Uniform Commercial Code
Encyclopedia
The Uniform Commercial Code (UCC or the Code), first published in 1952, is one of a number of uniform act
s 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).
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 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 Uniform Commercial Code deals with the following subjects under consecutively numbered Articles:
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 in 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 merchant
s, who customarily deal in a commodity and are presumed to know well the business they are in, and consumer
s, 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 lawyer
s 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.
as opposed to common law
.
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
, invoice
s, purchase order
s, 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.
) 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
.
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 non-uniform state laws.
Uniform Act
In the United States, a Uniform Act is a proposed state law drafted by the U.S. Uniform Law Commission and approved by its sponsor, the National Conference of Commissioners on Uniform State Laws ....
s that have been promulgated in conjunction with efforts to harmonize the law of sales
Sales
A sale is the act of selling a product or service in return for money or other compensation. It is an act of completion of a commercial activity....
and other commercial transactions in all 50 states within the United States of America
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
.
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
Personal property
Personal property, roughly speaking, is private property that is moveable, as opposed to real property or real estate. In the common law systems personal property may also be called chattels or personalty. In the civil law systems personal property is often called movable property or movables - any...
(movable property), not real property
Real property
In English Common Law, real property, real estate, realty, or immovable property is any subset of land that has been legally defined and the improvements to it made by human efforts: any buildings, machinery, wells, dams, ponds, mines, canals, roads, various property rights, and so forth...
(immovable property).
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
National Conference of Commissioners on Uniform State Laws
The National Conference of Commissioners on Uniform State Laws is a non-profit, unincorporated association commonly referred to as the U.S. Uniform Law Commission. It consists of commissioners appointed by each state, the District of Columbia, the Commonwealth of Puerto Rico and the United States...
(NCCUSL) and the American Law Institute
American Law Institute
The American Law Institute was established in 1923 to promote the clarification and simplification of American common law and its adaptation to changing social needs. The ALI drafts, approves, and publishes Restatements of the Law, Principles of the Law, model codes, and other proposals for law...
(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
Karl N. Llewellyn
Karl Nickerson Llewellyn was a prominent American jurisprudential scholar associated with the school of legal realism. The Journal of Legal Studies has identified Llewellyn as one of the twenty most cited American legal scholars of the 20th century.-Biography:He was born on May 22, 1893 in Seattle...
, William A. Schnader
William A. Schnader
William A. Schnader was Attorney General of Pennsylvania and founder of the law firm Schnader, Harrison, Segal & Lewis. Schnader graduated from Franklin & Marshall College in 1908, where he was a member of the Chi Phi Fraternity...
, Soia Mentschikoff
Soia Mentschikoff
Soia Mentschikoff was an American lawyer, law professor, and legal scholar, best known for her work in the development and drafting of the Uniform Commercial Code. She was also the first woman to teach at Harvard Law School....
, and Grant Gilmore
Grant Gilmore
Grant Gilmore was an American law professor who taught at Yale Law School, University of Chicago Law School, Moritz College of Law at Ohio State University, and Vermont Law School...
.
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
Guam
Guam is an organized, unincorporated territory of the United States located in the western Pacific Ocean. It is one of five U.S. territories with an established civilian government. Guam is listed as one of 16 Non-Self-Governing Territories by the Special Committee on Decolonization of the United...
and the U.S. Virgin Islands. Louisiana
Louisiana
Louisiana is a state located in the southern region of the United States of America. Its capital is Baton Rouge and largest city is New Orleans. Louisiana is the only state in the U.S. with political subdivisions termed parishes, which are local governments equivalent to counties...
has enacted most provisions of the UCC, with the exception of Article 2, preferring to maintain its own civil law
Civil law (legal system)
Civil law is a legal system inspired by Roman law and whose primary feature is that laws are codified into collections, as compared to common law systems that gives great precedential weight to common law on the principle that it is unfair to treat similar facts differently on different...
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
Louisiana law
Law in the State of Louisiana is based in part on civil law. Louisiana is unique among the 50 U.S. states in having a legal system partially based on French and Spanish codes and ultimately Roman law, as opposed to English common law...
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
Civil code
A civil code is a systematic collection of laws designed to comprehensively deal with the core areas of private law. A jurisdiction that has a civil code generally also has a code of civil procedure...
. Arkansas has a similar arrangement as the term “article” in that state's law generally refers to a subdivision of the Arkansas Constitution
Arkansas Constitution
The Constitution of the State of Arkansas is the governing document of the U.S. state of Arkansas. It was adopted in 1874, shortly after the Brooks-Baxter War replacing the 1868 constitution that had allowed Arkansas to rejoin the Union after the conclusion of the American Civil War; the new...
. 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 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:
| ART. | TITLE | CONTENTS |
|---|---|---|
| 1 | General Provisions | Definitions, rules of interpretation Statutory interpretation Statutory interpretation is the process by which courts interpret and apply legislation. Some amount of interpretation is always necessary when a case involves a statute. Sometimes the words of a statute have a plain and straightforward meaning. But in many cases, there is some ambiguity or... |
| 2 | Sales Sales A sale is the act of selling a product or service in return for money or other compensation. It is an act of completion of a commercial activity.... |
Sales Sales A sale is the act of selling a product or service in return for money or other compensation. It is an act of completion of a commercial activity.... of goods |
| 2A | Lease Lease A lease is a contractual arrangement calling for the lessee to pay the lessor for use of an asset. A rental agreement is a lease in which the asset is tangible property... s |
Lease Lease A lease is a contractual arrangement calling for the lessee to pay the lessor for use of an asset. A rental agreement is a lease in which the asset is tangible property... s of goods |
| 3 | Negotiable Instrument Negotiable instrument A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time. According to the Section 13 of the Negotiable Instruments Act, 1881 in India, a negotiable instrument means a promissory note, bill of exchange or cheque payable either... s |
Promissory note Promissory note A promissory note is a negotiable instrument, wherein one party makes an unconditional promise in writing to pay a determinate sum of money to the other , either at a fixed or determinable future time or on demand of the payee, under specific terms.Referred to as a note payable in accounting, or... s and drafts Cheque A cheque is a document/instrument See the negotiable cow—itself a fictional story—for discussions of cheques written on unusual surfaces. that orders a payment of money from a bank account... (commercial paper Commercial paper In the global money market, commercial paper is an unsecured promissory note with a fixed maturity of 1 to 270 days. Commercial Paper is a money-market security issued by large banks and corporations to get money to meet short term debt obligations , and is only backed by an issuing bank or... ) |
| 4 | Bank Deposits Deposit account A deposit account is a current account, savings account, or other type of bank account, at a banking institution that allows money to be deposited and withdrawn by the account holder. These transactions are recorded on the bank's books, and the resulting balance is recorded as a liability for the... |
Bank Bank A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:... s and banking, check collection process |
| 4A | Funds Transfers Wire transfer Wire transfer or credit transfer is a method of electronic funds transfer from one person or institution to another. A wire transfer can be made from one bank account to another bank account or through a transfer of cash at a cash office... |
Transfers of money between banks |
| 5 | Letters of Credit Letter of credit A standard, commercial letter of credit is a document issued mostly by a financial institution, used primarily in trade finance, which usually provides an irrevocable payment undertaking.... |
Transactions involving letters of credit |
| 6 | Bulk Transfers and Bulk Sales | Auction Auction An auction is a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder... s and liquidation Liquidation In law, liquidation is the process by which a company is brought to an end, and the assets and property of the company redistributed. Liquidation is also sometimes referred to as winding-up or dissolution, although dissolution technically refers to the last stage of liquidation... s of assets |
| 7 | Warehouse Warehouse A warehouse is a commercial building for storage of goods. Warehouses are used by manufacturers, importers, exporters, wholesalers, transport businesses, customs, etc. They are usually large plain buildings in industrial areas of cities and towns. They usually have loading docks to load and unload... Receipts, Bills of Lading Bill of lading A bill of lading is a document issued by a carrier to a shipper, acknowledging that specified goods have been received on board as cargo for conveyance to a named place for delivery to the consignee who is usually identified... and Other Documents of Title Title (property) Title is a legal term for a bundle of rights in a piece of property in which a party may own either a legal interest or an equitable interest. The rights in the bundle may be separated and held by different parties. It may also refer to a formal document that serves as evidence of ownership... |
Storage and bailment Bailment Bailment describes a legal relationship in common law where physical possession of personal property, or chattel, is transferred from one person to another person who subsequently has possession of the property... of goods |
| 8 | Investment Securities Investment Securities Investment Securities is a legal concept enshrined into Article 8 of the Uniform Commercial Code . The ownership aspects concerning securities are governed in the United States by Article 8 of the UCC.... |
Securities Security (finance) A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,... and financial assets |
| 9 | Secured Transactions Secured transactions in the United States Secured transactions in the United States are an important part of the law and economy of the country. By enabling lenders to take a security interest in collateral , the law of secured transactions provides lenders with assurance of legal relief in case of default by the borrower... |
Transactions secured by security interest Security interest A security interest is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation, usually the payment of a debt. It gives the beneficiary of the security interest certain preferential rights in the disposition of secured assets... s |
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
National Conference of Commissioners on Uniform State Laws
The National Conference of Commissioners on Uniform State Laws is a non-profit, unincorporated association commonly referred to as the U.S. Uniform Law Commission. It consists of commissioners appointed by each state, the District of Columbia, the Commonwealth of Puerto Rico and the United States...
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
Personal property
Personal property, roughly speaking, is private property that is moveable, as opposed to real property or real estate. In the common law systems personal property may also be called chattels or personalty. In the civil law systems personal property is often called movable property or movables - any...
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 in 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
Uniform Computer Information Transactions Act
Uniform Computer Information Transactions Act was an attempt to introduce a Uniform Act for US States to follow. As a model law, it only specifies a set of guidelines, and each of the States should decide if to pass it or not, separately. UCITA has been drafted by National Conference of...
(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
Maryland
Maryland is a U.S. state located in the Mid Atlantic region of the United States, bordering Virginia, West Virginia, and the District of Columbia to its south and west; Pennsylvania to its north; and Delaware to its east...
and Virginia
Virginia
The Commonwealth of Virginia , is a U.S. state on the Atlantic Coast of the Southern United States. Virginia is nicknamed the "Old Dominion" and sometimes the "Mother of Presidents" after the eight U.S. presidents born there...
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 merchant
Merchant
A merchant is a businessperson who trades in commodities that were produced by others, in order to earn a profit.Merchants can be one of two types:# A wholesale merchant operates in the chain between producer and retail merchant...
s, who customarily deal in a commodity and are presumed to know well the business they are in, and consumer
Consumer
Consumer is a broad label for any individuals or households that use goods generated within the economy. The concept of a consumer occurs in different contexts, so that the usage and significance of the term may vary.-Economics and marketing:...
s, 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 lawyer
Lawyer
A lawyer, according to Black's Law Dictionary, is "a person learned in the law; as an attorney, counsel or solicitor; a person who is practicing law." Law is the system of rules of conduct established by the sovereign government of a society to correct wrongs, maintain the stability of political...
s 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, has not been adopted by Louisiana, as its provisions are inconsistent with the Louisiana Civil Code, which is based on civil lawCivil law (legal system)
Civil law is a legal system inspired by Roman law and whose primary feature is that laws are codified into collections, as compared to common law systems that gives great precedential weight to common law on the principle that it is unfair to treat similar facts differently on different...
as opposed to common law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
.
Contract formation
- Firm offers (offers that cannot be revoked for a set time) are valid without consideration and irrevocable for time stated (or up to 3 months) and must be signed.
- 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 §2-206(1)
- Consideration -- modifications without consideration may be acceptable in a contract for the sale of goods. §2-209(1)
- 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. [2-305]
- AssignmentsAssignment (law)An assignment is a term used with similar meanings in the law of contracts and in the law of real estate. In both instances, it encompasses the transfer of rights held by one party—the assignor—to another party—the assignee...
-- a requirements contractRequirements contractA requirements contract is a contract in which one party agrees to supply as much of a good or service as is required by the other party, and in exchange the other party expressly or implicitly promises that it will obtain its goods or services exclusively from the first party...
CAN be assigned IF the quantity required by the assignee is not unreasonably disproportionate to original quantity (§2-306)
Contract repudiation and breach
- Nonconforming goods—If non-conforming goods are sent with a note of accommodationAccommodation (law)Accommodation is a term used in United States contract law under the Uniform Commercial Code to describe a delivery of nonconforming goods meant as a partial performance of a contract for the sale of goods, where a full performance is not possible. The accommodation must be specified as such in a...
, 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. [2-609]
- 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 [§2-201(2)]
- 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 [2-702(3)]. 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 [2-702]
- Implied warranty of fitness—Implied warranty of fitness arises when the seller knows the buyer is relying upon his 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. [2-713]
- 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 GilmoreGrant Gilmore
Grant Gilmore was an American law professor who taught at Yale Law School, University of Chicago Law School, Moritz College of Law at Ohio State University, and Vermont Law School...
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
Request for Proposal
A request for proposal is issued at an early stage in a procurement process, where an invitation is presented for suppliers, often through a bidding process, to submit a proposal on a specific commodity or service. The RFP process brings structure to the procurement decision and is meant to...
, invoice
Invoice
An invoice or bill is a commercial document issued by a seller to the buyer, indicating the products, quantities, and agreed prices for products or services the seller has provided the buyer. An invoice indicates the buyer must pay the seller, according to the payment terms...
s, purchase order
Purchase order
A purchase order is a commercial document issued by a buyer to a seller, indicating types, quantities, and agreed prices for products or services the seller will provide to the buyer. Sending a purchase order to a supplier constitutes a legal offer to buy products or services...
s, 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
Offer and acceptance
Offer and acceptance analysis is a traditional approach in contract law used to determine whether an agreement exists between two parties. Agreement consists of an offer by an indication of one person to another of the offeror's willingness to enter into a contract on certain terms without...
. 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.
Article 8
The ownership of securities is governed by Article 8 of the Uniform Commercial Code (UCC). This Article 8, actually 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 (DTCDTC
-Companies and organizations:*Defence Technology Centre*Delaware Theatre Company*Delhi Transport Corporation , the transportation backbone of Delhi*Denver Technological Center, a business park located on I-25 in Denver and Greenwood Village, Colorado...
) 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
DTC
-Companies and organizations:*Defence Technology Centre*Delaware Theatre Company*Delhi Transport Corporation , the transportation backbone of Delhi*Denver Technological Center, a business park located on I-25 in Denver and Greenwood Village, Colorado...
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
Beneficial interest
A beneficial interest is "that right which a person has in a contract made with another" person. The typical example is "if A makes a contract with B that he will pay C a certain sum of money, B has the legal interest in the contract, and C the beneficial interest." More generally, a beneficial...
".
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
Repurchase agreement
A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is the sale of securities together with an agreement for the seller to buy back the securities at a later date. The repurchase price should be greater than the original sale price, the difference effectively...
. 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
Unidroit convention on substantive rules for intermediated securities
The Unidroit convention on substantive rules for intermediated securities, also known as the Geneva Securities Convention, was adopted on 9 October 2009. So far , it has been signed by only one of the 40 negotiating States...
.
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 (“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 non-uniform state laws.
See also
- Codification
- Commercial lawCommercial lawCommercial law is the body of law that governs business and commercial transactions...
- United Nations Convention on Contracts for the International Sale of GoodsUnited Nations Convention on Contracts for the International Sale of GoodsThe United Nations Convention on Contracts for the International Sale of Goods is a treaty offering a uniform international sales law that, as of August 2010, has been ratified by 77 countries that account for a significant proportion of world trade, making it one of the most successful...
(CISG)