Uniformity of Law: Does It Exist?

One of the most critical policies of the Uniform Commercial Code is uniformity of law. Indeed, the lack of uniformity of law among the various jurisdictions was a prime mover in the overall undertaking to draft The Uniform Commercial Code.  This is codified in section 1-102(a)(3), which directs the courts once again, to ‘liberally construe and apply’ the Code ‘to make uniform the law among the various jurisdictions’.

In approaching the policy of uniformity, several realities must be taken into account.  First, the Official Text of the Uniform Commercial Code must go through the legislative process of each state prior to its enactment.  In the legislative process, states often amend the official text of the Code so that it lines up with the law of the particular state.  In that situation, the text enacted in the state would not be identical to the Official Text.  In some cases, the changes are minor and relatively insignificant; in others the changes might be dramatic.  Anyone involved in multistate transactions should check the law of the other state to be certain that it is consistent with the expectations of the parties.  This is particularly important in the drafting stage.

Second, the Official Text of the UCC provides options for states to choose in several very important provisions.  The differences among the alternatives can be dramatic.  Section 2-318, which deals with Third Party Beneficiaries of Warranties Express or Implied, clearly illustrates this point.  The Official Text to Section 2-318 provides three alternatives for the states to choose from:

                                                ALTERNATIVE A

A seller’s warranty whether express or implied extends to any natural person who is in the family or household of his buyer or who is a guest in his home if it is reasonable to expect that such person may use, consume or be affected by the goods and who is injured in person by breach of the warranty.  A seller may not exclude or limit operation of this section. [Emphasis Added]

ALTERNATIVE B

A seller’s warranty whether express or implied extends to any natural person who may reasonably be expected to use, consume or be affected by the goods and who is injured in person by breach of the warranty.  A seller may not exclude or limit operation of this section.  [Emphasis Added]

ALTERNATIVE C

A seller’s warranty whether express or implied extends to any person who may reasonably be expected to use, consume or be affected by the goods and who is injured in person by breach of the warranty.  A seller may not exclude or limit operation of this section with respect to injury of the person of an individual to whom the warranty extends. [Emphasis Added]

A casual examination of the alternatives presented in Section 2-318 reveals significant differences among them.

            Alternative A is the most restrictive of the three options presented, and is the option selected in the majority of the states.  In that scenario, the warranty extends only to ‘any natural person who is in the family or household of his buyer or who is a guest in his home’….  Alternative B is more expansive since it eliminates the ‘family, guest of household’ criteria. Finally, Alternative C extends the warranty to ‘any person’, eliminating the ‘natural person’ requirement, and does not limit damages to personal injury.

            The differences among these three alternatives are huge.  Imagine a wholesale buyer of goods in an Alternative C state such as Minnesota purchasing goods for resale in Minnesota from a seller in an Alternative A state such as Florida.  The expectation of the Minnesota purchaser is that he, and his buyers, will have the protection of the expansive warranty which exists in Minnesota under Alternative C. While it is not certain which law will apply—Minnesota or Florida [either one could depending on other facts and relative conflicts of law provisions], the Minnesota purchaser takes a major risk in going forward in the event the goods prove to be defective and there is injury as a result. If alternative A applies, and injury occurs to someone who is not ‘in the family or household of his buyer or who is a guest in his home, the Minnesota buyers would not have the benefit of a third party beneficiary under Section 2-318, and the wholesale purchaser will face major exposure.

            Attorneys involved in multi state transactions should always review the law of the other jurisdiction or jurisdictions involved.  In a situation like the one posed above, the Minnesota buyer can request, or insist, depending upon bargaining power, that the law of Minnesota will govern the transaction.  This choice of law will be protected under Section 1-301, which will be discussed in greater detail in a later blog.

Creating the Eyes Through Which to View and Process the Uniform Commercial Code: Part 2

In the previous post, we began our discussion of Section 1-103 of the Uniform Commercial Code, and noted the mandate by the drafters of the UCC, to the courts, to ‘liberally construe and apply’ the Code.  This liberal construction and application of the UCC is to be undertaken to further very specific, broad based goals embodied in Section 1-103(a)(1)(2)(3).

Under Section 1-103(a)(1), the courts are directed to liberally construe and apply the Code to ‘simplify, clarify, and modernize’ the law governing commercial transactions.’  This will have application in drafting and litigation.  In the drafting context, parties should seek to embody these principles in their contract, and further, to explicitly recognize them in the actual drafting.  For example, if the parties to a particular transaction seek to structure it in a unique way, something different than might normally be expected in such a situation, the parties might select an applicable policy and state it in the  contract along with the provisions agreed upon.  This increases the likelihood that the agreement between the parties will be recognized by the court. 

In the litigation context of course, the facts are in place; however, the process is basically the same. Once the facts have been deciphered—never as easy as it should be—the parties to the litigation create their strategies.  One of the very important strategies to undertake in any UCC litigation is to be certain that the positions you are presenting to the court line up with policies which support your claims.  You may seek to convince the court that the new way you have approached your transaction is consistent with the Code policy of ‘modernization’ or will somehow bring clarify or simplify’ the law governing commercial transactions.  In this situation, you are simply guiding the court to the desired result through the liberal construction and application of the UCC to accomplish the desired policy objectives of the Code itself.

The same type of analysis would apply for Section 1-103(1)(b) where the stated policies are:

(2) to permit the continued expansion of commercial practices through custom, usage, and  agreement of the parties;

           

Diagrammatically, the process looks like the following:

Once again under Section 1-103(1)(b) we see the concept of ‘expanding commercial practices’ embodying the overlying policy of the UCC to promote commerce.  Of particular significance under Section 1-103(1)(b), and throughout the Uniform Commercial Code as a whole, is recognizing, at a very high level, what is happening in a particular industry, customs which are observed, and the importance of the agreement between the parties.  These will be discussed in detail in upcoming posts.

           

Creating the Eyes Through Which to View and Process the Uniform Commercial Code: Part 1

The fact that Article 1 applies to all substantive transactions throughoutUniform Commercial Code, standing alone, is a powerful fact.  When one factors in the actual content of Article 1 in light of that universal application, the massive impact of Article 1 starts to appear.  While all of Article 1 is important, four areas are of particular significance:

1.    Enumerated policies and their impact on drafting and litigation;

2.    Drafting provisions;

3.    Outside bodies of law which are made applicable to the UCC by reason of Article 1;

4.    Key definitions which apply throughout the Code.

The importance of policy is often over looked, particularly at the law student level.  The focus tends to be on learning the black letter law.  The reality is that the accurate meaning of the ‘black letter law’ must be consistent with the policy or policies upon which the particular statutory provision was drafted.  The interactive process between the actual text and the policies will yield the true meaning of the statute.

I was fortunate to have the Associate Chief Reporter in the overall drafting of the Uniform Commercial Code as my UCC professor.  With well over a decade involved in the formal drafting process, Dean Mentschikoff had a unique understanding of the policies upon which the Code was drafted. All of us were fortunate to have the benefit of her unique insight. More than anything else, we were taught the ‘why’, and advised that if any interpretation of a statutory provision of the Code was inconsistent with the policy upon which the provision was drafted, the interpretation was wrong.  The policies become the eyes through which the Uniform Commercial Code was viewed and processed.  Policies will be emphasized accordingly throughout this blog.

Section 1-103 is one of the most important provisions of the Uniform Commercial Code. In the first instance, Section 1-103 (a)(1)(2)(3) delivers a legislative mandate to the courts as to how the courts are to ‘construe and apply’ the Uniform Commercial Code.

.(a) The  Uniform Commercial Code must be liberally construed and applied to   promote its underlying purposes and policies, which are:

(1) to simplify, clarify, and modernize the law governing commercial transactions;

(2) to permit the continued expansion of commercial practices through custom, usage, and  agreement of the parties; and

 (3) to make uniform the law among the various jurisdictions.

            The mandate for the courts to ‘liberally construe and apply’ the Uniform Commercial Code is similarly a guide to any learning or working within the Uniform Commercial Code.  As you learn, the mandate for ‘liberal construction’ encourages the mind to expand.  As a practitioner, you can approach drafting of documents  and litigation with equal creativity and confidence.  In the next post, we will begin our discussion of the application of Section 1-103(a)(1)(2)(3).

The Comprehensive Approach: Intra Article

An example of the impact of the intra Article comprehensive approach can be seen with a simple hypothetical.  Buyer of goods purchases 80 commercial washing machines from seller.  Shortly after installation, buyer experiences difficulty with the machines and it turns out that they are all defective due problems with the motors.  The machines work intermittently. Seller and buyer are unable to resolve the dispute, and ultimately, buyer sues for breach of the warranty of merchantability under Section 2-314.   

Buyer’s attorney does not use the comprehensive approach, and feels that he has this case locked under what he perceives to be the dispositive section and language of the case:

(1) Unless excluded or modified (Section 2-313), a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind….

(2) Goods to be merchantable must be at least such as

(a) pass without objection in the trade under the contract description; and
…
(c) are fit for the ordinary purposes for which such goods are used

 

Seller was a merchant dealing in goods of the kind; client was a buyer in the ordinary course; the goods were defective. The washing machines did not work. Clear violations of the merchantability warranties of Section 2-314(2)(a)(c).  Buyer thinks ‘case over’. 

Seller’s attorney on the other hand, follows the comprehensive approach and sees the applicability of other sections under Article 2 which might shed light.*   For example, was there any disclaimer of warranties?  As you will see, disclaimers of warranties can be disclaimed by trade usage, course of performance and course of dealing.  They need not be in writing.  Are there documents, trade information, or conversations between the parties which can help seller? Section 2-202 creates channels for the introduction of certain types of evidence if done in a manner consistent with the section.  

If buyer claims rejection, was timely notice given by the buyer under Section 2-602; if timely, did it satisfy the particularity requirement of Section 2-605.  If the rejection is not effective, then the product has been accepted per Section 2-606(1)(b).  If goods are accepted, and defects claimed, there are notice requirements for the buyer once again per Section 2-607.The failure to give proper and timely notice can result in a dismissal of the case.  There is great leverage in these sections.  If the goods were shipped, were they damaged in transit? What were the shipping terms? If it was an F.O.B. shipment contract, and proper shipping and notice were done, the risk of loss would pass to the buyer at the time of shipment?  Is there an exclusive remedy under Section 2-719?

At this point, the plaintiff buyer is no longer controlling the playing field.  His or her goal is to keep the case within Section 2-314.  You are now in control of where the case goes, because you have created a new playing field. The other side must now respond to your points of law, and each time a challenging response is required, you are moving toward a successful resolution of the case.  This is all done in good faith, and with the skill of someone who understands the meaning of the text of the Code and how to apply it consistent with your professional responsibility to represent your client at the highest possible level.

The foregoing illustration occurs in the litigation context.  The facts have already been fixed and the damage done.  In the drafting context however, you are predicting what might go wrong and to eliminate as much risk as possible.  You are looking for anything in applicable Code sections which impacts your client’s position.  I think drafting is the most intellectually challenging component of law, for you are attempting to imagine the totality of what will and might happen in a dynamic commercial setting, and how to establish protection for your client.  Unquestionably, for this endeavor you need to look at the whole Code.

* As you will see, Article 1 can have an enormous impact on any contract under the Code.  For now, I am using Article 2 to illustrate the potential impact of the comprehensive approach within a substantive Article.  Also, the sections being cited in connection with the example are illustrative.  There are many other sections activated by the facts.

Article 1 & The Comprehensive Approach to UCC Transaction

       The introduction of Article 1 provides an excellent place to discuss ‘The Comprehensive Approach’ to Uniform Commercial Code transactions.   This has two separate components.  First, multiple Articles apply to all transactions; second, multiple sections apply to all transactions within each Article.  It is in connection with the first component that the impact of Article 1 can be clearly seen.  Section 1-102 states as follows:

            This article [Article 1] applies to a transaction to the extent that                       it is governed by another article of the Uniform Commercial Code. 

                                                   Section 1-102

       Therefore, regardless of the substantive Article or Articles which govern a particular transaction, Article 1 will also apply.  The impact of the application of Article 1 can be extraordinary, as a litigator, draftsperson, and within the context of the business involved.  These will be explored in subsequent posts. 
 

       The utilization of multiple Articles as part of the comprehensive approach involves more than the application of Article 1 to every transaction.  In addition, it recognizes that an integrated commercial transaction will almost always involve more than one substantive Article.  By way of simple illustration: a sale of goods will activate Article 2; if the goods are shipped via carrier, that will activate Article 7; there will most certainly be a payment system involved which could activate Articles, 3, 4, 4A, or 5, and a possible combination of several of payment Articles; and finally, the goods might be financed at both the wholesale or retail level activating Article 9.
 
       Utilizing the comprehensive approach activates a multitude of sections throughout the applicable Articles of the Code. As these Code sections are linked together, a ‘UCC story’ is told. Facts are then processed through the activated sections, generating potential opportunities and vulnerabilities.  Some sections of course are of greater significance than others, but in this process potential problems will reveal themselves to the draftsperson, and opportunities to enhance litigation strategies will emerge for the litigator.
 
       In addition to the multiple Article aspect of the comprehensive method, there is the activation and application of multiple sections within the primary Article or Articles involved.  This too can have a very powerful impact on drafting and litigation. As a drafting and litigation strategy, the comprehensive approach provides the greatest arsenal available to achieve the most favorable result for the client.  
 

       The next post will contain an illustration of the intra Article application of the comprehensive method.

Navigating the UCC

       The Uniform Commercial Code can be divided into two major categories: Transactions in Goods and Payment Systems.  Transactions in goods include: Sales [Article 2]; Leases [Article 2]; Movement/Storage [Article 7]; and Secured Transactions [Article 9].  Payment systems include: Negotiable Instruments [Article 3]; Bank Deposits and Collections [Article 4]; Letters of Credit [Article 5]; and Electronic Funds Transfers [Article 4A.  It is very important to remember that these payment systems are governed by the Code regardless of whether or not the underlying transaction is governed by the UCC.  Thus, a promissory note executed in connection with a real estate transaction will still be governed by the law contained in Article 3.

       As you approach the text of the UCC, several things are very important to bear in mind.  First, the overwhelming majority of the Code is predicated upon commercial transactions that have repeated themselves over time.  Though the text may appear to be ‘dry’ [a word I have heard used often in describing the UCC], the reality is that the Uniform Commercial Code is a very dynamic statute and when facts are added to the text, it becomes very vibrant and alive.  Remember, the essence of the Code is the transaction of business, and that world is extremely active and dynamic.

       The second thing to bear in mind as you approach the Code is the drafting style.  The UCC is drafted in what I call a vertical style, while the transactions themselves unfold laterally.  For example, as you review Article 2, you will see that Part 1 deals with the Title, Construction and General Construction; Part 2 deals with Form, Formation, and Readjustment of the Contract; Part 3 deals with General Obligation and Construction of the Contract; Part 4 with Title, Creditors and Good Faith Purchasers; Part 5 Performance; Part 6 Breach, Repudiation and Excuse and Part 7 Remedies.  Each of these areas represents a vertical block of drafting.

       When examining a transaction, either as a draftsperson of litigator, one will necessarily start with the basic question of whether or not a transaction is within the scope of the UCC and then within the precise Article that you believe applicable.  As you will see as we work through the UCC, it is not always clear as to whether a particular transaction is governed by the Code, nor is it always clear what Articles apply.  Once however, you have crossed that threshold, you will essentially move laterally through the Code sections making special notation of those sections most applicable to your case or client’s position in the drafting process.  Once these are in place, you will refocus on those sections which are of the greatest applicability and proceed accordingly.

       In the upcoming posts, drafting and litigation strategies will be discussed.

  

The Need for the Uniform Commercial Code

       The Uniform Commercial Code was borne out of necessity, which was itself partly driven by better transportation and improvement in services presented by transportation.  For example, the idea of shipping perishable goods for long distances was not feasible when transportation was limited and refrigerated carriers nonexistent.  As transportation and related services became more sophisticated, the potential to establish new markets which transcended local and even regional boundaries grew enormously.  This was of course, not limited to perishables, but was equally linked to improvements in transportation.
 

       The lack of certainty as to state of the law in the various jurisdictions was inhibiting interstate transactions in goods and payment systems.  The risk of doing business in a jurisdiction that might treat the transaction totally or significantly different than what a business person was accustomed to, often made the transaction prohibitive to engage in.  This was disadvantageous to those in the commercial world seeking to expand their businesses across state lines, to banking institutions that finance those transactions, and ultimately to the consumer as well.
 

       This was the context in which the Uniform Commercial Code was borne, and represents what a positive result can be achieved when everyone has a common goal and is able to put aside certain personal preferences for the good of the whole.  The diverse business elements impacted by commercial transactions in goods and by payment systems in general, resulted in very rich and diverse drafting components for the Uniform Commercial Code. Hundreds of lawyers, businessmen and bankers were involved in the drafting process.
 

       Formal drafting of the Uniform Commercial Code began in 1942, although it was discussed for nearly ten years prior to the start of the actual drafting. Ten years after the project began, a draft was submitted to, and approved by the National Conference of   Commissioners on Uniform State Laws and the American Law Institute  In 1954 Pennsylvania became the first state to enact the Uniform Commercial Code. Today the Uniform Commercial Code has been enacted in all fifty states.  According to Soia Mentschikoff, the Associate Chief Reporter in the overall drafting of the Code, ‘The Uniform Commercial Code is the most ambitious codification ever undertaken in the Anglo-American legal world’.

The UCC Blogger

       I had the pleasure of being taught Secured Transactions by Professor LeVine over the Summer of 2014. After the first week of class, I knew I was hooked. Professor LeVine’s teaching style keeps you on your toes while not scaring you half to death like some law school professors. Instead, he focuses on keeping the brain engaged on the subject matter because, if not, his students would consist mostly of those engaged in Facebook or ESPN for the majority of class.  His teaching techniques are reflected throughout his book The UCC Made Easy, which was used as the primary reading. Instead of a long, cut-and-dry, black letter law book, LeVine writes a fun, interesting and captivating story of Stephen and his quest to open a boat distributor. Through this story, the reader is taught the UCC through a real world application. The way the book is written allows the reader to learn the UCC by pulling a situation from memory instead of the plain text of the Code.  However, the book is laced with footnotes so, if the reader does want further explanation or the black letter Code, he/she will never have to look far for answers to questions they may have. Come exam time, this was very helpful because I was able to remember how, for example, a creditor would be able to have a security interest with higher priority than another creditor with an already secured interest in the same inventory. If you would like to view some other student testimonials, please click here.

       While reviewing my exam with Professor LeVine, I shared some ideas on helping him get his book in front of the people who should be reading it, just about everyone. It took me a while to understand the applicability of the Code to everyday life, especially in areas not directly pertaining to a purchase of chattel paper or the like. But, after I realized the seemingly-boundless application of the Code, I knew more people needed to read Professor LeVine’s The UCC Made Easy. For instance, upon the death of an individual whose will calls for the dissolution of a company and that company has inventory and creditors, the UCC will be the governing law. The Code is applicable in all areas of the law and is naïve to think contrarily. Let’s face it, not everyone is as gung-ho as other’s about learning every little nuance of Code Law. But, by reading a humorous, real-life application of the Code, this daunting task is somehow made somewhat enjoyable.

       If reading another book isn’t what you are after, at least follow this blog, our Instagram, Twitter, Facebook, Youtube, and/or twitter account as we help make learning the Code a bit more pleasurable. There will be coinciding posts as well as animations, photos, and other things to help keep your mind engaged on learning the Code. I promise you will at least crack a smile once a week because if you aren’t having a little fun learning, what is the point? So, whenever you are bored perusing the Web, Instagram, or Facebook, come

- Conner Kempe

Welcome to The UCC Made Easy

       Welcome to The Uniform Commercial Code Made Easy.  The title may sound like an oxymoron, but in reality, the UCC can be easy.  Understanding and navigating the UCC is largely a function of understanding the structure, organization and policies of the Code and how they fit together.  To a large extent, simply sequencing logically connected Code sections yields the essential meaning of the text. This blog is designed to systematically guide you through the UCC in a logical, sequential manner.  
 

       By way of background, I was one of those few people who liked the UCC immediately.  I was drawn to the intensity and challenge of the Code in my first year of law school, and the day my Contracts professor said ‘Nobody knows what the UCC means’; I knew that was the place for me.  
 

       I had the privilege of having Soia Mentschikoff as my commercial law professor in law school, and later as my Dean at the University of Miami School of Law.  As the Associate Chief Reporter to the Uniform Commercial Code, Dean Mentschikoff was integrally involved in the oversight and drafting of the whole UCC, and brought a level of insight and intellectual energy to the classroom that was both exciting and inspiring.  I studied the UCC a minimum of five hours per day in law school.
 

       During my last year of law school, I came to the realization that I was far more suited to live in a warm climate than Chicago, so I made the move to Miami Florida where I went to work with Shutts & Bowen. Shortly thereafter, Dean Mentschikoff left the University of Chicago School of Law to become the Dean at the University of Miami School of Law.  I was elated when she called to offer me an adjunct position at the University of Miami teaching commercial law.  I knew I would be forced to dramatically improve my knowledge of the Code in order to be successful in the classroom. The thought of being in front of a class room as a law professor nine months out of law school created a huge level of motivation.  Fear can do that.   
 

       I put in roughly 15 hours of preparation for each 50 minute class.  The more I studied the Code, the more I could see the various levels.  The main concepts almost lift themselves off the text and become apparent with enough time spent studying the text.  I became a full time professor after one and one half years as an adjunct, teaching all Articles of the Uniform Commercial Code, and the Federal Regulation of Banking. 
 

       During my first year as a full time professor, I had a major insight through which I ‘saw’ the Uniform Commercial Code as a short story/novel.  My thought was to write an entertaining story, based on realistic commercial transactions which would work the reader through the text of the UCC.  This would allow for a wide range of communication systems for the delivery of content, and provide a medium for learning the Code which was far more efficient than reading cases or problem solving.  Fortunately, Dean Mentschikoff supported the idea.

The Uniform Commercial Code Made Easy took three and one half years for the original version and another six for the updated version.  Many thousands of hours were invested in the project.  The original version was endorsed by Dean Mentschikoff which was very special for me.  Her precise words after reading it were ‘You made it so simple’.

 
       For the past twelve years, I have been teaching Uniform Commercial Code classes at the Stetson University College of Law. For the past three years, I used The Uniform Commercial Code Made Easy as part of the curriculum and largely as a result of the students’ positive reactions to the book, I made the decision to undertake this blog and the marketing of the book in the national and international markets. If you would like to see law student or other professional evaluations of the book, click here.
 

       In 2012 I began delivering a one day Continuing Legal Education presentation covering the whole Uniform Commercial Code.  Since that time, I have delivered the program to: the Oregon State Bar Association; Oklahoma State Bar Association; Illinois State Bar Association; North Carolina State Bar Association; Ohio State Bar Association; Missouri State Bar Association; Minnesota CLE; Cincinnati Bar Association; Columbus Bar Association, and the Cleveland Municipal Bar Association.
 

       The primary goal of this blog is to deliver content which will greatly assist those studying the UCC to understand the basic meaning of the text of the Code and how to utilize the UCC to its fullest advantage in drafting documents, litigation, or simply understanding the statutory scheme that governs billions of commercial transactions occurring in the United States every working day.
 

       Today’s blog was designed as an introduction and to familiarize you with my background.  In the next blog, we will discuss a brief history of the Code; the drafting style of the Code, and how to approach UCC problems in general.  From there we will move to the substantive content of the UCC starting with Article 1, and with the goal of moving through the whole Uniform Commercial Code.  The blog will present the Code via its two component parts: Transactions in Goods and Payment Systems.
 

       Periodically, there will be animations and other graphics accompanying the posts.  These animations and graphics are the work of Conner Kempe, a former student at Stetson. Conner has also undertaken the lead in marketing The Uniform Commercial Code Made Easy. Conner’s work is excellent and will greatly assist in the learning process.

The plan is two posts a week—Monday and Thursday.  I look forward to having you join us, provide input, and enjoy learning the Uniform Commercial Code.

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        For a limited time only, enter promo code 'keytotheUCC' at checkout for 10 dollars off. To purchase The UCC Made Easy, please click here.