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.
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