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The Uniform Commercial Code (UCC) and Texas Code

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Uniform Commercial Code and Texas Code

1.0 Introduction to the UCC

The Uniform Commercial Code (UCC) refers to a comprehensive set of rules and regulations guiding commercial transactions between all states and territories within the U.S. The list of transactions includes sales of goods, contracts, cash lending/borrowing, leases, banking transactions, real estate etc. UCC should not be interchanged with a federal law. It is, however, an outcome of deliberations from the American Law Institute (ALI) and National Conference of Commissioners on Uniform State Laws (NCCUSL). Both organizations are private establishments obligated to conduct legal reviews for recommendations that led to the enactment and adoption of UCC by all states of the U.S. federation. According to the U.S. Small Business Administration (SBA), the legislature in every U.S. state, nonetheless, have the legal backing to either adopt the Uniform Commercial Code or carry out modifications—where necessary—to achieve state objectives. In the event that a state government, through its legislative arm, adopts and approves UCC, the rules and regulations gain status as a state law included in statutes of governance. In accordance with the laws guiding governmental processes in the U.S., all fifty (50) states of the federation, including the District of Columbia and other U.S. territories, have adopted UCC but with various degrees of de rigueur amendment (Speidel., 1981).

1.1 An Overview of UCC

The UCC is a complex, large collection of laws established by the American government to guide business activities. The “uniform” nature of UCC implies that these legal rules are simplified and dynamic to fit the ever-changing nature of modern-day commercial activities between states. The UCC is thus intended to be predictable, efficient and consistently enforced across all U.S. states and territories (Macaulay et al., 20100.

The UCC is categorized under 11 Articles divided into parts and sections. Though these will be discussed in the latter part of this study, the following is an insight into the list of titles found on the United States Uniform Commercial Code:

  1. Article 1: General Provisions (includes definition of terms and rules of interpretation)
  2. Article 2: Sales (guidelines on sale of goods and services)
  • Article 2A: Leases (guidelines of leasing goods, for example, in real estate)
  1. Negotiable Trade Instruments (refer to commercial documents such as drafts and promissory notes)
  2. Bank Deposits and Collection (guidelines on establishing financial institutions, banking operations, collection and clearing of checks)
  3. Fund transfers (guidelines for inter-bank fund transfers)
  • Letters of Credit (guidelines for issuing, accepting and clearing letters of credit between banks, businesses and individuals)
  • Bulk Transfers and Bulk Sales (guidelines of liquidating assets and auctioning). Most states in the U.S. have annulled this law
  1. Documents of Title such as Bills of Lading and Warehouse Receipts etc (guidelines for storing and clearing goods)
  2. Investment Securities (guidelines on financial securities and tangible or intangible assets which are easily converted into cash)
  3. Secured Transactions (guidelines on business transactions covered by security interests, for example, the legal rights of ownership exercised on goods/property owned by businesses or individuals during bankruptcy)

Every UCC section contains one regulation as seen in UCC 2-205, where “Firm Offers” explained the procedures and situations when commercial activities or agreements on buying and selling of goods are considered irrevocable. For example, when a buyer purchases goods with a written assurance from the seller confirming by its terms that the transaction is open, this is not revocable throughout the duration therein stated, for lack of consideration—even if no specific period is mentioned. However, in no circumstance should this “period of irrevocability” extend beyond 3 months but the offeror must be willing to sign any such documented assurance term provided by the offeree.

The size of UCC sections are not equal. Section 2-205, for instance, is precise and short compared to others that are relatively large in context, longer, and with many sub-sections as well as paragraphs. One essential feature of the UCC sections is that each one depends on the other as seen in Sections 2-104 and 2-105 which defined the terms “merchant” and “goods” respectively (Macaulay et al., 2010).

2.0 UCC Contracts and Common Law

Business contracts with the U.S. is ruled by two main sources of law vis-a-vis: The Uniform Commercial Code and common law. For example, UCC Article 2 contains guidelines on the contractual relationship between merchants and the process and condition for sale of goods which require two kinds of contract rules for “the people” and for sellers. In this section, we will discuss the elements of common law and UCC to highlight their different requirements in contract development (Rocks., 2018).

2.0.1 Common Law Contracts

Common laws are established to control and protect execution of contract terms for services, including other contracts under UCC. Contract formation requirements under common law is tougher when compared to the UCC, which has more characteristics of flexibility. Nonetheless, in any circumstance where the elements of common law are missing in the contract formation for merchants and goods, such an agreement becomes void, and by legal implications “voidable”.

The main features of common law as is applicable in contract formation are:

  1. There should be an offer
  2. The offer must be acceptable and declinable
  • There should be legal

In legal context, both offer and acceptance must conform with trade demands between a buyer and seller to for mutual consent, which is required to make contracts enforceable. The said contract must also exist for legal reasons. Most importantly, all parties are required to possess the capacity to consent to the contract terms and acceptance must be unequivocal, for example, when a seller says to you, “I’m selling my car to you for five thousand U.S. Dollars only,” this situation presents an open transaction with a valid offer because it contains the following: price of goods, recipient of a business proposal, and the item offered for sale i.e. the car. These contract features empower the offeree to either accept or decline.

However, there should be a correlation in “acceptance” under common law contracts. This implies that an acceptance must possess similar characteristics of the offer before it constitutes a lawful acceptance, for instance, to show that the offeree has accepted the contract terms, an ideal response should be something like, “I agree to buy your car for five thousand U.S. Dollars. If the offeree makes a counteroffer, saying something like “I agree to purchase your car for four thousand U.S. Dollars, this implies no acceptance because it is not a “mirror image” of the initial offer. A counteroffer therefore, invariably, means a rejection of the previous offer and this may be outright (by clearly decline and offer without mincing words) or by counteroffer. In both situations, the buyer may freely leave the business premises without the priced item. On the other hand, the seller accepts the interaction as a failed deal even though the offeree had offered to pay four thousand U.S. Dollars for the car. But, if the offeror withdraws a business proposal before a buyer accepts the terms, this implies that the element of acceptance had been revoked. In essence, the seller has legal rights to reduce the duration of a contractual offer and is not liable to prosecutions for revoking the validity period, especially if the offer was rejected during that time.

Bilateral and Unilateral Contracts

In the foregoing explanations, we presented a bilateral agreement between an offeror and offeree where both parties to a contract agreement had to make promises to legalize their transaction.

A unilateral agreement refers to a commercial activity where the buyer or accepting party responds to the offer by action. For example, the offeror says, “I’ll accept five thousand U.S. Dollars for my car” and the offeree makes payment immediately.

Valid Considerations

Valid considerations are, however, an essential part of common law contracts. This means there must be an item (goods or service) for which a bargain has been struck, with promise of payment or actual payment with no promises from the offeree. Further, both parties must consider themselves and their business agreement as subjects to the law guiding contract formation for merchant and goods.

Similar to the discussion on car sale, another example on valid consideration is an applicant who eventually received an employment offer from a company after prior negotiations. The acceptance of contract terms precedes your position within the organization hierarchy and covers your roles and responsibilities. The said contract becomes a valid document guiding relationships between the employer and worker. For instance, a part-time job may be terminated at the expiration of period stated on the contract. Likewise, the employer or organization is obligated to pay all benefits and salaries commensurate with the job.

Non-compete Agreement

In an event that your manager, after few days of beginning the job, asks you to sign a contract different from previous agreements, probably to ensure that you are bound by such a contract to accept unfavourable contract terms, for example, not to protest in a court of law if the company decides to terminate your appointment any time, that is known as a non-compete agreement. In most cases, workers are persuaded into accepting the contract even with no additional benefits as compensation. If you eventually sign this kind of agreement, by law, it is not valid or legally binding on you considering that the offeror has not yet observed any new responsibility or loss resulting from the contract. The said agreement becomes binding and enforceable only after the company has provided consideration, for instance, by increasing your salary with $1,000 per year. Nonetheless, you should have rejected the non-compete agreement when you were persuaded by the company or its representatives without adequate compensations.

In summary, a contract is considered valid only when it is established for a legal purpose. Moreover, parties to a contract are required by law to have the capacities to carry out the said contract before it becomes fully enforceable. For example, an agreement between a drug dealer and a pilot, who is required to fly and deliver cocaine at a price, is an illegal contract because none of the parties can protest default in a court of law even if their contract contains perfectly-formed and well-written clauses. On the other hand, young people below 18 (often referred to as minors) can enter into contractual agreements that they may also terminate at their own discretion. This implies that a contract signed between a minor and someone who possess the capacity to carry out the said agreement is voidable—except that only the underage person has the rights to cancel the contract by power of the infancy doctrine.

2.0.2 Uniform Commercial Code Contracts

UCC contracts are comparable to those formed by common law. It is more so because common law guides contract formation for services, including those not directly governed by UCC. For example, Article 2 of the Uniform Commercial Code controls sale of goods and other moveable items as explained in Section 2-105, but securities and cash as well as house and landed property are excluded. Contractual agreements between merchants directly fall under the dictates of this UCC section. In Section 2-104, a merchant was defined as someone who trades goods or presents himself as a person with valuable skills and knowledge about some services or practices that can be sold for cash. Contract law in the U.S. is strictly a state affair and this permits individual states to enact and enforce different contract-related laws. It is, however, an objective of the UCC to instil uniformity of contract laws across the country though, as noted in the introductory part of this study, the UCC only becomes a state law after it gains legislative approval—a reason why all 50 states operate with relatively dissimilar UCC models (Roszkowski., 2001).

The Implications of Language

First published in 1952, the UCC has achieved its purpose for establishment even though few U.S. territories such as Puerto Rico and Louisiana are yet to adopt some of the Articles. Another U.S. jurisdiction, American Samoa, has not implemented any of the 11-part Articles. Differences in the adopted UCC models are mainly due to problems posed by the existence of alternative language on the UCC blueprint. Adoption of changing reviews on the original UCC document has also forced some jurisdictions to abandon it for a more comprehensive and preferable law that satisfies their needs. Importantly, even two courts in two different U.S. jurisdictions may adopt the same UCC but with dissimilar statutory readings (Mojica., 2017).

Boilerplate Language

There are cases where contracts between merchants include certain offers with indefinite terms. This leads to acceptances that are nor “mirror images” of the said offer. For example, when merchants want to buy goods, they start with placing order stating the materials to be purchased. The seller reciprocates by sending the goods (by ship, freight etc) together with an invoice. Boilerplate language therefore refers to frequently used language common to all merchants who are either purchasing goods by orders or delivering materials with invoices (Spiedel., 1995).

It is common to see merchants whose languages are slightly or totally different from others and this creates situations where terms are inconsistent with the norm thereby exposing a contract to fatal errors in common law (in other words also understood as “battle of the form”). On this premise, the UCC aims to integrate more flexibility in common law contracts to accommodate language discrepancies in contract formation. This objective is essential in helping merchants trade freely—in the reality of business practices—without fear of losses or legal problems, including the mountainous challenge of needing to issue offers with clearly defined terms. It would be even more difficult for merchants to make offers and receive “mirror image” acceptances (promises or acts) from buyers to ensure that every item sold will have valid contracts that are binding on both parties and enforceable in a court of law.

Statute of Frauds

As embodied in the UCC, Statute of Frauds must have some types of written contract before they become enforceable. For example, sale of goods between the buyer and seller must have a document showing the purchased materials and price, together with signatures from both parties—especially the defendant—before it can be enforced by law when there is a default. However, other relevant contracts in this context include: interests accruing to land or landed property; promise or oath to offset debts incurred by another person; and other agreements that cannot be carried out within a one-year period. These Statute of Frauds contract is not under the UCC but are commonly found in the statutes of U.S. states (Spiedel., 1995).

The Statute of Frauds is a legal term borrowed from England, particularly in the 17th century when the English parliamentary body enacted a statute to eliminate or reduce fraudulent activities in real estate transactions and high-impact civil issues.

Conclusion

This study on common law contracts and UCC contracts is important to highlight the flexibility or rigidity of contract formation requirements. Findings from this research shows that contract matters are best analysed when the particular law governing such agreements are identified and clearly understood. In other words, one can never be sure of which rule applies to a case until the applicable law is known.

3.0 History of UCC

The Uniform Commercial Code (UCC) was the most elaborate joint project handled by NCCUSL and ALI which commenced in 1942. Exactly ten years after both organizations completed the initial drafts, the original version was released in 1952 under supervision from Judge Herbert Goodrich, who held position as the Editorial Board Chairman. Valuable inputs were made by notable legal scholars in the U.S. like William A. Schnader, Grant Gilmore, Karl N. Llewellyn and Soia Mentschikoff.

All 50 states and U.S. territories have rights to adopt or amend that UCC Articles to fit their preferences and needs. Each state’s legislature will need deliberations on the UCC before adopting it verbatim, in which case it becomes a statutory law. This indicates that merchants transacting businesses in any state of the federation should check the existing local law for conformity (Mojica., 2017).

Courts handling UCC cases or reviews aim at harmonizing the Articles to comply with interpretations given by other states where such statutes or similar provision have been adopted. For instance, in California, UCC Articles are referred to as “divisions” because articles within the state are found in the 3rf or 4th subdivisions of a code whereas “parts” or “divisions” appear in the first category of subdivisions. Further, use of hyphens as seen on the original UCC section numbers are not allowed in the Californian legal documentation procedure.

In 1989, the NCCUSL called for changes in Article 6 which handles matters on bulk sales. The organization wanted the category to be declared “obsolete” and repealed. About 45 U.S. states have implemented the change so far. Two states chose to revise the Article in question.

In 2003, the NCCUSL and ALI proposed amendments to Articles 2, 2A and 7. None of the fifty U.S. states adopted the changes due to stiff opposition from many industrial sectors. The sponsors, however, cancelled the texts in 2011 to ensure that the UCC enacted by most states remains untouched (Roszkowski., 2001).

The UCC was revised in two times between 1957-58 and over fifteen times between 1962 till date. U.S. territories such as Guam, District of Columbia, Puerto Rico and Virgin Islands have enacted the UCC Articles to some degrees. The revision process usually takes many years.

4.0 Texas Commercial Code (UCC)

Information from the UCC Committee of State Bar of Texas Business Law show that in 2007 Texas revised Article 9 (R9) ahead of changes or recommendations from NCCUSL. The aim was to:

  1. Eliminate legal issues that may arise from choosing the name of an organization
  2. Control unlawful use of driver’s license to gain protection for names of individual debtors and
  • Safeguard parties filing correction statement (i.e. proposed amendment of the 2007 Texas Code).

An overview of the Lemon Law

Texas UCC is arguably the most suitable commercial code for merchants because it provides a solid background for handling trade disputes relating to the timeframe within when a defendant must file complaints. The UCC limits this period to four years, which is a sharp contrast to the statute of limitation which allowed only 2 years and/or within a geographical location not more than 24,000 pending which one comes first.

The UCC in Texas handles mostly matters relating to sales transaction. For example, the law permits buyers or defendants to withdraw their acceptance of a seeming unfavourable car sale contract. The purchased item must, however, have noticeable defects that the owner has not tried fixing on different occasions—especially if such repairs affect the car value. In accordance with the law, an offeree should first contact the car dealer or company immediately such high-impact defects are noticed, with willingness to return the purchased item as an act of revoking the existing contract. A notification of contract termination should be tendered in written form. The list of Articles adopted in Texas are: Articles 3, 4 and 8.

Main issues from the Texas Code

Texas relies on NCCUSL to handle matters related to enacting uniform laws. For example, Texas made changes to R9 in 2007 ahead of the Texas legislative session in 2009, but the law-making arm of government postponed implementation pending when NCCUSL was expected to take effective action. Issues from the 2009 Draft are:

Name of individual debtors: Article 9-503(a) did not provide clear rules on how individual debtor names can be ascertained. This responsibility fell under state law but, in line with the approach taken by Texas—which allowed use of driver’s license as a valid confirmation of individual debtor name as required for UCC filing—a large number of individuals and businesses were affected. For instance, statistical records show that more than 50% of small businessowners made UCC filings using such personal ID verification method before the 2009 Draft. This legislation, however, had huge costs on small businesses which relied on driver’s license to access loans. The new filing rule stipulates that borrowers must register as sole proprietors—with names of companies replacing individual debtors’ names. Common practice in Texas, for people with non-filing insurance, is that they can file their financial statement using controlled consumer credit.

The 2007 Amendment on Article 9-503(a)(4) consolidated the uniform rule which allowed people to file financial statement with either an identification certificate or driver’s license. This approach was initially accepted in the Consumer Identification Program (CIP) available in U.S. financial institutions as included in the USA Patriot Act. The CIP registration process required any of: a state-issued identification card; passport; or driver’s license.

Collateral and Trust “Debtor”:

In some circumstances, the uniform provision for presenting collateral owned by an “express trust” has been faulted because Article 9-102(a)(28) defined a “debtor” as a person who has an interest in the collateral while Article 1-201(a)(27) referred to “person” as “a business, individual, trust etc” but “not a trustee.” However, Article 9-102(a)(28) stipulates that a debtor who has “interest” in the said collateral can be a trustee and—under UCC adopted by some U.S. states—can be considered a “trust”.

Conclusion and Recommendation

Texas code does not provide clarifications on many issues, for instance, the Texas Property Code found in Article 111-004(6) which defined “interest” to include legal and/or equitable interests, in present or future situations, vested or dependent—defeasible or impracticable—for objectives outlined for the Texas Trust Code. In this context, a trust goes beyond the titular honour recognized in the Texas Trust Code and should be understood as “a collection of interests.”

The legal review committee in-charge of Texas Code should therefore deliberate on a statutory language that clearly defines a debtor, especially in a trust situation as seen in the following excerpt from existing UCC:

On this premise, the best approach would be to consider trustee as a debtor since the former takes responsibility for signing a contract or security agreement.

Furthermore, the Texas 2007 Amendment failed by neglecting priority issues. It approved driver’s license as a valid ID for identifying name of individual debtors instead of allowing use of the personal verification method “only when” the debtor’s name is “consistent” in line with provisions of Article 9-503 or “if there’s a workable transition program.”.

Accordingly, the Joint Review Committee should make clear and predictable processes to satisfy needs and preferences for all UCC adopted in Texas—not just individual debtor filings. In addition, priority concerns should be clarified, especially on matters relating to an individual debtor having “inconsistent names.”

 

 

References

U.S. Small Business Administration (SBA), “Uniform Commercial Code,” [accessed online at: https://www.sba.gov/category/navigation-structure/starting-managing-business/starting-business/understand-business-law-7]

U.S. Legal, “Texas,” [accessed online at: https://uniformcommercialcode.uslegal.com/states-adopting-the-ucc/texas/]

Roszkowski Mark E., 2001, “Symposium on Revised Article 2 of the Uniform Commercial Code: Section-by-Section Analysis,” SMU Law Review, Dedman School of Law, Southern Methodist University, Vol. 54, p. 927

Speidel Richard E., 1981, “Teaching Materials on Commercial and Consumer Law (3rd ed.),” West Publishing Co., pp. 54–55.

Macaulay S, Braucher J, Kidwell J.A., & Whitford W., 2010, “Contracts: Law in Action (3rd ed.), LexisNexis, ISBN 978-1-42248176-9

Rocks S.M., Christophorou P.L., Steen C.G. & Hamilton L., 2019, “Memorandum Regarding the Uniform Version of Article 8 of the Uniform Commercial Code and the Treatment of Investment Property Under the Uniform Version of Article 9,” [accessed online at: http://files.ali-aba.org/thumbs/datastorage/skoobesruoc/pdf/Ck090-ch08_thumb.pdf]

Mojica A., 2017, “The UCC Article 2 and its Impact on Business The Uniform Commercial Code’s Article 2 and its Impact On Business Law,” University of New Hampshire.

Spiedel R.E., 1995, “The Revision of UCC Article 2, Sales in Light of United Nations Convention on Contracts for the International Sale of Goods,” Journal of International Law & Business, Vol. 165.

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