by J. Dianne Brinson and
Mark F. Radcliffe.
Important Provisions of Article Two
Article Two governs the substantive rights of the parties to a transaction. Freedom
of contract is the guiding principle of Article Two: The parties to a business transaction
may, by agreement, modify most of Article Two's rules.
The Writing Requirement
According to Article Two, a contract for the sale of goods for $500 or more is not
enforceable "unless there is some writing sufficient to indicate that a contract
for sale has been made between the parties" and it is signed by the party against
whom enforcement is sought (there are some exceptions). This provision doesn't require
you to use a formal written contract. All you need from the buyer is a signed writing
"sufficient to indicate that a contract for sale has been made." A writing is "sufficient"
if it states the quantity term correctly. A writing is "signed" if it includes "any
symbol executed or adopted by a party with present intention to authenticate a writing."
Presumably, for online sales the writing requirement is met if you have a reproducible
record of the terms of the agreement and a record of the user's response stored
in the computer's memory. A record of a buyer's emailed response to your offer should
also satisfy the requirement, so long as it is clear that the buyer intended to
form a contract.
In online ordering, it seems logical that the buyer's filling in of his or her name
on the order form should count as a signature. In an email, the buyer's email symbol
on the "from" line may count as a signature.
A few states -- California, Minnesota, Texas, Utah, and Washington -- have passed
laws to make it clear that a "digital signature" satisfies the "signed writing"
requirement. A digital signature is a piece of data added to a communication to
indicate that a certain person agreed to or authorized the contents of the communication.
Digital signature technology allows the recipient to verify the source and the integrity
of the communication.
Article Two provides for four types of warranties in connection with the sale of
- Implied warranty of merchantability.
- Implied warranty of fitness for particular purpose.
- Implied warranties of title and noninfringement.
- Express warranty.
For the three types of implied warranties, you should be aware that you may be making
these warranties every time you sell your product unless you take appropriate steps
to exclude the warranties.
Implied Warranty of Merchantability
When a merchant (defined earlier in this chapter) sells goods, a warranty that the
goods are "merchantable" is implied in the contract unless that warranty is excluded.
To be merchantable, goods must "pass without objection in the trade" and be "fit
for the ordinary purposes for which such goods are used."
Example: Big Company purchased a spreadsheet program that does not add correctly.
The program is not "merchantable" because it is not fit for the ordinary purposes
for which spreadsheets are used. Unless the seller excluded the implied warranty
of merchantability for the sale, the seller gave Big Company an implied warranty
that the program was merchantable. The seller is liable to Big Company for breaching
the implied warranty of merchantability.
To avoid disputes over whether goods are merchantable, many manufacturers and sellers
of goods exclude the warranty of merchantability. Article Two states that this warranty
can be excluded only with language that mentions merchantability. If the exclusion
is in writing (and it should be, for evidence purposes), the exclusion must be "conspicuous"
(in a different typeface, type size, or color from the rest of the contract). This
warranty also can be excluded by making it clear in the contract that the goods
are sold "as is."
Implied Warranty of Fitness
The "implied warranty of fitness for particular purpose" is made by a seller when
two factors are present: (1) The seller has reason to know of a particular purpose
for which the buyer requires the goods, and (2) the buyer relies on the seller's
skill or judgment to select suitable goods. The implied warranty of fitness for
particular purpose can be excluded through contract language that explicitly excludes
this warranty or by selling products "as is."
Implied Warranties of Title and Noninfringement
Unless excluded, each contract for the sale of goods also includes a warranty by
the seller that the seller has the right to transfer title in the goods and that
the buyer will get good title. The warranty of title can be excluded only by specific
language or by circumstances that give the buyer reason to know that the person
selling does not claim full title. Unless otherwise agreed, a "merchant" warrants
that the goods sold do not infringe third parties' intellectual property rights.
Many manufacturers and sellers of consumer products disclaim all of Article Two's
implied warranties. Instead, they warrant only that the product will, for a limited
period of time, be free from defects in materials and craftsmanship under normal
use and service.
State consumer protection laws and the Magnuson-Moss Warranty Act must be considered
in drafting warranty language. The Magnuson-Moss Warranty Act is a federal statute
that applies to consumer products manufactured after July 4, 1975. The statute defines
"consumer product" as "any tangible personal property that is distributed in commerce
and that is normally used for personal, family, or household purposes."
The purpose is of the statute is to make warranties on consumer products more understandable
and enforceable. It prohibits disclaiming or modifying the Article Two implied warranties
in the sale of a consumer product if a written warranty is given.
A seller can create express warranties by making statements of fact or promises
to the buyer, by a description of the goods, or by display of a sample or model.
An express warranty can be created -- in the physical world or in the online world
-- without using formal words such as "warranty" or "guarantee." All that is necessary
is that the statements, description, or sample become part of the "basis of the
bargain." To avoid making express warranties that you don't mean to make, you must
be careful about what you say -- and what your marketing representatives say --
in marketing your product or service.
According to Article Two, a buyer can obtain actual damages along with "incidental
damages" and "consequential damages" from a seller who breaches a contract. Incidental
damages are those resulting from the seller's breach of contract, such as expenses
incurred in inspecting and transporting rejected goods and obtaining substitute
goods. Consequential damages include any loss that could not reasonably be prevented
by the buyer that resulted from the buyer's requirements and needs that the seller
knew about (or had reason to know about). Consequential damages also include damages
for injury to person or property resulting from a breach of warranty.
Article Two states that a contract may provide for remedies "in addition to or in
substitution for those provided in this Article and may limit or alter the measure
of damages recoverable under this Article." Unless the contract remedy is the buyer's
exclusive remedy, the buyer can choose from the Article Two remedies or the contractual
remedy. Many manufacturers and sellers of products limit the buyer's remedy to repair
of the defect in the product, replacement of the product, or refund of the purchase
Most product manufacturers and sellers try to exclude consequential damages because
such liability exposes a seller to a risk of having to pay damages far in excess
of the product's price. Consequential damages may be limited or excluded unless
the limitation or exclusion is "unconscionable." The term "unconscionable" is not
defined in Article Two, but many courts have used the definition created by one
of the federal appellate courts: "Unconscionability has generally been recognized
to include an absence of meaningful choice on the part of one of the parties together
with contract terms which are unreasonably favorable to the other party." In the
case of consumer goods, limitation of consequential damages for personal injury
is assumed to be unconscionable.
If a seller excludes consequential damages or otherwise contractually limits remedies
and then "circumstances cause the… remedy to fail of its essential purpose" (that
is, leave the buyer with no real remedy), all of Article Two's normal remedies are
available to the buyer, possibly even consequential damages.
In one case involving a contractual limitation on damages, the buyer, a hospital,
had paid the seller, the software supplier Electronic Data Systems Corporation,
more than $2 million for software systems. The software systems were so defective
the hospital could not use them. The contract provision limited the hospital's damages
to $4,000, the amount of the average monthly invoice for the transaction. The court
found that because the hospital had paid more than $2 million for unusable software
systems, the $4,000 limit on damages failed to provide the hospital with an adequate
remedy and thus "failed of its essential purpose."
To avoid such a determination, many manufacturers and sellers who limit the customer's
remedy to repair or replacement also promise that they will refund the purchase
price if the product cannot be repaired or replaced. The refund promise is a "backup"
Clickwraps and Shrinkwraps
Many companies are beginning to use "clickwrap" agreements to define the terms and
conditions of transactions, to disclaim implied warranties of merchantability and
fitness, and to limit liability.
Software sellers have long used "shrinkwrap" agreements on product packaging for
these purposes. Whether shrinkwraps are enforceable is uncertain (some people take
the position that they are unenforceable "contracts of adhesion" because consumers
cannot really bargain with the seller). If the purchaser does not have the opportunity
to review the terms of the shrinkwrap prior to purchase, enforceability is particularly
Under a proposed revision to the UCC, shrinkwraps and clickwraps will be enforceable
only if the user actively manifests assent after having had an opportunity to review
the terms. A user has an "opportunity to review" the license terms if the license
is available before the user gets access, such that the user's attention is called
to the terms or provided in a conspicuous manner during the normal first use of
the work. A user manifests assent if, having had an opportunity to review a license
that states what conduct would constitute acceptance and having had the opportunity
not to take such action, he or she engages in such conduct. Forms 4, 8, and 10 include
tips on how to provide for an "opportunity to review" and the manifestation of assent
in online transactions.