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UCC Supplemental General Principles of Law: Potential Impact Can Be Huge

bookcover-for-facebook1.jpgAs stated in an earlier Blog, it is my belief that Article 1 is the most important Article under the Uniform Commercial Code.  One of the many reasons I believe this to be the case is found in the text of Section 1-103(b).  That section states as follows:

Unless displaced by the particular provisions of the Uniform Commercial Code, the principles of law and equity, including the law merchant and the law relative to the capacity to contract, principal and agent, estoppels, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, and other validating and invalidating cause shall supplement its provisions.

The potential impact of Section 1-103(b) is enormous.  The essence of the section is that unless the Uniform Commercial Code specifically displaces a substantive principle of law, including, but not limited to those listed, those principles of law survive the enactment of the UCC and ‘supplement’ its provisions.

In Re Invenux, Inc. 298 B.R. 442 (Bkrtcy. D. Colo. 2003), 51 UCC Rep Serv 2d, clearly illustrates the impact of Section 1-103.  The case was  before the court on defendant/trustee’s motion to dismiss and plaintiff’s cross motion for summary judgment.

In its Motion for summary judgment plaintiff was seeking a reformation of the Security Agreement between itself and Debtor.  The court noted that:

Although the UCC-1 financing statement which Plaintiff filed to perfect its security interest is worded broadly enough to embrace an interest in the Stock [the collateral], it does not appear as part of the collateral in the security agreement.  In Re Invenux, Inc. at 445-446

In order for a security interest to be enforceable, Section 9-203(b)(3)(A) requires that a description of the collateral be contained in the security agreement. Section 9-203 provides in relevant part as follows:

(a)     A security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral, unless an agreement expressly postpones the time of attachment.

(b)    Except as otherwise provided in subsections (c) through (i), a security interest is enforceable against the debtor and third parties with respect to the collateral only if:

(1)    value has been given;

(2)    the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; and

(3)    One of the following conditions has been met:

(A)   the debtor has authenticated a security agreement that provides a description of the collateral….

(B)   – (D) …

It is clear from the language of Section 9-203(b)(3)(A) [the other sections do not apply in the case] that in order for the security interest to be enforceable, the debtor must have authenticated a security agreement and such agreement must provide a description of the collateral.

The trustee took the position that since there was no description as required by Section 9-203, the security agreement was invalid.  The court framed the issue as follows:

The issue for this Court is whether Colo. Rev. Stat. Section 4—9—203 displaces Colorado’s common law such that the right of reformation due to mutual mistake—a common law right available to contracting parties generally—is not available to parties intending to create a security agreement under Article 9 of the U.C.C. id at 446

In finding for the Plaintiff on this point of law, the court said:

There is no question that Section 4—9—203 is in the nature of a statute of frauds because it requires a security agreement to be in writing. Colo.Rev.Stat. Section 4—9—203 Commernt 3.  But the fact that an agreement must be in writing to satisfy a statute of frauds is not inconsistent with reformation of that written agreement if, by reason of mutual mistake, the true agreement of the parties is not expressed in the writing. id at 447

The court found that the security agreement was reformed per the common law of reformation and mutual mistake which existed in Colorado, and therefore, the fact that there was no written description of collateral as provided for in Section 9-203 did not render the security agreement unenforceable.

In Re Invenux powerfully illustrates the potential impact of Section 1-103 in its application of the general contract principles noted.  When one factors in the multitude of general contract principles which apply and supplement the UCC one can clearly begin to see the magnitude of Section 1-103 on the many contracts which exist under the UCC.  When one superimposes the many bodies of law which similarly apply, the power and pervasive applicability of Section 1-03 becomes very clear.

Robert M. LeVine, J.D., Adjunct Professor and UCC mentor. Visit our website for more information.

http://www.ucc-madeeasy.com

Contact Rob at rob@ucc-madeeasy.com

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by learntheucc on March 16, 2013  •  Permalink
Posted in Article 1 - General Provisions, Article 9 - Secured Transactions, Learn the UCC
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Posted by learntheucc on March 16, 2013

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Uniformity of Law: Cases From Other Jurisdictions Can Make YOUR Case

Make YOUR Case
Although it is clear from the name itself—i.e.—the Uniform Commercial Code, the drafters of the Code explicitly stated the policy of uniformity in Section 1-103(a)(3):

(a)  [The Uniform Commercial Code] must be liberally construed and applied to promote its underlying purposes and policies, which are:

(1)  to simplify, clarify and modernize the law governing commercial transactions;

(2)  to permit the continued expansion of commercial practices through custom, usage, and agreement of the parties; and

(3)  to make uniform the law among the various jurisdictions.

Traditionally, courts are reluctant and often unwilling to consider the case law from other jurisdictions.  However, in furtherance of the uniformity of law policy of the Uniform Commercial Code, courts regularly look to the law of other jurisdictions in determining disputes before the court.  Attorneys who understand and actively employ this policy, have an arsenal of cases from all jurisdictions which can be used to support a theory or argument presented to the court.  This is obviously a great advantage over the attorney who is singularly focused on the law of his or her jurisdiction.

In the case of In re Hispanic American Television Co., Inc. 113 B.R. 453 (Bkrtcy.) N.D. Ill. 1990) 11 UCC Rep Serv 2d),  the legal issue before the court was the question of whether or not the contract between Motorweek Productions and Hispanic American Television Co., designated as a lease, was in fact a lease or a security agreement.  If the contract was in fact a true lease, Motorweek, as lessor, would be entitled to repossess the equipment as provided for in the lease.  If on the other hand, the contract was deemed to be a security agreement, the equipment would become property of the Debtor’s estate.  Under the purported lease, Hispanic American Television Co. was required to make monthly payments of $55,624.97 over a five year term.  At the time of default, Hispanic American Television Co. owed Motorweek $525,000.

The controlling law at the time of the case was Section 1-201(37), which contained the definition of “Security interest” and addressed the specific question of whether or not a lease is in fact a lease or a lease intended as security.  The latter question is now specifically addressed in Section 1-203, and the definition of “Security interest” is now contained in Section 1-201(35).

The case is particularly interesting for two reasons.  First, although the Court made a determination that the parties to the contract did in fact intend the contract to be a true lease; the Court nevertheless found that the contract between the parties was in fact a security agreement. Of course, the law determines the answer to the legal question of whether a transaction is a true lease or a security agreement, but the determination that the parties did in fact intend a lease is significant.  The characterization of the transaction however, must also be viewed outside the context of the parties to the agreement.  In addition to the controlling law, the agreement must be viewed in the context of the interests of other creditors of the Debtor who have a very high stake in the determination of the nature of the agreement.  As noted earlier, if the contract is a true lease, Motorweek can retake its equipment; if not, the equipment becomes part of the Debtor’s estate and hence available to other creditors.

The second reason that the case was particularly interesting is that the contract contained a choice of law provision which stated that the law of New York was to govern the transaction.  This certainly would include the case law of New York. Notwithstanding this provision however, the court stated:

Section 1-201(37) of the U.C.C. is identical in New York and Illinois.  The case law from both states is relevant on the issue of distinguishing a “true lease” from a security agreement.  In Re Hispanic Television Co., Inc. at 456

The court went on to state:

Further, given the uniformity purpose of the UCC, decisions from other states which have adopted its standard provisions are also relevant.  Id at 456-457

There are many cases which support these statements from In Re Hispanic Television Co., Inc..  They present a great arsenal for the attorney who utilizes their potential impact on his or her case.

Robert LeVine, Professor, Author the book The Uniform Commercial Code Made Easy

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by learntheucc on February 18, 2013  •  Permalink
Posted in Article 2 - Sales transactions, Article 9 - Secured Transactions, Learn the UCC, Twitter
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Posted by learntheucc on February 18, 2013

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Article 1 Purposes and Policies of the UCC: Impact Cases

In approaching the text of the Uniform Commercial Code, it is critical to remember that Article 1 applies to every transaction under the UCC:

This article applies to a transaction to the extent that it is governed by another article of the Uniform Commercial Code.  Section 1-102

Hence, in any UCC transaction, there will always be at least two Articles which are activated—Article 1 and the substantive content area involved, e.g. Sales, Leases, Negotiable Instruments, Bank Deposits and Collections, Electronic Funds Transfers, Letters of Credit, Documents of Title and Secured Transactions.  The application of Article 1 to any of the substantive Articles can have an enormous impact on the transaction, and the interpretation of the documents governing the transaction.

The next series of blogs will discuss the impact of Article 1 on transactions governed by the UCC.  The starting point for this analysis is Section 1-103 which sets forth rules for the construction of the UCC as well as supplemental principles of law which impact UCC transactions.  Couched in general terms, these vital principles are often overlooked rather than utilized by the advocate and draftsperson.

Section 1-103(a) states:

(a)  The Uniform Commercial Code must be liberally construed and applied to promote its underlying purposes and policies, which are:

(1)  to simplify, clarify, and modernize the law governing commercial transactions;

(2)  to permit the continued expansion of commercial practices through custom, usage, and agreement of the parties;

(3)  to make uniform the law among the various jurisdictions.

The advocate who properly utilizes Section 1-103(a) has a tremendous opportunity to guide the court to a desired result by properly aligning his or her case with the one or more enunciated policies to make that happen.  In looking at the language of Section 1-103(a)(1)(2)(3), it is clear that courts are directed to interpret and apply the Code in a particular manner;  the advocate merely acts as a guide by lining up appropriate purposes and polices to facilitate the court in this regard.

.Custom Communications Engineering, Inc. v. E.F. Johnson Co., 269 N.J. Super 531, 636 A. 2d 80; 22 UCC Rep. Serv. 2d 971 (App. Div.1993) illustrates the importance of some of the policies stated in Section 1-103. In Custom, the critical issue on appeal was whether or not the four year statute of limitations for the sale of goods contained in the UCC applied to the matter under consideration by the court.  That in turn depended on whether or not the distributorship agreement between Custom and Johnson was to be characterized as a contract for the sale of goods in which case it would be governed by the UCC and its four year statute of limitations, or whether it was predominantly a services contract in which case it would be governed by the six year statute of limitations rule in effect for non UCC contracts..

The court used one of the standard tests in making its determination—the ‘predominant purpose’ test; i.e., was the contract under consideration predominantly a sales contract with incidental services, or was the contract predominantly a services contract with incidental sales. In reaching its conclusion that the contract was predominantly a sales contract, the court stated:

The common theme expressed in nearly all of the cases is that, although most dealership or distributorship agreements involve more than a mere sale of goods, the sales aspect of the relationship predominates. Custom  p. 84

The court found that the sales and distributorship agreement was predominantly a sale and hence that the transaction was governed by the UCC with the four year statute of limitations.  In reaching its decision, the court utilized the policy considerations stated in the Code:

We adopt the majority rule as sound, since it is entirely consistent with the underlying purposes of the UCC: to foster consistency and predictability in the commercial marketplace….This fundamental theme of the UCC is particularly pertinent in applying a statute of limitations to claims arising under Article 2.  The purpose of Section 7-725(1) is ‘to introduce a uniform statute of limitations for sales contracts’ thus eliminating jurisdictional variations. Id

In any situation the advocate has great creative flexibility to facilitate a desired result, by lining up the facts of his or her case with applicable purposes and policies and guiding the court accordingly.

Your feedback and discussions are welcomed.

Robert LeVine, Professor, Author the book The Uniform Commercial Code Made Easy

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by learntheucc on January 30, 2013  •  Permalink
Posted in Article 1 - General Provisions, Learn the UCC
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Posted by learntheucc on January 30, 2013

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UCC – The Reply Doctrine & The Statute of Frauds

The basic rule for the enforceability of a sales contract under Article 2 of the Uniform Commercial Code is stated under Section 2-201(1):

Except as otherwise provided in this section, a contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his authorized agent or broker…..

This is clear and unambiguous.  If the contract has a value of over $500.00 and it is not ‘signed by the party against whom enforcement is sought’, a lawsuit against that individual is not enforceable and will be dismissed.

This basic rule is subject to a major exception which can wreak havoc on the business which does not know of its existence or fails to comply with the guidelines of the exception.  Conversely, the rule protects a party who confirms a contract that is later disputed. The exception noted is found in Section 2-201(2):

Between merchants if within a reasonable time a writing in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know of its contents, it satisfies the requirements of subsection (1) against such party unless written notice of objection to its contents is given within ten days after it is received.

Simply stated, if a ‘merchant’ receives a written ‘confirmation’ of a purported contract which may or may not exist in reality, the merchant must send a ‘written notice of objection’ or he will have waived the protection provided by Section 2-201(1).  While this waiver does not result in an affirmation of the purported contract, it does mean that the party asserting the contract will not be barred by the Statute of Frauds.

Bazak Intern. Corp v. Tarrant Apparel Group, 378 F. Supp. 2d 377 (S.D.N.Y. 2005) 58 UCC Rep Service 2d 612, clearly illustrates the impact of Section 2-201(2).  In that case, plaintiff Bazak contended that it had an agreement to purchase in excess of $1,000,000 worth of jeans from defendant Tarrant.  There was no written contract, although there was evidence of dealings between the parties, including a visit to Tarrants’ facilities by Bezak to inspect the jeans.

Defendant Tarrant moved for summary judgment on the basis that there was no written contract.  Plaintiff countered by introducing an e-mail which it alleged was a ‘confirmatory writing’ under the merchant exception to the Statute of Frauds.  The e-mail read in part as follows:

As per our agreement with Mr. Gerard Guez, we would like to inform you that Bazak International has bought the total inventory of 747,096 pcs per your Sep. 30, 2003 inventory report less the following:…The total inventory purchased is 687,896 pcs. Please send us a proforma invoice in order for us to proceed in preparing our L/C.  Please ship all samples per your conversation with Mr. Jacobi to Bazak International at the Address listed above

Tarrant did not object to the contents of the e-mail.

Tarrant contended that the e-mail did not satisfy the writing requirement of the Statute of Frauds, since e-mails were not specifically mentioned as a recognized form of writing under the Code. The court however, agreed with the Plaintiff, stating that:

‘…[T]he October 3 e-mail does, as a matter of law, satisfy this element.’ (Bazak), p. 383

Summary judgment was denied, and plaintiff was cleared to prove its case.

Parties who believe a contract for the sale of goods has been made should be advised to confirm those contracts per Section 2-201(2).  It is further advised that the language of the statute should be tracked in making this confirmation.  Conversely, if a writing ‘confirming’ a contract is received, and the party receiving it disputes the formation of the contract, that party must object within ten days, or it will lose the defense of the Statute of Frauds.  Obviously, this requires diligent review of all correspondence to the business, and as seen in the Bazak case, emails have been held to be an acceptable form of communication and confirmation within Section 2-201(2).

Robert LeVine, Author of the book The Uniform Commercial Code Made Easy

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by learntheucc on January 19, 2013  •  Permalink
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Posted by learntheucc on January 19, 2013

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UNIVERSAL CARING AND COMPASSION – The Real UCC

One of the great things about writing a blog, is that the writer can say whatever he or she wants to put in print.  The past twelve blogs have been about The Uniform Commercial Code—the UCC.  With Christmas upon us, I wanted to write about a different UCC, something far more important than my book.  That UCC is Universal Caring and Compassion.

When I wrote the original version of The Uniform Commercial Code Made Easy in 1977, there were two primary goals.  First, was to validate the underlying system from which the book was derived www.2ptpe.com.  By the time the book was published in 1980, this objective was accomplished with the endorsements received on the book which validated the content.

The second goal of the book was to create a law book which would put law students in contact with some of the inevitable realities of life before they actually encountered them, so they could be recognized and effectively dealt with.  While the book has not yet achieved the level of commercial success I believe is coming, I am pleased that those who have read it have indeed seen the importance of understanding where life, and certain energies lead.

In the past five years, I have had the privilege of speaking to audiences throughout the United States at a wide range of levels.  Many of the people to whom I have spoken are affluent professionals who have come to the realization that life does indeed have a starting point and a finish line.  As part of this realization, comes the analysis of the lives lived, and the legacy to be left.  Money is nice, but at the end of the day, a life predicated on the accumulation of wealth for the sake of the accumulation of wealth is a meaningless life.  Once this realization sets in, there is a burning desire to make the rest of life as significant and purposeful as possible.

The other groups to whom I have had the privilege of speaking are the abused and neglected children of America.  I have spoken to them in maximum security juvenile institutions, boot camps, group homes, boxing gyms, and low income inner city youth centers.  These children, through no fault of their own, were born into a veritable nightmare—drugs, abuse, poverty and a sense of hopelessness.  They have, in essence, been socialized into a universe which creates a perspective on life which makes all of their negative decisions appear logical.   Yet, within them is the same burning desire to change and break the cycle which has literally held them prisoner.

Which brings me to the goal of the latest publication of the book—to help children in need by creating an economic base to assist directly, and by helping others understand how much can be accomplished if we all just reach out and share what we have. At the end of the day, I believe that is why we are here— to help each other, in any way we can.  That is where true happiness derives.  That is the real UCC.

Rob LeVine

www.ucc-madeeasy.com

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by learntheucc on December 26, 2011  •  Permalink
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Posted by learntheucc on December 26, 2011

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Taking Aim: Lining Up the Case

As noted in the last blog, the drafters of the Uniform Commercial Code were very specific in their directions to the courts regarding the manner in which the UCC is to be interpreted:

The Uniform Commercial Code must be liberally construed and applied to promote its underlying purposes and policies…. Section 1-103(a).

The underlying purposes and policies of the Code are stated in Sections 1-103 (a)(1)(2)(3) as follows:

(1)   to simplify, clarify, and modernize the law governing commercial transactions;

(2)   to permit the continued expansion of commercial practices through custom, usage, and agreement of the parties; and

(3)   to make uniform the law among the various jurisdictions.

As an attorney and legal consultant, I have found the strategies utilized to implement these purposes and policies to be the most enjoyable component in the analytical process, in that it provides a limitless opportunity for creativity to achieve the desired result.  There are four steps involved in the process:

  1. Delineating the facts;
  2. Application of the facts to the relevant substantive provisions involved;
  3. Isolating the key provisions upon which the case will most likely be determined;
  4. Identifying a purpose or policy which supports the interpretation being advocated.

The first component is critical.  There are two basic directions that this portion of the case can take.  First, there may be two distinct versions of the facts, each of which will support a verdict if proven to be true.  Second, there may be no dispute as to the critical facts, in which case the result will depend on the interpretation of the law as applied to the facts.

In the second stage, the statute comes to life.  The UCC is, in many instances, a distillation of commercial fact patterns which have repeated themselves over time, in many cases, over hundreds of years.  A given section may contain many independent rules, which may or may not be activated when the facts are superimposed on the relevant statutory provision.  Once the applicable portions of the statute have been activated, the advocate is placed in the position of creating the arguments which will carry his or her side to victory.

The question then becomes: which of the purposes or policies can be utilized to guide the court to the desired result?  This is where the great art of advocacy comes into play.  The skilled advocate will be able to use the facts of his or her case, line it up with a particular policy, and demonstrate to the court why the result being advocated will support the policy being activated.

Once the appropriate policy is identified, the advocate directs the court’s attention the mandate of ‘liberal construction and application of the Uniform Commercial Code’ to support the policy identified, and why, in the case under consideration, the result so advocated precisely accomplishes that goal.

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by learntheucc on December 17, 2011  •  Permalink
Posted in Article 1 - General Provisions, Learn the UCC
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Posted by learntheucc on December 17, 2011

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Article 1: An Advocate’s and Drafter’s Best Friend

Article 1 of the Uniform Commercial Code is the most overlooked and critical Article of the Uniform Commercial Code.  No Article provides as much creative freedom in terms of drafting contracts and shaping litigation as Article 1. Of particular significance is the fact that Article 1 applies to all transactions under the Uniform Commercial Code, regardless of the substantive Articles which apply in a given situation.  This follows by reason of section 1-102 which states as follows:

This article applies to a transaction to the extent that it is governed by another article of the Uniform Commercial Code.

We have already discussed the very important definitions of ‘contract’ and ‘agreement’, defined in Article 1 in sections 1-201(b)(12) and 1-201(b)(3) respectively.  Likewise as to the very important connected definitions and application of ‘course of performance’, ‘course of dealing’, and ‘usage of trade’ under sections 1-303(a)(b)(c).

The next series of blogs are designed to guide the reader through a detailed analysis of Article 1.  In addition to discussing the meaning of the text, examples of the application of various sections will be undertaken.  Cases will also be used to illustrate certain concepts.

The starting point for analysis is the introductory language of section 1-103(a):

The Uniform Commercial Code must be liberally construed and applied to promote its underlying purposes and policies…. [Emphasis added]

The importance of this language cannot be overestimated.  At the outset, the drafters are giving two very important mandates to the courts; one pertaining to the construction and application of the Uniform Commercial Code; the other pertaining to the utilization of policies upon which the Uniform Commercial Code was drafted.  The court is directed, in the first instance, to ‘liberally construe and apply’ the Uniform Commercial Code; in the second instance the court is directed to do so in a manner which ‘promotes the underlying purposes and policies’ of the Uniform Commercial Code.

The advocate, within the structure of this mandate, has extraordinary ability to shape litigation and guide the court to reach the desired result.  The essence of the strategy is to line up the interpretation of relevant statutory provisions and the facts of the case with enumerated policies which support the interpretation of the position being advocated.  This positioning provides enormous flexibility and creativity for advocates and drafters alike.  The manner for utilizing these concepts will be discussed in upcoming blogs.

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by learntheucc on December 10, 2011  •  Permalink
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Posted by learntheucc on December 10, 2011

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The Uniform Commercial Code: The Comprehensive Approach

 As noted in Blog #9 (The Second Element of Contract: Application of the Uniform Commercial Code to the Agreement), once the parties ‘agreement’ has been delineated, the next element of the definition of ‘contract’ comes into play: application of the Uniform Commercial Code to the agreement which has been created.  Once an agreement for sale has been determined to be enforceable under Section 2-201, the next step involves the application of the Uniform Commercial Code to the totality of that agreement.

It is clear that Article 2 will apply since we are hypothesizing a sales agreement.  Article 1 will also apply since that Article applies to all transactions under the Uniform Commercial Code.  In addition, several other Articles will be activated by the typical commercial sales transaction.  First, there will generally be some shipment of goods from the seller to the buyer which will activate Article 7, documents of title.  For the shipping portion of the transaction, the primary document will be a ‘bill of lading’ as defined in Section 1-201(b)(6); if goods are stored either before or after shipment, a warehouse receipt will likely be issued which is defined in Section 1-201(b)(42).  The rights, duties and liability regarding these documents is covered under Article 7.  Once again, it is worth noting that the actual definition of the documents themselves is found in Article 1.

There will also be a payment mechanism of some type: a check or promissory note which activate Article 3; a wire transfer which activates Article 4A; or a letter of credit which activates Article 5.  If a documentary draft is involved, Section 4-104(a)(6), Article 4 will be activated.  Finally, if the transaction is financed, Article 9 will be activated as well.

The comprehensive approach to Uniform Commercial related problems, incorporates the reality that many sections of the UCC are activated in most commercial transactions.  While Article 2 may supply the key sections involved in a given Sales transaction, there are many sections in the other Articles which can create leverage and opportunities for someone drafting documents or someone involved in litigation. I have always been of the opinion that the comprehensive approach to Uniform Commercial Code matters is the best way to visualize and deal with UCC matters.

It is important to understand the reality of the comprehensive approach before undertaking the application of the substantive provisions of the UCC to the parties agreement.  The next Blog will begin the application of Article 1 to Sales transactions, in the litigation and drafting contexts.

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by learntheucc on December 4, 2011  •  Permalink
Posted in Article 1 - General Provisions, Article 2 - Sales transactions, Article 3 - Negotiable Instruments, Article 4 - Bank Deposits, Article 5 - Letters of Credit, Article 7 - Documents of Title, Article 9 - Secured Transactions, Learn the UCC, Twitter
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Posted by learntheucc on December 4, 2011

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The Second Element of Contract: Application of the Uniform Commercial Code to the Agreement

At this point in our mission to “Learn the UCC”, we have discussed the first element in determining what a contract is under the Uniform Commercial Code: namely, the ‘agreement’ of the parties as determined by the application of the criteria stated in Section 1-203(b)(3).  As discussed in Blogs 4 – “What IS a Contract”  & 5 – “Course of Performance: Impact on Contract”, there are two more elements which must be addressed before one can determine what the contract is in reality, or if in fact there is a ‘legal obligation between the parties’.  These elements include the application of relevant UCC provisions to the agreement between the parties, and the application of supplemental general principles of law which are also applicable to the agreement.  It is only upon the application of these criteria to the parties’ agreement, that the ‘legal obligation’ among the parties can be determined.

The laws which apply to a sales contract under the Uniform Commercial Code are those laws contained in Article 2, Sales, and the laws contained in Article 1, General Provisions.  It is extremely important to remember at all times that Article 1 applies to the whole Uniform Commercial Code per section 1-102; hence, regardless of the substantive article which applies to a given transaction, it will always be supplemented by the provisions of Article 1.  This is often overlooked, and in such a situation, a huge body of law, with enormous implications is not activated.

As we have already seen, the definition of ‘contract’ is found in Article 1 as are the terms comprising the definition of agreement.  Further, the application of these concepts as envisioned by Sections 1-201(b)(3) and 1-303, can have an enormous impact on the ultimate meaning of the parties agreement, and hence, their contract. Article 1 will be discussed in detail in upcoming Blogs.

Once the parties ‘agreement’ is determined, I believe that most logical next step is to determine whether or not the ‘agreement’ is enforceable under the Statute of Frauds.  While the totality of Article 1 applies to the ‘agreement’, it is irrelevant if the agreement itself has no legal import due to the Statute of Frauds.  The basic rule of Section 2-201(1), and the reply doctrine of Section 2-201(2), were discussed in Blog # 3 – “Monopoly and the UCC”.  If there is a written contract signed by the party against whom enforcement is sought, or the requisite confirmatory memoranda under Section 2-201(2), the contract is enforceable.  If however, neither of these criteria is met, there are still three possible exceptions to the writing requirement of Section 2-201(1).

Two of these exceptions are quite easy.  Under Section 2-201(3)(b), the contract is enforceable “if the party against whom enforcement is sought admits in his pleading, testimony or otherwise in court that a contract for sale was made”  Obviously, in such a situation, the contract has been admitted, and hence should be enforced.  Another situation which is very straightforward is the exception to the basic Statute of Frauds rule “with respect to goods for which payment has been made and accepted or which have been received and accepted”.  Payment for goods or acceptance of goods is an unmistakable statement that the contract exists.

The final exception is stated under Section 2-201(3)(a) which states as follows:

A contract which does not satisfy the requirements of subsection (1) but which is valid in other respects is enforceable

(a) if the goods are to be specially manufactured for the buyer and are not suitable to sell to others in the ordinary course of the seller’s business and the seller, before notice of repudiation is received and under circumstances which reasonably indicate that the goods are for the buyer, has made either a substantial beginning of their manufacture or commitments for their procurement.

There are thus four questions which must be answered in order to determine if Section 2-201(3)(a) applies in a given case:

(a)    Are the goods to be specifically manufactured for the alleged buyer?

(b)    Are the goods in question suitable for sale to others in the ordinary course of the seller’s business?

(c)   Did the seller make the “substantial beginning” of the manufacture of the goods in question or “commitments for their [its] procurement”?

(d)   Was the foregoing done before notice of repudiation was received, and under circumstances which reasonably indicate that the goods are for the buyer?

In order for the contract to be enforceable under the Statute of Frauds per Section 2-201(3)(a), the questions must be answered as follows:

(a)   yes; (b) no; (c) yes; (d) yes.

The policy behind Section 2-201(3)(a) is predicated upon the commercial reality that a seller is unlikely to undertake the manufacture of a product which cannot be sold in the seller’s ordinary course of business for no reason.  Such a move, involving time and expense is unlikely to be undertaken if there wasn’t a basis, provided by the buyer, for the seller’s going forward.  It should be noted however, that even if the criteria of Section 2-201(3)(a) are satisfied, the seller will still have to prove his or her case, for the satisfaction of those criteria merely eliminates the barrier of the Statute of Frauds.  It does not result in a conclusive presumption that the seller is entitled to judgment.

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by learntheucc on November 20, 2011  •  Permalink
Posted in Article 1 - General Provisions, Article 2 - Sales transactions, Article 3 - Negotiable Instruments, Article 9 - Secured Transactions, Learn the UCC, Twitter
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Posted by learntheucc on November 20, 2011

https://learntheucc.wordpress.com/2011/11/20/the-second-element-of-contract-application-of-the-uniform-commercial-code-to-the-agreement/

The Contract After the Agreement.

The recent sequence of Blogs began with one of the most fundamental, pervasive and important cornerstones of the Uniform Commercial Code: What is the contract between the parties? Our analysis began with section 1-201(b)(12) which states the basic definition of a “contract” under the Uniform Commercial Code:

“Contract”…means the total legal obligation that results from the parties agreement as determined by [the Uniform Commercial Code] as supplemented by any other applicable rules of law.  Section 1-201(b)(12)

The past three Blogs have focused on the first element: the parties agreement:  defined as:

…[T]he 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.

The importance and potential impact ‘of  language, course of performance, and usage of trade’ have been demonstrated. Reported cases overwhelmingly support the importance of these concepts.  It must be remembered however, that these are listed as examples of ‘inferences from other circumstances’ are thus illustrative, not exclusive.  To the extent a favorable ‘inference’ can be made from ‘other circumstances’, the advocate has a vehicle to introduce evidence which can establish that result.

The basics of ‘agreement’ are now in place.  However, it is clear from a reading of Section 1-201(b)(12), that this is only one of three elements which must be looked at in determining what the ‘contract’ is:

The other two involve:

  1. The application of the laws of the Uniform Commercial Code to the ‘agreement’;
  2. Supplemental rules of law which may be applicable.

As will be seen in subsequent entries, both of the foregoing can have extraordinary and far reaching impact on what the end result of the ‘agreement’ is in reality.  The potential for favorable drafting of contracts, timely intermediate actions, and creative strategies for litigation will be interwoven into these discussions.

www.ucc-madeeasy.com

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by learntheucc on November 13, 2011  •  Permalink
Posted in Article 1 - General Provisions, Learn the UCC, Twitter
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Posted by learntheucc on November 13, 2011

https://learntheucc.wordpress.com/2011/11/13/the-contract-after-the-agreement/

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