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.

Warranties

Article Two provides for four types of warranties in connection with the sale of goods:

• 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.

Disclaiming Warranties

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.

Express Warranties

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.

Remedies

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 price.

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" remedy.

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 questionable.

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.