Titled simply “Sales” and referring, more specifically, to sales of goods (as opposed to services or real estate), Article 2 is itself rather vast by UCC standards. It contains over 100 different sections. Taken together, those sections cover—in an intentionally general fashion—such matters as:
We’ll look very briefly at each of these areas; fuller treatment of at least some of these areas is contained in other articles of our UCC section.
It’s a general principle of contract law that, in order to form a contract, there must be: an offer and acceptance. Article 2 presents some general rules regarding offers and acceptances. These rules are meant to help, rather than hinder, the making of contracts. As a result, the rules are rather broad.
For example, Article 2 says that it generally isn’t necessary that there be a definitive moment of agreement between the parties for a contract to be binding.
Generally, a seller can make an offer to sell goods or a buyer can make an offer to buy them. The offer is usually recognized as an offer as long as whoever makes the offer:
For example, suppose you see a pop-up Girl Scout cookies stand. As you pass, a troop member asks if you’d like to buy a pack of cookies. They have made you an offer.
If you make an offer, you can take it back before it’s been accepted. However, once accepted, the offer is binding. For example, suppose you’re selling your business and liquidating (selling off) your assets. You tell a potential buyer that you’ll sell them your break room furniture for $200. They take a minute to think about your offer. Before they give you an answer, you change your mind and tell them the furniture isn’t for sale. You’ve successfully revoked your offer and aren’t bound by it.
The UCC makes one exception to revocable offers. When a merchant makes an offer in writing to buy or sell goods, it’s considered a “firm offer” and isn’t revocable. In other words, they can’t take the offer back. A merchant is anyone who deals regularly in their goods. (U.C.C. § 2-205 (2023).)
But the offer isn’t indefinitely irrevocable. The offer is irrevocable for as long as the written offer says. For example, if an offer to sell metalworking tools says that it’s good for 60 days, then the offer is irrevocable for 60 days. If the offer doesn’t say how long it’s good for, then it’s irrevocable for a “reasonable time.” An offer can be irrevocable for up to three months. (U.C.C. § 2-205 (2023).)
When you make an offer—unless you say otherwise—an acceptance can be made “in any manner and by any medium reasonable in the circumstances.” (U.C.C. § 2-206 (2023).) Generally, you can accept an offer either by saying you accept it or by your actions as long as it’d be reasonable to view your words or actions as an acceptance.
The UCC gives one example of how an offer can be accepted. When you order or offer to buy goods to be shipped, then someone can accept your offer either by:
(U.C.C. § 2-206 (2023).)
Even if your acceptance contains additional or different terms from the offer, it’s still valid as long as it’s definite and sent within a reasonable time. However, if your acceptance is conditioned on the offeror agreeing to your terms, then your acceptance is instead a counteroffer. (U.C.C. § 2-207 (2023).)
Typically, if the contract is between merchants and the new terms under the acceptance aren’t rejected by the offeror or don’t materially (significantly) alter the offer, they’ll make it into the final agreement. (To learn more about which terms make up a final contract, read our article on the UCC battle of the forms.)
For additional information, read what constitutes acceptance of an offer.
The most basic statement of terms can be considered a contract. Under the UCC, a contract isn’t necessarily invalid if certain terms are missing or incorrect. (U.C.C. § 2-201 (2023).) For example, suppose Annie wants to buy 100 pounds of flour from Lillian. They agree that Lillian will deliver the flour to Annie’s bakery by the end of the week. They write up a contract but Lillian forgets to include the delivery date. The contract would still be valid even though it doesn’t specify a delivery date.
If the contract gives the wrong quantity of goods, then the contract is only enforceable for the quantity of goods given under the contract. Going back to our example above, suppose Annie wants 100 pounds of flour. But the contract incorrectly says 80 pounds. Lillian would only be required to deliver 80 pounds of flour, and Annie would only be required to pay for those 80 pounds.
Some contracts must be in writing. Article 2 provides specific requirements for when a sales contract must be in written form—a rule known as a “statute of frauds.” Generally, a contract for the sale of goods must be in writing if the price of the goods is $500 or more. However, even if the price is more than $500, a contract doesn’t have to be in writing as long as the goods are either “specially manufactured” for the buyer or have been accepted and either paid for or received. (U.C.C. § 2-201 (2023).)
Modifying the contract. Often you’ll find that you need to modify an existing contract. Article 2 provides basic rules for how to do this. One key rule is that contract modification generally doesn’t require any additional consideration (added value) in order to be effective. Additionally, if the contract requires any amendment to be in writing and its acceptance signed, then you must follow the contract’s amendment provisions. (U.C.C. § 2-209 (2023).)
“Performance” on a contract basically means doing what you’re obligated to do under the contract. In the case of contracts for the sale of goods, the basic obligation is that the seller delivers the goods and the buyer pays for the goods.
Article 2 goes further and provides specific rules relating to shipments and deliveries of goods, as well as to payment. Additionally, under Article 2, you’ll find the following rules:
For more information, read about what the UCC requires for a buyer’s performance and a seller’s performance in a contract for the sale of goods.
A seller or buyer can breach the contract. Generally, a breach happens when the buyer or seller doesn’t perform their obligations under the contract. A failure to perform can happen when the buyer or seller either:
Seller breaches. One of the primary ways that a contract for the sale of goods can be breached is if a seller provides the buyer with the wrong items. Article 2 includes a series of rules regarding what options a buyer might have in such circumstances, including when and how to reject all or part of a group of ordered goods. The seller might also be able to fix any goods that don’t match what was promised under the contract without violating the contract.
Buyer breaches. Similarly, there are rules regarding a buyer’s acceptance of goods, which include a rule that acceptance occurs if a buyer “fails to make an effective rejection.” (U.C.C. § 2-606 (2023).) If a buyer accepts the goods, then they’re typically required to pay for the goods. Usually, payment for the goods and delivery of the goods happens at the same time. But the contract might require the buyer to pay prior to delivery and acceptance of the goods. If the buyer refuses to pay for accepted goods or under the terms of the contract, then they’re in breach of the contract.
Generally, when there’s a breach, the non-breaching party needs to give the breaching party notice of the breach.
If you believe that the other side won’t perform their end of the agreement, you can demand that the other side give you assurance that they’ll perform. To demand assurance, you must:
Until you receive adequate assurance, you can suspend your performance under the contract as long as it’s reasonable to do so. If the other party doesn’t give assurance within 30 days that they’ll perform their end of the contract, then the UCC considers them in breach. (U.C.C. § 2-609 (2023).)
When a party to a contract breaches the contract, then the non-breaching party generally is entitled to some compensation or “remedy” for the breach.
When the buyer breaches, the seller might be entitled to:
(U.C.C. § 2-703 (2023).)
When the seller breaches, the buyer might be entitled to:
(U.C.C. § 2-703 (2023).)
The remedies available to the buyer and seller usually depend on the type of goods involved. For example, specific performance is usually only available when a good is unique. Additionally, while these remedies might be available, the non-breaching party typically has to prove there was a breach of contract and that they’re entitled to the requested remedy.
All states, with the exception of Louisiana, have adopted Article 2 of the UCC into law. However, there might be some variation in the law among the states. Check your state’s commercial code for specific rules on how contracts for the sale of goods are enforced.
While Article 2 does a good job of providing widely applicable rules, every sales transaction is unique. If you have legal questions specific to your situation, you can talk to a business attorney. They can review or draft a sales agreement for you or advise you on your rights and obligations under the contract.
]]>The UCC, however, does not cover real estate leases. Most of the rules for commercial lease contracts are in Article 2A, which has nearly 80 individual sections. Additional relevant rules are located in other parts of the UCC, such as Article 1 (General Provisions) and Article 9 (Secured Transactions). Here we’ll look briefly at some of the main UCC lease rules.
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A lease is when one person gives another person the right to possess and use a good in exchange for consideration (value), usually money. Lease contracts involve two parties:
A lease is different from a sale. A sale is when a person buys a good and receives title to the good with no intention of returning it. A lease is when a person uses a good but doesn’t receive title and has the intention to return the good once the lease term ends.
There are three main types of leases under the UCC:
Both a consumer lease and a non-consumer lease can also be a finance lease. Finance leases have important characteristics that distinguish them from standard leases.
A finance lease agreement is usually between a financing company (the “lessor”) and a business or consumer (the “lessee”). The UCC has special rules for finance leases.
A finance lease differs from a standard lease in multiple ways.
The parties involved. In a regular lease, you have two parties: the lessor and the lessee. In a finance lease, you have three parties: the lessor, the lessee, and a seller (also called a “supplier”). The lessor buys a good from a seller for the purpose of leasing the good to the lessee.
Who owns the good in the beginning. The process of a finance lease starts when the lessee finds a good that they want to lease. At the time the lessee identifies the good, someone else who’s not the lessor—but is instead a seller or manufacturer—owns the good. Once the lessee picks the good out, the lessor then buys the good from the seller. Whereas in a typical lease, the lessor owns the good from the beginning.
The parties’ trade and industry. In a finance lease, the lessor is usually a financing company that doesn’t have any expertise in or knowledge about the leased good. Their primary trade is in providing financing, not in supplying or manufacturing goods. In a regular lease, the lessor is usually someone who buys and leases goods—such as a car dealership—or manufactures goods.
The parties’ involvement in the goods. In a regular lease, because the lessor owns the goods and trades in the goods, they have a better knowledge of the goods. The lessor supplies the lessee with information about the goods, including the associated warranties. In a finance lease, the lessor’s role is limited. Instead, it’s the seller (supplier) who provides the information about the goods as well as the promises and warranties. Often, the lessee will talk to the supplier about the goods and negotiate a price before the lessor purchases the goods. The lessor simply provides a way for the lessee to obtain the goods.
Now that we’ve gone over a few of the differences, let’s look at how a finance lease works.
With a finance lease, typically the following occurs:
Before the lessee signs a lease agreement with the lessor, the lessee will either:
(U.C.C. § 2A-103 (2023).)
So while the lessee isn’t a party to the sales contract for the good, the lessor does involve the lessee in the process. The lessee is the one who picks out the good and inspects the good to make sure it’s the one they want to lease. Generally, the lessee also has access to the sales contract and usually has the same information about the goods that the lessor does.
If the lease isn’t a consumer lease, then the UCC puts more stringent requirements on the lessor. As mentioned previously, a “consumer lease” is one where the lessee is using the goods primarily for personal, family, or household purposes. So, if you’re using the goods for business purposes, then these additional requirements would likely apply to your lease.
If the lease isn’t a consumer lease, then the lessor—before the lessee signs the lease agreement—must inform the lessee in writing:
(U.C.C. § 2A-103 (2023).)
These additional requirements somewhat overlap with the general requirements associated with a consumer finance lease. For example, if the lessee receives a copy of the lessor’s sales contract, then they’d probably already know who the seller is and potentially the warranties and promises associated with the goods. But these additional requirements assure that the lessor has this information in writing and is entitled to these promises and warranties—rather than just being aware of their existence.
One specific rule to note about non-consumer finance leases is that they’re irrevocable. Once the lessee accepts the goods, they must perform their obligations under the contract. (U.C.C. § 2A-407 (2023).) The reasoning for the contract being irrevocable is because the lessee was the one who picked out the goods and the lessor purchased the goods and arranged the transaction based on what the lessee wanted. Also, the lessor usually isn’t a regular seller or manufacturer of that good so it might not make as much sense for the lessor to guarantee anything about the goods beyond what the seller or supplier guarantees.
Sometimes determining whether something’s a lease or a secured transaction can be difficult. In fact, there are many court cases surrounding that particular issue. The UCC makes an important distinction between leases and secured transactions—and explicitly says that a lease that creates a security interest isn’t a lease.
True lease. If a business is truly leasing an item, the lessor keeps title to the item and has the right to repossess the item if the business runs out of money. With a true lease, there’s an expectation that the lessee will return the item at the end of the lease term.
Secured transaction. If a business is actually buying an item over time on credit, then it’s the business that has title to the item. If the business runs out of money, other creditors besides the lessor could have rights to take the item to satisfy unpaid debts.
Generally, the question of whether a lease is a true lease or a secured transaction comes up when:
If the lease creates a security interest in the goods, then the lease becomes a secured transaction. The contract would then be governed by UCC Article 9 instead of Article 2A.
A lease for goods will create a security interest in the goods if the lessee (buyer) is obligated to make payments on the goods for the entire term of the lease without a right to early termination. In other words, a lease isn’t a security interest if the lessee can cancel the lease early.
In addition to meeting the above requirements, to create a security interest, a lease must also have at least one of the following features:
(U.C.C. § 1-203 (2023).)
This rule might appear somewhat complicated but can be explained with a few short examples.
Example one: Your business signs a three-year “lease” for a very old office machine that only has an additional two-year useful life. This “lease” is, in fact, a sale on an installment plan and—per the first listed item above—creates a security interest.
Example two: Your business signs a two-year “lease” for the same old office machine as in example one. The lease can be renewed at the end of the two years, at no additional charge. This transaction is effectively a sale and—per the third listed item above—creates a security interest.
Example three: Your business signs a five-year “lease” for a different office machine that gives you the option to become the owner of the machine at the end of the five-year period at no additional charge. Again, this is effectively a sale and—per the last listed item—also creates a security interest.
These features typically indicate that someone is buying a good—and someone is selling it—rather than leasing it. If the transaction was a lease, usually the parties would act in a way that showed that the lessor had plans to or was open to leasing the good to someone else after the lease term was over.
Transactions might superficially appear to be lease contracts but in fact, are secured transactions. In these situations, “lessors” (actually, sellers) need to take additional steps to protect their interests in the goods. Many lessors will preemptively take these steps in case a court determines that their lease is actually a secured transaction.
Usually, if it’s been determined that a lease is actually a secured transaction, then the seller has already attached the security interest. Specifically, the buyer has:
Once the security interest attaches, the seller needs to take an additional step to perfect the security interest. Perfecting their security interest will ensure that the seller receives higher priority over other unperfected creditors in regard to their rights and claims to the goods.
For example, suppose the seller has perfected their security interest in the goods. These goods are also serving as collateral for the purchase. The buyer stops making payments and the seller wants to repossess the good to satisfy the debt. But another creditor who hasn’t perfected their security interest in the good also wants to lawfully repossess the goods. In this case, the seller would have the right to repossess the goods over the unperfected creditor because they have perfected their security interest.
To perfect their security interest, the seller should file a UCC financing statement with the appropriate government office.
For more information, see how to attach and perfect a security interest under the UCC.
Generally speaking, the UCC applies its warranty rules for the sale of goods to leases. So, just like there are rules for express warranties and implied warranties when goods are sold, there are rules for express warranties and implied warranties when goods are leased.
Generally, there are three main types of warranties:
The rules for these warranties—including how they’re created, modified, disclaimed, and breached—are all nearly identical for sales and for leases. The rules regarding the exclusion of warranties in lease contracts are also quite similar to the exclusion rules for sales contracts.
It’s important to note that the implied warranties of merchantability and fitness for a particular purpose don’t apply to finance leases.
Implied warranty of merchantability. With a finance lease, the lessor is typically a financial institution that doesn’t regularly trade in the associated goods. Therefore, the lessor isn’t a merchant. Since the implied warranty of merchantability only applies to merchants, finance leases are excluded. (U.C.C. § 2A-212 (2023).)
Implied warranty of fitness for a particular purpose. Similarly, the lessor in a finance lease doesn’t usually have any skill or knowledge in the good being leased. Instead, normally the lessee relies on their own knowledge and skill or on that of the supplier when picking a good to lease. So, an implied warranty of fitness for a particular purpose wouldn’t be created between the lessor and lessee. (U.C.C. § 2A-213 (2023).)
For additional information about lease warranties, read about the warranties for sales contracts.
In legal lingo, a law requiring a contract to be in writing is known as a “statute of frauds.” The UCC has a statute of frauds for leases. (U.C.C. § 2A-201 (2023).)
The general rule is that if the total payments to be made under the lease, excluding payments for options to renew or buy, are $1,000 or more, the lease must be in writing. The requirements for the enforceability of a lease are relatively flexible, allowing for omission or incorrect statements of certain terms. For example, if you left out a delivery date on the lease, then it’d probably still be enforceable.
There are exceptions to the $1,000 or more rule. Most notably, in cases involving “specially manufactured” goods or goods that have already been received and accepted by the lessee, you don’t need a written contract—regardless of the total payment amount.
As discussed earlier, if the contract is for a non-consumer finance lease, then the lessor is required to provide the lessor with certain information in writing.
For more information, read about when UCC contracts must be in writing.
A party is in default on a lease if they fail to meet their obligations under the lease contract. A lessor’s obligations under a lease contract are very similar to a seller’s obligations under a sales contract. Likewise, a lessee’s obligations under a lease contract are similar to a buyer’s obligations under a sales contract.
When one party defaults on a lease contract, the other party has the right to a remedy for that default. If one party defaults, then the other party isn’t required to provide them notice of the default unless the lease agreement calls for it. (U.C.C. § 2A-502 (2023).)
Unless agreed to otherwise, you must take action against the defaulting party within four years from the time when you discovered or should’ve discovered the default. (U.C.C. § 2A-506 (2023).)
If the lessor defaults, the lessee might be entitled to:
(U.C.C. § 2A-508 (2023).)
If the lessee defaults, the lessor might be entitled to:
(U.C.C. § 2A-523 (2023).)
When reviewing your lease or when considering making a lease, Article 2A of the UCC is often a good guide. Almost every state, with the exception of Louisiana, has adopted Article 2A into its commercial code. But states might have different variations of the code in their laws so it’s important to check your state’s specific laws.
If you have legal questions about your situation, consider talking to a business attorney. They can advise you on whether your lease is a true lease or a security agreement or they can draft a lease agreement for you.
]]>“Warranties” are, in essence, promises by the people who make or sell the goods that their goods are of a certain quality. If they break their promise, then you generally have some recourse against them—such as the ability to file a lawsuit and recover damages.
Article 2 of the Uniform Commercial Code (UCC) provides rules for contracts for the sale of goods. Within this UCC article, you can find rules for both express and implied warranties.
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The UCC provides three main types of warranties:
Let’s look at these three kinds of warranties in more detail. You can also find more information on our warranty rights FAQ.
A common warranty created in the sale of goods is one where the seller guarantees to the buyer that the goods being sold have clear title—also called a “clean title” or a “title free and clear.” This type of warranty is particularly important because it relates to the underlying purpose of a business transaction: to sell a good.
Under the UCC, a “warranty of title” in a sales contract means:
A lien (and security interest) is a legal claim of ownership over a good. A creditor generally puts a lien on a piece of property when the owner of that property owes them money—usually from a loan, unpaid taxes, or a court judgment. When a creditor puts a lien on a piece of property and the debtor (who’s also the property owner) doesn’t pay their debt, then the creditor can take possession of the property.
For example, suppose you buy a van for your housekeeping business. The sales contract says that the seller warrants a clear title on the van. Shortly after the purchase, you see that a lien was filed on the van in your county recorder’s office last year before your purchase. The seller has breached their express warranty because they haven’t actually transferred a clear title to you.
A sales contracts must contain this warranty unless the seller excludes or modifies it. A seller can only exclude or modify the warranty with specific language or by circumstances that makes it clear to the buyer that there’s no claim of clear title.
Express warranties are affirmative statements by a seller to the buyer that relates to the goods being sold. The UCC describes a warranty as an “affirmation of fact or promise” about the goods that becomes “part of the bargain.” According to the UCC, the seller doesn’t need to use formal words like “warrant” or “guarantee” and they don’t need to intend to make a warranty to create one. (U.C.C. § 2-313 (2023).)
The UCC gives two forms of express warranties that might be made by the seller:
If the seller gives a description of the goods or provides a sample or model to the seller that’s meant to represent the goods being offered, then the goods must conform (match) the description, sample, or model. (U.C.C. § 2-313 (2023).)
While not part of the UCC, and not covered in this article, there are other laws that relate to express warranties. Perhaps the most important among these is the Magnuson-Moss Warranty Act, which is a federal law governing express warranties related to consumer products.
An express warranty might be created when:
For example, an electronics retailer might tell customers that they’ll repair or replace any DVD player they sell if the player fails to work within three years of the sale, no questions asked. Or, an industrial machine manufacturer might tell an auto parts maker that the machines the manufacturer is selling will always be within certain tolerances.
As long as the buyers involved are relying on these types of statements—as long as the statements are part of the “basis of the bargain”—the statements qualify as express warranties under the UCC. These statements create legal obligations for the seller.
Express warranties can be oral as well as written. These warranties are usually found in or on:
For example, a car dealership might say in their advertisement that they offer free tire rotations and oil changes for any car you purchase from them for the life of the car. Or, a user manual might provide a two-year warranty on a printer that allows a buyer to send in their broken printer for a repair or replacement.
The seller or manufacturer can alter or disclaim an express warranty in whole or in part. The UCC says that the words or actions taken by the seller to create the warranty should be considered together with the words or actions taken to negate or limit the warranty. When considered together, you should conclude whatever’s reasonable and consistent. (U.C.C. § 2-316 (2023).)
For example, suppose you’re shopping for employee uniforms. You come across shirts that are advertised as medium blue on a website. But a note at the end of the product description says that the colors can range in their shades of blue due to different dye lots and no specific shade of blue is guaranteed for any shirt. So, even though the webpage lists the shirts as medium blue, the note in the product description modifies this express warranty. The modified warranty instead communicates that the shirt that you buy might differ in its shade of blue—a reasonable conclusion given the details provided.
Apart from express warranties, the UCC has various rules regarding implied warranties. Basically, these are warranties that automatically exist when goods are being sold, without the need for any specific “affirmation.”
Two particularly important implied warranties under the UCC are:
Along with these two kinds of implied warranties, other implied warranties might come up from the “course of dealing” or “usage of trade.” (U.C.C. § 2-314 (2023).)
There are an array of general standards under Article 2 for when goods are merchantable. Probably the most important of these standards is that the goods “are fit for the ordinary purposes" for which those types of goods are used. (U.C.C. § 2-314 (2023).) Consequently, the merchantability standard depends on the good sold.
At the very least, to be merchantable, the goods should:
An implied warranty of merchantability only applies to sellers who are merchants of those goods. The UCC defines a “merchant” as someone who regularly deals in their kind of goods or who’s considered (either by themselves or by their employment) as someone with knowledge or skill in those goods. For instance, a vacuum salesperson would be a merchant in relation to vacuums because they regularly sell them.
This type of warranty is created when a seller has reason to know that:
(U.C.C. § 2-315 (2023).)
When these two conditions are met, the seller will be bound by this warranty. Here are a few examples that help demonstrate how this warranty works:
Example one: Jorge asks an appliance dealer for a clothes dryer that can dry twenty pounds of wet clothes. The dealer recommends a specific model of dryer and on the basis of that recommendation, Jorge buys that model. If the dryer subsequently is unable to dry twenty pounds of wet clothes, then, even if it can handle smaller loads, Jorge likely has the basis for a warranty claim against the dealer.
Example two: Susan asks an outdoors outfitter for a parka that can keep her warm in weather below zero Fahrenheit. The outfitter assures Susan that a particular parka will keep her very warm well below zero Fahrenheit. Susan buys that parka on the strength of the outfitter’s advice. If it turns out that the parka can’t keep a person warm when the temperature is below freezing, much less below zero Fahrenheit, Susan probably has the basis for a warranty claim against the outfitter.
Example three: Charlotte asks a paint store manager for the best wood stain to use on the new tables and chairs she has made for herself, and the manager recommends a particular product. If the product is actually dark paint and not stain, and ruins Charlotte’s furniture, the warranty created by the manager has likely been breached.
Having looked at examples where implied warranties might be breached, it’s important to understand that implied warranties don’t cover every possible failure of goods or products.
For example, implied warranties generally don’t cover such things as:
Generally, the seller isn’t responsible for the product’s quality and performance that result from these uses.
Under the UCC, just as with express warranties, it’s possible for sellers to exclude or modify implied warranties. To exclude or modify an implied warranty, the seller generally must provide the exclusion or modification:
Implied warranties of merchantability. If you’re limiting, modifying, or excluding an implied warranty of merchantability, you must mention the word “merchantability.”
Implied warranties of fitness for a particular purpose. You can exclude an implied warranty of fitness by saying: “There are no warranties which extend beyond the description on the face hereof.”
Any implied warranties. You can exclude any implied warranties by using language like “as is,” “with faults,” or other similar wording that makes plain that there’s no implied warranty provided with the product. You can also exclude or modify an implied warranty by course of dealing, course of performance, or usage of trade.
It’s important to note another way in which an implied warranty can be excluded. If the buyer was given the chance to inspect the goods as much as they wanted or they refused to inspect the goods, then there’s no implied warranty as to any defect that should’ve been revealed during an examination of those goods.
For example, suppose Arisu wants to buy a desk for his new employee to use at the office. He goes to a furniture store where he finds the desk he wants. Before buying the desk, the manager allows Arisu to take all the time he needs to inspect the desk to make sure he’s happy with it. Arisu takes his time examining the desk and proceeds with the purchase. A day later, he realizes that one of the three drawers doesn’t open. Here, there’s no implied warranty—or subsequent breach—because Arisu had ample opportunity to discover the broken drawer during his inspection.
(U.C.C. § 2-316 (2023).)
A breach of warranty for goods occurs when a warranty is created and then violated. We’ve already discussed how the different warranties under the UCC are created. Put simply, when a product doesn’t align with a particular warranty, then the seller has breached the warranty.
Generally, buyers have to tell the seller (or manufacturer) that the warranty has been breached, and do it within a certain period of time.
Notice. If the seller breaches, the buyer must notify the seller of the breach within a reasonable time after they discovered the breach or should’ve discovered the breach. (U.C.C. § 2-607 (2023).)
Statute of limitations. The UCC says that any action against a breach of warranty has to be started within four years of the breach, even if the buyer didn’t know about the breach until much later. This rule limiting the time to make a claim is known as a “statute of limitations.” The breach is said to happen (and the clock starts ticking) when the goods are delivered (or tendered). So, essentially, buyers have four years from the time the goods are delivered to discover relevant defects in the goods sold and to take action against the seller. The parties can limit the statute of limitations to no less than one year in the sales contract. (U.C.C. § 2-725 (2023).)
Depending on the circumstances, the buyer has various available remedies. If there’s a breach, the buyer can:
You can read more about a buyer’s right to damages in our article on the buyer’s performance under the UCC.
If you’re dealing with a merchant, then you can usually count on the implied warranty of merchantability applying. If you took the seller’s advice when buying a particular good, you can usually expect the implied warranty of fitness for a particular purpose to apply. For express warranties, pay attention to promises or guarantees that are made in contracts, advertisements, and documents that come with the product (as well as the verbal promises the seller makes).
People and businesses expect the product they buy to align with the product description and to perform the way they expect it to. As a result, warranties are often overlooked. Usually products turn out more or less how they’re supposed to. But in some cases, they don’t. In those situations, make sure you know which warranties apply to your case and what your rights are.
While the UCC serves as a good guide, you should check your state law. The UCC itself isn’t law—states adopt the code and sometimes make changes to it. If you need legal guidance, talk to a business or product liability lawyer. They can look at the facts of your case to determine whether you have a valid breach of warranty case.
]]>When it comes to contracts specifically related to the buying and selling of goods, the Uniform Commercial Code (UCC) has various rules regarding the buyer’s performance. Some key rules are those involving:
Many of these rules rely on the general principle of what’s reasonable in the circumstances. In practice, disputes are generally treated on a case-by-case basis.
Under the UCC, the primary obligation of a buyer of goods is to pay for the goods. The general rule is that the buyer must accept and pay for the goods when the seller has delivered—or, to use more technical language, “tendered delivery of”—the goods.
More particularly, the UCC indicates that by default and unless otherwise agreed to:
The seller and buyer can make other contractual arrangements regarding payment and delivery of the goods. But, under the UCC, when payment is due on delivery, the buyer doesn’t have the right to keep or dispose of the goods unless they pay for the goods.
As to the form of payment, the UCC allows for payment “by any means or in any manner current in the ordinary course of business,” unless the seller demands payment in cash. (U.C.C. § 2-511 (2023).)
Depending on the circumstances, the buyer could pay by:
The method of acceptable payment might be specified in the contract. Even if a method isn’t specified, typically, this topic isn’t the subject of many disputes.
The UCC gives a buyer a right to inspect goods prior to accepting or paying for them. The buyer isn’t required to pay for goods that they don’t accept. More specifically, before making payment, the buyer has the right to inspect the goods “at any reasonable place and time and in any reasonable manner.” (U.C.C. § 2-513 (2023).)
In cases where the buyer is taking possession of the goods at the seller’s location, this likely would mean an inspection at that location. In cases where the seller ships the goods to the buyer, the buyer has the right under the UCC to perform the inspection after the goods have arrived at their destination.
Be aware that the UCC distinguishes between a buyer paying for goods and a buyer “accepting” goods. Acceptance is discussed below.
The buyer bears the cost of the inspection. The buyer is responsible for any costs associated with inspecting the goods. However, if the goods don’t conform to the contract, the buyer has the right to recover inspection costs from the seller. For example, suppose Ash owns a jewelry store and orders diamonds from Misty to stock his store. Ash hires an expert to inspect the diamonds to see if they’re of the quality that Misty guaranteed. The inspector determines that they’re not of the promised quality, and Ash cancels the deal. Because the diamonds didn’t conform to their deal, Ash can recover the cost of the inspection from Misty.
Exceptions to buyer’s right to inspection. The UCC has two specific exceptions to the general inspection rule. When these exceptions apply, the buyer must pay before making any inspection. The first exception is when the contract is for goods delivered C.O.D. (cash on delivery) or on similar terms. The second exception is when the contract is for payments against documents of title.
General contract law commonly allows for a party to fulfill contractual obligations through substantial performance. Under this doctrine, the seller can deliver goods that mostly (substantially)—though not exactly or perfectly—meet the requirements of the contract without breaching the contract.
However, for contracts for the sale of goods, the UCC requires “perfect tender” by the seller. In other words, the seller must deliver the exact number and specified goods under the contract on the exact date and through the exact delivery method called for in the contract.
If the seller doesn’t meet the contract requirements, the buyer can either:
(U.C.C. § 2-601 (2023).)
If the buyer is going to reject the goods, the UCC requires that the buyer both rejects the goods within a reasonable time after the goods have been delivered and notifies the seller of the rejection within a reasonable time. (U.C.C. § 2-602 (2023).)
If a buyer wants to reject goods because they don't conform to the contract, the rejection must occur before the buyer accepts the goods.
According to the UCC, acceptance occurs when the buyer:
(U.C.C. § 2-606 (2023).)
Your specific situation will determine what a reasonable opportunity to inspect or a reasonable time after delivery of the goods is. On a state-by-state basis, there might also be case law that can provide further guidance.
If the goods don’t conform to the contract, the buyer might not be able to reject the goods right away. Under some circumstances, the buyer must give the seller an opportunity to cure (fix) whatever problem or defect (nonconformity) in the goods led to the initial rejection.
If a seller delivers goods that don’t match the contract, and the buyer rejects those goods, the UCC gives the seller an opportunity to fix the problem—or to "cure" the goods.
The seller has the right to cure the defective goods in two specific situations:
(U.C.C. § 2-508 (2023).)
For more information on the seller’s rights (and obligations) under a contract for the sale of goods, see what the UCC says about the seller’s performance.
Rejection occurs before a buyer accepts the goods, whereas revocation refers to situations where a buyer has already accepted the goods but the buyer takes back their acceptance. The UCC gives buyers the right to revoke acceptance of goods only in very limited circumstances. A buyer can revoke their acceptance only of nonconforming goods.
Specifically, the buyer can revoke their acceptance of the nonconforming goods only if either:
(U.C.C. § 2-608 (2023).)
As with rejection, revocation must happen within a reasonable time after the buyer discovers the grounds for the revocation. Additionally, the buyer must revoke their acceptance before there’s any substantial change in the condition of the goods—unless the change is caused by their own defects. Moreover, as with rejection, revocation isn’t effective unless and until the buyer notifies the seller of it.
Unlike the seller’s duty to mitigate when the buyer breaches, the buyer isn’t required to mitigate their damages. Instead, the buyer can choose to mitigate their damages.
When a seller fails to deliver goods as required under a contract, the buyer can "cover" by getting the same or similar merchandise from another source to mitigate their damages. In essence, “covering” allows the buyer to buy substitute goods from another seller to help make up for the seller’s failure to perform. Generally, the buyer can find replacement goods with little effort or delay—and their potential losses can be largely, if not entirely, avoided.
The buyer’s damages are calculated based on the buyer’s decision to cover. Regardless of whether the buyer finds substitute goods, the buyer would be entitled to incidental and consequential damages. Though if the buyer doesn’t cover, they’d be entitled to a lesser extent of incidental and consequential damages.
“Incidental damages”: These types of damages include any expenses the buyer reasonably incurs in inspecting, receiving, transporting, or taking care of the goods, along with any other costs related to finding replacement goods.
“Consequential damages”: These types of damages include any losses the buyer suffers because of the seller’s breach that the seller had reason to know about that can’t be prevented from cover, as well as any personal injury or property damage from a breach of warranty.
(U.C.C. § 2-715 (2023).)
When the buyer covers, the measure of damages is the difference between the cost of cover and the contract price, together with any consequential or incidental damages. You deduct from the buyer's losses any expenses the buyer saved as a result of the breach (U.C.C. § 2-712 (2023).)
For example, suppose Harry’s Haircuts buys four salon chairs from Sally’s Seat Shop for a total of $1,200. On delivery day, Sally’s delivers nonconforming chairs, which Harry’s rejects. After rejecting the goods, Harry’s reasonably buys four comparable salon chairs from another vendor for $1,600. Harry can recover from Sally’s $400 (the difference between the replacement chairs and the contract price) as well as any incidental and consequential damages.
A buyer isn’t always able or willing to cover, and they’re not required to. For instance, it might be particularly difficult to cover when the goods are unique. Sometimes there’s no real alternative source readily available to the buyer.
If the buyer chooses not to cover, the UCC offers an alternative remedy. In such cases, the measure of damages is the difference between the market price for replacing the goods at the time the buyer learned of the breach and the contract price. You can add any consequential and incidental damages to the buyer’s losses except for those damages that require the buyer to cover. (U.C.C. § 2-713 (2023).)
For example, suppose Hakeem owns a music store and buys an antique piano from Andre. The piano is rare and more than 150 years old. Hakeem negotiates Andre down to a price of $3,000. At that time, the fair market price for the piano or one like it would be $3,800. After striking the deal, Andre changes his mind and wrongfully fails to deliver the piano to Hakeem the next day. Hakeem chooses not to find a replacement. In this case, Hakeem can recover from Andre $800 (the difference between the market price for replacing the piano and the contract price). Because Hakeem chose not to cover, he wouldn’t be entitled to some incidental and consequential damages.
As the buyer, you’re generally in a good position to protect yourself from the seller’s nonperformance, especially because the UCC requires perfect tender. On your end, your primary task is to pay the seller. Apart from that, it’s mostly up to the seller to produce and deliver the goods at the quality and on the date you’ve agreed to. And if they don’t, the UCC provides you with several remedies so you can choose the path that’s most beneficial to you.
But if you need legal assistance or you’re unsure of your rights, talk to a business attorney. They can advise you on your state’s laws and on your options according to your rights.
]]>When it comes to contracts specifically related to the buying and selling of goods, the Uniform Commercial Code (UCC) has various rules regarding the seller’s performance. It might seem obvious that the seller is obligated to deliver the right goods at the right time to the right place. But in practice, business transactions divert from the plan all the time—whether it’s a substitution of goods, delayed delivery time, or shipment oversight.
While circumstances might change, the seller’s obligations don’t.
General contract law, as opposed to the UCC, generally allows for a party to fulfill contractual obligations through substantial performance. Substantial performance means that the party substantially—though not exactly or perfectly—meets the requirements of the contract. So, while the party might not have performed perfectly, they also didn’t breach the contract.
For contracts for the sale of goods, however, the UCC requires "perfect tender” by the seller. Tender means, in essence, the delivery of goods to the buyer. Perfect tender means delivering goods that precisely meet the terms of the contract.
According to the UCC, if the goods as tendered “fail in any respect to conform to the contract,” the buyer has three options:
(U.C.C. § 2-601 (2023).)
For example, suppose Carrie sells tables and Freddy runs a convention center. With a big convention coming up, Freddy contracts to buy 30 tables from Carrie at $40 per table. On the agreed-to delivery date, Carrie tenders 28 tables to Freddy—two short of what the contract required. Because the UCC requires perfect tender, Freddy can choose to accept some or all of the delivery or reject it. Freddy decides to accept all of the tables and pays Carrie $40 each for the 28 tables.
A key section of the UCC gives a seller the right to “cure” goods delivered to a buyer that are defective or non-conforming. In other words, if a seller delivers goods that don’t match the contract, and the buyer rejects those goods, the UCC gives the seller an opportunity to fix the problem.
The seller has the right to cure the defective goods in two specific situations:
(U.C.C. § 2-508 (2023).)
For example, suppose a sales contract lists the date of delivery as March 31. The seller delivers defective goods on March 15, which the buyer rejects. The seller would still have until March 31 to deliver conforming, non-defective goods to the buyer.
Consider another example. Suppose Joe Young orders a surveillance security system from Mighty Security to install at his warehouse. Mighty Security is out of stock on the particular security system that Joe ordered. Instead, they send Joe a more expensive, higher quality system that offers a crisper picture and better features. Joe nevertheless rejects the new security system. Mighty Security would likely have the right, within a reasonable time, to provide the model actually ordered by Joe.
A seller’s primary obligation under the UCC is "tender of delivery,” meaning, delivering the goods to the buyer. In some cases, tender of delivery will involve the seller shipping or otherwise transporting goods to the buyer. In other cases, it can mean that the seller holds the goods where the buyer can take possession of them.
Unless agreed to otherwise, under the UCC, the seller will deliver the goods to their own place of business as long as the goods aren’t known by both parties to be kept somewhere else. (U.C.C. § 2-308 (2023).)
Often, the sales contract specifies how the goods will be tendered. However, where the contract doesn’t require the seller to ship the goods to the buyer, the two primary requirements for the seller under the UCC are:
(U.C.C. § 2-503 (2023).)
So, the seller must hold onto the goods until the buyer can either come and pick the goods up or can arrange for the goods to be brought to them. And when the goods are ready to give to the buyer, the seller needs to notify the buyer that they’re ready.
The buyer and seller can contractually arrange for a specific delivery location. Under the UCC, the parties can agree to have the seller either:
(U.C.C. § 2-504 (2023).)
Let’s look at these three options in more detail.
Make the goods available at a separate location. The UCC says that if both the seller and the buyer know specifically what goods are involved, and also know that those goods are located “in some other place” than the seller’s place of business, then that other place is the place for delivery. (U.C.C. § 2-308 (2023).)
Ship the goods to a location not specified by the buyer. This option is known as a “shipment contract.” For shipment contracts, the seller has three responsibilities. First, they have to promptly notify the buyer of the shipment. Second, the seller has to make a “proper contract” with a carrier for the transportation of the goods, taking into account the specific nature of the goods involved—for instance, whether they’re perishable. Third, the seller has to give the buyer any document necessary to allow the buyer to claim the goods from the carrier.
Ship the goods to a location specified by the buyer. This option is known as a “destination contract.” Some destination contracts will involve shipping goods to a third party, who will then hold the goods for the buyer. (The third party in this situation is technically known as a “bailee.”) In such situations, the UCC requires the seller to provide the buyer with the necessary documents to allow the buyer to get the goods from the third party.
As a final point, it’s worth noting that if the goods are being shipped to the buyer, the buyer has an obligation to provide facilities reasonably suited to receive the goods.
We know that the seller is responsible for performing their obligations under the contract. But what happens when the buyer doesn’t perform their obligations and breaches the agreement? In that case, the seller has remedies available just like the buyer. But the seller also has obligations—namely, the duty to mitigate damages.
If a buyer fails to purchase the goods according to the sales agreement—either by wrongfully rejecting the goods, revoking their acceptance of the goods, or not paying for the goods—the seller must make reasonable efforts to sell the goods to another party. If it's a private sale, the seller must give notice to the buyer of the proposed sale.
There are several exceptions that might relieve a seller of its duty to mitigate:
In both instances, the seller would be entitled to damages equal to the full contract price. For example, suppose Oscorp Inc. commissioned an artist, May Parker, to paint a picture of the company’s founder, Norman Osborn, for $50,000. May paints the picture and Oscorp wrongfully rejects the painting. Because the painting was ordered on commission and isn't reasonably resalable, May wouldn’t have a duty to mitigate the damages.
If the seller resells the goods, the measure of damages is the difference between the resale price and the contract price, along with any incidental damages. You subtract from this amount any expenses the seller saved as a result of the buyer's breach.
Under the UCC, “incidental damages” are defined as any expenses the seller incurred:
(U.C.C. § 2-710 (2023).)
For example, suppose a manufacturer sold a company 100 construction cones for $3,000 in total. The manufacturer delivers the cones to the company’s shop but the company wrongfully refuses to pay, breaching the contract. The manufacturer has to transport the cones back to its warehouse. The manufacturer makes a reasonable effort to find another fit buyer and sells the 100 cones to another business for $2,000. Under the UCC, the manufacturer would be entitled to $1,000 (the difference between the resale price and the contract price) plus the expense of transporting the cones back to its warehouse (the incidental damages).
If, alternatively, the seller can (but has not yet) resold the goods, the measure of damages would be the difference between the contract price and the market price at the time of the buyer's breach.
While the UCC provides rules to protect businesses and customers, these rules typically align with what most people would view as reasonable. And if there’s an issue in the sale, many buyers and sellers can work it out. But if you and the buyer can’t find a solution under the UCC rules or you need help interpreting the model code, consider consulting a business lawyer. They can help you find a resolution and advise you on your state’s laws as they relate to your situation.
]]>To a great extent, general contract law reflects this fact: Only certain types of contracts must be in writing to be valid. In legal lingo, a law requiring a contract to be in writing is known as a “statute of frauds.”
The Uniform Commercial Code (UCC), too, takes into account that commercial agreements are often unwritten. As a result, the UCC generally doesn’t require contracts to be in writing. In fact, the UCC requires written contracts in only a few situations, such as:
Also, the UCC exempts one particular kind of contract, involving securities (such as stock in a corporation), from a more general contract rule that would otherwise require such a contract to be in writing.
Generally speaking, the UCC requires that any contract for the sale of goods with a price of $500 or more must:
(U.C.C. § 2-201 (2023).)
The contract doesn’t need to be signed by both parties. But if you want to make the other party to a written contract comply with the contract, then that party must’ve signed it. In other words, a party that doesn’t sign a written contract generally can’t be forced by a court to abide by that contract.
For example, suppose Patrick sells fresh fish, and Bob owns a seafood restaurant. At the seafood market one morning, Bob agrees to buy $600 worth of fish from Patrick. Patrick writes down Bob’s order, and Bob promises to return later with payment when he picks up the fish. Bob doesn’t sign anything and never returns to pick up the fish or to pay Patrick. Because the contract is worth more than $500 and Bob never signed anything, Patrick can’t force Bob to honor their verbal deal.
The written contract to be enforced doesn’t have to be detailed. In fact, even if it fails to include or incorrectly states contract terms—for example, date of delivery or unit price—it’s still enforceable. In cases where terms are left out, there are usually UCC rules that’ll supply them. Many of these rules include default provisions that say that the supplied term will be whatever’s reasonable in the circumstances.
For instance, suppose Shurgood and Bonizonda, the presidents of two different technology companies, meet for a business lunch. During lunch, they discuss having Bonizonda’s company, Bonizonda Computer Corporation (BCC), make computer controllers for Shurgood’s company.
In this meeting, both presidents agree that:
Bonizonda writes on a blank page of his notebook, “BCC will deliver 30 controllers within 45 days at $500 apiece.” He then signs and dates the page, tears it out of the notebook, hands it to Shurgood, and goes back to his office.
Generally speaking, this notebook page would be a valid contract, and if BCC fails to deliver 30 controllers within 45 days, it’s in breach of that contract.
Note that the contract in this example doesn’t say where the controllers should be delivered. In the absence of a specified delivery location, the UCC terms would step in (as long as the state adopted these terms into law).
Under the UCC, the delivery location would be the seller’s place of business. (U.C.C. § 2-308 (2023).) So, if Shurgood wants these controllers, she’d need to pick them up at BCC.
There’s one notable exception to the requirement that contracts for the sale of more than $500 worth of goods be in writing. If the goods involved are “specially manufactured goods”—that is, they’re specially made for the buyer and can’t be sold to anyone else—then a deal without a signed written contract could still be enforceable. (U.C.C. § 2-201(3) (2023).)
Let’s go back to our example above. Suppose BCC custom makes the computer controllers for Shurgood’s company, and these controllers are useless for any other purpose. Then, even though Shurgood didn’t sign the contract, she would be legally obligated to pay for the thirty controllers if they were delivered on time.
Under the UCC, leases involve personal property like:
The UCC doesn’t cover commercial real estate leases. So, you’d have to look elsewhere in your state’s laws for rules for leasing office space and warehouses.
Under the UCC, any lease requiring total payments of $1,000 or more must be in writing. (U.C.C. § 2A-201 (2023).)
For example, suppose you want to lease a printing machine for a year and the payments are $300 per month. The total payment for the year-long lease would be $3,600 ($300 x 12 months). So, for the lease to be enforceable, you’d need to sign a written contract.
The UCC’s statute of frauds for lease contracts is similar to the statute of frauds for sales of goods contracts.
Leases don’t need to be detailed. As with the UCC’s statute of frauds for contracts for the sale of goods, UCC lease contracts don’t need to be highly detailed to be enforceable. For example, a description of the leased goods is sufficient if it "reasonably identifies” the goods. (U.C.C. § 2A-201 (2023).)
Leases can omit terms. As with sales contracts, lease contracts can leave out or incorrectly state certain terms and still be enforceable—at least for the duration specified in the lease contract.
A security interest is a creditor’s legal claim to a debtor’s collateral. When a debtor is trying to get approved for a business loan or for an equipment purchase, they’ll usually offer up collateral (something that they own) to the creditor as a way to assure the creditor that they’re taking the loan or purchase seriously and that they’ll make their payments.
The creditor doesn’t get the collateral right away and—if everything goes well—will never get the collateral. The debtor isn’t giving the creditor title to the collateral. The debtor merely gives the creditor the legal right to take the collateral if they don’t make their payments. Put another way: When the debtor doesn’t make their payments, the creditor can legally take the debtor’s collateral because the debtor has given the creditor a security interest in the collateral.
Under the UCC, a security interest is only enforceable against a debtor if:
(U.C.C. § 9-203 (2023).)
When a security interest becomes enforceable, it “attaches” to the collateral. (For more information, read how to attach and perfect a security interest.)
Probably the easiest way to understand how a security interest attaches is with an example.
Suppose Martin’s company makes specialized parts for airplanes and he has just signed an agreement to supply parts to a major airplane manufacturer. However, to fulfill the agreement, Martin’s company needs new machinery and a lot of raw materials.
Currently, his business doesn’t have enough money to buy those things. So, Martin goes to a bank to get a loan. In exchange for the money being loaned, the bank requires Martin’s company to provide collateral for the loan. So, Martin gives the bank a legal right to take possession of the new machinery (which the UCC calls “equipment”) and the raw materials (which the UCC calls “inventory”) if he misses his loan payments.
In this example:
Here, for the security interest to attach and be enforceable, Martin would need to sign a written security agreement. Of course, in practice, banks always have multiple loan papers requiring signatures in these situations. These documents generally include not only the security agreement but also a financing statement. The financing statement is usually filed with a public office to put other potential creditors on notice of the bank’s security interest in the collateral.
Usually, anything not contained in the written agreement is irrelevant. As long as the required conditions are met, the parties are generally bound by the terms in the written contract. But under the UCC, there are situations where other evidence can be considered in addition to the written contract to determine the terms of the agreement.
While the contents of written contracts generally carry substantial legal weight, sometimes things not contained in a written contract—such as the parties’ oral statements (in legal lingo, “parol evidence”) or actions (conduct)—might be relevant in a contract dispute.
The UCC’s articles on sales of goods and on leases (Articles 2 and 2A) provide rules in this regard. More specifically, the UCC says that the terms of a written contract can be supplemented by:
In these cases, the written agreement might not be the final say. If you’re striking a deal to sell, purchase, or lease goods, your statements and actions outside of the contract can come into play.
When making a business deal, it’s in your best interest to get everything in writing no matter who or what you’re dealing with. This way, in regard to the statute of frauds, you won’t have to spend time making the call on whether your agreement is enforceable and, if it is, under what terms. When writing your agreement, you should also add a clause that says the written agreement is final and represents the complete understanding between the parties.
Make sure you also check your state’s laws. While all states have adopted most of the UCC, there might be some variation between your state’s laws and the UCC model rules. Specifically, be aware that Louisiana hasn’t adopted Articles 2 and 2A of the UCC. If you have additional legal questions about your specific situation, you can always talk to an attorney. They can provide legal advice about the enforceability of your contract and your obligations under it.
]]>However, there are also many business-related activities that the UCC doesn't cover. Key among these transactions are:
Let's look at each of these types of contracts.
The UCC doesn't apply to commercial real estate purchases or leases. Another way to put it: The UCC covers personal property, not real property. To find laws for real estate contracts, you'll need to look to other state laws, regulations, and court cases that specifically relate to real property.
For additional guidance on commercial real estate, check out our section on business space and commercial leases.
Let’s say you run a manufacturing business and you need to buy a new factory or warehouse. At some point, after you’ve looked around at different spaces and locations, you’ll sign a real estate sales contract—also called a "purchase and sale agreement".
Later, at closing, you'll sign additional documents, likely including contracts related to financing the purchase. Even though you're buying commercial real estate, the laws and rules for these real estate contracts will not be found in your state’s commercial code.
For an alternative type of real estate purchase, consider the document widely known as a “land contract”—or known in some states, like California, as a “real property sales contract.” This type of contract is made between the current real estate owner and the buyer and is used to purchase the real estate from the current owner over time.
Typically, the buyer will make monthly payments to the current owner for a period of several years. Once the buyer pays off the full amount due under the contract, the title to the property is transferred from the current owner to the buyer.
In California, it's a section of the state’s civil code, not the commercial code, that defines this type of real estate contract:
The immediately following sections of the California Civil Code go on to provide more particulars about real property sales contracts, covering such matters as:
Whether your own state calls it a "land contract," a "real property sales contract," or something else, you'll need to look somewhere other than your state’s commercial code to find the rules governing this kind of contract.
Or, let’s say you run a service-based business and you want to lease office space. Once you’ve settled on the space you want and discussed the details with the owner or management company, you’ll be presented with a commercial lease. That lease is a contract—but not one that's covered under the UCC.
Like contracts related to the sale of commercial real estate, rules for contracts for leasing commercial real estate will instead be found in state real estate statutes and in court cases. For example, New York law is typical: Lease laws are part of the state’s real property laws, not its commercial code.
Your business might come across a contract related to services on different occasions. For example, your business might:
All of these situations involve contracts between the service provider and the client or customer. Your state’s version of the UCC, however, will not provide guidance on these types of contracts.
Insurance-related laws. Rules for some service contracts—in particular, services related to warranties or insurance—are frequently found among a state’s insurance laws. These laws are separate from a state’s commercial code. Illinois’s insurance statutes, for example, include the Service Contract Act, which covers “providers” who agree “to perform the repair, replacement, or maintenance... of any automobile, system, or consumer product.” (215 Ill. Comp. Stat. § 152/5 (2023).)
Contract law principles. When it comes to your own business providing services, or to hiring an independent contractor to work for you, you might not find much help in your state’s statutes. Instead, you might need to rely on more general principles of contract law, which are largely found in common law (court decisions). There could, however, be certain laws relating specifically to consumer contracts that'll be relevant.
In general, you'll want these service contracts to state clearly what the service provider (either your service-based business or the service provider your business is hiring) will and will not do. For additional guidance, see our tips on making business agreements.
In many instances, if you hire an employee, you won't use a written employment contract. At most, there might be a written offer letter. In fact, in many cases, it might be inadvisable for you to be highly detailed about what you're offering an employee.
However, notwithstanding these facts, employment generally involves at least some contractual aspects. The rules regarding those aspects will not be found in the UCC.
Implied contracts. Some elements of employment contracts grow out of general contract law. For example, when it comes to employment, an oral contract is still a contract—and, more specifically, an implied contract. If you make an oral promise to cover moving expenses for a new employee, and then fail to keep that promise, you would be in breach of contract and the employee could sue you. You might find a court case in your state that speaks to this point—but, to repeat, you'll find nothing about it in the UCC.
Employee handbooks. Also, if you make use of an employee handbook, which is usually a good idea, that handbook could be considered a part of an employment contract—unless the handbook contains a disclaimer. Again, to find out more details on that point, you'd need to look not to a commercial code but to your state’s court decisions.
For more information on when to use a contract with your employee, check out our article on firing employees with employment contracts.
In your business, you'll no doubt be part of dozens if not hundreds of contracts. For each contract, it's important to understand the laws that govern it, and what your rights and obligations are under it. If you're familiar with creating and interpreting business contracts, you probably won't need any help with these common documents. But for some contracts, it might be best to speak with an attorney before you sign or have someone else sign.
The type of lawyer you'll want to talk to will depend on the scope of the contract—but usually, a business attorney is a good person to start with. If you're signing a commercial purchase and sale agreement or commercial lease, you might want to talk to a real estate lawyer. If you're creating an employment contract or reviewing an old one, you should reach out to an employment lawyer. These attorneys can help you create, review, and negotiate contracts.
If you're looking for further reading on service contracts, including specific examples, check out Legal Forms for Starting & Running a Small Business, by Fred S. Steingold (Nolo) and Contracts: The Essential Business Desk Reference, by Richard Stim (Nolo).
While the UCC might seem endless, it does have its limitations (as we've already discussed). Here are some answers to frequently asked questions about the UCC and its coverage.
No. The UCC applies to the sale of goods. But it doesn't apply to the sale of real estate or to the sale of services.
If your business transaction doesn't involve real estate, services, or employment contracts, the UCC probably applies. If you look at the titles of the UCC articles, you can also get a good idea about which types of business activities the UCC covers.
If your business transaction involves both goods and real estate or services, the answer isn't as obvious. In this case, you'll need to determine what the main purpose behind the transaction is. For example, suppose you're dissolving your business and liquidating your assets. In one sale, you sell your warehouse, the land it's on, and some leftover equipment inside. Here, this sale involves real estate (the warehouse and land) and goods (the equipment). In this case, the UCC probably wouldn't apply because your main purpose behind the transaction is selling your real estate, and some goods are just included along with it.
All states have adopted most of the UCC. But you'll need to check your state's laws to see whether your state has adopted the most recent revisions of the UCC.
There are some important standouts to note. Louisiana is the only state to not adopt Article 2 of the UCC. Almost every state has chosen not to adopt Article 6 of the UCC governing bulk sales.
A 2022 revision of the UCC, adding another article—Article 12—was published in 2022. So far, as of 2023, only a small handful of states have adopted this most recent revision.
]]>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
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:
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.
Article 2 provides rules for the sales of goods. Specifically, this article gives rules for:
For more information, see the contract rules for the sale of goods.
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:
For additional guidance, see our article on commercial leases for goods.
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.
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:
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:
For more information, check out our article on attaching and perfecting a security interest.
While its reach is far, the UCC doesn’t cover all commercial transactions. Specifically, the UCC doesn’t provide rules for:
For more information, see when the UCC doesn’t apply.
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.
Below is each article’s year of original enactment and the year of its most recent revision:
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.
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.
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.
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.
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.
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.
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.
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.
]]>The passing, or transfer, of the piece of paper is known as a “negotiation.” The ability to freely make these kinds of person-to-person transfers—and then ultimately to exchange the piece of paper (or “instrument”) for money—is what makes the instrument negotiable.
Article 3 of the Uniform Commercial Code (UCC) contains dozens of sections laying out hundreds of rules for how checks, promissory notes, and other negotiable instruments work.
The UCC is riddled with terms and their corresponding definitions. Sometimes keeping track of them can be the most difficult part of understanding the model code. Before we dive too deep into the details of negotiable instruments, we should first clear up two terms that are often times confusing to parse:
Both a holder and bearer can redeem a negotiable instrument (like a check) that’s been made out to “bearer.” For example, a check would say “Pay to the order of bearer.”
But, generally, only a holder can redeem an instrument that specifies them (lists their name) as the payee. For instance, for a check that says “pay to the order of Alex Mack,” Alex Mack would be the holder as long as she has possession of the check.
The UCC defines two types of negotiable instruments:
The most obvious example of a draft would be a check. When a person with the authority to cash or deposit a check presents it to the appropriate bank, they’re effectively presenting an order that the bank pay the amount of the check. As long as certain conditions are met—such as the person with the check being authorized to cash it and not engaging in some kind of fraud—the bank has the legal obligation to comply with that order.
When issued, checks and other drafts commonly involve three parties:
Generally, the payee of a draft (and of a note) has physical possession of the instrument and is the holder.
A common example of a note is a promissory note associated with a loan. The borrower has promised to pay the amount of the note to a person presenting the note for payment. The borrower is legally obligated to pay the note according to its terms. For example, a note will usually include either a date when the payment is due or a statement that payment is due upon demand.
Notes generally involve just two parties:
Another example of a note would be a certificate of deposit (CD) at a bank.
In the most basic terms, a “negotiable instrument” is a signed written order or promise to pay money. However, not every signed piece of paper with a reference to money being paid is a negotiable instrument.
For example, if you write “I owe Carol $5,000” on a sheet of paper and then sign it, you haven’t necessarily created a negotiable instrument under the UCC. On the contrary, beyond being a signed written order or promise to pay money, a piece of paper with writing on it must contain five additional features to be considered a negotiable instrument.
To qualify as a negotiable instrument, the signed written order or promise must also:
(U.C.C. §3-104.)
In practice, of course, and especially when it comes to checks, it’s usually fairly easy to comply with all these requirements and to create a check that’ll work as a negotiable instrument. However, checks, as well as notes, are sometimes prepared in atypical ways. With that in mind, the UCC provides a great deal of additional detail regarding each of these five requirements. For more information, see part one of Article 3 of the UCC.
In some cases, a check, promissory note, or other signed piece of paper intended to serve as a negotiable instrument might be missing some necessary piece of information that the signer intended to include. In these cases, the UCC considers the writing an “incomplete instrument.”
An incomplete instrument isn’t necessarily non-negotiable. On the contrary, in some instances, the UCC allows words and numbers to be added—with the signer's authority—to complete an incomplete instrument. In other instances, the UCC provides default rules when certain information is lacking.
When there’s no due date. A signed promissory note might not state a due date for payment. However, according to an official comment in the UCC, if both the maker and the payee had agreed on a due date, the payee can add that date to the note. Alternatively, if no date is added to the note, then the default UCC rule is that the note is payable on demand.
When there’s no payee listed. Also, a check with no payee listed is “incomplete,” but, nonetheless—according to the UCC—such a check is payable to the bearer.
For a negotiable instrument to be enforced and redeemed, the person trying to enforce the instrument must meet certain requirements. Discussed below are some of these requirements.
Who can enforce the instrument? An instrument can be enforced by the holder of the instrument or by someone who has the rights of a holder—such as a holder’s successor or someone who has a legal claim to the instrument through the holder. You can sometimes also enforce an instrument that’s been lost or stolen.
Free of forgery or unauthorized alteration. You can’t enforce an instrument that’s been forged or altered in a way that’s unacceptable under the UCC. Generally, you also can’t enforce an instrument that’s overdue or has been dishonored.
Exchanged for value. An instrument that’s been exchanged for value (consideration) can typically be enforced. Exchanged for value can mean an instrument that’s given in exchange for money, the performance of an obligation, a security interest, or another negotiable instrument.
Free of claims and defenses. Generally, an instrument can be enforced as long as the person promising to make the payment or writing the check (or draft)—referred to as the “obligor”—doesn’t have a valid defense or claim against the instrument’s enforcement. For example, the obligor can argue against enforcement by claiming they lacked legal capacity or were under fraud or duress when they made the note or draft. The obligor can also argue that you breached your obligation to them and therefore aren’t entitled to enforce the instrument.
For more details on the enforcement of negotiable instruments, check out part three of Article 3 of the UCC.
Negotiable instruments are subject to many rules. Violating a single one can make your negotiable instrument unenforceable. Most people dealing with negotiable instruments will find it helpful to speak with a business lawyer at some point. If you have a negotiable instrument you’re not sure is valid or you need to create a negotiable instrument, a lawyer can help. They can advise you on your state’s laws on negotiable instruments and help you make a valid and enforceable instrument.
Note that while all states have adopted Article 3 of the UCC into their laws, there might be slight differences from the model code. Make sure you check your state’s laws or ask a lawyer for state-specific guidance.
For additional details on the required elements of negotiable instruments, check out our section on the UCC.
]]>Article 9 of the Uniform Commercial Code (UCC) provides rules for secured transactions, including how a security interest can attach and be perfected. Here we’ll look at both attachment and perfection of security interests.
Table of Contents
A secured transaction is a loan or purchase that's secured by collateral. Collateral is anything the debtor agrees to give up if they can’t make the required payments on the loan or purchase. Generally, a secured transaction involves:
Common secured transactions include a bank loaning a business money so the business can buy inventory, or a company selling a business equipment on credit. In these transactions, you’d have the following roles:
Most likely, the inventory or equipment will be at least part of the collateral. But the lender or selling company might require the business to offer something else as collateral.
Attachment of a security interest. Under the UCC, in order for a creditor to become a secured party—that is, a party with a legal right to take possession of the collateral if the debtor fails to pay—the creditor must take special steps (discussed below). These steps are known as “attachment of a security interest.”
Perfecting a security interest. Moreover, in order for a secured party to more fully ensure its legal rights if other parties are asserting an interest in the same piece of collateral, the secured party must take additional steps (discussed later). These additional steps are known as “perfecting a security interest.”
A creditor has a security interest in collateral—and becomes a secured party—if and when a security interest “attaches.” Under the UCC, a security interest generally doesn’t attach unless three basic requirements are met:
Let’s briefly look at each of these requirements.
A secured transaction is a contract between the debtor and the secured party. Like most contracts, there must be an exchange of consideration between the parties. In other words, there must be an exchange of value.
In the case of secured transactions, the value given by the secured party is usually obvious. For example, a bank gives value to a debtor when it loans money to the debtor to buy inventory. Similarly, a seller gives value to a debtor when it sells the equipment to the debtor.
For the debtor’s part, they give the secured party a security interest in the collateral.
A business might have rights in collateral either by:
Owning the collateral prior to the transaction. When a business already owns certain property, it should be clear that the business has rights in that property, and can use it as collateral. For example, if the business uses its real estate as collateral, it should have a corresponding deed. If the business wants to use its vehicle as collateral, it should have a bill of sale and title to the vehicle.
Purchasing the collateral as part of the transaction. In other cases, a business will buy items (materials, inventory, machinery, and so on) on credit and want to use those same items as collateral. In such cases, the business will sign a conditional sales contract—which is also considered a security agreement. Under UCC sales rules, the contract will give the business the necessary rights in the purchased items to use as collateral. (Note: The alternative option of having the “power to transfer” the collateral often involves relatively unusual circumstances and isn’t covered here.)
For purposes of attachment, the debtor must “authenticate” a security agreement. In other words, the debtor must sign the written agreement that gives the secured party an interest in the collateral. (The UCC uses the term “authenticate” to include the possibility of electronic signatures.)
A security agreement normally will contain a clear statement that the debtor is granting the secured party a security interest in specified goods. The agreement also must provide a description of the collateral. Section 9-108 of the UCC says that, generally, a description of collateral is acceptable if the description reasonably identifies the collateral.
The same section then goes on to provide a half-dozen different possibilities for a reasonable identification, such as:
(U.C.C. § 9-108(b).)
While the description of collateral in a security agreement might not need to be finely detailed, the UCC prohibits descriptions of collateral that are “supergeneric,” such as “all the debtor’s assets” or “all the debtor’s personal property.”
The three requirements to attach a security interest apply to the most common types of collateral, such as equipment, inventory, and even payments due under a contract. However, for certain less common types of collateral, the requirements relating to an authenticated security agreement can vary.
A secured party perfects a security interest to help assure that no other party—such as another creditor or a bankruptcy trustee—will be able to claim the same collateral if the debtor becomes insolvent. By perfecting its security interest, a secured party seeks to gain priority over other parties regarding the collateral.
The precise details of how to perfect a security interest depend in part on the local jurisdiction where the collateral is located. However, generally speaking, the primary ways for a secured party to perfect a security interest are:
Of these four listed items, the first—filing a financing statement—is by far the most common and important to understand.
Security interests for most types of collateral are usually perfected by filing a document simply called a “financing statement.” You’ll usually file this form with the secretary of state or other public office. The purpose of the financing statement is to put other people on notice of the secured party’s security interest in the collateral.
The UCC specifies what must be contained in a financing statement:
Name of the debtor. Regarding the first of these items, it’s important that the name of the debtor be sufficiently specific and accurate because financing statements are filed under the debtor’s name. If the name on the statement is wrong, the statement will fail to provide adequate notice to others, and will not succeed in perfecting the security interest.
Section 9-503 of the UCC provides various, more specific rules about how to specifically identify the debtor on a financing statement. For example, if the debtor is a “registered organization”—which might mean a state-registered corporation or limited liability company—then the name on the financing statement must match the name the debtor registers with the state.
Name of the secured party. The second required item on the statement, the name of the secured party, is generally a straightforward matter. Since the secured party is completing the form, there’s less chance of error. If the secured party is an individual, they should use their legal name. If they’re a registered company, the secured party should use the same name they have registered with their state.
Indication of the collateral. Finally, as to the third item, the rules for indication of collateral on the financing statement are largely the same as for the description of collateral on a security agreement (see above). However, unlike with a security agreement, on a financing statement, it is acceptable to use a “supergeneric” description of the collateral.
A standard form, known as Form UCC-1, is widely used by secured parties to file a financing statement. You can easily find a sample UCC-1 online—usually on your secretary of state’s website. While many financing statements must be filed with the secretary of state, you should check your own state’s laws for more information.
As a final point, be aware that a financing statement can be, and sometimes is, filed before a security interest has attached. Creditors file early in anticipation of creating a security interest to make sure that the interest is perfected immediately upon attachment.
As a secured party, you can perfect your security interest in some types of collateral by possessing it. The types of collateral where the security interest can be perfected by possession are:
However, so-called “intangible” collateral, such as accounts receivable, can’t be perfected by possession. Possessing intangible collateral doesn’t usually equate to possessing anything of value or that can be redeemed.
While “possession” isn’t directly defined by the UCC in this context, it does appear to include possession not only by the secured party but also by an agent of the secured party.
Under the UCC, a secured party can perfect their security interest in certain collateral by controlling that collateral. The types of collateral that can be perfected by control include:
The meaning of “control” can vary depending on which type of collateral is involved. For example, a secured party might have control of a deposit account if the bank, the debtor, and the secured party have all agreed that the secured party can handle the funds in that account “without further consent by the debtor.” (U.C.C. § 9-104.)
As another example, a secured party has control over investment property, such as securities (shares of stock or the like), if the property is delivered to the secured party, and, if necessary, endorsed (signed) to the secured party.
The most important type of security interest that’s perfected immediately upon attachment is what’s known as a “purchase-money security interest (PMSI) in consumer goods.”
A PMSI generally involves either:
When the debtor in one of these circumstances is buying consumer goods—goods to be used for personal or household purposes—the secured party (seller or bank) doesn’t need to file a financing statement to perfect the security interest.
Not all security interests in PMSIs are automatically perfected. Note that, while it might not be necessary to file a financing statement, not all security interests in PMSIs in consumer goods are perfected upon attachment. For example, some laws about certificates of title (such as for cars) require that a security interest be indicated on the certificate in order for the interest to be perfected.
Automatic perfection applies to other collateral. Finally, be aware that under the UCC, perfection occurs automatically upon attachment for about a dozen other relatively unusual types of collateral. For more information, check UCC Section 9-309.
Having covered the main ways to perfect a security interest, it’s important to note that there could be situations where a secured party with a perfected security interest might not have priority. In that case, the secured party would have their interest subordinated (or come second) to some other party. However, in most cases, perfecting a security interest provides very substantial protection of that interest.
The world of secured transactions is a complex one. With so much terminology to learn and relationships to understand, it can be hard to keep everything straight. You can refer to our frequently asked questions for quick answers to common questions.
Yes and no. A security interest is a type of lien. A lien is a creditor’s legal claim to a debtor’s property. Liens can be voluntary or involuntary. A security interest is a voluntary lien. With a security interest, the debtor has agreed to give the creditor (or secured party) an interest in their collateral (their property). So the creditor has a lien against the collateral.
But a lien can be involuntary—and therefore, not a security interest. For example, if a business doesn’t pay its federal taxes, the IRS can put a tax lien on the business’s property without the business’s consent. So, the IRS would have an interest in the business’s property and the ability to act on this interest and take the property to satisfy the tax debt.
Liens and security interests are often used interchangeably. Usually, people refer to voluntary liens as security interests and involuntary liens—like judgments and tax liens—as liens. Also, liens are more commonly related to real property.
Security interests can be possessory and non-possessory. A possessory security interest is one where the secured party has possession of the collateral; a non-possessory security interest is one where the debtor has possession of the collateral.
Non-possessory security interests are much more common because the debtor usually already owns and continues to possess the collateral or purchases and comes to possess the collateral during the secured transaction. Moreover, the debtor doesn’t get much benefit if they don’t possess the collateral—particularly if the collateral includes inventory, vehicles, equipment, and real estate.
A security interest that hasn’t been perfected is an unperfected security interest. A secured party has an unperfected security interest when they haven’t satisfied one of the ways to perfect their security interest—including filing a financing statement, possessing or controlling the collateral, or qualifying for automatic perfection.
A perfected security interest is preferred to an unperfected security interest because perfecting a security interest gives the secured party more protection, namely, priority over other creditors.
When there are multiple interests in the same piece of collateral (such as other creditors having a security interest in the collateral), a perfected security interest will give that secured party priority over the other creditors who have unperfected security interests. So, a secured party with a perfected security interest can claim the collateral over a secured party with an unperfected security interest.
All states have adopted Article 9 of the UCC. However, states might use different wording in their laws or follow different precedent when applying these rules. You should always check your own state’s commercial code for the most accurate information.
However, these state laws can get pretty dense and confusing. If you need help interpreting specific laws or need guidance on your specific situation, consider talking to a business attorney. They can advise you on your rights in the collateral, draft a security agreement, and help you perfect your security interest.
]]>If you have your own purchase order or order acknowledgment form and have squinted long and hard at those terms on the back, you might like what you see. These boilerplate forms typically represent only the interests of whoever’s using them.
But a business deal built solely on preprinted forms with conflicting one-sided terms has the potential to create challenges and uncertainty if a dispute arises. The threshold question for resolving these disputes is: Does the deal involve goods?
If the deal involves goods, the transaction falls under the Uniform Commercial Code (UCC). If the deal involves anything other than goods, like services or real estate, then common law contract rules apply instead.
Transactions involving goods are governed by Article 2 of the UCC. The UCC has special rules for contract disputes involving conflicting terms.
Typically these so-called battles of the forms occur when a buyer and seller of goods never reach a final agreement on the terms of a deal. Instead, the parties exchange pre-printed order forms with their own different terms on the back and then proceed with the transaction without ever signing any final contract.
Under well-established common law rules, no contract is formed when parties exchange documents unless the terms match exactly. This doctrine is called the “mirror image rule” and it applies to contracts for services or real estate.
Under common law rules, if an acceptance contains different terms, it’s a counteroffer instead. If the parties perform without ever reaching an agreement on the terms, then whatever’s in the final document exchanged between the parties is the final binding contract (also known as the “last shot rule”).
For example, suppose Leonard wants to hire Penny to design his website. Penny sends him a service agreement with her terms and conditions. Leonard doesn’t sign the agreement but instead sends Penny another contract with different terms. Penny receives Leonard’s contract, doesn’t sign it, but proceeds to design Leonard’s website.
So, which contract governs the website design services under the mirror image rule? Leonard’s. His contract would be the final binding contract because it’s the final document exchanged between him and Penny. In other words, Penny’s performance (design of the website) is her acceptance of Leonard’s counteroffer.
If your agreement includes both goods and services (or real estate), look to which of these comprises its primary or prevailing purpose. If the agreement is primarily for the sale and purchase of goods, then UCC law should control; if it’s primarily for the sale of services or real estate, then you’d apply the mirror image rule.
For example, suppose you own a gym and you want to retire and sell your business. You’re looking to sell the gym building, the land its on, and some miscellaneous fitness equipment. A contract for the building, land, and equipment would likely apply the mirror image rule because selling the real estate (the land and building) is the primary purpose behind the deal and the equipment (goods) is just included.
If a dispute arises over a contract involving goods, how it gets resolved will depend in part on whether the parties involved are considered merchants under the UCC.
Generally speaking, a merchant is someone who regularly deals in the kind of goods involved in the transaction. In other words, merchants are sophisticated, regular buyers or sellers of the goods in question.
If the deal is between merchants, then once an offer has been made, any new or additional terms included in the acceptance of that offer become part of the final agreement unless:
What does it take to materially alter the terms of the other party’s offer? The general rule is that any change that would surprise or impose hardship on the other party by shifting risk in a significant way would be considered “material.”
Modifications or changes to any of the following provisions would likely be considered a material alteration:
So any change in an acceptance of an offer that involves any of these provisions wouldn’t be considered part of the final agreement if a dispute arose.
In sum, the final agreement in a battle of forms dispute between merchants includes the terms that match the offer, and any additional terms that aren’t material or rejected become part of the agreement.
If neither the buyer nor the seller is a merchant—or only one of them is—then slightly different rules apply. If there are additional terms in an acceptance, those are considered proposals only (they’re not binding or included as part of the final agreement).
If the terms are different, then any different term included in an offer is incorporated into the contract. One exception to this would be if the acceptance was conditioned on the other party’s agreement to all of its terms. This would constitute a rejection of the offer and act as a counteroffer instead.
The battle of the forms isn’t necessarily a deal-breaker. Although in situations where no written agreement exists, the buyer and seller can still walk away from the transaction before it begins.
In many instances, as long as both sides want to proceed, the UCC will keep alive a transaction that would otherwise fail for lack of an agreement (unless a written agreement is required under the UCC). The potential downside of this preservation is that the UCC's default gap-filler terms might not be what one or both parties want—especially concerning implied product warranties and the seller's liabilities to the buyer.
Sign a master agreement. The best way to avoid uncertainty over conflicting forms is to negotiate a business agreement that’ll supersede those forms. A negotiated master agreement is practical when the buyer and seller expect to engage in multiple purchase orders and deliveries over time. This overarching agreement will by its terms take precedence over any conflicting buyer and seller form-based terms.
Resolve conflicting terms early. Another way to avoid problems with conflicting terms is to clearly identify them at the outset and to negotiate acceptable alternatives with the other party before going ahead with the purchase and sale. This can head off contract disputes before they occur, or reduce their potential negative effects if they can’t be avoided in advance.
Determining whether your contract is controlled by the UCC’s battle of the forms or the common law’s mirror image rule is usually straightforward. But how the contract is drafted and which terms become the final terms can become more complicated. If you have experience reviewing and drafting contracts and there’s not much disagreement between you and the other side, you can probably come to an agreement without any (or with limited) outside assistance.
But if the circumstances of your deal are complex, you and the other side can’t reach an agreement, or the contract price is high, consider talking to a business lawyer. Having the assistance of an attorney can help to ensure that you address all foreseeable problem areas and negotiate the most favorable terms possible.
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