Role of a Revised Sale of Goods Act 2000



APPENDIX 3
SUMMARY OF PROPOSED CHANGES FOR [NEW] REVISED ARTICLE 2

(a) Introduction

Article 2 of the Uniform Commercial Code (Sales) is currently under revision by the American Law Institute and the National Conference of Commissioners on Uniform State Laws. The process has not been an easy one. A draft revised Article 2, which had already been approved by the American Law Institute, was due to be considered at the July 1999 NCCUSL annual meeting. However, there had been widespread criticism of the draft and it was removed from the agenda. A freshly appointed drafting committee prepared a new draft revision for presentation at the May 2000 ALI annual meeting. The draft was debated at the ALI meeting, but ALI will not give its final approval until next year. In the meantime, the draft is due for consideration at the July-August 2000 NCCUSL annual meeting. The main changes the draft proposes to Article 2 are in the following areas:

  • scope

    electronic contracting

    “battle of the forms”

    unconscionability

    warranties

    remedies

The following discussion looks at each of these areas in turn. It draws on the Prefatory Note to the current draft revision and the draft section comments.

(a) Scope

UCC section 2.102 is the current scope provision. It says that, unless the context otherwise requires, Article 2 applies to “transactions in goods”. The draft revision substitutes a new provision, numbered section 2.103. The main purpose is to clarify the application of Article 2 to mixed transactions involving the sale of goods and computer information. Proposed section 2.103 mirrors the Uniform Computer Information Transactions Act. It reads in relevant part as follows:

“(b) If a transaction includes computer information and goods, this article applies to the goods but not to the computer information or informational rights in it. However, if a copy of a computer program is contained in and sold, or pursuant to Section 2.313A or 2.313B, leased as part of goods, this article applies to the copy and computer program unless:

(1) the goods are a computer or computer peripheral; or

(2) giving the buyer or lessee of the goods access to or use of the program is ordinarily a substantial purpose of transactions in goods of the type sold or leased.

(c) In a transaction that includes computer information and goods, then with regard to the goods, including any copy of a computer program constituting goods under Section 2.102(a)(23), the parties may not by agreement alter a result that would otherwise be required by this article”.

The expressions “computer information”, “computer program”, “information”, “informational content” and “information rights” are all defined in proposed section 2.102(a).

The draft comment to section 2.103 says:

“This section states, with a limited exception, that the rules in Article 2 do not explicitly apply to the computer information aspect involving both the sale of goods and the transfer of an interest in computer information. In that case, if the State has not enacted a statute (such as the Uniform Computer Information Transactions Act) specifically dealing with computer information transactions, a court must select an appropriate rule to govern that aspect of the transaction.”

The limited exception is that Article 2 does apply to the computer information component of the transaction if a computer program is contained in the goods and supplied with them, subject to the qualification that section 2.103(b) mentions. So, for example, the computer program that controls a car’s antilock braking system is governed by Article 2, as is the copy in which the program is contained. However, an upstream contract to develop or supply the program to the car manufacturer is beyond the scope of Article 2. So is a separately licensed program for a digital camera that enables the camera to link to a computer: draft Comment on section 2.103.

(a) Electronic contracting

The draft revision contains provisions to facilitate electronic sales contracts. The Article 2 formal requirements have been redrafted in medium neutral language. For example:

  • the statute of frauds provision in current section 2.201 requires a contract in some cases to be evidenced “in writing” “signed” by or on behalf of the party against whom enforcement is sought. The proposed new provision refers instead to a “record” “authenticated” by or on behalf of the party against whom enforcement is sought. “Record” means “information that is transcribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form”: section 2.102(a)(34). “Authenticate” means “(i) to sign, or (ii) to execute or otherwise adopt a symbol, or encrypt or similarly process a record in whole or in part, with the present intent of the authenticating person to identify the person or to adopt or accept a record or term”: section 2.102(a)(1). There are corresponding changes to the modification, rescission and waiver provision in section 2.209;

    the parol evidence rule in section 2.202 has been modified, substituting “record” for “writing”; and

  • the rules governing contract formation in section 2.204 now make express reference to the “interaction of electronic agents”. Draft new section 2.204(d) reads as follows:

“(d) Except as otherwise provided in Sections 2.211 through 2.213, the following rules apply:

(1) A contract may be formed by the interaction of electronic agents of the parties, even if no individual was aware of or reviewed the electronic agents’ actions or the resulting terms and agreements.

(1) A contract may be formed by the interaction of an electronic agent and an individual acting on the individual’s own behalf or for another person. A contract is formed if the individual takes actions that the individual is free to refuse to take or makes a statement that the individual has reason to know will:

(A) cause the electronic agent to complete the transaction or performance; or

(A) indicate acceptance of an offer, regardless of other expressions or actions by the individual to which the electronic agent cannot react.

(1) If an offer evokes an electronic record in response, a contract is formed, if at all:

(A) if the electronic record operates as an acceptance under Section 2.206, when the record is received; or

(B) if the offer is accepted under Section 2.206 by an electronic performance, when the electronic performance is received”.

Subsections (d)(1) and (2) are derived from Uniform Electronic Transactions Act, section 14(a) and (b).

According to the draft Comments, subsection (d)(1) confirms that contracts may be formed by machines functioning as electronic agents for parties to a transaction. The purpose is to negate any claim that lack of human intent at the time of contracting prevents a contract from coming into existence. When machines are involved, the requisite intent to contract flows from the programming and use of the machine. Subsection (d)(2) validates contracts formed by an individual and an electronic agent. It substantiates an anonymous click-through transaction. Subsection (d)(3) places the risk of transmission in an electronic transaction on the sender. Contrast the rule for paper transactions, which is that acceptance occurs at the point of dispatch.

Draft sections 2.211, 2.212 and 2.213 are new. Section 2.211 deals with the legal recognition of electronic contracts, records and authentication. It provides as follows:

“(a) A record or authentication may not be denied legal effect or enforceability solely because it is in electronic form.

(b) A contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation.

(c) Subsection (a) and Section 2.104(b) and (c) only apply to transactions between parties each of which agrees to conduct transactions by electronic means. Whether the parties agree to conduct transactions by electronic means is determined from the context and surrounding circumstances, including the parties’ conduct.

(d) This article does not require a record or authentication to be created, generated, sent, communicated, received, stored, or otherwise processed by electronic means or in electronic form.

(e) A contract formed by the interaction of an individual and an electronic agent under Section 2.204(d)(2) does not include terms provided by the individual if the individual had reason to know that the agent could not react to the terms as provided”.

Subsections (a) and (b) derive from Uniform Electronic Transactions Act, section 7(a) and (b). Subsections (c) and (d) derive from UETA section 5(a) and (b). Subsection (e) derives from Uniform Computer Information Transactions Act, section 206(c).

Draft section 2.212 deals with attribution. It provides as follows:

“An electronic record or an electronic authentication is attributed to a person if the record was created by or the authentication was the act of the person or the person’s electronic agent or the person is otherwise bound by the act under the law”.

This provision is based on UETA section 9. The draft Comments explain the provision as follows:

“As long as the electronic record was created by a person or the electronic authentication resulted from a person’s action it will be attributed to that person. The legal effect of the attribution is to be derived from other provisions of this Act or from other law. This section simply assures that these rules will be applied in the electronic environment. A person’s actions include actions taken by a human agent of the person as well as actions taken by an electronic agent, i.e., the tool, of the person. Although this section may appear to state the obvious, it assures that the record or authentication is not ascribed to a machine, as opposed to the person operating or programming the machine”.

Section 2.213 says:

“(a) An electronic record is effective when received even if no individual is aware of its receipt.

(b) Receipt of an electronic acknowledgment of an electronic record establishes that the record was received but, in itself, does not establish that the content corresponds to the content received”.

The provision is adapted from UETA, section 15 (e) and (f). The draft Comments explain the provision as follows:

“1. Subsection (a) makes clear that receipt is not dependent on a person having notice that the record is in the person’s electronic system. Receipt occurs when the record reaches the designated system whether or not the recipient ever retrieves the record. The paper analog is the recipient who never reads a mail notice.

2. Subsection (b) provides legal certainty regarding the effect of an electronic acknowledgment. It only addresses the fact of receipt, not the quality of the content, nor whether the electronic record was read or ‘opened’”.

(d) Battle of the forms

The draft revises and simplifies the “battle of the forms” provision in section 2.207. The new draft section 2.207 reads as follows:

“If (i) conduct by both parties recognizes the existence of a contract although their records do not otherwise establish a contract, (ii) a contract is formed by an offer and acceptance, or (iii) a contract formed in any manner is confirmed by a record that contains terms additional to or different from those in the contract being confirmed, the terms of the contract, subject to Section 2.202, are:

(1) terms that appear in the records of both parties;

(2) terms, whether in a record or not, to which both parties agree; and

(3) terms supplied or incorporated under any provision of the [Uniform Commercial Code]”.

The new provision states the terms of all contracts, and it is not limited to cases where there has been a battle of the forms. The draft Comments explain the provision as follows:

“1. This section applies only when a contract has been formed under other provisions of Article 2. Its function is to define the terms of that contract. Where forms are exchanged before or during performance, the subsection differs from original Section 2.207 and the common law in that it gives no preference to the first or the last form; it applies the same test to the terms in each. Terms in a record that insist on all of that record’s terms and no others as a condition of contract formation have no effect on the operation of this section. (Of course where one party’s record insists on its own terms as a condition to contract formation, where that party does not perform or otherwise acknowledge the existence of a contract, and where the other party does not agree to those terms, the record’s insistence on its own terms will keep a contract from being formed under Section 2.204 or 2.206, and Section 2.207 will not be applicable.) …

2. By inviting a court to determine whether a party “agrees” to the other party’s terms, the text recognizes the enormous variety of circumstances that may be presented to a court under this section, and the section gives the court greater discretion to include or exclude certain terms than original Section 2.207 did. In many cases mere performance should not be construed to be agreement to terms in another’s record by one that has sent or will send its own record with additional or different terms. Thus a party that sends a record (however labeled or characterized, including an offer, counteroffer, acceptance, acknowledgment, purchase order, confirmation or invoice) with additional or different terms should not be regarded as having agreed to any of the additional or different terms by performance; in that case the terms are found under paragraph (1) (terms in both records) and paragraph (3) (supplied by this Act). By the same reasoning performance after an original agreement between the parties (orally, electronically or otherwise) should not normally be construed to be agreement to terms in the other’s record unless that record is part of the original agreement.

The rule would be different where no agreement precedes the performance and only one party sends a record. If, for example, a buyer sends a purchase order, there is no oral or other agreement and the seller delivers in response to the purchase order but does not send its own acknowledgment or acceptance, the seller should normally be treated as having agreed to the terms of the purchase order”.

(d) Unconscionability

There are no substantive changes to the text of section 2.301, but the Preliminary Comment has been redrafted to encourage courts to be more flexible in their application of the provision to consumer contracts. The Prefatory Note to the draft revision summarizes the changes as follows:

  • Specifically, the Preliminary Comment:

    Recognizes that in certain circumstances a term can be held unenforceable on the basis of procedural or substantive unconscionability alone …

    Recognizes that disclaimers that meet the conspicuousness and language requirements of Section 2.316 can be held unconscionable under the traditional test …; and

    Provides additional support for the requirement imposed by some courts under Section 2.719 that sellers using exclusive remedy clauses provide at least a minimum adequate remedy to their buyers”.

(a) Warranties

(i) Remedial promises. The draft revision introduces a new category of actionable statement called a “remedial promise”. A remedial promise is a promise by the seller to repair or replace goods or to refund all or part of the price upon the happening of a specified event: section 2.102(a)(35). Examples include a commitment to repair any parts that prove to be defective, or a commitment to refund the purchase price if the goods fail to perform in a certain manner. The purpose is to resolve a statute of limitations problem. Section 2.725 currently provides that a right of action for breach of express warranty accrues at the time of tender, unless the warranty explicitly extends to future performance of the goods, in which case the cause of action accrues when the breach is or should have been discovered. By contrast, a right of action for breach of an ordinary (non-warranty) promise accrues when the breach occurs. The courts have divided on which of these rules applies where the seller breaches a commitment to take remedial action in relation to the goods in the event of a defect. Some courts have applied the time of tender rule. Others have applied the discovery rule even though the promise in question referred to the seller’s future performance, not the performance of the goods themselves: draft Comment on section 2.103(a)(35). Draft section 2.725 introduces a special set of rules for remedial promises. The basic rule is that the right of action accrues when the remedial promise is not performed when due. However, this is subject to a statute of repose-type qualification. If the remedial promise is made in connection with a warranty arising under section 2.313 (express warranties), 2.314 (merchantability) or 2.315 (fitness for purpose) or under section 2.313A or 2.313B (obligations to remote purchasers), an action may not be commenced more than two years after the right of action accrues or the period of limitations for the warranty or other obligation expires. If the remedial promise is not made in connection with any of the obligations specified above (for example, where the seller promises to repair or replace any part that proves to be defective but does not warrant that the parts will not fail), then an action may not be commenced more than two years after the right of action accrues or four years after tender of delivery to the immediate buyer or receipt of the goods by the remote purchaser, as the case may be: draft Comment on section 2.725.

(ii) Warranty of title. The draft revision amends section 2.312(1) (warranty of title) to cover the case of colourable claims that affect the value of the goods. The amendment says that the title “shall not, because of any colorable claim to the goods, unreasonably expose the buyer to litigation”. Examples include a sale of goods where the seller’s title is subject to litigation at the suit of a third party, and a sale of goods that are subject to export restrictions in their country of origin: draft Comment on section 2.312. The draft Comment says that “not only is the buyer entitled to a good title, but the buyer is also entitled to a marketable title, and until the colorable claim is resolved the market for the goods is impaired”. The amendment codifies case law on the application of section 2.312.

(iii) Express warranties. Section 2.313(1) currently reads as follows:

Express warranties by the seller are created as follows:

(a) Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to any affirmation or promise.

(a) Any description of the goods that is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.

(a) Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model”.

The draft revision adds a further category of case as follows:

“(d) Any remedial promise made by the seller to the immediate buyer creates an obligation that the promise will be performed upon the happening of the specified event”.

Section 2.313 imposes obligations on the seller to the immediate buyer only. The draft revision adds new sections 2.313A and 2.313B imposing warranty-type obligations on the seller to remote purchasers in certain cases. Section 2.313A covers obligations to a remote purchaser created by a record packaged with or accompanying goods. The draft Comment says the provision is meant to deal with so-called “pass-through warranties”. The typical case is where a manufacturer sells packaged goods to a retailer and includes in the package a record that sets out the obligations the manufacturer is willing to undertake in favour of the end consumer. The provision is limited to new goods that are sold in the normal chain of distribution. The operative part of the section reads as follows:

“(b) If a seller makes an affirmation of fact or promise that relates to the goods, provides a description that relates to the goods, or makes a remedial promise, in a record packaged with or accompanying the goods, and the seller reasonably expects the record to be, and the record is, furnished to the remote purchaser, the seller has an obligation to the remote purchaser that:

(1) the goods will conform to the affirmation of fact, promise or description unless a reasonable person in the position of the remote purchaser would not believe that the affirmation of fact, promise or description created an obligation; and

(1) the seller will perform the remedial promise”.

The measure of damages for breach of these obligations is “the loss resulting in the ordinary course of events as determined in any manner that is reasonable.” The seller is liable for incidental or consequential damages under section 2.715, but not for lost profits. The seller may limit or modify liability under the section so long as the modification or limitation is furnished to the remote purchaser no later than the time of purchase or it is contained in the record that contains the affirmation of fact, promise or description: section 2.313A(d).

Section 2.313B is a parallel provision that covers obligations to a remote purchaser created by communication to the public. The typical case is where: a manufacturer makes statements in its advertising which, if made to an immediate buyer, would amount to an express warranty or remedial promise under section 2.313; and the goods are sold to a person other than the recipient of the advertising and are then resold or leased to the recipient. By imposing liability on the seller, the section adopts the approach of cases such as Randy Knitwear Inc. v. American Cynamid Co. 11 N.Y. 2d 5; 226 N.Y.S. 2d 363; 181 N.E. 2d 399 (Ct App. 1962): draft Comment on section 2.313B. Section 2.313B does not apply if the seller’s communication is made to an immediate buyer. The immediate buyer’s remedy is governed by section 2.313. To recover under section 2.313B, the remote purchaser must, at the time of purchase, have knowledge of the affirmation of fact, promise, description or remedial promise and must also have an expectation that the goods will conform or that the seller will comply.

(iii) Third party beneficiaries of warranties, express or implied, warranty obligations and remedial promises. Section 2.318 in certain circumstances extends the seller’s liability for breach of express or implied warranty to third parties such as the buyer’s family members and guests. The draft revision expands this provision to cover obligations arising under sections 2.313A and 2.313B.

(iv) Disclaimer of warranty. Section 2.316 deals with exclusion or modification of warranties. The draft revision changes the current rules by imposing more detailed requirements for exclusion clauses in consumer contracts. The relevant part of the new provision reads as follows:

“(b) Notwithstanding subsection (c), unless the circumstances indicate otherwise, all implied warranties are excluded by expressions such as “as is” or “with all faults” or similar language or conduct that in common understanding make it clear to the buyer that the seller assumes no responsibility for the quality or fitness of the goods. In a consumer contract evidenced by a record, the requirements of this subsection must be satisfied by conspicuous language in the record.

(c) Subject to subsection (b), to exclude or modify an implied warranty of merchantability or fitness, or any part of either implied warranty, the following rules apply:

(1) In a consumer contract, the language must be in a record and be conspicuous and:

(A) in the case of an implied warranty of merchantability state “The seller undertakes no responsibility for the quality of the goods except as otherwise provided in this contract”; and

(B) in the case of an implied warranty of fitness, state “The seller assumes no responsibility that the goods will be fit for any particular purpose for which you may be buying these goods, except as otherwise provided in the contract.”

(1) In a contract other than a consumer contract, the language is sufficient if:

(A) in the case of an implied warranty of merchantability, it mentions merchantability; and

(A) in the case of an implied warranty of fitness, it states, for example, “There are no warranties that extend beyond the description on the face hereof”.

(3) Language that satisfies paragraph (1) also satisfies paragraph (2).”

Draft section 102(a) (10) defines “conspicuous” in medium neutral terms as follows:

“‘Conspicuous’, with reference to a term, means so written, displayed or presented that a reasonable person against which it is to operate ought to have noticed it. A term in an electronic record intended to evoke a response by an electronic agent is conspicuous if it is presented in a form that would enable a reasonably configured electronic agent to take it into account or react to it without review of the record by an individual. Whether a term is ‘conspicuous’ or not is a decision for the court. Conspicuous terms include the following:

(A) with respect to a person:

  • (i) a heading in capitals equal to or greater in size than the surrounding text, or in contrasting type, font or color to the surrounding text of the same or lesser size;

    (i) language in the body of a record or display in larger type than the surrounding text, or in contrasting type, font or color to the surrounding text of the same size, or set off from surrounding text of the same size by symbols or other marks that call attention to the language; and

(A) with respect to a person or an electronic agent, a term that is so placed in a record or display that the person or electronic agent cannot proceed without taking action with respect to the particular term.”

(a) Remedies

(i) Prepaying consumer buyer. Section 2.502 currently allows a prepaying consumer buyer to recover the goods if the seller becomes insolvent within ten days after receipt of the first installment of the purchase price. The draft revision extends this right of recovery to a consumer buyer in the case where the seller repudiates the contract or fails to deliver the goods as agreed.

(ii) Cure. Section 2.508 currently gives the seller a right of cure in cases where the buyer rejects the goods. The new draft provision extends also to the case where a non-consumer buyer justifiably revokes acceptance of the goods under section 2.608(a)(2). The seller must have performed in good faith. Also, where the agreed time for performance has passed, the cure must be “appropriate and timely in the circumstances”. The seller is required to compensate the buyer for the buyer’s reasonable expenses caused by the seller’s breach of contract and subsequent cure.

(iii) Notice of breach. Section 2.605 covers the case where a buyer rejects goods but fails to notify the seller of a particular defect that is ascertainable by reasonable inspection. The provision says that the buyer may not rely on the unstated defect to justify rejection or establish breach where: (1) the seller could have cured the defect if stated seasonably; or (2) between merchants, the seller has after rejection made a request in writing for a full and final statement of all defects on which the buyer proposes to rely. The draft revision expands this rule to cover revocations of acceptance. It also limits the consequences to the buyer of non-compliance. It prevents the buyer from relying on the defect to justify the rejection or revocation of acceptance. However, in contrast to the current law it does not prevent a buyer in a damages claim from relying on the unstated defect to establish breach. Waiver of a right to damages for a breach because of a failure properly to notify the seller is governed by section 2.607(c)(1). The revised version of this provision says that “where a tender has been accepted, the buyer must within a reasonable time after the buyer discovers or should have discovered any breach notify the seller; however, failure to give timely notice bars the buyer from a remedy only to the extent that the seller is prejudiced by the failure” (emphasis added). The words in italics are new.

(iv) Reasonable use of goods following rejection or revocation of acceptance. Section 2.608 governs the buyer’s right to revoke acceptance of goods. The draft adds a new subsection (1) which says that if the buyer uses the goods after a rightful rejection or justifiable revocation of acceptance, the following rules apply: (1) any use by the buyer that is unreasonable under the circumstances is wrongful as against the seller and is an acceptance only if ratified by the seller; and (2) any use of the goods that is reasonable under the circumstances is not wrongful as against the seller and is not an acceptance, but in an appropriate case the buyer may be required to compensate the seller for the value of the use. Rule (1) gives the seller a choice between ratifying the use, thereby treating it as an acceptance or pursuing a remedy in tort for conversion. Rule (2) permits reasonable use for the purpose of mitigating the buyer’s loss.

(v) Measuring market-based damages. Section 2.708 governs the seller’s right to damages for non-acceptance or repudiation. Section 2.713 governs the buyer’s right to damages for non-delivery or repudiation. Current section 2.708 measures the seller’s damages by reference to the market price of the goods at the time and place for tender. Current section 2.713 measures the buyer’s damages by reference to the market price of the goods at the time the buyer learned of the breach. Draft new section 2.713 changes the date to the date of tender. Draft new sections 2.708 and 2.713 both incorporate a provision to clarify the proper measure of damages in the case of anticipatory repudiation. The measure is the difference between the contract price and the market price at the expiration of a commercially reasonable time after the aggrieved party learned of the repudiation.

(vi) Seller’s consequential damages. Section 2.710 currently governs the seller’s right to incidental damages. The draft revision adds a new subsection to cover consequential damages: compare current section 2.715 (buyer’s incidental and consequential damages). Consequential damages include any loss resulting from general or particular requirements and needs of which the buyer at the time of contracting had reason to know and which could not reasonably be prevented by resale or otherwise. The seller’s right to recover consequential damages is limited to non-consumer transactions.

(vii) Specific performance. Section 2.716 currently says that specific performance may be decreed where the goods are unique or in other proper circumstances. The draft new provision goes on to say that in a contract other than a consumer contract, specific performance may be decreed if the parties have agreed to it. However, even if the parties have agreed to specific performance, it may not be decreed if the breaching party’s sole remaining obligation is the payment of money.

(viii) Liquidated damages. The draft revision simplifies the rules in section 2.718 governing the enforceability of liquidated damages provisions.

(ix) Statute of limitations. The draft revision amends the statute of limitations provision in section 2.725. The basic four year limitation period has been supplemented by a rule that permits a cause of action to be brought within one year after the breach was or should have been discovered but no later than five years after the time the cause of action would otherwise have accrued. The new provision precludes sellers from reducing the limitation period in consumer contracts. It also clarifies the accrual rules for causes of action based on different obligations.

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