The Uniform Commercial Code Explained
The Uniform Commercial Code was created in the early 1950s primarily to provide more consistency in commercial regulations across states. It continues to be governed by the National Conference of Commissioners on Uniform State Laws and the American Law Institute, and gives governors of individual states the power of regulation. By giving the option for individual states to adopt some or all of the code, the UCC has been able to more quickly implement changes to the code and update language to accommodate evolving business practices and technology. It does not replace existing state laws or federal laws that apply to a specific business area – such as the UCC’s Article 2 dealing with sales of goods and services , or Article 5, which applies to letters of credit. Rather, it adds a new level of consistency among states that address interstate commercial transactions.
The provisions of the UCC apply when a state adopts the full code or one or more articles of the code and the transaction being considered involves people doing business in that state. The code provides a solid structure so that people who want to do business in different states have a set level of protection and guidelines that govern the activities and prevent issues from arising due to a misunderstanding of the different governing styles in each state.
Principles Underlying Common Law
In contrast to the statutory-based Uniform Commercial Code, the common law of the various States emerged gradually over many years. A major source of the common law is customary law, which consists of rules arising from the business practices of a given industry or sector. Judges develop these customary law rules by observing and analyzing how merchants act with each other. Common law also consists of case law, which is created when an appellate court creates a precedent in a decision intended to guide lower courts. Another source of common law is statutes, enacted by legislatures in particular states. Statutory law sometimes adopts a specific provision of the common law or creates a new rule, such as an updated guideline for the governing of check collections in a jurisdiction.
To provide some historical context, England developed the common law during the Norman conquest of England in 1066. The kings of England helped the common law to grow by selecting judges to decide legal disputes. These judges then became responsible for ensuring that law became uniform throughout each of their respective jurisdictions.
Similarly, in the American colonies, judges created law through decision-making in the colonial courts. In the mid-1800s, legislatures in the United States began to codify certain areas of law, developed primarily through custom. Some laws, including the law of contracts and torts, became statutes based on English law. Prior to the UCC, states would adopt these laws, but they sometimes adopted them under varying language. For example, states differed in the language describing the elements required to prove fraud. This caused commercial disputes prior to the UCC due to confusion about what the law actually was.
Today, many states view the Uniform Commercial Code as a restatement of the common law, since its provisions merely change the language of the common law, while the core concepts remain the same.
UCC vs Common Law: A Side by Side Examination
When comparing the UCC with the common law, two key differences arise as the major points of distinction between these two forms of law. The first is that the UCC’s treatment of a contract is outside of the common law, which allows potential remedies (such as warranty) to be offered under the UCC even if such protections were not provided under the common law. Second, the UCC is flexible while also providing predictability in many commercial practices. The flexibility that the UCC provides is beneficial because there are constant amendments over time. Without this flexibility, the UCC may have lacked the widespread utilization that it has today.
Another aspect to consider is the relationship between the UCC and common law in contract formation. The UCC states that it will provide relief for bad faith breaches even if the common law has no such precedent. On its face, this seems to indicate that UCC rules will always prevail, especially as it relates to amendments. However, this is not fair to say. The reason for this is that common law principles apply when there are no specific statutory provisions. The UCC is typically not intended to displace all common law principles, only those that are specifically addressed by the code itself. Therefore, the relationship between the UCC and common law is one that more times than not provides extensive support, particularly as regards contract formation.
The UCC will provide predictability and flexibility for parties involved in contractual agreements. Parties to a contract can depend on the fact that contract formation and terms will provide flexibility whereas the UCC also provides predictability in actions. This creates a platform whereby parties can commence commercial transactions without any forward looking liability.
Benefits of the Uniform Commercial Code
A major advantage of the UCC is that this body of laws is consistent across jurisdictions. The UCC is comprised of nine articles, and each state adopts its own version of the UCC (called a "Revised UCC") to a greater or lesser extent. While there are many subtle differences between the various Revised UCCs, the overall framework is consistent, which allows parties to plan and conduct their business with certainty. This is particularly important in interstate business transactions where parties may be dealing with different states, and different legal frameworks, at any given time.
By contrast, under the common-law system, contract law in each state may differ on the details and nuances of how certain types of contracts fit into the broad theories of contract formation. Consequently, juries and judges may decide on matters, such as whether or not a contract has been formed, differently from one another and differently from other states.
The consistency provided under the UCC allows for a more efficient use of resources. Parties do not spend hours poring over the terms of the contracts, only to have a court in a different jurisdiction interpret key provisions differently than they intended. Likewise, court docket time spent on resolving contract issues is reduced since court interpretation will be less likely to be split.
Additionally, it is relatively easy for parties to determine whether a specific series of transactions are subject to a contract under the UCC. This allows the parties to proceed with certainty or to negotiate a different agreement if the terms are deemed unacceptable.
In addition to uniformity in the statutes, the UCC’s Article 2 (relating to the sale of goods) contains several detailed sections that address the unique needs of businesses. For example, UCC Article 2 requires that disclaimers of warranties must be conspicuous and sets out requirements for different forms of conspicuousness. UCC § 2-316. The UCC also includes standard performance and liability provisions that many courts would enforce even absent contractual provisions. UCC §§ 2-503; 2-509.
Because the UCC is often meritorious on its face, businesses sometimes mistakenly believe issues will be settled under the UCC rather than under common law contract principles. Courts will not fully ignore the common law merely because the contract at issue falls under one of the UCC’s articles. For example, even if a contract for obligations that fall under Article 2, "Sales," the contract may also contain provisions for services. Where this occurs, courts will apply the common law’s practical test and will look to see which of the elements of the contract is more dominant.
Disadvantages and Criticisms of the Uniform Commercial Code
One of the core criticisms of the Uniform Commercial Code is its complexity. Although the code was created to streamline and standardize commercial law across states, it often complicates matters by adding several new layers of state-specific law to simple transactions. While this may sound simple enough, the increased complexity can lead individuals and organizations to become confused as to the lawful requirements of their transactions. The Uniform Commercial Code has had no better friend in the neophyte lawyer hoping to start practicing or to further his existing practice.
According to a 1986 article in the Harvard Law Review, the UCC’s "one-size-fits-all" approach leads to unfortunate results in the majority of cases. The authors go on to offer what is likely the most frequently repeated criticism of the UCC in the modern era: Its lack of predictability undermines its effectiveness as a business law handbook because the act often defines the same legal terms in different ways throughout the code. While the drafters of the UCC hoped to create a standardization for state law, sometimes that standardization comes with unwelcome surprises.
The UCC also struggles with some conflicts with the local state laws it was presumed to replace. In many jurisdictions, despite the UCC’s broad, quasi-federal law application, local courts continue to uphold longstanding state law practices and sometimes reject UCC’s approach. While the UCC certainly eased the way for the codification of commercial law statutes , it cannot forever replace those provisions of law that are strictly of state origin. Policymakers must remember that the UCC is not and does not pretend to be a complete guide to commercial law. At best it is a guide to particular areas of dispute faced by businesspersons.
The occasional conflict between the UCC and common law also introduces problems into the system. Although the UCC derives from and is a part of American common law, it sometimes contradicts common law principles. A common criticism of the UCC is that it removes the ability of judges to exercise discretion, instead forcing them to rule according to the letter of the law. This can result in what some courts call "mechanistic justice."
Another major challenge facing the UCC is the consistency of its application. Since some states never ratified certain UCC Articles, the applicability of the code varies from state to state. For example, in the states that did not ratify UCC Section 2-207, there is no "battle of the forms" provision to determine the exact terms of a contract. In those states, additional bargaining may be required when parties attempt to contract under terms that would otherwise be covered by Section 2-207. Those seeking only uniformity when doing business across the country will have difficulty adapting their companies’ practices to the varying nature of the UCC from state to state.
When the Common Law Rules in Favor Over UCC
When common law prevails is a concept that requires in-depth discussion because the Uniform Commercial Code is not ubiquitous. That is to say that some types of transactions fall outside the scope of the UCC. When the subject matter does not concern itself with goods, for example, the UCC will not provide the rules to apply. Rather, the common law of the state will apply instead.
Some illustrative examples of separable types of transactions that continue to fall outside the scope of the UCC include the following:
Real Estate Transactions
Other service or intangible transactions
Common law principles will apply to the transaction above. Some examples include: express and implied warranties; the statute of frauds, especially the statute of frauds; failure of consideration; undue influence; fraud; economic duress; unconscionably; capricious performance; correlation of failure, breach or defect with consideration; the Statute of Limitations; and general negligence principles.
Looking Ahead: The Convergence of UCC and Common Law
A critical question is whether the UCC will adapt to incorporate tenets of common law additional rules or whether the common law will continue to evolve and develop alongside the UCC. The process of balancing these two, often conflicting, "systems" could soon accelerate as a result of continuing technological developments in commerce, where cross-border sales and digital transactions are fast becoming the new normal. For example, even though Article 2 of the UCC is intended to govern transactions in goods (sales), an ever-increasing number of transactions involve intellectual property violations, digital goods, payment processing systems, data transmission and other software-driven transactions. As a result, many companies now have to not only comply with Article 2, but increasingly with Article 9 and common law , along with the various federal and state privacy and data protection laws. At this point, all involved—legislators, companies, customers, etc.—must balance the goals of legal uniformity and predictability with commercial realities. While the rules related to sales of goods and secured transactions are becoming harmonized, via the UCC, those rules are also complemented and, to some extent, superseded by existing common law principles governing the other side of the equation—payment and credit transactions.
As technology changes the bouquet of transactions any given company engages in, the UCC may need to follow suit—or be rendered moot. We can expect and, in fact, hope for, a more efficient, predictable, consistent, and harmonized body of law that keeps pace with technology in dealing with these types of transactions.