Creating and Applying a Systematic Approach

         

            As of this post we have worked through Parts 1 and 2 of Article 2, the former dealing with scope and Article 2 definitions, the latter with the general formation of a contract. This content should be considered in the context of the definitions of ‘contract’ and ‘agreement’ contained in Article 1.   For those who are interested in laying a strong foundation for approaching all Uniform Commercial Code matters, I suggest going back to the first post on March 5, 2015 and reading and learning subsequent posts through May 5, 2015. 

            As stated in an earlier post, contracts exist throughout all Articles of the Uniform Commercial Code.  We looked at many under Article 3: the contracts of the maker; drawer; indorser, acceptor and accommodation parties.  In each of these situations, as well as Article 2 and the other Articles of the Code, a basic contract analysis will yield an enormous amount of information.  Piecing together the agreement between the parties will yield any writings which exist; what was stated between the parties; what information can be inferred from other circumstances, such as any course of performance or course of dealing which may exist between the parties.  Trade usage, as has been repeatedly stated throughout these posts, is almost always going to be relevant, for the overwhelming majority of commercial transactions are conducted within an established trade.

            Also referenced in an earlier post is the importance of a systematic approach to Uniform Commercial Code problems.  Understanding that the Code is like a major highway with many side roads, it is very important to stay focused and on track.  My personal approach to all UCC problems is exactly as stated above. Over time my mind has been trained to process information through this medium, and hence has increased efficiency in the process. 

            Once the basic agreement is in place, we turn to the contract.  This, simply stated, is the application of The Uniform Commercial Code as applied to the facts of the agreement as supplemented by all law not specifically displaced by the Code per 1-103(b).

            Once your facts are in place and diagrammed, you move to the index in front of whatever Articles are involved.  At this point, you look to the head notes in the index and process it through the facts of your case to see if any content is relevant.  By way of illustration, let’s take a look at the index to Part 2 of Article 2:

       

       

            The simple system I am proposing essentially involves creating a factual prism through which to process the content within the head notes.  This of course, requires a sufficient grasp of content, but as I have stated all along, this level of expertise is available for anyone who puts in the effort. It does not require complete mastery of the Code, which is also available with sufficient effort, but it does require enough knowledge to look at the head notes and have the content in the section come to mind.  More detailed analysis of the sections will occur later; for now, the basics are being put in place.

            As the facts are processed through the head notes, certain areas within the text will be activated.  For example, if there is no final written agreement, the Statute of Frauds will be activated; Section 2-204 regarding formation in general will also be activated, and of course, if writings are in confirmation of an offer, Section 2-207 will be activated.  This process is applied to each Part of each relevant Article, again yielding activated sections.  At the end of this process, you may have 40-50 sections activated, which when placed in proper sequence tell the ‘UCC story’.  Areas where more information is needed will reveal themselves, and sections of particular importance will become apparent.  These sections are dissected word by word and this process involves the application of the purposes and policies of the Code as stated in Section 1-103(a)(1)(2)(3).

            Part 3 of Article 2 deals with General Obligation and Construction of Contract  and should be read in connection with Part 5 which deals with Performance.  If you recall, Section 2-204(1) provides that the parties can consummate a contract ‘by any means sufficient to show agreement including conduct.’  This is elaborated upon in Section 2-207(3) which discusses what happens when an acceptance in confirmation of an offer results in a contract by conduct with writings insufficient to form a contract.  In that situation Section 2-207(3):

…In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act.

Part 3 of Article 2 will supply many of the contract terms which may not be contained in the writings.

            If for example, the parties intended to enter into a contract but had not agreed on a price, Section 2-305 provides a mechanism for determining price. As discussed in a previous post, Part 3 also provides for delivery terms regarding single or multiple lot deliveries where no such provision is made in the contract under Section 2-307; place of delivery where none is provided under 2-308; timeliness of action required under Section 2-309; authorization for a seller to make shipment under reservation under Section 2-310; certain options regarding the goods such as assortment of goods and specification of goods under Section 2-311.  In addition, various implied warranties and disclaimer of warranties are created by Section 2-314; 2-315 and 2-316 respectively. 

            Most of us are familiar with the importance of warranties and disclaimers of warranties; however, there is tremendously important content in each of the provisions noted, and, if in undertaking the analysis noted above, certain terms are missing from the terms of the contract, Part 3 will often provide the missing content.  Part 5, on the other hand, will detail what the parties are required to do to perform properly under the contract.  For example, requirements for proper shipment of goods; proper tender of goods; payment responsibilities; inspection rights and cure options are all dealt with in Part 5 of Article 2.

            The next series of posts will work through Parts 3 and 5 of Article 2.

Parol Evidence and Article 2

 We have discussed the basic drafting of Article 2 insofar as it relates to the general formation of a contract, noting that the Code has removed many formal restrictions for contract formation which existed in pre Code law.  This is consistent with the overall drafting of Article 2 which reflects the reality of the business world.  Often, there is no finalized contract, but instead a series of writings followed by conduct which recognizes the existence of a contract.  If there is an acceptance in ‘confirmation of an offer’ the rules of Section 2-207 will apply.

In that situation, and even in situations where you have a finalized contract, parties may wish to introduce evidence which assist the court in interpreting the writings in a manner favorable to the proponent of the evidence.  In that situation, Section 2-202 comes into play.  That section reads as follows:

Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented

(a) by course of dealing or usage of trade (Section 1-205) or by course of performance (Section 2-208); and

(b) by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement .

            Section 2-202 once again, underscores the importance of the individual elements of agreement in the ultimate interpretation of the meaning of the contract.  Thus, course of performance, course of dealing, and usage of trade not only create avenues whereby conduct and trade can supply terms of a contract, but also create an avenue by which evidence can be introduced to ‘explain or supplement’ the terms contained in any writings between the parties.  The manner in which this evidence is presented to the court is critical.  If the evidence of course of performance, course of dealing and trade usage is presented to ‘contradict’ the writing, it is not acceptable. If however, such evidence is introduced to ‘explain or supplement the writings’ the evidence is proper.  This is true regardless of whether or not the writings are intended as a ‘final expression’ of the parties’ agreement.

            Section 2-202 was discussed by the Arkansas Court of Appeals in L.F. Brands v Dillard’s 314 SW 3d 736, 2009 and, like most cases which have disc used Section 2-202, reached a decision that was consistent with the statute.  The case involved a breach of contract action brought by L.F. Brands against Dillard’s.  Brands was a supplier of Dillard’s with whom Dillard’s had a long standing relationship.  All transactions between the parties were governed by a document entitled ‘Dillard’s Inc. Purchase Order Terms, Conditions, and Instructions’.  In addition to the terms contained in the purchase orders, undisputed testimony from Brands and Dillard’s employees established that the parties would meet at the beginning of each fashion season to discuss profit margins.  Sales were monitored throughout the course of the season, and allowances would be processed at various times during the year to make adjustments to the margins.  At the end of the year, parties would determine if gross margins had been met.  If not, the parties would negotiate on further allowances to achieve an acceptable resolution.

            Among the provisions contained in the Purchase Order agreement was the following provision:

[L.F. Brands] acknowledges by acceptance and shipment against any Dillard Purchase Order that the terms, conditions and instructions stated herein, in the Purchase Order, [and in two other Dillard's documents] (collectively, the “Agreement”) shall bind [L .F. Brands] and shall constitute the entire agreement between Dillard and [L.F. Brands], which cannot be modified by either party except in a writing executed by both parties, or [another method]; provided, however, that this provision shall not apply to markdown allowance and other credits authorized by [L.F. Brands]․

L.F. Brands went out of business in December of 2003.  In February 2004, Dillard’s deducted markdown allowances and chargeback’s from its account balance.   These markdowns and chargebacks were the basis of Brands’ appeal. 

The trial court denied both parties’ motion for summary judgment determining that the entirety of the parties’ agreement must be determined by looking at both the written documents, as supplemented by the parties’ oral agreements.  The case was submitted to a jury with instructions with the definition of course of dealing, and that course of dealing evidence may be used to give particular meaning to and supplement the terms of the agreement.  The jury found for Dillard’s on the complaint, and further found for Dillard’s on its counterclaim in the amount of $1,265,938.98

            In discussing Brand’s argument that the merger clause in the Purchase Order superceded the prior oral agreements concerning merchandise allowances the Court stated:

This argument sweeps too broadly in this case for the sale of goods governed by Article 2 of the Uniform Commercial Code(UCC) which has a specific provision allowing parol evidence to be introduced even in situations involving fully integrated written agreements.  Under the UCC’s parol evidence rule, a writing intended to the parties’ final expression of their agreement may not be contradicted by evidence of any prior agreement or contemporaneous oral agreement, but it may be supplemented by evidence of the parties’ course of dealing or course of performance. [citing Section 2-202(a).]

The court went on to state:

In such instances, the evidence of a course of dealing that explains or supplements a contract is competent evidence of the parties’ intent and can become a part of a contract.

In affirming the trial court, the court of appeals also noted that, per comment one to Section 2-202, there is no requirement that the contract be ambiguous in order for such evidence to be introduced.

This case underscores a point that has been made repeatedly in previous posts—course of dealing and course of performance, if they exist, are always relevant.  If however, the parties choose to do so, they can include a provision in their contract which excludes evidence of course of dealing, course of performance or usage of trade.  If you are drafting a contract, it is a good practice to examine each of these concepts in the context of your situation, so that any desired adjustments can be made.