Does the UCC or Common Law Govern Your Contract?

Most every purchase and sale of “goods” or “services” is governed by either the Uniform Commercial Code, (UCC) or common law of contracts (CLC). With minor exceptions, this includes every consumer and commercial transaction throughout the United States and its territories. Consequently, everyone from consumers to C-Suites should understand whether the UCC or CLC applies.

The UCC is a creature of statute enacted by the legislatures within 49 of the 50 states and territories in the 1950’s (Louisiana adopted the UCC in 1990) to facilitate interstate commerce. After World War II, the US economy underwent massive growth prompting the purchase of “goods” and products by consumers and companies in one state from manufacturers and re-sellers from different states. Such interstate transactions created growing risks and disputes due to significant conflicts and differences between the state laws of purchasers versus those of sellers. Not to mention the headaches created if everyone needed to understand the laws of every state in which they either purchased or sold “goods” and products.

In recognition of the problems created by the rapid growth of interstate commerce, legal scholars within the American Law Institute proposed the UCC. The purpose of the UCC was to harmonize the laws within all 50 states such that one body of law would govern interstate transactions. In addition to the purchase and sale of “goods” and products, the UCC also governs other interstate transactions, including checks, transfer of funds, bank deposits, letters of credit, investment securities, and secured transactions. Since the UCC defines “goods” as all things movable at the time of sale (excluding vehicles, boats, food and drugs), it governs most everything purchased by consumers and companies.

The CLC is typically a child of the courts, created by judges within all 50 states and territories to govern intrastate commerce. However, legislatures of some states, like Georgia, have also codified existing common law into statutes. Unlike the UCC, the roots of the CLC date back to the English and Germanic laws of the 1600’s or earlier. And unlike the UCC, the CLC applies to the procurement of “services” and labor, generally provided in a specific locale, not the purchase and sale of “goods” across state lines. Since “services” are generally provided in the state or locale of the purchaser, transactions governed by the CLC are generally considered to be intrastate. At first blush, the risks, disputes, and headaches applicable to the interstate purchase and sale of “goods” would not appear to apply to the intrastate provision of “services”. However, it is now commonplace for written contracts governing the provision of “services”, to require the application of laws outside of the state or locale of the purchaser. Such provisions have caused the expansion of an area known as “conflict of laws” causing both courts and legislatures to supplement the CLC.

Since little in the legal system is black and white, there is a grey area between the UCC and CLC with respect to agreements applicable to the purchase of both “goods” and “services”. In such instances, the courts apply the “predominate purpose test” to determine whether the UCC or CLC applies. If the “predominate purpose” of the transaction was to purchase “goods” the UCC applies. But if the “predominate purpose” of the transaction was to purchase “services” the CLC applies. Factors used to identify the “predominate purpose” include, contract language, billing terms, allocation of costs, and the nature of the final product. For transactions involving “services” in excess of 20% of the contract value, the courts will typically find the CLC applies.

Application of the UCC versus CLC is just the starting point between the procurement of “goods” and “services” that impact both consumer and commercial transactions. There are significant differences between the UCC and CLC governing contract formation, implied warranties, available remedies, disclaimers, consideration, and multiple other factors that govern the transaction. But the first step for everyone, both consumer and C-Suite is to first understand whether the UCC or CLC governs their transactions.