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

THE UCC

HOW TO UNDERSTAND THE WORLD OF COMMERCIAL TRANSACTIONS

“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.”

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

Negotiable instruments MORE TOPIC COVERAGE Remedies Negotiable instruments Banks Secured transactions

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

FIRST WHAT IS A LAW MERCHANT ?

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

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

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

CHAPTER 19 Introduction to Sales

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

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.

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.

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

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

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

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

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

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

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

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.

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)

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

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

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.

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

CHAPTER 20 Ownership and Risk

“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.”

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

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.

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

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.

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

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.

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!

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

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

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

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

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

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

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

CHAPTER 21 Warranties and Product Liability

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

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

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

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

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

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.

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

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

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

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

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

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

When two parties contract, they are in privity.

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

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

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

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

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.

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

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

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

LEGISLATION Lemon Laws Consumer Protection Laws Magnuson-Moss Warranty Act

CHAPTER 22 Performance and Remedies

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

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

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

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

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.

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

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

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.

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

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

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.

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

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.

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.

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.

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

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

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

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.

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

CHAPTER 23 Creating a Negotiable Instrument

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

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.

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

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.

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

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.

DEFINITIONS Trade acceptance Sight draft Time draft Order paper Bearer paper

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.

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

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

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).

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

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.

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

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

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

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.

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.

CHAPTER 24 Liability for Negotiable Instruments

“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.”

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

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.

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.

THE PAYMENT PROCESS Presentment Payment, or Dishonor Notice of Dishonor

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.

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.

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.

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

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.

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.

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.

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.

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

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.

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

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

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

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

CRIMES Bouncing a check Check Kiting Forgery

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

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.

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

“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.”

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

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

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

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.

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

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.

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

INVALID INSTRUMENTS Forgery Alteration Completion

DATING ON CHECKS Stale Checks Post-dated Checks

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.

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

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.

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

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.

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

GOOD GRIEF! System Malfunctions Disclosure

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.

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

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

CHAPTER 26 Secured Transactions

“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.”

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.

DEFINITIONS Fixtures Security interest Secured party Collateral

MORE DEFINITIONS Debtor Obligor Security agreement Default Repossession.

And More Definitions Perfection Financing statement Record Authenticate

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 .

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.

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.

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)

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

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.

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

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

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

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

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

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