Uniform Commercial Code
The Uniform Commercial Code (UCC or the 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.
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 (movable property), not real property (immovable property).
Other goals of the UCC were to modernize contract law and to allow for exceptions from the common law in contracts between merchants. Also the UCC financing statement is used to clear checks in the bank ach department because the statement holds the priority over any other statement (i.e. IRS, FBI, ORDER OF THE COURT, etc.). Also the deposit slip should be made by the private person not the bank to insure a safe deposit is made (i.e. protection from underwriters).
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 (NCCUSL) and the American Law Institute (ALI), 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.
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:
|1||General Provisions||Definitions, rules of interpretation|
|2||Sales||Sales of goods|
|2A||Leases||Leases of goods|
|3||Negotiable Instruments||Promissory notes and drafts (commercial paper)|
|4||Bank Deposits||Banks and banking, check collection process|
|4A||Funds Transfers||Transfers of money between banks|
|5||Letters of Credit||Transactions involving letters of credit|
|6||Bulk Transfers and Bulk Sales||Auctions and liquidations of assets|
|7||Warehouse Receipts, Bills of Lading and Other Documents of Title||Storage and bailment of goods|
|8||Investment Securities||Securities and financial assets|
|9||Secured Transactions||Transactions secured by security interests|
In 2003, amendments to Article 2 modernizing many aspects (as well as changes to Article 2A and Article 7) 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 (UCITA) 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 (i.e., the model act; revisions to the law of a particular state only require enactment in that state). 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[who?] 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, 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.
- Firm offers (offers by a merchant to buy or sell goods and promising to keep the offer open for a period of time) are valid without consideration if signed by the offeror, and are irrevocable for the time stated (but no longer than 3 months), 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 (defect), he cannot rely on the reason later, in legal proceedings. (akin to the cure before cover rationale). 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 (limit liability etc.), 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. (delay in delivery of nails not the same as for fish).
- 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 (the opposite of realty)
- 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 (a) the offeror expressly limits acceptance to the terms of the original offer, (b) the new terms materially alter the original offer or (c) 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.
The ownership of securities is governed by Article 8 of the Uniform Commercial Code (UCC). 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 (DTC) 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 (so-called "transparent systems"). 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 (or intermediary) 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 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 (“attachment”); how security interests are made generally effective against third parties with a claim to the collateral (“perfection”); which among multiple security interests or other claims to the collateral is best ("priority"); 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.
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 (CISG), though the end result departed from the UCC in many respects (such as refusing to adopt the mailbox rule). 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.
|Part of the common law series|
|Defenses against formation|
|Excuses for non-performance|
|Rights of third parties|
|Breach of contract|
|Related areas of law|
|Other common law areas|
- Commercial law
- United Nations Convention on Contracts for the International Sale of Goods (CISG)
- p.2 ALI.org
- The American Law Institute – UCC 2007 Edition (Official Text with Comments)
- Stewart Macaulay; Jean Braucher; John A. Kidwell; William Whitford (2010). Contracts: Law in Action I (3rd ed.). LexisNexis. ISBN 978-1-42248176-9.
- UCC § 2-205
- UCC § 2-206
- UCC § 2-209
- UCC § 2-205
- UCC § 2-306
- UCC § 2-609
- UCC § 2-201
- UCC § 2-702
- UCC § 2-702
- UCC § 2-713
- UCC § 2-207
- Mark E. Roszkowski (2001). "Symposium on Revised Article 2 of the Uniform Commercial Code: Section-by-Section Analysis". SMU Law Review (Dedman School of Law, Southern Methodist University) 54: 927., (quoting Letter from Grant Gilmore, Professor, to Robert Summers, Professor, Cornell University School of Law (September 10, 1980), reprinted in Richard E. Speidel (1981). Teaching Materials on Commercial and Consumer Law (3rd ed.). West Publishing Co. pp. 54–55..
- See an online access to UCC Article 8 on Cornell.edu
- A further analysis of UCC article 8 can be found in an academic paper from Sandra Rocks on Ali-Aba.org