Article 2 of the Uniform Commercial Code contains powerful tools for buyers and sellers of food and other goods.  A recent case out of the Georgia Supreme Court emphasizes the critical gatekeeper function of the scope section of Article 2, Section 2-102.  This section provides:

Unless the context otherwise requires, this Article applies to transactions in goods;  it does not apply to any transaction which although in the form of an unconditional contract to sell or present sale is intended to operate only as a security transaction nor does this Article impair or repeal any statute regulating sales to consumers, farmers or other specified classes of buyers.

Prior case law has generally distinguished between contracts whose primary purpose is the sale of goods or services.  For instance, when you deal with a roofing contractor, are you buying the shingles or the installation services?

In Olé Mexican Foods, Inc. v. Hanson Staple Co. (Ga. April 28, 2009), the parties disputed whether certain packaging had met contract specifications.  Without lawyers present, they negoiated a handwritten settlement agreement.  The agreement included a provision whereby the buyer

would “purchase a minimum of $130,000 worth of current inventory from” [seller] and would “test the remainder of inventory and … purchase additional inventory if it meets quality expectations.”

On a motion to enforce the settlement agreement, buyer got the court to agree that "that such purchases would “be governed by the Georgia Uniform Commercial Code [UCC], and [buyer] shall retain the right to reject [seller’s product pursuant to the Georgia [UCC].”

The Georgia Court of Appeals reversed and the Georgia Supreme Court upheld the intermediate appellate court’s decision.  The reasoning was that the purpose of the settlement agreement was not the sale of goods, but the settlement of a dispute over the sale of goods. 

The fact that the document at issue is labeled “agreement reached in settlement” “is a good barometer of the parties’ intentions. Though the label that contracting parties affix to an agreement is not necessarily determinative of the agreement’s predominant purpose, it can constitute potent evidence of that purpose.”

Citing a number of cases, the court held that where the purpose was settlement, it would be wrong to treat the case instead as a sale of goods, bringing in the implied warranties that the language of the parties’ settlement indicated should not apply to the mandatory purchase of goods pursuant to the settlement.

As a UCC matter, the case is undoubtedly correct.  Kristen David Adams, a professor at Stetson Law School and one of the few others who possess the cap that illustrates this entry, has written:

one reason why the court’s holding is so clearly correct is that a contrary holding would essentially eviscerate the purpose of this particular settlement: since one of the central disputes in the underlying litigation was whether Hanson’s goods were merchantable within the meaning of the Uniform Commercial Code, and since the case was settled rather than having this issue decided by the court, applying the implied warranty of merchantability to the settlement agreement would almost certainly require the parties to relitigate the question of merchantability.

When settling a case involving goods that are alleged not to conform to the contract, then, it is often the case that the terms of the settlement might involve future shipments.  It is therefore critical to recognize that the question of whether implied warranties and other Article 2 default terms should be addressed by the parties directly in the contract, and not left for later interpretation by a court.  In this case, the parties settled without the benefit of counsel, and it is not inconceivable that each had a different take on whether the default warranties would apply.  It is also conceivable that neither gave the question a moment’s thought until their respective lawyers looked over their handiwork

Which is another reason to have the advice of counsel when settling a case.