Rights & Obligations
Buyers & Sellers
Master the UCC Article 2 framework governing commercial sales transactions: who bears the risk, when title passes, and what remedies each party has.
CPA Regulation (REG)
What is UCC Article 2?
The Uniform Commercial Code (UCC) Article 2 governs the sale of goods: tangible, movable personal property. It does not apply to real estate, services, or intangible assets. On the CPA exam, most buyer/seller questions test Article 2.
Goods
Tangible, movable items at the time of identification to the contract
Merchant
One who deals in goods of the kind, or holds out special expertise
Sale
The passing of title from the seller to the buyer for a price
The Sales Contract Lifecycle
Seller's Core Obligations
1
Tender delivery of conforming goods at the agreed time and place.
2
Transfer good title: the seller must have and convey clear ownership free from liens or encumbrances.
3
Warranty obligations: express warranties (promises, descriptions) and implied warranties (merchantability, fitness for a particular purpose).
4
Perfect Tender Rule: goods must conform in every respect to the contract, or the buyer may reject.
Buyer's Core Obligations
1
Accept the goods after a reasonable opportunity to inspect them.
2
Pay the contract price at the time and place specified (or on receipt if no terms stated).
3
Inspect within a reasonable time: failure to reject timely = acceptance by silence.
4
Mitigate damages if the seller breaches: the buyer must act in good faith (e.g., cover purchase).
Risk of Loss: Who Bears the Risk?
Title Passage & Insurable Interest
Title passes when the parties intend it to pass. If no agreement, title passes at the time and place of physical delivery. Both buyer and seller can have an insurable interest simultaneously.
Seller's Interest
Retains insurable interest as long as seller has title or a security interest in the goods
Buyer's Interest
Obtains insurable interest when goods are identified to the contract (even before delivery)
The Perfect Tender Rule
Shipment vs Destination Contracts
| FOB Shipping Point | FOB Destination | |
|---|---|---|
| Risk passes | When goods given to carrier | When goods reach buyer |
| Title passes | At shipment | At destination |
| Freight cost | Buyer pays | Seller pays |
| Transit loss | Buyer's problem | Seller's problem |
| Default? | YES: UCC default | Only if expressly stated |
Seller's Warranty Obligations
Express Warranty
Any affirmation of fact, promise, description, or sample that becomes part of the basis of the bargain
Implied: Merchantability
Goods are fit for ordinary purposes: arises automatically when the seller is a merchant
Implied: Fitness
Goods fit buyer's particular purpose: arises when seller knows the buyer's specific need and buyer relies on seller's expertise
Buyer's Remedies for Breach
1
Cover: buy substitute goods in good faith and recover the difference: \( \text{Cover Price} - \text{Contract Price} \).
2
Market price damages: if buyer does not cover: \( \text{Market Price} - \text{Contract Price} \) at time buyer learned of breach.
3
Specific performance: court orders seller to deliver when goods are unique (e.g., rare art, custom machinery).
4
Incidental & consequential damages: expenses from breach (inspection, shipping, storage) plus foreseeable losses.
Seller's Remedies for Breach
1
Resale: sell the goods to another buyer in good faith and recover the difference: \( \text{Contract Price} - \text{Resale Price} \).
2
Market price damages: if seller does not resell: \( \text{Contract Price} - \text{Market Price} \) at time of tender.
3
Action for the price: sue for the full contract price when goods cannot be resold or buyer has accepted.
4
Stop delivery: if buyer is insolvent, seller can stop goods in transit before the carrier delivers.
How to Apply on Exam Day
1
Identify the transaction: Is it a sale of goods? If yes, UCC Article 2 applies.
2
Determine the parties: Are both merchants, or is one a non-merchant? Merchant rules add extra duties.
3
Find the shipping term: FOB shipping point (default) or FOB destination? This controls risk and title.
4
Check for breach: Did goods conform? Was delivery timely? Apply the perfect tender rule (or substantial impairment for installments).
5
Select the remedy: Buyer remedies (cover, market damages, specific performance) or seller remedies (resale, action for price, stop delivery).
Example 1: Risk of Loss
Example 2: Buyer's Remedy
Contract Price
\( $10 \times 1{,}000 = $10{,}000 \)
Cover Price
\( $13 \times 1{,}000 = $13{,}000 \)
Damages
\( $13{,}000 - $10{,}000 = $3{,}000 \)
Example 3: Seller's Resale Remedy
Contract Price
\( $50{,}000 \)
Resale Price
\( $42{,}000 \)
Damages
\( $50{,}000 - $42{,}000 = $8{,}000 \)
Common Mistakes to Avoid
✕ Assuming FOB Destination
The UCC default is shipment contract (FOB shipping point). Only say FOB destination if the contract expressly states it.
✕ Confusing Title and Risk
Title and risk of loss do not always pass at the same moment. A seller can retain title (security interest) while risk has already passed to the buyer.
✕ Forgetting Inspection Rights
Buyers have a right to inspect before acceptance. Failing to reject within a reasonable time after inspection is deemed acceptance.
Summary: Buyer vs Seller
| Buyer | Seller | |
|---|---|---|
| Primary duty | Accept & pay | Tender conforming goods |
| Breach remedy (mirror) | Cover (buy substitute) | Resale (sell to another) |
| Damage formula | \( \text{Cover Price} - \text{Contract Price} \) | \( \text{Contract Price} - \text{Resale Price} \) |
| Unique goods remedy | Specific performance | Action for the price |
| Transit power | Reject nonconforming goods | Stop delivery (insolvency) |
| Warranty duty | None (has warranty rights) | Express + implied warranties |
Question 1 of 5
Under UCC Article 2, if a sales contract does not specify shipping terms, the contract is presumed to be:
The UCC presumes a shipment contract (FOB shipping point) when the contract is silent. Risk of loss passes to the buyer when the seller delivers the goods to the carrier.
Question 2 of 5
A buyer contracts to purchase 200 computers at $800 each. The seller delivers 200 computers, but 30 are defective. Under the Perfect Tender Rule, the buyer may:
Under the Perfect Tender Rule, if goods fail to conform in any respect, the buyer has three options: (1) reject the whole, (2) accept the whole, or (3) accept any commercial unit(s) and reject the rest.
Question 3 of 5
A buyer obtains an insurable interest in goods under the UCC at the moment when:
A buyer obtains an insurable interest when goods are identified to the contract: marked, shipped, or designated. This can occur well before title passes or the buyer takes possession.
Question 4 of 5
A seller fails to deliver goods as contracted. The buyer purchases substitute goods at a higher price. The buyer's primary remedy is:
Cover is the buyer's primary remedy when substitute goods are available. Damages = \( \text{cover price} - \text{contract price} \), plus incidental damages, minus expenses saved. Specific performance is only for unique goods.
Question 5 of 5
Which of the following implied warranties can be disclaimed by selling goods "as is"?
Language such as "as is" or "with all faults" disclaims both implied warranties (merchantability and fitness). However, express warranties that are part of the basis of the bargain cannot be disclaimed.