Selling Goods in the USA

If the business of the company is selling goods in the United States, its commercial activities are governed by both common contractual law and the Uniform Commercial Code (UCC), a set of laws relating to commercial transactions. The UCC modernizes contract law and allows certain exceptions from the common law in contracts between merchants. It has been promulgated in an effort to facilitate the contract formation between the market participants and to harmonize the law of sales and other commercial transactions in all fifty states within the United States of America. At this point in time, nearly all states have adopted it.

 

The UCC is divided into nine articles, each containing provisions that relate to a specific area of commercial law. Article 2 governs the sale of tangible, movable goods, not services, real estate, or intangible property, such as trademarks, patents, and copyrights. Those are governed by common contractual law. If the contract for goods is at issue and the provision between common law and the UCC is in conflict, the UCC prevails. Also, if the parties have not addressed the particular term in their agreement, the UCC default provisions will fill the gaps in such transactions. If the company is actively involved in the sale of goods, managers and other employees with the decision-making power should be familiar with the main provisions of the UCC Article 2.  

 

Selling goods creates a bilateral contractual relationship between a seller and a purchaser. All contracts for sale involve a common concept: the delivery of goods in exchange for payment of money. However, the legal procedures of doing so, as well as the recourses available under Article 2 of the UCC, are different from the provisions of general contracts law. It is beneficial to know the major differences.

 

Under the common law, the offer can be revoked before accepted with certain exceptions (option contracts, foreseeable reliance, start of the performance by the other party are among such exceptions). Article 2 of the UCC provides that if a merchant (almost every businessperson is a merchant under its broad definition) promises in a signed, written document to keep an offer open for a certain period of time, he or she cannot revoke the offer before the promised period ends. This firm offer can be irrevocable only for three months, subject to extension thereafter.

 

Under the common law, the acceptance of the offer must mirror the offer. The other party must respond “yes” or “no.” Adding or changing any terms operates as a rejection of the offer. Under Article 2, acceptance does not have to mirror the offer. The underlying policy is to facilitate contract formation between businesspeople. However, changes or additions made by the other party become the terms of the contract only if both negotiating parties are merchants, the term is not a material change, and there is no objection received within a reasonable time. If the added term is customary in the industry, it is not considered material (e.g., certain delivery requirements). If a newly added term imposes additional obligations on the other party or alters the subject matter of the transaction, it is a material change. In the latter case, the acceptance of the offer is still valid, but those additional terms will not be included in the final contract. The offering party can, however, keep out even a minor change if it objects to it within a reasonable time.

 

Under the common law, if the major contractual provisions are not performed as agreed, there is a breach. Article 2 says there is no breach if the seller sends other goods as an accommodation to the buyer. If the seller sends the wrong goods, it is a breach of the contract, but if the seller includes a note saying, “I’m out of that product, but I’m sending you this in the hope that it may meet your needs,” there is no automatic breach. The buyer does not have to keep the unsatisfactory goods. Rather, the buyer has two options: cancel the contract or require the seller to ship the proper goods and separately negotiate any damages caused by the delay.

 

Under the common law, if there is a need to modify a contract, the modification will be valid only if the parties received additional consideration for doing so (consideration is something bargained for, such as additional compensation, savings, non-material value). In sale-of-goods transactions under Article 2, new consideration is not required to modify an already existing contract. The parties only have to show good faith in proceeding with it. As an example, parties can agree to raise the price of the contract if it is reasonable. In such a case, the buyer does not receive additional consideration; actually, he or she may pay more, but this modification will be valid if there is a good faith reason for it.

 

Under the common law, the contract can be formed either orally or in writing. Article 2 and the Statute of Frauds require that the contract to be in writing in order to be valid if the sale of goods is for $500 or more.

 

Under the common law. the contract must contain all material terms to be enforceable (who, what, when, where, how much). In the sale-of-goods contracts under Article 2, the contract is enforceable if it has a quantity term and is signed by the party to be charged with in case of breach (the prospective defendant). The following note would be enforceable contract under Article 2: “I agree to buy fifty widgets from A&A Corp., signed, John Doe.” In some situations, the seller can use his or her own signed writing to satisfy the Article 2 requirement. This is known as “merchant’s confirmatory memo”. Such writing qualifies if:

 

  • both parties are merchants;
  • the writing claims a prior oral agreement;
  • the writing is signed and has a quantity stated; and
  • no written objection is received from a buyer within ten days.

 

Who bears the risk of loss while goods are in transit? This is a major concern for both parties.  The parties can negotiate the allocation of the risk in the contract. If the goods are transported by a common carrier such as UPS or FedEx, the risk of loss shifts to the buyer when the seller completes its delivery obligations. The seller’s delivery obligations are subject to negotiation between the parties. The commonly used term in contracts is free on board (FOB), followed by the name of a place. If the FOB is followed by the seller’s city, it means the seller must make delivery arrangements with a common carrier and notify the buyer. From that moment, the risk of loss is on the buyer, even while the goods are in transit. If FOB refers to some other place, the seller must deliver the goods to that specific place (usually where the buyer is located, unless otherwise agreed), and only upon delivery does the risk of loss flows to the buyer.

 

In non-carrier cases, when a buyer has to pick up or a seller has to deliver the goods, if a seller is a merchant, under Article 2, the seller bears the risk of loss until the buyer takes possession of the goods. If a seller is not a merchant, the seller bears the risk of loss until it makes the goods available to a buyer by notifying the buyer where and when to pick them up.

 

Under the common law, a contract is satisfied if it is substantially performed; even if the performance is not perfect, no material breach happened. Under Article 2 of the UCC, if the delivered goods are not perfect, the buyer may reject the goods under the perfect tender rule. The seller has an option to cure before he or she is officially in breach, provided the time for performance has not expired.

 

If the buyer keeps goods without objection after having a reasonable opportunity to inspect, the buyer is considered to have accepted the goods, but the buyer can still claim damages for any shortcomings. If the buyer rejects the goods, he or she is entitled to the following recourses:

 

  • return the goods to the seller at the seller’s expense;
  • get a refund on any money paid for the goods; and
  • receive damages from the seller for breach of contract.

 

The seller usually cannot reclaim the goods from a non-paying buyer. The two exceptions to this rule are:

 

  1. A buyer was insolvent when he or she received the goods and the seller makes a demand within ten days after the buyer received the goods.
  2. A buyer misrepresented its solvency in writing within three months before delivery, then the seller can reclaim the goods at any time.

 

Otherwise, if the buyer does not properly pay for the goods received, the seller’s only option is to sue for damages.

 

Warranties

 

Article 2 of the UCC also governs warranties arising in connection with the sale of goods. Under the UCC, there are two types of warranties, express and implied.

 

Express Warranty: This is created by any promise, statement of fact, description of the goods, demonstration of the sample, or affirmation made by the seller. If the seller states expressly that the goods have certain qualities and they do not, the buyer can sue the seller for breach of warranty. A mere opinion is not a warranty: “These goods are top quality.”

 

Implied Warranties: The seller is deemed to have made certain implied warranties of merchantability even if he or she remains silent about the quality of a product. The mere act of selling the product produces an implied warranty. By selling certain goods, the seller represents that the goods are of a quality normally acceptable in the particular trade and fit for their ordinary purpose. To be liable for implied warranties, however, the seller must be a merchant who regularly deals in the kind of goods at issue and has specialized knowledge about those goods. For example, when a shoe wholesaler sells shoes, he or she makes implied warranties regarding the quality of the shoes, since he deals with this kind of goods on regular basis. However, if the same shoe wholesaler sells his or her office equipment, he or she cannot be held liable for implied warranties since it is not the nature of his or her business to sell office equipment; he or she does it as an occasional sale. In the event that goods do not conform to the implied warranty, the buyer is entitled to recover the same damages as would be available in the case of an express warranty.

 

The seller can disclaim implied but not express warranties. For example, when the contract says “as-is” or “with all faults” and there is no other statement about quality, the implied warranties are disclaimed. However, if the seller made some express warranties about the goods and then wrote in the contract, “All warranties are disclaimed,” the express warranties will survive this disclaimer.

 

Article 2 of the UCC contains detailed extensive rules governing the transactions involving the sale of goods. Some of these rules may or may not be applicable to different types of deals and relationships between the parties. The information provided herein is a brief guidance of the basic, general terms that are applicable in all sale-of-goods contracts. Each separate transaction may contain some specifics, or certain facts may be present during the negotiation or execution process that must be carefully considered and evaluated before the parties commence their commercial dealings.

Leave a comment

Make sure you enter all the required information, indicated by an asterisk (*). HTML code is not allowed.