Back | WP 5.1 Version | ASCII Version |
PDF Version

SECTION 2-102. DEFINITIONS.

(a) In this article:

(1) "Authenticate" means to sign or to execute or adopt a symbol, including a digital signal, indentifier, or other symbol, [or to do an act that encrypts a record or an electronic message in whole or in part,] with present intent to authenticate a record or term that contains the authentication or to which a record containing the authentication refers. [2B- 102(a)(2)]

(2) "Between merchants", with respect to a transaction, means between parties both of which are chargeable with the knowledge or skill of merchants. [2-104(3)]

(3) "Buyer" means a person that buys or contracts to buy goods. [2-103(1)(a)]

(4) "Cancellation" means an act by either party which ends a contract because of a breach by the other party. [See 2-106(4)]

(5) "Commercial unit" means a unit of goods which by commercial usage is a single whole for purposes of sale and whose division materially impairs its character or value in the relevant market or in use. A commercial unit may be a single article, such as a machine; a set of articles, such as a suite of furniture or a line of machinery; a quantity, such as a gross or carload; or any other unit treated in use or in the relevant market as a single whole. [2A-103(1)(c). See 2-105(6).]

(6) "Conforming" goods or performance under a contract for sale means goods or performance that are in accordance with the obligations under the contract. [2-106(2)]

(7) "Conspicuous", with reference to a term, means so displayed or presented that a reasonable person against whom it is to operate would likely have noticed it or, in the case of an electronic message intended to evoke a response without the need for review by an individual, in a form that would enable the recipient or the recipient's computer to take it into account or react to it without review of the message by an individual. [The last sentence in the July, 1996 draft was deleted. Compare 1-210(10), 2B-102(6).]

(8) "Consumer" means an individual who buys or contracts to buy goods that, at the time of contracting, are intended by the individual to be used primarily for personal, family, or household use. The term does not include an individual who buys primarily for professional or commercial purposes. [2B-102(a)(7)]

(9) "Consumer contract" means a contract for sale between a seller regularly engaged in the business of selling and a consumer. [ individual who buys or contracts to buy goods, that at the time of contracting, are intended by the buyer primarily for personal, family, or household use.]

(10) "Contract" or "contract for sale" means a present sale or a contract to sell at a future date, whether or not the goods are future goods.

(11) "Delivery" means the transfer of physical possession or control of goods.

(12) "Electronic agent" means a computer program designed, selected, or programmed by a party to initiate or respond to electronic messages or performances without review by an individual. The term does not include a common carrier employed or used in that capacity. [2B-102(a)(12)]

(13) "Electronic message" means a record stored, generated, or transmitted for purposes of communication to another party or an electronic agent by electronic, optical, or similar means. The term includes electronic data interchange, electronic mail, facsimile, telex, telecopying, and similar communications. [2B-102(a)(13)]

(14) "Electronic transaction" means a transaction in which the parties contemplate that a contract will be formed by means of electronic messages in which the messages of one or both parties will not be reviewed by an individual. [2B-102(a)(14).]

(15) "Financing agency" means a bank, finance company, or other person that, in the ordinary course of business, makes advances against goods or documents of title, or that by arrangement with either the seller or the buyer intervenes in the ordinary course of business to make or collect payment due or claimed under a contract for sale, as by purchasing or paying the seller's draft, making advances against it, or merely taking it for collection, whether or not documents of title accompany the draft. The term includes a bank or other person that similarly intervenes between persons in the position of seller and buyer with respect to the goods. [2-104(2)]

(16) "Foreign exchange transaction" means a transaction in which one party agrees to deliver a quantity of a specified money or unit of account in consideration of the other party's agreement to deliver another quantity of different money or unit of account either currently or at a future date, whether delivery is to be through funds transfer, book entry accounting, or other form payment order, or other agreed means to transfer a credit balance. The term includes a transaction of this type involving multiple moneys and spot, forward, option, or other products derived from underlying moneys and any combination of these transactions. The term does not include a transaction involving multiple moneys in which one or both of the parties is obligated to make physical delivery, at the time of contracting or in the future, of banknotes, coins, or other form of legal tender or specie.

(17) "Future goods" means goods that at the time of contracting are neither existing nor identified. [2-105(2)]

(18) "Good faith" means honesty in fact and the observance of reasonable commercial standards of fair dealing. [2B-102(a)(16)]

(19) "Goods" means all things, including specially manufactured goods, that are movable at the time of identification to a contract for sale or, unless the context otherwise requires, future goods. The term includes the unborn young of animals, growing crops, and other identified things attached to realty in Section 2-108. The term does not include money in which the price is to be paid, .the subject of foreign exchange transactions, documents, letters of credit, information, instruments, accounts, deposit accounts, chattel paper, general intangibles, and payment intangibles.

(20) "Letter of credit" means an irrevocable letter of credit issued by a financing agency of good repute and, if the shipment is overseas, of good international repute. [See 2-325(3), 5-102(a)(10)

(21) "Lot" means a parcel or single article that is the subject matter of a separate sale or delivery, whether or not it is sufficient to perform the contract. [2A-103(1)(s)]

(22) "Merchant" means a person that deals in goods of the kind involved in the transaction, a person that by occupation purports to have knowledge or skill peculiar to the practices or goods involved in the transaction, or a person to which knowledge or skill may be attributed by the person's employment of an agent or broker or other intermediary that purports to have the knowledge or skill. [2-104(1), 2B-102(a)(26).]

(23) "Present sale" means a sale that is accomplished by the making of a contract. [2-106(1)]

(24) "Receipt":

(A) with respect to goods, means taking deliver; and

(B) with respect to an electronic record or information, means the event of entering an information processing system in a form capable of being processed by that system which systems the recipient uses or has designated for the purpose of receiving such records or information. [2-103(1)(c), 2b-102(a)(29)]

(25 ) "Record", means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form. [5- 102(a)(14), 2b-102(a)(30)]

(26) "Sale" means the passing of title to goods from a seller to a buyer for a price. [2-106(1)]

(27) "Seller" means a person that sells or contracts to sell goods. [2-103(1)(d)]

(28) "Standard form" means a record consisting of multiple contractual terms prepared by one party for general and repeated use which is used in a transaction without negotiation of, or changes in, the substantial majority of the standard terms. Negotiation or customization of price, quantity, method of payment, standard options, or time or method of delivery does not preclude a record from being a standard form. [2B-102(a)(34) except that "quantity" rather than "volume" is used.]

(29) "Standard terms" means terms prepared in advance for general and repeated use by one party. [2B-102(a)(35)(1996); UNIDROIT Principles, Art. 2.19(2)]

(31) "Termination" means an act by a party, under a power created by agreement or law, which puts an end to a contract for a reason other than for breach by the other party. [2-106(3), Conformed to 2A-103(1)(z), except that "breach" rather than "default" is used. See 2B-102(a)(37).]

(b) The following definitions in other articles apply to this article:

"Check". Section 3-104(e).

[Other relevant definitions will be provided in the July, 1997 Draft.]

(c) In addition, Article 1 contains general definitions and principles of construction that apply throughout this article.

SOURCES: Sales (July, 1996); Licenses (October, 1996).

2. Following the Sept. 1996 meeting of the Article 2 Drafting Committee, the last sentence in the July, 1996 definition of "conspicuous" was deleted. Rather, the situations listed in that sentence will be noted in the comments as factors to be considered rather than as conditions to establishing a safe harbor. Unlike 1-201(10), the definition does not state that the decision on conspicuous is for a court as a matter of law. Depending on the circumstances, the decision is for the trier of fact. The definition does not conform to 2B-102(a)(6)(Nov. 1996).

The policy questions are whether (1) compliance with any one of the "factors" in the last sentence should constitute a "safe harbor" and (2) the court or jury should decide the question. What ever definition is agreed, it should ultimately be in Article 1.

3. The July, 1996 Draft contained three alternative definitions of good faith. At the 1996 Annual Meeting, the Conference voted to adopt a modified version Alternative C. Alternative C provided that "good faith" means "honesty in fact and the observance of reasonable commercial standards of fair dealing in the conduct or transaction concerned." The Conference voted to delete the phrase after "fair dealing" and follow the definition in 3-103(a)(4). Accord: 2B-102(a)(16). This is not a significant change, since the duty of good faith applies to the "performance and enforcement" of the contract. Section 1-203. But see 5-102(a)(7) which provides that good faith means "honesty in fact in the conduct or transaction concerned."

4. The July, 1996 Draft contained four new, important definitions: Standard form, standard term, manifest assent and opportunity to review. As a matter of policy, the March, 1997 Draft conforms to Article 2B on the definition of "standard form" and "standard term". Section 2-103 on "manifesting assent" and "opportunity to review", however, was deleted at the November, 1996 meeting of the Drafting Committee. See revised 2-206, which relies upon other concepts. See also, 2B-112 and 2B-113.

5. Article 2 follows Article 2B in all definitions relating to electronic contracting.

SECTION 2-103. SCOPE.

(a) Unless the context otherwise requires, this article applies to transactions in goods.

(b) If a transaction involves both information and goods, this article applies to the aspects of the transaction which involve the goods and their performance and rights in the goods other than the copies, packaging, or documentation pertaining to the information. However, this article applies to a sale of a computer program that was not developed specifically for a particular transaction if that program is embedded in goods other than a copy of the program or an information processing machine unless the program is copied in the ordinary course of using the goods or is the subject of a separate license with the buyer. [2B- 103(c) & (d)(3)]

(c) Except as otherwise provided in subsection (b), if another article of this [Act] applies to a transaction in goods, this article does not apply to the part of the transaction governed by the other article. [2b-103(b)]

(d) This article does not apply to a foreign exchange transaction.

1. Article 2 covers "transactions in goods" unless the context otherwise requires. Normally this transaction is a contract for sale and many sections in Article 2 are expressly limited to contracts for sale. Although a "pure" service contract is not covered, the courts have applied Article 2 to mixed transactions of goods and services if the sale of goods "predominates" and, occasionally, they have applied Article 2 to disputes over the quality of goods furnished in a transaction where services predominate. These situations will be illustrated in the comments.

2. Subsection (a)(3) in the November, 1996 Draft stated that Article 2 applied to a common type of service contract where the seller, not a third person, agreed to install, service and repair goods sold at or after the time for delivery. Standards for measuring the seller's obligation in these contracts and appropriate remedies were provided in new Section 2-602. Subsection (a)(3) and 2-602 were deleted at the November, 1996 meeting of the Drafting Committee.

4. Although not stated in 2-103, courts may extend Article 2 by analogy to transactions not within its scope if the extension is relevant in principle and appropriate in the circumstances. See Barco Auto Leasing Corp. v. PSI Cosmetics, Inc., 478 N.Y.S.2d 505 (New York Civ. Ct. 1984)(explores theory of extension by analogy). Also, by including "transactions in goods" in subsection (a), courts may apply Article 2 to transactions that are not sales unless the particular sections that apply are limited to contracts for sale.

5. Embedded software. Subsection (b) deals with transactions where both goods and information licensed under Article 2B are involved. See 2B-103 on the scope of Article 2B. Presumably, Article 2B governs all disputes over "licenses of information and software contracts" and "related" support and maintenance agreements. 2B-103(a). Article 2, however, may apply to transactions excluded from Article 2B under 2B-103(d). Thus, a "sale or lease of a copy of a computer program that was not developed specifically for a particular transaction if the program is "embedded in goods" is excluded by 2B-103(d)(3) and is governed by Article 2.

6. Subsection (c), which is subject to subsection (b), delineates the line between Article 2 and other articles in the UCC, without attempting to define it.. It follows 2B-103(b). Query: Does the phrase "does not apply" adequately cover transactions where Article 2 and another article both apply to the same issue, such as the effect of a full payment check and certain document of title transactions?

7. Foreign exchange contracts, which are defined in 2-102(a)(17), are excluded from Article 2. The definition and the exclusion are based upon a recommendation by the Federal Reserve Bank of New York. Except for the "multiple moneys" exclusion where the contract requires the delivery of tangible forms of money, the transaction is governed by general contract principles and Article 4A.

SOURCES: 2B-103 (Feb. 1996); Sales (October, 1995)

SECTION 2-104. TRANSACTIONS SUBJECT TO OTHER LAW.

(a) A transaction subject to this article is also subject to:

(1) [list any certificate of title statutes covering automobiles, trailers, mobile homes, boats, farm tractors, or the like], except for a buyer in the ordinary course of business under Section 2-504(d) whose rights arise before a certificate of title covering the goods is issued in the name of the buyer:

(2) any applicable consumer protection statute of this State or final consumer protection decision of a court of this State, existing on the effective date of this article; or

(3) [list any other law of this State to which this article is subject];

(b) In the case of a conflict between this article and a statute or decision referred to in subsection (a), the statute or decision governs.

(c) Failure to comply with a statute or decision referred to in subsection (a) does not itself constitute a breach of contract or affect the applicability of this article.

SOURCES: 2A-104. See 2B-104.

1. Section 2-104 helps to determine what other law of "this state" governs a contract for sale otherwise within the scope of the Article 2. It is a more particularized application of the displacement principle in 1-103. The extent to which the law of another state governs is determined by applicable choice of law principles, see 1-105, or an enforceable choice of law clause. See 2B-106(Nov. 1996). Article 2 does not deal with choice of law or choice of forum..

Article 2 takes no position on the following questions: (1) To what extent can the parties agree that Article 2 does not apply even though the transaction is a contract for sale; (2) To what extent can the parties agree that Article 2 applies to a transaction that is not a contract for sale, see 2B-105(Oct. 1996); and (3) To what extent should a court extend Article 2 by analogy to a transaction that is not a sale, see 2A-102, comment.

2. Section 2-104(a)(1) states that a transaction covered by Article two is subject to any applicable "certificate of title statute of this state." Thus, if the applicable CTA provided a different rule than 2-504 on transfer of good title, the CTA would apply. Given the complexity and on-uniformity of various CTAs, the policy question is whether Article 2 should provide the uniform, preemptive rule and, if so, whether 2-504 states the proper rule? At the January, 1997 meeting of the Drafting Committee approved an exception for a buyer in the ordinary course of business whose rights arise before a certificate of title covering the goods is issued in his name was approved. Thus, a BIOCB of a new car from a dealer to whom a certificate of origin was issued or from a used car dealer in possession of a certificate of title in the name of another person will be protected under Article 2.

3. Subsection (a)(1) in the July, 1996 Draft provided that Article 2 was subject to any applicable "federal law to the extent it governs the rights of parties to, and third parties affected by, the transaction. This was deleted because it stated the obvious: federal law either preempts or it does not, although the preemption line is not always clear.

For example, the line between the United Nations Convention on Contracts for the International Sale of Goods, which is federal law, and Article 2, which is state law, will be clear in most cases. Under Article 1, CISG applies to "contracts of sale of goods between parties whose places of business are in different states: (a) when the States are Contracting States." Canada and the United States are contracting states. Thus, if a Canadian seller sued a United States buyer in the Southern District of New York, CISG rather than Article 2 would apply even though federal jurisdiction was based upon diversity of citizenship. See Filanto, S.p.A. v. Chilewich Intern. Corp., 789 F. Supp. 1229 (S.D.N.Y. 1992), appeal denied, 984 F.2d 58 (2d Cir. 1993). Article 2, in short, is preempted by federal law.

There are exceptions based upon CISG's more limited scope. CISG would not apply if the buyer were a consumer, Art. 2(a), or the subject of the sales was an "aircraft" or "electricity." Art. 2(d) & (e). Article 2, however, applies to these transactions. In addition, CISG does not apply to certain aspects of a sale otherwise covered. Thus, CISG is "not concerned with: (a) the validity of the contract or of any of its provisions or of any usage; (b) the effect which the contract may have on the property in the goods sold", Art. 4, and "does not apply to the liability of the seller for death or personal injury caused by the goods to any person." Art. 5. Article 2 applies to "validity" disputes involving unconscionability, 2-105, claims for personal injury resulting from a breach of warranty, 2-706(a)(2), and disputes over title. Finally, CISG applies only to disputes between the parties to a contract for sale. Lack of contractual privity is a defense in a suit under CISG. Under Article 2, however, a remote buyer may be able to sue a seller for breach of warranty. Lack of contractual privity, in these cases, is not a defense. See 2-404 & 2-308(a). Since Article 2 does not define "seller" to exclude a seller under CISG, to the extent that lack of privity is not a defense a remote United States buyer of imported goods presumably can sue a Canadian seller for breach of warranty under Article 2.

3. Although Article 2 assumes that a court will adjudicate the dispute, the parties may select the forum by agreement or agree that the dispute will be adjudicated in arbitration. Unless otherwise stated, the use of the word "court" in Article 2 includes alternative tribunals to which the parties may turn by agreement for adjudication.

SECTION 2-105. UNCONSCIONABLE CONTRACT OR TERM.

(a) If a court finds as a matter of law that a contract or a term thereof was unconscionable at the time it was made or was induced by unconscionable conduct, the court may refuse to enforce the contract, enforce the remainder of the contract without the term, or so limit the application of the term to avoid an unconscionable result.

(b) Before making a finding of unconscionability under subsection (a), the court, on motion of a party or its own motion, shall afford the parties a reasonable opportunity to present evidence as to the setting, purpose, and effect of the contract or term thereof or of the conduct.

SOURCE: Sales, Section 2-302 (December, 1994).

1. Except for the language "induced by unconscionable conduct", Section 2-105 is the same as 2-302 in the 1990 Official Text. Section 2-105 does not adopt the broader language of 2A-108. A proposal to conform original 2-302 to 2A-108(2) & (3) was rejected by the Drafting Committee at the October, 1993 meeting. The phrase "induced by unconscionable conduct," taken from 2A-108(2), was added and approved at the Annual Meeting of the Conference in July, 1996. The "induced" phrase, however, does not appear in 2B-109(Nov. 1996). See 2A-108, comments, and Uniform Consumer Credit Code 5.108, Comment 1.

What is "unconscionable conduct" that induces a contract that is otherwise conscionable? Possible examples include cases where excessive pressure is place upon senior citizens (a used car dealer takes the keys to the car of prospective buyers and won't let them leave for food or medication until they buy the used car) or the contract is presented in a manner so that the purchaser cannot see that an important terms has been changed. In short, the conduct approaches but does not clearly reach defenses such as duress or fraud. These examples and the concept of "inducement" were criticized at the Meeting of the ALI Article 2 Consultative Group in November, 1996. The issue will be revisited after revised 2-206 is completed.

2. The expanded treatment of consumer contracts and standard form contracts in Article 2 is a particularized application of unconscionability concepts. See, e.g., 2-206 and 2-316. Nevertheless, 2-105 may still apply to a dispute even though the requirements of those particular sections has been satisfied. Thus, a disclaimer of warranty that satisfies the requirements of 2-316(b) or a standard form to which a commercial party has manifested assent, 2-206(a), may still be unconscionable on other grounds. Those grounds, however, are limited to cases where there was little or no opportunity in the market to find needed goods with different terms and where the terms offered were unreasonably favorable to the buyer or seller. These cases are few and far between. See, e.g., Martin v. Joseph Harris Co., Inc., 767 F.2d 296 (6th Cir. 1985).

3. The Drafting Committee limited unconscionability to the time of contracting and concluded that the remedy should be avoidance or limitation of the contract or clause rather than damages. Moreover, the court or other tribunal rather than a jury determines whether a "contract or any clause thereof is unconscionable."

There are very few cases in the last 10 years where the courts have found a contract or clause unconscionable under former 2-302. Of the fourteen cases found, nine involved issues arising only under Article 2 and most involved the enforceability of agreed limitations on warranties and remedies. These cases, however, do not include those arising under 2-207 where findings of unfair surprise excluded terms from the agreement.

SECTION 2-106. INTERESTS AND PART INTERESTS IN GOODS.

(a) Goods must be both existing and identified before an interest in them may be transferred.

(b) A part interest in existing, identified goods may be sold.

(c) A purported present sale of future goods or an interest in future goods is a contract to sell future goods.

(d) An undivided share in a described bulk of fungible goods is sufficiently identified to be sold, even if the quantity of the bulk is not determined. Any proportion of the bulk or quantity agreed upon by number, weight, or other measure, to the extent of the seller's interest in the bulk, may be sold to the buyer. The buyer is an owner in common.

SOURCE: Sales, Section 2-105 (Oct. 1995)

SECTION 2-107. GOODS TO BE SEVERED FROM REAL PROPERTY; RECORDING.

(a) A contract for the sale of minerals, oil, gas, or similar things to be extracted, or a structure or its materials to be removed, from real property, is a contract for the sale of goods if they are to be severed by the seller. Until severance, a purported present sale of those things, other than a sale that is effective as a transfer of an interest in the real property, is only a contract to sell future goods.

(b) A contract for the sale, apart from an interest in real property, of growing crops, timber to be cut, or other things attached to real property and capable of severance without material harm to the real property other than the things described in subsection (a) is a contract for sale of goods, whether the thing is to be severed by the buyer or seller and even if it forms part of the real property at the time of contracting. The parties may effect a present sale before severance by identification of the goods.

(c) The rights of a buyer and seller under this section are subject to rights of third parties under the laws relating to records of real property. A contract for sale may be executed and recorded as a document transferring an interest in real property. The recording constitutes notice to third parties of the buyer's rights under the contract for sale.

SOURCE: Sales, Section 2-107 (December, 1994).

1. Section 2-107 implements a suggestion by the California State Bar Committee that there should be consistency in terminology. Thus, the phrase "real property" is substituted for the terms "realty" and "land" on the assumption that all mean the same thing. Similarly, the undefined phrase "contract to sell" [found in the original Article 2] was replaced by the defined phrase "contract for sale," which includes a contract for the sale of future goods. The phrase "contract for the sale of future goods" is proposed to replace "contract to sell."

2. After the 1996 Annual Meeting of the Conference, subsection (a) was revised to clarify that "minerals, oil, gas, or similar things" are to be "extracted" from the real property and structures are to be "removed" from the property. In some states, underground mineral deposits may be called structures. Also, it is clear that water is a thing similar to oil and gas. Article 2 applies to the sale of water after it is extracted not to the sale of the right to extract.

3. What about long-term sale and leaseback of buildings and structures? In typical cases, an owner of improved or unimproved land will convey it and then take a leaseback for a term of years. At some point in the leaseback, the lessee (formerly the owner) has a right to remove and, presumably, sell structures on the land. In general, Article 2 does not apply to this transaction even though the owner has a right to sever and sell. If, however, the owner actually sells the structures to a third person and reserves the right to sever, that transaction is covered by 2-107.

SECTION 2-108. EFFECT OF AGREEMENT.

(a) Except as otherwise provided in Section 1-102 and this article, the effect of any provision may be varied by agreement.

(b) The absence of a phrase such as "unless otherwise agreed" does not by itself preclude the parties from varying the provision by agreement.

(c) Whenever this article allocates a risk or imposes a burden as between the parties, an agreement may shift the allocation and apportion the risk or burden.

1. Section 2-108 retains the general principle of Section 2-109(a) of the July, 1996 Draft but deleted subsection (b), which purported to list those sections which could not be limited or varied by agreement. In the view of the Drafting Committee, subsection (b) duplicated the principle of variance in 1-102(3) and posed an unacceptable risk of unintended under and over inclusion in the drafting. Compare 2B-114.

2. Without purporting to make an exclusive statement, the comments should identify the sections which specifically prohibit variation. See, e.g., 1-203 & 2-102(a)(19), 2-202(b), 2-106, 2-316(a) and 2-318. See also, 2-710(a), 2-403, and 2-714(a).

It has been suggested, again, that subsections (a) and (b) duplicate material in 1- 102 and should, therefore, be deleted. Does the Drafting Committee agree? If so, subsection (c) must be relocated to Part 3.

SECTION 2-201. FORMAL REQUIREMENTS; STATUTE OF FRAUDS; SEALED INSTRUMENTS.

(a) Except as otherwise provided in this section, a claim for breach of contract for sale in the amount of [$5,000] or more is not enforceable by way of action or defense against a person that establishes by credible evidence that no oral contract was made unless there is a record authenticated or sealed by the person against which the claim is asserted as the record of that person which is sufficient to indicate that a contract was made. A record is not insufficient merely because it omits or incorrectly states a term, including a quantity term. If the record contains a quantity term, the claim is not enforceable beyond that quantity.

(b) If an authenticated or sealed record in confirmation of a contract which is sufficient against the sender is sent within a reasonable time to the other party, the record is sufficient against a merchant, including a farmer, unless the merchant sends a notice of objection to the record within 10 days after the record is received.

(c) A claim for breach of contract otherwise barred under subsection (a) is enforceable if:

(1) the goods are to be specially manufactured or processed for the buyer and the seller substantially manufactures or processes the goods in good faith performance of a contract believed to exist and the seller cannot resell the goods at a reasonable price;

(2) the conduct of the parties in performing the agreement recognizes that a contract was formed; or

(3) reliance by one party on representations or an agreement estops the other party from raising the lack of a sufficient authenticated or sealed record as a defense.

(d) A claim for breach of contract enforceable under this section is not unenforceable on the ground that it is not capable of being performed within one year or any other applicable period after its making.

(e) Except as otherwise provided in subsection (a), affixing a seal to a record evidencing a contract for sale or an offer does not make the record a sealed instrument. The law with respect to sealed instruments does not apply to the contract or offer.

SOURCE: Sections 2-201 and 2-203 (October, 1995)

Section 2-201(a) in the November, 1996 draft abolished the statute of frauds for Article 2. This result was strongly recommended by the PEB Study Group and was approved by the Drafting Committee on March 6, 1993. A motion to restore the statute of frauds was rejected by a voice vote of the Commissioners at the 1995 and 1996 Annuals Meeting of NCCUSL.

However, at the November, 1996 meeting, the Drafting Committee decided to restore "some version" of the statute of frauds. Section 2-201 of the November, 1996 Draft, based upon the able draft by Professor W. David East, clarified the text without making it harder to satisfy the statute.

At the January, 1997 meeting of the Drafting Committee, a further revision that makes it easier to satisfy the statute was submitted by Curtis Reitz was approved in principle The key concepts are as follows.

1. Subsection(a) follows original 2-201(1), with some important differences:

The diminimus amount of $10,000 is used, pending further research.

The statutes of frauds defense cannot be raised under subsection (a) unless the person against whom a claim or defense is asserted establishes by credible evidence that no oral contract exists. The implication is that the court will conduct a preliminary hearing, much like that expected under 2-202, to determine whether the claim of an oral contract rests upon credible evidence. If so, the defense is not available. Moreover, subsection (c)(2) states that even if there is no credible oral agreement, conduct by both parties recognizing the existence of a contract removes the case from the statute.

A record is sufficient if it is authenticated or sealed. See 2-201(e).

A record is not insufficient because it omits a quantity term. Although there is no Article 2 "gap filler" for quantity, the term may be established by relevant evidence, including trade usage and course of dealing. If, however, a quantity term is included in the record the claims is not enforceable beyond the quantity stated.

2. Subsection (b) retains the confirmation principle in 2-201(2) with the following change:

The text states that only the recipient of the confirmation must be a merchant. "Merchant" may include a farmer. This rejects cases that hold that farmers can never be a merchant and leaves the question when a farmer is a merchant to the particular case. See 2-102(a)(22). See also, 2-201 (1995), comment 2, paragraph 2, which states that the merchant concept under 2-201(2) rests "on normal business practices which are or ought to be typical of and familiar to any person in business."

As in subsection (a), the phrase "authenticated or sealed" is used. The authenticated record must be sufficient against the sender. The theory is that a merchant who does not object to an authenticated, sufficient record sent by the other party is estopped to raised the statute of frauds defense.

3. Subsection (c) states when a claim otherwise barred under subsection (a) or (b) is "nonetheless enforceable."

Subsection (a)(1) is revised for clarity. In most cases, the duty of good faith, 1-203, is not imposed on conduct relating to an unenforceable agreement.

Subsection (a)(2) expands the "part performance" exception in 2-201(3)(c)(1995). Conduct by both parties, including part performance, takes the case out of the statute. To illustrate, suppose S claims the breach of an alleged oral contract to supply the buyer's requirements over a 5 year period. After six months, the buyer requests, the seller delivers and the buyer accepts requirements for that period. Later the buyer repudiates and raises the statute of frauds defense. Assuming that the defense is proper under subsection (a), the conduct of both parties recognizes a contract and the defense is no longer available. In short, the seller's claim of a five year contract goes to the trier of fact.

Subsection (a)(2) recognizes that reliance on representations or an agreement by one party "may estop" the other from raising the statute of frauds defense. Whether estoppel exists depends upon the particular case. Presumably, the court will be guided by Restatement (Second) Contracts sec. 139, one factor of which is the extent to which the reliance "corroborates evidence of the making and terms of the promise, or the making and terms are otherwise established by clear and convincing evidence. See Sub. (2)(c).

Subsection 2(b) of former 2-201, dealing with "admissions" has been deleted. The issue is now covered by the requirement of a preliminary hearing under subsection (a).

4. Subsection (d) is new. See 2-201(a) (Nov. 1996). The phrase "any other applicable period" recognizes that some state statutes apply to periods longer than one year.

5. Subsection (f) is 2-201(b) in the November, 1996 Draft and 2-203 in former Article 2.

SECTION 2-202. PAROL OR EXTRINSIC EVIDENCE.

(a) Terms on which confirmatory records of the parties agree, or which are otherwise set forth in a record intended by the parties as a final expression of their agreement with respect to the included terms, may not be contradicted by evidence of a previous agreement or contemporaneous oral agreement. However, the terms may be explained or supplemented by evidence of:

(1) course of performance, usage of trade, or course of dealing; and

(2) [noncontradictory] additional terms that if agreed upon would certainly not have been included in the record, unless the court finds that the record was intended as a complete and exclusive statement of the terms of the agreement.

(b) Except in a consumer contract, a contractual term indicating that the record is a complete and exclusive statement of the agreement of the parties is [presumed to state] conclusive evidence of the intention of the parties. Otherwise, the court shall consider all evidence relevant to the intention of the parties to integrate the record.

SOURCE: Sales, Section 2-202 (March, 1995).

Notes

1. If, after a preliminary hearing authorized by 2-202(b)(1), the court concludes that the parties intended a partially integrated writing, 2-202(a) states when evidence of prior agreements or contemporaneous oral agreements is excluded. Evidence is excluded if it contradicts terms in the record but evidence is admitted if it proves an additional term that if agreed upon would not certainly have been included in the record. This latter ground for admissibility changes original 2-202, which excluded evidence of "inconsistent additional terms," and arguably narrows the effect of a partial integration. The change follows comment 3 of the original 2-202, which stated that if the "additional terms are such that, if agreed upon, they would certainly have been included in the document in the view of the court, then evidence of their alleged making must be kept from the trier of fact." But see 2B-301(a)(2), which retains the "consistent additional terms" language.

2. The effect of a totally integrated record is that both contradictory and non-contradictory additional terms are excluded. The best evidence of a total integration is a so-called "merger" clause. The last sentence of 2-202(b) in the May, 1994 Draft stated that a merger clause does not create a conclusive presumption of a total integration. Although this sentence was consistent with the case law, see e.g., ARB, Inc. v. E-Systems, Inc., 663 F.2d 189, 198-199 (D.C. Cir. 1980), it was removed at the March, 1995 meeting of the Drafting Committee. As a practical matter, a merger clause creates a presumption that both parties intended a total integration and puts a difficult burden on one party to establish the contrary. At the September, 1996 meeting, the Drafting Committee voted to include 2-201(b)(2), limiting the effect of the presumption to contracts other than consumer contracts. See 2B-301(b)(Alternative 2), stating that a merger clause not in a standard from is "presumed to state the intent of the parties on this issues."

Given the controversy over this decision, revised and underlined subsection (b) is offered as a solution: In commercial cases, a merger clause is conclusive on intention. In consumer contracts with merger clauses and all other cases where an intent to integrate is claimed, the court shall conduct a preliminary hearing where all relevant evidence on intention shall be considered.

3. In the case of either a partial or a total integration, terms in the record may be "explained" and also may be "supplemented...by course of dealing or usage of trade or by course of performance" 2-202(a)(1). Evidence intended to explain a term in a record is relevant to contract interpretation. The parol evidence rule does not apply. Evidence intended to supplement a term in a record poses in different language the problem of whether additional terms are contradictory or not. But unless the record clearly excludes or contracts out of the trade usage or course of dealing or performance, both 1-205(3) and 2-202(a)(1) support admissibility to supplement even though it may also appear to vary or contradict that term. The reason is the special status of this evidence (it is not directly related to pre-contract negotiations) and the assumption that the parties intended to include it unless otherwise clearly agreed. See, e.g., Nanakuli Paving & Rock Co. v. Shell Oil Co., Inc., 664 F.2d 772 (9th Cir. 1981).

4. Subsection (c) of the May, 1994 Draft, which stated that before extrinsic evidence was admissible to interpret a contract the court must find that the contract was ambiguous, was deleted at the March, 1995 meeting of the Drafting Committee. Subsection (c), which sparked controversy, was inconsistent with the policy of the 1990 Official Text, 2-202, comment 1(c), the Restatement, Second of Contracts, see 200-203, and the approach of most courts. See, e.g., Pacific Gas & Electric Co. v. G. W. Thomas Drayage & Rigging Co., 442 P.2d 641 (Cal. 1968)(Traynor, Chief Justice). Thus, the courts, as before, are left to decide whether a merger clause is conclusive on the question of intention and when extrinsic evidence should be admitted to interpret language in the record. Nevertheless, many still argue that a merger clause in commercial contracts should be conclusive.

At the October, 1995 meeting of the Drafting Committee, the scope of the court's power to interpret a term in an integrated writing was discussed. Concern was expressed lest the phrase "terms may be explained" in 2-202(a) would be limited to the sources listed in (1) and (2) and that the dreaded "plain meaning rule" might reemerge. A motion to save the phrase passed, however, [9-8, 7-0] with the expectation that the comments would state that the sources of evidence for contract interpretation are broader than those indicated in subsection (a). See CISG Art. 8(3).

Despite a contrary recommendation by the Coordination Committee, the Article 2 Drafting Committee voted (September, 1996) to retain subsection (b)(1) which requires the court to conduct a preliminary hearing on whether the parties intended to integrate the record. The last clause, dealing with type of evidence relevant to the intention question, however, was deleted at the November, 1996 meeting. Subsection (b) of the January, 1997 Draft now excludes commercial contracts with a merger clause from the requirement of a hearing.

5. In October, 1993, the Drafting Committee rejected motions that (1) a standard form merger clause in a consumer contract is inoperative against a consumer (2) a standard form merger clause in a consumer contract is not enforceable unless the party asserting it proves by clear and convincing evidence that the consumer "understood and expressly agreed to" the clause. A motion to approve the draft as presented was approved by the Commissioners present but rejected by a vote of all persons present. The conclusion of those adhering to the present draft was that revised 2-202(b)(1) gives the court sufficient flexibility to sort out cases where there is unfair surprise or no real assent, whether the issue involved using a merger clause as (1) a substitute for an inoperative disclaimer of express warranties, see 2-316(a), or (2) a device to exclude other terms agreed in the negotiating process. See 2-302. The Drafting Committee voted to retain 2-202(b)(1) at the September, 1996 meeting.

SECTION 2-203. FORMATION IN GENERAL.

(a) A contract may be made in any manner sufficient to show agreement, including by offer and acceptance or conduct of both parties recognizing the existence of a contract.

(b) If the parties so intend, an agreement sufficient to make a contract may be found even if the time when the agreement was made cannot be determined, one or more terms are left open or to be agreed upon, or the records of the parties do not otherwise establish a contract.

(c) Even if one or more terms are left open, a contract does not fail for indefiniteness if there is a reasonably certain basis for an appropriate remedy.

(d) Language in a record which expressly conditions the intention to contract upon agreement by the other party to terms in the record must be conspicuous.

SOURCE: Sales, Section 2-204.

1. In transactions where terms in the records of one or both parties appear to prevent agreement, the issue of contract formation is treated in 2-203(b) and 2-205(a)(1) rather than former 2-207. One looks there to determine whether a contract has been formed. If some contract is formed, the question of what terms in a record are included in the agreement is treated in new 2-206 where consumer contracts are involved and revised 2-207.

The last clause in 2-203(b) deals with contract formation where the parties intend to make a contract but varying terms in their records do not otherwise establish (or might prevent the formation of) a contract. The test is taken from the first sentence of the original 2-207(3). Thus, if there is conduct by both parties which recognizes the existence of a contract but terms in their records do not agree, a contract is still made under 2-203(b).

2. Under basic contract law, either party can condition the formation of a contract upon agreement by the other party to terms proposed. See 2-207(1) (1990 Official Text). Subsection (d) deals with the case where either the offeror or the person purporting to accept an offer expresses that condition in a record: The condition is not effective unless the language is conspicuous, see 2-102(a)(7). Suppose, for example, that the seller's offer, made in a record that notice of any breach of warranty must be given within 30 days of when the buyer "should have discovered" the breach and that the seller "will not be bound" unless the buyer agrees to the seller's terms. That language conditioning intention to be bound is not effective unless it is conspicuous. Whether it is conspicuous or not may depend upon whether the language is in standard terms or "boilerplate."

3. 2B-202 omits subsection (d) and contains two other differences: (1) The phrase "actions of electronic agents" is included in subsection (a); and (2) the phrase "one party reserves the right to modify terms" is inserted in subsection (b).

4. In November, 1996, the Drafting Committee decided to eliminate all references to "standard forms" and "standard terms" in Sections 2-203, 2-205 and 2-207. This approach was reaffirmed at the January, 1997 meeting of the Drafting Committee and all bracketed references to standard terms have been deleted.

SECTION 2-204. FIRM OFFERS. An offer by a merchant to enter into a contract made in an authenticated record that by its terms gives assurance that the offer will be held open is not revocable for lack of consideration during the time stated. If a time is not stated, the offer is irrevocable for a reasonable time not exceeding 90 days. A term of assurance in a record supplied by the offeree to the offeror is ineffective unless the term is conspicuous.

SOURCE: Sales, Section 2-205 (December, 1994)

1. The September 10, 1993 draft of 2-205 provided that if no time is stated in a written firm offer, "the offer is irrevocable for a commercially reasonable time." A motion to restore the original language of 2-205, imposing a three month limit, was subsequently approved. See 2B-203.

2. At the September, 1996 meeting, the Drafting Committee voted to replace the word "conspicuous" in the July, 1996 Draft with "manifests assent." See 2B-303, last sentence. It protects an offeror against surprise when the firm offer is in a record, frequently a standard form, prepared by the offeree to be used by the offeror. With the deletion of 2-103 and the concept of "manifests assent", the word conspicuous has been restored.

SECTION 2-205. OFFER AND ACCEPTANCE IN FORMATION OF CONTRACT.

(a) Unless otherwise unambiguously indicated by the language or circumstances, the following rules apply:

(1) An offer to make a contract invites acceptance in any manner and by any medium reasonable under the circumstances, including a definite expression of acceptance in a record that also contains terms varying the offer.

(2) An order or other offer to buy or acquire goods for prompt or current shipment invites acceptance by a prompt promise to ship or by prompt or current shipment of goods. However, a shipment of nonconforming goods is not an acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation.

(b) If the beginning of a requested performance is a reasonable mode of acceptance, an offeror that is not notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance.

SOURCE: Sales, Section 2-206.

1. Section 2-204 and Section 2-205 [formerly Section 2-206] were revised to state that, in the "battle of the forms" and other disputes over records, issues of contract formation are to be separated from questions of what terms become part of the contract. Thus, revised Section 2-203(b) provides that the parties can intend to contract even though terms in the records of the parties do not otherwise establish a contract and revised Section 2-205(a) provides that a "definite expression of acceptance" in a record accepts an offer even though it contains terms varying the terms of an offer. These principles were previously found in Section 2-207(1) and (3) of the 1990 Official Text. Compare 2B-204(a).

Although the statute does not say so, it is unlikely that a definite acceptance with varying terms in the same record will be found unless the varying terms are in the "boilerplate."

2. The formation test in 2-205(a)(1) follows that in the original 2-206(1). Unless the offer clearly provides otherwise, a definite acceptance creates a contract even though the acceptance contains terms in a record that vary the offer. Unlike the Restatement, Second and Article 19 of CISG, a definite acceptance containing a terms that materially vary the terms of the offer can create a contract. The offeree can avoid a contract by expressly stating that no contract exists unless the offeror agrees to the offeree's standard terms. See 2-203(d). Presumably, if both parties state that they will not be bound unless the other agrees to their terms, there is no contract unless there is subsequent conduct by both recognizing the existence of a contract.

Language in an offer or purported acceptance which attempts to condition contract formation upon agreement by the other to the terms proposed should be conspicuous when contained in a record. 2-203(d).

Here are some examples.

Example #1. After negotiations where no agreement was reached, B sent S an offer in a record to purchase 1,000 units of described goods at $500 per unit. The front of the purchase order contained blanks which Buyer filled in and the back contained several standard terms, including an arbitration clause. S sent an acknowledgment the front of which stated "we are pleased to accept your order for 1,000 units at $500 per unit." The back of the acknowledgment contained a standard term excluding all liability for consequential damages. After the acknowledgment was mailed, S changed its mind (the market price went up) and faxed a rejection to B. There is a contract under 2-205(a)(1), which reinforces 2-203(a). B clearly accepted the offer and the seller's record did not conspicuously indicate by language or otherwise that there would be no contract unless S agreed to all of the terms proposed.

The case for a definite expression of acceptance is even clearer if S also shipped the goods before attempting to revoke. There would be no contract, however, if S had said "we are pleased to accept your order at $600 per unit" or had conspicuously indicated that it did not intend to conclude a contract unless B agreed to all of S's terms, both negotiated and standard. See 2-203(d). Whether B's arbitration clause or S's exclusion clause are part of the contract depends upon 2-207.

Example #2. Suppose, in Example #1, that Seller "accepted" Buyer's order for $600 per unit and the back of the acknowledgment contained a standard term that "seller reserves the right to litigate any dispute." Nevertheless, Seller shipped the goods with the acknowledgment and Buyer accepted them without objection. There is a contract under 2-203(b). Since the price term was negotiated, Seller's price of $600 constituted a counteroffer which Buyer accepted by using the goods. [The usual principles of contract formation apply here.] There was no risk of unfair surprise and B assented without objection by accepting the goods. Which if any of the conflicting terms in the records prepared by the parties become part of the contract is determined by 2-207.

Example #3. Suppose, in Example #2, that Seller accepted Buyer's order for $500 and shipped the goods which Buyer accepted. Later, there was a dispute, Buyer demanded arbitration and Seller insisted that it had reserved the right to litigate. There is a contract under either 2-205(a)(1) or 2-203 despite the different standard terms on dispute resolution. Unless the Buyer's arbitration clause becomes part of the agreement under 2-207, the "default" rule is that the seller may litigate.

Example #4. Suppose that terms in the records of both parties conspicuously state that there will be no contract unless their terms are agreed to by the other party. See 2-203(d). The seller ships and the buyer accepts the goods. There is a contract under 2-203(a) & (b). The agreement of the parties includes the terms stated in 2-207.

3. 2-205 conforms to 2B-204 in that the phrase "invites acceptance" is substituted for the "must be construed as" language. The response by an "electronic agent" is treated in 2B-204(c). Both 2A-206 and 2B-204 omit subsection (b) of 2-205.

4. Recent cases and revised Article 2.

Two recent cases in the Seventh Circuit, ProCD, Inc. V. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996), and Hill v. Gateway 2000, Inc., ___ F.3d ___, 1997 WL 2809 (7th Cir. 1997), raise questions about the adequacy of the proposed contract formation provisions in Part 2 and the operation of the new "pass through" warranty provision in 2-404(a). Both were decided by Judge Easterbrook.

In ProCD the defendant, an individual, bought software with a "shrinkwrap" license from a retailer in a transaction that appears to satisfy the evolving definition of "mass market" in 2B-102(a)(25). When D paid and took possession of the disk he was told that there were terms on the inside. The key term was in fact a license and D was informed, both in the standard form record and on the computer disk, that he had an option to accept the license or reject it and return the software for a refund. D used the software, violated the license and was sued by P, the producer. The court, in reversing the district court, enforced the license. Among other things, the court concluded: (1) The dispute involved a single form not a "battle of the forms" under 2-207; (2) Section 2-204(1), augmented by 2-606, supported the view that the parties intended to conclude the contract when D accepted the terms of the license by using the program, not when D paid for and took delivery of the disk. The court rejected the argument that D was bound only by terms disclosed at the time of payment and possession; and (3) Article 2, which the court applied to the license of goods, did not require that the terms in dispute be conspicuous or be presented in any particular way. Section 2-302 was not discussed. Nor was a possible analogy to 2-207(1)& (2), which supports the view that a contract can be formed along with a proposal to modify the contract.

In Gateway, the defendant, responding to advertising, ordered a computer directly from Gateway, the manufacturer. D paid for the computer by credit card before it was shipped and was unaware, at that time, of the terms of the contract. The computer arrived in a box with no external message that there were terms inside. The terms inside contained, inter alia, a limited express warranty, a service commitment and an agreement to arbitrate. The record also stated that the purchaser would be bound to the terms unless the computer was returned within 30 days. D did not object in time and, when warranty claims were made, Gateway demanded arbitration. The district court refused to order arbitration and, upon appeal, the decision was reversed: D had agreed in writing to arbitrate by failing to object in time. Once again, the court rejected 2-207 as inapplicable and affirmed the approach of ProCD to formation under Article 2. More importantly, the court rejected any claim that D was surprised by the terms and imposed the primary responsibility to discover, understand and respond to the standard terms on the purchaser: [T]he Hills knew before they ordered the computer that the carton would include some important terms, and they did not seek to discover these in advance." Even though they did not learn of the terms in advance, they inspected the documents after delivery and did not exercise their option to avoid the contract and obtain a refund.

Questions:

1. Does Article 2 adequately support the court's conclusion that the contract is not formed and the proposed terms not included until the buyer has an option after paying for and taking possession of the goods to accept the terms or reject and return the goods for a refund. If not, what revisions should be made to respond to transactions of this type?

2. Does Article 2 adequately neutralize the risk of unfair surprise in these cases? If not, what revisions should be made?

SECTION 2-206. CONSUMER CONTRACTS; STANDARD FORM RECORDS.

(a) In a consumer contract, if a consumer agrees to a record by authentication or affirmative conduct,

any non negotiated term that a reasonable consumer in a transaction of this type would not expect to be in the record is excluded from the contract.

any term of which the consumer is not expressly aware is excluded from the contract if a reasonable consumer in a transaction of this type would not expect to find that term in the record.

if the preparer of the record had reason to know that the consumer would not agree to the record if it knew of a term contained in the record, that term is excluded from the contract.

(b) Before excluding a term under subsection (a), the court, on motion of a party or its own motion, after affording the parties a reasonable and expeditious opportunity to present evidence on whether the term should be included or excluded from the contract, shall decide the question as a matter of law. Evidence as to whether a term would be expected by a reasonable consumer in a transaction of this type, includes:

(1) efforts by the party preparing the record to inform the consumer of the term, including:

(A) the setting and circumstances in which the form was presented to the consumer;

(B) whether the term was called to the consumer's attention, including by a prior course of dealing between the parties, if any; and

(C) the degree to which the seller, or any other person on the seller's behalf, publicized the terms of the type of sale involved, including the term in dispute; and

(2) facts from other sources that are relevant to the expectations of reasonable consumers, including:

(A) the nature, price, and description of the goods;

(B) the expectations of consumers in similar types of transactions; and

(C) usages, standards, and common practices with respect to goods of the same type or description.

(c) If the seller complies with other more specific requirements in this article for including terms in a consumer contract, this section does not exclude those terms.

SOURCE: New.

1. This section expands 2-206(b) of the November, 1996 Draft and revises it to conform to decisions made at the January, 1997 meeting of the Drafting Committee. The question is when a consumer who authenticates or by affirmative conduct appears to agree to a record is not bound by the terms in the record. The answer in a consumer contract is when a term is not negotiated and a reasonable consumer in this type of transaction would not expect it. Subsection (a). A negotiated term is included. In this draft, no distinction between standard and non-standard terms is made.

When is a term negotiated? At a minimum, the consumer should be aware of the term and, perhaps, have an opportunity to review. At a maximum, the consumer should not be required to take the term or leave it after awareness. There must also be an opportunity to bargain over the term's inclusion or content. This latter opportunity is rare in modern consumer contracts.

Which conception of negotiation does the Drafting Committee wish to endorse? If the primary purpose of 2-206(a) is to prevent unfair surprise caused by the present of an unexpected term, then a minimum concept seems appropriate. Accordingly, Alternative B substitutes the phrase "expressly aware" for negotiated. If the particular consumer is expressly aware that the record contains a particular term, i.e., a disclaimer, then it is included even though a reasonable consumer may not be aware of it.

Alternative C, taken from Section 211(3) of the Restatement (Second) of Contracts, further sharpens the choices and appears at the request of Commissioner Jerry Bepko.

Other choices to test inclusion (not contained in this draft) include: (1) agreement in fact subject to general unconscionability; (2) express agreement as opposed to express awareness; and (3) mass marketing concepts, including the requirement of an opportunity to review.

2. Subsection (b) gives the parties the right to a hearing and indicates the source and type of evidence that may be relevant to a reasonable consumer's expectations in a transaction of this type. The court decides the question as a matter of law. See 2-106(b). The usual burdens of proof apply, e.g., if the consumer seeks to exclude the term the consumer must establish the conditions for exclusion.

Subsection (b)(1) identifies possible sources of evidence relevant to the whether a reasonable consumer in a transaction of this type would expect the term.

3. Subsection (c) states that if the term is included in a consumer contract under the more particular requirements of another section in Article 2 it will not be excluded under 2-206.

Not all records are standard forms but many records contain standard terms, usually preprinted. This draft does not distinguish between standard and other terms in a consumer contract. Should it? Arguably, the risk of surprise is greater when a consumer gives assent to a record with standard terms than when the record deals with price, payment or quantity.

SECTION 2-207. TERMS OF THE CONTRACT; EFFECT OF VARYING TERMS IN RECORDS. Subject to Sections 2-202 and 2-206, if a contract is formed under this article and the parties have exchanged records or one party has confirmed a contract by a record, the contract includes:

(1) terms on which the records of the parties agree in substance;

(2) in a record confirming a contract, terms that do not materially vary the contract and are not objected to in a timely manner;

(3) terms to which the parties have otherwise agreed, unless the inclusion would result in unfair surprise or hardship to one party; and

(4) terms supplied or incorporated under any other provision of this [Act], including applicable usage of trade, course of dealing, and course of performance.

Notes

1. Drafting History. The original Section 2-207 was both an exception to the common law "duty to read" principle and a particularized application in commercial cases of the unconscionability doctrine in 2-302. In practice it applied to determine if there was some contract for sale when the writings of the parties were in conflict and, if so, what terms in the writings of the parties became part of the contract. One objective was to neutralize any strategic advantage gained where standard terms were used (although 2-207 was not limited to standard terms) and to reduce the risk of unfair surprise where one party apparently agreed (assented by conduct) to standard terms which had not been read or understood. The assumption was that even in commercial transactions the risk of unfair surprise requires special rules where standard terms are involved. More particularly, it assumed that commercial parties in unstructured transactions [i.e., no record containing all the terms of the contract] do not have a realistic opportunity to review the standard terms of the other before apparently assenting by conduct.

Initially, two versions of Section 2-207 were drafted. The first followed Section 2-207 in the 1990 Official Text and attempted to amplify and clarify it in light of apparent objectives, academic commentary, and judicial decisions. The second developed a simplified structure that focused on the unfair surprise issue. Assuming that some contract was formed under 2-203 and 2-205, the sole question was whether "varying terms" became part of the contract. At the October 1-3, 1993 meeting, the Drafting Committee approved the approach of the second version of 2-207. A first effort to implement that objective was made in the May, 1994 draft, where the key concept, "varying terms," was defined in 2-207(a). Drawing on the September, 1994 Draft of the Licenses article, the December 20, 1994 Draft of Article 2 added a new section on "standard form agreements" and defined such terms as "standard form" and "standard terms" in Part 1. These sections provided a direct response to recurring questions raised in standard form contracting. Relying on new 2-206, covering "Standard Form Agreements," and the new definitions to deal with most unfair surprise and advantage taking, the May, 1995 Draft of 2-207 was limited to "conflicting" standard terms. i.e., terms which vary other terms by adding to or contradicting them.

In October, 1995 the Drafting Committee decided to limit 2-206 to cases where all of the agreement was contained in a standard form record. Section 2-207, therefore, was reworked to deal with the unstructured, partially negotiated transaction where standard terms are contained in the records [not standard forms] of one or both parties. Revised 2-207 in the July, 1996 operated as follows:

First, it assumed a contract for sale had been formed under 2-203 and 2-205. Section 2-207 does not deal with contract formation. It also assumed that there agreement between the parties on terms other than standard terms.

Second, Section 2-206, where all of the terms were contained in a standard form or a record containing standard terms, did not apply. If it applied, 2-207 did not.

Third, Section 2-207 applied where one or both parties used records [not standard forms] and the record contained standard terms which varied [added to or differed from] materially the terms [standard terms, negotiated terms or terms supplied by Article] in the agreement between them.

Fourth, the purpose of 2-207 is [in all drafts] to minimize unfair surprise and "first" and "last" shot advantage taking where one party seeks to include a standard term which varies terms in the agreement. Key definitions are "term," 1-201(42), and "standard terms," 2-102(a)(39). The phrase "varying terms," although not defined, includes standard terms which materially add to or are different from the agreement of the parties.

Fifth, the need for 2-207 arises [in all drafts] because the party against whom the standard terms operate has apparently agreed to them by conduct [not "manifested assent", 2-102(a)(29)] under circumstances where there is no realistic opportunity to review the record. Unlike the 2-206 case where all terms are in a standard form or record with standard terms, there is no assurance that a seller or a buyer will (or even "should") take time to read and understand the "boilerplate." Thus, a special test to validate apparent assent is required. Moreover, in the July, 1996 Draft, more than a simple awareness of the standard terms was required. In the absence of express agreement, the other party should also understand that the party seeking inclusion intended the standard terms to be part of the contract. This follows Judge Wisdom's well reasoned opinion in Step-Saver Data Sys. v. Wyse Technology, 939 F.2d 91, 102-103 (3d Cir. 1991)("shrink wrap" license).

At the November, 1996 meeting of the Drafting Committee, however, the decision was made to delete any rules responding to standard forms and standard terms in commercial transactions. Thus, 2-206(a) was withdrawn and a redraft of 2-207 that used the words "records" and "terms" rather than "standard forms" and "standard terms" was approved in principle. The January, 1997 Draft, however, retained [standard terms] bracketed for testing purposes and contained a subsection (c) proposing a "clean up" rule where one party claims that standard terms in a record were incorporated by express agreement. At the January, 1997 meeting of the Drafting Committee, the Reporter was directed to delete all references to standard terms in and subsection (c) to 2-207.

(2) The March, 1997 Draft of 2-207.

The title now reads: "Terms of the Contract; Effect of Varying Terms."

the special rules for consumer contracts, 2-206, and the parol evidence rule. 2-202.

The section deals with two special cases where disputes over terms may arise, (1) where both parties exchange records (herein of the "battle of the records") and (2) where one party uses a record to confirm a contract previously formed, and states what terms are included in, and by necessary implication excluded from, the contract. Thus, terms upon which the records agree in substance are included but terms upon which the records do not agree are excluded, unless they are "otherwise" agreed to or become part of a modification under 2-210(a). But the "otherwise agreed to" principle is subject to an exception: The court may find, after reviewing the transaction, that a term in a record to which one party apparently assented should be excluded because that party would be unfairly surprised or suffer hardship if the term were included.

A primary purpose of original 2-207 and the interpretive cases was to police against unfair surprise in commercial transactions. The risk of unfair surprise is high when one party attempts to include a standard term ("boilerplate") drafted to serve its own interest in a contract where the other party appears to agree by conduct or otherwise but did not read and was not expected to read the term. These terms are frequently excluded by the courts unless the other party assented with express awareness of or expressly agreed to them. Although the Drafting Committee, because of definitional problems, has not relied upon the presence of "standard terms" or imposed a requirement of "expressly agreed" in the statute, the process of contract formation here is still subject to the unconscionability limitation in 2-106, which deals with unfair surprise and hardship. It is expected that courts interpreting revised 2-207 will continue to find unfair surprise where the circumstances warrant and exclude terms not clearly exclude terms not clearly covered by 2-207 unless there is express agreement to them. The lesson from the case law is that it is much easier for a court to find unfair surprise or the presence of express agreement after the fact than it is to state those principles in the statute. Thus, 2-207(3) states the exclusionary principle in broad terms and relies upon the courts to apply it.

Assume that some contract has been formed. What are its terms?

(a) All terms are expressed in one record.

For consumer contracts, see 2-206. For commercial contracts, the usual principles of agreement apply.

(b) No terms are expressed in a record.

Does the statute of frauds apply? See 2-201. If not, for all contracts the usual principles of agreement apply.

(c) Some Terms in the Record of only one party.

Here the parties have concluded a contract and some (not all) of the terms are in the record of one party.

Assuming that the statute of frauds and the parol evidence rule have been satisfied, the usual principles of agreement, limited by 2-105, apply.

Suppose the offer is made in a record and is accepted orally or by conduct. The assumption is that all of the terms in the record (offer) are part of the contract (the offeree agreed to them) unless the court finds unfair surprise under 2-105. Without the 2-106 possibility, the "first shot" is alive and well.

Suppose the offer is oral and the acceptance (definite and seasonable) is in a record that contains additional or different terms. Without more, there is a contract and the varying terms are proposals to modify the contract. They are excluded unless agreed to by the other party. What is agreement here? Since 2-207 does not apply, there are no special rules. Thus, if the varying terms are standard terms to which there was no express agreement (only assent by conduct), the court must decide whether the claimed inclusion is unconscionable, 2-105, or, perhaps, apply 2-207(3) by analogy.

Can one assume that these cases, i.e., where there is only one record but there is a contract, are rare?

(d) Both parties exchange records.

Here the terms of the contract are determined by the primary rule of 2-207(1). Thus, if the seller seeks to include a term in its record and the buyer also has a record, the seller's term is out unless the records of the parties agree in substance. The would not agree unless both parties had a term on the same matter, e.g., notice time for breach of warranty, and the terms agreed in substance, e.g., 20 days vs. 18 days. This is the exclusionary rule in current 2-207(3) and Article 2.22 of the UNIDROIT Principles, except that the "knock out" does not depend upon standard terms. Hence, revised 2-207 deals with the "battle of the records."

(e) Confirmations.

Suppose Seller and Buyer reach an oral agreement or conclude a contract for sale through "informal" correspondence. Later, Seller then sends a record confirming the agreement and containing terms that vary the contract. What is the effect of the varying terms?

Original 2-207(1) provided that a "written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those...agreed upon." Thus, the confirmation was treated as an acceptance rather than a proposal to modify the contract and the additional or different terms became part of the contract only if 2-207(2) was satisfied. The problem was complicated where an earlier oral agreement was unenforceable under the statute of frauds and the writing both satisfied the statute between merchants, see 2-202(2), and proposed additional or different terms. Furthermore, a confirmation proposing additional or different terms and expressly conditioning the contract upon agreement to them was probably a repudiation rather than an acceptance or a proposal for modification.

The November, 1996 Draft solved the problem as follows:

First, the statute of frauds was repealed. [The statute of frauds is now reinstated.]

Second, whether the oral or informal agreement was a contract was decided under 2-203 and 2-205. [This remains the same.]

Third, if there was a contract whether the terms in the standard form confirmation become part of the agreement depended upon 2-207(a)(3): The terms were not included unless the other party expressly agreed to them.

Fourth, if the record proposes a modification and the terms are included under 2-207(a)(3), whether the modification is enforceable is determined by 2-210(a).

Finally, whether the record is a repudiation rather than a proposed modification is determined by 2-713.

The March, 1997 draft assumes that a contract has been formed and that the statute of frauds has been satisfied. Thus, 2-207(2) states that if "one party has confirmed a contract by a record, the terms of the contract are those terms...that do not materially vary the contract and are not objected to in a timely manner." Thus, terms that materially vary the contract are excluded and may constitute a repudiation. If not a repudiation, they are proposals for modification of the contract which may be accepted by agreement under 2-210(a).

SECTION 2-208. ELECTRONIC TRANSACTIONS: FORMATION.

(a) If an electronic message initiated by a party or electronic agent evokes an electronic response and the message and response reflect or are attributed with the intent to be bound, a contract exists when:

(1) the response is received if the response consists of furnishing the requested information or notice of access to the information and the originating message did not prohibit that form of response; or

(2) the sender of the originating message receives an electronic message signifying acceptance.

(b) In an electronic transaction, the following rules apply:

(1) A contract is formed although no individual representing either party was aware of or reviewed the initial message, response, reply, information, or action signifying acceptance.

(2) An electronic message is effective when received even if no individual is aware of its receipt.

(c) In an electronic transaction involving an interaction between two electronic agents or an interaction between an individual and an electronic agent, the following rules apply:

(1) If two electronic agents interact, a contract is formed if the interaction results in both agents engaging in further actions that signify a contract, such as by engaging in performance, ordering or instructing performance, or making a record of the existence of a contract.

(2) If there is an interaction between an individual and an electronic agent of another party and the individual has reason to know that the individual is dealing with an electronic agent, a contract is formed when the individual performs actions the individual should know will cause the agent to perform or to permit further use, or that are clearly indicated as constituting acceptance.

(3) the terms of the contract include terms on which the parties have previously agreed, terms which the electronic agents could take into account, and, terms provided by this article or other law.

Section 2-208 follows 2B-206 and 2B-205(e) (Dec. 12, 1996)

SECTION 2-209. COURSE OF PERFORMANCE OR PRACTICAL CONSTRUCTION.

(a) If an contract involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other party, a course of performance accepted or acquiesced in without objection is relevant to determine the meaning of the agreement.

(b) Express terms of an agreement, course of performance, course of dealing, and usage of trade must be construed whenever reasonable as consistent with each other. However, if that construction is unreasonable:

(1) express terms prevail over course of performance, course of dealing, and usage of trade;

(2) course of performance prevails over course of dealing and usage of trade; and

(3) course of dealing prevails over usage of trade.

(c) Subject to Section 2-210, course of performance is relevant to show a waiver or modification of a term inconsistent with the course of performance.

SOURCE: Sales, Section 2-208.

This Section has been conformed to 2B-302 (Sept. 1996). It is probable that 2-209, as conformed, will be moved to Article 1. See 1-304(a) (1997). If so, a drafting strategy may be to move 2-209 to the end of Part 2 so that section renumbering can be avoided.

SECTION 2-210. MODIFICATION, RESCISSION, AND WAIVER.

(a) An agreement made in good faith which modifies a contract under this article is binding without consideration.

(b) The agreement modifying a contract under subsection (a) may be binding even if the requirements of the [statute of frauds] are not satisfied. However, the contract as modified must satisfy [the statute of frauds].

(c) Except in a consumer contract, an authenticated record that contains a term prohibiting modification or rescission except by an authenticated record may not be otherwise modified or rescinded. However, a party whose language or conduct is inconsistent with the term may not assert the term if the language or conduct induced the other party to change its position reasonably and in good faith.

(d) Except as otherwise provided in subsection (c), a contractual term that is not part of the agreed performance may be waived. Language or a course of performance between the parties is relevant to show a waiver by one party of any term inconsistent with that language or course of performance. The waiver of an executory portion of a contract may be retracted by seasonable notification received by the other party that strict performance is required of any term waived unless the waiver induced the other party to change its position reasonably and in good faith.

SOURCE: Sales, Section 2-209.

1. There are several changes in revised Section 2-210 [formerly Section 2-209 of the 1990 Official Text].

First, the requirement of an agreement made in good faith to modify, previously found in a comment, is explicitly stated in subsection (a). This follows the cases, see, e.g., Roth Steel Products v. Sharon Steel Corp., 705 F.2d 134 (6th Cir. 1983), and avoids the argument that a contract modification is neither the "performance or enforcement" of a contract under 1-203. This revision is rejected in 2B-303.

Second, subsection (b) is revised to reflect the reinstatement of the statute of frauds. It is now clearer that an oral modification may be binding without satisfying the statute but that the contract as modified must satisfy the statute. Thus, if neither the contract nor the modification are within the statute (both are below the $10,000 threshold) but the contract as modified is (price now $15,000), 2-201 must be satisfied. Further, if the contract is within and satisfies the statute and there is an oral modification that increases the quantity and the price, the contract as modified is within the statute. Has it been satisfied? Under revised 2-201(a), the answer is yes to the price term and no to the quantity term. The contract is not enforceable beyond the quantity term stated in the record.

This subsection adopts the analysis in Costco Wholesale Corp. v. Worldwide Licensing, 898 P.2d 347 (Wash.App. 1995).

Third, except in a consumer contract the parties may agree in an authenticated record that an authenticated record is required to modify or rescind. The parties may create their own statute of frauds. The only way to avoid this limitation other than by compliance is by the estoppel test stated in subsection (c). In short, the party seeking to invoke the NOM clause may be estopped if inconsistent language or conduct have induced reasonable, good faith reliance. See Brookside Farms v. Mama Rizzo's, Inc., 873 F. Supp. 1029 (S.D. Tex. 1995). This result is consistent with the estoppel exception built into revised 2-201(3).

In the original Section 2-209(2), the NOM clause was valid in all transactions, with the requirement that a form containing the NOM clause supplied by a merchant had to be separately signed by a non-merchant. The Drafting Committee excluded Consumer Contracts from NOM clauses and deleted the "separately signed" clause, leaving commercial parties who are not merchants to fend for themselves.

(2) Subsection (d) recognizes the general principle of waiver where NOM clauses are not involved. Terms that are not part of the agreed exchange of performances (the "consideration) may be waived by one party without agreement by the other. These terms will normally be express conditions upon an agreed or promised performance.

There are three types of waiver. In the first, called election waiver, the party for whose benefit a condition is included elects not to insist upon the condition after the time for its occurrence has passed. The condition is excused without a need to prove reliance by the other party. Election waiver is included in the first sentence of subsection (d). In the second, called reliance waiver, the party for whose benefit a condition is included states that he will not insist upon the occurrence of a condition in the future. Here, however, the waiver may be retracted unless the other party has changed its position "reasonably and good faith." Subsection (d), last sentence. In the third, the court simply excuses the condition when its nonoccurrence would cause "disproportionate forfeiture" and the occurrence of the condition was not a "material part of the agreed exchange." Restatement, Second, Contracts 229. See Aetna Casualty and Surety Co. v. Murphy, 538 A.2d 219 (Conn. 1988)(burden on party seeking excuse to prove that condition was not a material part of exchange).

To illustrate, suppose the contract contains a NOM clause and a schedule for installment deliveries by the seller. The seller encounters production problems, misses a due date and requests an extension of delivery time from the buyer. First, suppose the buyer states that it will not insist on the NOM condition and orally agrees to a time extension. The seller does not request a written modification and proceeds to deliver under the modified schedule. Later, the seller invokes the NOM clause and sues for damages caused by late delivery. Here, the NOM clause is waived under subsection (b) by express, inconsistent language which induced reasonable, good faith reliance and the agreed modification is enforceable under subsection (a). The modification of the delivery schedule is enforceable under 2-209(a). Second, suppose the buyer states that the late delivery is excused and orally agrees to a time extension. The seller, without obtaining a written modification, proceeds under the modified schedule. Later, the buyer invokes the NOM clause and sues the seller for damages arising from late delivery. Once again, the NOM clause was waived under Subsection (c), this time by the buyer's "language and conduct in effecting a modification...is inconsistent with the term and induces the other party to change its position reasonably and in good faith."

Although a party may waive one late installment, an agreement to modify the time of future deliveries is not necessarily enforceable. It must be either a "good faith" agreement under subsection (a) or induce reasonable, good faith reliance under subsection (d). The doctrine of waiver is not available to create or modify agreed duties under the contract. Compare 2-604 and 2-702.

SECTION 2-211. ELECTRONIC TRANSACTIONS; ATTRIBUTION PROCEDURE.

(a) A procedure established by agreement or adopted by the parties for the purpose of verifying that electronic records, messages, or performances are those of the respective parties or for detecting errors in the transmission or the information content of an electronic message, record, or performance, constitutes an attribution procedure if the procedure is commercially reasonable.

(b) Whether an attribution procedure is commercially reasonable is a question of law to be determined by the court in light of the purposes of the procedure and the commercial circumstances at the time of the agreement, including the nature of the transaction, volume of similar transactions engaged in by either or both of the parties, availability of alternatives offered to but rejected by the party, and procedures in general use for similar types of transactions. An attribution procedure may require the use of algorithms or other codes, identifying words or numbers, encryption, callback procedures, key escrow, or similar security devices that are reasonable under the circumstances.

(c) Except as otherwise provided in Section 2-212, if a loss occurs because a party complies with a procedure that was not commercially reasonable, the party that proposed or required use of the procedure bears the loss unless it disclosed the nature of the risk to the other party or offered commercially reasonable alternatives that the party rejected.

Section 2-212 follows 2B-110 (Dec. 1996).

SECTION 2-212. ATTRIBUTION OF ELECTRONIC RECORD, MESSAGE, OR PERFORMANCE; ELECTRONIC AGENT.

1. Section 2-212 will follow 2B-111 (January, 1997) which is still under consideration by the Article 2B Drafting Committee.

What parts of this complex and evolving section are unique to licenses?

2. Section 2-211 (July, 1996), dealing with "delegation of performance," has been moved to Section 2-503.

SECTION 2-301. HOW CONTRACT PRICE PAYABLE.

(a) The contract price may be made payable in money or otherwise.

(b) If the contract price is payable in whole or in part in goods, each transferor is a seller for the purposes of this article with respect to the goods transferred.

(c) The sale of goods is subject to this article even if all or part of the contract price is payable in an interest in real property. This article applies to the transfer of goods but not to the transfer of an interest in real property.

SOURCE: Sales, Section 2-304.

There are no substantive changes in former 2-304.

SECTION 2-302. TRANSFER AT SINGLE TIME.

(a) If all of a party's performance can be rendered at one time, the performance is due at one time and the other party's reciprocal performance is due only on tender of full performance.

(b) If circumstances give either party the right to make or demand performance in parts or over a period of time, payment, if it can be apportioned, may be demanded for each part performance.

(c) If payment cannot be apportioned or the agreement or the circumstances indicate that payment may not be demanded for part performance, payment is due on completion of full performance.

SOURCE: Sales, Section 2-307.

1. This is an elaboration of former 2-307 and clarifies when a party's performance is due at one time and what the other party's duties are on full performance. Subsection (a) follows 2B-603. Subsections (b) and (c), which state when, in the absence of an agreed installment contract, a part performance is permitted and how payment is to be apportioned, follow 2B-604. Except for covering the obligations of both seller and buyer, no changes of substance are intended. See 2-610(a) and 2-611(a) on who, seller of buyer, must tender first.

2. The factors justifying delivery in more than a single lot include the type of disruptive circumstances, the alternatives reasonably available and the understanding that the parties will make up any deficiencies within a reasonable time. Thus, if the seller agreed to deliver 10 carloads and, because of a railroad strike, only three cars were available at the time of delivery and the cost of alternative transportation was high, the seller is probably obligated to tender three carloads. Assuming reasonable efforts, the balance is due as cars become available.

This section should be distinguished from 2-716, which deals with excuse and substitute performance when changed circumstances disrupt agreed methods of shipment, delivery or payment. Presumably, it takes less disruption to vary a "default" rule than to excuse an agreed performance.

3. The operation of 2-302 creates an installment contract, i.e., goods delivered "in separate lots to be separately accepted." 2-711(1). But it is not a credit installment contract: payment for each lot is due upon tender. This makes sense if payment for the single lot was due upon tender. But suppose the contract said nothing about the quantity to be delivered and the parties agreed upon 30 days credit. If circumstances justify delivery in lots, is payment for each lot due 30 days after delivery or must payment be made upon tender? The answer should be that the agreed credit term survives and payment is not due until all of the goods are tendered. Only the "default" rule is altered by circumstances.

4. Clearly, the installment contract created by 2-302 is by operation of law. It in no way interferes with the parties's power to create by agreement an installment contract where payment is due after the goods are tendered and accepted.

SECTION 2-303. OPEN PRICE TERM.

(a) The parties, if they so intend, may form a contract for sale even if the price is:

(1) not agreed to;

(2) left to be agreed by the parties and they fail to agree; or

(3) to be fixed in terms of some agreed market or other standard as set or recorded by a third party or agency and it is not so set or recorded.

(b) The price of a contract formed under subsection (a) is a reasonable price at the time that the seller is to complete its initial delivery.

(c) A price to be fixed by the seller or the buyer must be fixed in good faith.

(d) If a price left to be fixed otherwise than by agreement of the parties fails to be fixed through fault of one party, the other party at that party's option may treat the contract as canceled or may fix a reasonable price.

(e) If the parties intend not to be bound unless the contract price is fixed or agreed to and it is not fixed or agreed to, a contract is not formed. In that case, the buyer shall return any goods already received or, if unable to do so, pay their reasonable value at the time of transfer, and the seller shall return any portion of the contract price paid on account.

SOURCE: Sales, Section 2-305.

1. There are no substantive revisions in former 2-305.

2. Section 2B-305 on "open terms" provides a structure and approach to a variety of open terms, including price. Should an effort be made to conform 2-303 and other "gap fillers" in Article 2 to the form and structure of Article 2B?

SECTION 2-304. OUTPUT, REQUIREMENTS, AND EXCLUSIVE DEALING.

(a) A contractual term that measures the quantity of goods by the output of the seller or the requirements of the buyer means the actual output or requirements that may occur in good faith. If actual output or requirements occur in good faith, a seller may not offer or or a buyer may not demand any quantity unreasonably disproportionate to any stated estimate or, in the absence of a stated estimate, to any normal or otherwise comparable previous output or requirements.

(b) An agreement by a seller or buyer for exclusive dealing in the kind of goods concerned imposes an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.

SOURCE: Sales, Section 2-306.

1. Section 2-304(a), which conforms in substance to 2B-306(a), has several objectives.

First, it states the meaning of "output" and "requirements" terms when used in a contract for sale. Such terms do not cause a contract to fail for indefiniteness. See 2-203(c). The parties may agree upon a fixed quantity or no quantity or something in between. But unless the parties agree to measure all or part of the quantity by "output" or "requirements," 2-304(a) does not apply. See Lenape Resources Corp. v. Tennessee Gas Pipeline Co., 925 S.W. 2d 759 (Tex. 1996)(good faith increases in output subject to "take or pay" provision).

Second, it imposes a duty of good faith on the exercise of discretion by either party to determine the level of output or requirements. Section 2-306(a), however, does not require that there must be an exclusive dealing arrangement before an output or requirements term is enforceable. Although some states require exclusive dealing, see Essco Geometric v. Harvard Industries, 46 F.3d 718 (8th Cir. 1995)(Missouri law), this extreme position is rejected. The term should be enforceable where the seller or buyer agrees to supply or demand all or part of its output or requirements to or from the other. See Advent Systems Ltd. v. Unisys Corp., 925 F.2d 670 (3d Cir. 1991)(non-exclusive requirements term satisfies statute of frauds); Restatement (Second) Contracts sec. 79(c)(where consideration requirement is met there is no additional requirement of mutuality of obligation). For example, a term where the buyer agrees to buy 10% of its actual requirements in good faith from the seller should be enforceable. On the other hand, the buyer would not have the additional obligation to use "best efforts" unless there was an exclusive dealing contract. 2-306(2). See Tigg Corp. v. Dow Corning Corp., 962 F.2d 1119 (3d Cir. 1992).

Third, it clarifies that if there are no actual output or requirements in good faith, the party has no duty to perform even though there are estimates in the contract or there were prior output or requirements. The question is whether the lack of output or requirements occurred in good faith, not whether the lack of actual output or requirements was "unreasonably disproportionate." This follows the interpretation of prior 2-306(1) in Empire Gas Corp. v. American Bakeries Co., 840 F.2d 1333 (7th Cir. 1988), but rejects the court's dictum that the unreasonably disproportionate limitation is not applicable to any decrease in quantity or requirements. See also, Tigg Corp. v. Dow Corning Corp., 962 F.2d 1119 (3d Cir. 1992). The California State Bar, however, disagrees with this clarification, believing that the "yardstick for output and requirements contracts should be prior output or shared estimates, not actual output or requirements."

Fourth, the question when a party with no actual output or requirements has acted in good faith is more difficult to answer. Some courts have drawn the line between decisions made because the contract is simply unprofitable or too costly (bad faith) and those made because an event external to the contract has adversely affected the viability of the entire enterprise (good faith). The traditional definitions of good faith, see 2-103(1)(b) of the 1990 Official Text, do not clearly respond to this problem. At least one court has held, however, that bad faith is established if the party claiming no actual requirements fails to offer a reason for that situation. See Empire Gas Corp., supra.

Fifth, in cases where there are some actual output or requirements in good faith, 2-304(a) further controls the exercise of discretion by requiring a reasonable proportion between agreed estimates or prior comparable output or requirements and the goods actually supplied or ordered. Suppose, for example, that the buyer estimated its requirements to be 50,000 units per year. Over a five year period, the buyer's orders averaged between 45,000 to 55,000 per year. In the 6th year, buyer's actual requirements in good faith were 80,000 per year. If 80,000 units were ordered, the question is whether the quantity is "unreasonably disproportionate" to the stated estimate and this question is answered more by the size of the variations and whether they were reasonably foreseeable at the time of the contract than the motives of the buyer or seller. See Orange & Rockland v. Amerada Hess Corp., 397 N.Y.S.2d 814 (N.Y.A.D. 1977).

2. Section 2-304(b) deals with an exclusive dealing agreement in a contract where the requirements of a buyer depend upon the resale market demand for them. Unless otherwise agreed, the seller must use "best efforts" to supply those requirements. On the other hand, if the buyer has X requirements in good faith, the seller can insist that the buyer use "best efforts to promote their sale." Actual requirements in good faith are not enough. Unlike 2B-306(c) & (d), no effort is made in this Draft to state a standard for "best efforts."

SECTION 2-305. ABSENCE OF SPECIFIED PLACE FOR DELIVERY.

(a) The place for delivery of goods is the seller's place of business or, if there is none, the seller's residence.

(b) In a contract for sale of identified goods that to the knowledge of the parties at the time of contracting are in some place other than that described in subsection (a), that place is the place for their delivery.

(c) Documents of title may be delivered through customary banking channels.

SOURCE: Sales, Section 2-308.

There are no revisions of substance in former 2-308. See 2B-203(b).

SECTION 2-306. TIME FOR PERFORMANCE NOT SPECIFIED.

(a) Except as otherwise expressly provided in this article, the time for performance or any other action under an agreement in which a time for performance is not specified is a reasonable time.

(b) If an agreement provides for successive performances but is indefinite in duration, the duration of the agreement is a reasonable time. Subject to Section 2-311, either party may terminate the contract at any time.

SOURCE: Sales, Section 2-309(1) and (2).

1. Section 2-306 adopts without change the provisions for time and duration of performance found in 2-309(a) & (b) of the December, 1994 Draft. Termination of the contract, previously covered in 2-309(c), is now covered in 2-311. This conforms in substance to 2B-315.

2. The basic "gap filler" for time is a "reasonable time," defined in 1-204(2). Where the statute requires action to be taken within a reasonable time, however, "any time which is not manifestly unreasonable may be fixed by agreement." 1-204(1).

3. If the agreement is for "successive performances" but is indefinite in duration, the duration is a reasonable time. Subsection (b). The contract, however, is terminable at will by either party, subject to the notice requirement in 2-311(a).

SECTION 2-307. OPTIONS AND COOPERATION RESPECTING PERFORMANCE.

(a) An agreement that is otherwise sufficiently definite to be a contract is enforceable even if it leaves particulars of performance to be specified by one of the parties.

(b) If one party is required to specify the particulars of performance, the specification must be made in good faith and within limits of commercial reasonableness.

(c) An agreement providing that the performance of the seller be to the satisfaction of the buyer without further specifying the standard of performance requires that the performance be such that a reasonable person in the position of the buyer would be satisfied.

(d) A specification relating to an assortment of goods is at the buyer's option. Except as otherwise provided in subsection (e), a specification or arrangement relating to shipment is at the seller's option.

(e) If a specification by one party would materially affect the other party's performance but is not seasonably made or one party's cooperation is necessary to the agreed performance of the other but is not seasonably forthcoming, the other party, in addition to all other remedies:

(1) is excused for any resulting delay in the party's own performance; and

(2) may proceed to perform in any reasonable manner or, after the time for a material part of the party's own performance, treat the failure to specify or cooperate as a breach of contract.

SOURCE: Sales, Section 2-311.

SECTION 2-308. FAILURE TO PAY BY AGREED CREDIT.

(a) Failure of a party seasonably to furnish an agreed letter of credit intended as the primary method of payment is a breach of a contract for sale.

(b) Delivery to a seller of an agreed letter of credit suspends the buyer's obligation to pay. If the letter of credit is dishonored, the seller on seasonable notification may require payment directly from the buyer.

(c) In this section "confirmed letter of credit" means a letter of credit that carries the direct obligation of a confirmed or financing agency of good repute or, if the shipment is overseas, of good international repute that issues an irrevocable letter of credit.

SOURCE: Sales, Section 2-325.

Section 2-308, formerly 2-325 of the 1990 Official Text, states the effect of supplying or failing to supply an agreed letter of credit. Letter of credit is defined with reference to 5-102(a)(10) of the 1995 Official Text. All other aspects of the letter of credit transaction are covered by revised Article 5.

SECTION 2-309. SHIPMENT TERMS; SOURCE OF MEANING. The effect of a party's use of shipment terms such as "FOB", "CIF", or the like, must be interpreted in light of applicable usage of trade and any course of performance or course of dealing between the parties. If any applicable usage of trade, course of performance, or course of dealing is not shown, the meaning of shipment terms used in an agreement may be interpreted by reference to the Incoterms published by the International Chamber of Commerce.

SOURCE: Sales, Sections 2-319, 2-320, 2-321, 2-322, 2-324.

1. In the May, 1994 Draft, 2-319 through 2-324, dealing with shipment and delivery terms, were deleted. The conclusion was that these terms were out of date with current practice.

2. Section 2-309 is a first step toward filling the gap on delivery terms. If the meaning of a stated shipment or delivery term cannot be found in the agreement or an applicable usage of trade, the meaning may be determined by reference of the Incoterms of the International Chamber of Commerce. Nevertheless, some definition of delivery terms for revised Article 2 might still be required.

3. Professor Mark Roszkowski has made suggestions for incorporating shipping terms based on Incoterms 1990 into revised Article 2. The revision starts with 2-309A, which consolidates obligations imposed on the seller under all terms and then arranges 13 shipping terms containing more specific obligations into four categories, (1) departure terms, e.g., "ex works," (2) main carriage unpaid terms, e.g., FAS or FOB, (3) main carriage paid terms, e.g., C&F or CIF, and (4) arrival terms, e.g., "delivered at frontier" or "delivered ex ship." The draft is over 31 pages, including conforming amendments.

Policy question: Should some or all of these terms be included in Revised Article 2?

SECTION 2-310. TERMINATION; SURVIVAL OF OBLIGATIONS.

(a) Except as otherwise provided in subsection (b), on termination of a contract, all obligations that are still executory on both sides are discharged.

(b) The following survive termination of a contract:

(1) a right based on a previous breach or performance of the contract;

[(2) a limitation on the scope, manner, method, or location of the exercise of rights in the goods;]

(3) an obligation to return or dispose of goods, which obligation must be promptly performed;

(4) a choice of law or forum ;

(5) an obligation to arbitrate or otherwise resolve disputes through alternative dispute resolution procedures;

(6) a term limiting the time for commencing an action or for providing notice;

(7) an indemnity provision; and

(8) any right, remedy, or obligation stated in the agreement as surviving.

SOURCE: Licenses, Section 2B-617.

1. Section 2-310 states what obligations survive a termination. See former 2-106(4). "Termination" is defined as an act which ends a contract for other than breach. See 2-102(a)(48).

2. Section 2-310 has been conformed to 2B-626 (January, 1997).

SECTION 2-311. TERMINATION; NOTIFICATION.

(a) A party may not terminate a contract, except on the happening of an agreed event, unless the other party receives reasonable notification of the termination.

(b) A term dispensing with notification is invalid if its operation is unconscionable. However, an agreement specifying standards for the nature and timing of notification is enforceable if the standards are not manifestly unreasonable.

SOURCE: Sales, Section 2-309(3).

1. Assuming that a party has power to terminate the contract, 2-311(a) states when notice is a condition precedent to termination and subsection (b) limits agreements attempting to dispense with the notice requirement. See former 2-309(3). In short, the power to terminate at will is conditioned upon the receipt by the other party of "reasonable notification," which, in turn, "depends on the nature, purpose and circumstances of such action." 1-204(2). This differs from the September, 1996 draft of 2B-629(a), which states that the party terminating the contract must send reasonable notice of termination. Article 2B has been requested to conform to Article 2 on this.

2. The "reasonable notification" condition in subsection (c) refers to the time after which notice is received before the termination is effective. In short, the other party must be given a "reasonable time" to exit from the contract.

There are three exceptions to this important default rule.

First, notice is not required if the contract provides that termination will occur on the "happening of an agreed event." For example, if the parties in a requirements contract agree that the contract is terminated if the buyer has no actual requirements in good faith, a termination notice is not required.

Second, the parties can agree on what is reasonable notification, if the agreement is not "manifestly unreasonable." Section 1-204(1). Franchise and distributorship contracts typically provide for 30, 60 or 90 days notice and the courts have generally upheld such time provisions as reasonable.

Finally, the parties can agree to dispense with notification, unless the "operation" of that agreement "is unconscionable." Compare 1-105, which ties unconscionability to the time of contracting.

The last two limitations relate to the other party's investment in the contract and the opportunity to salvage and reinvest after termination. Thus, if the contract investment is substantial and the reinvestment process is difficult, the more likely it is that, say, an agreed 10 day notice is unreasonable or that an agreement dispensing with notice operates in an unconscionable manner. The assumption is that except for part performance under the contract, the terminated party assumes the financial risk of a proper termination.

3. Without more, the exercise of an agreed power to terminate is also subject to the duty of good faith, 1-203, which cannot be disclaimed by agreement. 1-102(3). Many courts, however, have found good faith where the terminating party follows the terms of the agreement. Under this approach, the motive of the terminating party is irrelevant and the agreed termination is effective if a reasonable notice is given.

SECTION 2-312. SALE BY AUCTION.

(a) In a sale by auction, if goods are put up in lots, each lot is the subject of a separate sale.

(b) A sale by auction is complete when the auctioneer so announces by the fall of the hammer or in another customary manner. If a bid is made during the process of completing the sale but before a previous bid is accepted, the auctioneer may in its discretion reopen the bidding or declare the goods sold under the previous bid.

(c) A sale by auction is with reserve unless at the time the goods are put up or during the course of the auction it is announced in express terms that the sale is without reserve. In an auction with reserve, the auctioneer may withdraw the goods at any time until completion of the sale is announced. In an auction without reserve, after the auctioneer calls for bids on an article or lot, the article or lot may not be withdrawn pending a bid within a reasonable time. In either case, a bidder may retract a bid until the auctioneer's announcement of completion of the sale, but a bidder's retraction does not revive any previous bid.

(d) If an auctioneer knowingly receives a bid on a seller's behalf or the seller makes or procures a bid, and notice has not been given that authority for such bidding is reserved, the buyer at the buyer's option may avoid the sale or take the goods at the price of the last bid made in good faith before the completion of the sale. This subsection does not apply to a bid at a forced sale.

SOURCE: Sales, Section 2-328.

No major revisions are proposed in former 2-318. There are relatively few cases and they reveal no significant problems of interpretation. For a focused analysis, see Jorge Contreras, The Art Auctioneer: Duties and Assumptions, 13 Hastings Comm./Ent. L. J. 717 (1991). See also, Patty Gerstenblith, Picture Imperfect: Attempted Regulation of the Art Market, 29 Wm. & Mary L. Rev. 501 (1988).

1. In subsection (a), in a "sale by auction" the auctioneer "invites price offers from successive bidders which he may accept or reject." Restatement (Second) Contracts sec. 28(1).

Although not specifically stated, an auctioneer can condition delivery upon payment for all goods sold, even if the sale is in separate lots. If each lot is a separate sale, bidders who arrive late are on constructive notice of the terms of later sales. Restatement, (Second) Contracts sec. 28(2).

2. In subsection (b), the quaint phrase "fall of the hammer" is preserved, although a more inclusive phrase is "announcement of completion of the sale."

The "prior bid" problem can occur when the sale is "with reserve," the default rule. 2-320(c). Subsection (b) supports a limited extension of the auctioneer's discretion beyond the time when the sale was completed.

3. Under subsection (c), in a sale "with reserve" (the default rule), the auctioneer invites bids (offers) and reserves the power to accept or reject them. Bidders assume the risk that the goods will be withdrawn before the sale is concluded. The contract is concluded, however, when the completion of the sale is announced. See Sly v. First Nat'l Bank of Scottsboro, 387 So.2d 198 (Ala. 1980); Restatement 2d, Contracts secs. 26, 28, Comment b.

If the sale is in "explicit terms...without reserve", when and where is the contract formed? Clearly, a final deal is not struck until a some bid is made within a reasonable time and not withdrawn before the auctioneer announces the completion of the sale. Both parties have some discretion (the auctioneer's is more limited) after the bid is made. This supports the conclusion that the contract is formed at the place where the auctioneer is located, rather than at the point where the bid is made, whether made by mail or through EDI.

Suppose, during the course of a "with reserve" auction, the auctioneer announces that the sale is now "without reserve." Original 2-328(3) did not recognize this conversion possibility, which (we are told) exists in practice. Such a conversion, in effect, announces a "reserve bid" in that the goods will not be sold below the last bid before the conversion. Does modern auction practice support the underlined language added to subsection (c) above? Suppose a sale "without reserve" is converted to a sale "with reserve" during the course of the auction? For a case holding that the goods were not in "explicit terms" put up without reserve where the auctioneer stated that there was no minimum bid and the goods would be sold to the highest bidder, see Miami Aviation Serv. v. Greyhound Leasing & Financé Corp., 856 F.2d 166 (11th Cir. 1988).

Subsection (c) does not deal with the so-called conditional sale, where final approval after the sale is concluded is reserved to the seller, a secured party or a court. These conditions are enforced by the courts. Lawrence Paper Co. v. Rosen & Co., 939 F.2d 376 (6th Cir. 1991). Language dealing with the "conditional sale," a third method of sale by auction, has not been added.

4. In a sale with reserve, the power of the seller to withdraw the goods at any time should be distinguished from bids by the seller without proper notice. The latter problem, which raises questions of rigged or fraudulent bidding, is addressed in subsection (d). See Vanier v. Ponsoldt, 833 P.2d 949 (Kan. 1992)(bid rigging).

Although subsection (d) is silent, the courts have required a bidder to take action to avoid the sale or take the goods at the last good faith bid within a reasonable time after he discovered or should have discovered the operative facts. Should language like this be added to subsection (d)?

The last sentence states that subsection (d) does not apply to a "forced sale." To avoid conflicts with auction sales under Article 9 and 2-819(c), should it be limited to public auctions under or required by legal process? If so, subsection (d) would then apply to auctions that enforce security interests or implement the resale remedy for breach of contract.

5. The following coordination needs or conflict resolution with other provisions in Revised Article 2 still need to be resolved.

2-402(a). When must the auctioneer disclose the name of the principal to avoid liability as a seller? In auctions where hundreds of sellers are involved or goods on consignment arrive just before sale, practical problems are posed if disclosure must be just before the bidding. But if not then, when? The current 2-402(a) states that the auctioneer must state that it is acting on behalf of a principal, not disclose the identity of the principal.

2-407(c). According to one commentator, this section as written would cause "catastrophic" changes in the auction industry. The argument is that since most auction warranties" auction sale unworkable. One solution is to except auctions from the definition of "consumer contract." Another is to provide a "safe harbor" for the "as is" disclaimer at auctions.

2-409(a). Clarify when the definition of seller used in 2-401(a) is the same as that used in other sections, such as 2-312.

2-506. Should auctioneers should be excluded from the "sale or return" provisions?

2-819. Possible conflicts between 2-312 and 2-819 on notice requirements in resales by auction should be resolved. Arguably, the more specific requirements for resale as a remedy for breach should control over 2-312.

These questions have not been resolved in this Draft.

SECTION 2-401. DEFINITIONS. In this part:

(1) "Damage" means all loss resulting in the ordinary course from a breach of warranty, including injury to a person or property.

(2) "Goods" includes a component incorporated in substantially the same condition into other goods.

(3) "Immediate buyer" means a buyer in a contractual relationship with the selle