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The Uniform Commercial Code

Rules of Uniform Commercial Code (UCC) Rejection

What Is the UCC?

The Uniform Commercial Code (UCC) is the set of laws governing commercial transactions.

Until the mid-1900s, the United States lacked a standard set of rules on the buying and selling of goods, things that are moveable at the time of identification to the contract for sale, which is the process of passing the title from a seller to a buyer for an agreed-on fee or price. A seller is a person who sells or contracts for sale of goods as a merchant operating in good faith under the Uniform Commercial Code. Following World War II, the National Conference of Commissioners on Uniform State Laws (NCCUSL) began drafting a uniform set of laws that could govern commercial transactions. The Uniform Commercial Code (UCC) is a set of laws, adopted by all states and the District of Columbia, that govern commercial transactions within the United States. Different jurisdictions enforce the UCC differently. It came into being officially in 1949 and over the next few years was substantially adopted by almost every state in the country.

The UCC laid out a uniform set of rules that could govern commercial transactions across state lines, with the goal of speeding up interstate commerce, the purchase or sale of goods between different states. In general, the UCC regards the formation and performance of contracts more liberally than those rules applied to contracts based on traditional common law principles, the principles that arise from a precedent.

Commerce for a merchant working with another merchant, who routinely deals with buying and selling goods, is less heavily regulated and subject to streamlined rules governing their behavior under the law. The idea is that professional buyers and sellers need less protection than nonprofessionals. Thus, merchant transactions are governed by the UCC, which streamlines the process and facilitates commerce, rather than by common law provisions that govern transactions between nonprofessionals. However, the UCC holds merchants to a higher standard and a greater level of responsibility in crafting contractual sales agreements, the formal contracts for the seller and buyer, the person who buys or contracts for purchase of goods as a merchant operating in good faith under the Uniform Commercial Code (UCC). It is presumed that a merchant conducting business has greater understanding of the legal consequences of their words and actions than a typical person would. Thus, in many cases the UCC offers two sets of rules: one for merchants in a particular area and one for everyone else.

For example, under the common law a farmer selling their crop to a food distributor would have agreed on specific terms, such as a price per bushel of corn and the number of bushels to be sold. Under the UCC, the farmer and food distributor are likely both considered merchants. Thus they can agree that the farmer will sell the entire crop for whatever the current market rate is for corn at harvest time. That contract will be legally binding, as there is an agreed-on industry-standard mechanism for determining price in that situation.

Although the UCC comprehensively covers commercial transactions, it does not cover every aspect of commercial law. For instance, it does not cover transactions involving services or real property—land and everything attached to it that cannot be easily moved, such as buildings, crops, and mineral rights. Real property is not the same as personal property.

Application of UCC or Common Law

For the sale of goods, the UCC typically applies instead of common law principles. Asking validating questions helps determine whether the UCC or common law applies to a particular situation.

Why Does the UCC Exist?

The Uniform Commercial Code (UCC) is one source of contract law.

The UCC was created so that there would be a consistent, integrated framework of rules that could govern all aspects that normally arise in the sale of goods—which may be crops, manufactured merchandise, or other items. Under the UCC, these rules are consistent from state to state. Having a common set of laws makes it easier to do business across state lines.

Before the UCC, laws varied widely from one state to another. Also, the federal government had not heavily regulated contract law or the law of commerce in general. Many types of commercial arrangements that were legal in one state were illegal in a neighboring state. Because commerce was becoming regional and national rather than local, businesspeople and consumers needed more consistency.

Legal scholars and businesspeople, not politicians, wrote the UCC. The UCC is effective because it was written and is regularly revised by professional merchants, who engage in the buying and selling of goods as their full-time job. This allows the UCC provisions to be practical in nature and reflect the realities of transacting business in the modern world.

Merchants who rely on the UCC can make assumptions about how contracts will be evaluated and can be more confident how an arbitrator (an independent person or body appointed to settle a dispute) or court will rule if disagreements arise.
The Uniform Commercial Code provides advantages such as consistent rules updated regularly, predictable decisions, and reliability of goods.

What Is the Right of Rejection under the UCC?

Rejection is a right the buyer has under UCC Article 2 if the goods fail in any way to conform to the contract. Rejection means the buyer does not keep the goods supplied under the contract.

Under Article 2 of the UCC, buyers have the right to reject or refuse goods under several circumstances. Rejection means that the buyer refuses to take the particular goods or services and does so in a timely fashion. Timeliness standards can vary depending on the product and nature of the transaction but are based upon the reasonable person standard. For example, if a buyer is going to reject the delivery of a food item, given the fact that food spoils quickly, such rejection would need to be made at the time of delivery or almost immediately thereafter once the food items are opened. For an item such as a new car, 72 hours would be a reasonable amount of time to allow the vehicle to be inspected by a mechanic and driven by the buyer before deciding to accept or reject the car. This set time a buyer has to refuse goods is governed by the perfect tender rule, a part of the UCC that empowers the buyer to reject any goods that fail in any respect to conform to the contract.

Under the perfect tender rule, buyers can reject all goods that fail to conform to the contract or reasonable expectation (the legal principle that the terms of the contract are interpreted according to what a reasonable person not trained in the law would expect). They can also reject some goods in the delivery and accept others. For example, a restaurant receiving a shipment of food from a supplier could accept the bread and milk in the shipment but reject the strawberries because they are moldy. The food supplier then would have to reduce its bill for the price of the strawberries or provide fresh unspoiled strawberries quickly. This is in contrast to the general common law rule, where buyers usually have to accept or reject the entire delivery shipment. The UCC seeks to encourage the completion of contracts and finds it is better to let the seller fix small errors rather than make transactions all or nothing, which would require complete acceptance or rejection.

The Perfect Tender Rule

The Uniform Commercial Code affects buyers' options at the time of delivery. Unlike common law, the UCC does not require buyers to make an all-or-nothing decision about accepting goods.
There are some limits to the perfect tender rule. Buyers must make allowances if the previously agreed-on mode of delivery becomes commercially impractical. For example, if there is a snowstorm, the buyer will have to agree to accept items at a later date. If items are delivered on an installment contract, in which payments of money or delivery of goods will be made in a series rather than all at once, a buyer cannot reject any nonconforming installment—one that fails to meet the agreed-on standard—while accepting others. The exception to this is if the nonconformity substantially impairs the value of that particular installment of goods. The rule presumes that buyers are acting in good faith—that is, honestly and up to standards—at all times and not rejecting goods that are conforming.

Sellers also have a right to cure, or fix, an improper tender or delivery if it can be done so in a practical and timely fashion by repairing, adjusting, or replacing nonconforming goods sent to a buyer. Buyers also must reject items in a timely fashion. For example, a farmer delivers wilted or rotten lettuce to a restaurant, and the restaurant rejects it. If the farmer can deliver a new batch of lettuce the same day, the contract should be honored, as the delivery has been cured in a reasonable fashion. If it is too late for the seller to be able to correct the flaw, courts generally will not allow the rejection.

UCC Rules of Rejection

Rejection must happen within a reasonable time after the buyer receives the goods. The buyer must promptly notify the seller of a rejection, and the rejection must happen before the buyer accepts the goods.

Receipt of goods by the buyer means that they are accepted and satisfy the sales contract. However, if the buyer rejects goods, there are rules and guidelines that govern the method and limitations of rejecting goods under Article 2 of the UCC.

First, rejection must occur within a reasonable time, and the buyer must properly notify the seller of the rejection of the goods and why they were rejected so that the seller can cure the defect—goods that do not conform with the contract, usually due to shortcomings, imperfections, or flaws—and fix the problem if possible. In determining what is reasonable, courts look at the relative difficulty of discovering the defect.

While the rejection must happen before the buyer accepts the goods, courts consider what is practical in determining acceptance. For example, a restaurateur should be able to discover if their food supplier delivered moldy or spoiled food at the time of delivery or soon after. However, if the defect is hidden, such as rust on the undercarriage of a car, the buyer may not discover that until the item has been in their possession for some time and problems develop.

The goal of the UCC is to encourage completion of contracts when possible. This is why buyers must reject goods in a timely fashion—so that sellers can fix the defective issue, minimize loss for both parties, and allow for the return of the defective item to the seller before it has lost value.

Buyers also must specify the reason for rejection with enough detail for the seller to fix the problem or determine if the item can be replaced or repaired or if a refund is necessary. Thus, the UCC requires buyers to identify all defects that can be discovered by a reasonable inspection of the goods after delivery. This is to prevent buyers from seeking to reject goods simply because the deal is no longer profitable or they have found a substitute item at a lower cost.