Contract Law & UCC Article 2

Contract Law & UCC Article 2

Master contract formation, breach remedies, and sales of goods with free flashcards and spaced repetition practice. This lesson covers common law contracts, UCC Article 2 provisions, the statute of frauds, and the battle of the forms—essential concepts for the U.S. Bar Exam.

Welcome to Contract Law & UCC Article 2

Contract law forms the backbone of commercial transactions and civil agreements in the United States. For the bar exam, you'll need to master two distinct bodies of law: common law (governing services, employment, and real estate contracts) and the Uniform Commercial Code (UCC) Article 2 (governing sales of goods). Understanding when each applies, how contracts are formed, and what happens when they're breached is critical to success.

📊 The Big Picture: Common Law vs. UCC

Element	Common Law	UCC Article 2
Applies to	Services, real estate, employment	Sales of goods (movable, tangible items)
Offer specificity	Must be definite and certain	More flexible; gaps can be filled
Acceptance	Mirror image rule applies	Battle of the forms (§2-207)
Consideration	Required for modification	No consideration needed (§2-209)
Statute of Frauds	$500+ varies by state	$500+ must be in writing (§2-201)

Core Concepts

🎯 Contract Formation: The Essential Elements

Every enforceable contract requires:

1. Offer - A manifestation of willingness to enter into a bargain, creating the power of acceptance
2. Acceptance - An unequivocal agreement to the terms of the offer
3. Consideration - A bargained-for exchange of value (benefit or detriment)
4. Mutual Assent - Meeting of the minds (no fraud, duress, mistake)
5. Capacity - Legal ability to contract (age, mental competence)
6. Legality - Lawful purpose and subject matter

💡 Tip: Use the mnemonic "OACCML" (Offer, Acceptance, Consideration, Capacity, Mutuality, Legality) to remember all elements.

📜 The Offer

An offer must:

• Show intent to be bound (look for "I will sell you..." not "I'm thinking about...")
• Contain definite and certain terms (who, what, price under common law)
• Be communicated to the offeree

Common Law: Requires specificity on all material terms (price, subject matter, parties, quantity)

UCC Article 2: Much more flexible! Under §2-204, a contract can be formed even if some terms are missing. The UCC will "fill the gaps" with default rules:

• Price: Reasonable price at time of delivery (§2-305)
• Place of delivery: Seller's place of business (§2-308)
• Time for payment: Due at delivery (§2-310)
• Quantity: CANNOT be filled by UCC (must be specified or determinable)

🔺 Critical Distinction: Under common law, "I'll sell you my car for a fair price" is too vague. Under UCC, this could be enforceable as a contract for sale at a "reasonable price."

✅ Acceptance

Common Law - Mirror Image Rule: Acceptance must be the "mirror image" of the offer. Any deviation = counteroffer (rejection + new offer).

Offer: "I'll sell my bike for $200 cash"
         │
         ├──→ "I accept" = ACCEPTANCE ✅
         │
         ├──→ "I accept if you deliver it" = COUNTEROFFER ❌
         │     (now YOU are the offeror)
         │
         └──→ "I'll give you $180" = COUNTEROFFER ❌

UCC Article 2 - Battle of the Forms (§2-207): This is where the UCC dramatically differs! Additional or different terms in acceptance do NOT automatically destroy the contract.

🤔 Did you know? The Battle of the Forms was created because businesses send pre-printed forms with contradictory boilerplate terms. The common law mirror image rule would mean many commercial transactions never formed contracts!

💰 Consideration

Definition: Something of legal value bargained for and given in exchange for a promise.

Requirements:

1. Bargained-for exchange (not a gift)
2. Legal value (benefit to promisor OR detriment to promisee)

Common Law Rule: Consideration is required for:

• Initial contract formation
• Contract modifications
• Option contracts (unless merchant's firm offer under UCC)

UCC §2-209 Exception: No consideration needed to modify a contract for sale of goods! But:

• Must meet statute of frauds if modified contract is $500+
• Must be made in good faith

⚠️ Pre-existing Duty Rule: Promising to do what you're already obligated to do is NOT valid consideration.

❌ INVALID: "I'll pay you extra $500 to finish the house"
          (Builder already contracted to finish)

✅ VALID: "I'll pay you extra $500 to add a deck"
        (New work = new consideration)

Exceptions to Consideration Requirement:

1. Promissory Estoppel - Reasonable reliance on a promise causing detriment
2. Firm Offers (UCC §2-205) - Merchant's written promise to keep offer open (max 3 months)
3. Modification under UCC §2-209 - Good faith modifications need no consideration

📝 Statute of Frauds

Certain contracts MUST be in writing to be enforceable. Remember "MY LEGS":

• Marriage (in consideration of)
• Year (contracts impossible to perform within one year)
• Land (sale or transfer of interest in real property)
• Executor (promises to pay estate debts personally)
• Goods $500 or more (UCC §2-201)
• Surety (promises to answer for debt of another)

UCC §2-201 Special Rules for Goods:

Writing must:

• Indicate a contract was made
• Be signed by party against whom enforcement is sought
• Specify the quantity (most critical term!)

💡 Tip: Price, time, place can be omitted from the writing under UCC, but NEVER quantity!

UCC Exceptions (enforceable even without writing):

1. Specially manufactured goods - Not suitable for sale to others in ordinary course, seller has substantially begun manufacturing
2. Admission in court - Party admits in testimony/pleadings that contract existed (only enforceable up to quantity admitted)
3. Part performance - Payment accepted or goods received (enforceable to extent of performance)
4. Merchant's confirmatory memo - Between merchants, if one sends written confirmation and other doesn't object within 10 days

Exception	Key Requirement	Limitation
Specially manufactured	Goods not suitable for resale + begun production	None if requirements met
Judicial admission	Party admits under oath in court	Only quantity admitted
Part performance	Payment made or goods delivered	Only quantity performed
Merchant memo	Written confirmation sent, no objection in 10 days	Both must be merchants

⚖️ Warranties Under the UCC

The UCC creates both express and implied warranties in sales contracts:

Express Warranties (§2-313):

• Created by affirmations of fact or promises about the goods
• Created by descriptions or samples/models
• Does NOT require words like "warrant" or "guarantee"
• Seller's opinion or "puffing" does NOT create warranty

🌍 Real-world example: "This car gets 30 MPG" = express warranty. "This is a great car" = puffing (not a warranty).

Implied Warranty of Merchantability (§2-314):

• Automatically applies when seller is a merchant with respect to goods sold
• Goods must be fit for ordinary purposes
• Must be adequately packaged and labeled
• Must conform to any promises on label

Implied Warranty of Fitness for Particular Purpose (§2-315):

• Seller knows buyer's particular purpose
• Buyer relies on seller's expertise to select suitable goods
• Applies to ANY seller (not just merchants)

┌─────────────────────────────────────────────┐
│        WARRANTY COMPARISON                  │
├─────────────────────────────────────────────┤
│                                             │
│  EXPRESS           MERCHANTABILITY          │
│  (§2-313)          (§2-314)                 │
│                                             │
│  ✓ Any seller      ✓ Merchant only         │
│  ✓ Affirmation     ✓ Ordinary use          │
│  ✓ Description     ✓ Auto-applied          │
│  ✓ Sample/model                             │
│                    FITNESS FOR PURPOSE      │
│                    (§2-315)                 │
│                                             │
│                    ✓ Any seller             │
│                    ✓ Particular purpose     │
│                    ✓ Buyer relies on seller │
│                                             │
└─────────────────────────────────────────────┘

Disclaimer of Warranties:

• Merchantability: Must mention "merchantability" and be conspicuous if written
• Fitness: Must be in writing and conspicuous
• "As is" or "with all faults" disclaims implied warranties
• Buyer's inspection: No implied warranty for defects that should have been discovered

🚫 Breach and Remedies

Perfect Tender Rule (UCC §2-601): Under the UCC, if goods or delivery fail in any respect to conform to the contract, buyer may:

1. Reject the whole
2. Accept the whole
3. Accept any commercial units and reject the rest

⚠️ This is much stricter than common law's "substantial performance" doctrine!

Limitations on Perfect Tender:

1. Installment Contracts (§2-612) - Can only reject installment if non-conformity substantially impairs value of that installment AND can't be cured
2. Cure (§2-508) - Seller has right to cure if:
   • Time for performance hasn't expired, OR
   • Seller had reasonable grounds to believe goods would be acceptable
3. Commercial Impracticability (§2-615) - Performance excused if unforeseen event makes performance commercially impracticable

Buyer's Remedies:

Remedy	Formula	When Used
Cover damages (§2-712)	Cover price - Contract price + incidentals - expenses saved	Buyer purchases substitute goods
Market damages (§2-713)	Market price - Contract price + incidentals - expenses saved	Buyer doesn't cover
Specific performance (§2-716)	N/A	Goods are unique or other circumstances proper
Consequential damages (§2-715)	Losses seller had reason to know about	Added to other remedies if foreseeable

Seller's Remedies:

Remedy	Formula	When Used
Resale damages (§2-706)	Contract price - Resale price + incidentals	Seller resells goods in good faith
Market damages (§2-708(1))	Contract price - Market price + incidentals	Seller doesn't resell
Lost profit (§2-708(2))	Profit seller would have made + incidentals	Lost volume seller
Price (§2-709)	Full contract price	Goods accepted or unable to resell

💡 Lost Volume Seller: A seller who could have made two sales (to breaching buyer AND to substitute buyer). Example: Car dealership has unlimited inventory.

🔄 Risk of Loss

Who bears risk if goods are destroyed before buyer receives them?

Step 1: Check if breach occurred

• Breaching party generally bears risk
• If seller ships non-conforming goods and buyer could reject → risk stays with seller

Step 2: Check if contract specifies (shipping terms)

• FOB (Free on Board) seller's location → Risk passes to buyer when goods delivered to carrier
• FOB destination → Risk stays with seller until goods arrive at destination
• FAS (Free Alongside Ship) → Risk passes when goods delivered alongside vessel
• CIF (Cost, Insurance, Freight) → Risk passes when goods loaded on ship

Step 3: Apply default UCC rules

┌────────────────────────────────────────────┐
│         RISK OF LOSS FLOWCHART             │
└────────────────────────────────────────────┘

    Is there a breach?
           │
      ┌────┴────┐
      ↓         ↓
    YES        NO
      │         │
   Breaching    Does contract
   party bears  specify?
   risk         │
           ┌────┴────┐
           ↓         ↓
         YES        NO
           │         │
        Follow     Is seller
        contract   a merchant?
        terms         │
                 ┌────┴────┐
                 ↓         ↓
               YES        NO
                 │         │
              Risk on    Risk on
              buyer at   buyer at
              delivery   tender

Default Rules (no breach, no shipping terms):

• Merchant seller: Risk passes to buyer when buyer takes physical possession
• Non-merchant seller: Risk passes when seller tenders delivery (makes goods available)

Examples with Explanations

Example 1: Battle of the Forms

Scenario: Ajax Corp (buyer) sends a purchase order to Beta Inc (seller) for 1,000 widgets at $5 each. The purchase order includes a clause: "Disputes resolved by arbitration." Beta responds with an acknowledgment form stating "We accept your order" but Beta's form includes: "All disputes resolved in New York courts." Both parties are merchants. Beta ships the widgets, Ajax accepts them. Later, a dispute arises.

Analysis:

1. Is there a contract? YES. Under UCC §2-207(1), Beta's response is a "definite expression of acceptance" even though it contains different terms. The mirror image rule doesn't apply.

2. Which dispute resolution clause governs? Apply §2-207(2):

   • Both are merchants ✓
   • Beta's term is "different" (not merely additional)
   • Most courts apply the knockout rule: Conflicting terms cancel each other out
   • Result: Neither arbitration clause nor forum selection clause is part of the contract. UCC gap-fillers apply (can sue in any court with jurisdiction).

3. What if Ajax were not a merchant? Then Beta's different term would be a mere proposal and would NOT become part of the contract unless Ajax expressly agreed to it.

💡 Bar Exam Tip: Always identify whether parties are merchants! This changes §2-207(2) analysis completely.

Example 2: Statute of Frauds Exception

Scenario: Seller orally agrees to sell Buyer 500 custom-embroidered jackets with Buyer's company logo for $10,000. Seller begins production and completes 200 jackets. Buyer then denies the contract exists.

Analysis:

1. Statute of Frauds applies? YES. This is a contract for goods over $500 under UCC §2-201.

2. Is there a writing? NO. Oral contract only.

3. Any exceptions apply?

   • Specially manufactured goods exception (§2-201(3)(a)): YES!
   • Goods are specially manufactured (custom logo)
   • Not suitable for sale to others in ordinary course of business
   • Seller has substantially begun manufacture
   • Result: Contract is enforceable despite lack of writing

4. Enforceable for how many jackets? Full 500. The specially manufactured goods exception doesn't limit quantity (unlike the part performance exception).

⚠️ Common Mistake: Students confuse "specially manufactured goods" with "part performance." Part performance only enforces contract up to the quantity actually paid for or delivered. Specially manufactured goods enforces the entire contract if requirements are met.

Example 3: Warranty Breach and Remedies

Scenario: Buyer contracts to purchase a commercial oven from Seller (a merchant) for $5,000. Seller describes it as "perfect for high-volume baking, can handle 50 loaves per hour." Buyer receives the oven, but it can only bake 30 loaves per hour and frequently overheats. Buyer immediately purchases a replacement oven from another vendor for $6,500. The market price for such an oven is $6,000.

Analysis:

1. What warranties exist?

   • Express warranty (§2-313): "Can handle 50 loaves per hour" is an affirmation of fact
   • Implied warranty of merchantability (§2-314): Seller is a merchant, oven must be fit for ordinary purposes (commercial baking)

2. Was there a breach? YES. Oven doesn't meet express warranty (only 30 loaves/hour) and arguably not merchantable (frequently overheats).

3. What damages can Buyer recover?

   • Buyer covered by purchasing substitute
   • Cover damages (§2-712): $6,500 - $5,000 = $1,500
   • Plus incidental damages (costs of finding replacement)
   • Note: Market price ($6,000) is irrelevant when buyer actually covers

4. Could Buyer have rejected the oven? YES, under perfect tender rule (§2-601), buyer could reject goods that fail to conform in any respect. But Buyer accepted the oven (used it), so rejection period has passed.

🌍 Real-world note: In practice, buyers often try to negotiate cure or price reduction before purchasing replacements, but under the UCC, they have the right to cover immediately after breach.

Example 4: Risk of Loss

Scenario: Seller (non-merchant) agrees to sell Buyer an antique desk for $2,000. Contract states "Buyer to pick up desk from Seller's home." Before Buyer picks it up, Seller calls and says "The desk is ready, you can come get it anytime this week." Two days later, before Buyer picks up the desk, Seller's home is struck by lightning and the desk is destroyed.

Analysis:

1. Is there a breach? NO. Lightning is not anyone's fault.

2. Does contract specify risk of loss? NO explicit terms about risk.

3. Apply UCC default rules:

   • Seller is non-merchant
   • Under §2-509(3), risk passes when seller tenders delivery
   • Tender = put and hold conforming goods at buyer's disposition with reasonable notice

4. Did Seller tender delivery? YES. Seller notified Buyer desk was ready and available for pickup.

5. Result: Buyer bears the risk of loss. The desk was destroyed after tender, so Buyer must still pay $2,000 even though Buyer never received the desk.

⚠️ Key Distinction: If Seller were a merchant, risk would stay with Seller until Buyer took physical possession. Non-merchant sellers get to shift risk earlier.

Common Mistakes

Key Takeaways

✅ Common law vs. UCC: Services/real estate vs. goods—know which applies!

✅ Formation is easier under UCC: Gap-fillers, battle of the forms, no consideration for modifications

✅ Statute of Frauds: $500+ for goods must be in writing (with 4 exceptions)

✅ Merchant status is crucial: Affects §2-207 (battle of forms), §2-205 (firm offers), §2-314 (merchantability warranty), risk of loss

✅ Perfect tender rule: UCC is stricter than common law substantial performance (but watch for cure rights and installment contracts)

✅ Warranties: Express (any seller), Merchantability (merchant only), Fitness (any seller with knowledge)

✅ Remedies: Buyer has cover/market damages; seller has resale/market/lost profit damages

✅ Risk of loss: Check for breach first, then contract terms, then default rules based on merchant status

📚 Further Study

For deeper exploration of contract law and UCC Article 2:

1. Cornell Legal Information Institute - UCC Article 2: https://www.law.cornell.edu/ucc/2 - Full text of UCC Article 2 with official comments explaining each section

2. American Bar Association - Contracts Overview: https://www.americanbar.org/groups/business_law/resources/contracts/ - Practice-oriented resources and recent developments in contract law

3. Barbri Bar Review - Contracts Outline: https://www.barbri.com/bar-exam-subjects/contracts/ - Comprehensive bar exam preparation materials and practice questions

🧠 Final Memory Device for Bar Exam Success:

"Good Contracts Make Passing Possible"

• Goods = UCC Article 2
• Common law = Services
• Merchants matter (§2-207, §2-205, §2-314)
• Perfect tender (but cure exists)
• Price, place, time can be filled by UCC (but NOT quantity!)

Master these distinctions, practice applying them to fact patterns, and you'll be well-prepared for contract law questions on the bar exam! 🎓