Upload
vivien-pearson
View
229
Download
6
Tags:
Embed Size (px)
Citation preview
1
THE UNIFORM COMMERCIAL CODE
CHAPTERS
19, 20, 21, 22, 23, 24, 25, 26
2
THE
UCC
3
HOW TO UNDERSTAND THE
WORLD OF COMMERCIAL
TRANSACTIONS
4
“The Uniform Commercial Code enables merchants to form contracts more quickly and easily. But along with this
increased facility goes greater responsibility, since informal
discussions may suddenly turn into… a contract.”
5
TOPIC COVERAGE
• Sales• Ownership
• Risk associated with ownership• Warranties
• Performance
6
MORE TOPIC COVERAGE
• Remedies
• Negotiable instruments
• Banks
• Secured transactions
7
HISTORY
FROM
LAW MERCHANTTO
THE UCC
(In 60 seconds or less)
8
FIRST
WHAT IS A
LAW MERCHANT?
9
THE UCC
• ARTICLE 1. GENERAL PROVISIONS• ARTICLE 2. SALE OF GOODS• ARTICLE 2.A LEASES• ARTICLE 3. NEGOTIABLE
INSTRUMENTS• ARTICLE 4. BANK DEPOSITS AND
COLLECTIONS• ARTICLE 4.A FUNDS TRANSFERS
10
THE UCC
• ARTICLE 5. LETTERS OF CREDIT• ARTICLE 6. BULK TRANSFERS• ARTICLE 7. WAREHOUSE RECEIPTS,
BILLS OF LADING, AND OTHER DOCUMENTS OF TITLE
• ARTICLE 8. INVESTMENT SECURITIES• ARTICLE 9. SECURED TRANSACTIONS
11
PURPOSE OF THE UCC
1. To simplify, clarify and modernize the law of commercial transactions
2. To permit expansion of commercial transactions
3. To establish uniformity
12
13
SALES UNDER THE UCC
• Article 2Applies to the sale of goods
• Article 2AGoverns the leasing of goods.
14
MIXED CONTRACTS
Involves both sales and services:
• The UCC will govern if the predominant purpose is the sale of goods
• Common law will control if the predominant purpose is service.
15
MERCHANT
Someone who routinely deals in the particular goods involved, or who
appears to have special knowledge or skill in those goods, or who uses agents with special knowledge or
skill in those goods.
16
MERCHANT STANDARDS
The UCC frequently holds a merchant to a higher standard of
conduct than a non-merchant.
17
GOOD FAITH
The UCC imposes a duty of good faith in the
performance of all contracts.
18
UNCONSCIONABILITY
A contract may be unconscionable if it is
shockingly one-sided and fundamentally unfair.
19
CONTRACT FORMATION
The law should reflect business
reality!
20
FORMING A CONTRACT
QUICK AND INFORMAL
Three basic rules:1. In any manner that shows
agreement.
2. Moment of making is not crucial.
3. One or more terms may be left open
21
STATUTE OF FRAUDS
A writing of some type is required for any sale for goods worth $500 or more:– Writing Sufficient to Indicate a
Contract– Incorrect or Omitted Terms– Enforceable Only to Quality Stated
22
EXCEPTIONS
However there are exceptions to the Statute of Frauds when two
or more merchants make an oral contract
23
SPECIAL CIRCUMSTANCES
An oral contract may be enforceable even without a written memorandum, if: – Specialty manufacture for buyer, or – The defendant admits in court that
there was a contract, or– The goods have been delivered or
they have been paid for.
24
ADDED TERMS
An acceptance that adds or alters terms will often create a contract.
OFFER Offeree intendsto accept
Offeree does NOT intendto accept
NOCONTRACT
Acceptsterms
Contract
Addsterms
Usuallyforms a contract
Changesterms
Usuallyforms a contract
Accepts IF offeror accepts new
terms
NO contract (is a new offer)
Click once to start self-building graphic.
25
ADDITIONAL OR DIFFERENT TERMS
• Additional: those that raise issues not covered in the offer.
• Different: contradict terms in the offer.
26
OPEN TERMS
• Open Prices: the parties may conclude a contract even though they have not settled the price.
• Output and Requirements Contracts
27
MODIFICATION
• An agreement modifying a contract needs no consideration to be binding.
• The parties may agree to prohibit oral modification and insist that all modifications be in writing and signed.
28
PROPOSED REVISIONS TO UCC
Numerous proposed revisions to UCC Article 2, have been under debate for over 5 years but are approaching final state.
$5,000 vs. $500
Recognize web transactions
29
30
“The Code has reduced the importance of abstract terms,
such as title, and replaced them with practical rules designed to
enable business people to anticipate risk and protect
against it.”
31
WHO OWNS IT??
The Code must sometimes determine the rightful owner when more than one person
claims to own something or not own it.
32
EXISTENCE AND IDENTIFICATION
– Goods must exist before title can pass.
– Goods must be identified to the contract before title can pass.
– The parties may agree in their contract how and when they will identify the goods.
33
WHEN TITLE PASSES
Passing of Title:
Title may pass in any manner on which the parties agree.
34
INSURABLE INTEREST
When you have a legal right in something– A buyer obtains an insurable interest when
the goods are identified to the contract.– The seller retains an insurable interest in
goods as long as she has either title to the goods or a security interest in them.
35
BONA FIDE PURCHASER
BFP
A person who purchases in good faith
36
SELLER HAS IMPERFECT TITLE
»Can be in the form of a void title which is no title at all.
»Or can be a voidable title gives limited rights in the goods, inferior to those of the owner.
37
HOW TO BECOME A BFP
When a person with voidable title has power to transfer valid title for value to a good faith purchaser, a BFP and the BFP shows:
1. He gave value for the goods and
2. He acted in good faith
THE BFP OWNS THE GOODS!
38
ENTRUSTMENT
Entrusting means delivering goods to a merchant or
permitting the merchant to retain them.
Be careful!
39
A CREDITOR
Someone with a financial stake in the goods the
merchant is selling
40
CREDITOR’S RIGHTS
Depends upon if it is an
– Ordinary SalesOr a
– Bulk Sales
41
RETURNABLE GOODS
May play a role in creditors rights depending on they being a
• Sale on Approval, or being subject to
• Sale or Return
42
RISK OF LOSS
The parties may allocate the risk of loss any way they wish.
Problems arise if the parties fail to allocate the risk
43
SHIPPING TERMS
• FOB place of shipment
• FOB place of destination
• FAS a named vessel
• CIF
• C&F
44
BAILMENT
When one person or company is legally holding goods for the benefit
of another.
CREATES SPECIAL PROBLEMS IF AGREEMENT BREACHED
45
46
PRODUCT LIABILITY
When goods cause injury, there is a question of
product liability.
47
PRODUCT LIABILITY ISSUES
There are three main issues related to product liability cases:
–Warranty
–Negligence
–Strict Liability
48
EXPRESS WARRANTIES
An express warranty is one that the seller creates with
his words or actions.
49
IMPLIED WARRANTIES
Are created by the Code itself, not by any act or statement of the seller.
50
MERCHANTABILITY
Merchantability means that goods are fit for their
intended ordinary purpose.
51
Unless excluded or modified, a warranty that the goods shall be
merchantable is implied in a contract for their sale, if the
seller is a merchant of goods of that kind.
IMPLIED WARRANTY OF MERCHANTABILITY
52
IMPLIED WARRANTIES (cont’d)
Implied Warranty of Fitness for a Particular Purpose
53
IMPLIED WARRANTIES (cont’d)
The seller of goods warrants that her title is
valid
54
IMPLIED WARRANTIES (cont’d)
A merchant warrants that the goods are free of any rightful claim of copyright,
patent, or trademark infringement.
55
DISCLAIMERS
Disclaimer: a statement that a particular warranty does not apply.– Oral Express Warranties– Written Express Warranties
56
DISCLAIMERS (cont’d)
Three other rules:–General rule
–Remedy Limitations
–Consequential Damages
57
PROPOSED UCC REVISIONS
Sellers attempting to limit warranties would be required to use very explicit language,
conspicuously placed.
58
PRIVITY
When two parties contract, they are in
privity.
59
FACTORS THAT LIMIT THE SELLER’S RESPONSIBILITY
• Buyer’s Misconduct
• Statute of Limitations and Notice of Breach
60
NEGLIGENCE
• In negligence cases, plaintiffs most often raise one or more of these claims:– Negligent design – Negligent manufacture– Failure to warn
61
HOWEVER
Where a sales contract includes proper disclaimers or
remedy limitations, a buyer barred from a negligence
case may have no remedy at all.
62
STRICT LIABILITY
Need not prove that the defendant’s
conduct was unreasonable.
63
STRICT LIABILITY (cont’d)
Strict liability may be imposed if:– The defective condition is
unreasonably dangerous to the user.
– Seller is in business to sell this product.
– The product reaches the user without substantial change.
64
STRICT LIABILITY (cont’d)
Strict liability may be imposed EVEN if:– The seller exercised all reasonable
care.– There is no contractual
relationship.
65
CONTEMPORARY TRENDS
Strict liability may be imposed based on
design, manufacture or failure to warn.
66
CONTEMPORARY TRENDS (cont’d)
Tests to measure design and warning cases include:
• Consumer expectation
• Risk-utility tests
67
LEGISLATION
• Lemon Laws
• Consumer Protection Laws
• Magnuson-Moss Warranty Act
68
69
“Performance and remedy under the Code reflect
contemporary commercial practices but also demand a satisfactory level of sensible,
ethical behavior.”
70
GOOD FAITH
The Code requires good faith in the performance and enforcement of every
contract.
71
CONFORMING GOODS
• Conforming goods satisfy the contract terms.
• Non-conforming goods do not.
72
SELLER’S OBLIGATION
The seller must tender the goods, which means to
make conforming goods, available to the buyer.
73
PERFECT TENDER RULE
– Under the perfect tender rule, the buyer may reject the goods if they fail in any respect to conform to the contract.
– Parties may limit the effect of the perfect tender rule by agreeing to accept imperfection in the goods.
74
RESTRICTIONS ON THE PERFECT TENDER RULE
• Usage of trade
• Course of dealing
• Course of performance
75
CURE
When the buyer rejects non-conforming goods,
the seller has the right to cure, by delivering
conforming goods before the contract deadline.
76
DESTRUCTION OF GOODS
• If identified goods are totally destroyed before risk passes to the buyer, the contract is void.
• If identified goods are partially destroyed, the buyer may choose whether to accept the goods at a reduced price or void the contract.
77
COMMERCIAL IMPRACTICABILITY
A supervening event excuses performance of a
contract, if the event was not within the parties’
contemplation when they made the agreement.
78
BUYER’S OBLIGATIONS (and a Few Rights)
• The buyer must provide adequate facilities to receive the goods.
• Right to inspection
• Right to partially accept
79
BUYER’S OBLIGATIONS (and a Few Rights) – (cont’d)
May revoke acceptance only if the nonconformity
substantially impairs the value and only if he had a legitimate reason for the
initial acceptance.
80
BUYER’S OBLIGATIONS (and a Few Rights) – (cont’d)
• May reject non-conforming goods by notifying seller within a reasonable time.
81
BUYER’S OBLIGATIONS (and a Few Rights) – (cont’d)
May reject a non-conforming installment,
only if it substantially impairs the value of that
installment and cannot be cured.
82
REMEDIES: ASSURANCE
When there are reasonable grounds for insecurity, a party may:– demand written assurance of
performance from the other party, and
– until he receives it, generally may suspend his own performance.
83
REMEDIES: REPUDIATION
• A party repudiates a contract by indicating that it will not perform.
• When either party repudiates the contract, the other party may: – for a reasonable time await
performance or – resort to any remedy for breach of
contract.
84
SELLER’S REMEDIES
• Cancel the contract
• Stop or refuse delivery
• Identify goods to the contract
• Resale
85
BUYER’S REMEDIES
• Cancel the contract
• Recover money paid
• Cover
• Accept Non-Conforming Goods
86
Buyer’s Remedies (cont’d)
• Obtain Incidental and Consequential Damages
• Obtain Specific Performance
• Obtain Liquidated Damages
87
DAMAGE LIMITATIONS AND EXCLUSIONS
• A court generally will not enforce a limitation that leaves the injured party with no remedy.
• A court will not enforce an unconscionable exclusion of consequential damages.
88
PROPOSED UCC REVISIONS
• Good Faith
• Seller’s damages
• Buyer’s damages
89
90
COMMERCIAL PAPER
• Commercial paper is a contract to pay money.
• It can be:– A Substitute for Money– A Loan of Money
91
PROMISSORY NOTE
The possessor of a piece of commercial paper has an unconditional right to be paid, as long as: – the paper is negotiable; – it has been negotiated to the possessor; – the possessor is a holder in due course; and – the issuer cannot claim any of the limited
number of “real” defenses.
92
TYPES OF NEGOTIABLE INSTRUMENTS
• Note (also called a promissory note) is a promise to pay money.
• Draft is an order directing someone else to pay money for you
93
RIGHTS
• The possessor of non-negotiable commercial paper has the same rights--no more, no less--as the person who made the original contract.
• The possessor of negotiable commercial paper has more rights than the person who made the original contract.
94
REQUIREMENTS FOR NEGOTIABILITY
The Instrument Must:– Be in Writing.– Be Signed by the Maker or
Drawer.– Contain an Unconditional
Promise or Order to Pay.
95
REQUIREMENTS FOR NEGOTIABILITY (cont’d)
– State a Definite Amount of Money.
– Be Payable on Demand or at a Definite Time.
– Be Payable to Order or to Bearer.
96
DEFINITIONS
• Trade acceptance• Sight draft • Time draft
• Order paper• Bearer paper
97
INTERPRETATION OF AMBIGUITIES
When terms contradict, three rules apply:– Words take precedence over
numbers.– Handwritten terms prevail over
typewritten terms.– Typed terms prevail over printed
terms.
98
NEGOTIATION
Negotiation means that an instrument has been transferred to the holder by someone other than
the issuer.
99
INDORSEMENT
An indorsement is the signature of the payee.– Blank Indorsement – Special Indorsement – Restrictive Indorsement
100
HOLDER IN DUE COURSE
A holder in due course has an automatic right to
receive payment for a negotiable instrument
(unless issuer can claim one of a few “real”
defenses).
101
NOTICE OF OUTSTANDING CLAIMS OR OTHER
DEFECTS
• The instrument is overdue
• The instrument is dishonored
• The instrument is altered, forged, or incomplete
• The holder has notice of certain claims or disputes
102
SHELTER RULE
• Under the shelter rule, the transferor of an instrument passes on all of his rights.
• When a holder in due course transfers an instrument, the recipient acquires all the same rights even if he is made a holder in due course himself.
103
DEFENSES
Real and personal defenses are valid against
an ordinary holder; only real defenses can be used
against a holder in due course.
104
DEFENSES (cont’d)
Real Defenses– Forgery, Bankruptcy, Minority,
Alteration Duress, Mental Incapacity, Illegality, and Fraud in the Execution
105
DEFENSES (cont’d)
Personal Defenses– Breach of Contract, Lack of
Consideration, Prior Payment, Unauthorized Completion, Fraud in the Inducement and Non-Delivery
106
CLAIMS IN RECOUPMENT
A claim in recoupment is a refusal to pay the full amount of
the instrument because the payee owes the issuer another debt. Issuer subtracts the prior
debt from the payoff of the current instrument.
107
CONSUMER EXCEPTION
• A consumer credit contract is one in which the seller is also the lender.
• In such cases, the Federal Trade Commission requires a specifically-worded notice to be included on the contract, making it non-negotiable.
108
109
“It is never wise to play an important game without
understanding the rules. The rules of negotiable
instruments are complex, but important because this game
is played by virtually everyone.”
110
LIABILITY
• Signature liability – liability of someone who has signed a document.
• Warranty liability -- liability of someone who has received payment.
111
PRIMARY VS. SECONDARY LIABILITY
• Someone with primary liability must pay unless he has a valid defense.
• Someone with secondary liability must pay only if the person with primary liability does not pay.
112
THE LAW OF LIABILITY
The holder of an instrument must first try to get payment from the party with primary liability before making demands against a party with secondary liability.
113
THE PAYMENT PROCESS
• Presentment
• Payment, or
• Dishonor
• Notice of Dishonor
114
SIGNATURE LIABILITY• The maker is primarily liable.
• The drawer of a check has secondary liability.
• The bank (drawee) is not liable to the holder and owes no damages to the holder for refusing to pay the check.
• Indorsers are secondarily liable.
115
SIGNATURE LIABILITY -- INDORSERS
• Indorsers are not liable if:– they write the words “without recourse”
next to their signature on the instrument,
– a bank certifies the check, – the check is presented for payment
more than 30 days after the indorsement, or
– the check is dishonored and the indorser is not notified within 30 days.
116
ACCOMMODATION PARTY
An accommodation party (sometimes called a co-signer or guarantor) is someone who
adds their signature to an instrument in a capacity other
than issuer, acceptor or indorser, in order to be liable
for the instrument.
117
ACCOMMODATION PARTY(NOT ME!)
An accommodation party has the same liability to the
holder as the person for whom she signed.
118
AGENT
To avoid personal liability when signing an instrument, an agent must: – indicate that they are signing as
an agent and – give the name of the principal.
119
PRINCIPAL LIABILITY
The principal is liable if the agent signs correctly, the agent signs just her own name, or the agent signs
only the name of the principal.
120
RULES OF WARRANTY LIABILITY
• The culprit is always liable.• The drawee bank is liable if it pays a
check on which the drawer’s name is forged.
• In any other case of wrongdoing, a person who first acquires an instrument from a culprit is ultimately liable to anyone else who pays value for it.
121
TRANSFER WARRANTIES
• When someone transfers an instrument, they warrant that:– They are the holder of the instrument,– All signatures are authentic and
authorized,– The instrument has not been altered,– No defense can be asserted against
them, and– As far as they know the issuer is
solvent.
122
PRESENTMENT WARRANTIES
Apply to someone who demands payment for an
instrument from the maker, drawee, or anyone
else liable.
123
PRESENTER WARRANTIES
• Anyone who presents a promissory note for payment warrants only that he is a holder of the instrument.
• Presenter warrants that:– He is a holder– The check has not been altered, and– He has no reason to believe the drawer’s
signature is forged.
124
OTHER LIABILITY RULES
• Conversion Liability
• Imposter Rule
• Fictitious Payee Rule
• Employee Indorsement Rule
125
NEGLIGENCE I
Anyone negligent in creating or paying an
unauthorized instrument is liable to an innocent
third party.
126
NEGLIGENCE II
Anyone careless in paying an unauthorized
instrument is liable.
127
NEGLIGENCE III
Anyone careless in allowing a forged or
altered instrument to be created is also liable.
128
CRIMES
• Bouncing a check
• Check Kiting
• Forgery
129
DISCHARGE
Discharge means that liability on an instrument terminates. By Payment By Agreement By Cancellation By Certification By Alteration
130
DISCHARGE OF AN INDORSER OR ACCOMMODATION PARTY
The UCC provides that virtually any change in an instrument that harms an
indorser or accommodation party also discharges them unless they consent to the
change.
131
132
“This area of law is important because
virtually everyone has written a check or used an ATM and because the
law regarding these transactions is changing
rapidly.”
133
WHO’S WHO
• Depositary Bank
• Payor Bank
• Intermediary Bank
• Collecting Bank.
• Presenting Bank
134
BANK’S DUTY TO PROVIDE INFORMATION
• A bank is not required to provide a monthly statement, but most do.
• A statement (if provided) must disclose:– Interest rate paid– Amount of interest earned– Fees imposed by the bank– The number of days covered by the
statement
135
MORE DUTIES
When an account is opened (and in ads), the bank must disclose:– Interest rate paid– How long this rate will be in effect– Requirements to earn the
advertised rate– Fees or penalties imposed by the
bank
136
THE BANK’S DUTY TO PAY
A bank must pay a check if the check is authorized
by the customer and complies with the terms of the checking account
agreement.
137
NO PAYMENT REQUIRED
A bank is not required to pay a check on an
overdrawn account, but may choose to do so.
138
WRONGFUL DISHONOR
If a bank violates its duty and wrongfully dishonors an authorized check, it is liable to the customer for
all actual and consequential damages.
139
DIFFICULT SITUATIONS FOR A BANK
• The Death of a Customer
• Incompetent Customers
140
INVALID INSTRUMENTS
• Forgery• Alteration
• Completion
141
DATING ON CHECKS
• Stale Checks
• Post-dated Checks
142
STOP PAYMENT ORDERS
As a general rule, if a bank pays a check over a stop payment order, it is liable to the customer for
the loss he suffers.
143
ELECTRONIC BANKING
Today’s consumers have options for banking that were barely imagined a generation ago:– Automatic Teller Machines (ATMs)
– Point of Sale terminals
– Automatic deposit systems
– Bill payment over the telephone lines or by internet
144
ELECTRONIC FUND TRANSFER ACT OF 1978
Employers may require all employees to accept payment by electronic transfer (direct deposit), but may not require that it go to a particular bank.
145
MORE
Electronic fund transfer cards (ATM, debit, etc.) sent
without a customer’s request must be invalid until the consumer activates it.
146
AND MORE
• Preauthorized transfers must be authorized in writing.
• Errors– If reported within 60 days, a bank
must investigate an error within the next 10 days or provisionally credit the account until the investigation can take place.
147
AND STILL MORE!
• Limited Consumer Liability for
Unauthorized Transactions (stolen
ATM card)
• Bank’s Liability
148
GOOD GRIEF!
• System Malfunctions
• Disclosure
149
WIRE TRANSFERS
• A wire transfer is a type of payment order that “pushes” money out of the issuer’s account into the payee’s.
• The originator is the person who sends the payment order; the beneficiary receives the payment order.
150
BANK ERRORS
• Bank Sends the Wrong Amount
• Bank Sends Money to the Wrong Person
151
PRIVACY
Banks and other financial institutions must disclose to consumers any non-public information they wish to reveal to third
parties.
152
153
“Secured transactions are essential to modern
commerce but create pitfalls for the unknowing. A person doing business in ignorance of Article 9 risks losing goods and
money.”
154
REVISED ARTICLE 9
• Governs secured transactions in personal property.
• Applies to any transaction intended to create a security interest in personal property or fixtures.
• About ½ of all UCC lawsuits involve Article 9.
155
DEFINITIONS
• Fixtures
• Security interest
• Secured party
• Collateral
156
MORE DEFINITIONS
• Debtor• Obligor
• Security agreement• Default
• Repossession.
157
And More Definitions
• Perfection
• Financing statement
• Record
• Authenticate
158
ATTACHMENT OF A SECURITY INTEREST
In order to obtain a security interest, an attachment must take place by the two parties making a security agreement and either: (1) it is in writing, describes the
collateral, and is signed by the debtor, or
.
159
STILL ATTACHING
(2) the secured party has possession of the collateral
• The secured party gave value in order to get the security agreement.
• The debtor has rights in the collateral.
160
FUTURE PROPERTY
The parties may agree that the security interest
attaches to after-acquired (future) property which are items the debtor obtains
after the parties made their security agreement.
161
PERFECTION
• Perfection guarantees the collateral’s availability in case of default.
• Methods of PerfectingFiling a financing statementPossession of the collateralPurchase money security interest
in consumer goods (PMSI)
162
PROTECTION OF BUYERS
Generally, once a security interest is perfected, it
remains effective regardless of whether the
collateral is sold, exchanged, or transferred.
163
BUYERS IN ORDINARY COURSE OF BUSINESS
– One who buys goods in good faith from a seller who routinely deals in such goods.
– A BIOC takes the goods free of a security interest created by his seller even though the security interest is perfected.
164
PROTECTION OF BUYERS (cont'd)
• Buyers of Consumer Goods
• Buyers of Chattel Paper, Instruments, and Documents
165
LIENS
A lien is a security interest created by law
(rather than by agreement).UCC does not cover.
166
DEFAULT AND TERMINATION
• Default: when debtor fails to make payments due or
enters bankruptcy.
• Taking Possession of the Collateral
167
DISPOSITION OF COLLATERAL
• A secured party may sell, lease, or otherwise dispose
of the collateral in any commercially reasonable
manner.
• Right of Redemption
168
PROCEEDING TO JUDGMENT
Upon default, a secured party may sue the debtor for the full debt instead of
seizing the collateral.
169
THE END
AND WHEN THE DEBT IS PAID THE SECURITY
AGREEMENT IS TERMINATED JUST
LIKE THIS LECTURE!