CHAPTER 4 AFTER THE HANDSHAKE: The Impact of the Uniform Commercial Code on Contracts for the Sale of Minerals and Other Goods
| Jurisdiction | United States |
(Mar 1985)
AFTER THE HANDSHAKE: The Impact of the Uniform Commercial Code on Contracts for the Sale of Minerals and Other Goods
Danziger Bangser Klipstein Goldsmith & Greenwald
New York, New York
The buyer and seller have agreed: they have a deal. They shake hands, congratulate each other, and head off in separate directions. Nothing definitive is yet in writing, no one has signed anything. Nevertheless, each party believes he has a binding commitment from the other on which he can rely.
For longer than anyone can remember, purchases and sales of mineral products have been contracted by a handshake (or its telegraphic or telephonic equivalent). In the United States, for the last two decades, the law that has governed the transaction after the handshake has been Article 2 of the Uniform Commercial Code (the "Code"). The Code governs all contracts to sell "goods," whether animal, vegetable or mineral, raw or processed.
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Yet, despite the broad scope of the Code's provisions, many businesses go about the daily activity of buying and selling without any awareness of the significance of the Code as governing all legal questions concerning each transaction.
The purpose of this article is not to teach the reader everything he or she might ever want to know about the Code. Rather, its purpose is to highlight how the Code affects certain aspects of common commercial transactions, with a focus on problems and concerns of particular interest to buyers and sellers of mineral products.
What Contracts are Covered by Article 2 of the Code?
Article 2 of the Code, by its terms, is limited to "transactions in goods" (Section 2-102). Goods, as the Code defines them (Section 2-105), are "all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale" other than money for the payment of a price or investment securities.
Thus, the Code covers contracts to sell virtually any discrete item. This includes minerals (including oil and gas) if they are to be severed from the ground by the seller (Section 2-107(1)). However, if the minerals are to be severed from the ground by the buyer, the contract constitutes
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an interest in real property, not goods.1
However, for Article 2 of the Code to apply, it is not enough that "goods" be transferred as part of the performance of the contract; the essence of the contract — its primary purpose — must be the sale of goods. If the providing of services is the central focus of a contract, and goods are furnished in connection with providing the service, the contract is not a contract for the sale of goods; and the provisions of Article 2 do not apply.2
How do I know I have made a contract?
Making a contract for the sale of goods under the Code is a very simple thing to do. The Code itself says so:
"Section 2-204. Formation in General.
"(1) 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.
"(2) An agreement sufficient to constitute
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a contract for sale may be found even though the moment of its making is undetermined.
"(3) Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy."
Thus, no special term, no magic word, not even a writing — in many instances — is needed to make a binding and enforceable contract. Even substantive terms (e.g., price or delivery) may be left open; and still the Code will recognize the contract, so long as the parties intended to be bound: the Code will fill in the open terms.3
That said, the difficulty is often in knowing when it is that one has actually entered into a contract, or what the terms of the agreement actually are.
Scenario No. 1
Take, for example, the following example: a buyer of coal telephones a miner of coal, and asks the miner if he would consider selling the buyer 50 carloads of coal. After some discussion, the parties arrive at a price ($1,000 per carload) and credit terms; and they agree upon delivery commencing in the next calendar quarter. Nothing further is done; and three months later (when the price has risen to $2,000/carload) the buyer awaits delivery of the coal. The
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miner refuses to deliver, claiming that he never actually agreed to sell the coal.
Can the buyer enforce the alleged oral agreement in court? Section 2-204 would seem to suggest it. After all, a contract for sale "may be made in any manner sufficient to show agreement" (Section 2-204(1); emphasis added). According to the draftsmen of the Code, that includes oral contracts: "Subsection (1) continues without change the basic policy of recognizing any manner of agreement, oral, written or otherwise." (Official Comment to Section 2-204.)
Unfortunately for the buyer in the scenario, the Code also has a Statute of Frauds, which prohibits an action to enforce a contract for the sale of goods at a price in excess of $500
"...unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought." (Section 2-201 (1)).
The writing required to prove a contract need not include or correctly state each and every term on which the parties agreed (Section 2-201(1)). It may be "written in lead pencil on a scratch pad" (Official Comment No. 1 to Section 2-201). It need not indicate who is the buyer and who is the seller. The necessary signature can be any mark which identifies the party to be charged — it can even be
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the printed name of the party contained in its billhead or letterhead.4 The writing need not have been delivered to the party seeking to enforce the contract,5 or to anyone at all.6
There is only one thing that the memorandum must state: a quantity.7 Even the quantity need not be correctly stated, but the agreement will not be enforceable beyond the quantity of goods shown in the writing (Section 2-201(1)).
In sum, the memorandum necessary to satisfy the Code's Statute of Frauds may be any writing, authenticated by the party against whom enforcement is sought, which affords "a basis for believing that the offered oral evidence rests on a real transaction" (Official Comment No. 1 to Section 2-201). It need not state price or any other term, except quantity. Indeed, the memorandum may even be a document
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created before the agreement was actually made, such as a written firm offer.8
Returning to the scenario described above, the buyer faces a difficult hurdle to cross before he can enforce his contract: he has nothing in writing signed by the seller. As noted above, this shortcoming is not necessarily fatal — perhaps the seller made an internal memorandum of his agreement, or noted it in a communication with a third party — but, obviously, the buyer's position is weak. In fact, in the absence of a writing, the buyer in our scenario has only one other avenue to avoid the bar of the Statute of Frauds. If the miner admits, in his pleading or testimony, that an agreement was made, the contract may be enforced; but only to the extent of any quantity the miner admits agreeing to sell (Section 2-201(3)(b)).
Scenario No. 2
The facts are the same as in Scenario No. 1, with one change: after the conclusion of the telephone conversation, the buyer sends a letter to the miner stating, "this is to confirm our agreement for 50 carloads of coal, at $1,000 per carload, delivery commencing next calendar quarter. Signed, Buyer." As before, the miner does nothing; and subsequently refuses to deliver the coal.
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Again, the buyer has nothing signed by the miner. This time, however, the result is different. Section 2-201 (2) of the Code provides:
"(2) Between merchants if within a reasonable time a writing in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know its contents, it satisfies the requirements of subsection (1) against such party unless written notice of objection to its contents is given within ten days after it is received."
What constitutes a "writing in confirmation" within the meaning of Section 2-201(2) will depend upon the circumstances under which a writing is created. No specific form or text is necessary; however, as in the case of a memorandum under 2-201(1), it should state a quantity.9
Nor need the confirmatory writing be a letter or a telex.10 Other types of documents commonly exchanged between businesses will function as a confirmation — provided that they clearly indicate the existence of a prior oral agreement.
For example, a buyer's purchase order, indicating that it is submitted in confirmation of an oral agreement,
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will suffice.11 On the other hand, a purchase order which does not show on its face that it is a confirmation will not satisfy 2-201(2).12
In contrast, a seller's invoice may be treated as an adequate confirmation regardless of whether it purports to confirm an earlier oral transaction.13 [The reason for the disparate treatment seems clear. Buyers may send purchase orders to a supplier as an offer to buy, without having first obtained the supplier's commitment to sell. Sellers, on the other hand, rarely send bills to customers with whom they have not reached an agreement.]
In our second example, the buyer's letter constitutes "a writing in confirmation" of the agreement. Thus, if
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both parties are deemed merchants14 of coal, the miner's failure to object to the letter would permit the letter to satisfy the Code requirements of a writing.
Unlike the memorandum of Section 2-201(1), in order to satisfy Section 2-201(2), the...
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