SALE OF GOODS – ARTICLE 2 OF THE UNIFORM COMMERCIAL CODE

SALE OF GOODS – ARTICLE 2 OF THE UNIFORM COMMERCIAL CODE Zara Law Offices 111 John Street Suite 510 New York, NY 10038 Tel: 1-212-619 45 00 Fax: 1-212-619 45 20 www.zaralawny.com

The Uniform Commercial Code (UCC) • The UCC is a model commercial law adopted in some form by all 50 US states as their respective state law. • Article 2 of the UCC governs the sale of goods (the state of Louisiana is the only US state that has not enacted Article 2 of the UCC) • The UCC’ s provisions will be applicable to your sale of goods to a US customer, unless the 1980 United Nations Convention for the International Sale of Goods applies (which applies by default if both parties to a sale of goods are from two different countries that enacted that Convention), or the parties have chosen another law to govern all matters pertaining to their relationship • Some UCC clauses contain pitfalls for the foreign exporter. Therefore it is recommended that you have general information about the UCC and take precautions accordingly • This presentation will focus on the UCC model law, without regard to modifications by different states

Statute of frauds (UCC § 2-201) • Under the UCC, a Sales Agreement for the price of $500 or more is not enforceable unless there is some record, signed by the party against which enforcement is sought, evidencing the parties’ agreement. Therefore, it is advisable for foreign exporters selling to a US customer to set forth the terms of their transaction in writing • The Statute of Frauds concerns only the enforceability of an oral agreement. It does not mean that an oral agreement for the sale of goods of 500$ or more cannot be formed or is invalid. However, if for example the Buyer fails to remit the price, you may not be able to enforce the agreement in court if the Buyer is able to successfully use the Statute of Frauds as a defense

Statute of frauds: Main exceptions • An agreement may be enforced even if it is not set forth in writing under the following circumstances: • “Merchant’s Exception” (UCC 2-201 (2)): If you and your Buyer are both merchants*, and you sent him something in writing memorializing the oral agreement (some courts consider detailed invoices sufficient), and he did not object, the oral contract is enforceable • If the Buyer against whom you are trying to enforce the Sales Agreement admitted its existence under oath (e.g. in pleadings or other sworn statements) • If the Buyer started to perform the Sales Agreement in part, you will be able to enforce itup to the amount already paid. • If the goods were specially manufactured per the Buyer’s order and youbegan to manufacture them, or you entered into a contract for the manufacture with a subcontractor and that subcontractor is unable to resell the products *A merchant under the UCC is defined as a person who “deals in goods of the kind or otherwise holds itself out by occupation as having knowledge or skill peculiar to the practices or goods involved in the transaction […] “

Parol or Extrinsic Evidence • The UCC provides that whenever an agreement has been set forth in writing and was intended to be the final agreement of the parties, no parol or extrinsic evidence is permitted (UCC 2-202). This means that a party is not allowed to introduce outside evidence, including earlier oral agreements, to contradict the terms of the written contract • However, the written agreement may be supplemented by evidence of: • Course of performance, course of dealing, or usage of trade; and • Consistent additional terms (unless the court determines that the record to have been intended as a complete and exclusive record of the parties’ agreement)

Formation of Sales Agreements • If aBuyer offers you to purchase goods in a signed document, his offer is irrevocable: • During the time indicated by the Buyer, or • If he did not indicate any time,during a reasonable time that shall not exceed three months (UCC 2-205). • A Sales Agreement is still formed even if the parties left one or more terms open (UCC 2-204 (3))

Passing of title (UCC 2-401) • Unless the parties have agreed otherwise,the passing of title is linked with the performance of the delivery • If the contract requires you to send the goods to the Buyer, and: • You do not have to deliver them at destination, title passes at the time of shipment • You must deliver them at a particular destination, title passes at the time you tender them there • If you do not need to move the goods: • If you must deliver a document of title (such as a Bill of Lading), title passes at the time you deliver such document; or • If no documents of title are to be delivered, title passes at the time of the conclusion of the Sales Agreement

Passing of risk (UCC 2-509) • Where the contract requires or authorizes the Seller to ship the goods by carrier, the risk of loss passes to the Buyer when the goods are duly delivered to the carrier • However, if the contract requires the Seller to deliver the goods at a particular destination and the goods are duly tendered at the destination while in the possession of the carrier, the risk of loss passes to the Buyer when the goods are so tendered, so that Buyer can take delivery • Where the Sales Agreement does not involve a carriage, the risk of loss passes to the Buyer when it receives the document covering the goods • In any other case,if the Seller is a merchant, the risk of loss passes to the Buyer on its receipt of the goods; otherwise the risk passes to him on tender of delivery

Perfect Tender Rule • The perfect tender rule refers to the common law legal right for a Buyer of goods to insist upon "perfect tender" by the Seller. In other words,ina SalesAgreement, the Seller has to deliver goods that conform to each and every detail of the Sales Agreement. If the goods do not so conform, the Buyer may reject them and rescind the contract (UCC 2-601) • Exceptions: • If the parties agreed otherwise • If you promptly notify the Buyer of your intention to cure the lack of conformity and if you are able do so within the period of time indicated in the Sales Agreement

Seller’s express warranties (UCC 2-313) • An express warranty can be a promise or affirmation of fact by the Seller to the Buyer with respect to the description of the goods that became part of the bargain • As part of the express warranty, you will have to deliver goods that conform to any such description • In addition, if you provided any samples or models of the goods to the Buyer during negotiations, the goods you deliver have to match the characteristics of such samples or models • However,if you merely opined on the value of the goods, such statements do not normally create an express warranty • If you sell your products to another merchant, you can exclude an express warranty in the contract

Seller’s impliedwarranties: Fitness for particular purpose and merchantability • The Implied Warranty of Fitness for a Particular Purpose applies when the Seller knew or had reason to know that (1) the Buyer was buying the goods for a particular purpose, and (2) the Buyer was relying on the Seller’s expertise to select goods suitable for that purpose. There exists then an implied guarantee that the goods are fit for such particular purpose (UCC 2-315) • Implied warranties are unwritten or unspoken assurances by the Seller implied by law • If you are a merchant, the Implied Warranty of Merchantability is applicable • In order for the goods to be merchantable, they must be at least: • Pass without objection in the trade under the Sales Agreement’s description; and • In the case of fungible goods, be of fair average quality within the description; and • Be fit for the ordinary purposes for which such goods are used

Exclusion of warranties (UCC 2-316) • If you want to exclude or modify an implied warrantyor any part of it: • You must use terms such as “sold as is”, “with all faults” or other language sufficient to convey that no implied warranty exists • The exclusion or modification must be set forth in writing • To exclude or modify the Implied Warranty of Merchantability, the term “Merchantability” must be used as language • In particular, with respect to a consumer contract, the Implied Warranty of Merchantability can only be excluded or modified if conspicuous language is used and the statement “The seller undertakes no responsibility for the quality of the goods except as otherwise provided in this contract” is included • If the Buyer before entering into the Sales Agreement has examined the goods, the sample or the model, or has refused to do so after you requested it, no implied warranty exists with regard to defects that an examination should have revealed under the circumstances • An implied warranty may also be excluded or modified by course of dealing or course of performance or usage of trade

Buyer's right to inspect the goods • The Buyer has the right to inspect the goods before accepting and paying for them • If the goods conform to the Sales Agreement, the Buyer is obligated to pay for the inspection costs • If the goods do not conform, the Buyer may demand the costs of the inspection from the Seller (UCC 2-513(2)

Buyer’s Acceptance of the Goods (UCC 2-606, 2-607) • The Buyer is deemed to have accepted the goods: • If, after a reasonable opportunity to inspect the goods, he indicates that they are conforming or that he will take them in spite of their non-conformity; or • If he fails to reject the goods properly after he had a reasonable opportunity; or • If he acts in a way inconsistent with the Seller’s ownership of the goods • If the Buyer accepts part of a commercial unit,he is required to accept the entire unit • The Buyer must pay at the rate indicated in the contract for any goods accepted

Buyer’s Right to Revoke Acceptance • If the Buyer accepted the goods on the reasonable assumption that the non-conformity would be cured, but it has not been cured; or • If the Buyer accepted the goods unaware of their non-conformity, either because it was difficult for the Buyer to learn of the non-conformity at the time of acceptance, or because the Buyer relied on the Seller’s assurances that the non-conformity would be corrected Buyer may revoke his prior acceptance of goods that turn out to be non-conforming and the non-conformity substantially impairs the value to the Buyer: A revocation of the acceptance is only effective if the Buyer notifies the Seller thereof within a reasonable time after the Buyer discovers or should have discovered the non-conformity

Buyer's remedies in case of Seller's contractual breach: • If the Seller breaches the contract by failing to perform its obligations under the Sales Agreement, the Buyer may, depending on the nature and on the seriousness of the breach (UCC 2-711): • Recover as damages any part of the price already paid, and/or direct, consequential damages and (if specified in the sales contract) liquidated damages • Obtain specific performance • Obtain the goods back by replevin • Recover identified goods • Compensate its loss with any part of the price still due • Cancel the contract

Buyer’s Remedies on Improper Delivery and in General • If the delivered goods do not conform to the Sales Agreement, the Buyer may: • Reject the whole; or • Accept the whole; or • Accept any commercial unit or units and reject the rest (UCC 2-601) • The Buyer acquires a security interest in any goods in his possession or control, for payments he has made on the price and for expenses incurred in inspection, transportation, etc. In accordance with this security interest, the Buyer may hold and resell the goods

Right to adequate assurance of performance (UCC 2-609) • Upon reasonable doubts that the respective other party will duly perform, either party may ask for adequate assurance of due performance • If you as the Seller have reasonable doubts about the Buyer’s ability to pay for the goods, you may ask for adequate assurance that the Buyer will be able to pay you. Provided it is “commercially reasonable”, you may even suspend shipment until the Buyer has provided you with adequate assurances of payment • If a justified demand for adequate assurance was not met within thirty (30) days, that party is deemed to have repudiated the contract. In such case, you do not have to ship the goods to Buyer, but you must as soon as possible notify the Buyer you are cancelling the contract

Seller’s Remedies

Seller's remedies in General (UCC 2-703) • If the Buyer is in breach of contract you may: • Withhold delivery of the goods • Stop delivery of the goods (UCC 2-705) • Proceed with respect to goods unidentified to the contract or unfinished (UCC 2-704) • Reclaim the goods [2-507(2) or 2-702(2)] • Require payment directly from the Buyer [UCC 2-325(c)] • Resell the goods and recover damages (UCC 2-706) • Recover the price (UCC 2-709) • Obtain specific performance (UCC 2-716) • Recover liquidated damages (UCC 2-718)

Seller’s specific remedies in case of Buyer’s insolvency • If you discover Buyer’s insolvency,you may refuse delivery of the goods (UCC 2-705) • If you discover that the Buyer has received goods on credit while insolvent, you may reclaim the goods within a reasonable time after the Buyer has received them • If you discover Buyer’s insolvency, or if Buyer repudiates or fails to make a payment due before delivery, you may stop the delivery of the goods in the possession of a carrier (UCC 2-702)

How to use the Sales Agreement to your advantage • You have to make sure that either the Buyer or its Agent have inspected the merchandise, or that such inspection is deemed waived under the Sales Agreement. You should not allow a partial inspection of the merchandise • As previously stated, under the UCC, the Buyer has the right to cancel its acceptance, even after having received the merchandise, therefore you should clearly set forth in your Sales Agreement: • When acceptance will be deemed to have occurred • That the Buyer will have no right to revoke its acceptance after it has inspected the goods, accepted and received them

Conclusion • Carefully read your client’s Purchase Orders • Never ship goods without a well-drafted Sales Agreement • Expressly exclude Seller’s UCC Warranties • Specify that Buyer’s inspection is to be done at your factory or is waived; and that the purchaser has waived its rights of Rejection and Revocation • Insist on Incoterms such as FOB (standard) that will exempt you from any liability with respect to any losses in connection with the goods after they pass the ship's rail at the port of shipment • Obtain one (1) or more payment security devices from your clients • If a neutral set of rules such as the UN Convention on Contracts for the International Sales of Goods is not automatically applicable, try to convince your client to accept its application • Murphy’s Law: Anything that can go wrong will go wrong… Keep this proverb in mind while drafting your Sales Agreement and protect your interests accordingly… • Good Luck!

SALE OF GOODS – ARTICLE 2 OF THE UNIFORM COMMERCIAL CODE