The first Article of the model Uniform Commercial Code (the "UCC") is titled “General Provisions.” Part 3 of Article 1 covers both choice of law and an array of general rules. We cover the current version of the model UCC in this article. Not all states have adopted all sections of the current model UCC. Moreover, the model UCC specifically leaves it to individual states to determine the precise wording of certain sections. Therefore, you should check your own state’s commercial code for the most accurate information on your state's laws.
Choice of Law
This part of the UCC contains important rules regarding what is often known as choice of law. It contains rules governing which jurisdiction’s laws apply in the case of transactions involving multiple states or countries. It is quite common for a business contract to contain a paragraph on choice of law which specifies which state's laws will apply in the event of a dispute.
The UCC choice of law rules make an important distinction between contracts where both parties are businesses and contracts where one party is a consumer. (Like so many terms, the term consumer is specifically defined in the UCC to mean people buying goods primarily for personal, family, or household purposes.) For contracts between businesses, the general rule is that the parties can agree that the law of any state will apply, regardless of whether the transaction has a relation to the state specified. For contracts involving consumers, however, the UCC requires that the transaction bear a reasonable relation to the state designated. In short, the UCC places greater restrictions on choice of law provisions for contracts involving consumers.
The UCC choice of law provisions also don't allow the parties to chose their governing law in certain specified situations. For example, the UCC provides that a bank’s liability for certain types of actions is governed by the law of the place where the bank is located. Thus, in certain cases where a bank’s liability is at issue, the parties to the dispute can not choose which jurisdiction’s law will be used to decide the matter.
Definitions; “Usage of Trade”
This part of the UCC also defines several important terms. These are in addition to many other definitions throughout the UCC, including the 43 terms defined in Part 2 of Article 1. Among these defined terms is “usage of trade.” This refers to regular practices or methods used in specific business transactions. Sometimes such practices are established in a written code for a particular type of business or industry. In other cases, it might be a matter for decision by a court.
As an example, consider a machine shop that makes moulds for a manufacturer. After twenty years of providing moulds, the machine shop closes down its business. As part of closing down, it demands payment from the manufacturer for several moulds it recently delivered. The manufacturer responds that it does not need to make payment until it uses the moulds to make products and gets paid by its own customers for those products. The machine shop sues the manufacturer for non-payment. In trying to resolve the case, a court might try to determine the “usage of trade” between these two businesses. This might include looking not only at the documents involved (the machine shop’s standard quotation form, the manufacturer’s standard purchase order form, and so on), but also at how payments were in fact handled during the preceding twenty years—and perhaps also how payment is handled generally between machine shops and manufacturers. Of course, if there was a state code that stated that payment is due to a machine shop from a manufacturer upon delivery of goods, that would also be relevant. Hopefully, this example makes clear how “usage of trade” can be an important factor in contract disputes between businesses.
Approach to Remedies
One other important section in Part 3 states that the remedies provided by the UCC are to be “liberally administered.” In other words, if you are involved in a business dispute covered by the UCC—perhaps most notably a case where another party broke a contract it had with you—the UCC specifically states that you should “be put in as good a position as if the other party had fully performed . . . .” However, the same section also specifically prohibits various damages that would go further, and, in effect, be punitive against the other party.
This article is not exhaustive. Part 3 of the UCC contains several other sections not covered in this short overview. For a complete list of sections in Part 3, 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 website for the section on the UCC.