Sale of Goods Disputes in Texas: How the UCC Changes a Contract Case

Does Chapter 2 apply?

Chapter 2 applies to transactions in goods: things that are movable at the time they are identified to the contract, which includes equipment, inventory, materials, vehicles and crops, and excludes real estate, services and most intangibles. Many commercial contracts mix goods and services: equipment plus installation, software plus support, materials plus labor. Texas courts apply the predominant purpose test, asking whether the contract is essentially for goods with services incidental, or for services with goods incidental. The whole contract then falls under one body of law. A construction contract is usually services; a sale of a machine with an installation day is usually goods. The answer sets the rules for everything that follows.

Formation: the $500 rule and the battle of the forms

Business and Commerce Code section 2.201 requires a writing for a contract for the sale of goods for the price of $500 or more, signed by the party against whom enforcement is sought and sufficient to show that a contract was made. The writing need not state every term, but the contract is not enforceable beyond the quantity it shows. Between merchants, a written confirmation sent within a reasonable time binds the recipient if it does not object in writing within ten days of receipt. Contracts are also enforceable without a writing for specially manufactured goods the seller has begun to make, to the extent the other party admits a contract in court, and to the extent goods have been paid for or received and accepted.

Section 2.207 addresses the common situation in which the buyer's purchase order and the seller's acknowledgment carry different printed terms. A definite expression of acceptance forms a contract even if it states additional or different terms, unless acceptance is expressly conditioned on assent to them. Between merchants the additional terms become part of the contract unless the offer limited acceptance to its own terms, the new terms materially alter the deal, or the other party objects within a reasonable time. Where the writings never line up but both sides perform, section 2.207(c) makes the contract consist of the terms on which the writings agree plus the Code's default terms. Arbitration clauses, warranty disclaimers and limitation of liability provisions that appear only in one party's form are the usual casualties of this analysis.

Gap fillers: what the Code supplies when the parties did not

Chapter 2 fills terms the parties left open. Section 2.305 lets a contract exist with no agreed price, which becomes a reasonable price at delivery. Section 2.309 makes the time for performance a reasonable time where none is stated and makes an indefinite-duration contract terminable by either party on reasonable notification. Section 2.306 measures output and requirements contracts by the quantity that occurs in good faith and imposes a best-efforts obligation in exclusive dealing arrangements. Section 1.304 imposes an obligation of good faith in the performance and enforcement of every contract within the Code, which Texas common law does not do for contracts generally, as explained in whether Texas recognizes a duty of good faith in business contracts.

Performance: perfect tender, rejection, cure and acceptance

The common law asks whether a breach was material. Chapter 2 starts from a stricter rule. Under section 2.601, if the goods or the tender fail in any respect to conform to the contract, the buyer may reject the whole, accept the whole, or accept some commercial units and reject the rest, subject to the installment contract rules and any agreed limitation of remedies. Rejection under section 2.602 must occur within a reasonable time after delivery and is ineffective unless the buyer seasonably notifies the seller; after rejection the buyer must hold the goods with reasonable care for the seller.

The seller is not without protection. Section 2.508 gives a seller whose tender is rejected the right to cure by delivering conforming goods within the contract time, and a further reasonable time to substitute a conforming tender when it had reasonable grounds to believe the original would be acceptable. A buyer that rejects on Friday and buys elsewhere on Monday, without allowing a cure the seller was entitled to make, has itself breached.

Acceptance changes the buyer's position. Under section 2.607 a buyer who accepts must pay at the contract rate, bears the burden of proving any breach, and must notify the seller of a breach within a reasonable time after discovering it or be barred from any remedy. Acceptance can be revoked under section 2.608 only for a nonconformity that substantially impairs the goods' value, and only if the buyer accepted on the assumption of cure or without discovering a defect that was hard to find or that the seller's assurances concealed. The warranty rules that run through these sections are covered in breach of warranty claims between businesses in Texas.

Insecurity and repudiation

Section 2.609 lets either party who has reasonable grounds for insecurity demand adequate assurance of performance in writing and suspend its own performance until it receives it; failure to provide adequate assurance within a reasonable time not exceeding 30 days is a repudiation. Section 2.610 then allows the aggrieved party to await performance for a commercially reasonable time or to resort immediately to its remedies for breach. These two sections give a party a lawful way to stop performing when the other side's ability to perform is in doubt, without guessing whether a breach has occurred yet.

Remedies: a menu rather than a measure

Chapter 2 replaces the general expectation-damages inquiry with specific remedies for each side.

The buyer, when the seller fails to deliver, repudiates, or the buyer rightfully rejects or revokes, may cancel and recover any price paid under section 2.711, and in addition may either cover under section 2.712 by purchasing substitute goods in good faith and without unreasonable delay and recover the difference between the cover price and the contract price, or recover market damages under section 2.713 measured by the difference between the market price when the buyer learned of the breach and the contract price. Incidental and consequential damages under section 2.715 may be added to either, and a buyer may obtain specific performance for unique goods under section 2.716.

The seller, when the buyer wrongfully rejects, revokes, fails to pay or repudiates, may under section 2.703 withhold or stop delivery, resell the goods in a commercially reasonable manner and recover the difference between the resale price and the contract price under section 2.706, recover market damages under section 2.708 or, where those are inadequate, its lost profit including reasonable overhead, or in a proper case recover the price itself under section 2.709 for goods accepted or goods that cannot reasonably be resold.

The parties can alter all of this. Section 2.719 allows them to add, substitute or limit remedies, to make repair or replacement the exclusive remedy, and to exclude consequential damages unless unconscionable, with the limits described in limitation of liability and damages caps in Texas.

Example

Suppose a Dallas restaurant group orders 40 custom refrigeration units from a manufacturer for a chain rollout, sending a purchase order that calls for delivery in two lots and says nothing about remedies. The manufacturer's acknowledgment form adds a clause limiting the buyer's remedy to repair or replacement and excluding lost profits. The first lot arrives with compressors that run loud and hot. The group's facilities manager emails the manufacturer within days describing the problem and asking what it intends to do. Under section 2.207 the manufacturer's added clause, which materially alters the deal, is not part of the contract unless the group agreed to it, so the group is not confined to repair or replacement. Under section 2.601 the group may reject the lot, and under section 2.508 the manufacturer may cure within the contract time. If the manufacturer cannot cure, the group may cancel, recover any deposit, cover by buying comparable units elsewhere and recover the difference in price under section 2.712, plus consequential damages for the delayed openings to the extent the manufacturer had reason to know of them. The email satisfies the notice requirements that would otherwise bar every one of those remedies.

Deadlines

Section 2.725 gives four years from the breach, accruing when the breach occurs regardless of the buyer's knowledge, and for warranties at tender of delivery. The parties may shorten the period to not less than one year in the original agreement. This is shorter in effect than the general contract rule, because the clock starts at delivery rather than at discovery, which is explained in how long you have to sue for breach of contract in Texas.

What Chapter 2 does to a case in practice

• The dispute is often won or lost on the paperwork exchanged at formation. Which form controls, and which terms survived section 2.207, is the first fight.
• Timing of notices decides remedies. A buyer that did not reject promptly, did not notify of defects or did not allow cure may have a real grievance and no claim.
• Damages are calculated from market and cover prices, which makes contemporaneous evidence of prices and of the substitute purchase essential.
• Attorney's fees remain available to a prevailing claimant under Civil Practice and Remedies Code chapter 38, because a sale of goods is a contract claim.

Sale of goods cases reward the party that understood the Code's sequence when the problem first appeared, which is usually weeks before anyone calls a lawyer. Tina Wysk represents Dallas manufacturers, distributors and buyers in UCC and commercial contract disputes in state and federal court and in arbitration.