UCC—Article 2:
Sale of Goods
and Dealings with Merchants
McGraw-Hill/Irwin
©2008 The McGraw-Hill Companies, All Rights Reserved
Objectives
Chapter Objectives:
• Use vocabulary regarding the UCC’s
transactions in goods properly
• Identify the types of transactions covered by the
UCC
• Explain the different standards applicable to
merchants and non-merchants under the UCC
• Discuss the exceptions to formation defects that
would otherwise invalidate the contract
• Explain the battle of the forms
15-2
Objectives
Chapter Objectives:
• Differentiate between a firm offer and an option
contract
• Evaluate the potential warranties involved in a
transaction
• Discuss the options available to the buyer and
seller upon breach
• Identify the remedies available to each
nonbreaching party
15-3
Objectives
• This chapter examines only one article of the
Uniform Commercial Code (UCC). Article 2
deals solely with transactions between
merchants relating only to movable goods—
those dealings that we normally associate
with commerce—or sales
15-4
Article 2 - UCC
• Article 2 of the UCC is divided into seven
sections. Each section deals with one aspect of
commercial contracts for the sale of goods
– Section 1 addresses the general construction
of the code and gives definitions and
intentions of this article
– Section 2 deals with the formation of the
contract
– Section 3 addresses the obligations of the
parties with respect to the transaction
including warranties and price, delivery,
allocation of risk
15-5
Article 2 - UCC
– Section 4 solely concerns the passage of title
to the goods and will not be discussed in this
chapter
– Section 5 addresses performance obligations
– Section 6 deals with the consequences of a
breach
– Section 7 describes the remedies available as
a consequence of the breach
15-6
Covered Transactions
• Transactions in goods
– A sale or other transfer of title to
identifiable, tangible, movable things from
a merchant to a buyer
• Predominant factor test
– An examination of a transaction to
determine whether the primary purpose of
the contract is the procurement of goods or
services
15-7
Merchants
• Now that the subject matter, the goods, has
been identified, it is important to define the
parties who are governed by the UCC
• Article 2 only applies where the seller is also a
merchant, a person that “ 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”
15-8
Formation Of The Contract
• Missing Terms Do Not Invalidate the Offer
– Under common law principles, an offer must
identify the parties, price, quantity, and time
for performance
– UCC has created a distinction between two
types of parties that could be involved in a
covered transaction, merchants and
nonmerchants
15-9
Formation Of The Contract
• Modifications or Counteroffers Do Not
Terminate the Offer
– Battle of the forms
• An evaluation of commercial writings whose
terms conflict with each other in order to
determine what terms actually control the
performances due from the parties
– Limitation of acceptance
• A commercial offeror may specifically state
that the offeree must accept all terms as set
forth in the offer with no deviations
15-10
Formation Of The Contract
• If the contract calls for the manufacture of
specialized goods , those that can only be used
by this one particular buyer, then the
contract can be enforced despite failing under
the UCC’s Statute of Frauds
• The manufacturer can recover for the time,
labor, and materials expended as it started
the process of creating these special goods
15-11
Formation Of The Contract
• The courts have fashioned a four-part test to
determine when this UCC exception applies:
1. the goods must be specially made for the buyer;
2. the goods must be unsuitable for sale to others in
the ordinary course of the seller’s business;
3. the seller must have substantially begun to have
manufactured the goods or to have a commitment
for their procurement; and
4. the manufacture or commitment must have been
commenced under circumstances reasonably
indicating that the goods are for the buyer and
prior to the seller’s receipt of notification of
contractual repudiation
15-12
Formation Of The Contract
• Material alteration
– A change in the terms that would surprise
or impose hardship on the other party if
allowed to become a part of the agreement
• Objection to terms
– A merchant must state her disapproval of
the offeree’s new or different terms within a
reasonable time, or else they are considered
accepted by her
15-13
Formation Of The Contract
• Firm offer
– An option contract to keep the offer open
between merchants that does not have to
be supported by separate consideration in
order to be valid
15-14
Formation Of The Contract
• Silence as Acceptance
– To reflect the reality of commercial
transactions, the UCC permits the
shipment of goods to act as acceptance.
The offeree has not transmitted an
acceptance to the buyer’s invitation to
purchase the goods; in silence she has
acted upon the offer
– On the receiver’s side, silence is
acceptance of the goods as conforming
under the contact unless the buyer
notifies the seller within a reasonable
time
15-15
Formation Of The Contract
• Warranty
– A promise or representation by the seller
that the goods in question meet certain
standards
• Warranty of title
– The seller promises the buyer that the
seller has the right to transfer the title free
and clear of encumbrances to the buyer
• Express warranty
– A written representation by the seller as to
the nature of the goods to be sold
15-16
Formation Of The Contract
• Implied warranty
– An unwritten representation that is normally and
naturally included by operation of law that applies
to the goods to be sold
• Merchantable
– Goods must meet certain standards that are
required in the relevant industry
• Implied warranty for a particular purpose
– If a seller has reason to know of the needs of the
buyer in relation to the goods to be sold, the seller
impliedly warrants the goods to that higher
standard
15-17
Formation Of The Contract
• Good faith obligation
– Both buyers and sellers must deal with each other
in a reasonable and fair manner without trying to
avoid legitimate performance obligations
• Sale on approval
– The agreement may provide that the contract for
sale is not consummated until the buyer receives
and approves of the goods
• Sale or return
– The agreement provides that if the buyer is
unable to resell the goods, she is permitted to
return the unsold goods to the original seller
15-18
Performance
• Identification of the goods to the contract
– Once a seller has designated specific goods as the
ones that will be delivered to the buyer, the buyer
has a protectable interest in them
• Tender of delivery
– The seller is ready to transfer the goods to the
buyer and the goods are at the disposal of the
buyer
• Nonconforming
– Goods that are not in reasonable compliance with
the specifications in the contract
15-19
Performance
• If the goods are found to be nonconforming,
the seller may tell the buyer that she will
cure the defect by delivering conforming
goods within the allotted contract time
• This right to cure, or fix the problems with
the performance, is absolute if the seller can
do so within the original time for performance
• If the seller has reason to believe that the
goods were in conformance with the contract,
she may have a reasonable amount of
additional time to cure the defect
15-20
Breach
• Upon improper delivery of nonconforming
goods, the seller is in breach of the contract.
It is the buyer’s responsibility to establish
proof of the breach and inform the seller
• Under section 2-601, the buyer may
– accept the whole;
– reject the whole;
– accept any commercial unit and reject the
rest
15-21
Breach
• Acceptance revocation of a previous
acceptance
– A buyer has the right to refuse to accept
the seller’s attempts at a cure if those
attempts are still not in conformance with
the contract requirements
• Commercial unit
– A batch of goods packaged or sold together
in the normal course of the relevant
industry
15-22
Breach
• Duty to resell
– The UCC requires commercial sellers to try to
resell the goods that have not been accepted by
the original buyer
• Actions inconsistent with rejection
– A buyer must not do anything that is contrary to
her previous refusal of the goods
• Specific reasons for rejection
– The buyer is under an obligation to notify the
seller within a reasonable time not only that the
goods have been rejected but also the reasons for
the refusal to accept the goods
15-23
Breach
• Adequate Assurances
– In a “last ditch” effort to avoid a breach
post-shipment, the UCC provides a
mechanism for both buyers and sellers to
ensure performance, or at least find out if
a breach is likely before time for
performance
– Section 2-609 gives the parties a right to
seek adequate assurance of performance
where the party has reason to believe that
the other will not be able to perform. This
feeling of insecurity must be commercially
reasonable
15-24
Remedies
• The UCC gives sellers the following options
where the buyer has breached:
1. Withhold delivery. Section 2-703
2. Stop delivery. Section 2-705
3. Identify and complete manufacture of the goods
in order to prepare them for resale or cease
production and resell for salvage value. Section
2-704
4. Resell and recover the difference. Section 2-706
5. Recover damages caused by the breach or recover
the contract price. Sections 2-708 and 2-709
6. Cancel the contract. Section 2-703
15-25
Remedies
• Finish or scrap
– The seller has the option to either finish
producing the partially manufactured goods
or stop production and scrap the materials
for their recycled value
• Price under the contract
– The seller has the right to collect the
agreed-upon price for the goods where the
buyer has possession, despite the market
conditions at the time
15-26
Remedies
• Buyer’s Remedies
– The UCC gives buyers the following
options where the buyer has breached:
1. Recover any payments made
2. “Cover” the loss by purchasing
substitute goods
3. Compel delivery of identified goods
4. Recover damages caused by the breach
5. Cancel the contract
15-27
Remedies
• Spot sale
– A purchase on the open market in that
particular place at that particular time
• Value of the goods as accepted
– The buyer is entitled to a “set-off” for the
difference between the price of the goods as
specified in the contract and the actual
price those goods would garner on the open
market
15-28
Summary
Article 2 of the Uniform Commercial
Code governs the sale of goods between
both merchants and nonmerchants.
Some particular rules apply to dealings
between merchants, persons holding
themselves out as having particular
knowledge or skills in goods involved
in the transaction
15-29
Summary
All of the UCC’s provisions governing
the transactions in goods give
certainty and clarity of action to the
participants so they may act in good
faith in a predictable, commercially
reasonable manner
15-30