How UCC amendments will impact the sale of goods

Dr. John Murray, Jr. -- Purchasing, 11/4/2004

The Uniform Commercial Code has governed commercial transactions throughout the United States for decades. The Code deals with a wide range of commercial transactions including commercial paper such as checks, notes and other instruments, bank collections, wire transfers, secured transactions, investment securities, bills of lading, warehouse receipts and leases. The most basic part of the Code, Article 2, governs contracts for the sale of goods. While other parts of the Code have been revised, Article 2 was not formally revised until 2003 even though the revision process began in 1991.

The revision created a series of amendments which are nearly ready to be presented to state legislatures throughout the country for enactment. While it is impossible to predict what will happen to any new concept when it is presented to a state legislature, the amended version of the law is likely to pass in most states. It is, therefore, important to highlight some of the more important changes.

Currently any contract for the sale of goods priced at $500 or more must be evidenced in writing to be enforceable. The amendment to Article 2 changes this amount to $5,000. Also, the term writing has been changed to record to include not only paper acknowledgements, but include electronic communications as records that provide just as much evidence of the transaction as the old paper form. Various other state and federal laws already recognize electronic records as acceptable for such contracts.

Another amendment that will impact buyers involves the use of distributors. When a buyer orders a product from a distributor, the goods may be delivered in the manufacturer's container and include certain statements about the product. These statements may have the same features as express warranties. If the goods fail to measure up to the statements, there is a breach, but the buyer did not have a direct contract with the manufacturer. This amendment permits the buyer to sue the manufacturer directly in that case.

The manufacturer may have engaged in public advertising that contains statements of fact about the goods that prove to be untrue. Again, these statements have all of the earmarks of an express warranty, but the buyer did not deal directly with the manufacturer in purchasing the product. If, however, the buyer was aware of the advertising statements before purchasing the product, the amended version allows the buyer to sue the manufacturer directly for the failure of the product to live up to the statements in the advertisements.

If goods delivered to the buyer do not conform to the contract description, the buyer has a right to reject the goods. If enough time remains under the contract, however, the seller has a right to cure the defect by supplying the buyer with perfect goods before the end of the time in which the seller had agreed to supply such goods.

One of the problems with this seller's right to cure under the current (original) version occurs where the buyer has accepted the goods by starting to use them or simply not rejecting them within a reasonable time. Once the buyer has accepted the goods, it is impossible for the buyer to reject them. The buyer may be able to revoke acceptance of the goods, but the time for rejection has passed once acceptance occurred. The current version limits the seller's right to cure only if the goods have been rejected. Where the buyer has accepted the goods before discovering the defect, however, there is no reason to deny the seller the right to cure if time remains under the contract to supply perfect goods. The amendment allows the seller to cure even after the goods have been accepted.

By far, the most significant change in the amended version is the section dealing with the notorious battle of the forms that takes place most often when the seller's form contains its favored terms such as disclaimers of warranties, exclusion of certain remedies, or arbitration clauses. The current version of Article 2 protects the buyer against such terms in certain situations but not in others. Courts are not consistent in how they deal with such terms in a seller's acknowledgment form. Various judicial constructions of this section of the Code have created considerable confusion. The amendment deals directly with this confusion by insisting that the only terms in the buyer's purchase order and seller's acknowledgment that will be enforced are terms that match. Unless the parties have otherwise agreed to an additional or different term, it will not become part of the contract.

Unfortunately, the amended version deliberately avoids another problem that has only recently developed in the courts. For example, a buyer may order a product by telephone that the seller ships. Inside the box with the product, there is a document with terms that favor the buyer. Several courts have decided that, unless the buyer objects to these terms and returns the goods, the buyer is bound by these terms. This rolling or layered contract theory has become somewhat controversial and the amended version expressly states that it takes no position on whether such terms should be enforced. If a buyer sent a purchase order instead of simply ordering the product by phone, the buyer can be protected under either the current or amended battle of the forms section.

The moral: Buyers should always send their purchase order when ordering goods and not rely on telephone orders.