The U.C.C. §1-302 Concept of
Variability By Agreement: Just How
Variable Are U.C.C. Arts 3 & 4?
by
Prof Eniola Akindemowo Ph.D.
Thomas Jefferson School of Law, San Diego, CA.
for
the General Provisions Panel
hosted by the U.C.C. Committee, Business Law Section,
2010 San Francisco ABA Annual Meeting
Variability By Agreement: The
U.C.C.§1-302 Concept
….except as otherwise provided in subsection (b) or
elsewhere in [the Uniform Commercial Code], the
effect of the provisions of the [the Uniform
Commercial Code] may be varied by agreement….
U.C.C. §1-302(a)
Prof Eniola Akindemowo
Thomas Jefferson Schl of Law, San Diego CA
[email protected]
Variability By Agreement: The
U.C.C.§1-302 Concept Contd…1
• The section continues:
… The obligations of good faith, diligence, reasonableness,
and care prescribed by [the Uniform Commercial Code]
may not be disclaimed by agreement. The parties, by
agreement, may determine the standards by which the
performance of those obligations is to be measured if
those standards are not manifestly unreasonable.
Whenever [the Uniform Commercial Code] requires an
action to be taken within a reasonable time, a time that is
not manifestly unreasonable may be fixed by agreement.
U.C.C. §1-302(b)
Prof Eniola Akindemowo
Thomas Jefferson Schl of Law, San Diego CA
[email protected]
Variability By Agreement: The
U.C.C.§1-302 Concept Contd…2
• the section ends with the following:
…The presence in certain provisions of [the Uniform
Commercial Code] of the phrase “unless
otherwise agreed’, or words of similar import,
does not imply that the effect of other provisions
may not be varied by agreement under this
section…
U.C.C. §1-302(c)
Prof Eniola Akindemowo
Thomas Jefferson Schl of Law, San Diego CA
[email protected]
Variability By Agreement: Questions
For Discussion…..
• How Much Scope Does §1-302 Provide To
Change Articles 3 & 4 Provisions?
– How much leeway does the freedom of contract
principle espoused in §1-302 provide in practice?
– Is there truly the freedom of contract to vary the
provisions, of say Articles 3 or 4, by agreement?
– Does the freedom of contract offered by §1-302
apply uniformly to the various articles, say Articles
2, 3 & 4, for example?
Prof Eniola Akindemowo
Thomas Jefferson Schl of Law, San Diego CA
[email protected]
U.C.C.§1-302: A Broad, Qualified Concept
• U.C.C.§1-302 provides
– A default, general principle to which all Articles of the
U.C.C. are subject
• Article 1 applies to a transaction to the extent that it is
governed by another article of the U.C.C.: U.C.C. §1-102
– This means that:
• As long as an article of the U.C.C. has coverage over a
transaction, Article 1 also applies
– In other words, the §1-302 principle applies to every transaction
to the extent that it is governed by any other U.C.C. Article
– It also means that the §1-302 principle applies unless it is
specifically excluded
» U.C.C. provisions lacking formulaic phrases confirming
variability are not implicitly exempted from the §1-302
principle: U.C.C. §1-302(c)
Prof Eniola Akindemowo
Thomas Jefferson Schl of Law, San Diego CA
[email protected]
The Mechanics of §1-302 Variability
– The possibilities for variability work out as follows:
• It is expressly permitted by a specific section
– This may be Indicated by the use of permissive phraseology such
as “unless it is otherwise agreed…”, “…or by agreement”,
– (less definitively) it may arise as an option to do something
different …”unless a contrary intent clearly appears…”, or to
follow individualized instructions may also permit such variability
“pursuant to instructions….”
• There is the permissive potential for such variability
– This exists without need for the use of any permissive
phraseology §1-302(c)
– As a matter of interpretation
» It amounts to a variation of the effect, rather than the
meaning of the provision concerned §1-302(a)
Prof Eniola Akindemowo
Thomas Jefferson Schl of Law, San Diego CA
[email protected]
The Mechanics of §1-302 Variability
Contd…1
• It is implicitly prohibited
– The effect of the variation is to change the meaning of the provision
– Contextual assessments mandate against such variability
» E.g. variability is an easy feature of Article 2 transactions, a less
characteristic but deliberately welcomed aspect of Article 4
transactions, but a less appropriate and deliberately limited aspect
of Article 3 transactions (see below)
• It is expressly prohibited
– In general:
» a variation that specifically or has the effect of disclaiming
obligations of good faith, diligence, reasonableness or care, is
specifically prohibited by §1-302(b)
» By a particular Article: Attempts to disclaim responsibility for a lack
of good faith or the failure to take due care may is specifically
prohibited by Article 4 - see 4-103(a)
– Specifically:
» Transferor obligations may not be disclaimed by an “without
recourse” indorsement or other disclaimer §4-207(b)
» Check presentment warranties may not be disclaimed §3-417(e)
Prof Eniola Akindemowo
Thomas Jefferson Schl of Law, San Diego CA
[email protected]
Variation By Agreement
• What kind of variations are permitted?
– The variability permitted by §1-302 is of a specific, qualified nature
• A variation will be permitted only so far as it changes the effect, rather
than the meaning of the provision
– Regarding Article 3 transactions for example, the provisions :
» Define negotiability §§3-201, 3-202
• the parties may not dispense with negotiability as a feature of an
instrument altogether; they may however rescind the negotiability of
an instrument to a limited extent §3-202(b)
» Identify who is liable on an instrument §§3-103, 3-204; joint liability is
addressed by §3-116
• The instrument may expressly provide on the face of the instrument
that there shall be no joint liability between relevant parties §3116(a), also the obligation to pay may by modified, supplemented or
nullified by agreement between an obligor and a person entitled to
enforce the instrument §3-117
» Provide for discharge of a party §§3-601, 3-604, 3-605
• the parties may not agree that the a party can not be discharged from
the transaction; they may however stipulate the necessary criteria for
such a discharge §§3-601(a), 3-604, 3-605
» Provide for the acquisition of rights by transfer of an instrument §3-601
• Parties may not agree that no such rights come into being; they may
however preclude the acquisition of such rights in their particular
contract §3-203(c)
Variation By Agreement Contd…1
• A variation will be permitted only so far as it changes the effect,
rather than the meaning of the provision (contd)
– Regarding Article 4 transactions for example, the provisions :
» provide for electronic presentment, identifying actions that will
constitute same §4-110
• the parties may specify or substitute other actions or stages
that will constitute electronic presentment for their purposes
§4-110
» provide time limits for the handling of items §§4-202(b), 4-301, 4302
• the parties may not dispense with the concept of delayed
items, but they may waive, modify or extend the time limits
for two or more days in certain circumstances §§4-109(a), 4109(b); they may also agree that the option to so extend the
prescribed time limits are inapplicable to their particular
transaction(s) §4-109(a)
» define what constitutes the medium and the time of settlement of
an item §4-213
• The parties may in their agreement substitute these
definitions with definitions of their own choosing §4-213(a)
Variation By Agreement Contd…2
– The distinction between the meaning and the
effect of a rule, however, is not clear cut:
• In some cases, a change to the effect of a rule is so
profound that it affects the innate nature, the very
meaning of the rule or concept:
– A holder in due course (HIDC) is the holder of an instrument
that bore no apparent evidence of forgery, alteration,
irregularities or incompleteness at the time it was issued or
negotiated. The holder must have taken the instrument for
good value, in good faith, without notice of any irregularities or
pending defenses or claims in recoupment §3-302(a)
» an attempt to constitute as a HIDC a party that meets only
some, rather than all of these criteria, would arguably
change the definition of the concept, and thus constitute
a change to the meaning of the rule
Prof Eniola Akindemowo
Thomas Jefferson Schl of Law, San Diego CA
[email protected]
Variation By Agreement Contd…3
» An attempt to water down the effect of the role of a HIDC
might be for example:
• An agreement that a HIDC will be subject not only to
real defenses e.g. fraud in the factum, incapacity,
duress, illegality §3-305(a)(1)) , but also to personal
defenses (e.g. those protecting an obligor against a
person entitled to enforce the instrument (PETE) either
conferred by Article 3 or the law of contract §3305(a)(2))
• This is a dilution of the protection conferred by the
role of a HIDC as personal defenses are not
intended to be effective against a HIDC §3-305(b)
• although ostensibly changing only the extent of
protection provided by the concept, such a variation is
so fundamental conceptually, that is arguably affects
the very nature or meaning of the concept.
• The role of a HIDC is a particularly, and deliberately
protected role in the law of negotiable instruments,
and to dilute this protection to the equivalent of a
PETE is to disrupt a fundamental distinction upon
which the law of negotiability is based
Variation by Agreement
• What constitutes ‘agreement’ for the purposes of the
§1-302 principle? It includes:
– Contractual agreements, which may be
• Direct e.g. between the owner of an item and a depository bank
• Indirect as occurs when the owner of an item authorizes a
particular procedure and any bank in the collection chain acts
pursuant to that authorization
– (A contractual agreement incorporating) usages of trade,
courses of dealing, courses of performance, or other
circumstances surrounding the bargain §1-201(3)
– Agreements rooted in
• a single item, or all items related to a particular customer e.g.
those originating from the general agreement entered into at the
time of opening a deposit account
• Legends on deposits tickets, collection letters, acknowledgements
of items accompanied by the action of the affected party
– So long as such action constitutes acceptance, adoption or ratification
Variation by Agreement Contd…1
• The variation of a provision by agreement may
not be plainly obvious
– It may occur by the parties adopting in lieu, a
similar rule that is different in effect, for example
• the prevailing (different) method, approach or custom
that is a current industry standard or a known variant
• By entering into and observing negotiated regional
clearing house agreements or clearing rules
Prof Eniola Akindemowo
Thomas Jefferson Schl of Law, San Diego CA
[email protected]
Contextualizing The Question
• Yet, further analysis is necessary
– We must go beyond an analysis of the bare
(variation) principle - we must also examine it in
context
• in the context of the Articles involved, namely by an
examination of:
– the central objectives of each Article
– the approach adopted by each Article
Prof Eniola Akindemowo
Thomas Jefferson Schl of Law, San Diego CA
[email protected]
Contextualizing the Question Contd…1
• The Principle in the context of Article 1
– It is helpful to evaluate Article 1 from a
comparative perspective. The objectives of Article
1 include:
• being the ‘glue’ holding the U.C.C., a compendium of
diverse Articles, together
• providing a point of commonality for this series of
diverse Articles that regulate most commercial
activities in the U.S. economy
– sales, payments, letters of credit, bulk sales, documents of
title, investment securities, and secured transactions.
Prof Eniola Akindemowo
Thomas Jefferson Schl of Law, San Diego CA
[email protected]
Contextualizing the Question Contd…2
• Article 1 in Context Contd
– Article 1 rules apply to every transaction that is
covered by the U.C.C. §1-102
• i.e. they apply unless a particular rule of Article 1 is
specifically excluded
• the common law, rules of equity, including the lex
mercatoria, principles of contract law etc also apply by
virtue of Article 1 §1-103(b)
– If they are not otherwise preempted, and
– they may supplement, but may not supplant (displace) U.C.C.
provisions §1-103 cmt 2
Prof Eniola Akindemowo
Thomas Jefferson Schl of Law, San Diego CA
[email protected]
Contextualizing the Question Contd…3
• Article 1 in Context Contd
– The U.C.C. is designed to be semi permanent, and is
expected to be subject to infrequent change, hence
flexibility was a drafting objective, accordingly the
U.C.C.
• is liberally construed
• is applied with the objective of simplifying, clarifying and
important for our purposes, modernizing the law of
commercial transactions
• the facilitation of the continued expansion of commercial
practices is an explicit objective
– Through custom, usage and agreement of parties §1-103(a)(2)
Prof Eniola Akindemowo
Thomas Jefferson Schl of Law, San Diego CA
[email protected]
Contextualizing the Question Contd…4
• Article 2 in Context
– It regulates contractual arrangements for the sale of goods
• Article 2 provides rules that determine how an agreement for the
sale of goods comes into being
– It specifically regulates matters such as
» The manner in which a contract may come into being §2-204
» Required formalities or acceptable evidence of the contract §§2201, 2-202
» Elements required for formation of a contract §§2-206, 2-207
» Modification, assignment or delegation §§2-209, 2-210
» General obligations of the parties §2-301
» What is an unconscionable contract or clause §2-302
» Details involved in the construction of a Contract - Part III generally
» Performance – Part V generally
» Breach, Repudiation and Excuse – Part IV generally
» Remedies – Part VII generally
– The content i.e. the details of their arrangement is a matter of the
parties discretion (agreement) for the most part
• Agreements between parties are of the very essence of Article 2
– The actions of parties formulating and changing the content of their
bargain by agreement are characteristic of such transactions
Contextualizing the Question Contd…5
• Article 3 in Context
– Article 3 regulates negotiable instruments.
• The article is the latest in a progression of efforts to codify
the law of negotiable instruments
– The rules, distantly rooted in the law of contracts, and informed
by the lex mercatoria, are formalistic and formulaic.
– The rules are deliberately defined, inter connected and carefully
calibrated to provide a framework within which negotiable
instruments will be most effective
– Article 3 regulates
» The context within which instruments operate – Part I
generally e.g. §§3-105, 3-119
» The mechanics of their operation
• Negotiation, transfer, indorsement - §§3-201, 3-312
» The liability of parties
• Based on signature, negligence, acceptance etc - §§3401, 3-601, 3-413
» Clarifies what will constitute dishonor, discharge or payment
- §§3-501 – 3-605
Prof Eniola Akindemowo
Thomas Jefferson Schl of Law, San Diego CA
[email protected]
Contextualizing the Question Contd…6
• Article 3 in Context Contd
• Article 3 is concerned with defining and establishing a
finely calibrated framework
• An approach that grants much leeway for individual
variations is antithetic to the nature of Article 3
– Such an approach would disrupt the careful checks and
balances
» One reason, probably, why there is no blanket permission
to vary in Article 3 as there is in Article 4
Prof Eniola Akindemowo
Thomas Jefferson Schl of Law, San Diego CA
[email protected]
Contextualizing the Question Contd…7
• Article 4 in Context
– Article 4 regulates Bank Deposits and Collections
• The area is subject to unrelenting advances in technology:
payment methods are less and less paper-based, and increasingly
digitalized
– Previously: check-expedition-producing MICR, digital check truncation
– More recently: evolving concepts of stored value and m-payments are
testing conventional deposit concepts
» For a discussion of the role of deposits in stored value policy, see my
article How to Devise U.S. SVP Policy? Prepare to Replace the
Deposit Concept available from http://ssrn.com/abstract=1600888
» The ULC and ALI deliberately refrained from a major revision of
Article 4 at the time
• – see ULC summary on U.C.C. Article 4 at
www.nccusl.org/Update/uniformact_summaries/uniformacts-s-ucc4.asp
Prof Eniola Akindemowo
Thomas Jefferson Schl of Law, San Diego CA
[email protected]
Contextualizing the Question Contd…8
• Article 4 in Context Contd
– Article 4 provides or regulates
• general provisions and definitions in Part 1
– Items are the primary subject matter
» §4-102(a)(9) an instrument or a promise or order to pay
money handled by a bank for collection or payment
• the collection of items by depositary and collecting banks –
Part 2
• The collection of items by payor banks in Part 3
• The relationship between a payor bank and its customer in
Part 4
• The collection of documentary drafts in Part 5
Prof Eniola Akindemowo
Thomas Jefferson Schl of Law, San Diego CA
[email protected]
Contextualizing the Question Contd…9
• Article 4 in Context Contd
• One aim of revised Article 4 was to update Art. 4 rules in
light of such technological advances to accommodate the
future potential of such developments
– It is noted that the technological evolution is certain to continue
• Another aim is to accommodate the complexity and the
broad variance in banking procedures
– Flexibility, and an openness to party variations is an aspiration of
revised Art.4
» “…it would be unwise to freeze present methods of
operation by mandatory statutory rules …” §4-103 cmt 1
• The blanket permission to vary in §4-103(a) is in accord with
that objective
– There is a reiteration –doubled permission if you will – to vary the
effect of Article 4 provisions by agreement, to faciliate the use of
modernized procedures
» It permits within wide limits, the variation of Article 4
provisions by agreement §4-103 cmt 1
Prof Eniola Akindemowo
Thomas Jefferson Schl of Law, San Diego CA
[email protected]
A Contrast of Potential Variability
Permission or Prohibition?
Article 3
Article 4
blanket permission to vary in
Article 1
Yes
Yes
blanket permission to vary in
specific Article concerned
No
Yes, in §4-103(a)
residual default permission to
vary
Yes
Yes
specific permission to vary in
Article concerned
Yes e.g. §3-418(b) extended
Yes, e.g. §4-401(a) circumstances
recovery of mistaken payments to
the extent permitted by the law of
mistake (e.g. contractual confines)
under which an item is deemed
properly payable may be amplified
by agreement
implicit permission to vary from
interpretation (e.g. contextual
objectives) of a specific provision
in a particular Article
Exists to a limited degree, as
Art. 3 is formulaic and
formalistic
Exists broadly speaking, as
Art.4 seeks flexibility and is
deliberately expansive
implicit prohibition against
variation (e.g. from contextual
objectives) in a specific Article
Is likely, as Art. 3 is formulaic
and formalistic
Is possible, but less likely , as
Art.4 seeks flexibility and is
deliberately expansive
There are few in Art.3, however a
negative stipulation e.g. §3-418(c)
is less likely to be overcome by the
Art.1 blanket permission
There are a few in Art.4, however it
is less unlikely that a negative
stipulation may be neutralized by
the freedom to vary conferred by
§1-302
specific prohibition against
variation by a particular
provision in a specific Article
Concluding Answers
• In conclusion, the answers to our main questions are:
Q: How much scope is there to change U.C.C. rules?
A: All articles are subject to the §1-302 principle of variability
– The extent permissible depends on the article concerned, and the nature of the
change
Q. How much leeway does the freedom of contract principle espoused
in §1-302 provide in practice?
A: the principle provides
– even greater leeway in Article 2 transactions that by nature anticipate that the
details of the transaction will be shaped by the agreement of the parties
– limited scope in Article 3 transactions as the provision of Article 3 are by nature
calibrated, formalistic, and formulaic
– the flexibility to shape transactions generally - according to evolving techniques or
customs - is buttressed by a blanket authority to so vary the provisions of Article 4 by
Article 4 itself
Q. Is there truly the freedom of contract to vary the application of U.C.C.
Articles 3 or 4 to a transaction?
A: to vary the meaning of a provision of any article of the U.C.C. is prohibited –
it is the application, e.g. it’s effect, that may be varied by agreement.
The difference between a change in meaning and a change in effect is not always
clearcut, and may depend on a contextual interpretation of the overall effect of the
change.
Prof Eniola Akindemowo
Thomas Jefferson Schl of Law, San Diego CA
[email protected]
Thank You.
Prof Eniola Akindemowo
Thomas Jefferson Schl of Law, San Diego CA
[email protected]