Strategic Application of UCC to E-Commerce

Strategic Application of UCC to E-Commerce — E-commerce has blurred the definition of merchant, allowing for the strategic use of the UCC.

New Jersey Law Journal Mach 9, 2023

By Jonathan Bick Bick is counsel at Brach Eichler in Roseland, and chairman of the firm’s patent, intellectual property, and information technology group. He is also an adjunct professor at Pace and Rutgers Law Schools.

Article 2 of the Uniform Commercial Code (UCC) streamlines and clarifies contract law as it applies to goods (UCC § 2-102). It preemptively, systematically, and comprehensively addresses contract law difficulties by disclosing default rules (gap fillers) that supply necessary contract terms where merchants have not done so effectively. E-commerce has blurred the definition of merchant allowing for the strategic use of the UCC.

UCC Section 2-102 provides that the term “sales” applies to all "transactions in goods." Since no exception was made for Internet sales, every state in the United States has adopted similar forms of the UCC, so the UCC is applicable to virtually all Internet goods transactions.

Moreover, Section 2-105(1) defines "goods" as all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale, other than money in which the price is to be paid, investment securities, and things in action. Thus, Article Two of the UCC applies both business-to-business contract and business-to-consumer contracts (unless the parties agree to vary the terms of their agreement).

E-commerce transactions may be designed so as to include or exclude various elements generally present as part of a traditional retailer transaction. For example, a traditional retailer generally resells goods from its inventory, while an e-commerce seller generally may dispense with a goods inventory (and the associated inventory costs).

The presence or absence of certain commerce elements may allow an e-commerce seller to be deemed either a merchant or non-merchant for UCC purposes. By constructing e-commerce transactions which either allow or bar the application of UCC merchant gap fillers, contract risk exposure may be changed, as the e-commerce seller desires. Since e-commerce traders may determine the elements which compose their e-commerce transaction, resulting in merchant or non-merchant status (thereby invoking or avoiding gap filler and associated risk shifting), the strategic application of the UCC by e-commerce seller may be advantageous.

According to UCC Section 2-104, some UCC rules apply only to “merchants” or transactions “between merchants.” The UCC holds merchants to commonly accepted practices and standards. The UCC will not hold non-merchants to these practices and standards, thus, will not apply gap fillers to transactions which would disadvantage non-merchants.

The UCC defines a "merchant" in Section 2-104(1) as "a person who deals in goods of the kind or otherwise by his occupation and holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction or to whom such knowledge or skill may be attributed." However, the differences between e-commerce and traditional commerce may cloud the application of the UCC term “merchant.”

More precisely, e-commerce, the purchase and sale of goods and services using the Internet, differs from traditional brick and mortar commerce in a number of ways. First, traditional retail is conducted in person or face to face, whereas e-commerce is a completely digital remote transaction. Second, traditional retails generally purchase and resell goods, often e-commerce retailers do not ever possess the goods they sell. Third, while traditional retailers usually transfer the goods instantaneously, e-commerce seller’s delivery of goods regularly involves a shipping period prior to delivery. Fourth, traditional merchants sell large quantities of particular goods, while an e-commerce merchant sales are highly variable both in quantity and type of good sold. Consequently, the application of the UCC term “merchant” is fluid.

UCC Section 2-104(1) defines a “merchant” as a person who: (1) deals in goods of the type in question; (2) holds themselves out as having particular knowledge or skill with goods of this type; or (3) is using a broker, agent or intermediary who holds themselves out as having particular knowledge or skill in this type of goods. Thus, to avoid disadvantageous gap filler or to take advantage of advantageous gap fillers, an e-commerce seller need only craft his or her e-commerce site accordingly.

For example, to avoid merchant status, an e-commerce seller might design an e-commerce site which clearly conveys that the seller has no special knowledge or skill. The UCC (UCC Section 2-104(1)) will hold a seller to the higher standard of a merchant, even if they do not actually have special knowledge or skill, if they hold themselves out as an expert, or if the seller’s action results in other people assuming expert status.

On the other hand, an e-commerce seller who desires to ameliorate contract breaches due to delivery delays, may want to have the other party deemed a merchant for UCC purposes by encouraging the other party to disclose their special knowledge or skill. Once a buyer has admitted special knowledge (perhaps by disclosing extensive experience with the transaction at issue), then the UCC prevents some delivery delays from constituting a contract breach.

In this case, for instance, if the buy/sell paperwork conflicts on a delivery date, then the UCC has a gap filler which supplements the parties agreement to include that delivery must be within a “reasonable time under the circumstances.” So, a delay, due to normal delivery scheduling, does not result in a breach of contract since they are the “circumstances” considered in forming a “reasonable time” delivery date.

Similarly, if the buyer in an e-commerce transaction discloses special skill (perhaps by disclosing certification or extensive education related to the transaction at issue), then the risk of replacing goods damaged in transit (another UCC gap filler) may be used by the e-commerce seller to change a risk of loss exposure. If for example, the buy/sell paperwork conflicts on the risk of loss, then UCC Sec. 2-308 and 2-319 apply. More specifically, if the seller’s FOB term specifies its factory, then the risk of loss to the unit passes to the buyer at that point, and it is the buyer’s problem to replace that unit according to UCC Sec. 2-509.