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

transcript

THE UNIFORM COMMERCIAL CODE

CHAPTERS

19, 20, 21, 22, 23, 24, 25, 26

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.”

TOPIC COVERAGE

• Sales• Ownership

• Risk associated with ownership• Warranties

• Performance

MORE TOPIC COVERAGE

• Remedies

• Negotiable instruments

• Banks

• Secured transactions

HISTORY

LAW MERCHANTTO

THE UCC

(In 60 seconds or less)

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

1. To simplify, clarify and modernize the law of commercial transactions

2. To permit expansion of commercial transactions

3. To establish uniformity

SALES UNDER THE UCC

• Article 2Applies to the sale of goods

• Article 2AGoverns 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.

CONTRACT FORMATION

The law should reflect business

reality!

FORMING A CONTRACT

QUICK AND INFORMAL

Three basic rules:1. In any manner that shows

agreement.

2. Moment of making is not crucial.

3. 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.

OFFER Offeree intendsto accept

Offeree does NOT intendto accept

NOCONTRACT

Acceptsterms

Contract

Addsterms

Usuallyforms a contract

Changesterms

Usuallyforms a contract

Accepts IF offeror accepts new

NO contract (is a new offer)

Click once to start self-building graphic.

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

“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.

BONA FIDE PURCHASER

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!

A CREDITOR

Someone with a financial stake in the goods the

merchant is selling

CREDITOR’S RIGHTS

Depends upon if it is an

– Ordinary SalesOr 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

BAILMENT

When one person or company is legally holding goods for the benefit

of another.

CREATES SPECIAL PROBLEMS IF AGREEMENT BREACHED

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.

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 WARRANTY OF MERCHANTABILITY

IMPLIED WARRANTIES (cont’d)

Implied Warranty of Fitness for a Particular Purpose

The seller of goods warrants that her title is

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

DISCLAIMERS (cont’d)

Three other rules:–General rule

–Remedy Limitations

–Consequential Damages

PROPOSED UCC REVISIONS

Sellers attempting to limit warranties would be required to use very explicit language,

conspicuously placed.

PRIVITY

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.

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

“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

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.

• May reject non-conforming goods by notifying seller within a reasonable time.

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

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

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.

“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.

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.

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.

“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

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.

Electronic fund transfer cards (ATM, debit, etc.) sent

without a customer’s request must be invalid until the consumer activates it.

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.

“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 PerfectingFiling a financing statementPossession of the collateralPurchase 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

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!