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This article has been written by D.Priya, pursuing a Diploma in Cyber Law, FinTech Regulations and Technology Contract from LawSikho. It has been edited by Smriti Katiyar (Associate, LawSikho). 

Introduction

UCC (Uniform Commercial Code) is a legal instrument governing and legalizing specific business contracts. It Merges regulations from various laws concerning commercial transactions. UCC is not a federal law, but a uniformly adopted state legislation. This is a comprehensive set of laws that govern and legalize specific business contracts.  

In 1942, the ULC and the American Law Institute joined and combined all the components of commercial laws together in a comprehensive Uniform Commercial Code that was offered to the states for their consideration in 1951. Pennsylvania was the first state to adopt the UCC in 1953, and other states followed. .

The UCC  upholds the philosophy of harmonizing commercial law and commercial transactions. Achieving uniformity throughout the country makes it easier to uphold the law even when there are multiple jurisdictions involved in a dispute. The uniform commercial code is a United States Code that has been adopted by most of the states.

But UCC is not adopted by all the states in America.  It is not the mandatory code that has to be followed by all states but rather  an optional code that can be adopted by the states if they wish to , and every state has its own procedure to adopt UCC. Even though the adoption of the code is not necessary, the major reason to adopt this code is  the wide commercial transaction crisis, especially if the transaction is inter-state in nature. So, the government has decided to have uniformly adopted state legislation to overcome the inter-state commercial crisis and to standardize the business law in commercial transactions.

Important provisions and its functions

The UCC (Uniform Commercial Code) is organized into nine articles, with each  article governing a separate area of the law. Below are the important provisions:

General provisions (Article-1)

Article 1 was last revised in 2001. This Article explains the general definitions and the way to interpret the provisions. This Article affects every transaction that is governed by the UCC, that includes sale of goods, transfer of negotiable instrument or check, commercial electronic fund transfer, letter of credit, warehouse receipt, bill of landing, transfer of investment security, credit transaction. It mainly binds other articles into one code and it is very important to keep it updated  and consistent with the other provisions to have a smooth economic function in the American economy. 

Sales (Article-2)

The 1951 version of this article governs the transactions related to the sale of the goods, and it is not applicable to transactions in the form of an unconditional contract to sell when the only intention is for security. Further, this article affects t any statute regulating sales to consumers, farmers or other specified classes of buyers. 

Goods are basically those that are identified when the contract is formed and can be moved.  For example, pencil, car, and computers are termed as “goods”. Whereas real estate, services, intangibles such as intellectual property will not come under the definition of “goods”. It mainly deals with merchants; a merchant is a person who regularly deals with selling a specific type of product and has wide and special knowledge about those goods.

When we compare the general contract rules and UCC rules, we will see a significant number of changes in UCC, such as a firm offer. The value in exchange for a promise can keep the offer open or else the offer can be withdrawn, whereas the firm offer concept is liberal in UCC rules.

Next is the contract acceptance, the “mirror image” rule is diluted and liberal in UCC when the additional terms are accepted by the offeree even though the “mirror image” rule is not satisfied, the additional term will be considered as the proposed additions to the contract, but will not become part of the existing contact, the exception to this rule is if both the parties are merchants. 

The next difference between general contract rules and UCC rules is that of “Gap Filler” Rules, in general contract rules, it is required that the parties to a contract have mutual assent to the key elements but whereas in UCC rules, it enables the party to enforce the contract even without the important terms in the agreement. For example, a party may not know the exact price, payment terms, and date of delivery but still, the UCC rules allow the contract to be enforceable based on the default rules set in the UCC.  

Lease (Article-2a)

This article deals with the lease of personal property. It was added to UCC in 1987 and amended in 1990. Lease is defined as “a transfer of the right to possession and use of goods for a term in return for consideration”, some of the types of leases are consumer lease and finance lease. 

Bank Deposits (Article-4)

Article 4 was revised in 1990 and amended in 2002. This Article explains the liability of a bank for actions or non-action pertaining to an item handled by the bank for presentment, payment or collection and automated inter-bank collection. 

Fund Transfers (Article-4a)

This Article deals with Fund transfer. Electronic Funds Transfers are an extremely important payment system in the current scenario. The major three parties are the bank, the beneficiary, and the bank’s customer. This is applicable to payment orders by the originator to any payments order issued by the bank for presentment, payment, or collection. 2012 Amendments to section 108 explain that this Article applies to a remittance transfer that is not an electronic funds transfer under the Federal Electronic Fund Transfer Act (EFTA). 

Letter Of Credit (Article-5)

This Article sets out certain rights and duties that arise out of Letter of Credit transactions, which are issued by a bank or other financial institution to its business customers in order to ease trade. There was an update made in the Article in 1995 to address advances in technology and modern business practices.

Bulk Transfers (Article-6)

Article 6 was drafted as a response to this “bulk sale risk” in order to prevent fraudulent bulk sales. Because of the advancement of technology in providing fast, accurate, and more complete credit histories, there is no evidence that fraudulent bulk sales took place, thus ULC and ALI recommended all states to revise or repeal Article 6 in 1989. 

Documents Of Title (Article-7)

Article 7 explains the Rights and Liability of the bailor and bailee. The documents of the title include a bill of landing, dock receipt, warehouse receipt, dock warrant, and an order for the delivery of goods and other documents used for commercial trade. In 2003, revised UCC Article 7 updated the Original UCC 7 to give way for the development of electronic documents of title. 

Investment securities (article-8)

Article 8 deals with shares, equity interests issued by an entity that is registered as an investment company. whereas it excludes insurance policy, endorsement policy, or annuity contract issued by an insurance company. 

Secured Transactions (Article-9)

A security interest is an interest in assets that secures payment or performance of an obligation, in the secured transaction the borrower grants a security interest over its assets in favour of the lender. There are two types of security interests mainly possessory and non-possessory. The secured party has possession of the collateral in the possessory security interest and the debtor maintains possession of the collateral in non-possessory security interest. Most security interests are non-possessory because the debtor usually wants to use the property which is  being used as collateral.

Article 9 governs security transactions in personal property, which includes consignment, Goods, Inventory, Equipment, a sale of accounts, payment intangibles, promissory notes, an agricultural lien, a transaction that creates a security interest in personal property. All 50 states, the District of Columbia, and United States territories have enacted it. 

Conclusion

In conclusion, it is clear that the UCC has many advantages and disadvantages. One of the major disadvantages is that even though it is adopted by 50 states, it is adopted based on the requirement of that state, it does not guarantee the originality of the code, thus there will be differences in each state and  the sole purpose of achieving uniformity will be  lost. The UCC is not governed as such, If any dispute arises between two states due to the non-uniformity of the code, the adoption of the code becomes a failure and  the common law or the state law may come into force.

Apart from that,  the UCC is not internationally recognized as it may not support international trade, as we all know that in this current generation most of the transactions are done online and worldwide. Therefore, in order to achieve the goal of uniformity, it is important to make changes to enhance the code to adapt to technological advancement and to make necessary changes so that all states may adopt the code without making any changes. Thus, paving the way for the uniform code not only for the commercial transactions between inter-states but also for international transactions.

References

  1. https://www.uniformlaws.org/acts/ucc
  2. Uniform Commercial Code | Uniform Commercial Code | US Law | LII / Legal Information Institute (cornell.edu)
  3. https://www.stimmel-law.com/en/articles/uniform-commercial-code-basic-structure

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