Monday, May 11, 2015

Contractual Freedom and the Uniform Commercial Code


At this point, a general foundation for the meaning of agreement has been laid.  I must once again, emphasize the importance of gathering and synthesizing facts.  Synthesizing takes at least two reads, and enough time between them for a foundation to be in place for the subsequent read.  This allows for a much better understanding as the transaction will be observed and analyzed with a general framework in place.
            One week ago, I was presented with a very interesting UCC case for analysis.  I followed the exact steps I have outlined in earlier posts.  What was the contract?  On to ‘agreement’.  I read the documents three times.   I diagrammed the transaction.  Once these processes were complete, I was confident of what the result should be under the Code. Once the facts are thoroughly understood, anyone conversant in the Code will have a pretty good idea of who should win, how to be persuasive for either side, and where to go in the UCC for the statutory basis for the result you believe to be commercially sound.
            With that background, and having a strong understanding of what ‘agreement’ means, we continue with the discussion of ‘agreement’.  That takes us to Section 1-302: Variation by Agreement.   The comments to Section 1-302 ‘states affirmatively at the outset that freedom of contract is a principle of the Uniform Commercial Code.  Subsection (a) to Section 1-302 reads as follows:


(a)  Except as otherwise provided in subsection (b) or elsewhere in the Uniform Commercial Code, the effect of provisions of the Uniform Commercial Code may be varied by agreement.

This is a very interesting provision, not just in what it means in fact, but the extent to which some parties have attempted take it.  The translation is best stated in Comments:

The meaning of the statutes itself must be found in its text, including its definitions, and in appropriate extrinsic aids; it cannot be varied by agreement....Thus, parties cannot make an instrument negotiable within the meaning of Article 3 except as provided in Section 3-104; nor can they change the meaning of such terms as ...’holder in due course’ as used in the Uniform Commercial Code.. 

This essentially tells us we can’t rewrite the law.  The comments go on to advise us what is permitted under the general statement made in Section 1-302(a):

But an agreement can change the legal consequences that would otherwise flow from the provisions of the Uniform Commercial Code.

For example, parties can create provisions in an agreement that will limit a remedy that would ordinarily result under the provisions of the Code.   
The general freedom of contract principle recognized by Section 1-302(a) has limitations placed upon it by Section 1-302(b) which states as follows: 
 

The obligations of good faith, diligence, reasonableness, and care prescribed by the Uniform Commercial Code may not be disclaimed by agreement. The parties, by agreement, may determine the standards by which the performance of those obligations is to be measured if those standards are not manifestly unreasonable. Whenever the Uniform Commercial Code requires an action to be taken within a reasonable time, a time that is not manifestly unreasonable may be fixed by agreement.

Under the first sentence, we are advised that there are certain standards of decency which must be upheld in the marketplace, and people cannot contract around those standards.  You cannot for example, have a contract provision which provides that ‘there is no duty to undertake repossession without breach of the peace.’  So, when Clyde wants to repossess Randy’s trailer and Randy says no, Clyde can do ‘whatever it takes to get him out of the cab'  For a case which graphically illustrates the point, you may check Clark v Associates Commercial Corp. 877 F. Supp 1439 (Dist. Ct, D. Kansas, 1994).
      The next sentence to Section 1-302, is one of the most important drafting provisions under the UCC, for it allows parties to a transaction to set standards which will determine whether certain conduct meets the standard of behavior called for.  The only requirement is that the parties cannot create terms which are ‘manifestly unreasonable’.  By way of illustration, parties to a sales contract could agree that it would be commercially reasonable for delivery of goods to be between 2:00 AM and 4:00 AM.  When the goods show up at 3:00 AM, Buyer wasn’t there as agreed. Seller waits until 4:00 AM and buyer is still not there. Seller resells the goods and buyer lost contract because he could not deliver. Buyer sues seller claiming the delivery time was unreasonable.
      Without that contract provision, the legal question would be ‘is a delivery of goods between 2:00 AM and 4:00 AM reasonable?’ If it is determined that such an hour is unreasonable, seller will have breached the contract.  If on other hand, the standard were agreed to between the parties, the inquiry would be: ‘Is a delivery time of 2:00 AM to 4:00 AM manifestly unreasonable?’  Proper drafting should include some rationale as to the ‘why’.  This gives the court evidence that it was discussed and thoroughly thought out in advance. In such a case, the court is likely to conclude that such a delivery time was not ‘manifestly unreasonable’ and therefore delivery was proper.
      Proper drafting of called for standards of conduct keeps a much greater percentage of control with the parties to the transaction.  This is consistent with the fundamental freedom of contract policy contained in the Uniform Commercial Code.

No comments:

Post a Comment