Re:Uniform Commercial Code Revision Process (Working Paper)

Memorandum

To:The Commission

From:John JA Burke

Date:10 May 2004

Re:Uniform Commercial Code Revision Process (Working Paper)

The National Conference of Commissioners on Uniform State Laws (NCCUSL) and the American Law Institute (ALI) have recently promulgated for adoption in the states several revised or amended articles of the Uniform Commercial Code: Revised Article 1 (General Provisions)(2001); Amended Article 2 (Sales)(2003); Amended Article 2A (Leases)(2003); Amended Article 3 (Negotiable Instruments)(2002); Amended Article 4 (Bank Collections)(2002); and Amended Article 7 (Warehouse Receipts)(2003).

The majority of states have not established a discernible trend toward active and widespread adoption of the revised or amended UCC articles thereby rendering it difficult for states to take a wait and see approach prior to enacting the revisions. The following examples illustrate this point. Revised Article 1 has been adopted by Idaho, Minnesota, Texas, United States Virgin Islands and Virginia. Revised Article 7 has been adopted by Alabama, Idaho, Maryland, Minnesota and Virginia. Revised Articles 3 and 4 have been adopted by Minnesota. No state has enacted Revised Article 2 or Revised Article 2A.

The implications to be drawn from this inactivity are difficult to infer. Various proposals explain the behavior. States may decide to unbundle the numerous articles and to submit each article individually to its legislature for reasons of political expediency. Other states may decide to put related articles in “mini-packages”, such as Articles 3 and 4 or Articles 2 and 2A. Placement of the revised and amended articles in a single package may produce a complex bill that legislatures may find difficult to pass. However, it must be noted that the Uniform Commercial Code, when first enacted in New Jersey in 1961, was in fact enacted in its entirety.

The darker inference to be drawn from state inactivity is the degradation of the uniform law making process. The collapse of the Uniform Computer Information Transactions Act, and the collapse of the original conception to revise Article 2 (Sales) have disrupted the development of uniform law by subjecting the process to political attack and by subjecting proposed changes to intense scrutiny, if not opposition, thereby making it virtually impossible to reach agreement on any proposed change in language. For example, the response to the proposed change related to choice of law contained in Revised Article 1 was disproportionate to the proposition itself that tracked developments in international trade law and European Union law generally.

The Uniform Commercial Code is perceived as the most successful uniform law in existence, making the Convention on Contracts for the International Sale of Goods pale by comparison in its success as an instrument of uniform substantive law. Commerce needs uniform law for reasons of certainty, efficiency and reduction of transaction costs. It is difficult to predict the future of the revised and amended versions of the UCC, but presently the approach is splintered leading to greater non-uniformity than that which already exists.

The Commission has released a Tentative Report and Recommendations on Revised Article 1. Since Revised Article 1 and the amended articles are somewhat inter-related, the question arises what approach is best suited for the task: to treat each article individually or to treat the revised and amended articles as a single package for consideration. The latter alternative has the advantage of developing a coherent project for the Legislature’s reflection and hence that approach is recommended. It also would give this Commission an overall picture of the changes recommended by NCCUSL and the ALI and their impact on existing law. Following this alternative, the instant memorandum incorporates by reference the earlier report on Revised Article 1 and analyzes Amended Article 2 (Sales). Subsequent memoranda will treat Article 2 issues further and then embark upon consideration of the remaining amended UCC articles.

Summary of Changes in Amended Article 2

The Prefatory Note summarizes the changes as:

1. The accommodation of electronic commerce.
2. The definition section has undergone major changes introducing new terms. The definition of “good faith” comports with recent changes to other articles, i.e., “honesty in fact and observance of reasonable commercial standards of fair dealing.”[1]
3. The scope section remains unchanged but it excludes “information” and “foreign exchange transactions” unless the contract requires the physical delivery of currency.[2]
4. Several terms on formation and terms are amended; for example, the Statute of frauds threshold is increased to $5000 from $500; the battle of the forms provision is restructured; and shipping and delivery terms, which were inconsistent with those used in practice, were removed.
5. The warranty sections have been rewritten.
6. Several provision related to performance and breach have been amended.
7. The remedies section has been clarified.[3]

There are a plethora of perspectives from which to begin the analysis of Amended Article 2; here, the analysis starts with certain definitions contained in § 2-103.

Definitions

The following defined terms are contained in §2-103: (1) “electronic”, (2) “electronic agent”, (3) “electronic record”, (4) “goods”, (5) “record”, and (6) “sign.” These definitions apparently are predicates to validate electronic transactions. However, the Uniform Electronic Transactions Act (L.2001, c. 116) contains identical definitions of these terms, plus others that are not reproduced in Amended Article 2, such as “automated transaction”, “computer program”, electronic signature”, and “information.” Select terms included in UETA but not included in Amended Article 2, though ostensibly and equally germane to electronic contracting, are:

1. "Automated transaction" means a transaction conducted or performed, in whole or in part, by electronic means or electronic records, in which the acts or records of one or both parties are not reviewed by an individual in the ordinary course in forming a contract, performing under an existing contract, or fulfilling an obligation required by the transaction.
2. "Computer program" means a set of statements or instructions to be used directly or indirectly in an information processing system in order to bring about a certain result.
3. "Electronic signature" means an electronic sound, symbol, or process attached to or logically associated with a record and executed or adopted by a person with the intent to sign the record.
4. "Information" means data, text, images, sounds, codes, computer programs, software, databases, or the like.

Why these definitions were left out, while others were included, is not clear from the commentary. The question naturally arises why, if New Jersey law already has adopted these definitions for the very purpose of making certain that electronic transactions are equivalent to paper transactions under existing Articles 2 and 2A, is there a need to repeat them in Amended Article 2.

UETA

New Jersey adopted the Uniform Electronic Transactions Act to remove existing barriers to electronic commerce, primarily the writing requirement embodied in the Statute of Frauds (abolished in New Jersey independently) and the record retention requirement. While UETA exempts most UCC articles from its scope of application, it specifically includes Articles 2 and 2A.[4] The Prefatory Note to the Official Text states, “In the context of Articles 2 and 2A the UETA provides the vehicle for assuring that such transactions may be accomplished and effected via an electronic medium.” The UETA also provides for contracting between an individual and an electronic agent, for example, an individual purchasing a book on the Amazon Web site, and between two electronic agents, for example, a dealer that purchases inventory from a supplier by means of programmed software to make transactions within a set of parameters.

The heart of UETA is contained in §7 that states, “A record or signature may not be denied legal effect or enforceability solely because it is in electronic form,” and continues, “A contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation.” In addition, §7 provides, “If a law requires a record to be in writing, an electronic record satisfies the law, and “If a law requires a signature, an electronic signature satisfies the law.” In sum, it is the message and not the medium that controls the legal effect. Article 2 transactions conducted electronically are as legally effective as paper based transactions.

Amended Article §2-211 duplicates UETA §7. Since existing Article 2, in conjunction with UETA, accommodates electronic contracts already, it is somewhat of an exaggeration to say that Amended Article 2 is critical to assure the validity of electronic contracting. While there may be no direct harm in repetition, the selective borrowing from UETA may lead decision makers to find a distinction where none is intended and may lead to ambiguity in construction of the two acts, though no particular hypothetical is provided to illustrate this potential problem.

Related New Jersey Definitions

New Jersey has repealed the definition of “writing” formerly contained in Title 1 of its statutory law thereby removing any general impediment to electronic transactions. New Jersey has retained the definitions of “signed”, “written” and “telegram” in its current versions of the Uniform Commercial Code, though UETA has effectively overridden their significance. The surviving terms are defined:

1. "Signed" includes any symbol executed or adopted by a party with present intention to authenticate a writing,

1. "Written" or "writing" includes printing, typewriting or any other intentional reduction to tangible form

1. "Telegram" includes a message transmitted by radio, teletype, cable, any mechanical method of transmission, or the like.

If New Jersey were to adopt Amended Article 2, New Jersey would repeal these definitions. However, as previously stated, because of New Jersey’s adoption UETA, and its specific application to Article 2 transactions, the repeal would not change existing law, though it would modernize the statutory language.

Remedial Promise

Amended Article 2 adds a new definitional term: remedial promise. It is “a promise made by a seller to repair or replace goods or to refund all or part of the price of the goods upon the happening of a specified event.” The Official Comments indicate that the term is needed to distinguish a remedial promise from a warranty to resolve a statute of limitations problem. “Under original section 2-725, a right of action for breach of an express warranty accrued at the time the goods were tendered ….By contrast, a right of action for breach of an ordinary (non-warranty) promise accrued when the promise was breached.” Under Amended Article 2, the remedial promise is not a warranty, and §2-725(2)(c) governs the accrual of a right of action for that promise. The reform of the statute of limitations section of Article 2 is extensive and will be the subject of a separate memorandum. The term “remedial promise” is introduced here since it may be viewed as a source of litigation.

UETA and Amended Article 2: The Interface

Amended Article 2-204 sets forth how a contract is formed under the Code. It states:

“(1) A contract for sale of goods may be made in any manner sufficient to show agreement, including offer and acceptance, conduct by both parties which recognizes the existence of a contract, the interaction of electronic agents, and the interaction of an electronic agent and an individual….”

(4) Except as otherwise provided in Sections 2-211 through 2-213, the following rules apply:

(a) A contract is formed by the interaction of electronic agents of the parties, even if no individual was aware of or reviewed the electronic agents’ actions or the resulting terms and agreements.

(b) A contract may be formed by the interaction of an electronic agent and an individual acting on the individual’s own behalf or for another person. A contract is formed if the individual takes actions that the individual is free to refuse to take or makes a statement, and the individual has reason to know that the actions or statement will: (i) cause the electronic agent to complete the transaction or performance or; (ii) indicate acceptance of an offer, regardless of other expressions or actions by the individual to which the electronic agent cannot react.

UETA §5 contains a related provision and provides in part: “This Act applies only to transactions between parties each of which has agreed to conduct transactions by electronic means. Whether the parties agree to conduct a transaction by electronic means is determined from the context and surrounding circumstances, including the parties’ conduct.” In a law review article, one professor has argued that the interface between UETA and Amended Article 2 creates chaos. He states:

“First, UETA specifically requires that a party assent to conduct a transaction electronically in order for the UETA to apply, while Article 2 does not. Also, the UETA provides the non-waivable right of a party to refuse to conduct future transactions electronically. Article 2 does not specifically provide for the ability to refuse to contract electronically. In fact, Article 2 specifically validates any action performed by an electronic agent by attributing such action to the parties…. From all indications, the UETA was depending on the continued existence of the then existing Article 2 provisions, which included the common law notions of contractual intent, in order to complement the UETA.”

Professor Daniel’s reading of the two texts is misguided and unsupportable. First, there is nothing in Amended Article 2 that dispenses with the notion of “intent” as the basis of every agreement. Referring to electronic transactions, the Official Comment to §2-204 states, “When the requisite intent to enter into a contract exists, subsection 4(b) validates contracts formed by an individual and an electronic agent. This subsection validates an anonymous click-through transaction.” Nothing in UETA contradicts this result. UETA does not require the formation of a contract to agree to contract by electronic means. The Official Comment to UETA §5 provides:

“If this Act is to serve to facilitate electronic transactions, it must be applicable under circumstances not rising to a full fledged contract to use electronics. While absolute certainty can be accomplished by obtaining an explicit contract before relying on electronic transactions, such an explicit contract should not be necessary before one may feel safe in conducting transactions electronically. Indeed, such a requirement would itself be an unreasonable barrier to electronic commerce at odds with the fundamental purpose of the Act.”

In addition, Amended Article 2 explicitly requires that an individual be given the choice to reject the method of contracting by electronic means for the contract to come into existence. Likewise, when two electronic agents enter into contracts, without human intervention at the time the contract is formed, the requisite party intent flows from the fact that human beings programmed software to enter into contracts under specified parameters. The “electronic agents” are the tools of human beings. If and when artificial intelligence develops to a point whereby they may act autonomously and not just automatically, and thereby place in question the concept of party intent, the Comment to §2 of UETA advises, “courts may construe the definition of electronic agent accordingly, in order to recognize such new capabilities.”

Furthermore, the enactment of Amended Article 2 does not repeal UETA. Amended Article 2 does not appear to contain any provision that contradicts a related UETA provision. Hence, under widely accepted practices of statutory interpretation, the two texts must be read together to produce the most consistent legal regime governing the transaction in question. Hence, UETA §10 governing transmission errors may apply to Amended Article 2 transactions to the extent such matters are not governed within the Article.

UCC ARTICLE 2 – MEMORANDUM MAY 10, 2004 – PAGE 1

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[1] In the event Revised Article 1 is adopted, which contains the new general definition; it is not necessary to repeat it again in Amended Article 2.

[2] While Amended Article 2 does not define “information,” the New Jersey version of the Uniform Electronic Transaction Act does define the term. Reading the law consistently leads to the result that anything contained within the definition of “information” in the UETA is logically excluded from Article 2. This would mean that the sale of computer programs and the like fall outside the scope of Amended Article 2. The Official Comment affirms this point: “Thus, this article does not directly apply to an electronic transfer of information.” The use of the adverb “directly” leaves open the possibility of courts using Article 2 by analogy, a tool courts already employ. The comments apparently assume that the physical delivery of currency under a foreign exchange transaction does not constitute a payment but an exchange of goods.

[3] A good summary of the changes appear in Linda J. Rusch, Is the Saga of the Uniform Commercial Code Article 2 Revisions Over? A Brief Look at What NCCUSL Finally Approved, 6 Del. L. Rev. 41 (2003). Professor Rusch was a member of the Amended Article 2 Drafting Committee.

[4] §3 of UETA provides in relevant part that it applies to “Sections 1-107 and 1-206, Article 2 and Article 2A” of the Uniform Commercial Code.