Trade Terms: Uniform Commercial Code (UCC) vs Incoterms

The Uniform Commercial Code (UCC) and its Role in Domestic Trade in the USA

The Uniform Commercial Code (UCC) began in 1952. It was created to simplify trade across the United States. Before this, the different states had different rules for business deals, which caused confusion and slowed down commerce. As a result, the UCC introduced a single set of rules that businesses in all states and territories could follow.

In relation to shipping, the Uniform Commercial Code focuses on the sale of goods and covers topics such as handling documents like bills of lading, and defines who is responsible for costs, risks and delivery at every stage of a transaction. These rules help businesses to avoid disputes and to trade with confidence.

Although the UCC is not federal law, it has been adopted (with some variations) by all 50 states, US territories and the District of Colombia, which gives businesses a consistent framework to follow.

The Uniform Commercial Code is governed and maintained by 2 key organizations.:

• The Uniform Law Commission (ULC), also known as the National Conference of Commissioners on Uniform State Laws (NCCUSL) is the primary body that is responsible for drafting and promoting the UCC. It works to ensure consistency in commercial law across US states by creating uniform laws that states can adopt.
• The American Law Institue (ALI) collaborates with the ULC in drafting and revising the UCC.  It provides scholary and practical expertise, ensuring that the UCC remains relevant to modern commercial practices.

Note: The content of this article is only for general information purposes and shall not in any circumstances be considered bespoke legal advice or professional advice.

Benefits of the UCC in Shipping

Uniform Commercial Code vs Incoterms

Common UCC Trade Terms

UCC Articles Relevant to Trade

The Uniform Commercial Code is divided into sections called articles. Each article focuses on a specific area of trade or commerce. These articles outline rules for things like selling goods, leasing equipment, or handling shipping documents.

Articles in the UCC are designed to address practical issues in trade. They explain how contracts are formed, how ownership is transferred and how disputes can be resolved. Each article focuses on different parts of the trade process.

For the complete and official text of the UCC articles, you can refer to the Uniform Law Commission’s website here.

Here are the main articles that are relevant to trade.

Article 2: Sales

This article focuses on the sale of goods and sets rules for forming contracts and what each party must do. For example, a buyer must pay on time, and a seller must deliver goods that match the agreement. If either party fails, the UCC provides remedies to address the issue.

If a seller doesn’t deliver, the buyer can cancel the contract or demand replacement goods. For example, if a company orders equipment and receives faulty items, they can ask for a refund or replacement. On the other hand, if a buyer fails to pay, the seller can withhold delivery or resell the goods to recover their losses. These steps ensure both parties are protected and have clear options in case of a dispute.

It also explains how risk and ownership transfer between the seller and buyer. For instance, when goods are shipped the risk might shift to the buyer as soon as the goods leave the seller’s warehouse, depending on the shipping terms. These details prevent confusion about who is responsible for the goods during transit.

Article 2A: Leases

This article deals with leasing goods. It’s less common in trade but applies in cases like renting equipment for construction or farming. The UCC ensures the lessor provides usable goods, while the lessee must return them in good condition. For instance, a company leasing a forklift for warehouse use must return it without damage beyond normal wear.

Article 3: Negotiable Instruments

Article 3 governs negotiable instruments, including checks, drafts, and promissory notes, which are essential tools in trade finance. It ensures the enforceability and transferability of these instruments, facilitating smooth payment transactions between businesses.

This article also outlines the rights and liabilities of parties involved, addressing issues such as forgery, alteration, and dishonor of instruments. By providing a clear legal structure, Article 3 supports trust and efficiency in financial transactions.

Article 4: Bank Deposits and Collections

Article 4 provides the legal framework for bank deposits and collections, focusing on the processing of checks and other negotiable items. It defines the responsibilities of banks in collecting funds on behalf of their customers, including the handling of returned items and the timing of availability of funds. This article is crucial for businesses that rely on banking systems for payment collection, ensuring the efficient and reliable flow of funds in trade transactions.

Article 4A addresses electronic funds transfers, a key payment method in modern commerce. It regulates the rights, responsibilities, and liabilities of parties involved in wire transfers, ensuring security and accuracy in the transmission of payment orders. This article is particularly important for high-value transactions where timeliness and precision are critical. It also establishes rules for the allocation of risk in case of errors or unauthorized transfers.

Article 5: Letters of Credit

Article 5 governs letters of credit, a vital financial instrument in international trade. Letters of credit provide assurance to sellers that payment will be made, as long as the stipulated terms and conditions are met.

This article defines the obligations of banks issuing letters of credit, as well as the rights of beneficiaries. It also outlines the role of shipping and other documentary compliance, making it an indispensable tool for managing cross-border trade risks.

Article 7: Documents of Title

Article 7 addresses documents of title, such as bills of lading and warehouse receipts, which are critical for the shipment and storage of goods. These documents serve as evidence of ownership or the right to control goods in transit. They can also be negotiable, meaning they can be transferred to another party to convey rights to the goods. This article supports logistics operations and trade financing, ensuring legal protection and operational efficiency.

Article 9: Documents of Title

Article 9 governs secured transactions, where goods, receivables, or other assets are used as collateral to secure loans or credit. This article is essential for trade financing, allowing businesses to leverage their assets to access liquidity. It details the process for creating and perfecting security interests, as well as the rights of creditors and debtors.