Uniform Commercial Code

Uniform Commercial Code


The Uniform Commercial Code, first published
in 1952, is one of a number of uniform acts that have been promulgated in conjunction
with efforts to harmonize the law of sales and other commercial transactions in all 50
states within the United States of America. Goals
The goal of harmonizing state law is important because of the prevalence of commercial transactions
that extend beyond one state. For example, goods may be manufactured in
State A, warehoused in State B, sold from State C and delivered in State D. The UCC
therefore achieved the goal of substantial uniformity in commercial laws and, at the
same time, allowed the states the flexibility to meet local circumstances by modifying the
UCC’s text as enacted in each state. The UCC deals primarily with transactions
involving personal property, not real property. Other goals of the UCC were to modernize contract
law and to allow for exceptions from the common law in contracts between merchants. History
The UCC is the longest and most elaborate of the uniform acts. The Code has been a long-term, joint project
of the National Conference of Commissioners on Uniform State Laws and the American Law
Institute, who began drafting its first version in 1942. Judge Herbert F. Goodrich was the Chairman
of the Editorial Board of the original 1952 edition, and the Code itself was drafted by
some of the top legal scholars in the United States, including Karl N. Llewellyn, William
A. Schnader, Soia Mentschikoff, and Grant Gilmore. The Code, as the product of private organizations,
is not itself the law, but only a recommendation of the laws that should be adopted in the
states. Once enacted by a state, the UCC is codified
into the state’s code of statutes. A state may adopt the UCC verbatim as written
by ALI and NCCUSL, or a state may adopt the UCC with specific changes. Unless such changes are minor, they can seriously
obstruct the Code’s express objective of promoting uniformity of law among the various states. Thus persons doing business in different states
must check local law. The ALI and NCCUSL have established a permanent
editorial board for the Code. This board has issued a number of official
comments and other published papers. Although these commentaries do not have the
force of law, courts interpreting the Code often cite them as persuasive authority in
determining the effect of one or more provisions. Courts interpreting the Code generally seek
to harmonize their interpretations with those of other states that have adopted the same
or a similar provision. In one or another of its several revisions,
the UCC has been enacted in all of the 50 states, as well as in the District of Columbia,
the Commonwealth of Puerto Rico, Guam and the U.S. Virgin Islands. Louisiana has enacted most provisions of the
UCC, with the exception of Article 2, preferring to maintain its own civil law tradition for
governing the sale of goods. Although the substantive content is largely
similar, some states have made structural modifications to conform to local customs. For example, Louisiana jurisprudence refers
to the major subdivisions of the UCC as “chapters” instead of articles, since the term “articles”
is used in that state to refer to provisions of the Louisiana Civil Code. Arkansas has a similar arrangement as the
term “article” in that state’s law generally refers to a subdivision of the Arkansas Constitution. In California, they are titled “divisions”
instead of articles, because in California, articles are a third- or fourth-level subdivision
of a code, while divisions or parts are always the first-level subdivision. Also, California does not allow the use of
hyphens in section numbers because they are reserved for referring to ranges of sections;
therefore, the hyphens used in the official UCC section numbers are dropped in the California
implementation. UCC Articles
The 1952 Uniform Commercial Code was released after ten years of development, and revisions
were made to the Code from 1952 to 1999. The Uniform Commercial Code deals with the
following subjects under consecutively numbered Articles:
In 2003, amendments to Article 2 modernizing many aspects were proposed by the NCCUSL and
the ALI. Because no states adopted the amendments and,
due to industry opposition, none were likely to, in 2011 the sponsors withdrew the amendments. As a result, the official text of the UCC
now corresponds to the law that most states have enacted. In 1989, the National Conference of Commissioners
on Uniform State Laws recommended that Article 6 of the UCC, dealing with bulk sales, be
repealed as obsolete. Approximately 45 states have done so. Two others have followed the alternative recommendation
of revising Article 6. A major revision of Article 9, dealing primarily
with transactions in which personal property is used as security for a loan or extension
of credit, was enacted in all states. The revision had a uniform effective date
of July 1, 2001 although in a few states it went into effect shortly after that date. In 2010, NCCUSL and the ALI proposed modest
amendments to Article 9. Several states have already enacted these
amendments, which have a uniform effective date of July 1, 2013. The controversy surrounding with what is now
termed the Uniform Computer Information Transactions Act originated in the process of revising
Article 2 of the UCC. The provisions of what is now UCITA were originally
meant to be “Article 2B” within a revised Article 2 on Sales. As the UCC is the only uniform law that is
a joint project of NCCUSL and the ALI, both associations must agree to any revision of
the UCC. The proposed final draft of Article 2B met
with controversy within the ALI, and as a consequence the ALI did not grant its assent. The NCCUSL responded by renaming Article 2B
and promulgating it as the UCITA. As of October 12, 2004, only Maryland and
Virginia have adopted UCITA. The overriding philosophy of the Uniform Commercial
Code is to allow people to make the contracts they want, but to fill in any missing provisions
where the agreements they make are silent. The law also seeks to impose uniformity and
streamlining of routine transactions like the processing of checks, notes, and other
routine commercial paper. The law frequently distinguishes between merchants,
who customarily deal in a commodity and are presumed to know well the business they are
in, and consumers, who are not. The UCC also seeks to discourage the use of
legal formalities in making business contracts, in order to allow business to move forward
without the intervention of lawyers or the preparation of elaborate documents. This last point is perhaps the most questionable
part of its underlying philosophy; many in the legal profession have argued that legal
formalities discourage litigation by requiring some kind of ritual that provides a clear
dividing line that tells people when they have made a final deal over which they could
be sued. Article 2
Article 2, dealing with sales, and Article 2A, dealing with leases, have not been adopted
by Louisiana, as its provisions are inconsistent with the Louisiana Civil Code, which is based
on civil law as opposed to common law. Contract formation
Firm offers are valid without consideration if signed by the offeror, and are irrevocable
for the time stated, or, if no time is stated, for a reasonable time. Offer to buy goods for “prompt shipment”
invites acceptance by either prompt shipment or a prompt promise to ship. Therefore, this offer is not strictly unilateral. However, this “acceptance by performance”
does not even have to be by conforming goods. Consideration—modifications without consideration
may be acceptable in a contract for the sale of goods. Failure to state price—In a contract for
the sale of goods, the failure to state a price will not prevent the formation of a
contract if the parties’ original intent was to form a contract. A reasonable price will be determined by the
court. Assignments—a requirements contract can
be assigned, provided the quantity required by the assignee is not unreasonably disproportionate
to original quantity. Contract repudiation and breach
Nonconforming goods—If non-conforming goods are sent with a note of accommodation, such
tender is construed as a counteroffer, and if accepted, forms a new contract and binds
buyer at previous contract price. If seller refuses to conform and buyer does
not accept, the buyer can sell the goods at public or private auction and credit the proceeds
to amount owed. Perfect tender—The buyer however does have
a right of “perfect tender” and can accept all, reject all, or accept conforming goods
and reject the rest, within a reasonable time after delivery but before acceptance, he must
notify the seller of the rejection. If the buyer does not give a specific reason,
he cannot rely on the reason later, in legal proceedings.. Also, the contract is not breached per se
if the seller delivered the non-conforming goods, however offensive, before the date
of performance has hit. “Reasonable time/good faith” standard—Such
standard is required from a party to a contract indefinite as to time, or made indefinite
by waiver of original provisions. Requirements/Output contracts—The UCC provides
protection against disproportionate demands, but must meet the “good faith” requirement. Reasonable grounds for insecurity—In a situation
with a threat of non-performance, the other part may suspend its own performance and demand
assurances in writing. If assurance not provided “within a reasonable
time not exceeding 30 days,” the contract is repudiated. Battle of forms—New terms will be incorporated
into the agreement unless 1) offer limited to its own terms, 2) materially alter original
terms, 3) first party objects to new terms in a timely manner, or first party has already
objected to new terms. Look at what the item is to determine whether
the new terms “materially alter” the original offer.. Battle of forms—A written confirmation of
an offer sent within a reasonable time operates as an acceptance even though it states terms
additional terms to or different from those offered, unless acceptance is expressly made
conditional to the additions. Statute of frauds as applicable to the sale
of goods—The actual contract does not need to be in writing. Just some note or memo must be in writing
and signed. However, the UCC exception to the signature
requirement is where written confirmation is received and not objected to within 10
days. Cure/cover—Buyer must give seller time to
cure the defective shipment before seeking cover
FOB place of business—The seller assumes risk of loss until goods are placed on a carrier. FOB destination: seller risks loss until shipment
arrives at destination. If the contract leaves out the delivery place,
it is the seller’s place of business. Risk of loss—Equitable conversion does not
apply. In sale of specific goods, the risk of loss
lies with the seller until tender. Generally, the seller bears risk of loss until
the buyer takes physical possession of the goods
Crop failure—Crop failures resulting from an unexpected cause excuses a farmer’s obligation
to deliver the full amount as long as he makes a fair and reasonable allocation among his
buyers. The buyer may accept the proposed modification
or terminate the contract. Reclamation—Successful reclamation of goods
excludes all other remedies with respect to the goods. A seller can reclaim goods upon demand within
20 days after buyer receives them if the seller discovers that the buyer received the goods
while insolvent. Rightfully rejected goods—A merchant buyer
may follow reasonable instructions of the seller to reject the goods. If no such instructions are given, the buyer
make a reasonable effort to sell them, and the buyer/bailee entitled to 10% of the gross
proceeds. Insolvency—If a buyer is insolvent, the
seller may refuse to deliver the goods except for cash, including goods already delivered
under the contract. Implied warranty of fitness—Implied warranty
of fitness arises when the seller knows the buyer is relying upon the seller’s expertise
in choosing goods. Implied warranty of merchantability: every
sale of goods fit for ordinary purposes. Express warranties: arise from any statement
of fact of promise. UCC damages for repudiating/breaching seller—Difference
between 1) the market price when the buyer learned of breach and the 2) contract price
3) plus incidental damages. An aggrieved seller simply suing for the contract
price is economically inefficient. Specially manufactured goods—Specially manufactured
goods are exempt from statute of frauds where manufacturer has made a “substantial beginning”
or “commitments for the procurement” of supplies. Section 2-207: Battle of the forms One of the most confusing and fiercely litigated
sections of the UCC is Section 2-207, which Professor Grant Gilmore called “arguably the
greatest statutory mess of all time.” It governs a “battle of the forms” as to whose
boilerplate terms, those of the offeror or the offeree, will survive a commercial transaction
where multiple forms with varying terms are exchanged. This problem frequently arises when parties
to a commercial transaction exchange routine documents like requests for proposals, invoices,
purchase orders, and order confirmations, all of which may contain conflicting boilerplate
provisions. The first step in the analysis is to determine
whether the UCC or the common law governs the transaction. If the UCC governs, courts will usually try
to find which form constitutes the offer. Next, offeree’s acceptance forms bearing the
different terms is examined. One should note whether the acceptance is
expressly conditional on its own terms. If it is expressly conditional, it is a counteroffer,
not an acceptance. If performance is accepted after the counteroffer,
even without express acceptance, under 2-207(3), a contract will exist under only those terms
on which the parties agree, together with UCC gap-fillers. If the acceptance form does not expressly
limit acceptance to its own terms, and both parties are merchants, offeror’s acceptance
of offeree’s performance, though offeree’s forms contain additional or different terms,
forms a contract. At this point, if offeree’s terms cannot coexist
with offeror’s terms, both terms are “knocked out” and UCC gap-fillers step in. If offeree’s terms are simply additional,
they will be considered part of the contract unless the offeror expressly limits acceptance
to the terms of the original offer, the new terms materially alter the original offer
or notification of objection to the new terms has already been given or is given within
a reasonable time after they are promulgated by the offeree. Because of the massive confusion engendered
by Section 2-207, a revised version was promulgated in 2003, but the revision has not yet been
adopted as law by any state. Article 8
The ownership of securities is governed by Article 8 of the Uniform Commercial Code. This Article 8, a text of about thirty pages,
underwent important recasting in 1994. That update of the UCC treats the majority
of the transfers of dematerialized securities as mere reflections of their respective initial
issue registered by the two American central securities depositories, respectively the
Depository Trust Company for the securities issued by corporations and the Federal reserve
for the securities issued by the Treasury Department. In this centralised system, the title transfer
of the securities does not take place at the time of the registration on the account of
the investor, but within the systems managed by the DTC or by the Federal reserve. This centralization is not accompanied by
a centralized register of the investors/owners of the securities, such as the systems established
in Sweden and in Finland. Neither the DTC nor the Federal Reserve hold
an individual register of the transfers of property. The consequence for an investor is that proving
ownership of its securities relies entirely on the accurate replication of the transfer
recorded by the DTC and FED at the lower tiers of the holding chain of the securities. Each one of these links is composed respectively
of an account provider and of an account holder. The rights created through these links, are
purely contractual claims: these rights are of two kinds:
1) For the links where the account holder is itself an account provider at a lower tier,
the right on the security during the time where it is credited there is characterized
as a “securities entitlement”, which is an “ad hoc” concept invented in 1994: i.e. designating
a claim that will enable the account holder to take part to a prorate distribution in
the event of bankruptcy of its account provider. 2) For the last link of the chain, in which
the account holder is at the same time the final investor, its “security entitlement”
is enriched by the “substantial” rights defined by the issuer: the right to receive dividends
or interests and, possibly, the right to take part in the general meetings, when that was
laid down in the account agreement concluded with the account provider. The combination of these reduced material
rights and of these variable substantial rights is characterised by article 8 of the UCC as
a “beneficial interest”. This decomposition of the rights organized
by Article 8 of the UCC results in preventing the investor to revindicate the security in
case of bankruptcy of the account provider, that is to say the possibility to claim the
security as its own asset, without being obliged to share it at its prorate value with the
other creditors of the account provider. As a consequence, it also prevents the investor
from asserting its securities at the upper level of the holding chain, either up to the
DTC or up to a sub-custodian. Such a “security entitlement,” unlike a normal
ownership right, is no longer enforceable “erga omnes” to any person supposed to have
the security in its custody. The “security entitlement” is a mere relative
right, therefore a contractual right. This re-characterization of the proprietary
right into a simple contractual right may enable the account provider, to “re-use” the
security without having to ask for the authorization of the investor. This is especially possible within the framework
of temporary operations such as security lending, option to repurchase, buy to sell back or
repurchase agreement. This system the distinction between the downward
holding chain which traces the way in which the security was subscribed by the investor
and the horizontal and/or ascending chains which trace the way in which the security
has been transferred or sub-deposited. Contrary to claims suggesting that Article
8 denies American investors their security rights held through intermediaries such as
banks, Article 8 has also helped US negotiators during the negotiations of the Geneva Securities
Convention, also known as the Unidroit convention on substantive rules for intermediated securities. Article 9 Article 9 governs how security interests may
be obtained in personal property to secure a debt. In Article 9 the owner of the collateral is
referred to as the “debtor” and the creditor is referred to as the “secured party.” Fundamental concepts under Article 9 include
how a security interest is created in property; how security interests are made generally
effective against third parties with a claim to the collateral; which among multiple security
interests or other claims to the collateral is best; and what remedies are available to
the secured party if the debtor defaults in payment or performance of the secured obligation. In general, Article 9 does not govern real
property security interests, except for fixtures to real property. Mortgages, deeds of trust, and installment
land contracts, which are the principal forms of real property security interests, remain
governed by state laws. International influence
Certain portions of the UCC have been highly influential outside of the United States. Article 2 had some influence on the drafting
of the United Nations Convention on Contracts for the International Sale of Goods, though
the end result departed from the UCC in many respects. Article 5, governing letters of credit, has
been influential in international trade finance simply because so many major financial institutions
operate in New York. Article 9, which established a unified framework
for security interests in personal property, directly inspired the enactment of Personal
Property Security Acts in every Canadian province and territory but Quebec from 1990 onward,
followed by the New Zealand Personal Property Securities Act 1999 and then the Australia
Personal Property Securities Act 2009. See also
Codification Commercial law
United Nations Convention on Contracts for the International Sale of Goods
Notes References
External links Text of the Uniform Commercial Code at the
Legal Information Institute, Cornell University Law School
Research Guide and Introduction to the UCC from Duke University Law School
State of Michigan UCC Book

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