- WHAT IS THE UNIFORM COMMERCIAL CODE (UCC)?
- INTRODUCTION TO UCC ARTICLE 2 (SALE OF GOODS)
- FORMULATION AND MODIFICATION OF CONTRACT
- When Do You Have a Contract?
- Contract Creation
- Firm Offers
- Essential Parts of a Contract
- Battle of the Forms
- Modification of Contracts
- CONTRACT INTERPRETATION
- Contract Terms Added by the UCC
- Risk of Loss
- CONTRACT PERFOMANCE AND BREACH
- REMEDIES FOR BREACH OF CONTRACT
A look at the Uniform Commercial Code (UCC) Table of Contents tells us that this subject is very broad. No lawyer, business person or college professor knows all of the Uniform Commercial Code. In fact, Court opinions interpreting the UCC could fill rooms.
This chapter will not attempt to discuss the entire UCC or even the entire Sale of Goods article. Rather, this chapter will include a brief discussion of the UCC, generally speaking. We will then highlight parts of UCC Article 2 on the Sale of Goods that are likely to impact a supplier or purchaser of construction materials. Another chapter of this book will discuss UCC Article 9 on Secured Transactions. These chapters will give you an idea of some of the issues covered by the UCC but should not be relied on to solve any particular problem.
As the name implies, the UCC is uniform, it concerns commercial transactions and it is a code.
The Uniform Commercial Code (UCC) is a "code" or a "collection of statutes." This is the type of law that may be adopted by all U.S. legislatures, including the U.S. Congress, the Virginia General Assembly, other state legislatures, and even a county board of supervisors. Codes are intended by the legislature to create new law in the targeted subject areas.
The other source of law is "case law" or "common law." For centuries, courts have been in the business of resolving disputes. When a court resolves a particular dispute, the record of this decision is case law, which may be used as authority in a future case. In future disputes, litigants may argue that their case is similar to a prior case and that the prior case law should be followed.
Often, to resolve a dispute, a court must interpret the "statutes" or codes created by the legislature. It is often difficult to determine how a statute or code should be applied to a particular fact situation. The law is usually written broadly so that it may be applied judicially. Courts must "fill in" the gaps in the statute.
An "Official Comment from the drafters of the Uniform Commercial Code" follows each UCC code section. The official comments explain the intent behind each code section and provide examples of appropriate factual situations. Most state legislatures also add a state comment describing how the new Uniform Commercial Code changed the law in that state. These official comments also fill in the gaps in the UCC and help courts, lawyers and business people better understand the UCC.
The UCC concerns a wide variety of commercial issues, including the sale of goods, banking and security interests. The UCC does not apply to:
- The sale of real estate
- Security interests or liens in real estate
- Service agreements or employment contracts
- Contracts involving significant labor
- Marriage settlements or other domestic relations law
The table of contents tells us that the UCC covers the following:
Article 1: General Provisions. Provides application of the UCC, subject matter and general definitions.
Article 2: Sales. Covers the sale of goods. This will be discussed in some detail here.
Article 2.A: Leases. Covers the lease of goods.
Article 3: Commercial Paper. Negotiable instruments such as promissory notes and bank checks.
Article 4: Bank Deposits and Collections. Covers the relationship between banks as they pass bank checks, deposits and credits among them.
Article 4.A: Funds Transfers. Covers modern electronic funds transfers.
Article 5: Letters of Credit. Covers letters of credit issued by banks, usually used by business people to guarantee payment of obligations.
Article 6: Bulk Transfers. Concerns the "bulk transfer" of all of a business’ inventory.
Article 7: Warehouse receipts, Bills of Lading and other documents of title. Covers these documents used in large wholesale transactions concerning the ownership and risk of loss of goods.
Article 8: Investment Securities. Concerns the regulation of investment securities.
Article 9: Secured Transactions. Covers security interests in all types of personal property, including accounts receivable, equipment and inventory. This will be discussed in some detail later.
The UCC was intended as a Uniform Model Code that might be adopted by every state legislature. Over the years, each state legislature created its own commercial transaction code. The laws in different states can vary widely. As the nation’s economy matured, interstate commerce became increasingly important. The variations in state law became a tremendous problem for businesses and banks dealing across state lines.
Many business people, lawmakers and academics saw a need for a uniform set of laws covering commercial transactions to facilitate interstate commerce. This would promote interstate commerce, create more comfort and security for interstate business transactions, increase competition and lower costs. A national conference of lawmakers, lawyers and college professors worked for years studying the various commercial laws of the 50 states, debating the pros and cons of these variations and drafting what they viewed as the best "Uniform Commercial Code."
This process has continued for decades. New articles are added over time, and specific sections of existing articles are revised.
The "Uniform Commercial Code" is a model. It is not law in any state unless and until a state legislature adopts it as the law of that state. Any state can decide not to adopt the UCC or can decide to make revisions to the code that satisfies that state’s particular heritage or commercial needs. Accordingly, the UCC is not entirely uniform in all 50 states. Also, each state’s court system can reach different results when interpreting the code provisions. Business people cannot assume, therefore, that the law will be exactly the same in each state. Nonetheless, the UCC has facilitated much greater uniformity of commercial laws.
UCC law, therefore, is derived from three places:
- The actual UCC passed by the legislature
- The official comment to the statute
- Case law that interprets the statute
For the purposes of this discussion, we will refer to the Uniform Commercial Code sections as the Virginia General Assembly has adopted them. Code sections in other states will be identical or very similar. Code section numbers also are usually similar. Uniform Commercial Code Article II, Section 305 (2-305), for example, is Virginia Code 8.2-305, New York Code Section 2-305 and Pennsylvania Code Section 2305.
Keep in mind that the UCC law can vary from state to state. This discussion is based generally on the Virginia Uniform Commercial Code provisions. Fortunately, if you understand the Uniform Commercial Code in one state, you probably understand it in all states. This discussion also is a very brief and general attempt to give you some idea of how a few of the UCC code sections work. As usual, however, you should not rely on any portion of this book to provide you with a legal solution to any specific problem.
The Uniform Commercial Code Article 2 on the Sale of Goods is basically a codification of existing commercial law. The UCC drafters tried to write down the generally understood business practices between merchants for the sale of goods. The UCC "fills in the gaps," providing controlling contract terms where the contracting merchants either didn’t agree or just forgot to discuss the matter. In many commercial transactions, the buyer and seller only discuss how many goods, how much to pay, and perhaps when delivery or payment is due. It is only later, after problems arise, that merchants also will discuss or argue about many more specific terms such as: "Where will the goods be delivered?" or "Is the buyer under any obligation if the goods are slightly defective?" The UCC answers most of these questions by basically providing the parties with a "50-page fine print contract," whether they know it or not.
The parties are almost always allowed to "contract out of the UCC." If the merchants do discuss and agree to terms different from the UCC, then the parties’ own terms will apply.
The UCC takes a very pragmatic and common sense approach to commercial transactions. It is usually not precise and does not provide exact rules. Many flexible terms are used, such as "reasonable" or "standards in the industry" or "commonly accepted practice." This can be frustrating in that the answers to a dispute are not always clear. A buyer can still argue about whether a seller took a "reasonable" approach. However, these terms do allow flexible and common sense solutions to practical problems.
The UCC has a philosophy of elastic performance to try and keep deals together. This philosophy frowns upon an "all or nothing" approach. The parties have to work together to keep things moving. For example, a buyer is generally not relieved of any further obligation if there are defects or delays in some deliveries. The seller will have a right to "cure" defects and continue deliveries. The buyer may be entitled to a credit for damages from the defects or delay, but the buyer must continue to take deliveries.
Some UCC rules apply only to "merchants" or transactions "between merchants."1 The UCC often holds parties to "commonly accepted practices" or "industry standards." Only persons familiar with this business should be held to these standards. Ordinary household consumers, for example, don’t know the industry standards and would be vulnerable to a merchant with more experience. Experienced merchants are held to a higher standard, therefore, than ordinary consumers.
A "merchant" is a person who: (1) deals in goods of the type in question; (2) holds themselves out as having particular knowledge or skill with goods of this type; or (3) is using a broker, agent or intermediary who holds themselves out as having particular knowledge or skill in this type of goods.2
Most construction material buyers and sellers will be merchants for transactions in the ordinary course of their business. A lumberyard will definitely be a merchant for transactions in lumber, although it may not be a merchant in a transaction involving the purchase of a new computer accounting system. A carpentry subcontractor also would be a merchant for the transaction involving the purchase of lumber. This is something that the carpentry subcontractor does on a regular basis and in which the carpentry subcontractor has experience, knowledge and skill.
Note that you can be held to the higher standard of a merchant, even if you do not actually have special knowledge or skill.3 First, if you "hold yourself out as an expert," other people may assume that you are. If a brand new carpentry subcontractor talks big to the lumberyard, he cannot later claim that he did not know the standards in the industry. Secondly, many businesses use expert brokers or agents to help them. It is a good idea to hire an expert to bring knowledge and skill to a transaction, but it will mean that the merchant rules will apply to the transaction.4 Buyers and sellers should choose their brokers carefully for this reason.
When a small lumberyard purchases its first computer accounting system, the computer seller is an experienced merchant in computers, but the lumberyard is not. The computer seller will be held to the higher merchant standard but not the lumberyard. In the lumber transaction described above, both the lumberyard and the carpentry subcontractor are merchants, which will mean that more UCC provisions will apply to the transaction.
Goods are "all things which are moveable."5 Lumber, asphalt, concrete, computers, trucks and gift shop greeting cards are all goods. UCC Article 2 applies to the sale of all such "goods." Note that goods can include items that are now attached to real estate but can later be "severed" or removed from the real estate.6This includes stone, sand and timber, as well as agricultural crops like corn.
The UCC does not apply to any transaction to buy or sell the real estate itself. More importantly, Article 2 does not cover any service contract like an employment contract for a salesperson.7 The UCC also does not apply if labor is a "significant part" of a contract. A contract for the sale of lumber is definitely a sale of goods, and Article 2 applies. A contract for carpentry labor only, where the owner is supplying the material, is definitely a service contract, and Article 2 will not apply.
Many construction contracts are in the "gray area," where it is hard to tell whether the UCC applies.8 For example, in a typical carpentry subcontract for labor and materials, the labor is a "significant part" of the contract and Article 2 will not apply. Mere delivery and unloading of materials are probably not "significant labor." Many truck drivers essentially "install" stone, however, by spreading the stone evenly over a road when they deliver it. Is this enough to make it a labor and materials contract? What about ready mix concrete? In a way, concrete is material delivered to the site the same way as lumber. What if the batch plant is on site, however, and the ready mix contractor has a supervisor and six other employees on site at all times? Many such transactions are in gray areas, and it is not clear whether the UCC applies.
Think about how contracts are formed in real life. You have letters and telephone conversations. Material suppliers send proposals and quotes. Contractors send purchase orders. These documents go by mail and facsimile machine. Sometimes the parties never write anything down and instead deal "on a hand shake." How do you know when you are bound to a contract? This is the issue of "contract formation."
Some contracts go on for years, with monthly deliveries of materials. Can the terms of this contract change over time? Prices rise. Methods of delivery change. Material specifications change slightly. Are you bound to these changes? This is the issue of "contract modification."
To determine what specific terms or provisions are in a contract, the agreement must be "interpreted." This is discussed in another section of this chapter, Contract Interpretation.
Contract Creation—Hypothetical #1: A contractor calls a lumberyard and asks, "What do you want for spruce 2x4 studs?" The salesperson answers, "$1.79 a piece." The contractor asks, "Do you have 2,000?" The salesperson answers, "Yes."
Do the contractor and lumberyard have a contract? Is the lumberyard bound to sell 2,000 studs at $1.79 a piece? Is the contractor bound to buy? Why or why not?
Contract Creation—Hypothetical #2: The carpentry contractor calls and requests a price for 2,000 spruce 2x4 studs. The lumber salesperson responds, "That would be $3,580." The contractor says, "OK, that is a deal, please deliver them tomorrow." The salesperson responds, "No problem." Later in the day, the salesperson discovers that all 2x4 studs have been committed to other purchasers and none will be available for at least 30 days. The salesperson calls back within one hour of the earlier conversation and informs the contractor that they will not be able to deliver.
Do these parties have binding contract? What if the contractor had requested 200 studs instead of 2,000?
Contract Creation—Hypothetical #3: The contractor calls the lumberyard and requests a price on 2,000 spruce 2x4 studs. The lumber salesperson faxes the contractor a quote of 2,000 studs for $3,580. The contractor writes the word "Accepted" across the face of the quote, signs it and faxes it back to the lumberyard.
Do these parties have a contract? Is each bound? The lumberyard discovers that afternoon that it has already committed all spruce studs available and tells the contractor that it cannot deliver. Is the lumberyard liable for damages? The lumberyard asserts that there was no contract because no time or place for delivery was agreed, no credit or payment terms were agreed, and there was no agreement on the quality of the studs to be delivered. Does this matter? Does this mean there is no binding contract?
If the contractor now has to pay $1.99 per stud for a total of $3,980, is the seller liable for damages? How much?
Once an offer has been made and accepted, the parties have a binding contract. In order to have a contract, "consideration must flow both ways." Consideration is any thing of value. When a lumberyard offers to sell 2,000 spruce studs at $1.79 a piece, this promise is worth something. When the contractor promises to pay for the 2,000 studs when delivered, this promise also is worth something. Consideration is flowing both ways. The parties have a contract.
Under the UCC, an offer can be accepted in "any medium and manner, which is reasonable."9 Sending a response letter is usually a reasonable manner of accepting an offer. Simple performance also may be enough.10 If a contractor says he will take 2,000 studs if the supplier can provide them tomorrow, it may not be necessary for the lumberyard to send a return letter. Rather, it can accept by performance. If the delivery truck simply appears at the contractor’s yard the next day with 2,000 studs, there has probably been an offer and a reasonable manner of acceptance. There is a binding contract.
When a merchant submits an offer in writing to buy or sell goods, the offer is open for a "reasonable" time.11 This means there will be a binding contract if a contractor accepts a material supplier’s firm offer (quote) within a reasonable time, even though the supplier has not promised to keep the quote open for any particular time.
What is a "reasonable" time depends on the circumstances and the knowledge each party has of the other’s circumstances.12
A material supplier or buyer could put a time limit on any offer.13 This would mean that they "contracted out" of the UCC provision by making an explicit time limit term. The UCC provision on "firm offers" is only to "fill in the blank," if neither the buyer nor the seller discuss the time limit on any offer.14
Suppose a contractor sends a written request for proposals, stating in its fine print that "all proposals must be kept open for 30 days." This could be a problem. That provision must be "separately signed" by the material supplier to be binding.15
There also is a problem with holding open any offer more than three months. An agreement to keep an offer open more than three months is not binding unless "supported by consideration."16 This means, basically, that there must be an agreement of some type. Remember that a firm offer is only an offer going one way, which has not yet been accepted. If a promise is made in exchange for the offer or a payment is made to keep the offer open, then there is "consideration" and the offer can be kept open longer than three months. This would be an "option contract," in which one party is paying to keep an offer open for an extended period of time. A contractor may pay a premium price for one load of wood, in order to get a guarantee of future deliveries at the same price. The contractor has paid for this option, and the firm offer will be open more than three months.
Based on this UCC provision, the written offer in Contract Creation—Hypothetical #3 was a "firm offer," which the contractor accepted within a reasonable time by writing "Accepted" across the front and faxing it back to the lumberyard. These parties had a binding contract.
The Uniform Commercial Code takes a very elastic, practical and common sense approach to contracts for the sale of goods:17 Many contracts can be oral; written agreements do not have to say "Contract" across the top; and letters are often enforceable contracts. It is not necessary to have agreement on all terms.18
The UCC will fill in these blanks. Even the price of the goods can be missing.19 There will still be a binding contract if the parties never agree on a time for delivery, the manner of delivery, the place for delivery or the time that payment is due.20 It is not even necessary to know exactly when a contract existed,21 because it can develop over a series of conversations, letters or actions. All of these UCC "fill in the gap" provisions are discussed in greater detail under the Contract Interpretation section below.
In Contract Creation—Hypothetical #3 above, the lumberyard faxed a quote for 2,000 2x4 studs for a price of $3,580. The buyer approved the quote and sent it back. These parties had an enforceable contract, even though they had not agreed to a delivery place or time and had not agreed on the payment or credit terms. The "fill in the blank" provisions of the UCC, discussed further in the Contract Interpretation section, tells us that delivery will be at the seller’s place of business within a reasonable time, unless otherwise agreed.22 Payment is due before the seller is obligated to deliver the goods unless otherwise agreed.23 And, even though they had not discussed material quality or specifications, the seller provided an implied "warranty of merchantability with the sale."24 This means that the seller warranted that the 2x4’s would be of sufficient quality to pass without objection in the trade and would be fit for their ordinary purposes.25
It is essential only that both parties intend that they be bound, and the agreement must be clear enough for a court to fashion a remedy for breach of the contract.26 Accordingly, in Contract Creation—Hypothetical #1 above, there was no contract. When the contractor asked and was provided information on the price and availability of spruce 2x4 studs, neither the contractor nor the lumberyard intended to make a contract. They intended to request and provide information. There was no "meeting of the minds," and there was no contract.
What if a contractor told a supplier, "I promise I will do business with your supply house some day"? The contractor may make such a promise in writing and may intend to be bound. He may have made the promise in exchange for some price reduction on an earlier delivery. In this case, there would be an intention to be bound and consideration for the promise to "do more business someday." This would not be an enforceable contract for the sale of goods, however, because the agreement is not sufficiently clear for a court to fashion a remedy.27 A court would have no idea what materials the contractor was promising to purchase, when, or the price to be paid. This is simply too indefinite to be enforced.
Any contract for the sale of goods with a price of $500 or more will not be enforceable unless there is "some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought."28 This is known as the Statute of Frauds.
This "writing" is not necessarily a formal contract.29 A letter or handwritten note is sufficient. There just needs to be something written, in addition to verbal conversations, and the writing must be "signed" by the other party.30 The concept of "signature" also is broad. A formal signature is definitely not necessary.31 Initials, a stamp or probably even the identifying marks made by a fax machine are sufficient. The writing would still be sufficient if it omits or incorrectly states some of the terms.32
In Contract Creation—Hypothetical #2, the contractor and lumberyard made a verbal agreement for the purchase of $3,580 in spruce 2x4 studs. This agreement would not be enforceable, and the lumberyard would not be able to sue for damages. A verbal agreement for 200 studs for $364, however, would be enforceable since it is under the $500 threshold.
There are some exceptions to the Statute of Frauds and no writing is required if: (1) the seller had to specially manufacture the goods, (2) both parties admit that a contract for sale was made, (3) the goods have already been delivered and accepted or 4) payment has already been made and accepted for the goods.33
As another exception to the Statute of Frauds, the Uniform Commercial Code added a new feature designed to grease the wheels of commerce. After a verbal agreement is made either a buyer or seller can prepare and send a "confirmation" of the contract.34 If the confirmation is sent between merchants, the party receiving the confirmation can be bound to it, unless they send written notice of objection within 10 days of receipt.35 This means that buyers and sellers must read their mail and send return letters (or at least handwritten objections) if they believe mail received does not accurately describe agreements made. There are other places in the UCC where merchants can lose contract rights if they fail to read and respond to mail from other merchants.36
In Contract Creation—Hypothetical #2, the contractor could not enforce the agreement to sell $2,000 spruce 2x4’s for $3,580 because there was no writing satisfying the Statute of Frauds. If the contractor had sent a letter confirming their agreement, and the lumberyard did not object within 10 days, this confirmation would have served as the necessary writing and the agreement would have been enforceable.
Let’s think again about the way modern commerce works. Material suppliers mail or fax quotes. Contractors send back purchase orders. Both quotes and purchase orders often have detailed "fine print." The fine print terms on the quote often conflict with the fine print terms on the purchase order. What provisions are in the final contract?
When the second party (buyer or seller) sends the return document (which is definitely accepting or confirming an agreement), the parties will have a contract even though the confirmation contains provisions adding to or differing from the original offer.39
Under common law prior to the Uniform Commercial Code, the "mirror image" rule required that the buyer’s acceptance be a mirror image of the seller’s offer.40 At common law, if the acceptance is not a mirror image of the offer, it rejects the initial offer and operates as a counteroffer. This is still the rule for most contract negotiations. If the contract involves the sale of goods, however, the Uniform Commercial Code controls.
The Uniform Commercial Code rejects the mirror image rule and converts a common law counteroffer into an acceptance even if it states additional or different terms."41 The UCC states:
A definite and seasonal expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.42
The UCC considers these "additional or different terms" to be "proposals for addition to the contract."43 If the transaction is between merchants, these additional terms will become a part of the contract unless the additional provisions: (1) "materially alter" the agreement, (2) the other party objects to the new terms or (3) the original offer was expressly limited to the terms of the offer.44 The UCC states that:
The additional terms are to be construed as proposals for additions to the contract. Between merchants, such terms become part of the contract unless:
- the offer expressly limits acceptance to the terms of the offer;
- they materially alter it; or
- notification of objection to them has already been given or is given within a reasonable time after notice of them is received.45
In other words, it is important to join the "battle of the forms" within the meaning of the UCC. It is not enough to respond with a confirmation that is silent about the terms in an offer. The recipient must expressly reject or object to any objectionable terms of sale or propose different terms.46 Sending purchase orders that only acknowledge the material and pricing, but were otherwise silent, certainly constitutes an acceptance of a supplier’s proposal and cannot be a "counteroffer" proposing a sale with no terms. Simply telephoning a supplier and verbally requesting shipment of materials, as often happens, also constitutes an acceptance of a supplier’s proposal and would not be a counteroffer.47 Even terms limiting the seller’s liability may be included in an initial offer and will become a part of the contract unless the buyer expressly objects.48
A response or confirmation can be made conditional on an agreement to the additional or different terms. A buyer could respond to a Quote by stating "I will agree to this only if you remove your limitations of liability and extend your payment terms to 90 days." This would not be an acceptance. This is a counteroffer and there is no contract unless the additional or different terms are accepted.49
If additional or different terms are added in a response or confirmation (and the response or confirmation is not made conditional on an agreement to the additional or different terms), it becomes relevant whether the additional or different terms were "material." Lawyers can spend a long time and a lot of your money arguing about whether the additional provisions "materially altered" the contract. This exception is possible protection if a return purchase order has a very important and costly provision in the fine print. It is normally better and easier, however, to limit acceptance of an offer or confirmation.
The best advice is to expressly limit acceptance of all proposals, quotes, purchase orders or confirmations you send out. Quotes sent out by material suppliers should state that "This proposal is subject to the terms and conditions on the reverse and any acceptance of this proposal shall be limited to the terms described in this proposal." This would make it difficult for the return "acceptance" to change the terms of the agreement.50
A buyer could send a response or confirmation that expressly rejects your terms and states that any contract must be on the terms of the response. This is another instance where it is important to read your mail and send written objections if you receive a confirmation that you believe does not accurately describe an agreement. This will be cheaper and more effective than paying your lawyer to argue about whether a return confirmation "materially altered a proposal."51
Even if your initial quote limited acceptance to the terms of the offer, a buyer could send a response or confirmation that expressly rejects your terms and states that any contract must be on the terms of the response. This is a "counteroffer," and you have no contract unless you agree to the buyer’s changes. If you ship product at this point, however, you have probably agreed that your initial quote does not apply and your buyer’s purchase order terms do apply. This also means that if you receive an initial "offer" from a buyer (the battle of the forms process starts with a purchase order from your buyer), you can send a response or confirmation that expressly rejects terms received and stating that any contract must be on the terms of your response.
This is why it is important to have good forms available for quotes, proposals, purchase orders and confirmations. The provisions you have in the fine print will be a part of your contract, unless they are expressly rejected.52 If you are sending a return document or "confirmation," you have an opportunity to change or neutralize some of the harsh terms in the original offer you receive.53 The fine print provisions in these documents involve a fairly small, one time investment by you or your company, but can considerably reduce your risk and costs for years to come.54
The sample Supplier Quote at Appendix 6 states:
1. Acceptance is limited to terms of this Quote. Seller objects to any different or additional terms contained in any purchase order, offer or confirmation sent or to be sent by Buyer, which are expressly rejected. The price quoted is firm only if an executed copy of this Quote is received by Seller at its office within 30 days of the date of this Quote. All terms of this Quote shall be incorporated into and shall become a part of any further or additional agreement regarding these goods.
To this point, we have been discussing the formation of a contract. Firm offers exist before any type of contract is formed. The battle of the forms determines what provisions exist in the contract between a buyer and a seller. Provisions can be added or subtracted from a contract after that original contract exists. These additions or subtractions are "modifications to the contract."
Modifications usually occur in long-term contracts with successive, repeated deliveries. For example, a concrete ready mix plant may take set deliveries of cement or stone each week for months or years. The price may be set for long periods of time or it may fluctuate with the market. Such price changes would be modifications to the supply contract.
Under the UCC, the Course of Performance is the way that the parties have performed throughout the life of the contract. This can determine whether there have been modifications to a contract.55 Examples are the prices charged on invoices, the manner of delivery and the time for payment.
Such course of performance is very important under the UCC to help a court determine what the terms of any contract are and whether those terms have been modified.56 If a buyer consistently makes payment 60 to 90 days after invoice for years, without objection, the seller may not be able to claim the buyer is in breach of a credit agreement requiring payment within 30 days of invoice. It looks like the seller agreed to modify the contract. If a seller raises its prices and the buyer pays the higher prices without objection for a long period of time, the buyer may not be able to return to the lower written prices in later litigation. 57
The UCC again puts the burden on parties to object. If you think that the other party is not performing your contract, you should send some sort of written objection. You may decide not to enforce all the terms of the contract and "let them get away with it." However, you should still preserve your contract rights by sending a letter noting that deliveries are consistently late, materials are not completely meeting specifications or payments are late.58
Even written contracts can be modified verbally.59 Sometimes, contract forms state, "There will be no modification of this contract unless in writing and signed by a representative of this company." Between merchants, this type of "no verbal modification" clause must be signed separately by the other party.60 This proscription against verbal modification cannot be effective if it is buried in the preprinted form.
The UCC recognizes that contracts are constantly modified verbally in modern commerce. The drafters of the UCC did not want buyers or sellers to disavow agreements to modify a contract by relying on a "no verbal modification" term hidden in the contract.
Either party can delegate its performance of a contract.61 This means that someone else can perform the contract for them. A material supplier may have a distributor, another supplier or "subcontractor" ship goods to a buyer. The supplier may run short of certain materials or may want to simply "direct ship" from a manufacturer.
This delegation of duties is allowable under the UCC generally, even though the buyer may not be aware this can happen. Such delegation is not allowable if the parties so agreed or the other party had a "substantial interest" in having performance from the original contracting party.62 This could happen in the case of hi-tech equipment that could be of substantially different quality from another manufacturer. Delegation in this instance may not be allowed.
In a delegation of duties, the original contracting party will remain responsible for performance.63 If the new supplier fails to perform, then the original supplier is liable for damages to the buyer.
Assignments of contracts also are generally allowed by the UCC.64 If a material supplier assigns a contract, the buyer now has its contract with the new supplier. For example, a material buyer also may want to assign a valuable supply contract, if a supplier has committed to favorable prices for a long period of time. An assignment will not be allowed if it would be "a material change" in the other party’s duty or materially increase the burden or risk of the other party.65
Many disputes concern the correct interpretation of a contract in both oral and written forms. There may be no question that a contract exists. There may be many detailed provisions over which the parties have no doubt. A dispute may arise because of an event neither party anticipated when entering into the contract. Even detailed written contracts can have terms that are ambiguous, often because of unforeseen circumstances.
There is much contract case law that provides rules for the interpretation of contracts. Courts attempting to resolve all types of disputes have developed these contract interpretation rules over centuries. Most of this case law would apply to the interpretation of any type of contract, not just Article 2 of the UCC.66 These general rules for the interpretation of contracts are beyond the scope of this UCC outline. An example, however, would be the Course of Performance, discussed above.67 The course of performance can be very important to a court trying to interpret what the parties intended in their contract.
Where sophisticated business professionals enter into an arms-length transaction, the court will enforce the terms of the agreement between them absent some compelling reason that enforcement would be unreasonable or unjust.68 The guidepost in determining the legal responsibilities of the parties is the contract itself. The contract, unless it is illegal or violates public policy, constitutes the law that governs the parties' relationship.69
When an agreement is plain and unambiguous in its terms, it will be given full effect.70 This means that buyers and sellers of materials that are not consumers and are regularly in the business of buying and selling materials will usually be stuck with their contract terms. This is true, even if you were not even aware of some contract terms, because you did not read them or you never joined the "battle of the forms" by expressly objecting to terms and conditions received.
The UCC does have several special provisions that only apply to the interpretation of contracts for the sale of goods. These are mostly "fill in the gap" rules that provide the parties a contract term to resolve an issue they neglected to consider when entering into the contract.
The UCC has a very vague, but flexible and useful, catchall provision concerning unconscionable contracts or clauses.71 If a court determines that a contract is unconscionable, the court can simply refuse to enforce it.72 If just one term of the contract is unconscionable, that one term can be stricken. The court can still enforce the balance of the contract.73
This provision gives the court great flexibility to avoid what the court considers an unfair result and to fashion a remedy that avoids a result the court considers unjust. The power in the court can keep a buyer or seller from gaining too much by burying provisions in the fine print of a long contract form. It also can remedy unfair results caused by unequal bargaining power.
No buyer or seller should ever count on being able to get a contract term stricken as unconscionable. It is a far better practice to read contracts carefully and remove any provision that is unacceptable. It is impossible to predict how or whether a court will consider any particular contract clause unconscionable.
Parties can have a binding contract even if they never agreed to a price.74 This will be true, however, only if the parties intended to enter into a binding agreement.75 Sometimes buyers or sellers haven’t yet discussed price. They may agree to negotiate a price later, or they may agree on a formula or standard to set the price at a later time. In each of these cases, the UCC states, "The price is a reasonable price at the time of delivery."76 Note that the parties are bound to the price at the time of delivery.77 In the case of fluctuating prices, it could be very important whether the enforceable price was the market price at the time of the agreement or the market price at the time of later delivery.
It is possible for parties to a contract to agree that the seller will provide all of its production capacity or "output."78 A buyer can agree that it will purchase from one supplier all of the buyer’s "requirements." Buyers and sellers can agree to deal exclusively with each other.79
All goods described in a contract must be delivered in a single lot, unless otherwise agreed.80 In other words, a seller could not unilaterally decide to deliver some of the goods now and make the buyer wait until later for the rest.
Generally speaking, the place for delivery of goods is the seller’s place of business.81 A buyer cannot assume that there will be delivery to the buyer, unless such delivery is made a part of the contract.
Unless otherwise agreed, payment by the buyer is a condition precedent to the seller’s duty to deliver.82
Goods must be delivered within a "reasonable time" if the parties have not agreed on any other schedule.83 This is again vague, but it does mean something. In most markets, it is not reasonable for a lumberyard to deliver two months after an order.
What is reasonable will vary depending on such factors as the nature of goods to be delivered, the purpose for which they are used, the extent of seller’s knowledge of buyer’s intentions, transportation conditions, the nature of the market and so on.84 A court would look at 1) the course of dealing between the parties; 2) trade usage in the industry; and 3) buyer’s notification to seller of time concerns.85 A purchase order with a definite delivery date can make time of the essence for a material supplier.86
Payment is due for goods supplied at the time and place of delivery, unless the parties have agreed otherwise.87 This means that no credit or "time" is ever assumed. Most material supplier invoices state "due on receipt of invoice" or "due within 30 days." Such provisions on an invoice are actually granting more time for payment than otherwise exists. Material suppliers should consider remaining silent on invoices about the time for payment or stating "payment is due on the receipt of goods."
Many material suppliers and subcontractors are concerned about beginning work on a project before they have a signed contract. This may not be such a problem, however. On a sale of goods under the UCC, we have seen that the law will fill in most of the missing provisions. If the party on the other side of the transaction supplies the written contract, then the contract form provisions will help them far more than the provisions will help you. If you are in an unequal bargaining position, you may be better off without the written contract.
If the goods are shipped in multiple lots, a material supplier also is entitled to payment on each delivery.88 A construction subcontractor with a labor and materials contract (not covered by the UCC) will be entitled to payment upon completion, but will not be entitled to partial payments as the work progresses. This may be a serious problem. A subcontractor would have to complete his entire contract, spending large sums of money for months on materials and payroll, without any progress payments. For this reason alone, many labor and material subcontractors must make sure they have a signed subcontract. A supplier of goods, however, may be better off without a written contract, deciding to utilize the terms provided by the UCC, if the supplier is unable to require the use of the supplier’s form contract.
Where the seller is required or authorized to ship the goods on credit, the credit period runs from the time of shipment.89 Post-dating the invoice or delaying the invoice’s mailing, however, will correspondingly delay the start of the credit period.90
Unless otherwise agreed, payment by the buyer is a condition precedent to the seller’s duty to deliver.91 The buyer may make payment in any manner "current in the ordinary course of business."92 If the parties have not made any other agreement as to credit or payment, the seller has the right to demand legal tender (cash).93 In this case, however, the seller must give "any extension of time reasonably necessary" to procure the cash.94
Normally, the buyer has the right to inspect the goods before accepting them and before payment is due, unless otherwise agreed.95 The term "COD" (collect on delivery) means that the buyer must pay for the goods before inspection.96
Many verbal and written supply contracts run over a long period of time, with many successive deliveries. An example would be the ready mix contractor who gets weekly shipments of cement and stone. Either party can terminate such a contract at any time, unless otherwise agreed.97 If your business is dependent upon a steady flow of materials, you may want to have a contract requiring shipments in steady quantities. Remember that a seller can agree to such a contract, even if the price or quantity is not set.98 A buyer can get a commitment that the seller will ship all of the buyer’s requirements, even if the buyer has not committed to buy from the seller.99
Any contract that can be terminated also can be modified. A material supplier that is able to terminate an ongoing supply relationship also can call the buyer and say, "I will terminate shipments unless you agree to a higher price or agree to do your own trucking."
F.O.B. means "Free on Board."100 Contracts, proposals or letters often state that materials will be delivered, for example, F.O.B. seller’s plant, F.O.B. carrier or F.O.B. buyer’s place of business.
When the term is F.O.B. place of shipment (usually the seller’s plant), the seller must put the goods into the possession of the carrier at that place.101 The seller bears the risk until the goods are in the possession of the carrier.102 It would be the seller’s problem, for example, if the goods are stolen or damaged before the seller puts them in the possession of the carrier.103
If the term is F.O.B. vessel or carrier, the seller also bears the risk and expense of loading the goods for the carrier.104 If the term is F.O.B. the buyer’s place of business or some other place of destination, the seller must deliver the goods to that place at the seller’s risk and expense.105 The term F.A.S. is similar; it means "Free Along Side" and is normally used in connection with shipments by boat.106
In a normal construction material situation, title to goods normally passes at the time they are delivered.109 This means that the buyer owns the goods once they are delivered, regardless of when payment is made. After delivery, the seller owns the right to obtain money from the buyer but no longer owns the goods. If a buyer fails to make payment and the seller takes the goods, the seller may be guilty of larceny for stealing the goods. The seller no longer owns them and cannot reclaim them unless the seller fits within an exception.110
The UCC states, "Title passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods, despite any reservation of a security interest and even though a document of title is to be delivered at a different time or place."111 In some cases, the time or place that the seller completes his performance could be different than delivery at the construction project.
Generally, the risk of loss stays with the seller until delivery.114 It will be the seller’s problem if the goods are damaged or stolen before the risk of loss transfers to the buyer. If the seller has breached the contract, however, and the buyer has rightfully rejected the goods, then the risk of loss remains with the seller after delivery.115
Warranties can be "expressed" or "implied." Consider the following hypotheticals:
Warranty—Hypothetical #1: The carpentry contractor walks into a lumberyard and says, "I am building a house. Give me 2,000 2x4s." The house is framed using normal practices, but the 2x4s don’t hold weight sufficiently. They bend and break, and soon the second floor deck falls in. The carpenter contacts the lumberyard and complains. The lumberyard’s response is, "You never specified a particular strength 2x4, and I didn’t promise any particular strength."
Is the lumberyard correct? Can the lumberyard be held liable for the cost of reframing the house?
Warranty—Hypothetical #2: A carpentry contractor walks in and requests 2,000 spruce 2x4 studs. The contractor uses the studs to frame a floor deck for a garage over a basement. He then parks his semi-tractor trailer truck in the garage. The floor deck collapses, and he calls the lumberyard to complain. The lumberyard’s response is, "You are out of your mind if you thought wood 2x4 studs would hold up a semi-tractor trailer."
Who wins this argument? Would it make a difference if the contractor had told the lumberyard the purpose for the studs? Would it make a difference if the 19-year-old salesmen at the lumberyard had expressed an opinion that he thought, "The studs, framed 12 inches on center, would hold the truck"?
Warranty—Hypothetical #3: A brick manufacturer sends a sample brick to a masonry subcontractor in connection with a contract bid. They enter into a contract for 10,000 bricks. When the bricks arrive they are uneven in size and appearance. The masonry contractor complains, but the manufacturer’s response is, "There was nothing in the specifications concerning these problems."
Who wins this argument? Can the contractor reject the brick and order brick from another manufacturer or will the first manufacturer be able to sue the buyer for the price?
Modern automobile or equipment manufacturers normally supply lengthy written warranties to buyers. This is only one type of express warranty. Express warranties can arise in other ways, and a seller is often unaware that they are providing an express warranty at all.116 Any affirmation of fact or any promise can create an express warranty.117 In Warranty—Hypothetical #2, the 19-year-old salesmen stated an opinion that wood 2x4s studs would hold up a semi-tractor trailer. This may have been an express warranty for which his employer could be held liable.118 Material salespersons must be trained not to express opinions on material performance. Salespersons should refer the buyer to architects, engineers or other professionals, unless the salesperson has had adequate training and does know how materials will perform.
Any type of description of goods supplied by a seller also can be an express warranty.119 Advertising brochures, for example, which describe material capabilities, will be express warranties of material performance. Sample materials provided by a supplier, specifications, correspondence or other communications also can be express warranties.120 If the goods eventually delivered do not confirm with the samples, specifications or correspondence, this will constitute a "breach of warranty." According to the UCC, an express warranty is created by "(a) Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain . . . or (b) Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description."121
It is important to remember that the express warranty will not mean that other implied warranties do not apply. To do this, the written warranty must expressly exclude the implied warranties and this language must be conspicuous.122 This is why you often see contracts and warranties with language in large, capitalized print stating "BUYER ACCEPTS THIS WARRANTY IN LIEU OF ANY OTHER WARRANTY EXPRESSED OR IMPLIED, INCLUDING THE WARRANTY OF MERCHANTABILITY."
Implied warranties are another type of "fill in the blank" provision where the UCC is supplying contract terms that the parties did not discuss.
In all sales of goods, unless expressly excluded, the seller warrants to the buyer that the goods are merchantable.123 This means that the goods: (1) would pass without objection in the trade under the contract description; (2) are of fair, average quality within the description; (3) are fit for the ordinary purposes for which such goods are used; (4) are of even kind, quality and quantity within each unit or lot and among all units or lots involved; (5) are adequately packaged and labeled; and (6) conform to the promises or affirmations of fact made on the container or label.124 These are again somewhat vague and flexible concepts, but they are very important to protect buyers of materials.
In Warranty—Hypothetical #2, holding up a semi-tractor trailer is not an ordinary purpose for wood 2x4 studs. That seller cannot be held liable for the failure. In Warranty—Hypothetical #1, however, it is an ordinary purpose to use wood studs to frame a house using normal framing practices. The lumberyard will be liable for the costs of this breach of warranty, including the cost of new labor and materials and possibly the damages from any personal injury that may have occurred. These studs were not of fair average quality and would not pass without objection in the trade.125
In Warranty—Hypothetical #3, a court would consider whether large shipments of brick are often of uneven size and color.126 Would such a shipment normally pass without objection in the trade? Were they of even kind, quality and quantity, within variations permitted by the agreement? There also would be a question as to whether a single brick constituted an express warranty on how all 10,000 bricks would appear. These are the types of factual questions a court or jury must decide in a UCC breach of warranty lawsuit.
Other implied warranties may arise from course of dealing or usage of trade, unless excluded or modified.127 The masonry contractor in Warranty—Hypothetical #3 may have purchased brick from this manufacturer for years. If these bricks had always had consistent color and size, then this course of dealing would create an implied warranty that future deliveries would be the same. Because of this breach of warranty, the contractor could refuse the brick delivery.
Under the implied warranty of merchantability, sellers warrant that their materials are fit "for ordinary purposes."128 Sellers do not warrant that materials are fit for any particular purpose, however, unless the seller has reason to know the purpose for which the materials will be used and that the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods.129 Such a warranty is an implied warranty of fitness for a particular purpose.130
In Warranty—Hypothetical #2, the seller could have a problem if the carpenter had told the salesmen that he would use the wood studs to hold up a semi-tractor trailer. Material salespeople must be trained to listen to unusual statements from buyers about the use of materials and suggest that the buyer investigate whether the materials are fit for that purpose.
All sellers of goods provide an implied warranty that the buyer will get good title (ownership) of the goods, free and clear of any liens.131 Any seller who is a merchant regularly dealing with these types of goods warrants that the goods will not violate any patents or infringe on any other rights of third parties.132 This would normally be an issue with tools, machinery and equipment. If a buyer supplied the specifications for the goods to be manufactured, however, the buyer is warranting to the seller/manufacturer that these specifications do not violate any patent or other third party rights.133
Express and implied warranties are cumulative. In other words, a buyer would have the choice of suing under an express written warranty or an implied warranty or both. Even if an express warranty is offered, the seller must carefully exclude the implied warranty of merchantability.
The UCC permits disclaimers of express warranty.134 If a seller has excluded all express warranties, it does not matter what any salesperson may have said in any meetings. The buyer has agreed in advance not to rely on any oral statement.135 Unconscionability is not an element in determining whether waivers of express warranty are effective. A writing must only be "conspicuous" to exclude warranties under the UCC. It is the limitation of remedies, discussed below, that can possibly be avoided if unconscionable.136
It is not easy to contract out of the implied warranty of merchantability. Any exclusion of this warranty must be "conspicuous" and must specifically identify the warranty of merchantability.137 This is why you often see such language in large print, all caps, in a contract or written warranty. This would make the exclusions conspicuous as a matter of law.138 Language excluding any other implied warranty, such as warranty of fitness for a particular purpose, must be in writing and must be conspicuous, but does not need to be as specific.139 It would be enough to state that "there are no warranties which extend beyond the description on the face hereof."140
The implied warranties of title and against liens and infringement can be excluded or modified only by specific language or by circumstances that give the buyer reason to know such warranties are not provided.141
It also is possible to limit the remedies available to a buyer for damage caused by any breach of contract, including any breach of warranty.142 Material sellers should consider adding language to their credit agreements and quotes that limits the buyer’s remedies and the seller’s liability for damages. This is discussed in the subsection below on Remedies for Breach of Contract. The ability of a general contractor, owner or other third party without a direct contract to sue the supplier for breach of warranty also is discussed in Remedies for Breach of Contract.
As discussed above,143 the buyer normally has the right to inspect goods before payment is due.144 If the parties have agreed that payment must be made prior to an opportunity to inspect (COD), then the buyer will still have an opportunity to later reject the goods or revoke any acceptance of the goods.145
The buyer has the right to reject any goods that do not conform to the contract.146 The buyer may reject the whole delivery or accept part of the delivery and reject the rest.147 The buyer must pay the contract price for any goods that have been accepted.148
The buyer must affirmatively reject the goods within a reasonable time, or they will be deemed accepted.149 If the buyer is a merchant and has the right to reject the goods, then the buyer will still have the obligation to act reasonably and to use reasonable care to hold the goods for a time sufficient for the seller to retrieve them.150 The merchant buyer also must follow reasonable instructions received from the seller if the seller is geographically far away and unable to promptly retrieve the goods.151 If the seller does not provide instructions, then the buyer must take reasonable efforts to resell the goods on the seller’s account if the goods are perishable or will quickly decline in value.152
When a buyer rejects goods, the buyer must give the seller notice of any "particular defect which is ascertainable by reasonable inspection."153 The buyer cannot later rely on any unstated defect to justify rejection or to establish breach if: (1) the seller could have cured the defect if the seller had received notice of it, or (2) the buyer and seller are both merchants and the seller, after rejection, made a request in writing for a full and final statement of all defects on which the buyer will rely.154 Any seller whose goods have been rejected would be advised to make such a request in writing promptly. This may limit the defects on which the buyer can later rely. It also may provide the seller a notice of defects that the seller can promptly cure.
If the buyer has rejected goods and the time for delivery has not passed, the seller may give the buyer notice of the seller’s intent to cure.155 In this case, the buyer must allow the seller to cure by making another delivery of goods that do conform to the contract.156
In a typical construction material context, the time for the seller’s performance will not usually be "expired" at the time a buyer rejects the goods. If a supply contract states that "delivery shall be made by 10:00 a.m. on January 5," then the time for performance would have expired at that time. Most construction material supply contracts, however, do not state such a specific time for delivery. Delivery must be within a "reasonable time," therefore, and the seller also would have a reasonable time to cure any defective delivery.
Even if the time for performance has expired, the seller will have a right to cure within a reasonable time, if "the seller had reasonable grounds to believe [that the goods] would be acceptable with or without money allowance."157 This is to avoid injustice to the seller by reason of a surprise rejection.158
The seller may have the right to reclaim goods if the buyer breaches. The buyer’s right to retain goods is conditional upon the buyer making payments due.159 The buyer’s payment by a check is "conditional."160 In other words, the buyer never really made payment if the check does not clear. In other words, the buyer never really made payment if the check does not clear. If a check does not clear, the seller has the right to reclaim the goods if the seller makes demand within 10 days after delivery of the goods.161
The seller also has the right to reclaim goods within 10 days after the receipt if "the seller discovers that the buyer has received goods on credit while insolvent."162 As long as the seller makes demand within 10 days after receipt in accordance with the UCC, the seller can reclaim and again become the owner of the goods.163 If the owner fails to make demand within the time stated, then the buyer will remain the owner of the goods and the seller will only own a debt and be another creditor of the buyer.
To reclaim goods under the UCC, the creditor-reclamation claimant must prove:
- The debtor was insolvent at the time of delivery
- Written demand was made within 10 days of delivery (extended to 20 days after bankruptcy, if bankruptcy is filed within 45 days after delivery)
- The goods are "identifiable" at the time of the reclamation demand
- The goods are in possession and control of the debtor at the time of the reclamation demand
A creditor should be sure to send notice by some method providing third-party verification of receipt, such as commercial courier, Federal Express, certified mail or service by the Sheriff. Otherwise, it will be difficult to prove receipt of written demand.
The right to reclaim goods is always important to creditors when a debtor files bankruptcy. A vendor with the right of reclamation becomes a secured creditor and may be able to retake possession of the goods sold. If there is no right or reclamation, the vendor is a general unsecured creditor.164
The bankruptcy code always has generally respected the state law right of reclamation in the UCC and now actually expands this right. A creditor can reclaim goods delivered within the 45 days prior to a bankruptcy petition, as long as written reclamation demand is delivered within 20 days after the bankruptcy petition.165 A creditor can file for an administrative expense claim for any goods delivered within the 20 days prior to a bankruptcy petition in any event, regardless of whether any reclamation notice has been sent.166
If the buyer made a misrepresentation in writing concerning solvency within three months before delivery, then the 10-day limitation under the UCC does not apply.167 The seller could reclaim the goods more than 10 days after delivery. Credit applications are important for this reason. They can be representations concerning solvency that induce a material seller to deliver.
The right to reclaim goods after delivery will be of limited help to a construction materials supplier, however, because the goods delivered will normally be resold promptly by the buyer. Once 2x4 studs go into the construction of a house or asphalt goes into the construction of a highway, title (ownership) of these materials has passed through the buyer to the owner of the property. It will be too late to reclaim. The seller’s right to reclaim is subject to the rights of this type of buyer in the ordinary course of business or a good faith purchaser.168 Under those circumstances, a seller may not have a right to reclaim the goods but may have an administrative expense claim in the bankruptcy or state law mechanic’s lien or payment bond rights.
It also can be very expensive or impossible for a construction materials supplier to repossess goods such as large quantities of gravel. Note also that successful reclamation of goods excludes all other remedies under the UCC.169 In other words, the seller cannot reclaim the goods and sue the buyer for damages. Nonetheless, this right to reclaim can provide the seller an opportunity to get something from a bankrupt debtor where the seller may otherwise get nothing.
Where the seller discovers the buyer is insolvent, the seller also may refuse future deliveries unless the buyer pays cash for future deliveries and pays for all goods delivered up to that time. 170 The seller may also stop any deliveries that are under way.171
A seller will be excused from contract obligations if performance of the contract as agreed "has been made impracticable by the occurrence of a contingency, the non-occurrence of which was a basic assumption on which the contract was made."172
If stone deliveries were to be by barge and a drought emptied the canals to be used, the seller would have a complete excuse. Other examples would be an extreme shortage of materials because of labor disputes or crop failures. A seller also is excused from performance if the seller complied in good faith with governmental regulations that made performance impossible.173 The arms embargo after the Gulf War would be an example of this.
It is not enough that the cost of performance for the seller has increased dramatically.174 It is no excuse that the seller will lose money by performing. "Impracticability" means something close to "impossibility" caused by conditions that were unexpected at the time of contract.175 The seller will not be excused from conditions that were foreseeable at the time of the contract.
In order to be excused, the seller also must "notify the buyer seasonably that there will be a delay or non-delivery."176 A seller is under an obligation to allocate production and deliveries among his customers to the extent possible where only part of a seller’s capacity to perform is affected.177
If an agreed method of delivery becomes unavailable or commercially impracticable, but a "commercially reasonable substitute is available," then the seller must use the substitute method of delivery and the buyer must accept it.178
A material buyer has the right to expect that goods will be delivered. A material seller has the right to expect payment for the materials. When reasonable grounds for "insecurity" arise, the other party may demand in writing an "adequate assurance of due performance."179 If a seller, for example, has reasonable grounds to believe that the buyer will be unable to make payment, that seller could demand an assurance that the buyer is capable of paying, before goods are delivered.
"Between merchants, the reasonableness of grounds for insecurity and the adequacy of any assurance offered shall be determined according to commercial standards."180 The Official Comment to the UCC states that a seller has reasonable grounds for insecurity if a buyer falls behind in his account with the seller, even though the items involved have to do with separate and legally distinct contracts.181 On the other hand, a buyer who requires precision parts has reasonable grounds for insecurity if he discovers the seller is making defective deliveries of such parts to other buyers.182
If either party "repudiates the contract," the other party can treat the contract as "breached" at the time of repudiation and does not have to wait until performance is due.183 For example, a material supplier can tell a buyer that it will be unable to deliver, or the buyer could notice that the seller’s manufacturing plant has closed down. In either case, the buyer does not have to wait until delivery is due in order to declare the seller in breach. Once the contract is "repudiated," the buyer can arrange for substitute goods and hold the seller responsible for damages.184 A repudiation can be retracted, unless the aggrieved party has materially changed his position.185
If a buyer fails to make a payment due or wrongfully rejects goods or repudiates the contract, then the seller may:
- withhold delivery of further goods,
- stop any delivery that is under way,
- resell the goods and hold the buyer responsible for any damages (such as the costs of sale and any loss on the sale),
- recover lost profit,
- cancel the contract.188
The seller must do any resale of the goods in a "commercially reasonable" manner.189 If the seller is entitled to damages, it is computed by subcontracting the contract price from the market price at the time and place the goods were to be delivered plus any incidental costs, minus expenses saved by the breach.190
In unusual circumstances, the seller would be able to sue the buyer for the full contract price. This is normally only if the goods were specially manufactured and could not be resold after a reasonable effort.191 The seller will usually need to take reasonable steps to resell the goods and then go after the buyer for lost profit and damages.
If a seller fails to make a delivery, or the seller makes a defective delivery, the buyer may reject the goods, cancel the contract and: (1) obtain "cover" goods (substitute materials) or (2) recover damages for the non-delivery.192 The buyer also can recover damages for the defects in any accepted goods.193 This would be a breach of warranty claim.
If the buyer covers and gets substitute goods, the buyer also is entitled to recover from the seller the cost of that cover (with a credit for the contract price).194 The buyer also can get damages for incidental damages such as the cost of handling the defective goods delivered by the seller, the cost of obtaining cover and the cost of delay.195 The buyer will be entitled to consequential damages only if the seller had reason to know the particular needs of the buyer.196 Such consequential damages must be foreseeable by the seller.197 The buyer has a duty to mitigate consequential damages by seeking adequate cover (substitute goods).198
The buyer’s damages for non-delivery would be the difference between the market price at the time the buyer learned of the breach and the contract price, plus any allowable incidental and consequential damages.199 This gives the buyer an incentive to obtain the best available substitute goods at the best available price promptly after the buyer learns of a breach.
If the buyer elects to accept defective goods, the seller is still liable for breach of warranty.200 The damages for such a breach of warranty are the difference in value of the goods accepted and the value of the goods that should have been delivered as warranted.201 The buyer is still entitled to incidental and consequential damages.202
A buyer is rarely entitled to "specific performance" of a contract for delivery of goods.203 Only if goods are truly unique and unavailable elsewhere and monetary damages would not adequately compensate the seller, is it possible for a buyer to force the seller to perform and deliver the contract goods.204
If a buyer rightfully rejects defective goods, the buyer will have a security interest in the goods for the reasonable cost of handling the goods.205 If the buyer rightfully rejects goods and the seller gives the buyer instructions on how to handle or resell the goods, the buyer can demand reimbursement for the expenses of such steps.206
A buyer can agree that remedies will be limited for any breach of contract by a seller. One example would be an exclusion of express or implied warranties, discussed above in the section on Contract Interpretation, subsection, Exclusion of Warranties.
Where sophisticated business professionals enter into an arms-length transaction, a court will enforce the terms of the agreement between them absent some compelling reason that enforcement would be unreasonable or unjust.207 When an agreement is plain and unambiguous in its terms, it will be given full effect.208 Construction industry buyers and sellers are sophisticated business people. If they waive warranties or limit liability in contract documents, they will be held to those terms. These terms could even be inserted during the "battle of the forms" in a response or confirmation without the actual knowledge of the buyer.
The Uniform Commercial Code provisions state:
Section 8.2-719. Contractual modification or limitation of remedy.
(1) . . .
(a) the agreement may provide for remedies in addition to or in substitution for those provided in this title, and may limit or alter the measure of damages recoverable under this title, as by limiting the buyer’s remedies to return of the goods and repayment of the price or to repair and replacement of nonconforming goods or parts; and
(b) resort to a remedy as provided is optional unless the remedy is expressly agreed to be exclusive, in which case it is the sole remedy.
(2) Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this act.
(3) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable.209
A buyer can be bound to limits of liability and exclusions of warranties in a credit agreement for any sales of goods after the credit agreement is signed. A buyer also can be bound to these same limits of liability and exclusions of warranty if they are stated in each proposal or quote for each individual sale of goods.210
The sample Supplier Quote at Appendix 6 states:
3. Seller agrees to replace or, at Seller’s option, repair any defective goods within a reasonable time. Buyer’s remedies for any delay or any defect in the materials are subject to and limited by any limitations contained in the manufacturer’s terms and conditions to Seller. Further, Buyer’s sole and exclusive remedy and Seller’s limit of liability for any and all loss or damage resulting from defective goods shall be for the purchase price of the particular delivery and materials with respect to which loss or damage is claimed, plus any transportation charges actually paid by the Buyer. In no event shall Seller be liable for any damage due to delay of any type, nor consequential, special or punitive damages. THE FOREGOING WARRANTY IS EXCLUSIVE AND IS IN LIEU OF ALL OTHER WARRANTIES, WHETHER WRITTEN, ORAL, EXPRESS OR IMPLIED, INCLUDING THE WARRANTY OF TITLE, AGAINST LIENS, INFRINGEEMENT, THE WARRANTY OF MERCHANTABILITY AND THE WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE.4. Buyer shall make a careful inspection at the time of delivery. Buyer’s failure to give written notice specifying any claim within ten (10) days of delivery shall constitute an unqualified acceptance of the labor and material delivered and a waiver of all claims. Seller will not be liable for any damage, warranty or remedy and back charges will not be accepted without prior notification, an opportunity to view and repair, replace or otherwise cure, and approval by Seller. No returned product will be accepted without prior approval. A restocking charge of 25% will apply on products approved for refund. These provisions evidence a clear intent to create a comprehensive set of remedies. First, the Limitations in any manufacturer’s warranty are passed on to a buyer. This creates a "conduit relationship" for a distributor that did not manufacturer the goods. The eventual buyer and end user is limited to the manufacturer’s warranties and remedies. The "middleman" distributor cannot be responsible for more that the manufacturer.
The Uniform Commercial Code Section discussed above also allows a limitation of the buyer’s remedies to return of the goods and repayment of the price or to repair and replacement of non-conforming goods.211 This could eliminate the potential for any claim or counterclaim against a seller for allegedly defective material, if the buyer has not paid the purchase price. A buyer would have at most a defense to a seller’s claim for the unpaid purchase price. If the seller repairs or replaces any defective goods within a reasonable time, the buyer would owe the full purchase price.212
It is probably important to be clear in a contract that these remedies are "sole and exclusive." Remedies for breach of contract or breach of warranty are generally cumulative. Saying a buyer has one remedy does not necessarily mean that all other remedies are excluded.213
A buyer can argue that an exclusive or limited remedy "fails of its essential purpose."214 If successful, the buyer would have remedies "as provided in the Uniform Commercial Code." It is difficult to argue, however, that limited remedies fail of their essential purpose. Failure of essential purpose generally relates to circumstances arising during the performance of the agreement and the application of the agreement to novel circumstances not contemplated by the parties.215 Normally, there is nothing novel about the purchase of materials or the possibility that some of those materials would be defective. This is usually and precisely the risk contemplated in the exclusion of warranty and limitation of liability language in credit agreements or quotes. Generally, in commercial cases, the "essential purpose" exclusion arises only where a seller has refused to make repairs or cannot repair the product.216
Remedies do not fail their essential purpose unless a seller in bad faith fails to replace allegedly defective material and fails to return the purchase price.217 If a buyer has not paid a purchase price, there cannot be a failure of remedy to recover the purchase price—and there can be no failure of essential purpose in these remedies.218 Failure of essential purpose generally involves sellers that fail to repair or replace defective material successfully and fail to refund a purchase price.219
A buyer also can wave incidental, consequential, special, punitive or delay damages. Damages are generally either "direct" or "consequential" ("indirect"). Direct damages are those which arise "naturally" or "ordinarily" from a breach of contract. They are damages that can be expected to result from a breach in the ordinary course of human experience. Consequential damages are those which arise from the intervention of "special circumstances" not ordinarily predictable.220 Generally, direct damages are compensable. If damages are consequential, they are compensable only if it is determined that the special circumstances were within the "contemplation" of both contracting parties or were "predictable."221
Consequential damages are discussed in greater detail in another chapter of this book titled Changes, Delays and Other Claims. However, it is possible to waive the right to consequential damages in a contract, just as it is possible to waive other remedies. Consequential damages may be limited or excluded, unless they are unconscionable."222 If experienced parties agree to allocate unknown or undeterminable risks, however, they should be held to their bargain. Courts should not be permitted to rewrite the agreement.223
As discussed above, the Uniform Commercial Code does have a catchall provision concerning unconscionable contracts or clauses.224 If a court determines that a contract term is unconscionable, a court can simply refuse to enforce it.225 In a commercial sale, however, it is difficult to argue that limitations of remedy or exclusions of warranty are unconscionable. Courts will rarely find unconscionable contract terms in commercial cases.226 Commercial cases should not be confused with consumer cases, where courts are more likely to find unconscionable contract terms.227
It also is possible to waive damages for delay in a "no damage for delay" clause, which is discussed in greater detail in the Changes, Delays and Other Claims chapter of this book.
In a construction context, a materials supplier will normally supply goods to a subcontractor, who then supplies the goods to a general contractor, who then supplies the goods to a real estate owner. The general contractor and owner are "third parties" to the supply contract between the supplier and subcontractor. The general contractor and owner do not have "privity of contract" with the supplier.
Third parties, with no privity of contract, cannot normally make a claim for breach of contract. The third party owner or general contractor has no contract with the supplier.
Third parties with no contract can sue for negligence that causes personal injury or property damage. When there is a car accident, the victim can successfully sue for personal injury and property damage, even though there is no contract. The lines between contract actions and negligence actions can often be muddled. For example, owners often sue suppliers on a negligence theory, claiming property damage. The "economic loss rule," however, precludes recovery of damages based on economic loss alone, even in a negligence action, absent privity of contract.228 The economic loss rule’s privity requirement applies where damage is claimed because goods purchased fail to meet some standard of quality."229
The Uniform Commercial Code has an exception to the normal privity of contract rule stating that "[l]ack of privity . . . . shall be no defense in any action brought against the . . . seller of goods to recover damages from breach of warranty . . ."230 If you buy a malfunctioning dishwasher from a department store, you can sue the manufacturer under the UCC, even though you have no privity of contract with the manufacturer.
However, recovery for breach of warranty for a third party not in privity is limited to the warranty that exists between the contracting parties. If the original contract of sale excluded or modified warranties or remedies for breach, such provisions are equally operative against beneficiaries of warranties under this section.231 In other words, if a material supplier had excluded express and implied warranties in its sales contract with the subcontractor, these warranties also are excluded to the general contractor or owner. The end user of a product can enjoy no more contractual rights than are enjoyed by the original purchaser."232
Even without a contractual exclusion of warranties, a third party not in privity probably cannot recover consequential (indirect) damages, which arise from the intervention of special circumstances not ordinarily predictable. Although the UCC does not require privity for recovery of direct damages resulting from breach of warranty, the Code does require privity to recover consequential damages resulting from breach of warranty.233
The Uniform Commercial Code Section 2-607(3) states that when a buyer has accepted goods, the buyer must notify the seller within a reasonable time after the buyer discovers or should have discovered any breach—or be barred from any remedy.234 This generally means that a buyer has to notify a seller fairly promptly after delivery if there are any defects in the material. Otherwise, the buyer will lose the right to claim breach of contract or breach of warranty.235
This code section is helpful to a seller, especially where a buyer waits to complain of problems until after the seller files suit to collect the purchase price. However, the UCC probably does not require written notice or a complete statement of defect,236 and a buyer may claim that notice of defects was given verbally to employees of the seller. It also is not clear how long a buyer can wait to complain.237
These uncertainties can be eliminated in a contract term requiring written notice and an opportunity for the seller to cure within a defined period of time, like paragraph 4 in the Appendix 6 Quote form shown above.
James D. Fullerton, Esq.
COPYRIGHT (1997,2010) James D. Fullerton (703) 818-2600
Footnotes1. UCC Section 2-104. [back]
2. UCC Section 2-104(1). [back]
3. UCC Section 2-104(1). [back]
4. UCC Section 2-104(1). [back]
5. UCC Section 2-105(1). [back]
6. UCC Section 2-105(1); UCC Section 2- 107. [back]
7. UCC Section 2-102. [back]
8. Burton v. Artery Co., 279 Md. 94 (Md. 1977)( UCC applied where seller sold and placed trees, shrubs, and sod); [back]
9. UCC Section 2-206(a). [back]
10. UCC Section 2-206(1)(b). [back]
11. UCC Section 2-205. [back]
12. UCC Section 2-206(2). [back]
13. UCC Section 2-205. [back]
14. UCC Section 2-205. [back]
15. UCC Section 2-205. [back]
16. UCC Section 2-205, Official Comment 3. [back]
17. UCC Section 2-204(1). [back]
18. UCC Section 2-204(2). [back]
19. UCC Section 2-305(1). [back]
20. UCC Section 2-311(1). [back]
21. UCC Section 2-204(2). [back]
22. UCC Section 2-308(a); UCC Section 2-309(1). [back]
23. UCC Section 2-310(a). [back]
24. UCC Section 2-314(1); See section below, Warranties. [back]
25. UCC Section 2-314(2)(c); See section below, Warranties. [back]
26. UCC Section 2-204; Flowers Baking Co. v. R-P Packaging, Inc., 229 Va. 370, 329 S.E.2d 462 (1985). [back]
27. UCC Section 2-204(3). [back]
28. UCC Section 2-201(1). [back]
29. UCC Section 2-201(1); Barber & Ross Co. v. Lifetime Doors, Inc., 810 F.2d 1276 (4th Cir.), cert. denied, 484 U.S. 823, 108 S. Ct. 86 (1987). [back]
30. UCC Section 2-201(1); Barber & Ross Co. v. Lifetime Doors, Inc., 810 F.2d 1276 (4th Cir.), cert. denied, 484 U.S. 823, 108 S. Ct. 86 (1987). [back]
31. UCC Section 2-201, Official Comment 1. [back]
32. UCC Section 2-201(1). [back]
33. UCC Section 2-201(3). [back]
34. UCC Section 2-207(1). [back]
35. UCC Section 2-207(2)(c). [back]
36. See section below, Battle of the Forms. [back]
37. UCC Section 2-207(3). [back]
38. UCC Section 2-204(3). [back]
39. UCC Section 2-207(1). [back]
40. James J. White & Robert S. Summers, Uniform Commercial Code, § 1-3 (5th ed. 2000). [back]
41. Idaho Power Co. v. Westinghouse Electric Corp., 596 F.2d 924, 926 (9th Cir. 1979). [back]
42. UCC Section 2-207(1). [back]
43. UCC Section 2-207(2). [back]
44. UCC Section 2-207(2). [back]
45. UCC Section 2-207(2). [back]
46. UCC Section 2-207. [back]
47. UCC Section 2-207(1). [back]
48. Idaho Power Co. v. Westinghouse Electric Corp., 596 F.2d 924, 926 (9th Cir. 1979) (Terms of the offer limiting seller liability constituted terms of the agreement even though the purported acceptance omitted these terms). [back]
49. UCC Section 2-207(1). [back]
50. UCC Section 2-207(2)(a). [back]
51. UCC Section 2-207(2)(b). [back]
52. J.B. Moore, Inc. v. Westinghouse, 221 Va. 745, 273 S.E.2d 553 (1981). [back]
53. UCC Section 2-207. [back]
54. See chapter above, Contracts and Preserving Rights; section, Use Your Contract Form. [back]
55. UCC Section 2-208(1). [back]
56. UCC Section 2-208(3). [back]
57. UCC Section 2-208(1); Crane Company v. Progressive, 418 F.Supp. 662 (E.D.Va. 1976). [back]
58. UCC Section 2-208(1). [back]
59. UCC Section 2-209. [back]
60. UCC Section 2-209(2). [back]
61. UCC Section 2-210(1). [back]
62. UCC Section 2-210(1). [back]
63. UCC Section 2-210(1). [back]
64. UCC Section 2-210(2). [back]
65. UCC Section 2-210(2). [back]
66. Contracts should be read in the entirety, no words should be disregarded if possible. Winn v. Aleda Const. Co., 227 Va. 304, 307, 315 S.E.2d 193 (1984). In construing a contract, effect must be given to each provision, if possible, giving the entire contract a harmonious construction. Carpenter v. Town of Gate City, 185 Va. 734, 740, 40 S.E.2d 268 (1946). [back]
67. See subsection above, Modification of Contracts; sub-subsection, Course of Performance. [back]
68. M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 92 S.Ct. 1907, 32 L.Ed.2d 513 (1972). [back]
69. McDevitt & Street Co. v. Marriott Corp., 713 F. Supp 906, 914 (E.D. Va 1989), aff’d in part and rev’d in part 911 F.2d 723 (4th Cir. 1990), on remand 754 F. Supp 513 (E.D. Va. 1991, citing Chantilly Construction Corp. v. John Driggs Co., 45 B.R. 297, 306 (Bankr.E.D.Va.1985);
Bob Grissett Golf Shoppes, Inc. v. Confidence Golf Co., 44 B.R. 156, 159 (Bankr.E.D.Va.1984);
Russell County v. Carroll, 194 Va. 699, 703, 74 S.E.2d 685, 687-88 (1953). [back]
70. McLean House v. Maichak, 231 Va. 347, 349, 344 S.E.2d 889, 890 (1986); Gordonsville Energy v. Virginia Elec. & Power Co., 257 Va. 344, 354, 512 S.E.2d 811, 817 (1999) (reiterating that “when contract terms are clear and unambiguous, the words used by the parties must be given their plain and ordinary meaning”). [back]
71. UCC Section 2-302. [back]
72. UCC Section 2-302(1). [back]
73. UCC Section 2-302(1) [back]
74. UCC Section 2-305(1). [back]
75. UCC Section 2-305(1). [back]
76. UCC Section 2-305(1). [back]
77. UCC Section 2-310(a). [back]
78. UCC Section 2-306. [back]
79. UCC Section 2-306. [back]
80. UCC Section 2-307. [back]
81. UCC Section 2-308(a). [back]
82. UCC Section 2-511(1). [back]
83. UCC Section 2-309(1). [back]
84. White and Summers Uniform Commercial Code, Vol 1. Ch. 3 at 126; Am Jur Sales §268 and Corpus Juris Secondum Sales § 170. [back]
85. Jamestown Terminal Elevator v. Heib, 246 NW.2d 736 (ND, 1976); Schiavi Mobile Homes v. Gagne, 510 A.2d 236 (Maine, 1986) (Buyer’s failure to object to date of performance resulted in court concluding that performance had occurred within reasonable time.); Robinson v. Commercial Contractors, 274 A.2d 160 (CT, 1970) (Adds intent of the parties to the “facts and circumstances” test, although this case does not address the time issue under the UCC but applies a common law contract standard.); Thornton Construction Co. v. Mackinac Aggregates Corp., 157 N.W.2d 456 (MI 1968) (Court held that time of performance was reasonable based on both parties’ understanding of timing of like projects in the industry). [back]
86. Kirn v. Champion Iron Fence Co., 86 Va 608, 10 S.E. 885 (1890). [back]
87. UCC Section 2-310. [back]
88. UCC Section 2-307. [back]
89. UCC Section 2-310(d). [back]
90. UCC Section 2-310(d). [back]
91. UCC Section 2-511(1). [back]
92. UCC Section 2-511(2). [back]
93. UCC Section 2-511(2). [back]
94. UCC Section 2-511(2). [back]
95. UCC Section 2-513(1). [back]
96. UCC Section 2-513(3)(a). [back]
97. UCC Section 2-309(2). [back]
98. See section above, Contract Interpretation; subsection, Contract Terms Added by the UCC; sub-subsection, Open Price Term. [back]
99. See section above, Contract Interpretation; subsection, Contract Terms Added by the UCC; sub-subsection, Output, Requirements and Exclusive Dealings. [back]
100. UCC Section 2-319(1). [back]
101. UCC Section 2-319(1)(a). [back]
102. UCC Section 2-319(1)(a). [back]
103. UCC Section 2-319; See also subsection below, Risk of Loss. [back]
104. UCC Section 2-319(1)(c). [back]
105. UCC Section 2-319(1)(b). [back]
106. UCC Section 2-319(2). [back]
107. UCC Section 2-320(1). [back]
108. UCC Section 2-320(3). [back]
109. UCC Section 2-401(2). [back]
110. See subsection below, Seller’s Right to Reclaim Goods. [back]
111. UCC Section 2-401(2). [back]
112. UCC Section 2-401(4). [back]
113. UCC Section 2-401(4). [back]
114. UCC Section 2-509. [back]
115. UCC Section 2-510. [back]
116. UCC Section 2-313. [back]
117. UCC Section 2-313(1). [back]
118. UCC Section 2-313(2). [back]
119. UCC Section 2-313(1)(b). [back]
120. UCC Section 2-313(1)(c). [back]
121. UCC Section 2-313. [back]
122. UCC Section 2-316(2). [back]
123. UCC Section 2-314(1). [back]
124. UCC Section 2-314(2). [back]
125. UCC Section 2-314(2). [back]
126. UCC Section 2-314(2)(d). [back]
127. UCC Section 2-314(3). [back]
128. UCC Section 2-314. [back]
129. UCC Section 2-315. [back]
130. UCC Section 2-315. [back]
131. UCC Section 2-312. [back]
132. UCC Section 2-312(3). [back]
133. UCC Section 2-312(3). [back]
134. UCC Section 2-316(1) states, “Words or conduct relevant to the creation of an express warranty and words or conduct tending to negate or limit warranty shall be construed wherever reasonable as consistent with each other . . .” See also Buettner v. R.W. Martin & Sons, Inc., 47 F.3d 116 (4th Cir. 1994). Express warranty disclaimer between a seller and a buyer was valid and enforceable, even against a third party. [back]
135. King Industries, Inc. v. Worlco Data Systems, Inc., 736 F. Supp 114, 118 (E.D.Va. 1989) citing Hill v. BASF Wyandotte Corp., 696 F.2d 287, 291 (4th Cir. 1982) (“the parol evidence rule precludes the admission of oral statements which contradict the terms of a written disclaimer”). [back]
136. Envirotec Corp. v. Halco Engineering, Inc., 234 Va. 583, 593, 364 S.E.2d 215, 220 (1988). [back]
137. UCC Section 2-316(2) states that “to exclude or modify the implied warranty of merchantability or any part of it the language must mention merchantability and in case of a writing must be conspicuous, and to exclude or modify any implied warranty of fitness the exclusion must be by a writing and conspicuous.” [back]
138. Armco, Inc. v. New Horizon Dev. Co., 229 Va. 561, 567, 331 S.E.2d 456, 460 (1985). [back]
139. UCC Section 2-316(2). [back]
140. UCC Section 2-316(2). [back]
141. UCC Section 2-312(2). [back]
142. UCC Section 2-316(4). [back]
143. See subsection above, Contract Terms Added by the UCC; sub-subsection, Time for Payment. [back]
144. UCC Section 2-513. [back]
145. UCC Section 2-601; UCC Section 2-608. [back]
146. UCC Section 2-601(a). [back]
147. UCC Section 2-601. [back]
148. UCC Section 2-607. [back]
149. UCC Section 2-602(1)Moore & Moore General Contractors, Inc. v. Basepoint, Inc., 485 S.E.2d 131, 253 Va. 304 (1997); contractor’s installation of nonconforming cabinets was an act inconsitent with supplier’s ownership and amounted to acceptance of the goods under UCC. [back]
150. UCC Section 2-602. [back]
151. UCC Section 2-603. [back]
152. UCC Section 2-603(1). [back]
153. UCC Section 2-605(1). [back]
154. UCC Section 2-605(1). [back]
155. UCC Section 2-508(1). [back]
156. UCC Section 2-508(1). [back]
157. UCC Section 2-508(2). [back]
158. UCC Section 2-508, Official Comment 2. [back]
159. UCC Section 2-507(2). [back]
160. UCC Section 2-511(3). [back]
161. In Re Helms Veneer Corp., 287 F.Supp. 840 (W.D. Va. 1968). [back]
162. UCC Section 2-702(2). [back]
163. UCC Section 2-702(2); In Re Helms Veneer Corp., 287 F.Supp. 840 (W.D. Va. 1968). [back]
164. 11 USC §546(c). See chapter below, Bankruptcy Primer for Creditors; section, Adversary Proceedings; subsection, Reclamation Rights. [back]
165. 11 USC §546(c). See chapter below, Bankruptcy Primer for Creditors; section, Adversary Proceedings; subsection, Reclamation Rights. [back]
166. 11 USC §503(b)(9). [back]
167. UCC Section 2-702(2). [back]
168. UCC Section 2-702(3). [back]
169. UCC Section 2-702(3). [back]
170. UCC Section 2-702(1). [back]
171. UCC Section 2-702(1); UCC Section 2-705(1). [back]
172. UCC Section 2-615(a). [back]
173. UCC Section 2-615(a). [back]
174. UCC Section 2-615, Official Comment 4. [back]
175. UCC Section 2-615, Official Comment 1. [back]
176. UCC Section 2-615(c). [back]
177. UCC Section 2-615(b). [back]
178. UCC Section 2-614(1). [back]
179. UCC Section 2-609(1). [back]
180. UCC Section 2-609(2). [back]
181. UCC Section 2-609, Official Comment 3. [back]
182. UCC Section 2-609, Official Comment 3. [back]
183. UCC Section 2-610. [back]
184. UCC Section 2-610(b). [back]
185. UCC Section 2-611. [back]
186. UCC Section 2-612(1). [back]
187. UCC Section 2-612. [back]
188. UCC Section 2-703; See also UCC Sections 2-704, 2-705, 2-706 and 2-708. [back]
189. UCC Section 2-706. [back]
190. UCC Section 2-708(1). [back]
191. UCC Section 2-709. [back]
192. UCC Section 2-711. [back]
193. UCC Section 2-714(1). [back]
194. UCC Section 2-712(2). [back]
195. UCC Section 2-712(2). [back]
196. UCC Section 2-714); See subsection below, Limitation of Liability. [back]
197. UCC Section 2-715(2)(a). [back]
198. UCC Section 2-715(2)(a). [back]
199. UCC Section 2-713(1). [back]
200. UCC Section 2-714. [back]
201. UCC Section 2-714(2). [back]
202. UCC Section 2-714(3). [back]
203. UCC Section 2-716. [back]
204. UCC Section 2-716. [back]
205. UCC Section 2-711(3). [back]
206. UCC Section 2-603(2). [back]
207. M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 92 S.Ct. 1907, 32 L.Ed.2d 513 (1972). [back]
208. McLean House v. Maichak, 231 Va. 347, 349, 344 S.E.2d 889, 890 (1986); Gordonsville Energy v. Virginia Elec. & Power Co., 257 Va. 344, 354, 512 S.E.2d 811, 817 (1999) (reiterating that “when contract terms are clear and unambiguous, the words used by the parties must be given their plain and ordinary meaning”). [back]
209. UCC Section 2-719 (emphasis added). [back]
210. UCC Section 2-207; See e.g. Foley Co. v. Phoenix Engineering & Supply Co., 819 F.2d 60 (4th Cir. 1987) and Moore Electrical Contractor, Inc. v. Westinghouse Electrical Supply Co., 221 Va. 745, 273 S.E.2d 553 (1981). [back]
211. UCC Section 2-719(1)(a); Baptist Mem. Hosp. v. Argo Constr. Corp., 2009 Tenn. App. LEXIS 502 (Tenn. Ct. App. 2009). [back]
212. Marr Enterprises, Inc. v. Lewis Refrigeration Co., 556 F.2d 951, 955 (9th Cir. 1977). [back]
213. UCC Section 2-719(1)(b). [back]
214. UCC Section 2-719(2). [back]
215. See Envirotech Corp. v. Halco Engineering Inc., 234 Va. 583, 593, 364 S.E.2d 215, 220 (1988); See also Baptist Mem. Hosp. v. Argo Constr. Corp., 2009 Tenn. App. LEXIS 502 (Tenn. Ct. App. 2009) for a good discussion of the relationship between failure of essential purpose and unconscionability and then a discussion of the split in authorities whether a latent defect barred by an agreed statute of limitations can cause a failure of essential purpose. [back]
216. Riegel Power Corp. v. Voith Hydro Crowder Construction Co., 888 F.2d 1043, 1046 (4th Cir. 1989). [back]
217. Riegel Power Corp. v. Voith Hydro Crowder Construction Co., 888 F.2d 1043, 1046 (4th Cir. 1989) (essential purpose exclusion generally applies where seller has acted in bad faith in making repairs or has repudiated its obligation to repair and replace). [back]
218. Coastal Modular Corp. v. Laminators, Inc., 635 F.2d 1102, 1106 (4th Cir. 1980); Dowty Communications Inc. v. Novatel Computer Systems Corp., 817 F. Supp. 581 (D.Md. 1992); Marr Enterprises, Inc. v. Lewis Refrigeration Co., 556 F.2d 951, 955 (9th Cir. 1977) (“In our case, if the seller did not replace the defective parts, the purchaser was entitled to refund of the purchase price. Thus, mere failure to replace or repair would not cause the court to read in the general remedy provisions of the UCC as in the cases cited above.”). [back]
219. See Milgard Tempering v. Selas Corp. of America, 902 F.2d 703 (9th Cir. 1990) and Chatlos Systems v. National Cash Register Corp., 635 F.2d 1081 (3d Cir. 1980). [back]
220. Beard Plumbing and Heating, Inc. v. Thompson Plastics, Inc., 254 Va. 240, 243, 491 S.E.2d. 731, 732 (1997); Pulte Home Construction v. Parex, Inc., 265 Va. 518, 526, 579 S.E.2d 188, 192 (2003)(whether damages are direct or consequential is a matter of law for decision by the Court.)(Plaintiff's damages of “uncompensated costs to repair homes, lost of the remainder of its contract with the general contractor, and revenue loss due to damaged business reputation all constituted consequential damages.). [back]
221. UCC Section 2-715(2) states that “consequential damages resulting from the seller’s breach include; . . . any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know. . .” (emphasis added). [back]
222. UCC Section 2-719(3). [back]
223. Envirotech Corp. v. Halco Engineering Inc., 234 Va. 583, 593, 364 S.E.2d 215, 220 (1988), citing S.M. Wilson & Co. v. Smith International, Inc., 587 F.2d 1363, 1374-76 (9th Cir. 1978). [back]
224. UCC Section 2-302. [back]
225. UCC Section 2-302(1). [back]
226. Reibold v. Simon Aerials, Inc., 859 F.Supp. 193, 198 (E.D.Va. 1994), citing White & Summers Uniform Commercial Code § 12-11; Kaplan v. RCA Corp., 783 F.2d 463 (4th Cir. 1986)(where the court held that terms limiting the seller’s liability and excluding consequential damages were not unconscionable, given the buyer’s business acumen and experience, even though the buyer was a small family owned corporation and the seller was a national corporation; Envirotech Corp. v. Halco Engineering Inc., 234 Va. 583, 364 S.E.2d 215, 220 (1988)(where the parties are “sophisticated business men with access to legal counsel.”). [back]
227. Carlson v. General Motors Corp., 883 F.2d 287, 293, 295 (4th Cir. 1989). [back]
228. Moore & Son v. Drewry, 251 Va. 277, 467 S.E.2d 811 (1996). [back]
229. Sensenbrenner v. Rus, Orling & Neal, 236 Va. 419, 423, 374 S.E.2d 55, 57 (1988) (Economic loss rule applied where negligent installation of a swimming pool resulting in damage to a home. Damage to the home amounted to economic loss and nothing more than disappointed economic expectations. The claim related to property damage and was subject to the economic loss rules privity requirement.) [back]
230. UCC Section 2-318. [back]
231. UCC Section 2-318, Official Comment 1. [back]
232. Buettner v. R.W. Martin & Sons, Inc., 47 F.3d 116, 119 (4th Cir. 1994). [back]
233. See Pulte Home Corporation v. Parex, 265 Va. 518, 579 S.E.2d 188 (2003) (lack of privity bars claim for consequential damages). This results from the interplay between UCC Section 2-318 and 2-715. UCC 2-318 provides that “[l]ack of privity between plaintiff and defendant shall be no defense in any action brought against the . . . seller of goods to recover damages from breach of warranty . . .”. UCC Section 2-715(2), however, states that “Consequential damages resulting from the seller’s breach include; . . . any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know. . .” (emphasis added). Most courts hold that the “at the time of contracting” language in this section implies that there is a contract between the parties and therefore, to recover for consequential damages, the plaintiff must be in privity with the defendant. See Beard Plumbing and Heating, Inc. v. Thompson Plastics, Inc., 254 Va. 240, 245, 491 S.E.2d 731, 733 (1997) (Plaintiff’s damages of uncompensated cost to repair homes, loss of the remainder of its contract with the general contractor, and revenue loss due to damage to business reputation all constituted unrecoverable consequential damages). [back]
234. UCC Section 2-607(3). [back]
235. Begley v. Jeep Corp., 491 F. Supp. 63 (W.D. Va. 1980) (Whether plaintiffs gave defendants reasonable notice of breach of warranty is ordinarily a question of fact reserved for the jury, however, if the evidence is clear, the court can rule as a matter of law that a party failed to give proper notice. Plaintiffs violated the letter and spirit of by waiting over two years to give defendants notice and sanction of dismissal should operate against them); Hebron v. American Isuzu Motors, Inc., 60 F.3d 1095 (4th Cir. 1995) (a two-year delay in giving notice under subsection (3) was unreasonable as a matter of law where no explanation for the delay was provided and actual prejudice was sustained). [back]
236. Cancun Adventure Tours, Inc. v. Underwater Designer Co., 862 F.2d 1044 (4th Cir. 1988) (The provision does not require that notification include a clear statement of all objections. A buyer simply is required to notify the seller that the transaction is troublesome and should be watched); See also Virginia Transformer Corp. v. P.D. George Co., 932 F. Supp. 156 (W.D. Va. 1996). [back]
237. Begley v. Jeep Corp., 491 F. Supp. 63 (W.D. Va. 1980) (Plaintiffs violated the letter and spirit of by waiting over two years to give defendants notice and sanction of dismissal should operate against them); Hebron v. American Isuzu Motors, Inc., 60 F.3d 1095 (4th Cir. 1995) (a two-year delay in giving notice under subsection (3) was unreasonable as a matter of law where no explanation for the delay was provided and actual prejudice was sustained). [back]