The UCC: Sales and Secured Transactions

“A commodity appears at first sight an extremely obvious, trivial thing. But its

analysis brings out that it is a very strange thing, abounding in

metaphysical subtleties and theological niceties.”

Karl Marx, German political philosopher

UCC was created to solve two problems:◦ Old contract law principles did not reflect modern

business practices◦ Laws had become different from one state to

another Good: Moveable physical object except for

money and securities

Scope of Article 2◦ UCC §2-102: Article 2 applies to the sale of goods◦ Regulates sales

Sales: One party transfers title to the other in exchange for money

Mixed contracts◦ UCC will govern if the predominant purpose is the

sale of goods Common law will control if the predominant purpose

is providing services

Merchant: Someone who routinely deals in the particular goods involved◦ UCC holds a merchant to a higher standard of

conduct than a non-merchant

Formation basics: Section 2-204◦ Rules

Any manner that shows agreement Moment of making is not critical One or more terms may be left open

Statute of frauds◦ Rules

Contracts for goods worth $500 or more Writing sufficient to indicate a contract

Must be signed by the defendant Enforceable only to the quantity stated

Statute of frauds◦ Rules

Exception Merchant exception Specialty goods exception Judicial admission exception

Added terms: Section 2-207◦ An acceptance that adds or alters terms will often

create a contract◦ Intention

Added terms: Section 2-207◦ Additional terms: Terms that raise issues not

covered in the offer When parties are merchants, additional terms

become part of the bargain Additional terms do not bind the parties when:

Original offer insisted on its own terms Additional terms materially alter the offer Offeror promptly objects to the new terms

Added terms: Section 2-207◦ Different terms: Terms that contradict those in

the offer Cancel each other out Gap-fillers – Code supplies its own terms when there

is no clear oral agreement Modification

◦ UCC does away with consideration requirement for changes in contracts Long as both sides agree to the modification

Buyer’s remedies◦ Seller is expected to deliver what the buyer

ordered◦ Buyer has the right to inspect the goods before

paying or accepting◦ Cover

If the seller breaches, the buyer may “cover” by reasonably obtaining substitute goods

Buyer may then obtain the difference between the contract price and the cover price: Plus incidental and consequential damages, minus

expenses saved

Buyer’s remedies◦ Incidental damages cover such costs as:

Advertising for replacements Sending buyers to obtain new goods Shipping the replacement goods

◦ Consequential damages are those resulting from the unique circumstances of this injured party

Seller’s remedies◦ Refuse to deliver the goods when buyer breaches

before the seller has delivered the goods◦ The injured seller may resell the goods when

buyer unjustly refuses to accept or pay for goods The seller may recover difference between the resale

price and contract price: Plus incidental damages, minus expenses saved

◦ Seller may simply sue for the contract price if: Buyer has accepted the goods Goods are conforming and resale is impossible

Contractual assurance that goods will meet certain standards◦ Express warranty: One that the seller creates

with his words or actions Disclaimer: Statement that a particular warranty

does not apply◦ Implied warranties: Are created by the Code

itself, not by any act or statement of the seller Implied warranty of merchantability

Merchantable: Goods are fit for the ordinary purposes for which they are used

◦ Implied warranties - Created by the Code itself, not by any act or statement of the seller Implied warranty of merchantability

Merchantable: Goods are fit for the ordinary purposes for which they are used

Principles Unless excluded or modified Merchantability Implied Merchant with respect to goods of that kind

◦ Implied warranties Implied warranty of fitness for a particular purpose

When the seller: Knows about a particular purpose for which the buyer

wants the goods Knows that the buyer is relying on the seller’s skill and

judgement Consumer sales

Code provides stronger protection for consumers than for businesses

Article 9: Terms and scope◦ Applies to any transaction intended to create a

security interest in personal property or fixtures Article 9 vocabulary

◦ Fixtures: Goods that have become firmly attached to real estate

◦ Security interest: Interest in personal property or fixtures that secures the performance of an obligation

◦ Secured party: Party who holds the security interest

◦ Collateral: Property subject to the security interest

Article 9 vocabulary◦ Debtor: Person who has some original ownership

in the collateral◦ Obligor: Person who must repay money◦ Security agreement: Contract which gives a

security interest to the secured party◦ Default: When the debtor fails to pay◦ Repossession: When the secured party takes

back the collateral because the debtor has defaulted

Article 9 vocabulary◦ Perfection: Steps the secured party must take to

protect rights in the collateral against people other than the debtor

◦ Financing statement: Document filed by secured party to give notice of security interest in the collateral

◦ Record: Information on paper or other medium◦ Authenticate: To sign a document (includes use

of symbols or electronic encryption)

Attachment: Three-step process that creates an enforceable security interest◦ The two parties made a security agreement and

either Debtor has authenticated a security agreement

describing collateral 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

Agreement◦ Without an agreement, there can be no security

interest Control and possession Value

◦ For the security interest to attach, secured party must give value

Debtor rights in the collateral◦ Debtor can grant security interest in goods only if

he has some legal right to those goods himself

Kinds of perfection◦ Perfection by filing◦ Perfection by possession◦ Perfection of consumer goods◦ Perfection of moveable collateral and fixtures

The common way to perfect an interest is by:◦ Filing a financing statement with one or more

state agencies Financing statement: Gives the names of

all parties, describes the collateral, and outlines the security interest◦ Contents of the financing statement

Sufficient if it provides: Name of the debtor Name of the secured party Indication of the collateral

Financing statement◦ Place of filing

Secured party must file in the state of the debtor’s location

Goods – Central location will be the Secretary of State’s office

Fixtures – Secured party has choice between Filing in the same central office Filing in the local country office

◦ Duration of filing Effective for five years

Advantages◦ Notice to other parties is very clear

If debtor defaults, secured party has no difficulties repossessing

Impose one important duty◦ Secured party must use reasonable care in the

custody and preservation of collateral in possession or control

UCC gives special treatment to security interests in most consumer goods◦ Consumer goods – Used primarily for personal,

family, or household purposes◦ Purchase money security interest (PMSI):

Interest taken by the person who sells the collateral or advances the money so the debtor can buy it PMSI in consumer goods perfects automatically,

without filing

Once security interest is perfected:◦ Remains effective regardless of whether collateral

is sold, exchanged, or transferred Buyers in ordinary course (BIOC): Buys

goods in good faith from a seller who routinely deals in such goods◦ Takes goods free of a security interest created by

its seller even though the security interest is perfected

Three principal rules◦ Party with a perfected security interest takes

priority over a party with an unperfected interest◦ If neither secured party has perfected, the first

interest to attach gets priority◦ Between perfected security interests, the first to

file or perfect wins

Default - When debtor fails to make payments due or enters bankruptcy◦ Taking possession of the collateral

When the debtor defaults, the secured party may take possession of the collateral

◦ Disposition of collateral Secured party may sell, lease, or otherwise dispose

of the collateral in any commercially reasonable manner

Debtor is liable for any deficiency

Termination◦ Happens when the debtor pays the full debt◦ Termination statement - Document indicating that

there is no longer a security interest in the collateral