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Application of the UCC

The Uniform Commercial Code (UCC) is a large body of regulations that governs commercial business transactions.  Generally, the UCC deals with transactions of personal property but not of real property.  The code was first published in 1952.  The UCC was developed to address two growing problems in U.S. business.  The increasingly unmanageable legal and contractual requirements of doing business and the differences in state laws that made it difficult for business people from different states to do business with one another.

The UCC’s essential elements address commercial transactions through a single uniform code.  Statutory and common law approaches are not applicable in the case of the UCC.  This is because states can apply the UCC differently.  States can make modifications to the code based on local commercial usages.

The UCC is applicable to supplemental bodies of law.  The UCC was drafted as a backdrop to the existing bodies of law.  The bodies of law include common law and equity. However, the UCC is now the primary source of commercial law rules.  The UCC is given the effect of law only when states adopt it.  The states in the U.S. can make variations in the UCC as desired before implementing it as law.  Therefore, common law and equity principles can supplement provisions of the UCC.  However, they cannot be used to supplant its provisions, or the purposes and policies those provisions reflect.  This is unless a specific provision of the code provides otherwise.  If there is no such statutory provision allowing common law or equity principles to act as to supplant the UCC, the code preempts principles of common law and equity that are inconsistent with either its provisions or its purposes and policies.

When courts have difficulty implementing the exact substance provided in the UCC, other laws that can supplement the code can be used by the courts.  This is where common law displaces the UCC.  However, laws inconsistent with the purposes and policies of the UCC should not be applied in these cases.  Commercial contracts made by supplemental bodies of law are acceptable only if they do not contravene the provisions and policies of the UCC.  The laws that are inconsistent with the provisions of the UCC can be explicitly displaced by the UCC.

The UCC is applicable in sales, leases, negotiable instruments, bank deposits, funds transfers, letters of credit, bulk transfers and bulk sales, warehouse receipts, bills of lading and other documents of title, investment securities, and secured transactions of commercial transactions.

Article 2 of the UCC deals with transaction of goods.  It does not apply to any transaction intended to operate only as a security transaction.  However, the Article does not impair or repeal any statute regulating sales to consumers, farmers or other specified classes of buyers.  In some circumstances, the UCC has been held not to be applicable to a franchise.  This is because the code does not apply outside the sale of goods.

Provisions of Article 3 of the UCC govern negotiable instruments.  Article 4 of the UCC deals with the liability of a bank for action or non-action with respect to an item handled by it for purposes of presentment, payment, or collection.  The law of the place where the bank is located has more applicability in matters of bank deposits.

Article 5 governs letters of credit.  Generally, a term in an agreement or undertaking excusing liability or limiting remedies for failure to perform obligations is not sufficient to vary obligations prescribed by this article.  Article 6 deals with bulk sale.  The article does not apply to a transfer made to secure payment or performance of an obligation, a transfer of collateral to a secured party, a sale or retention of collateral.

The UCC applies on warehouse receipts, bills of lading and other documents of title according to the Article 7 of the code.  Meanwhile, Article 8 is concerned with the issuance, purchase, and registration of investment securities.  It replaced the Uniform Stock Transfer Act.  Article 9 is another provision that is particularly important to small business owners. The Article deals with secured transactions, sales of accounts, and chattel paper.  Article 9 has supplanted a number of earlier laws, including the Uniform Trust Receipts Act, the Uniform Conditional Sales Act, and the Uniform Chattel Mortgage Act.

The most recent addition to the UCC, Article 4A, covers corporate-to-corporate electronic payments.  This includes wire transfers and automated clearinghouse credit transfers.  This article has been adopted by most states.

The UCC is periodically reviewed and revised by the National Conference of Commissioners on Uniform State Laws (NCCUSL), and the American Law Institute (ALI) according to new needs.  The modifications are adopted by the various states according to varying need of the states and provided the effect of law.

Inside Application of the UCC