Gap Fillers and Statutory terms and open terms

These three terms are synonymous, and refer to the terms that a court will often read into a contract to "save it," if the court is convinced that a contract indeed has been concluded by the parties. The relevant Article 2 sections are 2-304 through 2-311 and 2-319. The type of terms that the court may conclude are present in a contract, even if not mentioned, include price, quantity (for certain limited types of contract), delivery time, delivery place and other particulars of performance. Recall that the Code's commitment to enabling commerce to take place (1-103(a)(2)) is the philosophical grounding for these sections. In addition, these terms differ from "trade terms" (1-303) in that the latter are present in every contract unless disclaimed, while the former are default rules that a court may apply in the absence of specificity in the contract. The purpose of this and the next page is to give an overview of these terms. I assume you have your text with you as you read these essays.

2-304

This section can be disposed of quickly, though you need to know it. It permits prices of Article 2 transactions to be "payable in money or otherwise." Barter, therefore, is within Article 2. When you trade goods for other goods, both parties are buyers and sellers. In addition, in a joint goods/real estate transaction, the "goods" part of the transaction is covered under Article 2.

2-305

This section covers open price terms and represents a dramatic departure from the CLC. A contract can be concluded even though a price isn't agreed upon by the parties. Note the language of Cmt. 1: that this section applies when a price term is omitted even though the parties intended a binding contract. The idea of contract as mutual agreement has not been relaxed by the Code. In such a case, the price is a reasonable price at the time of delivery (2-305(1)). Remember that if any of the three provisions in (1)(a)-(c) is invoked, it throws you back to the "reasonable price" provision earlier in the sentence. The Mathis case explored the contours of 2-305(2) as well as Cmt. 3 before concluding that a subjective ("honesty in fact") as well as an objective ("commercial reasonableness") test will be enforced.

We saw in class through the examples of the purchaser of sculpture in an art gallery that 2-305(3), that a party may sometimes set a price even in the absence of both a price being set as well as a crucial condition of the contract (i.e., price set by a particular expert) not being fulfilled. There is nothing in CLC remotely similar to this provision. Cmt. 4 makes a helpful distinction between valuation where there is no market standard and valuation where there is a clear market standard but where you just need an expert to tell you what that standard is. In conclusion, I said that this section "drips" with the requirement of good faith. Therefore, never stray too far from that concept, as well as "reasonable price," if you have a question regarding open price terms.

2-306

This section covers both requirements and outputs contracts. The former is a contract from the perspective of the buyer (I will buy my "requirements" from you), while the latter impinges upon the seller's activity (the "output" of the seller). There is some confusion in the case law whether a "requirements" contract means "all the buyer requires;" the majority of courts now would probably say that as long as a range is given and adhered to, it isn't crucial if it refers to everything the buyer requires. These two types of contracts again are quite different from the CLC in that lack of specificity regarding quantity was a deal-killer under the CLC.

Two crucial concepts to understand under 2-306 are the difference between an estimate of output/requirements and a "minimum or maximum" and the concept of unreasonable disproportionality. I didn't mention the former in class, but it is an important point and is in Cmt. 3. The Cmt differentiates between an estimate, which doesn't bind the parties, and a "minimum or maximum," which does. Thus, if parties estimate the requirements to be between 800-1000 pounds/month, they can vary beyond that, but if you set those as definite floors and ceilings, you cannot, with out being in breach.

The reasonably disproportionate prong is the key to the statute because it envisions variation and gives guidance as to what kind of variation is acceptable. I tried to explore the meaning of "unreasonably disproportionate" in 2-306(1) through some examples. Note that the sentences beginning with "reasonable elasticity" in Cmt. 2 try to give some nuance to the idea. Good faith, again, is the big requirement. The provision, or example, that has given the courts most fits is when someone decides to curtail production completely in the middle of a multi-year requirements or output contract. Does the Cmt say that the only requirement for such a curtailment is that it be in good faith, or does the 'unreasonably disproportionate' prong also apply? The 7th Circuit would adopt only the good faith test.

Concluding Thought

Even though the statute and comments try to bring precision into these areas, there is a great deal of room for creative and forceful advocacy, especially under 2-306. And, we saw in the Mathis case that 2-305 was a fertile source of litigation.