CPA REG: UCC Article 2 - Sales of Goods

UCC Article 2: Sales of Goods for the REG Exam

UCC Article 2 governs the sale of goods, defined as movable, tangible personal property. It applies whenever goods are sold, regardless of the amount, though the Statute of Frauds writing requirement applies to sales of $500 or more. The UCC modifies several common law contract rules to facilitate commercial transactions, and these modifications are heavily tested on the REG exam.

Merchants and Non-Merchants

The UCC distinguishes between merchants and non-merchants. A merchant is a person who deals in goods of the kind involved in the transaction or holds themselves out as having knowledge or skill peculiar to the practices or goods involved. Certain UCC provisions apply only between merchants, including the firm offer rule, the battle of the forms treatment of additional terms, the merchant's confirmation exception to the Statute of Frauds, and the implied warranty of merchantability.

Contract Formation Under Article 2

UCC Article 2 is more flexible than common law in contract formation. A contract may be formed in any manner sufficient to show agreement, including conduct by both parties recognizing the existence of a contract. The only essential term is quantity; the UCC provides gap-filler provisions for price (reasonable price at the time of delivery), place of delivery (seller's place of business), time for performance (reasonable time), and payment terms (due at time and place of delivery).

Output contracts (where the seller agrees to sell all output to the buyer) and requirements contracts (where the buyer agrees to purchase all requirements from the seller) are enforceable under the UCC even though the quantity is not stated, provided the parties act in good faith and within reasonably foreseeable figures.

Warranties

Article 2 provides for express and implied warranties. An express warranty arises from any affirmation of fact, promise, description, or sample made by the seller that becomes part of the basis of the bargain. No specific language such as "warrant" or "guarantee" is required.

The implied warranty of merchantability arises automatically in every sale by a merchant and requires that goods be fit for their ordinary purpose, be adequately packaged and labeled, conform to any representations on the label, and pass without objection in the trade. The implied warranty of fitness for a particular purpose arises when the seller has reason to know the buyer's particular purpose and the buyer relies on the seller's expertise to select suitable goods. This warranty can arise in sales by both merchants and non-merchants.

Warranties may be disclaimed. The implied warranty of merchantability may be disclaimed by using the word "merchantability" in the disclaimer, or by selling goods "as is" or "with all faults." The implied warranty of fitness must be disclaimed in writing. Express warranties generally cannot be disclaimed once made.

Risk of Loss

Risk of loss determines which party bears the financial loss if goods are damaged or destroyed after the contract is formed but before the buyer takes possession. If the contract involves shipment by carrier, the rules depend on the shipping terms. Under a shipment contract (FOB shipping point), risk passes to the buyer when the seller delivers goods to the carrier. Under a destination contract (FOB destination), risk passes when the goods are tendered at the destination.

If no carrier is involved and the seller is a merchant, risk passes when the buyer receives the goods. If the seller is not a merchant, risk passes upon tender of delivery. When goods are held by a bailee and are to be delivered without being moved, risk passes when the buyer receives a negotiable document of title, or upon acknowledgment by the bailee.

If the seller breaches by tendering nonconforming goods, the risk of loss remains on the seller until the seller cures or the buyer accepts. If the buyer breaches after conforming goods have been identified to the contract, the risk shifts to the buyer to the extent of any deficiency in the seller's insurance coverage.

Performance and Remedies

The perfect tender rule under UCC Section 2-601 allows the buyer to reject goods if they fail to conform to the contract in any respect. The buyer may accept all, reject all, or accept some and reject others. However, the seller has the right to cure nonconforming tender if the time for performance has not expired or if the seller had reasonable grounds to believe the nonconforming tender would be acceptable.

Buyer's remedies include the right to cover (purchase substitute goods and recover the difference), recover damages for nondelivery (market price minus contract price), specific performance (for unique goods), and incidental and consequential damages. Seller's remedies include the right to resell goods and recover damages, recover the contract price (when resale is impractical), and recover lost profits (for lost volume sellers).

Exam Strategy

• UCC Article 2 applies only to the sale of goods (movable, tangible personal property)
• Only quantity is essential; the UCC fills gaps for other terms
• Know the three types of warranties and how each can be disclaimed
• Risk of loss rules differ based on shipping terms and merchant status
• The perfect tender rule applies to sales of goods but not common law contracts
• Distinguish between merchant and non-merchant rules throughout Article 2