UCC Or Contract Law?

Author(s):

Donald L. Woods, J.D., C.P.M.
Donald L. Woods, J.D., C.P.M., International Consulting & Contracting, Las Vegas, NV 89117, 702/254-6606, dlw@anv.net

85th Annual International Conference Proceedings - 2000 

Prior to the enactment of the Uniform Commercial Code (UCC) the primary concept for enforcing agreements was "contract law", which was based upon what was known as the old English Common Law and sometimes referred to as case law. Rules for interpreting contracts flowed from rulings on prior cases as interpreted by appellate courts.

Contract law required specific elements to be present before a "contract" was enforceable in a court of law:

• Identification of the parties.
• Consideration: Mutuality of obligation.
• Parties have the intent to contract.
• Parties have the capacity to contract i.e. knowledge, freedom of will, legal capacity

Subject matter of the contract must be legal.

Enforcers of contracts (attorneys, contract administrators, and procurement processionals) traditionally looked for specific items as evidence of the enforceability of a contract:

• Was a writing required?
• Valid offer and acceptance?
• Money or other form of consideration?
• Was there a breach?
• What remedy applied?

The results of applying these standards were not uniform throughout the nation, and starting in 1949, the states had the opportunity to replace "contract law" with the UCC which codified the rules by which merchants would deal with each other for the sale of goods.

Each attendee can verify the actual wording by reviewing the UCC in their state statutes, but universally, the following definitions apply:

"'Merchant' means a person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction or to whom such knowledge or skill may be attributed by his employment of an agent or broker or other intermediary who by his occupation holds himself out as having such knowledge or skill." UCC § 2-104.

"'Goods' means all things (including specifically manufactured goods) which are movable at the time of identification to the contract for sale..." UCC 2-105.

Some of the other sections of the UCC that are applicable to purchasing professionals can be generally classified as follows:

UCC 2-200 = Form of the writing.
UCC 2-300 = Obligation of parties - consideration.
UCC 2-400 = Passing of title.
UCC 2-500 = Performance.
UCC 2-600 = Breach and excuse.
UCC 2-700 = Remedies.

The most important thing for us to remember is to ask ourselves the following question whenever an issue or problem arises:

Which law applies - UCC or contract law?

To better understand the importance of knowing the answer to the above question, let us walk through the following common problems Purchasing repeatedly encounters.

1. A buyer called out of state and placed an order for bath towels, and sent the following purchase order to the supplier:

   "Quantity 2000 bath towels at vendor's cost (no profit), per phone call to Suzie Q on March 30, 1999."
   [UNSIGNED] "Ima Buyer"
   Is there a valid and binding agreement?

2. Your supply contract for paper specified delivery at 90 days ARO (After Receipt of Order). On day 85 you receive a call from the supplier's salesman that they need a few extra delivery days, but he guarantees the goods will be in your hands by day 95. What is your response?
3. You received a document that stated, "We offer to sell you ten (10) carloads of coal at the price of $600.00 per car, delivery to your dock in San Francisco within one week ARO. This is a firm offer that will remain open for 150 days and you may accept by remitting payment with an order." On day 100 you send an order and the proper payment, but within 5 days the order is rejected and the payment returned. Did seller breach a valid contract that was formed when you accepted the offer?
4. You ordered 50 black widgets in boxes of 5 widgets each. When they were received, they were put in the warehouse that followed the "first in/first out" theory of inventory control and the invoice was paid. Six months later the first of the boxes was opened and you ultimately discovered that all 50 widgets were red. What do you do now?
5. Your purchase order/contract for computer hardware has a shipping requirement of FOB your dock. When the truck backed up to your dock and the trucker opened the trailer door, the cardboard box containing the computer you purchased had two large holes indicating a very serious forklift damage. What action do you recommend to the receiving clerk?
6. A consultant you hired for an environmental study has been working diligently with you to complete the project, but it is obvious that the contract will not be completed on time. Both of you want to amend or extend the deadline. What elements of a contract must be included in the negotiations?
7. You entered into a written agreement with a contractor to have an 8-ton refrigeration unit installed on your office building. He was not able to locate a reasonably priced 8-ton unit, so he asked for permission to install two 4-ton units. When you refused he said he was going to walk off the job. What do you say to him now? Especially when you learn it will cost twice as much to have another contractor complete the job?

Answers as discussed in the workshop:

1. UCC applies because towels are goods. Had it been governed by contract law, there would have been no valid contract due to the missing elements, but under the UCC:

   "Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy." UCC 2-204(3).

2. UCC applies because paper is a goods. If an authorized employee or you agree to extend the time for performance there is a valid agreement.

   "An agreement modifying a contract within this article needs no consideration to be binding." UCC 2-209(1).

3. UCC applies because coal is a goods. Do not confuse this scenario with an option, as options must have all of the elements of a contract, especially consideration. After 90 days there was no offer, firm or otherwise, for you to accept.

   "An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months. ..." UCC 2-205.

4. UCC applies because widgets (items that can be boxed) are goods. The courts might go either way with this one because of the lapse of six months from date of delivery until the date you discovered the wrong goods. Under the old contract law the shipment of wrong goods might have been considered an immediate breach and a counter offer or accommodation. But let's look at some appropriate UCC clauses:

   "Rejection of goods must be within a reasonable time after the delivery or tender." UCC 2-602(1).

   "The buyer has no further obligation with regard to goods rightfully rejected." UCC 2-602(2)(c).

   "Revocation of acceptance must occur within a reasonable time after the buyer discovers or should have discovered the ground for it and before any substantial change in condition of the goods which is not caused by their own defects." UCC 2-608(2).

   "Where any tender or delivery by the seller is rejected because nonconforming and the time for performance has not yet expired, the seller may reasonably notify the buyer of his intention to cure and may then within the contract time make a confirming delivery. UCC 2-508(1).Most buyers would be successful if they carefully worded a Notice of Revocation based upon the above UCC 2.608(2).

5. UCC applies as computers are goods Do not tell the trucker to keep or return the goods to the seller. Under the old contract law the defective goods might have been breach of contract, but under the UCC the buyer has a duty to retain possession of the goods and contact the seller for instructions. UCC 2-602; 2-603.

6. Consulting is a service and falls under contract law, not the UCC. Because an amendment or modification to a contract is "an agreement to modify a contract" all elements of a contract must be present in this agreement, including consideration on both sides. Compare this to No. 2 above where the UCC applied.

7. If the agreement was simply for construction or the services "to install" a refrigeration unit, it would be outside the purview of the UCC, but here the contractor must also "purchase" the unit for installation. Courts will look at the primary function of the contractor, but sometimes look at the dollar values of the different stages of a contract to determine which law applies. Because or licensing requirements for this type of work, the primary purpose of the work is probably services and the courts would probably not apply the UCC. The result would then be that you already have an enforceable agreement and the contractor's only defense would be to try and prove up "impossibility of performance" in order to have the court set the contract aside.

Conclusion. As you can see from the varying results in the above discussions, it is important to know which law applies to your contract. It could be disastrous if decisions were based upon erroneous assumptions. Be able to spot the issues and then research the applicable law; and always contact your attorney early in a dispute that might cross over into either area. In addition to the applicable state statutes or Uniform Commercial Code, a good reference book is Miller, Roger LeRoy and Jentz, Gaylord A., "Business Law Today, The Essentials", West Publishing Company, 4th Ed., 1997.

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