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To:       Commission

From:  Staff

Date:   December 8, 2003

Re:      Revised UCC 1

The National Conference of Commissioners on Uniform State Laws, and the American Law Institute have approved for enactment in the States the national uniform text of Uniform Commercial Code Article 1 (2001). Article 1 provides definitions and general provisions that, in the absence of conflicting provisions, apply as default rules covering transactions governed by another Article of the Code. “Other parts of the UCC have been revised and amended to accommodate changing business practices and development in the law. Therefore, these changes must be reflected in an update of Article 1.”

Two states – Texas and Virginia – and one territory – the Virgin Islands have enacted Revised Article 1.  It is introduced in Connecticut, Hawaii and Massachusetts. In addition, the Business Law Section of the State Bar of California, in an exceptionally well-analyzed and detailed report, has recommended the adoption of Revised Article 1 in California.  

Generally, Revised Article 1 contains technical, non-substantive modifications, such as reordering and renumbering of sections and adding of gender-neutral terminology. In addition, several other changes reflect an effort to add greater clarity to the provisions of Article 1. Finally, developments in the law require that certain substantive changes in Article 1 be made as well.

Scope. The substantive rules of Article 1 apply only to transactions governed by other articles of the UCC. There is no impact outside the UCC. While this rule appears clear, it generated substantial litigation as to what matter was inside, as opposed to outside, the UCC. The revision emphasizes that Article 1 has no application to a non-UCC matter, like a credit card. Likewise, it emphasizes that when the UCC applies to a transaction it preempts other state non-mandatory law. Thus, this section reflects the interrelationship between the Code’s purposes and policies and the extent to which other law is available to supplement the Code.

Good Faith. Section 1-201 adopts the objective standard of “good faith” that applies in all of the recently revised UCC articles, except revised Article 5 (Letters of Credit).[1] The objective standard of “good faith” requires honesty in fact and commercially reasonable behavior.

Opponents of this definition have argued that the “new” good faith standard applied only to articles that specifically mentioned good faith and that the “old” good faith applied to the remaining provisions. In their article, The State of the Commercial Code – 2003, Henning and Miller stated clearly that the “good faith” definition of section 1-304 applied to all provisions of the Code, excepting Article 5.”Any other interpretation, if there even could be one, would leave the concept of good faith meaning two different things in the same Code and that is patent nonsense.” 

Choice of Law. The default choice of law is found in section 1-301 and replaces section 1-105. It is the source of the fiercest opposition to Revised Article 1 mounted mainly by the banking industry. The banks claim that the revision diminishes their authority to dictate which law applies in consumer contracts. Professor Neil Cohen, a reporter of Revised Article 1, carefully addressed and dismantled the logic of the bank’s arguments.

First, section 1-301 augments the authority of commercial parties to select the law governing their contract, because it removes any requirement that the transaction and the law of the place bear any relationship to one another. In effect, commercial parties may choose whatever law they like, provided the jurisdiction of enforcement does not contain a mandatory rule, contrary to a rule selected by their choice of law provision.

Second, for consumer transactions, section 1-301 provides that a choice of law cannot deprive the consumer of consumer law protections where the consumer resides.[2] First, as Professor Cohen notes, the choice of law rules of section 1-301 apply only to UCC transactions. Therefore, the banks’ freedom of contract is untouched in non-UCC, such as credit cards, bank loans and the like. Second, the Revised Article 1 rule on choice of law is subject to choice of law rules contained in various substantive articles of the UCC. “Thus, the rules of section 1-301 do not apply, even within the realm of UCC transactions, to the extent that the applicable substantive article of the UCC contains its own choice of law rule.

Example 1. A resident of New Jersey enters into an agreement with Credit Card Company, a Delaware corporation with its chief executive office located in New York whereby the New Jersey resident agrees to pay for purchases charged to his card. The agreement contains a provision stating that the law of South Dakota governs the contract. Section 1-301 does not apply, because the contract is a matter outside the scope of the UCC.

Example 2. A resident of New Jersey opens a bank account with a bank located in Ohio. The deposit agreement limits the liability of the bank, for example in case of dishonoring a check, and states that the law governing the contract is that of Ohio. Article 4, however, governs the provisions purporting to limit the bank’s liability. Section 4-102, not section 1-301, would determine the effectiveness of the choice of law clause contained in the bank deposit agreement with the consumer.

The banks concerns arise in two remote contexts: (1) a negotiable note to evidence a consumer loan and (2) issues related to a secured loan.  As to point one, the use of a negotiable note in a consumer transaction is rare; if it is used, the bank would only need to learn the rules relating to negotiable instruments in the consumer’s jurisdiction. These are few and relate mainly to restrictions on the ability to assert holder in due course status – a restriction already imposed by federal law. As to point two, the bank would only have to comply with consumer protection provisions relating to the security aspects of the transaction. These rules generally are covered under Part 6 of Article 9, and banks are typically aware of them.

The banks also oppose the notion that a choice of law agreement is ineffective if it violates the fundamental policy of the state or country whose law would govern in the absence of choice. This is an ancient principle of private international law found in many national and international laws. Further, the fundamental policy exception tracks section 187(2)(b) of the Restatement (second) conflict of Laws. The rule then is neither novel nor a change from current law.

Course of performance. Under revised section 1-304, evidence of “course of performance” (a concept currently utilized only in Articles 2 and 2A of the UCC) may be used to interpret a contract along with course of dealing and usage of trade.

Statute of Frauds. The statute of frauds requirement in former section 1-201, which was aimed at transactions beyond the coverage of the UCC, has now been deleted.

It is recommended that New Jersey enact Revised Article 1 with appropriate New Jersey amendments.

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