General Provisions of the UCC, Part 2

Learn about Article 1, Part 2, of the UCC which covers definitions and rules on how to interpret certain business-related actions.

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Article 1 of the model Uniform Commercial Code (the "UCC") is titled “General Provisions.” Part 2 of Article 1 covers a host of definitions and a few basic rules on how to interpret certain business-related actions. We cover the current version of the model UCC in this article. However, not all states have adopted this version and the model UCC specifically leaves it to individual states to determine the precise wording of certain sections. Therefore, you should always check your own state’s commercial code for the most accurate information on your state's laws.

Important Definitions

The first section of Part 2 presents a list of 43 definitions. At first glance, these definitions may seem innocuous and even boring. However, questions do arise about defined terms and the outcome of a dispute can hinge on a term’s applicability—or lack thereof. To take just one example, consider the UCC’s definition of “conspicuous,” which states that whether a term in a document is conspicuous “is a decision for the court.” Now, imagine a situation where your business signs a contract to purchase an expensive manufactured item, and that the UCC requires that an important term in the contract—let’s say a statement that the item is excluded from normal seller’s warranties—is required to be “conspicuous.” Imagine, that the contract has just such a warranty exclusion but it appears in tiny cursive handwriting on the back of the contract. If the item you bought broke down while still under warranty, a court might decide that the handwritten “exclusion” did not apply because it was not “conspicuous,” and, therefore, you are covered by the warranty.

The 43 definitions in Part 2 of the General Provisions are in some ways just the tip of the iceberg as far UCC definitions are concerned. Many further definitions are provided elsewhere in the Code; for example, Sections 2-104, 2-105, and 2-106 of Article 2 (covering Sales) provide many additional, sales-specific definitions.

Notice

Part 2, Section 1-202, specifies when a person has “notice” of a fact. Specifically, a person has notice of something if:

  • the person has actual knowledge of the fact
  • the person received notice or notification of the fact; or
  • “from all the facts and circumstances known to the person at the time in question,” the person has reason to know that the fact exists.

With this rule in mind, imagine that one week ago you shipped $50,000 worth of products to a business customer, using the last address that the customer had on file with you. Now imagine you find out that the customer moved three weeks ago, and the goods you shipped were delivered to a now-vacant building and were stolen. Your customer does not want to pay for the stolen goods and you don’t want to take a loss on those same goods. The outcome will likely depend on in part on whether your customer had “notice” of when and where the goods would be shipped—and also whether you had “notice” that your customer had moved.

Lease vs. Security Interest

Part 2 distinguishes between a lease and a security interest. The importance of the distinction mainly has to do with the rights of creditors in the event of a bankruptcy. If a business is leasing an item from a company, then the company keeps title to the item in the event the business runs out of money and can’t pay any of its creditors. However, if the business is buying the item over time on credit, then it is the business that has title to the item, not the company from which it bought the item, and if the business runs out of money, creditors other than the company that sold the item may have rights to take the item to satisfy unpaid debts.

Final Words

This article is not exhaustive; Part 2 of Article 1 of the UCC contains several other sections not covered in this overview. For a complete list of sections in Part 2, you should check online for the model UCC or your state’s commercial code. For information on the other Parts of UCC Article 1, as well as other UCC Articles, check Nolo’s section on the UCC.

April 2013

by: , Contributing Author

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