UNDERSTANDING COMMERCIAL SALES TRANSACTIONS AND CONTRACT TERMS

• Sale of goods transactions are governed by article 2 of Uniform Commercial Code (UCC)

– Goods broadly defined as “all things movable”

• Service contracts are governed by common law

• Our focus will be sales transactions

SALE OF GOODS VS. SERVICE CONTRACTS

HISTORY LESSON

• UCC was specifically developed to regulate commercial transactions

– All contracts originally governed by common law

– Common law was not designed for commercial transactions and led to unpopular results

– Merchants developed separate code of laws and enforced amongst themselves

– Merchant codes eventually adopted as law

– UCC = modern merchant code

– UCC adopted in all states but Louisiana

WHY IS THIS IMPORTANT?

• Understanding origins of UCC permits better understanding of its functioning:

– Designed specifically for commercial transactions

– Emphasizes practicality over traditional formalities

– If transaction not documented, UCC provides default terms

– UCC provides unique remedies

HOW CAN I PUT THIS KNOWLEDGE TO WORK

• Because UCC is aimed at practical results, it imposes default terms in every contract– Price (default = reasonable)– Payment (reasonable method; e.g., check = ok)– Delivery (default = buyer pick-up where goods

are located)– Risk of loss (default = multiple variables)– Warranties (default = provided by seller)

HOW CAN I PUT THIS KNOWLEDGE TO WORK

• Understanding that these default terms are present allows you to contract around them by expressly excluding their application (freedom of contract)

Documents commonly utilized in sales transactions:

•Purchase orders•Delivery receipts / “pick” tickets / invoices•Credit application (if credit transaction)

* Put consideration of credit app on hold for now.

UCC INTERPRETATION OF TYPICAL SALES TRANSACTION

UCC INTERPRETATION OF DOCUMENTSCONTRACT = OFFER + ACCEPTANCE

• Offer = order– Written offer = purchase order– Oral offer = telephone call

• Acceptance = order confirmation– Written confirmation = delivery receipt,

pick ticket– Confirmation = shipment of goods– Silence = acceptance as between

merchants (e.g., transactions between distributors)

UCC INTERPRETATION OF DOCUMENTSCONTRACT = OFFER + ACCEPTANCE

Offer and acceptance together create contract

“Battle of the Forms”

• Buyers’ terms are part of contract by default• Buyers’ terms take precedence over seller’s by default Default: if terms disagree, buyer’s terms control!

UCC INTERPRETATION OF DOCUMENTSCONTRACT = OFFER + ACCEPTANCE

• How can I prevent buyer’s terms from becoming part of contract?

– Eliminate buyer’s offer via statutory counter-offer

– Vehicle for counter-offer = offer acknowledgement; delivery receipt; pick ticket

– Magic words to include = “acceptance expressly conditioned on assent to additional or different terms” (aecoatadt)

– Simply put: I reject your terms and offer to sell goods according to my own

– Effect: buyer fails to read acknowledgement and accepts goods on seller’s terms

CREDIT APPLICATIONS

What is the function of a credit application?

• Two primary functions of credit application:1. Acquire information from customer

2. Establish account: credit application is a contract for creditPrimary function of credit application is to govern terms of credit, as opposed to terms of specific transactions

1. ACQUIRE INFORMATION FROM CUSTOMER

Making the informed decision: should I extend credit?

• Who am I dealing with?– Business entity or sole proprietor?

• Trade names– Credit history

• References• Authorization to check references and other sources• Previous bankruptcies?

– Bank account information• Important if default

– Asset information• Yes, you can ask!

• Recitation that information is accurate – If info is inaccurate, may prevent discharge ability of debt in event of

bankruptcy – debt incurred through fraud may not be discharged under barcode

2. ESTABLISH ACCOUNT: CREDIT APPLICATION IS A CONTRACT FOR

CREDIT

“Umbrella function”: credit application ties multiple transactions under single account

• Without credit application, sales are series of separate and independent contracts

• Properly entered credit application brings separate transactions under single “open account”

ESTABLISH ACCOUNT: CREDIT APPLICATION IS A CONTRACT FOR CREDIT

– Open account has unique legal significance • i.e. Established open account has unique

statute of limitations– SOL runs from date of last payment on

account, as opposed to date of breach of independent sales contracts

• i.e. If guaranty, guaranty extends to entire account, as opposed to having to consider each transaction separately

ESTABLISH ACCOUNT: CREDIT APPLICATION IS A CONTRACT FOR CREDIT

Credit application allows seller to control credit terms:

Interest rate• Attorneys’ fees• Payment terms

caveat: specific sale of goods terms (e.g., risk of loss, disclaimer of warranties, etc.) are often also incorporated in credit app; however, these terms can be excluded by a buyer’s carefully drafted purchase order! • Personal guaranty

CREDIT TERMSINTEREST

• Default interest rate in NC is 8% APR the maximum interest rate permitted in NC is 1½% per month (18% APR)

• A contract provision seeking 2% per month is considered usary and attempts to recover (e.g., send demand letter) are subject to penalties

• Unique interest rate allowed for delayed payment to subcontractor on construction projects – 1% per month

CREDIT TERMSATTORNEYS’ FEES

• US rule: attorneys’ fees are not permitted absent specific statute

• No attorneys’ fees if not expressly included in contract (i.e., Credit application or delivery receipt)

• Maximum attorneys’ fees on open account = 15% of principal balance owed

• Award always subject to judge’s discretion• Magic words: “reasonable attorneys’ fees pursuant

to N.C. Gen. Stat. 6-21.2”

CREDIT TERMSPERSONAL GUARANTY

• Most significant credit term

• Often difference between getting paid and writing of account

• Greatest single form of leverage for repayment

• Recommend uniform policy of mandatory personal guaranty

CREDIT TERMSPERSONAL GUARANTY

• Different forms of guaranty• Guaranty of Payment vs. Guaranty of

Collection– Guaranty of Collection requires judgment against

principal debtor before seeking recovery from guarantor

– Guaranty of Payment allows direct pursuit of guarantor

– Default = Guaranty of Collection

– Magic words: “. . . as guarantor of payment”

CREDIT TERMSPERSONAL GUARANTY

• Use of “continuing guaranty” in conjunction with credit account

• Continuing guaranty allows guaranty to extend to each transaction under open account

• Magic words: “continuing guaranty, which may only be revoked by signed writing”

• Continuing guaranty also extends SOL under same principle as credit account

– SOL runs from date of last payment, as opposed to breach of underlying transactions

THANK YOU!

1720 Hillsborough Street, Suite 200 | Raleigh, NC 276051720 Hillsborough Street, Suite 200 | Raleigh, NC 27605

Tel: 919-510-8585 | Fax: 919-510-8570Tel: 919-510-8585 | Fax: 919-510-8570

1200 East Morehead Street • Suite 251 • Charlotte, NC 28204 1200 East Morehead Street • Suite 251 • Charlotte, NC 28204

Phone: 704-496-7495 • Facsimile: 704-496-7480Phone: 704-496-7495 • Facsimile: 704-496-7480

www.vannattorneys.comwww.vannattorneys.com

1720 Hillsborough Street, Suite 200 | Raleigh, NC 276051720 Hillsborough Street, Suite 200 | Raleigh, NC 27605

Tel: 919-510-8585 | Fax: 919-510-8570Tel: 919-510-8585 | Fax: 919-510-8570

1200 East Morehead Street • Suite 251 • Charlotte, NC 28204 1200 East Morehead Street • Suite 251 • Charlotte, NC 28204

Phone: 704-496-7495 • Facsimile: 704-496-7480Phone: 704-496-7495 • Facsimile: 704-496-7480

www.vannattorneys.comwww.vannattorneys.com