Easy Guide to the UCC Articles
There are eleven different Articles that make up the UCC. The names of each Article is provided within the UCC itself.
Article 1: General Provisions
The first of the Uniform Commercial Codes that comprise the UCC. This Article does not lay out any specific codes to govern commercial interactions. The only things which Article 1 lays out are the names of the different Articles of the UCC, how the Uniform Commercial Codes should be referred, and the definitions of terms that will be used throughout the document, although most of the Articles have definitions related to the contents of the particular Article.
Article 2: Sales
The next of the Uniform Commercial Codes is concerned with the different terms that are involved in the normal sales process between two parties.
Article 2A: Leases
This section of the UCC focuses on the obligations placed on a person who leases property, who is known as the lessor, and the person who pays the lease, who is referred to as the lessee. Unlike in other portions of the Uniform Commercial Code, Article 2A restricts legal actions arising from disputes over leases to being handled in the jurisdiction where the lease originates.
Despite the colloquial understanding of leases as a contract for the renting of an apartment, these Uniform Commercial Codes are primarily concerned with the leasing of business equipment, such as bulldozers, or the lease of a car. Later sections of the Article lay out the legal recourse available to both lessees and lessors in the event the other party defaults, as well as the obligations of the defaulting party.
Article 3: Negotiable Instruments
The third Article of the UCC is concerned with handling checks. This article defines "check," "cashier's check," "teller's check," and "traveler's checks" to all mean essentially the same thing. All these kinds of checks reflect an item that can be paid on demand to the person holding the item.
This negotiable instrument can be passed from one individual to another at any time, thus the word negotiable. The UCC requires that these negotiable instruments bear the words "pay to the order of," and bear the signature of both the person authorizing the payment and the person being paid. The party issuing the check is called the "drawer." The "drawee," usually the bank, is the party who issues the funds. The person receiving the money is the "payee."
Negotiable instruments are a special circumstance of contracts because they compel action from one party and provide a service to another party. The action is the exchange of funds and the service is the transfer of those funds. Article 3 provides the general guidelines for the exchange of funds. Articles 4, 4A, and 9 provide more specific terms. In the event of a conflict between any of these three Articles and Article 3, the other Article overrides the terms in Article 3.
Article 4: Bank Deposits
The fourth of the Uniform Commercial Codes is similar to the third. It is concerned with the different kinds of deposit accounts that banks use. This section may be one of the most familiar to the average individual because it deals with checking accounts, saving accounts, money market deposit accounts, and time deposit accounts. Although many people do not realize it, opening an account at their local bank creates a contract between the person and the bank.
When the bank accepts an individual's deposit the individual forms a contract that allows them to withdraw their money at any time of their choosing. The bank is required to honor the withdrawal. The benefit the bank receives from the contract is the ability to make investments with the deposited money. In the event of conflict between Article 4 and Article 3, Article 4 has supremacy. Of Article 4 and Article 8, Article 8 is supreme.
Article 4A: Funds Transfers
This part of the UCC governs wire transfer networks, automated clearing houses, or any other systems by which banks exchange funds. This Article also limits the liability of banks in the event that a transfer of funds happens improperly. It is important because it tries to provide both an assurance to consumers that their funds will be handled properly, as well as providing coverage to banks in the event that the information they receive is incorrect.
As long as the bank transferring funds can be shown to have been acting in a reasonable manner they will not incur additional responsibility, while anyone who benefits from a bank error will be protected from having to refund the money if the error did not happen because the beneficiary did not do anything to try to cause the error.
Article 5: Letters of Credit
The fifth Article of the Uniform Commercial Codes involves letters of credit. Letters of credit are generally non-transferable. They are used for large scale and usually international sales. A letter of credit involves the exchange of funds between individuals and their banks. The important distinction of Article 5 is that it exempts banks from the obligation of proving that the contract governed by the letter of credit has been fulfilled to the satisfaction of both parties. The payment of a letter of credit is only concerned with obtaining the documents that satisfy the terms of the contract and does not worry about the goods that are required to fulfill a contract.
Article 6: Bulk Transfers and Bulk Sales
The most recent revision of the UCC has suggested abolishing Article 6. Bulk sales were instances when a company sold its entire inventory in an abnormal manner. For instance, it is common for a farmer to arrange for an individual buyer to obtain their entire crop. The UCC does not concern itself with regulating instances when the sale is considered normal. It does, however, regulate a car dealership selling the entire inventory at once and walking away from the company with a large amount of money at once. This practice is considered abnormal and is generally discouraged by the Uniform Commercial Codes.
If, however, several purchasers bought the entire inventory, the UCC does not regulate this because while it is abnormal it is not suspicious. These abnormal bulk sales are considered a form of fraud, and thus Article 6 was created to criminalize instances when this fraud was perpetrated. In 1989, the National Conference of Commissioners on Uniform State Laws came out in support of abolishing this Article on the grounds that it was obsolete. Several jurisdictions, however, have retained this Article.
Article 7: Warehouse Receipts, Bills of Lading, and Other Documents of Title
Article 7 of the Uniform Commercial Codes is concerned with instances where an individual is in possession of property owned by another party. It lays out the responsibilities of parties which transfer goods owned by another party. The most common examples are the United States Post Office and UPS, or the United Parcel Service. These parties are governed by bills of lading. Warehouse receipts, as the name implies, cover instances where one party's goods are in the possession of another person, although the person in possession of the good has no rights to use the property.
This is known as bailment. Bailment is different than a lease. Under a lease, the person who possesses the property has every right to use it. In a bailment, the possessor has no rights to use the property. A valet in a parking garage has a license to use the car in order to park the car, but has no right to use the car in any other manner. This license is a bailment.
Article 8: Investment Securities
The next part of the UCC deals with security trading. Article 8 focuses on the rights and obligations of stockholders and stock traders. It governs equity offered in corporations, business trusts, joint stock companies. Although investment securities fulfill all the terms of negotiable instruments laid out in Article 3, they are governed by Article 8 in the event that the Articles conflict.
The Article focuses on instances where a security is lost by the proper owner and provides general guidance for instances when the proper ownership of a security is in conflict. This Article of the Uniform Commercial Codes also grants general guidelines for payment and distribution of profits derived from the securities.
Article 9: Secured Transactions
The final of the Uniform Commercial Codes is concerned with instances when a party to a contract is forced to file bankruptcy. It is concerned with how liens are filed against a debtor's property, the proper schedule for repayment to creditors, and the rights of creditors who cannot provide specific proof of the debts owed to them.
Article 9 also lays out the process by which a claim of insolvency must be filed and the specific things which must be included in a bankruptcy filing for it to be considered valid. This part of the UCC also covers what happens when a party to a contract is forced to default on the terms of the contract and what happens while the contract transitions from being in effect to being declared voided.
NEXT: Important Details Regarding Minors and Contracts