What is the UCC 500 dollar rule?

The UCC 500 dollar rule, formally known as a provision within the Statute of Frauds under Article 2 of the Uniform Commercial Code (UCC), dictates that a contract for the sale of goods priced at $500 or more must generally be in writing to be legally enforceable. This rule is a critical aspect of commercial law, ensuring that significant transactions have verifiable proof.

Understanding the UCC 500 Dollar Rule

The core of the UCC 500 dollar rule is designed to prevent fraudulent claims of contracts that never existed. Specifically, under UCC Article 2-201(1), a contract for the sale of goods for the price of $500 or more is not enforceable unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought (or their authorized representative).

This means that if you have an oral agreement to buy or sell goods worth $500 or more, and the other party denies the agreement, you may have difficulty enforcing it in court unless certain exceptions apply.

Key Elements of the Written Requirement:

• Sale of Goods: This rule applies exclusively to contracts involving the sale of "goods," which are defined by the UCC as all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale, other than the money in which the price is to be paid, investment securities, and things in action. Services or real estate transactions are governed by different statutes of frauds.
• Monetary Threshold: The contract's price must be $500 or more. If the price is below this amount, an oral agreement can typically be enforced without a written document, assuming other contract elements (offer, acceptance, consideration) are present.
• Sufficient Writing: The writing doesn't need to be a formal contract. It merely needs to be sufficient to "indicate that a contract for sale has been made." This is a relatively low bar. It must include:
  • Evidence of a contract for the sale of goods.
  • The quantity of goods.
• Signature: The writing must be "signed by the party against whom enforcement is sought" (or their authorized agent). This means only the person denying the contract needs to have signed a document.

Purpose of the Rule

The primary purpose of the UCC 500 dollar rule is twofold:

• Evidentiary: To provide reliable evidence of the existence and terms of a contract, reducing disputes over whether an agreement was made.
• Prevent Fraud: To protect parties from false claims that a contract was formed when it was not, especially for substantial transactions.

Key Aspects and Exceptions to the Rule

While the rule emphasizes written contracts, the UCC recognizes several situations where an oral agreement for goods over $500 can still be enforced. These exceptions are crucial for fairness and commercial practicality.

Here's a summary of the general rule versus its exceptions:

Important Exceptions:

1. Specially Manufactured Goods: If the goods are custom-made for the buyer and are not suitable for sale to others in the ordinary course of the seller's business, and the seller has made a substantial beginning of their manufacture or commitments for their procurement, an oral contract may be enforceable. This prevents a buyer from reneging on a custom order that leaves the seller with unsaleable goods.

   • Example: A custom-designed industrial machine built specifically for one factory.

2. Admissions in Court: If the party against whom enforcement is sought admits in their pleading, testimony, or otherwise in court that a contract for sale was made, the contract is enforceable to the extent of the goods admitted.

   • Example: During a deposition, a seller admits they verbally agreed to sell 1,000 units to a buyer.

3. Part Performance: An oral contract is enforceable with respect to goods for which payment has been made and accepted or which have been received and accepted. This exception applies only to the quantity of goods actually paid for or received.

   • Example: A buyer verbally agrees to purchase 100 widgets for $10 each ($1,000 total) and sends payment for 50 widgets. The contract is enforceable for those 50 widgets, even without a full written agreement.

4. Merchant's Confirmation Rule (Between Merchants): If both parties are "merchants" (individuals or businesses regularly dealing in goods of the kind or holding themselves out as having knowledge or skill peculiar to the practices or goods involved in the transaction), and one merchant sends a written confirmation of an oral agreement to the other within a reasonable time, the contract is enforceable against the recipient even if they haven't signed it. This applies unless the recipient sends a written notice of objection to its contents within 10 days after receiving it.

   • Example: After a phone call, Seller A (a merchant) sends Buyer B (also a merchant) an email confirming their agreement to sell 500 units of a product for $2,500. If Buyer B doesn't object within 10 days, the contract is enforceable against Buyer B, even without their signature.

Practical Implications

For businesses and individuals alike, understanding the UCC 500 dollar rule is essential for risk management.

• Always get it in writing: The safest practice is to document all contracts for the sale of goods over $500 in writing, with clear terms and signatures from all involved parties.
• Be aware of exceptions: Recognize that even without a formal written contract, oral agreements can still be enforceable under certain circumstances, especially for merchants or custom orders.
• Act promptly: If you receive a written confirmation of an oral agreement and disagree with its terms, object in writing within 10 days to avoid being bound by it under the Merchant's Confirmation Rule.

The UCC 500 dollar rule serves as a fundamental protection in commercial transactions, aiming to balance the need for flexibility in business dealings with the critical requirement for clear and verifiable contractual commitments.