 2-607, which deals with a buyer’s duty to notify a seller of a breach with respect to accepted goods states:

The notification which saves the buyer’s rights under this Article need only be such as informs the seller that the transaction is claimed to involve a breach, and thus opens the way for normal settlement through negotiation.

The ‘looseness’ of Article 2 in this regard is to be contrasted with the specificity of other Articles. Under Article 9, for example, you are more likely to find a definitive answer to a problem than you would under Article 2.  Secured lenders want certainty when enforcement of a secured obligation must take place.  Thus, the policy of certainty is expressed in the text of Article 9 and the policy of ‘keep the deal alive’ is expressed in the structure and text of Article 2.

            Third, the definitions of ‘contract’ and ‘agreement’ as defined under Article 1 have particular significance under Article 2.  This follows from the lack of formality referred to above.  Thus, course of performance, course of dealing and usage of trade need to be carefully examined in each instance to see how a particular concept might impact the contract.  As noted in an earlier post, a particular transaction may not involve a ‘course of performance’ or ‘course of dealing’ since parties may be dealing with one and other for the first time, and the contract may not call for ‘repeated occasions for performance’ with objectionable behavior.  However, virtually all sales transactions occur within some trade or industry which has its own rules and protocols.  Absent limiting contract provisions, these rules and protocols become part of the contract. Trade journals are a potential source of incredibly valuable information.

             Part 3 of Article 2 deals with General Obligations of the Parties:  Among other things, Part 3 supplies certain terms that the parties may not have included in their written agreement or writings.  For example, in certain circumstances parties to a contract can conclude a binding deal without have explicitly agreed on a price; the Code will supply a place of delivery if none has been stated; and where action is required by no timeline stated, the Code requires that action be taken within a ‘reasonable time’.  This ties into a Section 2-204(3) discussed in an earlier post:

A contract does not fail for indefiniteness if the parties intended a contract and there is a reasonably certain basis for giving an appropriate remedy.

Section 2-301 states the obligations of the buyer and seller in very general terms:

The obligation of the seller is to transfer and deliver and that of the buyer is to accept       and pay in accordance with the contract.

 The comment to Section 2-301 explains this as follows:

In order to determine what is in ‘accordance with the contract’ under this Article usage of trade, course of dealing and performance, and the general background of circumstances must be given due consideration in conjunction with the lay meaning of the words used to define the scope of the conditions and duties.

 Section 2-301 thus forms the foundation for going forward in litigation; implicitly emphasizes the importance of drafting; and explicitly recognizes ‘usage of trade, course of dealing and performance’ as critical elements in determining the terms and interpretation of a contract.  These concepts, the drafting style of Article 2, and the overall purposes and policies of the Code should be incorporated in the process of analyzing Article 2 transactions.

Events Impairing Performance: The Code Response

In the previous post we looked at situations where ‘reasonable grounds for insecurity’ concerning the other party’s performance have arisen, as well as action which can be taken in such a situation to ‘demand adequate assurance of performance.’ The first sentence of Section 2-609(1) notes in this regard  ‘A contract for sale imposes an obligation on each party that the other's expectation of receiving due performance will not be impaired.' The impairment contemplated by Section 2-609 is the result of some behavior by one of the contracting parties.

            Section 2-615 also contemplates a situation where performance is not forthcoming; however, in this instance, the non performance is not caused by the behaviors of one of the parties to the transaction.  Rather, the non performance (or partial performance) contemplated by Section 2-615 is the result of some event which makes performance ‘impracticable.'  Section 2-615(1)(a) reads as follows:

Except so far as a seller may have assumed a greater obligation and subject to the preceding section on substituted performance:

(a) Delay in delivery or non-delivery in whole or in part by a seller who complies with paragraphs (b) and (c) is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.

In order for the event to come within Section 2-615, it must be of such a nature that the non occurrence of that event was ‘a basic assumption on which the contract was made.' 

The other situation contemplated by Section 2-615 is where the party who is unable to perform is precluded from performance by ‘any applicable foreign or domestic governmental regulation.' As noted in the text, it is irrelevant if the regulation is later proved to be invalid.

            There are several things which should be noted in the initial discussion of Section 2-615..  First, Section 2-615 deals with a situation where performance has become ‘impracticable.'  This is not the same thing as ‘impossible.'  As noted in Official Comment 3 to Section 2-615, the word ‘impracticable’ was used ‘to call attention to the commercial character of the criterion chosen by this Article.'  Second, although the section is drafted as pertaining only to the seller, Official Comment 9 states in part that in certain situations ‘the reason of the present section may well apply and entitle the buyer to the exemption.' There is case law which supports that result.  Third, a dramatic price change is not within the purview of Section 2-615.  That stated, there must have been some event that caused the dramatic price change, and that is where the focus should be directed.

In order to avail oneself of Section 2-615(1) the party must comply with Sections 2-615(a)&(b). Section 2-615(b) is activated when the triggering event affects only part of a seller’s capacity to perform and requires an allocation of product by the seller:

Where the causes mentioned in paragraph (a) affect only a part of the seller's capacity to perform, he must allocate production and deliveries among his customers but may at his option include regular customers not then under contract as well as his own requirements in any manner which is fair and reasonable.

Note, upon activation of Section 2-615(1), the seller ‘at his option’ may include ‘regular customers not then under contract’, and may also include its own requirements for further manufacture. 

Any allocation must be done in a ‘fair and reasonable manner.'  Once again, we see an opportunity to draft what is, or is not, an allocation which is fair and reasonable, and if this is done, the inquiry will be limited to: were the called for standards of ‘fair and reasonable’ met; and if so, were these standards not ‘manifestly unreasonable’ per Section 1-302.  As will be demonstrated shortly, this is one of several creative drafting provisions that can pay big dividends in the event of litigation.

            Section 2-615(c) states the final requirement for Section 2-615(a) to be properly utilized:

The seller must notify the buyer seasonably that there will be delay or non-delivery and, when allocation is required under paragraph (b), of the estimated quota thus made available for the buyer.

The procedure required for the notice referred to is contained in Section 2-616(1)(a)(b)(2)(3).*

            The general freedom of contract principle contained in Section 1-302 is explicitly stated in the first sentence of Section 2-615(a) which states in relevant part as follows : Except so far as a seller may have assumed a greater obligation... The ‘greater obligation’ does not need to be stated as guarantee of delivery in a Section 2-615 situation.  The greater obligation can be created through a remedial provision.

             Gold Kist v Stokes 138 Ga. App. 482 (1976), 226 S.E.2d 268 involved an appeal from a summary judgment.  There were a number of evidentiary issues at the trial court which the appellate court required to be heard by a jury.  Another issue raised was the failure of the trial court to include the introductory language of Section 2-615 in its jury instruction as it relates to ‘seller assuming a greater obligation’.  The contract in the Gold Kist case had the following provision:

... [i]f the producer is unable to deliver the quantity contracted for solely because of reasons beyond his control, the measure of damages for failure to deliver is the difference between contract and market price on the day of breach.

In reversing the trial court, the appellate court found that under the noted provision, seller had ‘assumed a greater obligation’ via the damage provision, and that the failure of the jury instruction to include the introductory language of Section 2-615 as it pertained to the assumption of a greater obligation by the seller was error.

            The case graphically illustrates a point made throughout these posts. Proper drafting yields great results.   The remedial provision probably got very little notice by the seller during negotiations or one would assume the seller’s attorney would have objected to the provision.  As a result of inclusion in the contract, the remedial provision effectively overrode the result that would have occurred under Section 2-615.

           

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*(1) Where the buyer receives notification of a material or indefinite delay or an allocation justified under the preceding section he may by written notification to the seller as to any delivery concerned, and where the prospective deficiency substantially impairs the value of the whole contract under the provisions of this Article relating to breach of installment contracts (Section 2-612), then also as to the whole,

(a) terminate and thereby discharge any unexecuted portion of the contract; or

(b) modify the contract by agreeing to take his available quota in substitution.

       (2) If after receipt of such notification from the seller the buyer fails so to modify the contract within a reasonable time not exceeding thirty days the contract lapses with respect to any deliveries affected.

         (3) The provisions of this section may not be negated by agreement except in so far as the seller has assumed a greater obligation under the preceding sections.