Variation by Agreement Within Article 2

Curtis Bridgeman

Florida State University

First…What about opting out of Article 2 altogether? Complicated, and beyond our scope here. Possibilities include: Arbitration CISG or other non-U.S.-state law Forum-shopping within U.S.

Although 49 states have enacted article 2, not all do so uniformly, and some states may have more or less desirable case law.

Courts will be especially wary in consumer contracts.

Presumption in UCC is that terms can be varied by agreement § 1-302. Variation by Agreement (a) Except as otherwise provided in

subsection (b) or elsewhere in [the UCC], the effect of provisions of [the UCC] may be varied by agreement.

Article 2 has few provisions that cannot be varied by agreement Broad categories include: Formation issues Issues that directly affect third parties Naughty behavior Some remedies A few odds and ends not worth discussing in

detail (e.g. 2-715(1) (statute of limitations), 2-616 (what happens after notice is given that performance will fail because of excuse)).

Formation Issues

Naturally, it is hard to vary the rules for when an agreement is enforceable by agreement without implicating those very rules…

…unless, of course, we are referring to modifications of agreements.

For example, parties may require that modifications be in writing even if they otherwise would not have to be (2-209(2)).

Formation (cont’d)

According to 2-201(1), contracts for the sale of goods worth over $500 must be in writing in order to be enforceable. But…

…in practice, the exceptions of 2-201(3) eat away at this rule. For example, when a buyer receives and accepts goods notwithstanding the lack of a writing – which can be seen as a tacit agreement to do without a writing – it can be held to the contract at least to the extent of those goods. 2-201(3)(c).

Formation (Cont’d)

Other formation issues are very much relaxed in Article 2 compared to pre-code common law, making Article 2 much more likely to find an enforceable agreement:

Offer and acceptance (2-204 recognizes a contract based on “any manner sufficient to show agreement” even if “the moment of its making is undetermined”).

Indefiniteness (2-204(3), 2-305, 2-306). No mirror image rule (2-207) No consideration required for modifications (2-209). Eager to recognize modifications and waivers through course of

performance (2-208).

Third Parties

Article 9 has many more mandatory rules than Article 2, no doubt in large part because of the effect on third parties. Article 2 has less effect on third parties, but…

2-318 limits the abilities of sellers to disclaim warranties to third parties for personal injury that it extends to buyers themselves.

2-403(2) allows merchants to transfer to title to buyers in the ordinary course of business if entrusted with goods.

Naughty Behavior

§ 1-302. Variation by Agreement(a) Except as otherwise provided in subsection (b) or

elsewhere in [the UCC], the effect of provisions of [the UCC] may be varied by agreement.

(b) The obligations of good faith, diligence, reasonableness, and care prescribed by [the UCC] may not be disclaimed by agreement. The parties, by agreement, may determine the standards by which the performance of those obligations is to be measured if those standards are not manifestly unreasonable. …

Naughty Behavior (cont’d)

“Good faith” is normally defined as at least “honesty in fact”

Revised article 1, and for merchants article 2, add “…and the observance of reasonable commercial standards of fair dealing.” 1-201(20); “…fair dealing in the trade.” 2-103(1)(b).

Naughty Behavior (Cont’d)

Parties may decide for themselves what counts as good faith, so long as those standards are not “manifestly unreasonable.” 1-302(b).

In practice, though, I have been able to find virtually no cases where “good faith” is defined explicitly in the contract.

Naughty Behavior (cont’d)

Unconscionable Contracts 2-302. The language does not suggest 2-302

can be avoided by agreement, and obviously clauses that purported to do so would presumably themselves be held unconscionable.

2-719(3) Limiting remedies so that they do not include personal injuries is per se unconscionable. (More on this in a moment….)

Remedies

Most complicated set of limitations. Also most controversial. As a general matter, it seems parties are unable to

contract away from any sort of remedy altogether. “…it is of the very essence of a sales contract, that at least minimum adequate remedies be available. If the parties intend to conclude a contract for sale within this Article they must accept the legal consequences that there be at least a fair quantum of remedy for breach….” 2-719 cmt. 1.

Remedies (cont’d)

Why must minimum remedies be available for breach? Presumably parties are still free to negotiate alternative means of performance as they wish, e.g. in “take or pay” contracts, thus making it as easy as they like to avoid breach in the first place. It is not at all clear why the Code drafters allow parties to define breach however they want, but place limits on their ability to define the consequences of breach.

Remedies – Liquidated Damages Like the common law, Article 2 will not enforce

liquidated-damage clauses deemed punitive. Amounts must be “reasonable in light of the anticipated or actual harm.”

Language “or actual harm” is a departure from pre-code common law (replicated in Second Restatement). CL judged reasonableness as of the time of contract formation, but this language invites a second look. Theoretically this should make these clauses more likely to be enforced. But…

Liquidate Damages (cont’d)

…common-law courts have struggled with cases where liquidated-damages clause gives an estimate that was reasonable at time of contracting, but as things turned out there were clearly no damages suffered.

Very few UCC cases have tested the reaches of the second-look standard.

Liquidated Damages (cont’d)

Like common law, the more difficult proof of loss, the more likely the clause is to be enforced. (2-718(1)).

Although 2-718(1) says “A term fixing unreasonable large liquidated damages is void as a penalty,” in rare cases small amounts are considered void as a “penalty.”

Cmt. 1 endorses this result: “An unreasonably small amount would be subject to similar criticism and might be stricken under the section on unconscionable contracts or clauses.”

Liquidated Damages (cont’d)

Small amounts most likely to be considered penalty when:

Shotgun clause (many ways to breach, but only one amount, thus no relationship between breach and damage amount), and/or…

When actual loss is particularly easy to determine. This is especially likely to be true for commodities.

Liquidated Damages (cont’d)

As in common-law cases, courts should take care to distinguish small liquidated-damage estimates from clauses that limit liability to a small amount, or exclude consequential damages.

Consequential damages may be excluded by agreement except for those relating to personal injury (2-719(3)) – and this is perhaps the most common change to the default rule.

Remedies -- Warranties

(Warranties are not remedies, but as we shall see they become tangled with remedies very quickly.)

Warranties completely variable by agreement Can give express warranties: 2-313. Code is more eager than common law to

imply warranties (2-314, 2-315), but seller can disclaim all warranties if done properly (clearly and conspicuously) (2-316).

Remedies (cont’d)

Perhaps most common problems involve express warranties – what counts as an express warranty vs. mere puffery, or the conflict between an express warranty and a disclaimer of all warranties.

In case of conflict, express warranties win out over “negation or limitation” of warranties. 2-316(1).

Remedies & Warranties

Although clauses that limit consequential damages “for injury to the person” are per se unconscionable (2-719(3)), arguably clauses that disclaim warranties for personal injury are not.

See 2-719 cmt. 3 (“The seller in all cases is free to disclaim warranties in the manner provided in Section 2-316.”).

And 2-316 cmt. 2 (“This Article treats the limitation or avoidance of consequential damages as a matter of limiting remedies for breach, separate from the matter of creation of liability under a warranty. If no warranty exists, there is of course no problem of limiting remedies for breach of warranty.”)

Remedies & Warranties

But some courts have struck down disclaimers of warranties for personal injury as being unconscionable under 2-719(3)

Other courts have found them unconscionable under 2-302.

White & Summers are troubled by this, and for good reason if we give weight to the comments. But…

It may not matter anyway if strict tort liability cannot be contracted around, and…

Remedies and Warranties (cont’d) What is the policy reason that disclaiming warranties

for personal injury would not be unconscionable, but disclaiming consequential damages would be?

“This won’t blow up in your hand, but if it does I will not pay for your medical bills.” Per se unconscionable. But…

“I do not promise or guarantee this won’t blow up in your hand after you buy it.” Not unconscionable? Hard to justify the distinction.

Remedies – Further Complications. A clause that purports to limit damages must

explicitly claim to be the exclusive remedy. 2-719(1)(b).

Even exclusive remedies can be avoided if they “fail of their essential purpose.” 2-719(2). In that case, “remedy may be had as provided in this Act.”

Remedies – Essential Purpose The “essential purpose” referred to in 2-

719(2) is the purpose of the remedy, not of the contract.

Most common example: remedy limited to repair, but seller is unwilling or unable to repair in a timely fashion

Remedies – Essential Purpose (cont’d) Some cases refer to “minimum adequate

remedies” language in comment to strike down remedies as failing of essential purpose.

Better understanding only applies 2-719(2) to situations not contemplated by the parties at time of drafting, like the inability to repair. Otherwise remedies should be either enforced or held unconscionable.

Remedies – Essential Purpose (cont’d) Complications occur when plaintiff seeks not only a

substitute for repair, but also consequential damages.

Suppose clause for sale of tractor says repair only, no consequential damages. As it happens, tractor cannot be repaired.

Plaintiff argues that remedy fails of its essential purpose, and therefore “remedy may be had as provided for in this Act,” including consequential damages, in this case for lost crops.