Getting to know the Uniform Commercial Code (UCC)

The UCC was published to harmonize transactional rules

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Introduction

The Uniform Commercial Code (UCC) was published in 1952 and its main purpose was to harmonize rules for each of nine transactional areas that pertain to commerce and commercial law. After a number of revisions since the first publication there are none ten distinct areas within the code, as well as a section on the general provisions of the code.

The UCC took ten years to write and it is not itself a law, but recommendations of laws that should be adopted in the fifty states.

When a state adopts the UCC it is then part of that state’s code of statutes, although modifications to the original UCC have been made by some states. The UCC has been adopted in some form by all fifty states, Guam, Puerto Rico, US Virgin Islands, and the District of Columbia.

Articles of the Uniform Commercial Code

The UCC applies to most transactions between a buyer and a seller, so it is important for purchasing professional to have a basic understanding of the UCC. Although in procurement there are other laws that can apply to purchases such as federal and state legislation, common law, and requirements of regulatory boards.

The rules for each of the transactional areas are grouped into separate parts called an article. As of 2011 the types of transactions that are included in the UCC are:-

  1. General Provisions (Article 1) – this describes the general definitions and principles of interpretation for all of the articles in the UCC.
  1. Sales (Amended Article 2) – this article governs contracts for the sale of goods. The most important aspect of Article 2 for purchasing professionals is that it does not cover transactions that involve service contracts or the sale of real estate.
  2. Leases (Amended Article 2A) – this article describes the lease of goods. It was added in 1987 and modified in 1990. The article describes a true lease as when a lessor gives possession and right to use the goods to the lessee for a fixed period of time in return for rent, but the title to the property remains with the lessor. This article also describes finance leases, which are true leases where the lessor is not the fundamental supplier of the goods leased, but leases goods to lessees as a means of financing their purchase from the supplier.
  1. Negotiable Instruments (Revised Article 3) – this article looks at negotiable instru¬ments which can be either a draft, which we know as a check, or it could be a note, which could be a traditional promissory note. A draft is an order from one person to another to pay money to a third person. A note is evidence of a debt between the maker, who promises to pay, and another person.
  2. Bank Deposits and Collections (Amended Article 4) – this article examines the rules surrounding checks. The banking process and physical checks are a vital part of everyday commerce. Without checks and bank accounts, virtually no business could take place.
  3. Funds Transfers (Article 4A) – this article was created in 1989 when electronic banking was the way which business payments were being to be processed. In 1989 the daily average for electronic banking was one trillion dollars. This article determines the rules for the sender and receiving bank.
  4. Letters of Credit (Revised Article 5) – this is described as an instrument of payment that is an undertaking by an issuer of the credit to a beneficiary, the individual who gets paid, on behalf of an applicant, the individual to whom credit is extended by the issuer. The payment will require the presentation of a document, usually a draft on behalf of the beneficiary to the issuer.
  1. Bulk Sales (Revised Article 6) – this article provides protection for creditors of businesses that sell merchandise from stock. Creditors of these businesses are vulnerable to a bulk sale, where the business sells all or a large part of inventory to a single buyer outside the ordinary course of business, and then the business owner flees with the proceeds.
  2. Documents of Title (Revised Article 7) – this article refers to warehouse receipts, bill of lading, and other documents of title. The issue for this article was the transfer of title while goods were stored or shipped. The main documents in this article are the warehouseman’s receipts on the storage side, and the bill of lading on the carrier side.
  3. Investment Securities (Revised Article 8) – this article governs the transfers of investment securities. This includes stocks, bonds, mutual fund shares, and limited partnership shares.
  1. Secured Transactions (Revised Article 9) – this article provides the rules governing any transaction, except a finance lease, that couples a debt with a creditor’s interest in a debtor’s personal property. If the debtor defaults, the creditor may repossess and sell the property to satisfy the debt.

Updated by Gary Marion, Logistics and Supply Chain Expert.