UCC Article 2 vs Common Law Contracts: The First Question Every REG Business Law Item Is Really Asking

Before any contract question on REG can be answered, one question has to be answered first: is this a sale of goods, or is it anything else? A sale of goods is governed by Article 2 of the Uniform Commercial Code. Everything else, services, land, employment, intangibles, is governed by the common law of contracts. The two bodies of law disagree about whether an offer can be revoked, whether a reply with new terms is an acceptance, whether a promise to modify needs anything in return, and what has to be in writing. A candidate who answers from the wrong body of law is answering a different question.

Gulf candidates have a particular disadvantage here, and it is worth naming. Saudi, Emirati and Egyptian contract law descend from civil codes, in which a contract is offer, acceptance and lawful cause, and the concept of consideration, the bargained-for exchange the common law requires, has no equivalent. Neither does the idea that a body of statute law sits beside the judge-made rules for one category of contract and quietly changes them. REG's business law area assumes both as background, and this article supplies it.

The threshold question

Goods are things movable at the time of identification to the contract: equipment, inventory, crops, cars, software on a disk. Not goods: services, real property, intangibles such as patents and receivables, and money. When a contract mixes the two, an installation contract for an air-conditioning system, a catering contract with food, a software licence with support, courts apply the predominant purpose test: which was the main thing bought? If the goods dominate, Article 2 governs the whole contract, including the service portion; if the service dominates, the common law governs everything.

Two more definitions matter, because several Article 2 rules apply only between them. A merchant is a person who deals in goods of the kind, or holds themselves out as having knowledge or skill about them. A retailer selling televisions is a merchant; a family selling a used car is not. Article 2 applies to both, but it imposes stricter rules and higher standards on merchants, and the exam signals which rule it wants by telling you whether the parties are merchants.

Where the answers differ

Issue	Common law	UCC Article 2
Irrevocable offers	Only an option contract, which needs consideration	A firm offer: a merchant's signed written offer to hold open is irrevocable without consideration for the time stated, or a reasonable time, not exceeding three months
Acceptance with different terms	Mirror image rule: a reply that changes any term is a counteroffer, not an acceptance	A definite acceptance forms a contract even with additional terms; between merchants the additional terms become part of the contract unless they materially alter it, the offer limited acceptance to its terms, or the offeror objects within a reasonable time
Modification	Needs new consideration; a promise to do what one is already bound to do is unenforceable	No consideration needed if made in good faith
Statute of frauds	Writing needed for contracts that cannot be performed within a year, for land, for promises to answer for another's debt, in consideration of marriage, and by executors	Writing needed for goods of 500 or more, with four exceptions: specially manufactured goods, admission in court, part performance to the extent of payment or acceptance, and a written confirmation between merchants not objected to within ten days
Open terms	Essential terms must be definite: parties, subject, price, quantity	Gap fillers supply a reasonable price, place and time; only quantity and intent to contract are essential
Acceptance by conduct	Acceptance must be by the method the offer requires or a reasonable one	An order for prompt shipment may be accepted by shipping; shipping nonconforming goods is both an acceptance and a breach, unless the seller says it is an accommodation
Performance standard	Substantial performance: minor defects entitle the other party to damages, not to rejection	Perfect tender: the buyer may reject goods that fail in any respect, subject to the seller's right to cure
Warranties	None implied	Express warranties from affirmations, descriptions and samples; the implied warranty of merchantability from a merchant; the implied warranty of fitness for a particular purpose when the seller knows the purpose and the buyer relies

Each row is a question type, and the exam's fact patterns are built to make the wrong body of law give a plausible answer.

The rows, worked

Firm offer. A dealer in Jeddah writes to a buyer offering fifty air conditioners at a stated price, "offer held open for sixty days," and signs. Ten days later the dealer tries to revoke. Under the common law the revocation is effective, because the buyer gave nothing for the promise to hold open. Under Article 2 the dealer is a merchant, the offer is signed and in writing, and it is irrevocable for the sixty days. Change one fact, the seller is a private individual clearing a warehouse, and the offer is revocable again; change another, "held open for six months," and the firm offer lasts three.

Battle of the forms. A buyer's purchase order for machinery is answered by the seller's acknowledgment form, which adds an arbitration clause. Under the common law the acknowledgment is a counteroffer and there is no contract until someone accepts it, usually by performance. Under Article 2 there is a contract on the buyer's terms the moment the seller sends a definite acceptance; whether the arbitration clause joins it depends on whether both are merchants, whether the clause materially alters the deal (arbitration usually does), and whether the buyer objects. If the buyer is a consumer, the added term is a proposal that does not become part of the contract unless accepted.

Modification. A contractor building a warehouse demands 100,000 more mid-project to finish on the agreed date. Under the common law the owner's promise to pay it is unenforceable: the contractor was already bound to finish. A supplier of steel for the same warehouse demands a higher price because of a cost increase, and the buyer agrees in writing. Under Article 2 the modification is binding if made in good faith, no consideration needed, and the writing satisfies the statute of frauds if the total is 500 or more.

Statute of frauds. An oral contract for 8,000 of goods is unenforceable, unless the seller has begun manufacturing goods not suitable for sale to others, the buyer admits the contract in court, the buyer has paid or accepted part of the goods (enforceable to that extent), or one merchant sent the other a written confirmation the recipient did not object to within ten days. An oral contract for a year of consulting, to begin next month, is unenforceable under the common law because it cannot be performed within a year of its making; an oral contract for consulting "for as long as needed" is enforceable, because it could be performed within a year.

Remedies

The common law measures damages by the expectation interest, the value of the promised performance, with the duty to mitigate. Article 2 gives each side a menu. A buyer whose seller fails to deliver may cover, buying substitute goods and recovering the difference, or recover the difference between contract and market price, or in the case of unique goods obtain specific performance. A seller whose buyer refuses the goods may resell and recover the difference, recover the contract-market difference, or, for a lost-volume seller who could have made both sales, recover lost profit. The perfect tender rule lets the buyer reject nonconforming goods, but the seller may cure before the delivery date, or after it if the seller reasonably believed the tender would be acceptable. Risk of loss follows Article 2's own rules, by the shipping terms and by who breached, and belongs to a separate study.

What the two bodies of law share

Article 2 does not replace the common law; it modifies it. Capacity, legality, mutual assent, fraud, duress, mistake and the parol evidence rule apply to sales of goods as they apply to everything else, and Article 2 says so. A minor's contract for a car is voidable by the minor under the common law rule of capacity; a contract to sell stolen goods is void for illegality. The exam expects a candidate to apply the common law wherever Article 2 is silent, which is most of the law of contracts, and to apply Article 2 only on the points in the table above.

How REG asks

Question pattern	First question	Answer
Merchant's signed written offer, revoked early	Goods	Firm offer; revocation ineffective, up to three months
Reply adds a term, both merchants	Goods	Contract formed; term included unless material, limited or objected to
Reply adds a term, service contract	Services	Counteroffer; no contract yet
Agreed price increase, no new consideration	Goods: binding. Services: not
Oral sale of 2,000 of goods, buyer accepted half	Goods	Enforceable for the half accepted
Contract with no price stated	Goods: reasonable price. Services: may fail for indefiniteness
Goods delivered with a minor defect	Goods	Buyer may reject; seller may cure
Installation contract, mostly labour	Predominant purpose: services	Common law throughout

Where to practise this

Contract questions are decidable once the threshold question is a reflex, and the reflex comes from volume. Prepito's REG course covers contracts, sales, secured transactions and the rest of the business law area with practice questions whose explanations name the body of law and the rule in every option. For the approach to REG as a whole from a civil-law background, see How to Study REG When You Have Never Filed a US Tax Return and the REG study guide; for the rest of the qualification, the CPA programme.

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Sources: Uniform Commercial Code, Article 2, Sales (text as published by the Legal Information Institute), AICPA CPA Exam Blueprints, REG Area II. The UCC is enacted state by state with variations, and the exam tests the uniform text; the 500 statute of frauds threshold is the uniform figure and some states have amended it.