Recently I was asked what reference material I most often used when I was a practicing credit professional. Without hesitation I replied the Uniform Commercial Code.  

I have over four dozen books on the bookshelves in my office, from the Credit Manager’s Handbook to Sales versus Credit by Sol Barzman. However, the publication that has always sat on my desk, close at hand, is the Uniform Commercial Code.

The Uniform Commercial Code (UCC), was first published in 1952, twenty years prior to my entering the credit profession. It was not until 1958 that it was first adopted by the state of Massachusetts and it took another eight years after that before it was adopted by any other state. Today, it has been adopted by all fifty states, the District of Columbia , Puerto Rico, and the Virgin Islands . The UCC was a joint project of the National Conference of Commissioners on Uniform State Laws and the American Law Institute who began drafting the initial version during the second world war in 1942.

The UCC is one of a number of uniform acts that have been promulgated in conjunction with efforts to commonize the law of sales and other commercial transactions in all 50 states within the United States . The purpose of commonizing state law is important because of the prevalence of commercial transactions that extend beyond one state. For example, goods may be manufactured in Alabama , warehoused in Georgia , sold from California and delivered in Wisconsin . 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 regulations by modifying the UCC's provisions as enacted by each state’s legislature. The UCC deals primarily with transactions involving goods and not services or real propery

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The UCC is a product of private organizations and 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 individual 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. It is important that when doing business in different states you check the local  law for any deviations made by that stae’s legislature.

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 incorporate 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, Louisiana has enacted the majority of the UCC, with the exception of Article 2, preferring to maintain its own civil law or Napoleanic tradition for governing the sale of goods rather than rely on common law as in the other 49 states.

Although the substantive content is largely similar, some states have made structural modifications to conform to local customs. For example, in Louisiana they refer 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. The same can be said of Arkansas where 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 such as UCC-2 is dropped in the California implementation.

UCC Articles

Ater ten years in development the Uniform Commercial Code was released to the states for review and ratification in 1952, Between 1952 and 1999 the state’s made numerous revisions to the Code in oder for it to conform to their existing laws. The Uniform Commercial Code deals with the following subjects under consecutively numbered Articles:

Article 1                       General Provisions

Article 2                       Sales and 2a Leases

Article 3                       Negotiable Instruments

Article 4                       Bank Deposits and 4a Funds Transfer

Article 5                       Letters of Credit

Article 6                       Bulk Transfers and Sales

Article 7                       Warehouse Receipts

Article 8                       Investments

Article 9                       Secured Transactions

The most important of the two articles for credit professionals is article(s) two and nine. The only article that is not relevent to the credit function is article 8, investments.

In 2003, a major revision of Article 2 updating many aspects as well as changes to Article 2A and Article 7 was proposed by the NCCUSL and the ALI. Although being considered, there are no states that have yet adopted the revised version of Article 2.

In 1989, the NCCUSL recommended that Article 6 of the UCC, dealing with bulk sales, be repealed as obsolete since many of the states already had laws that were more strigdent then Article 6. However, many states were relunctant to make changes and Article 6 still remains in force in several jurisdictions.

A major revision to Article 9, became effective in July 2001. The revision, commonly referred to as RA-9 adopted national forms to be used by all the states for perfecting and amending security interests; eliminated dual filing; and eliminated the signing of the financing statement for perfection. There were many other changes but these were the most significant.

The Uniform Computer Information Tranasctions Act which was to have become article 2b within a revised Article 2 could not be agreed on by the NCCUSL and ALI and it has been set aside for further discussion. The UCC is the only uniform law that is a joint project of NCCUSL and the ALI, and both associations must agree to any revision of the UCC before it is given to the states for enactment of the changes in that state.

Since ALI and NCCUSL could not come to agreement on Article 2bAs the NCCUSL responded by renaming Article 2b as the Uniform Computer Information Transactions Act and as of 2004, only two states Maryland and Virginia have adopted it.

The philosophy behind 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 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 legal counselor the preparation of elaborate documents.

As stated earlier the two most important Articles in the UCC to the credit professional are two and nine.

Article 2

Again, 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 the civil law as opposed to common law in the other 49 states.

The majority of the content of Article Two deals with 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 (company letterhead is sufficient).
• 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]
• 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. [2-609]
• 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.
• 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)
• 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.

Article 9

Article 9 identifies the four types of security:

·         Security Agreement

·         Purchase Money Security Agreement

·         Consignment

·         Bailment

It also governs how security interests may be obtained in personal property that a buyer and a seller agree will serve as security for payment of specified debts. In Article 9 the buyer is referred to as the “debtor” and the seller is referred to as the “secured party.”

Fundamental concepts under Article 9 include how a security interest is imposed on property (“attachment”); how security interests are made complete (“perfected”); and what remedies are available to the secured party if the debtor defaults in payment or performance of the secured debt or 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.

Knowledge of the Uniform Commercial Code and how it applies to state laws is a valuable tool for every credit professional and should never be overlooked.

I wish you well.

The information provided above is for educational purposes only and not provided as legal advice. Legal advice should be obtained from a licensed attorney in good standing with the Bar Association and preferably Board Certified in either Creditor Rights or Bankruptcy.