Good Faith Under the Uniform Commercial Code: Part 1

Now that the ‘agreement’ is in place, we refer back to the definition of ‘contract’ to determine the legal significance of the agreement.  This is no small task, since it involves the application of the UCC to the totality of the facts, and thereafter the application of any supplemental principles of law.  With the recognition that Article 1 applies to every transaction under the Code, there are other powerful provisions which must be addressed before moving into the substantive Articles.

First among these provisions, is the obligation of good faith which is stated in Section 1-304. That section reads as follows:

Every contract or duty within the Uniform Commercial Code imposes an obligation of good faith in its performance and enforcement.  [Emphasis added]

That is a very powerful and obviously extremely pervasive provision.  What exactly does it mean, and what happens when the standard of good faith is breached?

            At the outset, it is clear from the language of Section 1-304 that the good faith requirement applies not only to the execution of the contract, but to all ‘duties’ which arise under the Uniform Commercial Code.  These duties are pervasive throughout the UCC and will reveal themselves through the utilization of the comprehensive approach to the Code.  The comprehensive approach was discussed in the March 16^th and March 19^th posts.

            In analyzing the impact of the good faith requirement, it is important to remember that the definition of ‘good faith’ among the various jurisdictions is not uniform. Hence, in some jurisdictions—Illinois for example—good faith remains ‘honesty in fact in the conduct or transaction concerned’.  The majority of states, however, have adopted the amended definition of ‘good faith’ which states:

“Good faith,” except as otherwise provided in Article 5, means honesty in fact and the observance of reasonable commercial standards of fair dealing. Section 1-201(b)(20)  

Therefore, in addition to ‘honesty in fact’ parties, under the amended definition, are required to observe reasonable commercial standards of fair dealing. The difference is significant.  According to the comments of Section 1-201(b)(20) the amended definition is to be read as including:

‘both the subjective element of honesty in fact and the objective element of the observance of reasonable commercial standards of fair dealing.”

            My preference is the unamended version of ‘good faith’.  While I certainly believe that all professionals should be required to act in a commercially reasonable manner, I do not believe that consumers should be held to the same standard as a professional in the business, particularly when the consumer is unsophisticated in commercial transactions and conducting himself ‘honestly in fact.’  Those states that have not adopted the amended definition of good faith have not abandoned the concept of commercial reasonableness as it pertains to professionals in the business.  Thus, under Article 2 for example, Section 2-103(1)(b) incorporates ‘the observance of reasonable commercial standards of fair dealing’ in the trade as well as honesty in fact if the person involved is a merchant. 

The varying definitions might be of great significance in multistate transactions, and attorneys drafting documents for such transactions, or selecting the law to govern their transaction, should check the definitions of the states involved and select the one that best protects the interest of his or her client.

            Another important element of good faith is that it is factual in nature.  Therefore, where an allegation of lack of good faith has been properly made in court, summary judgment should rarely, if ever, be granted.  While in law school, I did a research paper on the significance of good faith under the Uniform Commercial Code. I read every case in which good faith was discussed, and among the many things I learned was that every case in which summary judgment was granted where a lack of good faith was alleged, was reversed.

There are no specific consequences stated in the statute for the failure to act in good faith.  The comments however state as follows:

This section does not support an independent cause of action for failure to perform or act in good faith. Rather, this section means that a failure to perform or enforce, in good faith, a specific obligation under the contract constitutes a breach of that contract or makes unavailable, under the particular circumstances, a remedial right or power.

Case law has consistently followed this language, insofar as the creation of an independent cause of action.  However, as you will see in the next post, even though courts have not recognized an independent cause of action for a breach of the duty of good faith, punitive damages claims have been allowed by some courts for a breach of this duty. 

           

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Do Express Terms Really Control?

Before leaving the current discussion of Section 1-303 [we will see it again], I want to take a moment to focus on Section 1-303(e).  I do so because of a very important potential issue raised in the text of that section. As noted in the last post, this section creates the hierarchy among course of performance, course of dealing and usage of trade.  The first sentence to Section 1-303(e) states this hierarchy and specifically directs the court as to the manner it is to interpret the express terms and other elements of agreement:

Except as otherwise provided in subsection (f), the express terms of an agreement and any applicable course of performance, course of dealing, or usage of trade must be construed whenever reasonable as consistent with each other. [Emphasis added]

So, the court is given a specific mandate on how to construe a conflict between express language of an agreement and the items stated in Section 1-303(e). This is in addition to the general mandate of Section 1-103(a), so I consider it particularly important.  Section 1-303(e) tells the court that it must construe them as consistent wherever reasonable to do so. If however, such construction is ‘unreasonable’, Section 1-303(e) states that express terms prevail:

If such a construction is unreasonable: (1) express terms prevail over course of performance, course of dealing, and usage of trade; (2) course of performance prevails over course of dealing and usage of trade; and (3) course of dealing prevails over usage of trade.

            The majority of reported cases have found that where the express language of the agreement and the course of performance, course of dealing and trade usage are inconsistent with one and other, express terms control. What has not been discussed in these opinions is whether the express provision in question can reasonably be construed in a manner consistent with course of performance, course of dealing and usage of trade.  Rather, courts have generally looked at the express language, determined that it is inconsistent with the course of performance or other elements of agreement, and therefore the express terms control.      

Taken literally, as these courts have, the result would be that course of performance, course of dealing and trade usage will not be considered if the express terms of the agreement are different than any of those elements. I disagree with that result. My difficulty with such a reading is that it dramatically limits the impact of course of performance, course of dealing and usage of trade in the precise area that those concepts are designed to address—trying to figure out what the parties meant when they entered into their agreement.  In effect, such a result is a statement to that, where express terms exist and cover a contested issue, those terms will control, every time, thus eliminating the elements of course of performance, course of dealing and usage of trade from consideration. I consider this result illogical and inconsistent with the essence of the definition of agreement.

            The solution to the potential conflict is squarely within the statute. The challenge stated is:  How to utilize course of dealing, course of performance and trade usage when the express terms differ from those concepts?  For this endeavor, I suggest the key focus be on the last clause in the first sentence of Section 1-303(e), noted above, particularly that the court must construe course of performance, course of dealing and usage of trade ‘consistent with the express terms whenever reasonable’ to do so. The challenge therefore, is to convince the court that, even though the express terms differ from the course of performance, course of dealing or usage of trade, the manner of construction being presented is ‘reasonable’, and therefore, the supplemental concepts apply with full force.  There are enough cases and definitions from which to draw a definition of reasonable that would fit almost any situation.

            There is case law support for a non literal reading and application of Section 1-303(e)..  Celebrity, Inc. v. Kemper, 1981-NMSC-084, 96 N.M. 508, 632 P.2d 743 the court addressed a situation where the course of dealing for rejecting goods was different than the express language of the written agreement.  At issue was the manner in which seller and buyer treated situations where goods have been rejected.  Under the terms of the invoices supplied by Celebrity, Kemper was required to return goods within five days after receipt, and further that these goods would be accepted only with prior written authorization.  The course of dealing between the parties however was that typically Kemper would set aside defective items, and Celebrity’s salesman would check the items and if defective would make an adjustment accordingly.  In the matter being contested, the salesman refused to make the adjustment when notified of the defective goods.

            The court distinguished between those rejections which occurred prior to the salesman’s refusal to follow the course of dealing, and those which occurred thereafter.  As to the former, the court found that:

… Kemper was justified in acting according to the established course of dealing until notified of a change, [and] we find that only those items set aside and presented to the salesman were properly rejected. In Celebrity Inc at 744.

The court therefore recognized that even though the invoice, which it treated as part of the contract, required a specific protocol for returning goods, the course of dealing between the parties dictated a different result.  The court went on to state, however, that once notice was given to Kemper that the written terms were going to be followed, the course of performance would not override the written terms.

            In Nanakuli Paving & Rock Co. v. Shell Oil Co., 664 F.2d 772 (9th Cir. 1981), the court was faced with a term in a written agreement which contained a specific price term designed to ‘price protect’ a paving contractor if the supplier raised its price for asphalt.   On two prior occasions, Shell had protected the contractor, but refused to do so on the third price raise.  The price term in question for the asphalt was “Shell’s posted Price at time of delivery,” F.O.B. Honolulu. In addressing this issue, the court stated:

…[W]e hold that, although the express price term of Shell’s posted price of delivery may seem, at first glance, inconsistent with a trade usage of price protection at time of increases in price, a closer reading shows that the jury could have reasonably construed price protection as reasonable with the express term.  In Nanakuli Paving & Rock Co. at 780.

The court thus treated the question of whether the written price term could be reasonably construed as consistent with the trade usage was a question of fact for the jury.

            I believe that Celebrity Inc. and Nanakuli Paving and Rock Company reach the correct results by giving course of performance and usage of trade appropriate consideration as to what the parties’ agreement was.  To exclude course of performance, course of dealing and usage of trade summarily because there are express terms in the agreement to the contrary is, in my opinion, inconsistent with the purposes of the expanded definition of agreement.

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Finished The Facts: Now What?

We have arrived at our last, and in some ways, most interesting element of ‘agreement’. To fully appreciate this last element, let’s return for a moment to the precise language used in the definition:

"Agreement", as distinguished from "contract”, means the bargain of the parties in fact, as found in their language or inferred from other circumstances, including course of performance, course of dealing, or usage of trade as provided in Section 1-303. Section 1-201(b)(3). [Emphasis added].

Upon a review of the language of Section 1-201(b)(3), it is immediately apparent that ‘course of performance, course of dealing and usage of trade' are illustrative of ‘other circumstances’ from which inferences may be drawn, not the only ones. This expansive reading literally opens up a universe of possibilities from which a creative advocate can draw.

            One circumstance that I always look at in connection with UCC cases is the market at the time any dispute might have arisen.  Did a particular buyer microscopically inspect goods to find defects because the price at which he had contracted to buy the goods is now 40% above the market price for the same goods? What about personal circumstances?  Would a dramatic increase in lifestyle be of any relevance when a party to a contract states that business has become so bad that he can’t supply your clients’ needs?  I have not seen Section 1-201(b)(3) used in that manner, nor have I had the opportunity to do so, but I would not hesitate to do so.  In any event, it is a provision which opens options for a creative attorney. The interpretation suggested would also provide a statutory basis for a wide range of questions during discovery.

            With the addition of ‘other circumstances’, we have completed all the elements of agreement.  The initial impact of this information is explained in Section 1-303(d):

A course of performance or course of dealing between the parties or usage of trade in the vocation or trade in which they are engaged or of which they are or should be aware is relevant in ascertaining the meaning of the parties' agreement, may give particular meaning to specific terms of the agreement, and may supplement or qualify the terms of the agreement…..  Section 1-303(d). [Emphasis added].

That language is extremely powerful, and should be read very carefully. We saw the impact of trade usage in the In re Cotton Yarn Antitrust litigation.  The other elements of agreement can have the same dramatic impact. 

There is a hierarchy of the weight given to course of performance, course of dealing and usage of trade. This is stated in Section 1-303(e):

Except as otherwise provided in subsection (f), the express terms of an agreement and any applicable course of performance, course of dealing, or usage of trade must be construed whenever reasonable as consistent with each other. If such a construction is unreasonable: (1) express terms prevail over course of performance, course of dealing, and usage of trade; (2) course of performance prevails over course of dealing and usage of trade; and (3) course of dealing prevails over usage of trade.

            With all of the elements of agreement in place, relevance established, relative weight in place, we return to the definition of ‘contract’ for it is here that the legal effect of the agreement is determined:

‘Contract’ means the total legal obligation that results from the parties’ agreement as determined by the Act and other applicable rules of law. Section 1-201(b)(12).

Thus, we have returned to our initial inquiry as to what a contract means under the UCC, after a journey through the definition of agreement and the sections connected to agreement. Once the parties ‘agreement’ is in place, there are two steps required to determine the legal impact of that agreement.  First, the application of the text of the Uniform Commercial Code to the facts determined; second, ‘other applicable rules of law’ which impact the agreement—Section 1-103(b).

As of this point, we have discussed the following Code sections:

1.    1-102;

2.    1-103(a)(1)

3.    1-103(a)(2)

4.    1-103(a)(3);

5.    1-103(b);

6.    1-201(b)(12);

7.    1-201(b)(3);

8.    1-302

9.    1-303(a);

10. 1-303(b);

11. 1-303(c);

12. 1-303(d);

13. 1-303(e)

Learning Suggestion:  For those who are learning the Uniform Commercial Code, the best step at this point would be to go over each of the Code sections as many times as necessary to be certain the text of each section is fully understood.  Each time you go over the material, those patterns continue to get stronger in the brain.  Eventually, it will be automatic analysis.  In reviewing these sections, remember that this basic contract analysis will apply to contracts throughout out the UCC.

For more information on the author and book, please visit ucc-madeeasy.com.

Like a Good Neighbor, Trade Usage is There

I was extremely fortunate to have been taught by some extraordinary professors.  From these individuals, I learned not only the substantive areas being taught, but some extremely effective teaching techniques.  Several significant substantive lessons came from Soia Mentshikoff, my UCC professor.  Dean Mentschikoff, as mentioned in an earlier post, was the Associate Chief Reporter to the Code.  As such, she was involved in the overall drafting of the UCC, a process which formally lasted for over a decade, but was actually twice that long. Her insight into ‘all things UCC’ was incredible. I listened intently to everything she said.

            There were three major points emphasized repeatedly throughout every class I took with Professor Mentschikoff, all of which have profoundly impacted my approach to the Uniform Commercial Code. Two are most relevant in this discussion. First, Dean Mentschikoff was emphatic in her belief that you ‘can’t spend too much time on the facts’.  In other words, ‘You need to know the facts. Cold.’ There were two major reasons why this was emphasized so strongly. First, is the fact that the majority of the Code is predicated upon factual assumptions which have repeated themselves over time.  Hence, when the facts of your case are superimposed upon the activated Code sections, the statute comes to life as to your situation.  The better the facts are known, and distilled, the more effective this process.

The second reason Dean Mentschikoff felt so strongly about the importance of the facts was her belief that, despite the winding road the law sometimes takes on its way to justice, the end result is usually correct and fair.  Courts want to achieve the right result, and will do so when the facts are thoroughly and properly presented, since the courts will achieve a common sense, reasonable result.

All of this ties into the definition of ‘Agreement’ and gathering the facts of a given case. I want to emphasize that this strategy applies to drafting documents as well as preparing cases.  The more thoroughly you understand the facts, and how the transaction is going to unfold, the better you can draft for contingencies.

                                    Summarizing Agreement

As of this point in our analysis of agreement, we have any language, written or verbal, as a core element of our factual foundation.  It must be borne in mind that in a litigation context, the other side will most certainly have a different version of the facts.  In the drafting context the process is not quite so adversary, but must be approached with equally intense focus.  Sometimes, important information is forgotten or withheld.

With ‘language’ having been roughly determined, we check to see if there is a ‘course of performance’ or a ‘course of dealing’.  As discussed in an earlier post, neither may be present.  At this point, we may have contested facts, and no course of dealing or usage of trade. 

Amidst all of this uncertainty there is one thing that can almost always be counted on to supply valuable information to any agreement under the Uniform Commercial Code: Trade Usage.  Commercial transactions take place within the context of an existing industry, 99 plus per cent of the time.  Within that industry, there is a manner of business so customary and fundamental to the industry, that it becomes part of the agreement between the parties, regardless of whether or not it is even discussed.   Trade usage is defined under Section 1-303(a) as follows:

A "usage of trade" is any practice or method of dealing having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question. The existence and scope of such a usage must be proved as facts. If it is established that such a usage is embodied in a trade code or similar record, the interpretation of the record is a question of law.  Section 1-303(a).

There are over 86,000 trade and professional associations in the United States, each with their own way of doing business.  Many of these associations have publications which are filled with information regarding their industry. Individuals dealing in commercial transactions should take the time to review these journals, for this can be an invaluable resource in any situation.

The impact that trade usage can have in a case is dramatically illustrated in the case of   In Re: COTTON YARN ANTITRUST LITIGATION, 505 F 3d. 274 (4^th Cir., 2007).  At issue was whether or not plaintiff purchasers of cotton and poly-cotton yarn were required to submit their antitrust case to arbitration via an arbitration provision which, according to defendants, was part of the contract as a result of the regular and customary use of arbitration in the textile industry as a means of resolving disputes.  The facts can be briefly stated as follows:

Purchasers of cotton and poly-cotton entered into discussions with defendant Frontier for the purchase of the products noted.  Discussions leading up to the contract were conducted on the phone and included discussions of quantity, price, and delivery. These discussions were followed by a written contract, denominated ‘Sales Contract’ or ‘Confirmation’ which stated the contracts ‘were subject to the Yarn Rules’, and further that, absent specific agreement otherwise, the arbitration rule [the Yarn Rules] would govern all further transactions. 

The effect of this provision, if upheld, was to require that all claims be submitted to arbitration, including the antitrust violation. The contracts were sent by Frontier to the purchasers, but were not signed or returned to Frontier.

At issue on appeal was whether the district court’s ruling which excluded

arbitration for the antitrust claim was correct.  The district court based its reasoning on 2-207, essentially stating that the arbitration provision submitted in the Sales Contract and/or Confirmation was a ‘material alteration’ of the oral contract between the parties and hence a violation of Section 2-207(b)(2). This ‘material alteration’ according to the District Court, resulted in the arbitration provision not becoming part of the contract.

The court of Appeals reversed the District Court on the arbitration ruling.  The Court of Appeals found that the written confirmations were not ‘additions to the contract’.  The rationale was:

The "Yarn Rules" incorporated in the Frontier sales contracts and confirmations are a collection of "industry rules regarding contract terms and conditions and industry norms" that have been gathered and reported by the American Yarn Spinners Association for more than 50 years. J.A. 541. As to arbitration, the Yarn Rules state that "[p]arties to the sale and purchase of yarns are members of the textile industry, which has, for over fifty years, settled disputes by arbitration in accordance with the terms and conditions of contracts which have tended to become standard and in accordance with equity and good conscience and the customs and practices of the trade." J.A. 542-43. Thus, the Yarn Rules themselves are strong evidence that arbitration is a usage of trade in the textile industry [Emphasis added] In re Cotton Yarn at 283.

After discussing case law which recognized arbitration as the standard manner of resolving disputes in the industry, the court held that the arbitration provision was automatically part of the contract between the parties as a result of arbitration being a trade usage in the textile industry.  This was true regardless of the fact that it was never formally agreed to by the purchasers.  The court further found that a party’s knowledge of a trade usage, or lack thereof, is irrelevant, a result which is clearly consistent with the text of the statute.

If you are involved in drafting or analyzing contracts in the business world, it is imperative that a basic understanding of the norms of the trade of any industry be understood.  Otherwise, you may have agreed to terms of which you have no knowledge and which, down the road might be extremely important.  If you are already in litigation, you are certain to gain valuable insight from the journals into the trade as well.

For more information on the author and book, please visit ucc-madeeasy.com.

The Power of Agreement

The word ‘agreement’ has a unique potency of impact throughout the Uniform Commercial Code.  In the same way that section 1-103(b) can ‘change’ a contract through the application of supplemental contract law principles as in the case of  In re Invenux,  application of the concepts contained in section 1-201(b)(3) can do the same thing via the terms of the agreement.   Also of importance is Section 1-302, ‘Variation by Agreement’, which states the general freedom of contract principle in subsection (a), as well as certain limitations on freedom contract under the Code.  In addition, a significant number of Code sections contain the words ‘unless otherwise agreed’ and of course, we have seen ‘agreement of the parties’ as one of the underlying purposes and policies upon which the Code is drafted under Section 1-103(b). The drafters of the Uniform Commercial Code made it emphatically clear that freedom of contract was a fundamental principle of the Code not just inferentially through the provisions stated, but in Comment 1 to Section 1-302.         

Subsection (a) states affirmatively at the outset that freedom of contract is a principle of the Uniform Commercial Code.

In upcoming posts, I will share some of the wonderful avenues available for drafting.  For now, it is essential to lay the basic foundation of the contract and the agreement.

As noted in the last post, the definition of agreement is comprised of five elements:

1. The language used by the parties;

2. Course of performance;

3. Course of dealing;

4. Usage of trade;

5. Inferences from other circumstances, in addition to inferences from items noted in # 1-3 above.

1.    The language used by the parties

In gathering the facts, it is important to remember that anything relevant said, whether verbally or in writing, is valuable information.  While there may be limitations on the use of some of this language via the parole evidence rule, it is still part of your client’s story and one never knows where things lead. In addition, there are certain Code sections which make it possible to introduce oral evidence provided it is done in a certain manner. In eliciting information from a client or prospective client, it is very helpful to track the language of the sections which are referenced in Section 1-201(b)(3).  In so doing, you will have covered the parameters of the parties’ agreement.

2.    Course of Performance

The second potential element of the contract is ‘course of performance’. The words ‘potential element’ are used because there may not be a course of performance in a given transaction since certain specific elements are required.  Course of performance is defined under Section 1-303(a):

A "course of performance" is a sequence of conduct between the parties to a particular transaction that exists if:

(1)                   the agreement of the parties with respect to the transaction involves repeated occasions for performance by a party; and

(2)                    the other party, with knowledge of the nature of the performance and opportunity for objection to it, accepts the performance or acquiesces in it without objection.  Section 1-303(a).

The first element requires a ‘sequence of conduct’ to a ‘particular transaction’; hence, other transactions between the parties do not impact ‘course of performance’. The sequence of conduct in the particular transaction becomes a ‘course of dealing’ if the contract involved ‘repeated occasions’ for performance, the performance of one of the parties to the contract is non conforming to the contract, and the nonconforming behavior was accepted overtly or passively by the other party.

            By way of illustration: Assume Seller and Buyer have a written contract under which Seller is to deliver 20 carloads of oranges on the first of each month from April 4, 2014 to April 3, 2017.  Shipments routinely arrived between the 8^th and 11^th of the month.  For the first 11 months of the contract, Buyer said nothing.  However, when the March 2015 delivery showed up on March 11^th, Buyer rejected because the ‘delivery was late’.

            If Seller were to litigate the matter with Buyer, Seller would have a very strong argument that the date of delivery under the contract has been modified by the course of dealing.  The contract had ‘repeated occasions for performance’. Seller’s time of delivery was consistently in violation of the due date for delivery; Buyer said nothing.  In essence, Seller is arguing that Buyer ‘waived’ his or her right to the delivery date originally stated in the contract by not saying anything about the late deliveries for one year.

3.    Course of dealing

The third element of the ‘agreement’ is ‘course of dealing’.

A "course of dealing" is a sequence of conduct concerning previous transactions between the parties to a particular transaction that is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.   Section 1-303(b)

Upon a quick review of the text of Section 1-303(b), it is clear that the situation envisioned involves ‘previous transactions’ between the parties.  A course of dealing will arise when the ‘conduct’ concerning those transactions is at a level which creates a ‘common basis of understanding for interpreting their expressions and other conduct’.  In other words, what they have said and done in past transactions will have bearing on what they have said and done in the transaction under discussion.

            The definition of ‘course of dealing’ was amended with the Article 1 amendments.  The earlier version had a ‘course of dealing’ which could be based upon ‘previous conduct’ between the parties’, rather than ‘previous transactions’.  I believe the former version is the better of the two. The rationale for the section lies in the fact that, in the situation envisioned, parties to a business transaction have reasons for understanding what the other party means when he or she says or does something.  This increased understanding can occur outside of the business transaction realm. It could occur in business club; it could occur at a weekly golf game or many other places.  The point is, if there have been some prior dealings between the parties which shed light on what they mean in a given transaction, I believe that should be allowed.

            I would make the argument that interactions outside of the business context should be within the definition of course of dealing.  I would begin my argument with a favorable dictionary definition of the word ‘transaction’: 

                A communicative activity involving two parties or things that 

                reciprocally or influence each other.

                                       Webster’s Dictionary

Clearly, there is no requirement in that definition of a business related activity. From there, I would go back to Section 1-103(a) and fashion an argument through the purposes and policies.  To all listening—Courts frequently use the dictionary in UCC cases.

The final stated element of the agreement is ‘usage of trade’, which is one of those extremely important and pervasive concepts of the Uniform Commercial Code.  ‘Usage of trade’ will be discussed in the next post, but I want to share a thought with you about that as an introduction to the topic.  You may not have a ‘course of performance’; you may not have a ‘course of dealing’; but there will almost always be a usage of trade.  That usage of trade is part of virtually every agreement under the Uniform Commercial Code.

 

Learning Suggestion:  Try the exercise above.  See what policies favor a more inclusive definition of transaction versus the business transaction limitation. It will crystallize the process in your mind and lay the foundation for what will emerge as a general structured approach to the Uniform Commercial Code.  When doing so, systematically review the text of the statute under consideration.  Visual stimulus is a very important part of the process. 

For more information on the author and book, please visit ucc-madeeasy.com.

Entering the Uniform Commercial Code: The Contract—Section 1-201(b)(12)

The essence of the previous posts has been to create a mental framework as you enter the text of the Uniform Commercial Code.  You understand that the overall goal in the drafting of the Code was to facilitate commerce.  Further, that the Code was drafted upon some very specific policies including the expansion of commercial practices, recognition of the agreement of the parties, and a general desire to simplify and clarify the law governing commercial transactions’.  Courts have been instructed by the legislatures of their states to ‘liberally construe and apply’ [the Uniform Commercial Code] to implement these policies.  You also enter the UCC knowing that you have, at your disposal, the whole body of American Jurisprudence except where the Code has displaced it.  You are ready!

One of the themes you see throughout the Uniform Commercial Code, particularly in Article 2, is the idea that in interpreting and analyzing the UCC, we should incorporate the meaning of certain words or phrases as that meaning exists in their commercial context, as well as their legal context. I am using this general theme to introduce Section 1-201, General Definitions, for often these definitions contain nuances and elements that we don’t ordinarily associate with those terms.  These definitions, like all of Article 1 apply throughout the Uniform Commercial Code, and should be consulted regularly.  While all of these definitions are important, some of them have special significance.

The first of very important definitions are ‘contract’ and ‘agreement’.  As you entertain these definitions, remember the full reach extends throughout the Code.  Most individuals who think of the word ‘contract’ tend to think of it in a singular manner.  However, contracts exist under all substantive Articles of the Uniform Commercial Code.  By way of illustration, which is by no means exhaustive: the contract of the buyer and seller under Article 2; the contract of the lessor and lessee under Article 2A; the contract of the maker, drawer or acceptor of a draft under Article 3; the contract between a bank and its customer under Article 4; the contract between a bank and its customer under Article 4A; the contract between a bank and its customer under Article 5; the contract between the carrier and the shipper under Article 7; the contract between the debtor and the secured party under Article 9.  There are many more contracts within these Articles.  The main point is, as you take in the definition of contract, try to remember the reach of this definition.  Keeping this reality in mind will create an expansive framework through which to process the definition.

            Contract is defined under Section 1-201(b)(12) as follows:

“Contract” ...means the total legal obligation which results from the parties’ agreement as affected by this Act and any other applicable rules of law.

‘Contract’ therefore is the legal result of the parties’ agreement.  Therefore, in order to ascertain the legal obligations of parties to a contract, one must first know what the terms of the parties’ “agreement” are.

(B) Definition of Agreement

“Agreement”, like contract, is a defined term under the Code. It is defined in Section 1-201(b)(3) as:

...the bargain of the parties in fact as found in their language or inferred from other circumstances, including course of performance, course of dealing or usage of trade as provided in Section 1-303.

There are thus five variables set forth in Section 1-201(b)(3) which comprise the agreement and thus affect the contract:

1. The language used by the parties;

2. Course of performance;

3. Course of dealing;

4. Usage of trade;

5. Inferences from other circumstances.

The next post will focus in detail on the elements of ‘agreement’. The use and impact of ‘agreement’ throughout the Uniform Commercial Code is of the utmost significance, particularly in the implementation of certain Code based policies.

Learning Suggestion:  Periodically reread earlier blogs—or simply the Code sections discussed in the sequence presented—so that you begin to form a solid foundation for current and long term learning.

Underlying Theory:

Basically, the repetition creates ‘UCC tracks’ in your brain.  This is caused not only by thought, but by the pure visual stimulus of looking at the words.  Returning to the 100,000,000,000 neurons—they are just waiting for you to activate them.  If the same ‘packet’ is activated over and over again the connections start to form.  Over a long period they become strong and automatic.

If you undertake this process, you will find that the time needed to go through the Code sections decreases [no surprise] and the words are easier [no surprise]. You will also find, as your understanding increases, that you are actually enjoying the UCC [surprise!].

For more information, please visit www.ucc-madeeasy.com.