Transactions between those who make their living engaged in commercial buying and selling of goods (often termed “merchants”) are usually regulated by statutes and regulations that are far more streamlined than those typically applicable to contracts with end users who are protected by myriad consumer protection laws. The concept is that merchants are professionals in the buying and selling of goods and need far more efficient procedures and less protection- based laws to facilitate their transactions. Those laws are normally contained in state statutes that are the state’s version of the Uniform Commercial Code. See our companion article on Commercial Transactions in the United States.
The Uniform Commercial Code (“UCC”) is a set of laws that provide legal rules and regulations governing commercial or business dealings and transactions. The UCC regulates the transfer or sale of personal property. The UCC does not address transactions or financing of real property. Theoretically, the UCC standardizes business laws in these fields in the United States and seeks uniformity amongst the states. Since merchants almost always engage in interstate business, this is a vital benefit for them.
The code was first published in 1952 and has been revised numerous times throughout the years. The code is a recommendation of laws that can be but is not required to be adopted by the various states. The code has the effect of law only when it is adopted by the particular state. California has largely adopted the UCC, with some changes.
Indeed, the UCC has been adopted by all 50 states of the U.S, although with variations. It is the longest and most elaborate of the uniform acts. The UCC is applicable to small business people and entrepreneurs and all those who it classifies as “merchants.”
The UCC can be considered a statutory program under the law of administering, legalizing, and recording specified business contracts and lien instruments. Collectively, the UCC can be explained as a comprehensive modernization of various statutes relating to commercial transactions. This includes sales, lease, negotiable instruments, bank deposits and collections, funds transfers, letters of credit, bulk sales, documents of title, investment securities and secured transactions.
The UCC was developed to address two problems in United States business:
- the increasingly complex legal and contractual requirements of doing business deriving from some states, and
- differences in state laws that made it difficult for business people from different states to do business with one another.
The code is divided into nine articles, each containing provisions that relate to a specific area of commercial law. The UCC seeks to allow people to make contracts according to their particular needs in the transaction, e.g. draft their own terms. However, the code requires the insertion of missing provisions with UCC provisions where parties to the agreement are silent or fail to include in the agreement certain critical provisions. The code imposes uniformity and streamlining in transactions such as processing of checks, notes, and other routine commercial paper. The code also provides different provisions depending on whether one is a merchant or a consumer. The UCC also seeks to minimize the use of legal formalities in making business contracts and tries to rely on the business custom of the particular type of business. This is seen as an effort to avoid legal review being required for each and every transaction.
The UCC is periodically reviewed and revised by the National Conference of Commissioners on Uniform State Laws (NCCUSL), and the American Law Institute (ALI) to meet new needs. The NCCUSL and ALI include the official comments and cross references from prior uniform acts into the code. Other than the code, the official comments are treated as authority in the construction of state statutes.
Most UCC transactions involve secured property, financed by a bank or lender with the title to the property held by the lender as security until the loan is paid off. The UCC also eradicated some ambiguities and differences in state laws. For example, the code requires that contracts for sale or purchase of goods worth $500 should be in writing to be enforceable.
The UCC Section (Section) is the central filing office for financing statements and other documents under the UCC. The Section’s main objective is to review all documents for statutory compliance, then accept or reject the documents. All accepted documents are processed in a timely manner, recorded, filed, and made available to the public upon request.
The Nine Articles of the UCC:
The Code, as the product of private organizations, is not itself law, but a recommendation of a set of laws that should be adopted by 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. Of course, unless such changes are minor, they can affect the purpose and meaning of the Code in promoting uniformity of law among the various states.
The Uniform Commercial Code deals with the following subjects under consecutively numbered Articles:
Art. 1 General Provisions: UCC Article 1 deals with definitions as well as the rules of interpretation of the provisions.
Art. 2 Sales: UCC Article 2 applies to transactions of goods; it does not apply to any transaction which although in the form of an unconditional contract to sell or present sale is intended to operate only as a security transaction nor does this Article impair or repeal any statute regulating sales to consumers, farmers or other specified classes of buyers.
Art. 2A Leases: UCC Article 2A applies to any transaction, regardless of form, that creates a lease.
Art. 3 Negotiable Instruments : UCC Article 3 applies to negotiable instruments. It does not apply to money, to payment orders governed by Article 4A, or to securities governed by Article 8. If there is conflict between this Article and Article 4 or 9, Articles 4 and 9 govern. Regulations of the Board of Governors of the Federal Reserve System and operating circulars of the Federal Reserve Banks supersede any inconsistent provision of this Article to the extent of inconsistency.
Art. 4 Bank Deposits: UCC Article 4 covers the liability of a bank for action or non-action with respect to an item handled by it for purposes of presentment, payment, or collection. The law of the place where the bank is located governs. In the case of action or non-action by or at a branch or separate office of a bank, its liability is governed by the law of the place where the branch or separate office is located.
Art. 4A Funds Transfers: UCC Article 4A applies to funds transfers; beginning with the originator’s payment order, made for the purpose of making payment to the beneficiary of the order. The article also includes any payment order issued by the originator’s bank or an intermediary bank intended to carry out the originator’s payment order.
Art. 5 Letters of Credit: UCC Article 5 applies to letters of credit and to certain rights and obligations arising out of transactions involving letters of credit.
Art. 6 Bulk Transfers: UCC Article 6 applies to bulk sales auctions and liquidations of assets.
Art. 7 Warehouse Receipts, Bills of Lading and Other Documents of Title: UCC Article 7 deals with storage and bailment of goods.
Art. 8 Investment Securities: UCC Article 8 applies to a share or similar equity interest issued by an entity that is registered as an investment company under the federal investment company laws, an interest in a unit investment trust that is so registered, or a face-amount certificate issued by a face-amount certificate company that is so registered. An investment company security does not include an insurance policy or endowment policy or annuity contract issued by an insurance company.
Art. 9 Secured Transactions: UCC Article 9 applies to:
(1) a transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract;
(2) an agricultural lien;
(3) a sale of accounts, chattel paper, payment intangibles, or promissory notes;
(4) a consignment; and
(5) a security interest. However, interest in a secured obligation is not affected by the fact that the obligation is itself secured by a transaction or interest to which this article does not apply. Article Nine is the Article most familiar to businesses since it is by checking with the recording of UCC Statements indicating who has what security interests in the assets of borrowers in business.
Note that the UCC is applicable in sales, leases, negotiable instruments, bank deposits, funds transfers, letters of credit, bulk transfers and bulk sales, warehouse receipts, bills of lading and other documents of title, investment securities, and secured transactions of commercial transactions.
Article 2 of the UCC deals only with transaction of goods. It does not apply to any transaction intended to operate only as a security transaction. However, the Article does not impair or repeal any statute regulating sales to consumers, farmers or other specified classes of buyers. In some circumstances, the UCC has been held not to be applicable to a franchise. This is because the code does not apply outside the sale of goods.
Provisions of Article 3 of the UCC govern negotiable instruments. Article 4 of the UCC deals with the liability of a bank for action or non-action with respect to an item handled by it for purposes of presentment, payment, or collection. The law of the place where the bank is located usually has more applicability in matters of bank deposits.
Article 5 governs letters of credit. Generally, a term in an agreement or undertaking excusing liability or limiting remedies for failure to perform obligations is not sufficient to vary obligations prescribed by this article. Article 6 deals with bulk sale. The article does not apply to a transfer made to secure payment or performance of an obligation, a transfer of collateral to a secured party, a sale or retention of collateral.
The UCC applies on warehouse receipts, bills of lading and other documents of title according to the Article 7 of the code. Meanwhile, Article 8 is concerned with the issuance, purchase, and registration of investment securities. It replaced the Uniform Stock Transfer Act. Article 9 is another provision that is particularly important to small business owners. The Article deals with secured transactions, sales of accounts, and chattel paper. Article 9 has supplanted a number of earlier laws, including the Uniform Trust Receipts Act, the Uniform Conditional Sales Act, and the Uniform Chattel Mortgage Act.
The most recent addition to the UCC, Article 4A, covers corporate-to-corporate electronic payments. This includes wire transfers and automated clearinghouse credit transfers. This article has been adopted by most states.
California and the UCC:
California has adopted the following Articles of the UCC:
Article1: General Provisions: UCC Article 1 deals with definitions and also the rules of interpretation of the provisions.
Article 2: Sales: UCC Article 2 applies to transactions in goods; it does not apply to any transaction which although in the form of an unconditional contract to sell or present sale is intended to operate only as a security transaction nor does this Article impair or repeal any statute regulating sales to consumers, farmers or other specified classes of buyers.
Article 2A: Leases: UCC Article 2A applies to any transaction, regardless of form, that creates a lease.
Article 3: Negotiable instruments: UCC Article 3 applies to negotiable instruments. It does not apply to money, to payment orders governed by Article 4A, or to securities governed by Article 8. If there is conflict between this Article and Article 4 or 9, Articles 4 and 9 govern. Regulations of the Board of Governors of the Federal Reserve System and operating circulars of the Federal Reserve Banks supersede any inconsistent provision of this Article to the extent of the inconsistency.
Article 4: Bank Deposits and Collections: UCC Article 4 covers the liability of a bank for action or non-action with respect to an item handled by it for purposes of presentment, payment, or collection is governed by the law of the place where the bank is located. In the case of action or non-action by or at a branch or separate office of a bank, its liability is governed by the law of the place where the branch or separate office is located.
Article 4A: Fund Transfers: UCC Article 4A applies to funds transfers. Beginning with the originator’s payment order, made for the purpose of making payment to the beneficiary of the order. The article also includes any payment order issued by the originator’s bank or an intermediary bank intended to carry out the originator’s payment order.
Article 5: Letters of Credit: UCC Article 5 applies to letters of credit and to certain rights and obligations arising out of transactions involving letters of credit.
Article 6: Bulk Sales: UCC Article 6 applies to bulk sales auctions and liquidations of assets.
Article 7: Warehouse Receipts, Bills of Lading and Other Documents of Title: UCC Article 7 deals with storage and bailment of goods.
Article 8: Investment Securities: UCC Article 8 applies to a share or similar equity interest issued by an entity that is registered as an investment company under the federal investment company laws, an interest in a unit investment trust that is so registered, or a face-amount certificate issued by a face-amount certificate company that is so registered. Investment company security does not include an insurance policy or endowment policy or annuity contract issued by an insurance company.
Article 9: Secured Transactions; Sales of Accounts and Chattel Paper: UCC Article 9 applies to:
(1) a transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract;
(2) an agricultural lien;
(3) a sale of accounts, chattel paper, payment intangibles, or promissory notes;
(4) a consignment; and
(5) a security interest.
However, interest in a secured obligation is not affected by the fact that the obligation is itself secured by a transaction or interest to which this article does not apply.Note that while California has adopted these provisions, its courts and, at times, its legislature have interpreted or amended the provisions and the law may be altering over time. Legal advice should be obtained from California counsel before relying on the UCC, alone, to determine California applicable law.
Conclusion:
A theme one soon encounters in reviewing the UCC is that common sense and typical business practices of the particular field of business is the overarching source for most of the prescribed transactions. It is a great benefit to merchants and makes the seamless and efficient transaction of business possible throughout the United States. As one business client once commented with wry humor, “I can’t believe the law actually uses common sense as often as it does with these rules. You lawyers have finally seen the light.” He is right.
The UCC is a powerful tool for merchants engaged in business and when used correctly and with knowledge of its procedures, can allow the merchant in goods to engage in transactions nationwide without undue concern. But the procedures also require close adherence to the procedures that are required and such matters as filing UCC1s to protect security interests and filing the requisite notices of secured interests or breach of warranty are an essential part of the tasks required of the knowledgeable business person. One cannot simply rely on common sense but must learn the basic law that applies. It is as much a requirement for the effective business person as learning the basic principles of cost accounting. But once mastered, it is one of the aspects of the United States legal system which works and serves its citizens well.