UCC Fundamentals: – A Guide to Article 2 (Sales)
Part 3: Contract Formation
In our two previous posts, we tackled questions surrounding when UCC Article 2 applies and when a contract for the sale of goods needs to be in writing. This entry of our UCC fundamentals series asks, “how do I form a contract for the sale of goods?”
As most first year law students will tell you, any valid and enforceable contract requires an offer, an acceptance, consideration, mutual assent, and the absence of contract defenses. While there are a litany of rules pertaining to each element of contract formation, Article 2 streamlines the process into RCW 62A.2-204. Article 2 largely foregoes the formalities of contract formation and rather looks at the parties’ language and conduct to determine whether or not a contact has been formed.
Contract Formation in General – RCW 62A.2-204
RCW 62A.2-204(1) & (2) provide that “[a] contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract… even though the moment of its making is undetermined” (emphasis added).
Critically, this means that no specific formalities are required to form a contract for the sale of goods. Contracts can be formed in any manner sufficient to show agreement.
Methods for Contract Formation of Course of Performance, Course of Dealing, and Trade Usage
There are several core manners of contract formation, which the UCC ranks into a hierarchy of importance. First, courts examine the parties’ express terms to determine whether the manner of agreement is sufficient to warrant the formation of a contract. Next, if the parties’ express terms are insufficient, courts look next look to the parties’ course of performance; the parties’ course of dealing; and/or trade usage. RCW 62A.1-201(3) (UCC’s General Definition of “Agreement”).
Express terms include the language exchanged between the parties. For example, if an apple dealer’s offer states that the apple supplier must accept by shipping the apples directly to the apple dealer, that is the only manner by which offeree could accept the offer and form a contract.
Course of performance is the conduct between the parties as it relates to the particular transaction at hand, so long as the particular transaction involves repeated occasions for performance by a party; and the other party, with knowledge of the nature of the performance and opportunity for objection, accepts the performance or fails to object. RCW 62A.1-303(a). Course of performance is generally inapplicable to contract formation because a contract must presently exist in order for performance to be required.
Course of dealing is the conduct between the parties as it relates to previous transactions between them, that is fairly to be regarded as establishing a common basis of understanding as it relates to the present transaction. RCW 62A.1-303(b). For example, a manufacturer ships nails to a contractor monthly for 16 months in a row without a new contract for each shipment. The contractor routinely pays for the nails without communicating “I accept your offer” or otherwise manifesting acceptance of the new monthly shipments. If upon the next monthly shipment, the contractor attempts to reject a shipment on the grounds that the parties never agreed to a new shipment, the contractor will nevertheless be contractually bound to pay for the new shipment in accordance with the parties’ course of dealing established over the last 16 months. It is possible that the contractor could reject the goods as non-conforming, but that is a subject for a future entry in this series.
Trade usage is any practice or method of dealing having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed in the present transaction. RCW 62A.1-303(c). This manner of agreement is more easily understood in the context of interpreting the terms of the agreement rather than whether the parties entered into an agreement at all. For example, in the construction industry, a “2×4” piece of lumber actually does not measure out to be exactly 2 inches by 4 inches, rather, it typically measures to about 1.5”x3.5”. If a contractor attempt to reject a contract for the sale of 2×4 lumber because product supplied is actually 1.5 inches by 3.5 inches, the court will use trade usage, meaning the construction industry’s generally accepted meaning of a 2×4, to hold the contractor to the generally accepted usage in the industry.
Importantly, courts give greater weight to the respective manners of agreement in accordance with the following hierarchical order. Express terms will prevail over course of performance, course of performance will prevail over course of dealing, and course of dealing will prevail over trade usage. RCW 62A.1-303(e).
Considerations
This post considered whether the parties entered into an agreement governed by Article 2 of the UCC. In our next post, we will dig deeper into certain special UCC provisions pertaining to offer, RCW 62A.2-205, and acceptance, RCW 62A.2-206.
To learn more about UCC Article 2, contract formation, or contract acceptance, please contact Beresford Booth at info@beresfordlaw.com or by phone at (425) 776-4100.