Article 2 of the UCC governs the sales of goods in commercial transactions. Goods can include almost anything, from tiny computer parts to live animals to massive quantities of gravel. Usually, it is clear whether an item that is being sold is a good or a service, though sometimes questions arise. Some contracts are a mix of services and goods. For example, a school system may contract with a software company to write educational software, create and maintain a website and data to manage the software program, and also provide physical computer hardware to run the software program. In determining whether the UCC would apply or not to a contract of this type, courts would attempt to determine the predominant purpose of the transaction. They would consider things such as the nature of the buyer's and seller's businesses, the purpose of the contract, and the line item amount charged for each part of the contract, such as how much the school is being charged for the computers in relation to how much they are being charged for the writing of the software and the maintenance of the website.
The terms of a sales agreement can be extensive. The most commonly used terms relate to several factors:
- description of the goods
- quantity
- price
- quality
- payment terms
- delivery
- inspection
- warranties
- insurance
- remedies for breach
- risk of loss
- circumstances excusing performance
Standard business practices carried out in a particular industry often drive how a contract dispute will be interpreted and settled. Courts often look at the usage of trade, meaning any method of dealing that happens so often in a vocation or trade that it will most likely happen during the transaction in question.
This means every sales contract must be tailored to suit the particular transaction. But in general, sales of goods contracts under the UCC must describe the contracting parties and the quantity, quality, and type of goods. The contract should specify what warranties, or guarantees, are in place, when delivery and title of the goods will transfer from seller to buyer, what risk of loss and insurance is provided, and what the seller's obligation is to properly tender, or present, the goods to the buyer.
The sales contract should describe the time, place, and manner of delivery. It should include the right of the seller to reject improperly tendered goods. It should give specifics on the manner of rejection and the obligation to state reasons for rejecting goods and to properly care for the goods until the seller can retrieve, fix, or replace nonconforming goods (goods that fail to meet specifications). It should also mention the buyer's right to inspect rejected goods. Terms must be addressed regarding price, medium, and time of payment for the goods.
Sales contracts may contain many details to address foreseeable issues with the sales. For instance, sales contracts may spell out what happens if one or both parties become insolvent, or unable to pay, before tender is made. They may specify how installment contract provisions will work, meaning how the payments will be made and goods delivered over a specific time. Also, they may detail which economic price indexes (the average of prices in a given region) or outside factors will be considered to determine fair market price or interest rates if those terms are open. And if the transaction is across state or international boundaries, then the contract should specify which area's laws should apply if there is a court case.
Some key differences between UCC rules and common law rules include the following. The UCC only applies to sale of goods contracts while the common law also applies to contracts involving property, services, and employment. The UCC allows for merchants to leave some terms open in a contract, such as price and quantity. For example, under the UCC, a restaurant may agree to buy a farmer's entire harvest and agree to having a third party, such as the Chicago Board of Agricultural Trade, set the price for how much a bushel of corn is worth at harvest time. Under the common law, however, subject matter, price, and quantity must be specifically agreed to by the parties to a contract. The UCC is also more flexible about requiring the acceptance of a contract to be a mirror image of the offer or that consideration - the passing of something of value from one party to another - is needed to modify contracts. Additionally, the UCC allows for postcontract modifications, meaning any part of a contract can be amended after agreement as long all parties agree.
UCC Rules versus Common Law Rules
| Rule of Application | UCC Rules | Common Law Rules |
|---|---|---|
| Contracts that apply | Contracts for sales of goods | Real property, services, employment contracts |
| Offer requirements | Subject matter required; price and other terms may be open | Subject matter, price, quantity required |
| Option agreements | Consideration not required | Consideration required |
| Acceptance requirements | Mirror image not required | Acceptance must be mirror image of the offer |
| Consideration requirements | Consideration not needed for postcontracting modifications | Consideration required |
| Statute of frauds applies (contracts that must be in writing) | Goods must be worth $500 or more | Real estate and contracts that may take more than one year to complete |
Key differences exist between UCC rules and common law rules, including rules covering offer requirements, option agreements, and the statute of frauds.