Putting the Framework in Place

We began our journey into the Uniform Commercial Code on March 4, 2015.  The initial goal was to establish a methodology for approaching Uniform Commercial Code transactions.  Part of this process required an understanding of the basic reasons the UCC was drafted, and the policies in the Code which are designed to guide the interpretation and application of the Code. We know that the overriding purpose of the Code was to facilitate commercial transactions, and hence there are core policies in the Code which are designed to achieve that overall purpose.

            The Uniform Commercial Code is not stagnant.  Modernization of commercial transactions is a fundamental purpose and policy of the Uniform Commercial Code. We know that the Code pays great deference to freedom of contract, particularly between merchants. The Code also gives great weight to the customs and practices of any given industry to which the Code applies.  These too are affirmatively stated at the outset in specific language in Section 1-103.  Uniformity of law was a critical goal of the drafting of the UCC and this is recognized as well. The drafters of the Code direct users of the Code to ‘liberally construe and apply the Code to achieve its underlying purposes and policies.’ All of this should be part of the mental framework in place when approaching UCC transactions. 

In drafting contracts involving multistate transactions it was noted that there are differences among the states on a meaningful number of provisions.  The wise draftsperson will always check the law of both states to insure his or her client’s best interests.  Section 1-301 allows the parties to a UCC transaction to choose the law of any state as long as the transaction bears a reasonable relation to the state chosen. In litigation, the uniformity provision has been consistently held to stand for the proposition that cases decided under the UCC in one jurisdiction have relevance in others as well.

            As a draftsperson, the responsibility is to analyze the transaction from start to finish. Activate all Code sections in play. This will provide you with drafting insights which will enable you to draft in the best interests of your client.   As you recall, language is one of several elements to the agreement between the parties.  In fact, there are five elements to the legal definition of ‘agreement’ under the Uniform Commercial Code: language; inferences from other circumstances including course of performance; course of dealing; usage of trade.  Remember, these are illustrative of ‘other circumstances’ not exclusive. The most important in the hierarchy is the written language of the parties.  Under Article 9 you would almost always have a written, executed security agreement due to the nature of Article 9.  Under Article 2 you may simply have a purchase order, an email or just a phone call with some miscellaneous documents and emails.  The latter situation is where you see 2-207 cases.

            One thing to always keep an eye on is the trade involved.  As stated in an earlier post, there are over 83,000 professional and trade associations.  Most of these associations have rules and standards which pertain to their industry.  The meaning given to words in the industry is very important under the Uniform Commercial Code:  The comments to section 2-202 are emphatic on this point:
             
                                     This section definitely rejects: 

                

(b) The premise that the language used has the meaning attributable to such language by rules of construction existing in law rather than the meaning which arises out of the commercial context in which they were used.

Trade usages and any written rules governing a trade should be accessed whenever possible.  It only takes a few minutes and periodicals and articles are extremely helpful. Industry rules supplement and explain the meaning of words used as they relate to their industry.  The differences among the industries are vast. It was noted that the elements of course of performance may not be present, and there may not be a course of dealing, but there will almost always be a trade with attendant customs. 

            So at this point in any preliminary analysis, you almost certainly have language and trade usage, and perhaps conduct which indicates that a contract exists.  Whether or not a contract does in fact exist will be determined by the totality of the agreement; the impact of the Uniform Commercial Code on that agreement; and any applicable supplemental rules of law as stated in the UCC definition of contract in Section 1-201(b)(12).

            For purposes of Sales the starting point is going to be whether or not the agreement is enforceable.  The major hurdle here is the statute of frauds, which requires contracts in the amount of $500 or more to be in writing and signed by the party against whom enforcement is sought.  Contracts exist throughout the Uniform Commercial Code and all have their attendant formalities, legal rights and responsibilities. In each situation, once you get past enforceability issues, the general contract analysis applies with full force to all of these contracts.  

            At this point, ‘Say Hello to My Little Friend; Section 1-103(b).  This provision stands for the proposition that all laws not specifically displaced by the Uniform Commercial Code shall supplement its provisions.  This section is one of the most powerful in the Uniform Commercial Code and opens up a universe of possibilities, particularly in litigation. Does the result being advocated by the other side violate laws of equity?  Is there an estoppel of some kind that your client can use?  Was there fraud or misrepresentation involved? Is there anything under the general law of contracts that might be useful? What about agency?  The list goes on, but only those with trained eyes and a thorough understanding of the facts will see the possibilities.

            Regardless of what might apply under Section 1-103, ‘every contract or duty within the Uniform Commercial Code imposes an obligation of good faith in its performance or enforcement’  Section 1-304.  In most cases, this means ‘honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade’ Section 1-201(b)(20).  According to the comments, there is no independent cause of action for the failure to act in good faith.  Most courts agree.  However, some courts have determined that the failure to act in good faith as required by Section 1-304 can give rise to punitive damages.   Properly pleading such a cause of action, and getting it past the motion stage, will change the dynamics of almost any litigation.

            With this solid basic background in place, we begin our foray into other articles of the Code. As this is the first time I have employed this type of teaching model [linear explanations], I can’t be certain of the direction other than to say it will start with Article 3.  Most readers are familiar with Articles 2 or 9, and Article 3 fits nicely with both as a payment mechanism and an integral part of most Article 9 transactions.  It is my expectation that I will move around the Code to try to deliver the best overview possible by the end of February 2016. 

            In addition to discussing the Uniform Commercial Code, there will be some discussion of certain brain and learning theories that I have developed over the course of the past 47 plus years which are integral to my teaching of the UCC and learning in general.  The level and volume which is ultimately presented will depend on the response the posts.  

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