Winning Your UCC Article 2 Case Before It Starts

By Alexander Blum and Noah Nathan

1. Introduction

Although the Uniform Commercial Code (“UCC” or the “Code”)¹ is not an overly complex statute, many companies rarely devote the time and attention required to integrate the specific rules and the general statutory scheme into the company’s “normal business practices.” UCC 2-104, comment 2. However, given the Code’s relatively logical construction and bright line rules, a basic understanding can be accomplished by attorneys who are engaged by a company either during the formation of the business or just after the start of operations. The analysis should cover two interrelated topics: 1) a review of the specific provisions that are most relevant to the company’s operations, and 2) a description of the overall structure of the Code, topics it covers, and the motivating factors present throughout it.  Once learned, this information can assist decision-makers in predicting how the Code will apply to a particular issue or dispute. 

The goal of such an assessment should be to integrate an understanding of the Code’s rules and motivating factors into the operations of the business and to familiarize the company’s managers with its specific language and the types of decisions it governs.  This should result in less litigation and, if litigation does arise, the company should already be in a position to demonstrate that its practices and operations comply with the Code and were adopted in light of the specific rules set forth in the Code. Such a showing will not only provide a basis for the company to prevail but, just as important, such a proactive policy should generate opportunities to limit the time and issues subject to litigation.

  For example, the manager may know about liquidated damages as the amounts can be significant, but may not be aware that they can be calculated prior to a course of conduct that may implicate such damages. Thus, the company can perform some amount of risk analysis in anticipation of a course of conduct that would be adverse to the interests of its contractual partners. A basic understanding of the Code will also alert managers to issues that will likely require consultation with the company’s attorney, for example, an analysis of whether a breach is “material,” or advice on how the company can “mitigate” its damages. Without a well-grounded understanding of the UCC, such questions are unlikely to arise, leaving the company vulnerable to liability.

This article aims to provide non-litigation attorneys with tools and strategies to counsel their clients on how to use the Code to avoid litigation. Understanding the basic structure and rules of the UCC is not a difficult task. Thus, at the very least, managers should be able to identify situations (or the companies’ Terms and Conditions) that are governed by the Code , and contact counsel to avoid UCC violations. Subsequently, managers and other decision-makers can make resolving issues under the Code part of regular meetings where they can continue to build on their knowledge and integrate its provisions so that they become part of the everyday operations of the company.

1. Presenting the Code and Its Fundamental Terms  

The Code was not intended to establish a set of prescriptive rules that the drafters sought to impose on the business community. Instead, the Code is constructed around a few principles that govern the sale of goods, from the birth of a pin to its final sale to the consumer.

The Code’s primary concern is keeping products moving through the system. Thus, a dispute between two parties should be self-contained; it should not be permitted to shut down a supply chain involving 10 or 20 companies. Thus, regardless of how a dispute arises, the parties’ first concern should be how to continue buying and selling products while preserving what they need for the dispute in a manner that does not affect the company’s ability to perform its contractual obligations. 

Thus, some questions that every party should ask before potentially destroying the relationship are the following (which is not an exhaustive list): 1) Are the damages the company is going to claim monetary? If yes, the company generally must continue performing and seek monetary damages later. 2) Can the company continue to perform by purchasing raw materials or components from a different source? If yes, the company must purchase the parts and sue for the price difference later. 

Another fundamental principle is the Code’s preference for establishing enforceable contracts—again, the focus is on maintaining a constant supply of goods. The Code tries to build contracts out of a meager number of agreed-upon terms, i.e., one. “The agreement must explicitly state a quantity term; courts may not infer a quantity term.” Lorenz Supply Co v. American Standard, Inc, 419 Mich 610 (1984). This quantity term establishes a mutual obligation, meaning the seller must provide a specified quantity, and the buyer must purchase that quantity. Feighner Co, Inc v. Thru-Flow, Inc, 730 F Supp 3d 684, 690 (WD Mich 2024). The Code does not require a price term unless it is clear that the parties did not intend to engage in a transaction if they could not agree on a price term. See MCL 440.2305 onopen price term. Thus, the only necessary term is quantity; everything else can be determined by looking to the Code and at general business practices. 

Ultimately, the UCC recognizes the parties’ freedom to contract. It offers reasonable terms for situations where the parties have agreed to cooperate but have not addressed every possible term, or gap fillers. For example, see MCL 440.2306, cmt., which states that the statute “applies to such contracts …” whose “commercial background and intent” will be interpreted “into the language of any agreement.” Furthermore, the so-called battle of the forms determines which party’s terms prevail when the parties’ terms and conditions present conflicting provisions. MCL 440.2207. This provision provides a guide for determining which terms are enforceable when the two parties have sent their terms and conditions in the offer and acceptance. This does away with the mirror image rule and the meeting of the minds. It provides a complex but rational means of saving the contract even where the parties’ terms do not coincide with each other. Under more general theories of contract, such a discrepancy would have likely made the contract unenforceable. 

1. Using the Code to Build an Ongoing Relationship with the Client.

Explaining these principles and some of the introductory provisions, such as “acceptance,” “rejection,” “non-conforming,” “mitigation,” etc., is a good way for attorneys to supplement their services. For example, an attorney hired to assist in forming the company or purchasing another company may discuss the Code and its essential terms with the client, who may then be alerted that the company Code-related issue and needs the advice of counsel.

Ideally, such conversation will provide a means of establishing a continuing relationship with the client. The initial presentation may be supplemented at periodic meetings between the client and the attorney. Suppose the meeting is the first contact between the attorney and client. In that case, the attorney should inquire whether the company has any ongoing disputes, the type of goods the company produces/sells, the types of contracts that it has with its suppliers and buyers, and other essential information that could affect the client’s rights and ability to maneuver if a dispute arises with any of its contractual partners.

During these periodic meetings, the party and its attorney can review the company’s current contractual relationships, assess potential vulnerabilities, and proactively address any emerging legal or operational concerns before they escalate into full-blown disputes. Given the flexible nature of the Code, businesses that fail to routinely assess their contracts and operations in light of the Code may find themselves at a disadvantage, either missing key opportunities to protect their interests or exposing themselves to unnecessary legal risks.

Periodic meetings between the business and its in-house counsel ensure that the company remains proactive and adaptive, strengthening its ability to negotiate favorable terms while ensuring ongoing compliance with Code principles. These discussions should be held as frequently as the client wishes, whether monthly, quarterly, or annually, depending on the volume and complexity of transactions. The goal is not merely to check for compliance but to use the Code to shape the company’s legal and commercial strategies. By reviewing active contracts, discussing emerging legal trends, and identifying potential pitfalls in real time, businesses can position themselves for success while minimizing exposure to costly disputes.

1. Learning Through Doing: How Businesses Can Use the Code to Their Advantage

One of the most valuable aspects of these periodic meetings is the opportunity for company leaders to develop a working understanding of the Code through practical application. Businesses should integrate its principles into their day-to-day decision-making rather than treating the Code as an abstract legal framework only relevant in times of dispute. The best way to do this is through a hands-on approach—learning through doing—where each meeting involves referencing the Code to confirm that business practices remain within legal bounds while also exploring how companies can use it strategically.  The other benefit of this is that it gives counsel a greater understanding of the business, its competitors, and other dynamics at play.

For instance, businesses frequently negotiate contracts without considering how the Code’s provisions on risk allocation, damages, or performance obligations may apply if a dispute arises. Many companies erroneously assume they have complete discretion to stop performance, reject goods, or modify their obligations when confronted with unfavorable situations. However, the Code imposes specific requirements on parties regarding notice, timing, and reasonableness, which, if ignored, could result in unintended liability.

Take, for example, the issue of rejecting nonconforming goods. Under UCC 2-602, a buyer must reject goods within a reasonable time after delivery or tender, and the rejection is effective only if the buyer gives reasonable notice to the seller.² What counts as a “reasonable time” depends on factors such as the nature of the goods, industry standards, and the specific terms of the contract, as explained in UCC 1-205(a).³ Additionally, UCC 1-205(b) clarifies that actions are deemed reasonable if they occur within the agreed time frame or, in the absence of an agreement, within a reasonable period.⁴ The official comments to these sections further emphasize that prior dealings between the parties, trade usage, and past performance can affect the timing and effectiveness of rejection.

The case of Koviack Irrigation & Farm Servs v Maple Row Farms, LLC illustrates the importance of understanding and applying the Code in real-world transactions.⁵ Maple Row Farms purchased an irrigation pump from Koviack Irrigation, relying on the seller’s expertise. Due to late delivery, the farm could not install or test the pump until the following spring, when an independent specialist discovered it was incompatible. Maple Row Farms rejected the pump, which led to litigation over payment.

This case reinforces key Code principles. First, under UCC §2-602, buyers must have a reasonable opportunity to inspect goods before acceptance, especially when dealing with complex products. The court ruled that waiting until installation was practical and sensible. Second, it emphasizes the importance of effective rejection. While written notice is preferred, the court found that Maple Row Farms’ repeated statements and actions and the seller’s refusal to engage constituted valid rejection.

Through these meetings and discussion of the Code, it is hoped that management will develop a feel for how the Code works, which will result in better day-to-day decisions and a better sense of the type of decisions that should cause the manager to contact her attorney before deciding.

1. Post Script: When Litigation Does Occur

Many circuit courts in Michigan have created business courts⁶ that handle most litigation involving merchants, as defined under the Code. Early mediation is encouraged in most cases, and it would be particularly beneficial in a typical UCC case, where each party believes that it is the non-breaching party and, therefore, entitled to payment from the other side. As litigators know, it is much easier to resolve a case where the parties are $200,000 apart, where one party starts at $0 and the other at $200,000, than to settle a case where both parties believe they are entitled to $100,000. 

A mediator in non-binding mediation can still determine which party is likely to prevail under the Code and use his or her status as an objective third party to encourage the breaching party to reassess its position under the relevant provision of the Code. Early mediation not only has the potential to guide the parties toward an eventual resolution but also reinforces an attorney’s analysis, especially where the attorney must give the client bad news. Before either party becomes fully committed to their positions, a mediator who tackles this issue at the start of the case could save the parties and their attorneys countless hours of frustration and wasted resources.

Attorneys who provide such advice should be aware of the recent Michigan Supreme Court decision of MSSC, Inc. v. Airboss Flexible Products Co. 511 Mich. 176, 194-196 (2023). In brief, traditionally, there are three (3) methods that parties have used to specify the quantity term in a contract: (1) expressly stating a specific quantity; (2) a requirements or output contract; or (3) a blanket purchase order where future releases would specify the quantity. In Airboss, the Court held that:

• The parties’ contract was a blanket purchase order, which typically does not have a quantity term. A significant benefit of such contracts is that they allow the parties to establish a contractual relationship so that they will have a company on hand when new orders come through; when an order comes through to the seller with a week turnaround, it is not the time to look around for companies to supply the parts it will need to complete the purchase order on time.
• Since the blanket purchase order did not include a quantity term, the parties’ agreement was not enforceable under the statute of frauds. The UCC has a statute of frauds that requires a written agreement for all orders exceeding $1,000: MCL 440.2201. As stated above, the only term required to form a contract is the quantity term. 
• The lower courts combined various documents in an attempt to create a quantity term—likely because the statute of frauds plays almost no role in contracts for the sale of goods as virtually every sale between companies is over $1,000

This decision will force many companies to change their operations in a fundamental way. How they will do that and maintain the same production level with anything close to the same quality and speed remains to be seen.

1. In Michigan, the UCC is codified at MCL 440.2101 et seq. The article contains references to the general Uniform Commercial Code and to the Michigan Uniform Commercial Code. ↩︎
2. https://www.law.cornell.edu/ucc/2/2-602 ↩︎
3. https://www.law.cornell.edu/ucc/1/1-205 ↩︎
4. Id ↩︎
5. Koviack Irrigation & Farm Servs v Maple Row Farms, LLC, 2017 Mich. App. LEXIS 1505, 93 U.C.C. Rep. Serv. 2d (Callaghan) 1018, 2017 WL 4182409 ↩︎
6. See Michigan’s business court statute, MCL 600.8031 et seq. ↩︎