Understanding the Uniform Commercial Code

If you have ever purchased a vehicle, bought or sold goods, or borrowed money, you have completed a transaction that is subject to your state’s adoption of the Uniform Commercial Code. To clear up a common misconception, the federal Uniform Commercial Code (UCC) is not a set of laws in and of itself. It is merely a legislative model, created by a non-profit entity called the Uniform Law Commission. All 50 states have adopted the UCC in some form or fashion, including California, but there are many variations from one jurisdiction to the next. 

The Uniform Commercial Code is especially helpful for businesses that engage in commerce that crosses state lines. With the advent of the Internet, businesses of all types and sizes engage in interstate commerce these days, which makes understanding the UCC more important than ever. Here are some important things to know:

Implied Covenant of Good Faith and Fair Dealing

For many types of transactions, the most essential part of the Uniform Commercial Code is the “good faith” doctrine, which mandates that all parties engaged in enterprise applicable to the UCC must act with honesty and not use “shifty means” to undercut the integrity of these transactions. For example, if a business alters a product it has sold unbeknownst to the buyer but still demands the agreed-upon payment, that is not acting in good faith. Both buyers and sellers have different obligations under the UCC than they do under regular contract law, so you may have additional legal recourse available to you in a dispute if the UCC applies to your situation.

Financing Statements

One of the more common UCC documents that business owners encounter is the UCC-1 form, often referred to as the UCC financing statement. Parties must fill out this form when tangible assets are used as collateral for commercial borrowing. For example, say your small business needs a large truck to deliver goods to your customers. If your business is seeking a loan to pay for the use of the truck, the lender may file a UCC-1 statement identifying the vehicle as collateral if you do not make payments.   

This form is a public record, filed with the state, that gives the creditor a secured right to seize assets for repayment. Entrepreneurs occasionally sign these without realizing that their debt is now public or that the creditor has been given the right to claim their property should they run into trouble with their financing. Using a UCC-1 is not an uncommon practice for commercial lenders and borrowers, but you must be careful not to stack debt on the same piece of collateral.

Conclusion

California’s rendition of the Uniform Commercial Code is useful for business owners in many instances, such as its application of the “good faith” doctrine. Running afoul of the UCC can do serious damage to your business’s reputation. If you have any questions or concerns about the UCC or any other state commercial law, please get in touch with Integrated General Counsel here and book your consultation today.

Written by Integrated General Counsel

Our focus includes handling a variety of corporate matters and also includes litigation in state and federal courts. Our current practice includes providing transactional services and representing a variety of small and medium-sized companies as their outsourced general counsel.