Saturday, May 21, 2016

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.

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