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ANALYSING THE IMPORTANCE OF A UNIVERSAL COMMERCIAL LAW CODE TO BUSINESS ENTITIES

Author: Ruchira Pareek, Pursuing LL.M from Damodram Sanjivayya National Law University, Vishakhapatnam.

Co-author: Rajshree Rawat, B.A.,LL.B from National Law University and Judicial Academy, Assam.


Abstract

A uniform code is consolidation of different laws existing on similar subject matters, which may differ from states to states. When all these different existing laws are combined into one, it means every state and every person will be bound by it equally. Uniform laws majorly help to simplify or we can say make less complicated, laws which are segregated on different basis. Uniform commercial code means a segregation of different commercial laws to be applied equally on all business entities. It can be defined as a standardized set of laws which describes the rules and regulations to be applicable on business transactions. The code is a valuable, clear and concise expression of commercial law and is drafted to give advantage to different beneficiaries like makers, drawers, sellers, buyers etc.


Keywords: Uniform Code, Commercial laws, Business transactions, Beneficiaries.


Introduction

The term ‘Uniform code’ in itself suggests that it means a code which is applicable uniformly on everyone. A uniform code is consolidation of different laws existing on similar subject matters, which may differ from states to states. When all these different existing laws are combined into one, it means every state and every person will be bound by it equally. Uniform laws majorly help to simplify or we can say make less complicated, laws which are segregated on different basis. For instance, in India different religions have different laws for marriage, inheritance, succession, adoption etc. making it complicated for the courts to deal with such matters. However, if a uniform code comes it will simplify all the complex laws and apply equally to everyone irrespective of their faith.


Now Uniform commercial code will mean a segregation of different commercial laws to be applied equally on all business entities. It can be defined as a standardized set of laws which describes the rules and regulations to be applicable on business transactions. It is among the numerous uniform codes adopted by the United States and is considered as one of the important developments as the companies were starting to find it extremely difficult to do business transactions across state lines because of the various state laws. The introduction of such a uniform code helped such companies by providing them with a standard legal and contractual framework.


The code, known as the “backbone of American Commerce” has been adopted by all 50 US states and a part has been adopted by District of Columbia, however, it has not been adopted as federal law. Because it has been adopted by all the states businesses belonging to different states can enter into contracts with one another knowing that every American court will enforce the terms equivalently.


The law, even if, adopted uniformly by all the states, although this adoption varies from one US jurisdiction to another US jurisdiction as one of the special consideration given by the makers to the states was the option of adopting the code as it is or may modify the same. The UCC being a model code so unless it’s provisions are enacted as domestic laws by individual states it does not apply to them.


For example not all the Articles have been adopted by jurisdictions like Louisiana and Puerto Rico and none by American Samoa. The decision can be attributed to different reasons like alternative language found in the UCC or individual requirement and priorities of the states. Also different approaches by each jurisdiction’s courts when it comes to interpretations of the provisions even though identical language have been adopted by the two party states.


The code consist of 9 articles dealing with various commercial angles including sale and leases of goods, fund transfers, bulk sales, bank deposits, negotiable instruments, letters of credit, warehouse receipts, investment securities, bills of landing and secured transactions.


The general purpose of UCC as can be analysed through its provisions are:

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


2. To permit the continued expansion of commercial practices through custom, usage, and agreement of the parties; and


3. To make uniform the law among various jurisdictions.

History

In the year 1942, legal scholars and experts belonging to two prestigious organizations, the American Law Institute and the National Conference of Commissioners on uniform state laws, sat down to work on one of the longest and and most comprehensive sets of uniform laws in the United States and developed Uniform Commercial Code in the year 1951.


If we dig more into the history of this code, it starts in the year 1892 when the Uniform Law Commission was established to formulate uniform commercial laws.


Later Uniform Negotiable Instruments Law was created in 1896, followed by Uniform Sales Act, Uniform Warehouse Receipts Act in 1906, Uniform Bills of Lading Act and Uniform Stock Transfer Act in 1909; and the Uniform Conditional Sales Act in 1918. It was in 1940 when the commission started drafting a comprehensive code inclusive of all the above mentioned different laws. In 1942, ULC and American Law Institute came together to give USA a uniform commercial code in 1951 which was initially presented for consideration by the states. Pennsylvania was the first state to adopt this code in 1953 and other states followed the suit over the next twenty years.


As of today the Permanent Editorial Board for the Uniform Commercial Code (PEB) which comprises of members allotted by ULC and ALI is responsible for management of the UCC. Created in 1961, the PEB checks the progress of commercial law and give recommendations regarding amendments and revisions in UCC as required. If any amendment/revision takes place it publish official commentary to help courts interpret any specific provision.


Jurisprudential perspective

It is evident from the purpose served by the UCC that its drafters created it by keeping in mind that it is a remedial legislation. They drafted it in a way so that it helps to avoid maximum complexities and divergent interpretations by courts to which prior uniform laws have fallen prey to. Secondly, the drafters also ensured that the policies which are embedded in each in each provision must be explained. In doing so they acted more like judges justifying decision rather than legislators declaring law. They called this approach as necessary for attainment of code’s remedial objectives. The principal of patent reason becomes important here which elaborates that every provision should show its reason on its face. The main reason behind this approach is that it is practically and intellectually impossible to bring the construction and application of provisions at par because uniform interpretation of a law by judges of different schooling, learning and skills cannot be expected. Talking specifically about the UCC, the makers have attached official comments to individual sections which are headed as ‘purpose’ or ‘purposes’. The rationale is to use the commentary to link purposive construction with the underlying goal of uniformity.


Different Jurists have different thinking towards this approach which sought to eliminate the scope of different interpretations of same provision by different judges and promote uniform interpretation in line with the given purpose of the provision. Professor H.L.A. Hart, a positivist, contends that in hard cases where legal rules are uncertain a judge may legislate appropriately.


On the contrary, Prof. Ronald Dworkin, a provocative challenger, contends that even in hard cases a judicial decision should be made based on principle and not policy. In this debate the arguments have been made giving considerable attention to the issue of ‘judicial interpretation’. Professor Hart supplements his opinion by referring to an ordinance which prohibits vehicles in a public park. In such a case he argues that the word ‘vehicle’ must be given a specific meaning so that no doubts arise at the time of application. In the absence of a specific meaning general meanings will be used as a mode of communication.


In general sense the word ‘vehicle’ may mean bicycle, airplanes motor car and even a roller skate.


Professor Dworkin, supported his contention by citing the case of Riggs v. palmer whereby a New York law was enacted establishing that property will be disposed according to testator’s will. The court observed that “no one shall be permitted to profit by his own fraud, or to take advantage of his own wrong, or to found any claim upon his own iniquity, or to acquire property by his own crime”. By holding this court stopped inheritance of a victim’s will by his own murderer. Even though they have different opinion , both Hart and Dworkin limit the role of purpose or objectives of the lawmakers. HART mainly focusing on linguistic difficulties suggests that to prevent difference in interpretations ‘linguistic convention’ can alone be helpful. On the other hand Dworkin propounds that where legislature has failed to formulate a policy, the judge may base his decision on policy that most appropriately ties with the language the legislature used.


UCC: The Basic structure

The code proves to be fitting for different kind of business negotiations, from the exchange of goods to sale of investments securities and the transfer of money to the content of lease agreementsThe policies inserted in the code were made while keeping in mind the interest and activities of small businesses and entrepreneurs.


The term commercial transaction is ambiguous as it may range from a small act of signing or endorsement of the check to making up of whole contract or shipment of goods. The UCC presumes that all these transactions are strand of one single transaction be it sale or lease etc. the code discusses these phases from beginning to end which are organized in following Articles different articles.

  • Sales (Article 2)

  • Leases (Article 2A)

  • Commercial Paper (Article 3)

  • Bank Deposits and Collections (Article 4)

  • Funds Transfers (Article 4A)

  • Letters of Credit (Article 5)

  • Bulk Transfers (Article 6)

  • Warehouse Receipts, Bills of Lading, and Other Documents of Title (Article 7)

  • Investment Securities (Article 8)

  • Secured Transactions; Sales of Accounts and Chattel Paper (Article 9)


UCC: what it means for the business world

Even years before from today business entities only used toengage in commercial transaction with entities in the same state.


Then with the technological advancements taking place in the world internet and electronic devices came over and made business transactions a lot faster. Now companies could can enter into business with companies beyond their state borders.


For example raw materials may be supplied by one state, goods may be manufactured in one state and distributed in another. These transactions which otherwise would have been very complicated have now become easier due to introduction of UCC.


In USA a company must adhere with the UCC if it wants to enter into a business transaction with another company in another state. When there is no uncertainty regarding the law which will govern the commercial agreement it works as a satisfaction for both businesses as well as customers.


It is also helpful for the courts to a large extent. The code helps in the growth of the business world as it encourages its subjects to get involved in business with partners who are best according to their needs by making interstate deals possible. Before the formulation of UCC contacting companies for interstate deals and doing business with them was expensive and cumbersome.


International Influence

Different provisions of the UCC have influenced different International statutes or some provisions of them. United Nations Convention on Contracts for the International Sale of Goods is guided by Article 2 of the Code however there are certain aspects where differences can be seen like not including the concept of mailbox. Because number of mega financial institutions operate in New York so trade finance is by default gets influences by Article 5 which talks about letter of credit. Another equivalent of UCC is Canada. The country adopted Personal Property Security Act which is based on Article 9 of the UCC. The suit was followed by New Zealand and Australia in their in their Personal Property Security Act of 1999 and 2009 respectively.


Advantages of the Uniform Commercial Code

  • The UCC helps to fill in the gaps by laying out controlling contract terms for cases where merchants entering into a business transaction create a contract and they either didn’t agree on certain terms or just forget to discuss any matter. For example when two merchants enter into an agreement they normally formulate terms on how many good to be delivered and how much to pay or that when payment or delivery will become due but they often forget to discuss about other essential terms such as: where goods should be delivered? Or what will be the rights/liabilities of the party on default of one? , this is where UCC comes in which pre provides answers for such conditions.

  • The code is a valuable, clear and concise expression of commercial law and is drafted to give advantage to different beneficiaries like makers, drawers, sellers, buyers, carriers, shippers, acceptors, debtors, bankers and many more.

  • With the formation of UCC interstate business transactions can now be executed more effectively and efficiently due to applicability of uniform laws on all the US jurisdictions. Interstate transactions has also become less expensive and less cumbersome and allows entities to choose business partners according their best interest as they can now deal outside state border as well.

  • The bulk of trade that takes place in United States is interstate trading. However before the introduction of UCC these state to state transactions were halted as the companies had to deal with different legal requirements of different states.

  • The UCC has also led to standardization of commercial expectations because now the states do not need to conduct research or do reviews statutes and regulations of different states they want to enter into an agreement with.

  • Commercial stability is another advantage of this code. As per the requirement of the provisions of the code for every transaction above Rs.500 there must be a contract in writing and as soon as a contract is framed there are only little or no chances of discrepancies.


Disadvantages of the Uniform Commercial Code

  • Even though there are many advantages but the uniform laws also have some limitations. One of the major drawbacks is that laws are not absolutely same in all the states as one may think. The UCC provides states with a special consideration to the states that they may either enforce the code as it is or may also modify it according to their best interest and requirement. Hence, even though many states applied it as it is others made changes according to their needs.

  • Another flaw can be noticed when it comes to International trade because not every country which is ready to engage with USA in business have same constitutional exemption as that of United States. Such a issue rarely arise during state to state transactions but cannot be overlooked when it comes to international trade.

  • The divergence in relationship between the countries that would be willing to impose UCC also acts as one of the disadvantage for international trade.

  • UCC is vulnerable to supplemental bodies of law as it cannot function alone without common law and law of equities. The UCC can be replaced by these where its jurisdiction is not enough.


Which is better – Common Law or UCC?

UCC is vulnerable to supplemental bodies of law as it cannot function alone without common law and law of equities. The UCC can be replaced by these where its jurisdiction is not enough. Common law and UCC are laws which governs contract in United States of America. Common law provides rules and regulation regarding real estate, insurance, employment contracts, service and intangible assets whereas UCC only deals with sales of goods and securities. Under common law in case of any changes made it would either lead to rejection of the contract or counter offer of the offer but in case of UCC minor changes does not cancel the contract and the original offer still stands.


Contracts can be modifies with additional considerations under common whereas no additional consideration needed in UCC.


There is also a major difference when it comes to terms of the contract. On one hand while framing terms quantity is of the prime focus under UCC while in common law terms include performance, time, price, quantity, identity of offer and nature of work. The imitation period ranges from 4-6 years under common law whereas it is 6 years under UCC. The factors which results in discharge of a contract under common law includes death, insanity or destruction of the subject of the agreement while a contract under UCC it gets discharged only due to impracticability.


Where privity of contract is required to be sued under common law, it cannot be sued as per UCC. Under UCC a contract can be called an absolute contract even when the price is not stated but under UCC it is expedient to state a price. Under common law punitive damages are not required to be paid in case of fraud while under UCC if fraud is committed the purchaser has better title.


Another crucial difference to discuss is regarding ‘acceptance’. When it comes to acceptance the common law requires ‘mirror image rule’ to be followed that is offer must be accepted exactly as it is required by the terms of the contract i.e. it has to be mirror image of the terms only then it will be recognized legally otherwise it will result into its rejection or counter offer. However, under UCC only material changes will have the effect of voiding the contract and minor changes will not create any conflict.


Is there a requirement for Global Commercial Code?

The last two decades have seen immense success of uniform commercial code as many other codes were framed deriving inspiration from UCC and also based their provisions on them and can be seen working well for the respective countries.


Different provisions of the UCC have influenced different International statutes or some provisions of them. United Nations Convention on Contracts for the International Sale of Goods is guided by Article 2 of the Code however there are certain aspects where differences can be seen like not including the concept of mailbox. Because number of mega financial institutions operate in New York so trade finance is by default gets influences by Article 5 which talks about letter of credit. Another equivalent of UCC is Canada. The country adopted Personal Property Security Act which is based on Article 9 of the UCC.


The suit was followed by New Zealand and Australia in their in their Personal Property Security Act of 1999 and 2009 respectively.


What is unique about UCC is that perhaps it is neither “commercial” nor “code” and strictly speaking also not “uniform” throughout the country and these qualities make it more attractive. So if a global commercial code is proposed it must be with drafted with same approach and much broader territorial application.


Global commercial code should not strictly be a ‘commercial’ code applicable to only merchants but it should be more of a civil code. The rationale behind this suggestion is that, firstly, no global civil code exists as of now and secondly, it must cover both transactions between business entities as well as between two private parties entering into agreement in their personal capacity.


It is fair to say that UCC is a code comprising of general principles and provisions which only provides solution which according to the legislators may arise. Global commercial code on the contrary include special rules governing the most important type of commercial transactions.


Like UCC global commercial code should also provide states with the option of adopting it in whole or with modifications.


First of all many sovereign countries will refuse to adopt such across the board legislation without any amendments.


Secondly, it is obvious that different nations have different legal traditions which will prevent them from adopting it in its entirety. Lastly, some states are already party to existing statutes or codes on same subject matter.


The UCC applies to both domestic as well as interstate transaction. However, it is suggested that the jurisdiction of the global commercial code should be limited to cross border transactions. This can be appealing for many different reasons. For instance, commercial agreements between different nations are very likely to create confusion as to applicability of law which will govern the transaction. But at the same time nations are now more prepared than ever to give countries contracting with them the widest possible autonomy in regulating their relationships and to ensure this nations cannot impose their own regulations.


CISG and UCC: Key distinctions

The contracts for International sale of good (CISG) applies with respect to sale of goods and comes into action only when the countries to which the parties belong have signed the convention. It is to be noted that unless otherwise provided in the contract, CISG overtakes the state laws for contracts. Where the contract does not specify that which code is to be excluded among the two, the parties can choose application of either to their contract.


However, if the parties do not choose any but it is important to settle the dispute, both the codes fill the gap in different ways. For example, for a contract formed between USA and China, three choices can be made. First, contract can be enforced under CISG as both USA and China have signed the treaty. Secondly, the parties can either choose its enforcement under UCC or else the commercial law of China. Finally, parties can mutually pick another country which would be beneficial for both of them.

From formation of the contract to damages due to breach the provisions under both the codes implement diversely. Some of the comparisons are:


  • Formation of Contracts

Under UCC as long as sufficient agreement is shown between the parties and their intent is clear the contract can be considered to be formed even if some of the terms of the agreement are not specified.

Under CISG a proposal is considered to be definite when the price and quantity of the subject is clearly indicated as it serves as an evidence of the intention of the offeror to be bound by the acceptance. If the proposer wants to serve the offer as an invitation only then such an intention must be specified beforehand.


  • Contract offers and acceptance

Under UCC an offer to commence a contract is considered as an invitation for which acceptance can be made in any reasonable manner and medium. In such contracts whose formation is based in the acceptance, if the notice of acceptance is not received by the proposer then the offer stands expired before the acceptance.


CISG allows an offer to be revoked at any time before its conclusion if the offeror informs the offeree before the acceptance that the offer has been revoked. However, an offer stands concluded and cannot be revoked if the acceptance is deemed to be acknowledged due to passage of specific time or if the offer could be interpreted as irrevocable by its nature and the offeree has shown reliance of this nature.


Acceptance can also be made by partial or complete performance under CISG with giving the actual notice of acceptance. However, this can only happen in the cases where offeror has not specifically mentioned the requirement of a notice of acceptance. The offer stands ineffective if the acceptance is not made within the time specified by the proposer after which neither the proposer nor the proposee are bound to the offer.


  • Battle of the forms

Under UCC even if acceptance is made by making a counter offer on the original offer but there is no condition on assent it will be taken as a valid acceptance. While making changes in the original offer it is to be ensured that the original intent of the offer is not materially changed. On the contrary provisions of CISG invalidate any acceptance which is made after making any modifications to the original offer and consider it as a rejection of the offer. However, if the offeror do not object to the modified terms then the revised terms constitute the new contract binding both the parties.


  • Breach of contract

UCC permits rejection of non-conforming goods either in whole or in part by the buyer declaring it as breach of contract. Goods which are not at par with the stated standards in the contract are considered as non-conforming goods. A failure on part of the buyer to reject the goods within a reasonable time constitutes as acceptance of the delivery.


Unlike UCC, the CISG it’s not non-conformation of goods but the moving of seller substantially from the expectations of opposite party constitute a breach. Both the codes take different approaches when it comes to breach of contracts. The UCC way is more precise and predictable as it makes clear what is expected of seller and buyer. On the other hand CISG requires deprivation of one party by another in a substantial way making it difficult to ascertain that what degree of deprivation will be considered as ‘substantial’.


  • Damages

UCC includes both incidental and consequential damages. Incidental damages are the direct results of the breach of a contract, like, costs incurred on care, custody, Receipt or transportation of goods. Consequential damages are indirect in nature as they arise due to existence of certain special circumstances and could not be easily prevented. For example, loss or profit sustained due to fire damage in a factory.


As per the CISG’s definition of damages it includes the loss incurred by the party due to breach including loss of profit by the opposite party.


  • Remedies

CISG provides for various kind of remedies like specific performance, right to fix the problem, right to rescind the contract, as well as right to reduction of the price. The UCC is stricter when it comes to remedy of specific performance of the contract as it is allowed only in case of unique goods and other proper circumstances. CISG on the other hand allows in all the circumstances until and unless it is inconsistent with the nature of the contract.


Conclusion

UCC is a standardized set of laws which describes the rules and regulations to be applicable on business transactions. The code is a valuable, clear and concise expression of commercial law and is drafted to give advantage to different beneficiaries like makers, drawers, sellers, buyers, carriers, shippers, acceptors, debtors, bankers and many more.


UCC has proved to be of great benefit for the merchants and its existence has made the transactions seamlessly and efficiently possible throughout the United States. If used correctly and with proper knowledge it can prove to be a powerful tool in the field of business and can be used by merchants without undue concern. It is as important as learning basic principles of cost accounting. But once understood, it is one of those legal aspects of USA which serves its citizens well. Another positive criticism of UCC is that it casts down the use of legal formalities like taking help from the lawyers or preparing a detailed document.


The law related to negotiable instrument was formed hundreds of years and was organized as well modernized according to the need of time in various areas when it was codified under Article 3 of the Uniform Commercial Code. However, it still remains complex and outdated in various aspects. What is to be understood is that better results come out when one comes out of his or her comfort zone especially in this fast forward digitalized era.