The Uniform Commercial Code is a long-term, joint project of the American Law Institute (ALI) and the National Conference of Commissioners on Uniform State Laws (NCCUSL), now known as the Uniform Law Commissioners. The code itself is merely a recommendation of laws that the states should adopt to achieve the goal of uniformity of law among the states of the Union. The project began in 1942, when commercial transactions were increasingly extending beyond one state. In such a climate, interstate variations of commercial law caused much confusion. The need was evident for a more uniform system of commercial law among the states. Of course, the states were not coerced into accepting the UCC, but all 50 states have enacted it in one of its revisions, with or without specific changes. There are many small differences between states’ respective UCCs. The 70-year history of the UCC, including states’ interactions with proposed amendments, have brought about increased irregularities in the UCC nationwide. However, the substance of the UCC remains relatively uniform throughout the United States. Most of the differences are marginal and reflect preferences relating to structure and nomenclature rather than substantive disagreement.
The UCC is codified at Chapter 336 of the Minnesota Statutes. The Minnesota legislature chose to preserve the intended structure and substance of the UCC, so Chapter 336 is organized by the UCC’s original article and section numbers.
This article gives definitions and general provisions which apply as default rules. Precision and decisiveness are especially important in Article 1, because it governs important aspects of the application of the UCC, such as choice of law, scope and application of the UCC, and definitions of key terms. There have been many changes in Article 1 over the years as disputes have arisen over certain technicalities. All revisions have attempted to make the language more precise and decisive.
This is the most ubiquitous article in the UCC, because it governs every sale of goods in the nation (except for Louisiana). Goods are strictly defined as items which are identifiable and moveable at the time of sale. It does not cover contracts for services or sale of real estate. An important distinction is made in this article between merchants, who regularly deal in goods of the kind, and non-merchants, who are held to a lower standard. One important aspect of Article 2 is that it operates on fundamental principles which, if they are not met, may take the transaction outside the protection of the UCC. Three of these fundamental principles are good faith (honesty in fact), honest dealing and fundamental fairness (equal exchange). If a contract for the sale of goods does not meet these fundamental principles, a court will find it unconscionable and may void the contract or reform it to avoid the unconscionable result. Article 2 includes many important buyer protections, like the implied warranty of merchantability, which exists in every sale, no matter how small, between a merchant and a consumer and requires all goods to be fit for their ordinary use. There are several other buyer protections, in Article 2, including the implied warranty of fitness for a particular purpose, which is created whenever a consumer seeks and relies on the expertise and advice of a sales associate. Article 2 also contains many refined common law contract principles such as offer, acceptance and consideration, which seek to precisely define the steps of, and defenses to, contract formation.
- Example of an Article 2 issue — Article 2 issues arise in any situation in which there is a sale of goods. Buying a pack of gum from the convenience store is a sales contract governed by the UCC. The sales contract for the pack of gum inherently disfavors the consumer because he is not able to negotiate terms because the contract was written by the merchant who doesn’t care about the gain or loss of a single customer. Article 2 ensures the consumer gets the product which was advertised, is not charged an unfair price and is satisfied with the quality of the product. If the consumer finds that the gum inside the pack is rotten, the merchant has violated the implied warranty of merchantability, which requires every sale of goods to be fit for their ordinary purpose. In this case, the consumer would have a cause of action against the merchant and could recover the difference between the contract price and the real market value plus incidental damages. For all sales of goods nationwide, the UCC attempts to set rules and parameters to increase the predictability and stability of commercial transactions. Article 2 protects both parties to a sales contract, especially when there is an inequality of bargaining power, a lack of competing choices, or similar unequal conditions.
- Article 2A: This article deals with leases of goods.
This article governs negotiable instruments. Negotiable instruments are documents guaranteeing payment of a specific amount of money, either on demand, or at a set time. They have a long history, probably originating in 8th Century China, and have developed differently in different areas of the world. Article 3 governs only those instruments which are unconditional orders to pay a specific sum of money, payable on demand, to the order of a specific person. Examples of common negotiable instruments are promissory notes, drafts, checks, and commercial paper.
This article governs bank deposits and collections. All agreements and accounts between persons and banks are governed by this article. Article 4 governs banks obligations to their depositors and governs the movement of checks through commerce. Article 4 contains very clear-cut rules which ensure that banks and depositors are properly protected. Almost all of Article 4 is variable upon agreement, so varying business practices are allowed to evolve as needed in international commerce.
- Article 4A: This article governs electronic funds transfers, specifically for the purpose of ensuring that this type of transaction remains safe, secure and trusted.
This article governs letters of credit, which are documents a lender sends to a seller of goods or services to serve as payment on behalf of the buyer. The lender accepts the risk that the buyer will fail to pay the seller of goods or services. Letters of credit are primarily used in international trade for large transactions between parties in different countries. The instruments usually take the form of a letter, which is delivered to the seller as assurance that they will receive payment. There may also be other parties who accept liability on a letter of credit. The use of these letters of credit has grown exponentially in the last 50 years, mainly because of the expansion of foreign trade.
This article attempts to replace the “bulk sale” laws throughout the nation. These laws protected creditors from businesses which sold merchandise from stock. These businesses had a tendency to make a “bulk sale” of all or most of their inventory outside their ordinary course of business and abscond with the proceeds. Article 6 requires bulk sale buyers to provide notice to the creditors of the seller and keep a list of their purchases from the bulk sale for six months after the sale. Auctioneers who handle bulk merchandise must do the same. Recently, states have been given the option of repealing Article 6 or accepting a revised version which is more narrowly tailored and less demanding on bulk buyers. Article 6 became unnecessary for three reasons: (1) the Uniform Fraudulent Transfer Act overlaps Article 6 in significant ways, (2) the modern credit environment allows creditors to avoid the risk of absconding debtors through better credit evaluations; and (3) Article 9 of the UCC bypasses Article 6 protections by providing even better protection for inventory financing.
This article governs storage and shipment of tangible goods for commercial purposes. This type of law has always been necessary where warehouses and merchants have existed. Because of the many parties involved, it was necessary to be precise about the intangible transfer of rights in the goods while they are being stored or shipped. The old common law rules of bailment are incorporated into Article 7, making the intangible transfer of rights equivalent to the transfer of specific documents of title. Article 7 was so well-written that there were no revisions from 1951 to 2003. The basic principles have not changed, but the revised version attempts to seamlessly insert rules for the use of electronic documents of title without affecting users’ choices between electronic or tangible documents of title. It also provides for conversion of tangible documents to electronic documents.
This article governs the ownership of securities. In 1994, the article was revised, and it now works to centralize the system of title transfers of securities. The article 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 — the Depository Trust Company (for corporate securities) and the Federal Reserve (for Treasury Department securities. However, neither the DTC nor the FED hold an individual register of the transfers of property. Investors should know that the accuracy of their securities interests rely entirely on the records of the transfers replicated by the DTC and the FED. Article 8, in its revised form, has been criticized as limiting the security rights of investors, but the article has been proven to have advantages for the United States in the international arena.
This article governs how security interests (liens) may be obtained in personal property to secure a debt. Liens on real property are governed non-uniformly by state laws. Core principles in this article are (1) attachments — creation of security interests in property, (2) perfection — making security interests effective against third parties (3) priority — organizing multiple security interests or other claims in order of priority and (4) remedies — possible actions available for the both the secured party (if debtor defaults) and the debtor (if secured party fails to comply with notice requirements). Article 9 does not apply to real property security interests; these are governed by non-uniform state laws.
Who should know the UCC?
Knowledge of the UCC is a great tool for individual consumers, because awareness of rights and remedies under the UCC can be very empowering. Business owners must be especially knowledgeable of their rights and duties under the UCC so that they fulfill their legal duties as merchants and protect themselves against liability in all contract negotiations and bargaining.
The UCC may appear to be complex, but it was the result of an attempt to simplify the existing commercial law to the point where lawyers were not needed for common commercial transactions. Laws like the UCC, however, become more complex with time because of the huge variety of scenarios which continue to arise. Each scenario has a unique set of facts, and the purpose of the law is to precisely define just outcomes for all situations, providing a remedy for all those who have been unfairly treated.