Legal Guide to the UCC

The Uniform Commercial Code (UCC) is a very large collection of model legal rules for business (or "commercial") activities. You might've worked under these rules without even knowing it when you bought machinery for your business or took out a small business loan.

The UCC was originally created by two national nongovernmental legal organizations: the National Conference of Commissioners on Uniform State Laws (NCCUSL) and the American Law Institute (ALI).

As the word "Uniform" in its title suggests, the primary purpose of the UCC is to make business transactions more predictable and efficient by making business laws consistent across states. All states have adopted most of the UCC and incorporated these rules into their own laws.

Let's take a look at the UCC and how it's changed over the years.

Table of Contents

• An Overview of the UCC Articles
• What the UCC Doesn't Cover
• A History of the UCC: Versions and Amendments
• 2022 UCC Revision: Keeping Up With Technological Advancements and E-Commerce
• UCC Official Comments

An Overview of the UCC Articles

The UCC is organized into eleven sections over nine articles. You can get at least a general idea of the activities covered by the UCC from the titles of the articles:

• Article 1: General Provisions
• Article 2: Sales
• Article 2A: Leases
• Article 3: Negotiable Instruments
• Article 4: Bank Deposits and Collections
• Article 4A: Funds Transfer
• Article 5: Letters of Credit
• Article 6: Bulk Transfers/Bulk Sales
• Article 7: Documents of Title
• Article 8: Investment Securities
• Article 9: Secured Transactions

These eleven articles are further subdivided into parts and then into sections. A single UCC rule is contained in a section. For example, UCC Section 2-205, "Firm Offers," provides the rule for when offers by certain businesses to buy or sell goods can't be taken back.

Some articles are more relevant to and used by the masses than others. For example, more businesses would probably come across rules for sales (Article 2) and negotiable instruments (Article 3) than rules for documents of title (Article 7).

Let's briefly review the more popular articles.

UCC Article 2: Sales of Goods

Article 2 provides rules for the sales of goods. Specifically, this article gives rules for:

• how a contract is formed, including what counts as an offer, counteroffer, and acceptance of an offer
• the price, quantity, and delivery of the goods
• expressed and implied warranties in a contract
• the rights of creditors in the goods
• the seller's performance obligations
• the buyer's performance obligations
• when and how a contract is breached; and
• how you can recover your losses from a breach.

For more information, see the contract rules for the sale of goods.

UCC Article 2A: Leases

A lease is when someone who owns a good (the "lessor") gives someone else (the "lessee") the right to use the good for a period of time in exchange for value (consideration)—usually money. Leases are usually used for vehicles, equipment, and machinery.

This article covers many of the same topics as Article 2, but it applies to leases instead of goods. You can find rules for:

• when a lease is created
• the terms and conditions of the lease
• the performance obligations of the lessor and lessee, and
• what happens when a lessor or lessee defaults.

For additional guidance, see our article on commercial leases for goods.

UCC Article 3: Negotiable Instruments

Article 3 defines a negotiable instrument. Briefly, a "negotiable instrument" is a written promise or order to pay money, such as a check or promissory note. In this article, you can find rules for how to create and enforce a negotiable instrument, along with the parties' obligations and liabilities.

For more information, read our article on negotiable instruments.

UCC Article 4: Bank Deposits and Collections

This article provides rules for how banks handle transactions, including how they collect, process, transfer, and remit funds. Under this article, you can find specific rules for:

• bank deposits
• check processing
• postdated checks
• stop-payment orders, and
• electronic presenments (sending an image of a check or other item instead of handing it over).

UCC Article 9: Secured Transactions

Article 9 covers secured transactions. In a secured transaction, you give the other party (the "secured party") a security interest in your collateral, meaning they can claim your collateral if you don't make your payments. In exchange for the security interest, the secured party approves your loan or purchase. Article 9 includes the following topics:

• attachment of security interests
• perfecting a security interest
• rights of secured parties
• priorities of security interests, and
• filing financing statements.

For more information, check out our article on attaching and perfecting a security interest.

What the UCC Doesn't Cover

While its reach is far, the UCC doesn't cover all commercial transactions. Specifically, the UCC doesn't provide rules for:

• service contracts
• real estate contracts, and
• employment contracts.

For more information, see when the UCC doesn't apply.

A History of the UCC: Versions and Amendments

The original version of the UCC was first published in 1951. Pennsylvania would be the first to adopt the UCC just two years later, and every other state would follow. The original version of the UCC included all of the current articles with the exception of Article 2A and Article 4A. Articles 2A and 4A would be added in the late 1980s.

Over the years, the UCC has undergone multiple revisions and incorporated many new amendments. In the case of any particular state, you'll probably need to do some research to determine whether the latest revision to a UCC section has been adopted.

Specific Article Enactments and Revisions

Below is each article's year of original enactment and the year of its most recent revision:

• Article 1: General Provisions (original 1951, revised 2001)
• Article 2: Sales (original 1951, 2003 revision withdrawn)
• Article 2A: Leases (original 1987, 2003 revision withdrawn)
• Article 3: Negotiable Instruments (original 1951, revised 2002)
• Article 4: Bank Deposits and Collections (original 1951, revised 2002)
• Article 4A: Funds Transfer (original 1989, revised 2012)
• Article 5: Letters of Credit (original 1951, revised 1995)
• Article 6: Bulk Transfers/Bulk Sales (original 1951, revised 1989)
• Article 7: Documents of Title (original 1951, revised 2003)
• Article 8: Investment Securities (original 1951, revised 1994)
• Article 9: Secured Transactions (original 1951, revised 2018)

States' Adoptions of the UCC

The UCC is only a model or recommendation for what a particular state's commercial code might include; by itself, the UCC has no legal force. However, in practice, every state has adopted some version of the UCC. Those state versions, typically known as the states' "commercial codes" (for example, the California Commercial Code), do have the force of law—in fact, they are laws.

Moreover, because individual states generally adhere closely to some version of the UCC, there's often relatively little variation among states' commercial codes. Variations do, however, exist. To take an extreme example, Louisiana has never adopted UCC Article 2.

Because your state's commercial code might not be identical to the UCC in every detail, you should always look first at your own state's version of the UCC when trying to answer real-life questions.

2022 UCC Revision: Keeping Up With Technological Advancements and E-Commerce

One of the most significant revisions to the UCC came in 2022. In this most recent amended version, a new article was added: Article 12. Article 9 was also heavily affected by the revisions. This latest overhaul was in response to advancing technology, particularly accounting for digital assets like non-fungible tokens (NFTs) and cryptocurrency.

In a combined effort from the NCCUSL and the ALI, the new revisions are now being considered by state legislatures. A handful of states have already adopted the amendments.

UCC Article 12: Controllable Electronic Records

A new section hasn't been added to the UCC in more than three decades. But with the emergence of virtual currencies, artificial intelligence, and other developments, the writing was on the wall. A revisit to the model code was necessary.

Why UCC Article 12 Was Added

The drafters of the 2022 revision have said that they wanted to update the UCC so that it's current and adaptive to new technologies affecting electronic commerce. The amendments are specifically meant to address distributed ledger technology (DLT), like blockchain technology. DLT records electronic transactions involving digital assets—such as Bitcoin and NFTs—and acts as a master ledger to show who owns which assets.

The previous versions of the UCC weren't equipped to handle digital assets. And the general lack of laws and regulations surrounding these types of transactions was likely to result in disagreements. The UCC revisions can clear up these disputes and provide standard instruction to businesses across states.

Article 12 is intended to address current technology and advancements yet to come.

Major Additions to the UCC Under Article 12

Article 12 is mainly meant to define the rights of the purchaser of a controllable electronic record (CER). Let's discuss the more notable provisions of UCC Article 12.

Defining "CERs." A "CER" is a record stored in an electronic medium that a person has the ability to control. CERs can include property (such as cryptocurrency and NFTs) or records that evidence rights in property (like an electronic promissory note). CERs don't include deposit accounts, electronic documents of title, electronic money, and investment property.

Defining "control" of a digital asset. "Control" means that a person has the power to spend, sell, or transfer the digital asset as well as to stop others from using the asset. For example, you'd likely say that a person has control over 1 BTC (bitcoin) if they can spend it, give it to someone else, and prevent someone else from using their bitcoin.

The "take-free" rule. If you, in good faith, receive a digital asset for value and it turns out that someone else has a claim to that asset, then you're protected against that claim. In other words, the person who actually had claim to the asset can't come after you, and you'll gain the rights to the digital asset "free" of any competing claims.

"Tethering." If you have an electronic representation showing your right to payment, then the right to payment exists—or is "tethered" to—that electronic representation. For example, suppose you've been given an electronic promissory note. That note represents your right to be paid. If you sell the promissory note to someone else, then they'll now have the right to be paid because that right is tethered to the electronic note.

Major Changes to UCC Article 9

In comparison to the changes made by adding a whole other article, the changes to Article 9 might seem relatively insignificant. But there's one big change to Article 9 that's important to note.

The new amendment now gives you the ability to perfect a security interest in a CER by controlling it. Previously, you could only perfect your security interest in a CER by filing a financing statement. Perfecting a security interest gives you priority over other security interests in the same CER.

UCC Official Comments

The individual sections of the UCC, which state the rules, sometimes can be difficult to understand. In many cases, it's easier to make sense of the rule by also reading the official comment related to the section.

The official comments are prepared under the authority of the organizations that draft and amend the rules. They're written in relatively plain language and sometimes will provide concrete, explanatory examples.

In short, if you find yourself confused when reading a section of the UCC, a good place to look first for clarification is the official comment for that section. This advice applies to state-specific commercial codes. Each state's commercial code is based on an adoption of the model UCC, so the official comment is generally a reliable way to further illuminate a UCC section regardless of which state you're dealing with.

Note, however, that the official comments aren't always readily available without cost. While you should be able to find sections of both your state's commercial code and the model UCC for free online, finding the official comment for a particular section could take more digging.

Talking to a Business Attorney

The UCC's definitions and rules are complex and confusing. You can find yourself re-reading a sentence multiple times to understand its meaning. If you're part of a transaction that's covered under the UCC, you might find it helpful to talk to a business attorney. A lawyer can help explain the technical terms and multi-layered concepts found in the UCC.

When reading through the UCC, even if you get the gist of what it's saying, a quick conversation with an attorney can provide you with a confident interpretation. A lawyer can also quickly tell you whether your state has adopted the latest UCC revisions and provide legal advice specific to your situation.

For more information, see our section on the UCC.