Uniform Commercial Code (UCC): Definition, Purpose, and History

What Is the Uniform Commercial Code (UCC)?

The Uniform Commercial Code (UCC) is a standardized set of regulations for conducting business and financial transactions in any state in the U.S. It is not a federal statute but a state law that has been adopted by all 50 states and the District of Columbia.

The Uniform Commercial Code was established in 1953 to ease the complexities of doing business across state lines given the various state laws then in effect.

The UCC provides a legal and contractual framework for doing business across states. Although there are slight variations from state to state, the UCC consists of nine articles governing various types of transactions, including banking and loans.

How the Uniform Commercial Code (UCC) Works

If you’ve ever purchased a business or a vehicle, chances are you signed a UCC-1 statement. The title remains in the lender’s possession until the loan is paid off.

The policies instituted under the Uniform Commercial Code (UCC) are largely focused on the activities of small businesses and entrepreneurs. Part of the intent is to clear up confusion over how each state might separately regulate such operations.

The UCC code imposes standards for processing checks and other types of commercial paper. Often it is applied to the property secured by a bank where the title is held until the borrower pays off the balance of the financing.

Companies that conduct business transactions outside of their home state must comply with the applicable UCC law, including when leasing equipment, selling goods, borrowing money, and establishing contracts.

UCC Articles

Each of the nine articles in the code addresses a distinct issue:

Article 1: General provisions establish definitions and certain parameters for how the Uniform Commercial Code (UCC) is to be applied. It was last updated in 2001.

Article 2/2a: The sale of goods, excluding real estate and service contracts. Article 2a covers leases of personal property.

Article 3: Checks, drafts, and other negotiable instruments, such as a note (a promise to pay money). An item is considered negotiable if it can be transferred to another individual and still be enforceable against the original payer.

Article 4/4a: Bank deposits and collections, which covers rules for check processing and automated inter-bank collections. Article 4a focuses on fund transfers.

Article 5: Letters of credit issued by a bank for trade facilitation.

Article 6: Bulk sales, auctions, and liquidations of assets. Most states believe this article to be obsolete. The Uniform Law Commission (ULC) has recommended its repeal, and most states have done so.

Article 7: Documents of title, including warehouse receipts, bulk sales, and bills of lading (BoL).

Article 8: Investment securities; specifically the holding of securities through intermediaries.

Article 9: Secured transactions of personal property, agricultural liens, promissory notes, consignments, and security interests.

The Uniform Commercial Code (UCC) undergoes frequent revisions to address specific issues.

History of the UCC

The Uniform Commercial Code (UCC) was created by private organizations including the Uniform Law Commission (ULC), which is also known as the National Conference of Commissioners on Uniform State Laws (NCCUSL), and the American Law Institute (ALI).

The ULC was established in 1892 to standardize commercial law. The organization established a variety of laws from its founding up until the 1950s. In the 1950s, along with the ALI, the ULC compiled all the commercial laws into one set of commercial codes for states to follow.

The UCC was presented to the states in 1951, with Pennsylvania being the first to adopt the UCC in 1953 and other states adopting it over time. Louisiana is the only state that has not fully ratified the code, though it has adopted part of it.

Special Considerations

Each state has the option of adopting the code as it is written or adopting and modifying provisions of it.

Louisiana did not adopt Article 2 of the Uniform Commercial Code (UCC) as written. The state also did not adopt Article 2A, which covers the lease and rental of personal property not regarded as real estate.

California has made some modifications as well, implementing its own version of the UCC laws. The regulation of real estate contracts is an exception to California's adoption of the UCC. State laws regulating the purchase of real estate, such as a warehouse, are covered by other state real estate regulations.

Service contracts in California do not follow UCC rules. Contracts for auto repairs and painting jobs are covered by the state's insurance laws, not the UCC.

The Bottom Line

The Universal Commercial Code assures both parties in a financial transaction that a check, a lease, or a cash transfer is handled pretty much the same in any state in the U.S. It was designed to remove barriers to business across states.