Transactional Elements of Sales Contracts (2024)

Module 2: Transactional Elements of Sales Contracts

Statute of Frauds

Salvador Dali was a famous painter who, in the 1950's,was commissioned to paint the Statue of Liberty for a television show. WhenDali did not perform as allegedly agreed, the other party sued. Dali argued that the arrangement to paintconstituted a sale of goods under the UCC and was therefore subject to theCode's requirement that there be a written record for sales of goods. The courtruled that the arrangement to procure the painting was not a sale of a"good," so Dali lost.[1]

The Code’s requirement that there be a writing is theUCC’s version of the Statute of Frauds.

To address what was then perceived to be a widespreadproblem with contractual fraud, the English Parliament passed the original Statuteof Frauds in 1677.[2]The statute required certain types ofcontracts, including sales of goods, to be in writing in order to beenforceable. England repealed itslegislation in 1954 as it pertained to sales of goods. But the UCC continues toenforce this rule. It has been maligned by commentators, as, instead ofpreventing fraud, some argue that it actually promotes fraud when parties can claimthe absence of a writing allows them to escape enforcement of an otherwisevalid agreement.[3]

Section 2-201 of the UCC requires that in order to beenforceable, a contract for the sale of goods $500 or more must be in writing,signed by the party (or its agent) against whom enforcement is sought.[4]The terms of the writing need not necessarilybe complete or accurate and the writing of the agreement and its signing mayoccur at different times.[5] Allthat is necessary for the provision to be satisfied is that the writingindicate the existence of the agreement and the quantity of the goods to beexchanged. Even the price term can be left out without running afoul of the UCCStatute of Frauds. So, for example, if the writing states that the buyer agreedto purchase 100 loaves of bread, that is sufficient. The price can be agreed toorally or left to a UCC gap filler (which would simply insert a “reasonable”price).

Note that the contract cannot be enforced beyond the quantityreferenced in the writing if a larger quantity is agreed to orally.[6] Forexample, imagine that Acme Corporation orders 10,000 fluorescent bulbs fromChandler’s Electrical Supply. Thepurchase order and matching invoice stipulated a quantity of 10,000 but Acmeclaimed it ordered 12,000 and has a phone recording showing that the partiesagreed to 12,000 orally. Because the writing specified a quantity of 10,000,under the UCC Statute of Frauds, only the sale of 10,000 units can be enforced.

Between merchants, the Code allows a received writtenconfirmation of an oral order to satisfy the statute of frauds requirement.After agreeing to an order, which may be oral, emailed, online, etc., themerchant may send a confirmation of the agreement to the other party. Under the UCC, the party receiving theagreement has ten days to object to the confirmation. If the receiving party fails to object to theagreement within ten days, then the parties are bound even without the originalagreement having been in writing. This is assuming that the original agreementcan be proven (such as with an email exchange or recorded phone call). Theconfirmation itself must comply with the requirements of the statute of frauds.[7]

The Code specifies exceptions regarding when a party mayprovide evidence of an agreement without a writing. For example, if the partiesorally agree to the production of specially manufactured goods not saleable toothers in the ordinary course of business, and the seller has alreadysubstantially commenced production or procurement of the goods in question,then the agreement will be enforceable.[8]

Forexample, Acme Corporation builds replicas of old Ford Mustang sports cars withmodern safety and convenience features. Each vehicle is manufactured according to specifications selected by theindividual purchaser and at a purchase price of $100,000. Jeff orders a model from Acme and Acme weldstogether the chassis and frame. AfterAcme configures the engine and transmission, Jeff cancels the order and claimsthat since nothing was in writing, their agreement is unenforceable. Given that production substantially commencedon a specially manufactured good and the amount of the agreement exceeds $500, Jeff would arguably be liable under this statute of frauds exception (assumingthat the initial agreement can be proven).

Another exception exists when a party admits in pleadingsor court testimony to the existence of the agreement. Such admission can establish the existence ofthe agreement without a writing.The Code also provides that when a party haspaid for goods and accepted the shipment of those goods, then the existence ofthe agreement has been shown by performance, even though there is no writing.[9]

Some courts have allowed estoppel (when the other partyreasonably relies on an oral agreement to its detriment) or fraud by the partyasserting that there’s no agreement as exceptions. These may allow a party to provean agreement in the absence of a writing where enforcing the writingrequirement would be unjust.[10]

Forexample, Acme Corporation imports exotic sports cars and Jeff agrees to buy oneof their very expensive models. Jeff lies about his finances, though he knew hecould not afford to buy the car. He doesnot have the funds to pay Acme for the vehicle he ordered and when Acme learnsof Jeff’s fraud, it cancels the order, but bills Jeff for losses it suffereddue to the agreement. Jeff claims there is no writing, but his fraud mayoperate to prevent him from denying liability on the agreement.

Parol Evidence Rule

The parol evidence rule governs the admissibility ofevidence at trial. Specifically, itaddresses what extrinsic evidence, if any, can be admitted thatcontradicts or varies the terms of a written agreement. The purpose of the ruleis to preserve the integrity of written instruments and encourage the partiesto ensure that written agreements are complete and proper. The rule can be confusing in itsinterpretation and application and leaves judges with significant discretion indetermining what evidence can be used to ascertain a contract's terms andmeaning.[11]

If a writing is intended to be a complete and exclusiveexpression of the terms of an agreement, then evidence of additional terms,whether or not they contradict the writing, must be excluded. The parties may includein an agreement a "merger clause," which expressly provides that thecontract is complete and exclusive. For an agreement that is not a complete andexclusive writing of all terms, but leaves some terms incomplete, a court may considerevidence of additional terms that do not contradict the written agreement.[12]

Forexample, assume Acme Auto Repair orally agrees to purchase 100 car batteries at$200 each from Baker Auto Supply. The parties later sign a contract for 100 carbatteries at $175 each. Baker ships 100car batteries and demands $20,000. Acmeinsists that it only owes Baker for 100 car batteries at $175 each. Since theprices set forth by the agreements contradict each other, the written agreementcontrols, and evidence of the first agreement must be excluded.

Courts interpreting Article 2 have added yet anotherdimension of complexity to the parol evidence rule. Courts use differentcriteria to determine whether a writing is complete and exclusive. One approachis the "four-corners test" which is an examination solely of theagreement itself without reference to evidence outside the writing. Anotherapproach also looks at the agreement in the context in which it was concludedto determine whether the agreement is complete in itself.[13]

Beyond the common law parol evidence rule, the Codeprovides that course of performance, course of dealing or usage of trade may beused to assist a court in interpretation of an agreement, even one that iscomplete and exclusive in its terms and even when the agreement is clear on itsface.[14] For agreements that are not complete, theCode additionally allows evidence of “consistent additional terms” to explainor supplement the writing.[15] Fraud and mistake also operate as exceptionsto the parol evidence rule. Evidence otherwise inadmissible under the parolevidence rule may be admitted by a court in order to prevent fraud or clarify amistake.[16]

Battleof the Forms

One of the most noteworthy provisions of Article 2 isSection 2-207, which has been dubbed by legal scholars as the "battle ofthe forms" provision.[17]In a typical commercial sale, a buyer submitsa purchase order to a seller, who then sends the buyer a confirmation orinvoice. The forms thus exchanged may contain differing terms. It then becomesdifficult to definitively ascertain whether an agreement between the partiesexists and, if so, what the terms are. The “battle of the forms” provision ofSection 2-207 was intended to provide some guidance by stipulating the rulesthat govern the resolution of disagreements involving the use of forms.[18]

Under the common law “mirror image”rule, any change to the terms of an offer operated as rejection of the originaloffer and a counteroffer with the new terms. When the parties exchanged varyingforms, the last form operated as a counteroffer that the other party couldaccept or reject. This “last-shot” rule, like many of the common law rules theCode sought to remedy, was not based on commercial realities and did notpromote effective and efficient transactions.[19] Thus,while the mirror image rule still applies in other contracts, the UCCdramatically changed the rule for contracts for the sales of goods.

Section 2-207 provides that if a formconstitutes a “definite and seasonable” expression of acceptance of an offer,then there is a validly enforceable agreement, even though the acceptance orconfirmation provided terms different from those in the original offer.[20] This provision effectively eliminates thecommon law mirror image rule and allows the parties to vary the terms of anagreement in the course of their transactions. However, the Code provides thatan acceptance made conditional on the inclusion of the additional terms is NOTconsidered an acceptance.

In order to ascertain the terms of acontract in the event of variance between the offer and acceptance, the Codedistinguishes between contracts made by merchants and contracts made bynon-merchants. If a contract involves atleast one non-merchant, then the varying acceptance operates as an acceptance onthe terms of the offer. Any additional terms constitute proposals foradditional agreements that are ineffective unless agreed to by the other party.

For example,assume that Bill, a non-merchant, orders a used car on eBay from Jim’s ChevyDealership with an advertised price of $10,000. Jim sends Bill a confirmationthat says “Thank you for your order, which is accepted and processed. Pleasenote that the car must be removed from our lot by you within 48 hours or yourorder will be cancelled.” Since neither the car ad nor the order said anythingabout the 48-hour pickup requirement, the acceptance (the confirmation) variedfrom the offer (the order). Under Section 2-207, the contract is valid, but the48-hour pickup requirement does NOT become part of the agreement unlessaccepted by Bill.

If both parties are merchants, though,then the Code provides that the additional terms DO become part of the contractunless one of three exceptions applies. The first exception is that the offerorcan expressly forbid the alteration of the offer. If the offeror does so, thenany changes are ineffective. A second exception is if the terms of theacceptance materially alter the terms of the offer, then the alteredterms do not become part of the agreement. Finally, if the other party objectswithin a reasonable time of the alterations, those alterations do not becomepart of the agreement.[21]

For example, AcmeAuto Repair requests in writing a shipment from Baker Auto Supply to purchase400 truck tires at $130 each. Baker responds with an acceptance, but theacceptance states that he can only provide 395 tires, so he crosses out “400”and inserts “395.” This is probably not a material change. So, the 395 wouldbecome the binding agreement unless Acme’s offer stipulated that the ordercould not be altered or unless Acme objects to the change from 400 to 395within a reasonable time.

Modifications

At common law, modifications to a contract after it hadbeen executed needed to be supported by additional consideration on both sides.Otherwise, the modifications, even if agreed to by both sides, were treated asgratuitous, unenforceable promises.[22] Article 2 allows the parties to modify acontract without compromising the agreement's enforceability, even if there isno new consideration. However, to be binding, the Code imposes a good faithrequirement.[23] Good faith means “honesty in fact and the observanceof reasonable commercial standards of fair dealing in the trade.”[24] The modification must have legitimate purposeand not be the product of pressure by one party on the other, to the extentthat the coerced party has no meaningful choice.[25]

Forexample, assume that Joe agrees with Jane, who owns a hardware store, that Joewill buy 10 snow shovels for $20 each on January 15. On January 14, there is abig snowstorm and, suddenly, Jane can get twice as much for each shovel. Shetells Joe that she won’t sell the shovels to him for less than $30. Joe,needing the shovels now, agrees to the new price. This modification will not bebinding because Jane used undue pressure and the modification was not made ingood faith.

On theother hand, assume that Jane’s supplier ran out of shovels and she could notget shovels wholesale except by paying an extra $10 per shovel. Afterdiscussion, Joe agrees to pay an extra $5 per shovel so that they can split thecosts of this development. This seems like a good faith modification and willlikely be enforced.

Article 2 also allows use of a "no-oralmodification" clause, which bars enforcement of any subsequent oralmodifications. These clauses wereunenforceable under the common law. If amerchant and non-merchant are the parties to an agreement, then thenon-merchant must separately sign the no-oral modification clause.[26]Even where allowed, modifications may need to comply with the Statute of Fraudsif the new agreement is so covered.[27]

Forexample, Tom orally agrees to buy a motorcycle from Acme Corporation for$450. He later talks to a salespersonand, after acknowledging some confusion regarding model and options, agrees toadjust the price to $550. Since the saleof the motorcycle is now in excess of $500, the agreement between Acme and Tomis within the statute of frauds and must be in writing.

If the modification does not satisfy the Statute of Fraudsrequirement, it may still operate as a waiver, in the sense that theother party, by agreeing to a modification, may waive its objection to theagreement. While the modification may be excluded by the Statute of Frauds, awaiver would achieve the same result as the invalid modification.[28]However, some courts have held that for such a waiver to be effective, theother party needs to demonstrate reasonable detrimental reliance on the waiver.[29]

In our next module, we’ll look at warranties and otherimplied elements of agreements, such as the unenforceability of unconscionableagreements and special rules that apply to electronic transactions.