1. THE UNIFORM COMMERCIAL CODE
CHAPTERS
19, 20, 21, 22, 23, 24, 25, 26

2. THE
UCC

3. HOW TO UNDERSTAND THE WORLD OF COMMERCIAL TRANSACTIONS

4. “The Uniform Commercial Code enables merchants to form contracts more quickly and easily. But along with this increased facility goes greater responsibility, since informal discussions may suddenly turn into… a contract.”

5. Risk associated with ownership
TOPIC COVERAGE
Sales
Ownership
Risk associated with ownership
Warranties
Performance

6. Negotiable instruments
MORE TOPIC COVERAGE
Remedies
Negotiable instruments
Banks
Secured transactions

7. HISTORY
FROM
LAW MERCHANT TO
THE UCC
(In 60 seconds or less)

8. FIRST
WHAT IS A
LAW MERCHANT ?

9. THE UCC ARTICLE 1. GENERAL PROVISIONS ARTICLE 2. SALE OF GOODS
ARTICLE 2.A LEASES
ARTICLE 3. NEGOTIABLE INSTRUMENTS
ARTICLE 4. BANK DEPOSITS AND COLLECTIONS
ARTICLE 4.A FUNDS TRANSFERS

10. THE UCC ARTICLE 5. LETTERS OF CREDIT ARTICLE 6. BULK TRANSFERS
ARTICLE 7. WAREHOUSE RECEIPTS, BILLS OF LADING, AND OTHER DOCUMENTS OF TITLE
ARTICLE 8. INVESTMENT SECURITIES
ARTICLE 9. SECURED TRANSACTIONS

11. PURPOSE OF THE UCC
To simplify, clarify and modernize the law of commercial transactions
To permit expansion of commercial transactions
To establish uniformity

12. CHAPTER 19
Introduction
to Sales

13. SALES UNDER THE UCC Article 2 Article 2A Applies to the sale of goods
Governs the leasing of goods.

14. MIXED CONTRACTS Involves both sales and services:
The UCC will govern if the predominant purpose is the sale of goods
Common law will control if the predominant purpose is service.

15. MERCHANT
Someone who routinely deals in the particular goods involved, or who appears to have special knowledge or skill in those goods, or who uses agents with special knowledge or skill in those goods.

16. MERCHANT STANDARDS
The UCC frequently holds a merchant to a higher standard of conduct than a non-merchant.

17. GOOD FAITH
The UCC imposes a duty of good faith in the performance of all contracts.

18. UNCONSCIONABILITY
A contract may be unconscionable if it is shockingly one-sided and fundamentally unfair.

19. The law should reflect business reality!
CONTRACT FORMATION
The law should reflect business reality!

20. FORMING A CONTRACT QUICK AND INFORMAL Three basic rules:
In any manner that shows agreement.
Moment of making is not crucial.
One or more terms may be left open

21. STATUTE OF FRAUDS
A writing of some type is required for any sale for goods worth $500 or more:
Writing Sufficient to Indicate a Contract
Incorrect or Omitted Terms
Enforceable Only to Quality Stated

22. EXCEPTIONS
However there are exceptions to the Statute of Frauds when two or more merchants make an oral contract

23. SPECIAL CIRCUMSTANCES
An oral contract may be enforceable even without a written memorandum, if:
Specialty manufacture for buyer, or
The defendant admits in court that there was a contract, or
The goods have been delivered or they have been paid for.

24. ADDED TERMS
An acceptance that adds or alters terms will often create a contract.
Click once to start self-building graphic.
Offeree does NOT intend
to accept
OFFER
Offeree intends
to accept
Accepts
terms
Adds
terms
Changes
terms
Accepts IF offeror accepts new
terms NO
CONTRACT
Contract
Usually
forms a contract
Usually
forms a contract
NO contract (is a new offer)

25. ADDITIONAL OR DIFFERENT TERMS
Additional: those that raise issues not covered in the offer.
Different: contradict terms in the offer.

26. OPEN TERMS
Open Prices: the parties may conclude a contract even though they have not settled the price.
Output and Requirements Contracts

27. MODIFICATION
An agreement modifying a contract needs no consideration to be binding.
The parties may agree to prohibit oral modification and insist that all modifications be in writing and signed.

28. PROPOSED REVISIONS TO UCC
Numerous proposed revisions to UCC Article 2, have been under debate for over 5 years but are approaching final state.
$5,000 vs. $500
Recognize web transactions

29. CHAPTER 20
Ownership
and Risk

30. “The Code has reduced the importance of abstract terms, such as title, and replaced them with practical rules designed to enable business people to anticipate risk and protect against it.”

31. WHO OWNS IT??
The Code must sometimes determine the rightful owner when more than one person claims to own something or not own it.

32. EXISTENCE AND IDENTIFICATION
Goods must exist before title can pass.
Goods must be identified to the contract before title can pass.
The parties may agree in their contract how and when they will identify the goods.

33. WHEN TITLE PASSES Passing of Title:
Title may pass in any manner on which the parties agree.

34. INSURABLE INTEREST When you have a legal right in something
A buyer obtains an insurable interest when the goods are identified to the contract.
The seller retains an insurable interest in goods as long as she has either title to the goods or a security interest in them.

35. A person who purchases in good faith
BONA FIDE PURCHASER
BFP
A person who purchases in good faith

36. SELLER HAS IMPERFECT TITLE
Can be in the form of a void title which is no title at all.
Or can be a voidable title gives limited rights in the goods, inferior to those of the owner.

37. HOW TO BECOME A BFP
When a person with voidable title has power to transfer valid title for value to a good faith purchaser, a BFP and the BFP shows:
1. He gave value for the goods and
2. He acted in good faith
THE BFP OWNS THE GOODS!

38. ENTRUSTMENT
Entrusting means delivering goods to a merchant or permitting the merchant to retain them.
Be careful!

39. Someone with a financial stake in the goods the merchant is selling
A CREDITOR
Someone with a financial stake in the goods the merchant is selling

40. CREDITOR’S RIGHTS Depends upon if it is an Ordinary Sales Bulk Sales
Or a
Bulk Sales

41. RETURNABLE GOODS
May play a role in creditors rights depending on they being a
Sale on Approval, or being subject to
Sale or Return

42. RISK OF LOSS
The parties may allocate the risk of loss any way they wish.
Problems arise if the parties fail to allocate the risk

43. SHIPPING TERMS FOB place of shipment FOB place of destination
FAS a named vessel
CIF
C&F

44. CREATES SPECIAL PROBLEMS
BAILMENT
When one person or company is legally holding goods for the benefit of another.
CREATES SPECIAL PROBLEMS
IF AGREEMENT BREACHED

45. CHAPTER 21
Warranties
and Product
Liability

46. When goods cause injury, there is a question of product liability.

47. PRODUCT LIABILITY ISSUES
There are three main issues related to product liability cases:
Warranty
Negligence
Strict Liability

48. EXPRESS WARRANTIES
An express warranty is one that the seller creates with his words or actions.

49. IMPLIED WARRANTIES
Are created by the Code itself, not by any act or statement of the seller.

50. MERCHANTABILITY
Merchantability means that goods are fit for their intended ordinary purpose.

51. IMPLIED WARRANTY OF MERCHANTABILITY
Unless excluded or modified, a warranty that the goods shall be merchantable is implied in a contract for their sale, if the seller is a merchant of goods of that kind.

52. IMPLIED WARRANTIES (cont’d)
Implied Warranty of Fitness for a Particular Purpose

53. IMPLIED WARRANTIES (cont’d)
The seller of goods warrants that her title is valid

54. IMPLIED WARRANTIES (cont’d)
A merchant warrants that the goods are free of any rightful claim of copyright, patent, or trademark infringement.

55. DISCLAIMERS
Disclaimer: a statement that a particular warranty does not apply.
Oral Express Warranties
Written Express Warranties

56. Three other rules: DISCLAIMERS (cont’d) General rule
Remedy Limitations
Consequential Damages

57. PROPOSED UCC REVISIONS
Sellers attempting to limit warranties would be required to use very explicit language, conspicuously placed.

58. When two parties contract, they are in privity.

59. FACTORS THAT LIMIT THE SELLER’S RESPONSIBILITY
Buyer’s Misconduct
Statute of Limitations and Notice of Breach

60. NEGLIGENCE
In negligence cases, plaintiffs most often raise one or more of these claims:
Negligent design
Negligent manufacture
Failure to warn

61. HOWEVER
Where a sales contract includes proper disclaimers or remedy limitations, a buyer barred from a negligence case may have no remedy at all.

62. Need not prove that the defendant’s conduct was unreasonable.
STRICT LIABILITY
Need not prove that the defendant’s conduct was unreasonable.

63. STRICT LIABILITY (cont’d)
Strict liability may be imposed if:
The defective condition is unreasonably dangerous to the user.
Seller is in business to sell this product.
The product reaches the user without substantial change.

64. STRICT LIABILITY (cont’d)
Strict liability may be imposed EVEN if:
The seller exercised all reasonable care.
There is no contractual relationship.

65. CONTEMPORARY TRENDS
Strict liability may be imposed based on design, manufacture or failure to warn.

66. CONTEMPORARY TRENDS (cont’d)
Tests to measure design and warning cases include:
Consumer expectation
Risk-utility tests

67. LEGISLATION Lemon Laws Consumer Protection Laws
Magnuson-Moss Warranty Act

68. CHAPTER 22
Performance
and Remedies

69. “Performance and remedy under the Code reflect contemporary commercial practices but also demand a satisfactory level of sensible, ethical behavior.”

70. GOOD FAITH
The Code requires good faith in the performance and enforcement of every contract.

71. CONFORMING GOODS Conforming goods satisfy the contract terms.
Non-conforming goods do not.

72. SELLER’S OBLIGATION
The seller must tender the goods, which means to make conforming goods, available to the buyer.

73. PERFECT TENDER RULE
Under the perfect tender rule, the buyer may reject the goods if they fail in any respect to conform to the contract.
Parties may limit the effect of the perfect tender rule by agreeing to accept imperfection in the goods.

74. RESTRICTIONS ON THE PERFECT TENDER RULE
Usage of trade
Course of dealing
Course of performance

75. CURE
When the buyer rejects non-conforming goods, the seller has the right to cure, by delivering conforming goods before the contract deadline.

76. DESTRUCTION OF GOODS
If identified goods are totally destroyed before risk passes to the buyer, the contract is void.
If identified goods are partially destroyed, the buyer may choose whether to accept the goods at a reduced price or void the contract.

77. COMMERCIAL IMPRACTICABILITY
A supervening event excuses performance of a contract, if the event was not within the parties’ contemplation when they made the agreement.

78. BUYER’S OBLIGATIONS (and a Few Rights)
The buyer must provide adequate facilities to receive the goods.
Right to inspection
Right to partially accept

79. BUYER’S OBLIGATIONS (and a Few Rights) – (cont’d)
May revoke acceptance only if the nonconformity substantially impairs the value and only if he had a legitimate reason for the initial acceptance.

80. BUYER’S OBLIGATIONS (and a Few Rights) – (cont’d)
May reject non-conforming goods by notifying seller within a reasonable time.

81. BUYER’S OBLIGATIONS (and a Few Rights) – (cont’d)
May reject a non-conforming installment, only if it substantially impairs the value of that installment and cannot be cured.

82. REMEDIES: ASSURANCE
When there are reasonable grounds for insecurity, a party may:
demand written assurance of performance from the other party, and
until he receives it, generally may suspend his own performance.

83. REMEDIES: REPUDIATION
A party repudiates a contract by indicating that it will not perform.
When either party repudiates the contract, the other party may:
for a reasonable time await performance or
resort to any remedy for breach of contract.

84. SELLER’S REMEDIES Cancel the contract Stop or refuse delivery
Identify goods to the contract
Resale

85. Accept Non-Conforming Goods
BUYER’S REMEDIES
Cancel the contract
Recover money paid
Cover
Accept Non-Conforming Goods

86. Buyer’s Remedies (cont’d)
Obtain Incidental and Consequential Damages
Obtain Specific Performance
Obtain Liquidated Damages

87. DAMAGE LIMITATIONS AND EXCLUSIONS
A court generally will not enforce a limitation that leaves the injured party with no remedy.
A court will not enforce an unconscionable exclusion of consequential damages.

88. PROPOSED UCC REVISIONS
Good Faith
Seller’s damages
Buyer’s damages

89. CHAPTER 23
Creating a
Negotiable
Instrument

90. COMMERCIAL PAPER Commercial paper is a contract to pay money.
It can be:
A Substitute for Money
A Loan of Money

91. PROMISSORY NOTE
The possessor of a piece of commercial paper has an unconditional right to be paid, as long as:
the paper is negotiable;
it has been negotiated to the possessor;
the possessor is a holder in due course; and
the issuer cannot claim any of the limited number of “real” defenses.

92. TYPES OF NEGOTIABLE INSTRUMENTS
Note (also called a promissory note) is a promise to pay money.
Draft is an order directing someone else to pay money for you

93. RIGHTS
The possessor of non-negotiable commercial paper has the same rights--no more, no less--as the person who made the original contract.
The possessor of negotiable commercial paper has more rights than the person who made the original contract.

94. REQUIREMENTS FOR NEGOTIABILITY
The Instrument Must:
Be in Writing.
Be Signed by the Maker or Drawer.
Contain an Unconditional Promise or Order to Pay.

95. REQUIREMENTS FOR NEGOTIABILITY (cont’d)
State a Definite Amount of Money.
Be Payable on Demand or at a Definite Time.
Be Payable to Order or to Bearer.

96. DEFINITIONS Trade acceptance Sight draft Time draft Order paper
Bearer paper

97. INTERPRETATION OF AMBIGUITIES
When terms contradict, three rules apply:
Words take precedence over numbers.
Handwritten terms prevail over typewritten terms.
Typed terms prevail over printed terms.

98. NEGOTIATION
Negotiation means that an instrument has been transferred to the holder by someone other than the issuer.

99. INDORSEMENT An indorsement is the signature of the payee.
Blank Indorsement
Special Indorsement
Restrictive Indorsement

100. HOLDER IN DUE COURSE
A holder in due course has an automatic right to receive payment for a negotiable instrument (unless issuer can claim one of a few “real” defenses).

101. NOTICE OF OUTSTANDING CLAIMS OR OTHER DEFECTS
The instrument is overdue
The instrument is dishonored
The instrument is altered, forged, or incomplete
The holder has notice of certain claims or disputes

102. SHELTER RULE
Under the shelter rule, the transferor of an instrument passes on all of his rights.
When a holder in due course transfers an instrument, the recipient acquires all the same rights even if he is made a holder in due course himself.

103. DEFENSES
Real and personal defenses are valid against an ordinary holder; only real defenses can be used against a holder in due course.

104. DEFENSES (cont’d) Real Defenses
Forgery, Bankruptcy, Minority, Alteration Duress, Mental Incapacity, Illegality, and Fraud in the Execution

105. DEFENSES (cont’d) Personal Defenses
Breach of Contract, Lack of Consideration, Prior Payment, Unauthorized Completion, Fraud in the Inducement and Non-Delivery

106. CLAIMS IN RECOUPMENT
A claim in recoupment is a refusal to pay the full amount of the instrument because the payee owes the issuer another debt. Issuer subtracts the prior debt from the payoff of the current instrument.

107. CONSUMER EXCEPTION
A consumer credit contract is one in which the seller is also the lender.
In such cases, the Federal Trade Commission requires a specifically-worded notice to be included on the contract, making it non-negotiable.

108. CHAPTER 24
Liability for
Negotiable
Instruments

109. “It is never wise to play an important game without understanding the rules. The rules of negotiable instruments are complex, but important because this game is played by virtually everyone.”

110. LIABILITY
Signature liability – liability of someone who has signed a document.
Warranty liability -- liability of someone who has received payment.

111. PRIMARY VS. SECONDARY LIABILITY
Someone with primary liability must pay unless he has a valid defense.
Someone with secondary liability must pay only if the person with primary liability does not pay.

112. THE LAW OF LIABILITY
The holder of an instrument must first try to get payment from the party with primary liability before making demands against a party with secondary liability.

113. THE PAYMENT PROCESS Presentment Payment, or Dishonor
Notice of Dishonor

114. SIGNATURE LIABILITY The maker is primarily liable.
The drawer of a check has secondary liability.
The bank (drawee) is not liable to the holder and owes no damages to the holder for refusing to pay the check.
Indorsers are secondarily liable.

115. SIGNATURE LIABILITY -- INDORSERS
Indorsers are not liable if:
they write the words “without recourse” next to their signature on the instrument,
a bank certifies the check,
the check is presented for payment more than 30 days after the indorsement, or
the check is dishonored and the indorser is not notified within 30 days.

116. ACCOMMODATION PARTY
An accommodation party (sometimes called a co-signer or guarantor) is someone who adds their signature to an instrument in a capacity other than issuer, acceptor or indorser, in order to be liable for the instrument.

117. ACCOMMODATION PARTY (NOT ME!)
An accommodation party has the same liability to the holder as the person for whom she signed.

118. AGENT
To avoid personal liability when signing an instrument, an agent must:
indicate that they are signing as an agent and
give the name of the principal.

119. PRINCIPAL LIABILITY
The principal is liable if the agent signs correctly, the agent signs just her own name, or the agent signs only the name of the principal.

120. RULES OF WARRANTY LIABILITY
The culprit is always liable.
The drawee bank is liable if it pays a check on which the drawer’s name is forged.
In any other case of wrongdoing, a person who first acquires an instrument from a culprit is ultimately liable to anyone else who pays value for it.

121. TRANSFER WARRANTIES
When someone transfers an instrument, they warrant that:
They are the holder of the instrument,
All signatures are authentic and authorized,
The instrument has not been altered,
No defense can be asserted against them, and
As far as they know the issuer is solvent.

122. PRESENTMENT WARRANTIES
Apply to someone who demands payment for an instrument from the maker, drawee, or anyone else liable.

123. PRESENTER WARRANTIES
Anyone who presents a promissory note for payment warrants only that he is a holder of the instrument.
Presenter warrants that:
He is a holder
The check has not been altered, and
He has no reason to believe the drawer’s signature is forged.

124. OTHER LIABILITY RULES Conversion Liability Imposter Rule
Fictitious Payee Rule
Employee Indorsement Rule

125. NEGLIGENCE I
Anyone negligent in creating or paying an unauthorized instrument is liable to an innocent third party.

126. Anyone careless in paying an unauthorized instrument is liable.
NEGLIGENCE II
Anyone careless in paying an unauthorized instrument is liable.

127. NEGLIGENCE III
Anyone careless in allowing a forged or altered instrument to be created is also liable.

128. CRIMES
Bouncing a check
Check Kiting
Forgery

129. DISCHARGE Discharge means that liability on an instrument terminates.
By Payment
By Agreement
By Cancellation
By Certification
By Alteration

130. DISCHARGE OF AN INDORSER OR ACCOMMODATION PARTY
The UCC provides that virtually any change in an instrument that harms an indorser or accommodation party also discharges them unless they consent to the change.

131. Liability for Negotiable
CHAPTER 25
Liability for Negotiable
Instruments:
Banks and
Their Customers

132. “This area of law is important because virtually everyone has written a check or used an ATM and because the law regarding these transactions is changing rapidly.”

133. WHO’S WHO Depositary Bank Payor Bank Intermediary Bank
Collecting Bank.
Presenting Bank

134. BANK’S DUTY TO PROVIDE INFORMATION
A bank is not required to provide a monthly statement, but most do.
A statement (if provided) must disclose:
Interest rate paid
Amount of interest earned
Fees imposed by the bank
The number of days covered by the statement

135. MORE DUTIES
When an account is opened (and in ads), the bank must disclose:
Interest rate paid
How long this rate will be in effect
Requirements to earn the advertised rate
Fees or penalties imposed by the bank

136. THE BANK’S DUTY TO PAY
A bank must pay a check if the check is authorized by the customer and complies with the terms of the checking account agreement.

137. NO PAYMENT REQUIRED
A bank is not required to pay a check on an overdrawn account, but may choose to do so.

138. WRONGFUL DISHONOR
If a bank violates its duty and wrongfully dishonors an authorized check, it is liable to the customer for all actual and consequential damages.

139. DIFFICULT SITUATIONS FOR A BANK
The Death of a Customer
Incompetent Customers

140. INVALID INSTRUMENTS
Forgery
Alteration
Completion

141. DATING ON CHECKS
Stale Checks
Post-dated Checks

142. STOP PAYMENT ORDERS
As a general rule, if a bank pays a check over a stop payment order, it is liable to the customer for the loss he suffers.

143. ELECTRONIC BANKING
Today’s consumers have options for banking that were barely imagined a generation ago:
Automatic Teller Machines (ATMs)
Point of Sale terminals
Automatic deposit systems
Bill payment over the telephone lines or by internet

144. ELECTRONIC FUND TRANSFER ACT OF 1978
Employers may require all employees to accept payment by electronic transfer (direct deposit), but may not require that it go to a particular bank.

145. MORE
Electronic fund transfer cards (ATM, debit, etc.) sent without a customer’s request must be invalid until the consumer activates it.

146. Preauthorized transfers must be authorized in writing. Errors
AND MORE
Preauthorized transfers must be authorized in writing.
Errors
If reported within 60 days, a bank must investigate an error within the next 10 days or provisionally credit the account until the investigation can take place.

147. AND STILL MORE!
Limited Consumer Liability for Unauthorized Transactions (stolen ATM card)
Bank’s Liability

148. GOOD GRIEF!
System Malfunctions
Disclosure

149. WIRE TRANSFERS
A wire transfer is a type of payment order that “pushes” money out of the issuer’s account into the payee’s.
The originator is the person who sends the payment order; the beneficiary receives the payment order.

150. BANK ERRORS Bank Sends the Wrong Amount
Bank Sends Money to the Wrong Person

151. PRIVACY
Banks and other financial institutions must disclose to consumers any non-public information they wish to reveal to third parties.

152. CHAPTER 26
Secured
Transactions

153. “Secured transactions are essential to modern commerce but create pitfalls for the unknowing. A person doing business in ignorance of Article 9 risks losing goods and money.”

154. REVISED ARTICLE 9 Governs secured transactions in personal property.
Applies to any transaction intended to create a security interest in personal property or fixtures.
About ½ of all UCC lawsuits involve Article 9.

155. DEFINITIONS
Fixtures
Security interest
Secured party
Collateral

156. MORE DEFINITIONS Debtor Obligor Security agreement Default
Repossession.

157. And More Definitions Perfection Financing statement Record
Authenticate

158. ATTACHMENT OF A SECURITY INTEREST
In order to obtain a security interest, an attachment must take place by the two parties making a security agreement and either:
(1) it is in writing, describes the collateral, and is signed by the debtor, or .

159. STILL ATTACHING (2) the secured party has possession of the collateral
The secured party gave value in order to get the security agreement.
The debtor has rights in the collateral.

160. FUTURE PROPERTY
The parties may agree that the security interest attaches to after-acquired (future) property which are items the debtor obtains after the parties made their security agreement.

161. PERFECTION
Perfection guarantees the collateral’s availability in case of default.
Methods of Perfecting
Filing a financing statement
Possession of the collateral
Purchase money security interest in consumer goods (PMSI)

162. PROTECTION OF BUYERS
Generally, once a security interest is perfected, it remains effective regardless of whether the collateral is sold, exchanged, or transferred.

163. BUYERS IN ORDINARY COURSE OF BUSINESS
One who buys goods in good faith from a seller who routinely deals in such goods.
A BIOC takes the goods free of a security interest created by his seller even though the security interest is perfected.

164. PROTECTION OF BUYERS (cont'd)
Buyers of Consumer Goods
Buyers of Chattel Paper, Instruments, and Documents

165. LIENS
A lien is a security interest created by law (rather than by agreement).
UCC does not cover.

166. DEFAULT AND TERMINATION
Default: when debtor fails to make payments due or enters bankruptcy.
Taking Possession of the Collateral

167. DISPOSITION OF COLLATERAL
A secured party may sell, lease, or otherwise dispose of the collateral in any commercially reasonable manner.
Right of Redemption

168. PROCEEDING TO JUDGMENT
Upon default, a secured party may sue the debtor for the full debt instead of seizing the collateral.

169. THE END
AND WHEN THE DEBT IS PAID THE SECURITY AGREEMENT IS TERMINATED JUST LIKE THIS LECTURE!