All posts tagged contracts

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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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

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“Course of Dealing”: Impact

This is third post dealing with one of the most critical and fundamental issues of the Uniform Commercial Code: The agreement of the parties. The first element was the language used by the parties involved; second, is ascertaining if there is a course of performance, a certain type of behavior between the parties to a particular transaction which sheds light on the actual meaning of the agreement. 

One of the three remaining elements to the definition of 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 for interpreting their expressions and other conduct.  Section 1-303(b)

In approaching Section 1-303(b), and Code sections in general, it is important to remember that any given Code section can have up to seven or eight rules or qualifiers.  Every word is important.   A careful look at Section 1-303(b) reveals a number of avenues through which various words can be utilized or attacked.

The conduct which gives rise to a course of performance must:

  1. Be a sequence of conduct;
  2. The conduct must involve transactions which occurred before the particular  transaction;
  3. Conduct must “fairly regarded” as a common basis for interpreting their expressions and other conduct.

Section 1-303(b) makes good sense as it incorporates the realities which attend a history of knowing someone into a particular transaction.

All of the elements are important; however, one bears direct comment and examination.  This arises in connection with the requirement that a course of dealing requires “previous transactions” between parties.  It is clear that conduct which occurs between parties in past business dealings is relevant in understanding what the parties mean in a current transaction and is within the definition of course of dealing.

I think it is also important to integrate non transactional interactions between parties when these relationships give rise to the basis of understanding referred to in the section.  Certainly, one can learn a great deal about someone from knowing them outside a direct transactional basis, and to the extent this sheds light on what the parties meant in a particular transaction, I believe it should be incorporated into ascertaining what the agreement is.

With language, course of performance, and course of dealing having been discussed, the next blog will focus on the final two elements of ‘agreement: usage of trade and inferences from other circumstances.

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by learntheucc on October 31, 2011  •  Permalink
Posted in Article 1 - General Provisions, Article 2 - Sales transactions, Learn the UCC
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Posted by learntheucc on October 31, 2011

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“Course of Performance”: Impact on Contract

The “contract”, or “total legal obligation” between the parties, as defined in Section 1-201(b) (12) is comprised of three elements:

  1. The parties’ agreement;
  2.  The laws of the Uniform Commercial Code;
  3. Other applicable rules of law.

Each of these three variables can have an enormous impact on a sale of goods contract, and any other transaction which occurs under the Uniform Commercial Code.

      1.      The parties’ agreement;

Per section 1-201(b)(3) the parties’ agreement consists of five elements:

  1. Language;
  2. Course of Performance;
  3. Course of Dealing;
  4. Usage of Trade;
  5. Inference from Other Circumstances

Language within the purview of Section 1-201(b)(3) may be written or oral.  While there may be parol evidence issues, the “agreement” is being determined here.  Parol evidence and other laws may affect what the agreement is as a legal reality, but at this stage of the process we are considering all written language and any purported verbal discussions.

      2.      C ourse of Performance

Even if there is a written contract with terms clearly stated, the “course of performance” between parties to an agreement, can dramatically alter the ultimate meaning of the words used.

(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 performance or acquiesces in it without objection.

Patterns of behavior which exist under a “course of performance” may become part of the agreement.  Assume for a moment that Buyer and Seller had a contract whereby Seller was to deliver 40 car loads of tomatoes on the third day of each month.  Further assume that during the first two years of the contract, delivery was made on the 8th, and that Buyer never objected to that date.  Finally, assume that the price of tomatoes dropped by fifty per cent and Buyer purchased  40 carloads in the open market since the deal was “too good to pass on”.

When the forty carloads from the original Seller show up on the 8th, Buyer rejects the tender stating “they were not delivered in accordance with the terms of the contract. Delivery was due on the third”.

I believe that the “course of performance” between the parties for the two years in question, resulted in effectively changing the delivery date to the 8th of the month.

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by learntheucc on October 20, 2011  •  Permalink
Posted in Article 1 - General Provisions, Article 2 - Sales transactions, Learn the UCC, Twitter
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Posted by learntheucc on October 20, 2011

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What IS a Contract

Most people visualize a sales contract as a written legal document embodying a sale of goods by a seller to a buyer, and executed by both parties. A contract for the sale of goods is much, much more than that.  In this Blog, and several which follow, we will discuss and analyze what a contract for the sale of goods under the Uniform Commercial Code really entails.

At the outset, it must be noted, that a valid contract can be created even if there is no written contract.  As noted in Section 2-204(1):

  • A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by the parties which recognizes the existence of such a contract.

Even if there is a written legal document, a contract for the sale of goods under the Uniform Commercial Code embodies a tremendous amount of content beyond the four corners of the document.  A look at the definition of “contract” under the Uniform Commercial Code gives insight into this proposition:

  • “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)

It is immediately apparent that in order to understand what the contract really means, one must initially determine the agreement of the parties.  Agreement is defined in Section 1-201(3) 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.

As we will see in subsequent discussions, the elements of Section 1-201(b) (3) can have a dramatic impact on what otherwise appears to be a clear written agreement.  

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by learntheucc on October 16, 2011  •  Permalink
Posted in Article 1 - General Provisions, Article 2 - Sales transactions, Learn the UCC
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Posted by learntheucc on October 16, 2011

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