Impact Of Evolving Commercial Law On Standard Contract Provisions

Monday, November 1, 2004 - 01:00

Editor: Article 1 of the UCC provides general rules of construction for the code's interpretation and application, and defines various terms used throughout the UCC, including good faith. How have the drafters changed the definition of good faith?

Forte: Section 1-201(19) currently defines good faith simply as honesty in fact. The drafters have added an element of objectivity by requiring the parties to observe reasonable commercial standards of fair dealing. In the past, this objective obligation of good faith was imposed only on merchants. The new Section 1-201(20) would impose the objective obligation of good faith on consumers as well. Although the current and amended versions of Article 1 do not permit parties to include language in their contracts disclaiming their obligation of good faith, the parties can define their good faith obligation by tying it to an industry, trade association or other standard, provided that this standard is not manifestly unreasonable.

Editor: Choice of law provisions are frequently debated in contract negotiations. What changes have the drafters proposed to the UCC's choice of law provisions?

Forte: For commercial transactions not involving consumers, the drafters provide the parties with wide latitude concerning the law applicable to their transactions. The new Section 1-301 allows for the laws of any state to be chosen, except where another UCC provision specifies the applicable law or a fundamental policy issue is presented, and does not require that state to bear a reasonable relationship to the transaction.

If a consumer is involved, then the new Section 1-301 would require a reasonable relationship with the state or country designated and the choice of law cannot deprive the consumer of the protection available under the state or country whether the consumer principally resides or where the consumer makes the contract and takes delivery or the goods.

None of the seven states that have adopted the drafters' changes to Article 1, however, have adopted the new Section 1-301, and the New Jersey Law Revision Commission has recommended that the New Jersey legislature not include this provision in any amendments adopted.

Editor: When a contract dispute arises, questions are often asked about what information outside the contract can be used to clarify the parties' understanding of the transaction. What changes have the drafters made for determining the meaning of the parties' agreement?

Forte: The drafters' amendments to Section 1-205, which are found in revised Section 1-303, change the UCC's rules about the use of parol evidence. They've added a definition of "course of performance" to the concepts of "course of dealing" and "usage of trade" to aid in contract interpretation. "Course of performance" is the sequence of the parties' conduct if the agreement provides for repeated occasions for performance, as distinguished from "course of dealing," which is the sequence of conduct concerning previous transactions between the parties.

Currently, parol evidence is used when the contractual language is ambiguous. The new Section 1-303 provides that course of performance, course of dealing and usage of trade are always used along with the express contractual language to provide the framework for determining the parties' understanding. Thus, absent a specific clause in the parties' agreement disclaiming reliance upon course of performance, course of dealing or usage of trade, evidence of such performance, dealing or trade usage is admissible to explain a term in the parties' agreement without a finding by the court that the language of the agreement is ambiguous.

Editor: Please give an example of the changes made by the drafters in Article 2 to accommodate changing business practices.

Forte: The drafters have deleted Sections 2-319 through 2-324, which provided definitions of F.O.B., F.A.S., C.I.F. and other outdated terms. They also increased from $500 to $5,000 the amount of a contract for the sale of goods governed by the statute of frauds.

Also reflecting the increase in electronic commerce, the drafters have added the definition of "record" and modified the definition of "sign" to include electronic signatures and acceptances such as clicking on an "I Agree" box. The drafters also added the definition of "electronic agent," which is a program or other automated process of initiating or responding to electronic records without human intervention.

Editor: Corporate counsel often caution their clients not to proceed with a business transaction until both parties have signed a definitive agreement. Commercial exigencies, however, sometimes supersede best practices. How do the drafters address issues related to the formation of contracts?

Forte: The new Section 2-206 attempts to do away with the battle of forms. No longer will the last document exchanged between the parties carry the day. Under the new Section 2-206, if the parties' conduct evidences an agreement between them, then the common terms upon which the parties have agreed would apply and the UCC would be used to fill in the gaps.

Editor: One of the fundamental elements of a sale of goods is the transfer of title. What changes have the drafters made to Article 2's provisions governing warranty of title and against infringement?

Forte: Under current Section 2-312, the seller provides a warranty that the title is good and the transfer is rightful without any liens or encumbrances. The drafters have added language requiring the seller to warrant that his or her title to the goods is marketable, that is, the buyer will not be unreasonably exposed to litigation because of any colorable claim to or interest in the goods.

Editor: Other fundamental elements of a sale of goods are the express warranties. How have the drafters attempted to clarify Article 2's provisions governing express warranties?

Forte: The drafters distinguish the warranties that pass to the immediate buyer from those that pass to remote purchasers, and specifically defined the terms "immediate buyer" and "remote purchaser." The revisions to Article 2 also create the concept of "remedial promise," which is a promise by the seller to repair or replace goods or refund upon the happening of a specified event, and separate that concept from an express warranty, where it currently lies.

In their comments to Section 2-313, the drafters explain that the express warranties are the "dickered" aspects of the individual bargain negotiated between the seller and the immediate buyer. They add Section 2-313A to address the obligations of a seller to a remote purchaser in a record packaged with or accompanying the sale of the goods. To limit the remedies available to the remote purchaser, the modification or limitation of these obligations must be furnished to the buyer no later than the time of the purchase or can be contained in the record itself.

In Section 2-313B, the drafters attempt to address the discrepancy between the courts in their treatment of warranties created by communication from a seller to the public. Some courts have said that posting pictures, statements or other information on the web or in publications is enough to create a warranty running to a remote purchaser. Others have required that knowledge of the information and reliance on it by the remote purchaser must be shown. The drafters have essentially taken the latter position, and require the remote purchaser to establish that it entered into the transaction with knowledge of the affirmation of fact, promise or description and with the expectation that the goods will conform to the affirmation, promise or description.

Editor: Often in a commercial or consumer transaction, problems can be resolved quickly and inexpensively if the seller is given an opportunity to cure. How have the drafters addressed the issue of nonconforming tender?

Forte: Under the current Section 2-508, a seller has the right to cure if a buyer rejects the goods and the time for delivery has not expired or the seller reasonably believes the buyer would accept delivery with or without a money allowance. The drafters now permit the seller the right to cure in a situation in which the buyer has accepted the goods but thereafter justifiably revokes acceptance. This additional right to cure, however, does not apply to consumer transactions. The drafters also expressly require the seller to compensate the buyer for all the buyer's reasonable expenses caused by the seller's breach and subsequent cure.

Editor: What remedial measures have the drafters included for an aggrieved seller that incurs storage costs, lost commissions and other incidental and consequential damages as a result of the buyer's breach?

Forte: Section 2-710 currently enables an aggrieved seller to collect only incidental damages. The drafters have expanded the section to enable the seller to recover consequential damages, except a seller cannot recover consequential damages from a consumer. When merchants are involved, the seller's right to recover consequential damages can be altered by the parties' contract.

Editor: How have the drafters amended Article 2's statute of limitations?

Forte: Current Section 2-725 provides for a four-year statute of limitations and for the period to begin running from the date on which the cause of action accrues. The revisions extend that four-year period for an additional year provided that the action was brought within one year after the breach was or should have been discovered.

As in the current Section 2-725, the parties can shorten the period of limitations to not less than one year, but they cannot extend it. Revised 2-725, however, would not permit the parties to a consumer contract to shorten the statute of limitations.

Editor: Thank you for your excellent overview of a few key areas in which commercial law is evolving. Where can corporate counsel learn more about the language proposed by the drafters and the status of the UCC amendments in their states?

Forte: They can visit the website of the Uniform Law Commissioners, which can be found at www.nccusl.org/update.