The sometimes surprising practical implications of revised UCC article 1: article 1 of the Uniform Commercial Code articulates the principles that underlie the remaining articles - it is the basic or "meta" article, in other words - and Illinois recently adopted revised article 1. As the author explains, that change has important and sometimes surprising practical implications for all lawyers whose practice touches upon the UCC.
A little over a year ago (on January 1, 2009, to be precise), a revision of the basic article of the Uniform Commercial Code ("UCC" or "the Code") became effective in Illinois. All Illinois lawyers whose practice touches upon the UCC should familiarize themselves with these changes.
Article 1 of the UCC "contains general rules of construction for interpreting the provisions of the entire Code, definitions applicable throughout the Code, a choice of law rule that applies to the other articles to the extent they do not contain their own provisions on choice of law, and a few substantive provisions applicable throughout the entire Code." (1) In other words, it articulates principles that guide the remaining articles of the Code.
The most recent pre-2009 revision of Article 1 was in 2001. (2) As of January 1, 2009, 34 states had enacted Revised Article 1. (3) Illinois is one of those states. (4)
Major changes in Illinois' Revised Article 1
The Illinois version of Revised Article 1 incorporates four major changes to the previous text. (5) First, it adds an express provision that states that the rules of Article 1 apply only to transactions that are governed by other articles of the Code, (6) which in turn has important implications for how and when the statute of frauds applies.
Second, it adds the term "record" to the general definitions list in section 1-201, (7) a change that better accommodates various kinds of electronic communication. Third, it solidifies the relevance of course of performance in determining the parties' agreement by formally introducing it into the hierarchy of gap-fillers applicable to all transactions governed by the UCC. (8)
Lastly, it has revised and re-organized the definition of "conspicuous" (9) in a way that broadens its meaning. It is now less a matter of fonts, more about other factors such as, say, the placement of a disclaimer in a document.
Each of these changes has important and sometimes surprising practical consequences. They are discussed in turn below.
The explicit-scope provision and the statute of frauds Illinois' Revised Article 1 states that it "applies to a transaction to the extent that it is governed by another Article of the Uniform Commercial Code."10 Thus, if a transaction is controlled by Article 2, 2A, 3, 4, 4A, 5, 7, 8, or 9, it is also subject Article 1.
Most courts held this assertion implicit in the text of the pre-revision version of Article 1. (11) However, a careful reading of the new wording reveals a bigger impact. Pursuant to the canon of statutory construction expressio unius est exclusio alterius (the express mention of one thing excludes all others), the new wording should be read to mean that Article 1 governs transactions only insofar as they are covered by another article of the UCC. (12)
This interpretation of the statute would conflict with pre-revision Article 1, which set out a statute of frauds requirement for the sale of "general intangibles" not covered by the UCC. (13) In other words, the pre-revision version of Article 1 had a statute of frauds requirement for "general intangibles" that weren't explicitly covered by other parts of the UCC. If that provision had remained in the revised version, the two sections would be in direct conflict. Tellingly, with the inclusion of the explicit scope provision came the exclusion of the aforementioned stat ute of frauds requirement. (14)
Although there are no Illinois cases on point, cases in other jurisdictions shed light on the impact of the change. For instance, in FDIC v Herald Square Fabrics Corp, (15) the court said that because Article 9 did not cover the sale of chattel paper, the transaction at issue was subject to what is now the pre-revision version of UCC section 1-206 statute of frauds requirement as opposed to the enforceability requirements set out in section 9-203 of the UCC. (16)
There, the court said that because the transaction was not subject to Article 9 and obviously not subject to the statute of frauds requirement in UCC section 2-201 because it was not for the sale of goods, that left only the statute of frauds requirement in section 1-206. The purpose of UCC section 1-206 was to provide a requirement for transactions that lacked a statute of frauds because the UCC's wording and organization let them fall through the cracks. (17) However, if Revised Article 1 had been in effect, not only would there be no "gap filling" statute of frauds requirement to apply to the transaction, but also, nothing in Article 1 would apply to the transaction because it was not governed by any Article of the UCC.
In short, Illinois attorneys should be aware that their clients' rights and obligations are subject to the provisions of Article 1 only if their clients' transaction is subject to another Article of the code--as with the statute of frauds situation in FDIC. (18)
The addition of the term "record"
Illinois' Revised Article 1 defines "record" as "information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form." (19) The addition of the term is noteworthy because it builds on the notion of a "writing," which is defined as a "printing, typewriting, or any other intentional reduction to tangible form." (20)
In other words, "writing" is a subset of "record." (21) A "writing" is just one way in which information can be "inscribed on a tangible medium ... retrievable in perceivable form."
The addition of the term "record" reflects an attempt to address modern business practices. More specifically, "Given the rapid development and commercial adoption of modern communication and storage technologies, requirements that documents or communications be 'written,' 'in writing,' or otherwise in tangible form do not necessarily reflect or aid commercial practices." (22)
Moreover, a "record" does not include "oral or other communication that is not stored or preserved by any means. it must be stored on paper or some other medium." (23) Thus, a "record" includes, but is not limited to, paper, pictures, audiotapes, e-mail, digital voice messaging systems, and so on. (24) Human memory, however, is not a valid medium. (25)
Accordingly, practitioners should be cognizant of whether a transaction they are working on requires evidence in the form of a "record" or a "writing." For example, to meet the definition of "chattel paper," "the obligation and security interest or lease must be evidenced by a record or records." (26) In this case, the obligation and security interest can be memorialized by various means including, but not limited to, on a compact disc, on an audio tape, in an email, or as a writing. (27) However, the statute of frauds requirement for sales of goods being sold for a contract price of $500 or more can be satisfied only with a "writing." (28)
Midwest Generation, LLC v Carbon Processing and Reclamation, LLC (29) provides another example of how this distinction between a "record" and a "writing" can impact a case. There the defendant, in a counterclaim, argued that there was an oral contract for the sale of goods (fuel oil). (30) Accordingly, the transaction had to be evidenced by "some writing sufficient to indicate a contract for sale has been made between the parties" in order to satisfy the statute of frauds requirement set forth in Article 2. (31)
The defendant argued that an e-mail sent to the plaintiff sufficed as a writing satisfying the statute of frauds. (32) However, the court disagreed. (33) If the statute of frauds requirement could have been satisfied by a "record" as opposed to a "writing," then, by definition, the defendant in Midwest would have fared better in his counterclaim.
In sum, any "writing" is a "record." (34) The inverse is not true, and practicing attorneys should know exactly what format or method of memorializing is required for a given transaction.
Inclusion of "course of performance"
The pre-revision version of Article 1 placed "course of performance" in Article 2. (35) Accordingly, courts were unsure of the significance of course of performance in transactions governed by other articles of the code. (36) Revised Article 1 eliminates this ambiguity by unequivocally placing course of performance in the hierarchy of gap fillers used in interpreting any agreement subject to the UCC. (37)
This change would have affected the progression of both Watseka National Bank v Ruda (38) and Westinghouse Credit Corporation v Shelton. (39) In Watseka, the appeal would not challenge the trial court's use of course of performance in its analysis. In Westinghouse, the district court would have been precluded from finding that UCC section 2-208 only applies to transactions governed by Article 2.
Clearly, the inclusion of course performance in the hierarchy of gap-fillers is a change at a fundamental level. It now applies to any transaction governed by the UCC. (40) The lens through which UCC cases are analyzed has been tweaked, and practitioners should be aware of the change. Course of performance is a variable that must now be factored into the formula used to determine the terms of any agreement subject to the UCC. Accordingly, Illinois attorneys must consider it in their assessments of likelihood of success of their clients' UCC claims.
A new, broader definition of "conspicuous"
Illinois's Revised Article 1 also expanded the notion of conspicuousness (e.g., of disclaimers and the like). While the pre-revision version of Article 1 strictly dealt with how a term was written, (41) Revised Article 1 allows for a term to be conspicuous by being "so written, displayed, or presented...." (42)
In other words, a term can be conspicuous not only by varying the characteristics (capitalization, font, color, size, etc.) of the written text itself to differentiate it from the surrounding text, but also by where the term is displayed physically in relation to the document as whole, whether it is enclosed by a border, and so on.
The situation in R.O.W. Window Co, Inc v Allmetal, Inc (43) is on point. Responding to alleged breaches of warranties of fitness for a particular purpose and merchantability, the defendant seller claimed that all relevant documents provided to the buyer contained sufficiently conspicuous disclaimers of said warranties. (44) There, the court held that the disclaimers were conspicuous, not because of how the text of the disclaimer language differed from the surrounding text, but rather, because of how the text was presented on the page spatially and graphically:
The determination of whether a particular term or clause is conspicuous is to be made by the court. 810 ILCS 5/1201(10). The court should make that determination by asking if attention can reasonably by [sic] expected to be called to the term or clause. Bell Fuels, Inc, 130 Ill App 3d at 946, 474 NE2d at 1317. Applying the above legal principles to facts of the present case, we find that the written disclaimers contained in the product catalog and in the invoices are conspicuous. In the catalog, the written disclaimer was contained in a section entitled, "Terms and Conditions of Sale". That section was listed in the table of contents at the front of the catalog. As for the disclaimer itself, it was printed in all capital letters and was set off in a separate text box that was either surrounded by a border or was shaded. The language used very specifically disclaimed the implied warranties in question. In the invoice, although smaller, fine print was used, the disclaimer was again listed in all capital letters. The plaintiff tries to minimize the significance of this by arguing that almost all of the text on the invoice was in capital letters. However, the disclaimer was essentially the only textual paragraph on the invoice, was set off by open space above and below it, and was located in the center of the page. As with the catalog, the language used in the invoice very specifically disclaimed the implied warranties in question. While it may be true that the defendant could have made the disclaimers more conspicuous, that is not the test before this Court. The disclaimers were presented in a manner reasonably sufficient to draw attention to them. (45)
Although the new definition of the term conspicuous seems to be more of a reorganization and clarification of the rule, practitioners should not deny the new definition's emphasis on the notion that a term can be conspicuous not only by how it is written, but also by how it is presented.
A further complication: "choice of law" and "good faith"
There is another potential pitfall that practitioners should be aware of. The uniform version of Revised Article 1 changed the definition of "good faith" to mean "honesty in fact and the observance of reasonable commercial standards of fair dealing." (46) Contrast that with the pre-revision version of Article 1, which bifurcated the definition of "good faith." Illinois' adoption of Revised Article 1 kept the bifurcated definition of "good faith" intact. (47)
Before revision, "good faith" was defined as "honesty in fact in the conduct or transaction concerned." (48) However, if there was a "merchant" involved in the transaction, "good faith" required a higher standard. Merchant good faith was defined as "honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade." (49)
In short, the uniform version of Revised Article 1 reduced the definition of good faith to essentially one objective standard for merchants and non-merchants alike. Again, as the UCC is normative in nature, individual states are free to adopt the UCC and its revisions verbatim or with modifications, and Illinois opted to keep the pre-Revision definition of "good faith." But the issue is deeper than merely matching a state with its "good faith" standard.
Choice of law considerations also affect which "good faith" standard applies to a given transaction. Revised Article 1 of the UCC also revamped the old "choice of law" provision formerly found in section 1-105. (50)
The pre-revision version of Article 1 provided that where parties from different states agree on what law will govern their transaction, that agreement is valid as long as the transaction bears a "reasonable relation" to the state whose law was chosen to govern the deal; if the parties fail to make this designation, a court is free to choose any state's law to govern the transaction as long as the transaction bears an "appropriate relation" to the chosen state. (51)
Revised Article 1 loosened the reins on parties to commercial transactions by saying that they can agree to have any law govern their transaction as long as neither of them is a "consumer." Thus, the need for a "reasonable" or "appropriate" relation was discarded. However, if one of the parties is a "consumer," the law chosen to govern the transaction must again bear a "reasonable relation" to the designated state. (52)
The rule has some further intricacies that are also worth exploring though they are not mentioned here. Like all the other states that adopted Revised Article 1, Illinois' version of Revised Article 1 retained the old choice of law rules. (53) States have been reluctant to give the parties further autonomy when making choice of law decisions.
All attorneys should take note of the interplay between the choice of law rules and the good faith standard that may be implicated by that rule. For example, assume that X, from Illinois, and Y, from Kentucky, are non-merchant parties to a transaction governed by the UCC. Also keep in mind that when its legislature adopted Revised Article 1, Kentucky opted for the new un-bifurcated definition of "good faith." (54)
Let us complete the hypothetical by assuming that X and Y agree to have Kentucky's Revised Article 1 govern the transaction. The attorney representing X, from Illinois, should be aware that if "good faith" becomes an issue, Kentucky's newer definition will be applied as opposed to Illinois' older version. This can have important ramifications for the parties in litigation.
Continuing the hypothetical, if X and Y end up in court and there is a material dispute as to whether Y displayed a lack of "good faith" on his end, it is X's attorney's duty to recognize that Kentucky's "good faith" standard will be the measuring stick for Y's conduct. Accordingly, the court will look at "the subjective element of honesty in fact and the objective element of the observance of reasonable commercial standards of fair dealing." (55)
X's attorney must be aware of this so she can use all the facts in her client's favor to argue that Y lacked good faith both subjectively and objectively. However, if the parties agreed that Illinois' law would govern the transaction and "good faith" was a material issue, X's attorney would simply have to argue that Y lacked subjective honesty in fact.
In sum, it is crucial to maximizing a client's potential for success by being fully aware of what standard is being applied to a dispute and using facts to bolster your client's position pursuant to that standard. In the context of the Illinois Commercial Code, practitioners should not only familiarize themselves with the "choice of law" rules, but also both "good faith" standards, because despite what Illinois' commercial code provides, it can readily be the case that another state's commercial code will govern. Attorneys should familiarize themselves with the merchant good-faith standard cases.
Illinois' version of Revised Article 1 has implemented several substantial changes to the state's commercial code. The scope of Article 1 was narrowed. The term "record" was added to the lexicon. Course of performance was formally recognized as a gap-filler in all transactions governed by the code. The definition of conspicuous was expanded. In addition to these major changes, lesser changes include provisions dealing with electronic signatures and sureties as secondary obligors.
All attorneys in Illinois should acquaint themselves with the changes to the commercial code. Depending on the nature of the case and the issues at bar, these changes undoubtedly will force practitioners to adapt their strategies, both in litigation and transactional work, in an effort to protect their clients' interests.
(1.) Kathleen Patchel and Boris Auerbach, The Article 1 Revision Process, 54 SMU L Rev 603, 603-604 (2001).
(2.) Craig H. Averich, et al, Commercial Law and Practice Guide [section] 2-27 at 27.02 n 1 (Matthew Bender 2008).
(3.) Keith A. Rowley, Article 1 (2001), (Jan 13, 2007), online at http://www.law.unlv.edu/faculty/rowley/ra1_ updates.htm (Ala, Ariz, Ark, Cal, Colo, Conn, Del, Fla, Hawaii, Idaho, Ill, Ind, Iowa, Kan, Ky, La, Minn, Mont, Neb, Nev, NH, NM, NC, ND, Okla, Pa, RI, SD, Tenn, Tex, Utah, Vt, Va, and W Va (Rowley's memo of January 14, 2009).
(4.) Act of Jan 1, 2009, PA 095-0895, codified at 810 ILCS 5/1-101 et seq.
(5.) Minor changes that will not be further addressed in this paper include: 1) the addition of 810 ILCS 5/1-108 dealing with electronic signatures and 2) the inclusion of "other secondary obligors" in the definition of a "surety" in 810 ILCS 5/1-201(b)(39). Practitioners are urged to review these changes on their own.
(6.) 810 ILCS 5/1-102.
(7.) 810 ILCS 5/1-201(b)(31).
(8.) 810 ILCS 5/1-303.
(9.) 810 ILCS 5/1-201(b)(10).
(10.) 810 ILCS 5/1-102.
(11.) UCC [section] 1-102 Official Comment 1.
(12.) Adrian Vermeule, The Cycles of Statutory
Interpretation, 68 U Chi L Rev 149, 182 n 72 (Winter 2001).
(13.) Pre-revised UCC [section] 1-206 Official Comment and 810 ILCS 5/1-206, repealed by Act of Jan 1, 2009, PA 095-0895.
(14.) Pre-revised UCC [section] 1-206 and UCC [section] 1-102.
(15.) 81 AD2d 168, 439 NYS2d 944 (1981).
(16.) Id, 81 AD2d at 179-80.
(18.) 810 ILCS 5/1-102.
(19.) 810 ILCS 5/1-201(31).
(20.) 810 ILCS 5/1-201(43).
(21.) UCC [section] 9-102 Official Comment 9a.
(26.) 810 ILCS 5/9-102(a)(11).
(27.) UCC [section] 9-102 Official Comment 9a.
(28.) 810 ILCS 5/2-201.
(29.) 445 F Supp 2d 928 (ND Ill 2006).
(31.) 810 ILCS 5/2-201.
(32.) Midwest, 445 F Supp at 936.
(34.) UCC [section] 9-102 Official Comment 9a.
(35.) UCC [section] 2-208.
(36.) Compare Watseka Natl Bank v Ruda, 135 Ill 2d 140, 552 NE2d 775 (1990) (affirming the trial court's consideration of course of performance, course of dealing, and usage of trade in deciding an Article 9 case) with Westinghouse Credit Corp v Shelton, 645 F2d 869 (10th Cir 1981) (where the district court's ruling that UCC [section] 2-208 on course of performance only pertains to Article 2 transactions was reversed on appeal).
(37.) 810 ILCS 5/1-303.
(38.) Watseka, 135 Ill 2d 140, 552 NE2d 775 (1990).
(39.) Westinghouse, 645 F2d 869 (10th Cir 1981).
(40.) 810 ILCS 5/1-102.
(41.) 810 ILCS 5/1-201(b)(10), repealed Jan 1, 2009, PA 095-0895.
(42.) 810 ILCS 5/1-201(b)(10).
(43.) 367 Ill App 3d 749, 856 NE2d 55 (3d D 2006).
(44.) Id at 751, 856 NE2d at 57.
(45.) Id at 753-54, 856 NE2d at 59-60.
(46.) UCC [section] 1-201(b)(20).
(47.) 810 ILCS 5/1-201(b)(20) and 810 ILCS 5/2 103(1)(b).
(48.) Pre-revised UCC [section] 1-201(19).
(49.) Pre-revised [section] 1-201 Official Comment 19 and
UCC [section] 2-103(1)(b).
(50.) UCC [section] 1-301.
(51.) Pre-revised UCC [section] 1-105(1).
(52.) UCC [section] 1-301(e).
(53.) 810 ILCS 5/1-301.
(54.) Ky Rev Stat Ann [section] 355.1-201(2)(t) (Michie 2009).
(55.) UCC [section] 1-201 Official Comment 20.
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|Publication:||Illinois Bar Journal|
|Date:||Apr 1, 2010|
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