Why It's Your Business to Know the Uniform Commercial Code
Every manufacturer, whether big or small, is a seller of goods. Therefore, it is essential that every manufacturer have a basic, working knowledge of the law governing the sale of goods.
In the United States, the principal statute governing the sale of goods is Article 2 of the Uniform Commercial Code (the "UCC"). As its name implies, the UCC has been adopted in virtually identical form throughout the United States.
Under the UCC, it is possible to have a valid contract for the sale of goods simply by two parties agreeing upon the identity and quantity of the goods to be sold and purchased. If the parties fail to specify other terms, such as delivery dates, method of transport, or even price, the UCC will imply "reasonable" terms and other statutorily specified terms so as to make the contract fully enforceable. Thus, a quotation, and a purchase order issued in response to that quotation, will constitute an enforceable contract under the UCC, even if they contain only the barest of information.
Why, Then, are Terms and Conditions of Sale so Important?
The answer is that UCC terms are extremely favorable to the buyer of goods, and extremely disadvantageous to the seller of goods. Absent express agreement of the parties to the contrary, (that is, terms and conditions of sale) the following rules (among others) would apply:
- Warranties of merchantability and fitness for a particular purpose are implied.
- There are no limitations on warranties. In other words, even the seller's advertising materials with respect to the goods may be construed to be a warranty.
- There are no limitations on the remedies of a buyer in the event that there is a breach of warranty. In other words, in addition to demanding repair or replacement of the defective good, the buyer may claim monetary damages.
- There are no limitations on the amount of damages that can be claimed.
- There are no limitations on the types of damages that can be claimed. Thus, a seller can be liable for such things as the lost profits of the buyer.
- There is no right to recovery of attorneys' fees, costs of collection and (in some states) even interest, if the buyer fails to make timely payment.
Looking at these items, it becomes readily apparent that, in the absence of terms and conditions protecting the seller, the risk allocation of a transaction involving a sale of goods is heavily skewed in favor of the buyer. This can be illustrated by a simple example.
A seller delivers a $100 part to a buyer for installation in an assembly line. If the part breaks and causes the assembly line to go down for a week, the seller could be liable for all of the following damages:
- The cost of a replacement part.
- The cost of removing the defective part and installing the replacement part.
- The lost profits of the buyer due to being out of business a week.
- Incidental costs incurred by the buyer in dealing with the situation caused by the defective part.
Obviously, damages of these types could amount to many thousands of dollars.
Conversely, if the buyer fails to pay the purchase price for the $100 part, the seller's only remedy is to sue for the $100 plus (in some states) interest on the $100. Typically, the seller would not even be able to recover its attorneys' fees.
It is extremely important, from the seller's perspective, to have a good set of terms and conditions which, among other things: 1) limits warranties; 2) limits remedies for a breach of warranty; 3) limits the types of damages for which the seller can be liable; 4) limits the overall amount of damages for which the seller can be liable; and, 5) adequately protects the seller in the event of non-payment by the buyer.
A related, but equally important subject, is making certain that the seller's terms and conditions become part of the contract. This is especially important in the age of e-commerce.