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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