Supply Chain Survival Series: Additional Statutory Default Terms
Litigation and Dispute Resolution and Business Law 10/19/22 Brandon Krajewski, Patrick Taylor, Lauren Zenk, Michael Chargo, Hannah Schwartz
We’ve previously discussed the UCC’s “Battle of the Forms,” which occurs when buyers’ and sellers’ transaction documents (such as quotations and purchase orders) contain conflicting terms and can result in neither side’s terms governing their agreement. In our last article we examined the impact of Battle of the Forms on some key provisions commonly found in parties’ standard terms and conditions. We now continue this examination with a look at some additional statutory terms that may apply in certain situations.
Having determined that ABC Corp.’s standard terms and conditions conflict with the customer’s, and that neither party’s terms apply because you rejected each other’s, you are now left trying to understand what terms do apply. Your attorney has explained to you about limitations of liability, implied warranties, and attorneys’ fees. But what about the more “nuts and bolts” terms of a contract, such as when and how goods must be delivered, when payment is due and at what price, and who bears the risk of goods being damaged in shipping? And are there other standard terms that are implied in only certain types of contracts? It is important to know how the UCC answers these questions not only to understand your own immediate obligations, but also to understand how to contract around these default terms in future agreements. These terms can become particularly important when shortages disrupt commercial supply chains.
Place of Delivery
At times a seller such as ABC Corp. may agree to sell products to a buyer, but the parties may not address who is responsible to get the goods from ABC’s facility to the buyer’s facility. In this case, the UCC provides that the place for delivery is the seller’s place of business, meaning that the buyer is responsible to arrange for the goods to be picked up from ABC’s facility.1 The UCC goes on to state that, if the parties are aware that goods are located at some other location at the time of contracting, then the place of delivery will be that location (again, putting the onus on the buyer to pick up the goods).2 This may be surprising to a buyer who is expecting the goods to be delivered to the buyer’s facility, and so buyers should be careful to specifically negotiate any desired delivery terms.
Open Price Term
What happens when goods are shipped by ABC Corp. and accepted by a buyer, but the parties never agreed upon a price? In that situation, it is likely that the parties intended to enter a contract (as evidenced by the delivery and acceptance of the goods), and so there will be a binding agreement. Since there was no agreed-upon price, the UCC provides that the price “is a reasonable price at the time of delivery” if the parties: (a) never said anything about the price; (b) left the price open to negotiation, but never agreed to one; or (c) decided that the price would be tied to a third-party formula, standard, or index, which was never set.3 Because the UCC sets the price at the time of delivery, this puts the potentially significant risk of fluctuating markets on the buyer until the goods are delivered.
Time for Performance; Time for Payment
When parties agree to the sale of goods, but fail to specify when the goods need to be delivered, delays in delivery could frustrate the buyer and result in a dispute. In these situations, the UCC provides that the time for shipment or delivery will be “a reasonable time.”4 What is reasonable can depend heavily on the circumstances, particularly in our current supply chain climate. As a result, a buyer should be sure that any critical deadlines are specifically included in the negotiated terms of the contract.
Similarly, the UCC provides a default term that applies when parties fail to specify a time for payment. In this situation, the UCC (somewhat surprisingly) requires that payment be made at the time of the buyer’s receipt of the goods.5 This could be a very unpleasant surprise for a buyer who commonly purchases on more favorable payment terms and is expecting to have 90+ days in which to make payment.
Quantity: Output, Requirements and Exclusive Dealings
Rather than specifying a specific quantity of goods to be sold, the parties may agree to tie the quantity to ABC’s “output” (i.e. production capacity) or the buyer’s “requirements.” In such cases, however, the UCC includes default terms that may serve to limit this quantity. Any reference to a seller’s output or a buyer’s requirements is deemed to be such actual output or requirements as may occur in good faith.6 Further, the UCC states that a seller may not reasonably be required to sell, and a buyer may not reasonably be required to buy, a quantity that’s unreasonably disproportionate to a stated estimate, or, if there is no stated estimate, unreasonably disproportionate to prior output.7 So, for example, if ABC Corp. has agreed to supply all of a customer’s requirements for widgets, and historically this customer has purchased 1,000 widgets per month, ABC would likely not be required to supply all of the customer’s requirements if the customer suddenly placed purchase orders for 100,000 widgets per month.
The UCC also includes a default term that applies to lawful contracts for exclusive dealing, such as a contract where a buyer agrees that ABC will be its exclusive provider of a specific type of product. In these sorts of arrangements, the UCC states that there is an implied obligation on a seller to use best efforts to supply the goods, and an implied obligation on a buyer to promote the sale of the goods.8
In some instances, a party may want to end a contractual relationship, only to find that the contract does not include a specific term or a provision addressing the parties’ rights to terminate. For example, after making an initial delivery of hand sanitizer to a hospital customer, ABC Corp. might determine that its installment contract is not very profitable. Perhaps other potential customers are willing to pay a higher price for ABC Corp.’s hand sanitizer, and so ABC Corp. wants to terminate its contract with the hospital, but the parties’ agreement is silent with respect to when and how the parties may terminate it. In this case, the UCC provides that a contract that does not have an expiration will be deemed to continue for a reasonable period of time, and it may be terminated at any time by either party, upon reasonable notice.9 Thus, if the duration of the contract is not addressed and the contract doesn’t address the parties’ rights to terminate, ABC may terminate the contract upon reasonable notice.
Having gained a better understanding of many of the default terms that the UCC imposes in certain situations, we move next to a discussion on how existing contracts may be modified, which will be addressed in our next article.
1 UCC § 2-308.
3 UCC § 2-305(1).
4 UCC § 2-309.
5 UCC § 2-310.
6 UCC § 2-306.
9 UCC § 2-309.
Quarles & Brady attorneys Michael Chargo and Hannah Schwartz also contributed to this article.
If you have any specific questions on this article, please contact your Quarles & Brady attorney: