It is increasingly common to make transactions with businesses in other countries. If you are purchasing goods not for personal or household use, Article 2 of the Uniform Commercial Code ("UCC art. 2") or the United Nations Convention on Contracts for the Sale of Goods ("CISG") apply.
All 50 states have enacted the UCC. As of December 2012, 78 nations ratified the CISG. Wikipedia, United Nations Convention on Contracts for the Sale of Goods, http://en.wikipedia.org/wiki/United_Nations_Convention_on_Contracts_for_the_International_Sale_of_Goods (last visited February 21, 2013). Parties can generally contract around UCC art. 2 or the CISG, as long as other requirements for a valid contract exist. There are some things that cannot be varied by agreement, such as good faith, diligence, reasonableness and care. (If a party enters a contract in bad faith with the intention to take advantage of the other party, the other party would likely have a cause of action for fraud.)
In many cases, the parties do contract around the provisions of the UCC or CISG. In international transactions, when the parties are both contracting states and the contract is silent regarding choice of law, the CISG applies.
There are minor differences between the two. CISG art. 18 provides that acceptance of an offer is valid when it reaches the offeror. In American law, acceptance is valid when dispatched, when that is the method by which acceptance is to be effectuated. CISG art. 19 provides that a reply to an offer that appears to be an acceptance but adds additional terms or limitations operates as a rejection and counteroffer. UCC art. 2 provides that such a reply operates as an acceptance, unless the acceptance is expressly conditioned on the adoption of those terms or limitations in the contract. CISG art. 11 does not require contracts for goods over $500 to be in writing. In American law, the Statute of Frauds and the UCC require such a contract to be in writing, electronically or otherwise.
There are no likely changes in the foreseeable future to either the UCC or CISG, so any practical differences between the two are likely to remain minimal. But there are situations when the two differ, as noted above, in which case legal consequences can vary quite widely.
Showing posts with label UCC. Show all posts
Showing posts with label UCC. Show all posts
Monday, April 29, 2013
Friday, May 25, 2012
Is it a sale or lease?
A common mistake that businesspersons who deal in goods may make is to characterize a transaction improperly. At first glance, it would seem that it is easy to delineate what constitutes a sale from what constitutes a lease. If it is a sale, Article 2 will apply. If it is a lease, Article 2A will apply. The line between sales and leases becomes fuzzy when security interests are involved. A sale intended for security occurs when goods are purchased on credit but the seller retains the right to foreclose on the goods if the buyer stops making payments. In such a case, Article 9 also applies.
The "Economic Realities" test offers salient guidance. It posits that a purported lease is actually a sale when the lessor/seller is scheduled to receive the goods back with little or no economically useful life remaining. The UCC goes beyond merely asking whether the putative lessor would receive the goods back with any economically useful life. The UCC does not follow the Economic Realities test, even though the test is subsumed in it.
Article 1 of the UCC distinguishes a lease from a security interest. It defers to the facts of each case. If the lessee/buyer cannot terminate the lease and is obligated to pay for the entire term of it, there is a security interest if: (a) there is no remaining economic life to the goods after the lease expires; (b) the lessee/buyer must renew the lease; or (c) the lessee/buyer has an option to renew the lease for little to no additional payment.
If you lease goods in your business, you should take care to ensure that your leases are not disguised sales. If they are disguised sales and a security interest is created, you would be remiss to not take advantage of Article 9 by perfecting your security interest. Generally, to perfect, it is necessary for the security interest to "attach" and to file a financing statement with the Secretary of State. Generally, a security interest attaches only when it becomes enforceable against the buyer. Perfecting your security interest helps establish priority over other creditors. A perfected security interest has priority over later-in-time perfected security interests. A perfected security interest has priority over unperfected security interests, even those that attached before perfection.
The "Economic Realities" test offers salient guidance. It posits that a purported lease is actually a sale when the lessor/seller is scheduled to receive the goods back with little or no economically useful life remaining. The UCC goes beyond merely asking whether the putative lessor would receive the goods back with any economically useful life. The UCC does not follow the Economic Realities test, even though the test is subsumed in it.
Article 1 of the UCC distinguishes a lease from a security interest. It defers to the facts of each case. If the lessee/buyer cannot terminate the lease and is obligated to pay for the entire term of it, there is a security interest if: (a) there is no remaining economic life to the goods after the lease expires; (b) the lessee/buyer must renew the lease; or (c) the lessee/buyer has an option to renew the lease for little to no additional payment.
If you lease goods in your business, you should take care to ensure that your leases are not disguised sales. If they are disguised sales and a security interest is created, you would be remiss to not take advantage of Article 9 by perfecting your security interest. Generally, to perfect, it is necessary for the security interest to "attach" and to file a financing statement with the Secretary of State. Generally, a security interest attaches only when it becomes enforceable against the buyer. Perfecting your security interest helps establish priority over other creditors. A perfected security interest has priority over later-in-time perfected security interests. A perfected security interest has priority over unperfected security interests, even those that attached before perfection.
Wednesday, May 23, 2012
Introduction to Commercial Law.
Commercial law is the body of law governing business and commercial transactions. [1] In the United States, the Uniform Commercial Code ("UCC") is indispensable to the discussion of commercial law. All 50 states have enacted some form of the UCC, even if they have made minor changes. The UCC's scope is wide. Article 1 contains general provisions. Article 2 deals with the sale of goods. Article 2A deals with leases. Article 3 deals with negotiable instruments (e.g., checks). Article 4 deals with banks and banking deposits. Article 5 deals with letters of credit. Article 6 deals with bulk transfers and bulk sales. Article 7 covers warehouse receipts, bills of lading and other documents of title. Article 8 deals with investment securities. Article 9 deals with secured transactions.
If one had to say that there is a "most commonly used" article of the UCC, it would likely be Article 2. As mentioned above, Article 2 deals with the sale of goods. For sales of services, the UCC does not apply. When transactions involve goods and services, there are different rules that may be applied, depending on the jurisdiction in which the case is being tried.
The majority approach is the "Predominant Purpose" test, where courts decide whether the predominant purpose of the transaction is to sell goods or services. If it is goods, then Article 2 applies. The UCC will apply to the whole transaction, even the services portion. If the predominant purpose is services, then Article 2 does not apply to any part of the transaction. [2]
Another common approach is the "Gravaman of the Action" test. Under this test, the inquiry is whether the source of the complaint is with the goods or services portion of the transaction. If the source of the complaint lies with the goods, then Article 2 applies even if the predominant purpose of the transaction is services rather than goods. If the source of the complaint lies with the services, then Article 2 does not apply even if the predominant purpose of the transaction is goods rather than services. [2]
Outside the United States, the Convention on Contracts for the International Sale of Goods ("CISG") is indispensable to the discussion of commercial law. Its scope is the same as the scope of Article 2 in the U.S. As of August 2010, the CISG had been ratified by 77 countries, including the United States. [3] The CISG applies when there is a sale of goods between contracting states to the CISG, or when the rules of private international law lead to the application of the law of a contracting state to the CISG.
It is also important to note that parties to a contract can often provide for rules differing from those of the UCC and CISG. Very generally, parties of equal bargaining power can vary the terms of the UCC and CISG. If two large businesses contract for a transaction in goods, a general rule is that the parties can input contractual provisions to modify the UCC or CISG. However, if a transaction in goods is between two parties of unequal bargaining power (sometimes the difference in bargaining power must be profound), then generally the UCC or CISG cannot be modified through contracting. Please note that the point of the general rule is that it does not necessarily hold throughout its sphere of application.
Identifying the major players in commercial law is only the tip of the iceberg. It will take many more posts to reveal more of that hypothetical iceberg.
Citations:
[1] Wikipedia, Commercial Law, http://en.wikipedia.org/wiki/Commercial_law (last visited May 23, 2012).
[2] Lynn M. LoPucki, Elizabeth Warren, Daniel Keating, Ronald J. Mann, Commercial Transactions: A Systems Approach, 12 (Aspen Publishers 4th ed. 2009).
[3] Wikipedia, United Nations Convention on Contracts for the International Sale of Goods, http://en.wikipedia.org/wiki/United_Nations_Convention_on_Contracts_for_the_International_Sale_of_Goods (last visited May 23, 2012).
If one had to say that there is a "most commonly used" article of the UCC, it would likely be Article 2. As mentioned above, Article 2 deals with the sale of goods. For sales of services, the UCC does not apply. When transactions involve goods and services, there are different rules that may be applied, depending on the jurisdiction in which the case is being tried.
The majority approach is the "Predominant Purpose" test, where courts decide whether the predominant purpose of the transaction is to sell goods or services. If it is goods, then Article 2 applies. The UCC will apply to the whole transaction, even the services portion. If the predominant purpose is services, then Article 2 does not apply to any part of the transaction. [2]
Another common approach is the "Gravaman of the Action" test. Under this test, the inquiry is whether the source of the complaint is with the goods or services portion of the transaction. If the source of the complaint lies with the goods, then Article 2 applies even if the predominant purpose of the transaction is services rather than goods. If the source of the complaint lies with the services, then Article 2 does not apply even if the predominant purpose of the transaction is goods rather than services. [2]
Outside the United States, the Convention on Contracts for the International Sale of Goods ("CISG") is indispensable to the discussion of commercial law. Its scope is the same as the scope of Article 2 in the U.S. As of August 2010, the CISG had been ratified by 77 countries, including the United States. [3] The CISG applies when there is a sale of goods between contracting states to the CISG, or when the rules of private international law lead to the application of the law of a contracting state to the CISG.
It is also important to note that parties to a contract can often provide for rules differing from those of the UCC and CISG. Very generally, parties of equal bargaining power can vary the terms of the UCC and CISG. If two large businesses contract for a transaction in goods, a general rule is that the parties can input contractual provisions to modify the UCC or CISG. However, if a transaction in goods is between two parties of unequal bargaining power (sometimes the difference in bargaining power must be profound), then generally the UCC or CISG cannot be modified through contracting. Please note that the point of the general rule is that it does not necessarily hold throughout its sphere of application.
Identifying the major players in commercial law is only the tip of the iceberg. It will take many more posts to reveal more of that hypothetical iceberg.
Citations:
[1] Wikipedia, Commercial Law, http://en.wikipedia.org/wiki/Commercial_law (last visited May 23, 2012).
[2] Lynn M. LoPucki, Elizabeth Warren, Daniel Keating, Ronald J. Mann, Commercial Transactions: A Systems Approach, 12 (Aspen Publishers 4th ed. 2009).
[3] Wikipedia, United Nations Convention on Contracts for the International Sale of Goods, http://en.wikipedia.org/wiki/United_Nations_Convention_on_Contracts_for_the_International_Sale_of_Goods (last visited May 23, 2012).
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