SALE OF GOODS – ARTICLE 2 OF THE
UNIFORM COMMERCIAL CODE:
Zara Law Offices
111 John Street Suite 510 New York, NY 10038
Tel: 1-212-619 45 00
Fax: 1-212-619 45 20
www.zaralawny.com
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The Uniform Commercial Code (UCC)
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The UCC is a model commercial law adopted in some form by all
50 US states as their respective state law.
Article 2 of the UCC governs the sale of goods (the state of
Louisiana is the only US state that has not enacted Article 2 of
the UCC)
The UCC’ s provisions will be applicable to your sale of goods to
a US customer, unless the 1980 United Nations Convention for
the International Sale of Goods applies (which applies by default
if both parties to a sale of goods are from two different
countries that enacted that Convention), or the parties have
chosen another law to govern all matters pertaining to their
relationship.
Some UCC clauses contain pitfalls for the foreign exporter.
Therefore it is recommended that you have general information
about the UCC and take precautions accordingly.
This presentation will focus on the UCC model law, without
regard to modifications by different states.
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Statute of frauds (UCC § 2-201)
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Under the UCC, a Sales Agreement for the price of $500 or
more is not enforceable unless there is some record, signed by
the party against which enforcement is sought, evidencing the
parties’ agreement. Therefore, it is advisable for foreign
exporters selling to a US customer to set forth the terms of their
transaction in writing.
The Statute of Frauds concerns only the enforceability of an oral
agreement. It does not mean that an oral agreement for the
sale of goods of 500$ or more cannot be formed or is invalid.
However, if for example the Buyer fails to remit the price, you
may not be able to enforce the agreement in court if the Buyer
is able to successfully use the Statute of Frauds as a defense.
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Statute of frauds : Main exceptions
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An agreement may be enforced even if it is not set forth in
writing under the following circumstances:
„ “Merchant’s Exception” (UCC 2-201 (2)): If you and your Buyer
are both merchants*, and you sent him something in writing
memorializing the oral agreement (some courts consider
detailed invoices sufficient), and he did not object, the oral
contract is enforceable.
„ If the Buyer against whom you are trying to enforce the Sales
Agreement admitted its existence under oath (e.g. in pleadings
or other sworn statements)
„ If the Buyer started to perform the Sales Agreement in part,
you will be able to enforce it up to the amount already paid.
„ If the goods were specially manufactured per the Buyer’s
order and you began to manufacture them, or you entered
into a contract for the manufacture with a subcontractor and
that subcontractor is unable to resell the products.
*A merchant under the UCC is defined as a person who “deals in goods of the kind or
otherwise holds itself out by occupation as having knowledge or skill peculiar to the
practices or goods involved in the transaction […] “
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Parol or Extrinsic Evidence
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The UCC provides that whenever an agreement has been set
forth in writing and was intended to be the final agreement of
the parties, no parol or extrinsic evidence is permitted (UCC 2202). This means that a party is not allowed to introduce
outside evidence, including earlier oral agreements, to
contradict the terms of the written contract.
However, the written agreement may be supplemented by
evidence of:
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Course of performance, course of dealing, or usage of trade; and
Consistent additional terms (unless the court determines that the
record to have been intended as a complete and exclusive record
of the parties’ agreement).
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Formation of Sales Agreements
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If a Buyer offers you to
purchase goods in a signed
document, his offer is
irrevocable:
„ During the time indicated by
the Buyer, or
„ If he did not indicate any
time, during a reasonable
time that shall not exceed
three months (UCC 2-205).
A Sales Agreement is still formed even if the parties left one or more
terms open (UCC 2-204 (3)).
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Passing of title (UCC 2-401)
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Unless the parties have agreed otherwise, the passing of title is
linked with the performance of the delivery.
If the contract requires you to send the goods to the Buyer,
and:
„ You do not have to deliver them at destination, title passes at
the time of shipment;
„ You must deliver them at a particular destination, title passes at
the time you tender them there.
If you do not need to move the goods:
„ If you must deliver a document of title (such as a Bill of
Lading), title passes at the time you deliver such document; or
„ If no documents of title are to be delivered, title passes at the
time of the conclusion of the Sales Agreement.
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Passing of risk (UCC 2-509)
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Where the contract requires or authorizes the Seller to ship the goods
by carrier, the risk of loss passes to the Buyer when the goods are duly
delivered to the carrier.
However, if the contract requires the Seller to deliver the goods at a
particular destination and the goods are duly tendered at the
destination while in the possession of the carrier, the risk of loss passes
to the Buyer when the goods are so tendered, so that Buyer can take
delivery.
Where the Sales Agreement does not involve a carriage, the risk of loss
passes to the Buyer when it receives the document covering the goods.
In any other case, if the Seller is a merchant, the risk of loss passes to
the Buyer on its receipt of the goods; otherwise the risk passes to him
on tender of delivery.
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Perfect Tender Rule
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The perfect tender rule refers to the common law legal right for
a Buyer of goods to insist upon "perfect tender" by the Seller. In
other words, in a Sales Agreement, the Seller has to deliver
goods that conform to each and every detail of the Sales
Agreement. If the goods do not so conform, the Buyer may
reject them and rescind the contract (UCC 2-601).
Exceptions:
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If the parties agreed otherwise;
If you promptly notify the Buyer of your intention to cure the lack
of conformity and if you are able do so within the period of time
indicated in the Sales Agreement.
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Seller’s express warranties (UCC 2-313)
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An express warranty can be a promise or affirmation of fact by
the Seller to the Buyer with respect to the description of the
goods that became part of the bargain.
As part of the express warranty, you will have to deliver goods
that conform to any such description.
In addition, if you provided any samples or models of the goods
to the Buyer during negotiations, the goods you deliver have to
match the characteristics of such samples or models.
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However, if you merely opined on the value of the goods, such
statements do not normally create an express warranty.
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If you sell your products to another merchant, you can exclude
an express warranty in the contract.
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Seller’s implied warranties: Fitness for particular
purpose and merchantability
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Implied warranties are unwritten or
unspoken assurances by the Seller
implied by law.
If you are a merchant, the Implied
Warranty of Merchantability is
applicable.
In order for the goods to be
merchantable, they must be at least:
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Pass without objection in the trade
under the Sales Agreement’s
description; and
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In the case of fungible goods, be
of fair average quality within the
description; and
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Be fit for the ordinary purposes for
which such goods are used.
The Implied Warranty of Fitness for a Particular Purpose applies when the Seller
knew or had reason to know that (1) the Buyer was buying the goods for a
particular purpose, and (2) the Buyer was relying on the Seller’s expertise to
select goods suitable for that purpose. There exists then an implied guarantee
that the goods are fit for such particular purpose (UCC 2-315).
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Exclusion of warranties (UCC 2-316)
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If you want to exclude or modify an implied warranty or any part of it:
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You must use terms such as “sold as is”, “with all faults” or other language
sufficient to convey that no implied warranty exists;
The exclusion or modification must be set forth in writing;
To exclude or modify the Implied Warranty of Merchantability, the term
“Merchantability” must be used as language;
In particular, with respect to a consumer contract, the Implied Warranty of
Merchantability can only be excluded or modified if conspicuous language is
used and the statement “The seller undertakes no responsibility for the
quality of the goods except as otherwise provided in this contract” is
included.
If the Buyer before entering into the Sales Agreement has examined
the goods, the sample or the model, or has refused to do so after you
requested it, no implied warranty exists with regard to defects that an
examination should have revealed under the circumstances.
An implied warranty may also be excluded or modified by course of
dealing or course of performance or usage of trade.
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Buyer's right to inspect the goods
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The Buyer has the right to
inspect the goods before
accepting and paying for
them.
If the goods conform to the
Sales Agreement, the Buyer
is obligated to pay for the
inspection costs.
If the goods do not conform,
the Buyer may demand the
costs of the inspection from
the Seller (UCC 2-513(2).
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Buyer’s Acceptance of the Goods (UCC 2-606, 2-607)
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The Buyer is deemed to have accepted
the goods:
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If, after a reasonable opportunity to
inspect the goods, he indicates that
they are conforming or that he will
take them in spite of their nonconformity; or
If he fails to reject the goods properly
after he had a reasonable
opportunity; or
If he acts in a way inconsistent with
the Seller’s ownership of the goods.
If the Buyer accepts part of a
commercial unit, he is required to accept
the entire unit.
The Buyer must pay at the rate indicated
in the contract for any goods accepted.
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Buyer’s Right to Revoke Acceptance
Buyer may revoke his prior acceptance of goods that turn out to
be non-conforming and the non-conformity substantially impairs
the value to the Buyer:
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If the Buyer accepted the goods on the reasonable assumption that
the non-conformity would be cured, but it has not been cured; or
If the Buyer accepted the goods unaware of their non-conformity,
either because it was difficult for the Buyer to learn of the nonconformity at the time of acceptance, or because the Buyer relied
on the Seller’s assurances that the non-conformity would be
corrected.
A revocation of the acceptance is only effective if the Buyer notifies
the Seller thereof within a reasonable time after the Buyer discovers
or should have discovered the non-conformity.
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Buyer's remedies in case of Seller's contractual breach:
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If the Seller breaches the contract by failing to perform its
obligations under the Sales Agreement, the Buyer may,
depending on the nature and on the seriousness of the breach
(UCC 2-711):
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Recover as damages any part of the price already paid, and/or
direct, consequential damages and (if specified in the sales
contract) liquidated damages
Obtain specific performance
Obtain the goods back by replevin
Recover identified goods
Compensate its loss with any part of the price still due
Cancel the contract
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Buyer’s Remedies on Improper Delivery and in
General
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If the delivered goods do not conform to the Sales Agreement,
the Buyer may:
„ Reject the whole; or
„ Accept the whole; or
„ Accept any commercial unit or units and reject the rest (UCC 2601).
The Buyer acquires a security interest in any goods in his
possession or control, for payments he has made on the price
and for expenses incurred in inspection, transportation, etc. In
accordance with this security interest, the Buyer may hold and
resell the goods.
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Right to adequate assurance of performance (UCC 2609)
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Upon reasonable doubts that the respective other party will duly
perform, either party may ask for adequate assurance of due
performance.
If you as the Seller have reasonable doubts about the Buyer’s
ability to pay for the goods, you may ask for adequate
assurance that the Buyer will be able to pay you. Provided it is
“commercially reasonable”, you may even suspend shipment
until the Buyer has provided you with adequate assurances of
payment.
If a justified demand for adequate assurance was not met
within thirty (30) days, that party is deemed to have repudiated
the contract. In such case, you do not have to ship the goods to
Buyer, but you must as soon as possible notify the Buyer you
are cancelling the contract.
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Seller’s Remedies
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Seller's remedies in General (UCC 2-703)
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If the Buyer is in breach of contract you may:
„ Withhold delivery of the goods;
„ Stop delivery of the goods (UCC 2-705);
„ Proceed with respect to goods unidentified to the contract or
unfinished (UCC 2-704);
„ Reclaim the goods [2-507(2) or 2-702(2)];
„ Require payment directly from the Buyer [UCC 2-325(c)];
„ Resell the goods and recover damages (UCC 2-706);
„ Recover the price (UCC 2-709);
„ Obtain specific performance (UCC 2-716);
„ Recover liquidated damages (UCC 2-718).
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Seller’s specific remedies in case of Buyer’s insolvency
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If you discover Buyer’s insolvency, you may refuse delivery of
the goods (UCC 2-705).
If you discover that the Buyer has received goods on credit
while insolvent, you may reclaim the goods within a reasonable
time after the Buyer has received them.
If you discover Buyer’s insolvency, or if Buyer repudiates or fails
to make a payment due before delivery, you may stop the
delivery of the goods in the possession of a carrier (UCC 2-702).
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How to use the Sales Agreement to your advantage
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You have to make sure that
either the Buyer or its Agent
have inspected the
merchandise, or that such
inspection is deemed waived
under the Sales Agreement. You
should not allow a partial
inspection of the merchandise.
As previously stated, under the UCC, the Buyer has the right to cancel
its acceptance, even after having received the merchandise, therefore
you should clearly set forth in your Sales Agreement:
„ When acceptance will be deemed to have occurred.
„ That the Buyer will have no right to revoke its acceptance after it
has inspected the goods, accepted and received them.
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Conclusion
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Carefully read your client’s Purchase Orders.
Never ship goods without a well-drafted Sales Agreement.
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Expressly exclude Seller’s UCC Warranties.
Specify that Buyer’s inspection is to be done at your factory or is
waived; and that the purchaser has waived its rights of Rejection
and Revocation.
Insist on Incoterms such as FOB (standard) that will exempt you
from any liability with respect to any losses in connection with the
goods after they pass the ship's rail at the port of shipment.
Obtain one (1) or more payment security devices from your clients.
If a neutral set of rules such as the UN Convention on Contracts for
the International Sales of Goods is not automatically applicable, try
to convince your client to accept its application.
Murphy’s Law: Anything that can go wrong will go wrong… Keep
this proverb in mind while drafting your Sales Agreement and
protect your interests accordingly…
Good Luck!
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